Wednesday, October 13, 2010

The Subtle Change from Principles to Rules (Part III) What does it all mean?????

10/13/2010 Portland, Oregon – Pop in your mints…

So it looks like the Federal Reserve is set to unleash what they call QE2.  Yesterday, Reuters informed us that, as the masters of the universe met back in September, they:
“had a "sense that (more) accommodation may be appropriate before long,"  and that “Several officials felt that unless conditions improved, they would consider it appropriate to take action soon in hopes of spurring a stronger recovery.”


For the uninitiated, that is code for “shamelessly printing money”.  We will discuss this issue in the chronicles as this will not be the last time we hear of it and it is likely to become VERY IMPORTANT and relevant to our day to day existence in the not so distant future.  Needless to say, it is, thanks to the miracle of technology, much easier to create money today than the old fashioned way of printing money, which more often than not involved pulling hard metals from the ground, refining it, and giving it a “finishing touch” (as demonstrated by your author.)

No, the hard work of making money in the digital age rarely if ever falls to the pusher of said button, rather, the work is socialized.  As for spurring the economy, that is code for “causing people to buy anything and everything they can at a rapid pace to avoid holding a rapidly depreciating currency.”  In other words, it is the ultimate stimulus project.

But enough of this, where were we in our exploration of what happened in the meadow?  Ah yes…


The Subtle Change from Principles to Rules (Part III) What does it all mean?????:

If you have missed the previous two posts, you have missed essential data that will hinder the understanding of what comes next.  To avoid becoming completely lost, please visit them below:

The Subtle Change from Principles to Rules (Part I)

The Subtle Change from Principles to Rules (Part II) “Meadow Improvement”

 

 As you will recall, we left our meadow to step back and ask the question that is begging to be asked.  WHAT DOES THIS ALL HAVE TO DO WITH THE SUBTLE CHANGE FROM PRINCIPLES TO RULES ALREADY???  What does it mean?????  Have I suffered through the previous posts in vain?  Please read on as I pray that this is not the case, dear reader.

The parable that was elaborated during the last two posts was intended to highlight the difference between principles and rules.  In the meadow parable, “meadow improvement” represents rules.  Rules were made by those who either do not fully understand or care to adhere to the principles of an activity with the purpose of maintaining or “improving” the status quo.  Once a human institution, as the meadow was to represent, makes the inevitable but subtle change from being guided by principles to being governed by rules, these rules fill the meadow with “cordoned off areas” and “canals” until no one can freely move about within them.

I would like to offer the following definitions to help us better understand the conceptual difference between principles and rules.  A principle, according to the wikipedia, “signifies a point (or points) of probability on a subject (i.e. the principle of creativity), which allows for the formation of rule or norm or law by (human) interpretation of the phenomena (events) that can be created.”  By contrast, a rule, according to dictionary.com, is “a principle or regulation governing conduct, action, procedure, arrangement, etc.”  You can see how making a distinction between principles and rules is confusing because the terms are often used interchangeably to define two concepts that could not be more different.  This is why the change is subtle.

We will attempt, dear reader, to summarize the concepts I am talking about in the following manner:  Principles make things possible.  Principles create.  Rules “govern conduct” or regulate.  Rules destroy.  Here I will postulate that, while Principles tend to create rules, rules tend to destroy principles once the propagation of rules dwarfs the principle that created them.  It is as if an invisible prison has been constructed by the growing threat of going to a real one.  Does this mean that Principles are bad because they create rules?  By no means, in the same way, rules are not bad either, but principles must be held above the rules that they create in order for them to continue to create and make things possible.  Once rules are allowed to dominate, they thrust aside principles and the prison begins to quickly “auto-construct” itself.

This is what our brilliant local CPA was alluding to in the “GAAP Update” seminar, now so long ago, when he mentioned that the word “should” in of some of the pronouncements had been changed to “must.”  You see, the word “should” bestows some glimmer of freedom of choice upon the hearer.  As in “You should wear a jacket, its cold.”  While a strong suggestion that “should” be heeded, it is understood that the hearer may ignore the guidance at their own peril.  Once you place the word “must” in the same sentence, this freedom is removed and the only thing that remains is the expectation of punishment for non-compliance.  This, perhaps better than the meadow parable (which I hope you enjoyed, nonetheless), describes this subtle change from principles to rules that is happening in not only in GAAP but, if you look for it, in many other areas of society as well.

For the accounting addicts in the audience, we will, in coming posts, I will relate, as eloquently as possible, the tale of the glorious days of GAAP before Enron, when they truly were principles to be embraced instead of a set of rules to be judged by and punished according to.

GAAP.

Thank you for your time,

David Mint