Recent accounting scandals have cast a shadow over the credibility of corporate finances. As a consequence, companies are greatly increasing their efforts to ensure that financial reports are presented in an accurate and transparent manner to gain investor confidence.
Meanwhile, Congress has rushed to pass misguided legislation on financial reporting. New rules may also be issued by the Financial Accounting Standards Board, which sets the nation’s “generally accepted accounting principles” (GAAP). For example, FASB is considering damaging changes to the treatment of stock options. Congress is also considering stock option legislation, with its eye set more on populist politics than on sound financial accounting.
New mandates threaten to move accounting further away from commonsense business realities. In recent years, flawed FASB rulings have led to the growth of alternative pro forma financial reporting in Silicon Valley. In fact, 74 percent of semiconductor companies now also report with pro forma financial statements because GAAP rules no longer provide an accurate measure of company performance for investors.
GAAP rules for mergers and acquisitions have caused particularly large misrepresentations of corporate finances. Further serious problems will be created for Silicon Valley companies if expensing of stock options is mandated. FASB and Congress must be more sensitive to the damage their rule making can cause to financial statement accuracy. If they are not, it will hurt the efficiency of the country’s business and financial decisionmaking and weaken the powerful engine of free-market capitalism that propels the U.S. economy.