Accounting Doesn'T Need Much Fixing (Just Some Reinterpreting)

In response to Stewart's proposal for comprehensive reform of GAAP, this article offers a classic defense of traditional accounting practices and standards. Like the recent efforts of the FASB to achieve greater balance sheet realism through “fair value accounting,” Stewart's call to make economic profit the centerpiece of GAAP is said to rest on a mistaken premise–the widespread notion that audited financial statements are intended primarily to guide equity investors in setting stock prices. More important than the valuation role of public accounting is its “stewardship” function in detecting theft and gross misuse of corporate assets. And it is this stewardship role, with its emphasis on producing reliable (and conservative) numbers that can be readily verified by auditors, that is likely to be compromised by Stewart's proposal, fair‐value accounting, and other well‐meaning attempts to incorporate greater economic realism into GAAP statements. At the same time, however, the author agrees with Stewart's contention that GAAP a accounting numbers have major limitations for investors seeking to establish the market values of companies and for managers attempting to make value‐increasing investment and operating decisions. Accordingly, he endorses many of Stewart's proposed modifications of GAAP both for internal purposes, such as performance evaluation and incentive compensation, and for voluntary supplemental reporting to the investment community.