The Subtle Change from Principles to Rules (Part I)
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The Subtle Change from Principles to Rules (Part I):
I recently attended a brief seminar which was titled “GAAP Update.” This title, to anyone who is not an accountant, makes it sound like some sort of fashion show. While I had hoped to observe some of the latest models of pocket protectors, the only thing that any reasonable person (that is you and I, dear reader) could observe to be “in fashion” was decreasing reliance on professional judgment and increasing scrutiny, oversight, and more rules. In order to understand this observation, we must first understand GAAP. GAAP, while not addictive, should be taken in small doses. As such, I will administer it in small doses so that we can avoid the common side effects of confusion, drowsiness, and its other less understood attacks upon the human psyche.
GAAP, for those of you who have been fortunate enough to avoid the acronym thus far, stands for “Generally Accepted Accounting Principles.” According to wikipedia, “GAAP is the standard framework of guidelines for financial accounting. It includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.” Wikipedia goes on to list the principles by which GAAP is guided by as the principles of sincerity, permanence of methods, non-compensation, prudence, continuity, and periodicity. We will return to these principles in future tips as they are important for anyone trying to understand the methods and madness of the world of accounting.
The presenter at the seminar, a brilliant local CPA, alluded to what I am calling the “subtle change from principles to rules” when he mentioned that the word “should” in of some of the pronouncements had been changed to “must.” On the surface, this sounds like a simple grammatical correction, as if a language expert had been asked to make the writings of accountants more accessible to the general public. The deeper truth, the one that our brilliant local CPA alluded to, is that trust in professional judgment has disintegrated and the need for specific, carefully worded instructions that remove the need for “flawed” professional judgment, is taking its place. This should alarm us all as the accounting field is by no means the only field that this subtle change is taking place in.
Any institution that is organized by human beings, such as a company, a religion, a government, or a soccer team, follows a pattern. Observe closely, dear reader, and see if you can pull an example from your own experience. These institutions begin with some sort of principle or set of principles. The person or persons who begin the institution understand the principles upon which they were founded and operate according to these principles. When something is in its genesis, it is fresh and exciting. Its possibilities bound about, like deer in a meadow in early spring. It is a thing to behold. People flock to this bounding, this life, to simply breath it in, to somehow be a part of it. “Let it always be this way,” they say “I love this! How do I join?”
So join they do, in great multitudes. Everyone wants to bound with the deer, drink from the stream, to lie in the grass. BUT WHAT HAPPENS? The new people, those that were not there for the genesis, do not understand why the deer are bounding. And when the deer try to explain this to them, the new people may not understand or perhaps disagree with the why. But they do agree that the bounding must continue, and increase, by all means. So they continue to flock to the meadow. BUT THEN WHAT HAPPENS? Soon, because of the crowds, the bounding area becomes a mosh pit, the water in the stream becomes undrinkable, and the grass turns to mud.
SO THEN WHAT HAPPENS? In Part II, we will look at what happens once the meadow turns into the aftermath of Woodstock…
The Subtle Change from Principles to Rules (Part II) “Meadow Improvement”:
Can you believe they are not going to give a cost of living increase to Social Security dear reader? From the looks of it, Bernard Sanders certainly can't. Either that or he is watching as an approaching mob comes to show him that Social Security recipients are a much larger constituency than the bankers. But enough of current events...
The Subtle Change from Principles to Rules (Part II) “Meadow Improvement”:
In a metaphor which has reached into the field of philosophy and attempts to use it to explain what I observed at the “GAAP Update”, we will return to our once vibrant meadow and attempt to gain an understanding of difference between principles and rules and what it means for us as persons living in this subtle but important cultural change.
We pick up our meadow in the aftermath of Woodstock. It has become obvious to everyone in the meadow that the meadow has not continued to become the utopia that they had entered, and they become desperate to understand what went wrong, and how to keep it from going wrong again in the future. How do they go about this? First, they cordon off a bounding area, so that bounding may continue in a limited fashion. Other areas are cordoned off and efforts are made to revive the grass in these areas. It is prohibited to enter into these areas until it has been deemed “suitable for bounding.” Second, they decide to construct a canal system in part of the meadow and allow the stream to “revive” itself within its newfound confinements, and water is rationed, which in turn limits bounding, which seems to rejuvenate the meadow for a time.
BUT THEN WHAT HAPPENS? The people in the meadow begin to see that, although bounding now has become a limited activity and their other projects have worked, they dedicate themselves more and more to “meadow improvement” and less to bounding. There is not time nor space for bounding, anyhow, and “meadow improvement” is a much more worthy cause. Why just look! We have grass growing where no one can bound and our canal system now provides more rations of more water for more people who are not bounding. What could be better? Why, bounding, of course, bounding without rations and cordoned off areas. But nobody dares to say it, because “meadow improvement” has become so “vital.”
Of course the original, “genesis” deer and their principles, are all long gone, searching for another meadow to freely bound in. Some who remain in the meadow are still searching for these principles and long for the days when they will bound freely again. However, since most of those who remain were either unaware of or in some stage of disagreement with the original principles, the “why” of the boundless joy that they once beheld, “meadow improvement” continues and the deer and their principles are idolized, but rarely sought. Why? That would lead to too much bounding, of course. And, of course, too much bounding leads to ruined meadows. And, of course, too much bounding leads to ruined meadows.
So what is the point of this tale, dear reader? What can you and I learn from a humble accounting lecture, bounding deer, and “meadow improvement” projects? What does it all mean?????
Stay tuned,
David Mint
Click here if you missed part I
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
