Accounting lunacy, indeed

Chief Executive, The, June, 2005

THE STORY WOULD have been easy to miss. Robert Merritt, chief financial officer of the Outback Steakhouse chain, announced his retirement because of the difficulties of accounting for restaurant leases. "Recent lunacy over lease accounting took me past the breaking point," he said, noting that more than 150 companies have been forced to restate earnings because of the issue.

Every CEO and C-level team is feeling Merritt's pain. The accounting, auditing and lawyering clearly have gone too far. The partners of outside auditing firms have become more conservative than ever, refusing to sign off on many transactions and practices that have been allowed for years due to worries about what the Public Company Accounting Oversight Board might do or say. That auditor must get the opinion of a "concurring" partner for every serious decision and a third partner may get involved if there is a filing to be made to the Securities and Exchange Commission (SEC). If those partners can't reach consensus on a subject such as "revenue recognition," the issue gets kicked upstairs to a national review process inside the audit firm and possibly reaches the point of arbitration. At each stage, the auditors are worried that the PCAOB will exercise its "peek-a-boo" privilege and demand to see an avalanche of paper that illuminates how they've done their jobs.

The reason this is so crippling is that there are many gray zones in Generally Accepted Accounting Principles that require judgments to be made. If accountants and auditors are so fearful that they can't make decisions, CEOs have to devote enormous resources to resolving what are often petty issues. They can't concentrate on growing their businesses, which has serious consequences for job creation, the financial markets and U.S. competitiveness in the world.

CEOs must keep up the pressure on the SEC, the PCAOB and others to restore sanity. Post-Enron, the worst excesses have been wrung out of the system. Let CEOs get back to their real work--running their businesses and creating wealth.