Posted on 07/29/2002 12:07:01 PM PDT by Tumbleweed_Connection
Congress needs to be very careful that in tackling corporate greed they don't throw the baby out with the bath water, warns Richard Rahn in today's Washington Times.
Citing the dangers inherent in setting strict accounting standards for corporations without making allowances for margins of error or individual circumstances, Rahn, a senior fellow of the Discovery Institute and an adjunct scholar at the Cato Institute shows how imprecise accounting standards can be.
"To obtain a bank loan, you are often asked to produce a personal balance sheet and income statement," he writes. "If you were told that if you made a mistake you could be fined $100,000 and go to jail, as corporate executives now face with the new legislation, would you be willing to submit the documents?"
He then lists a series of examples that show that in putting together an iron clad financial statement one can find oneself between the Devil and the deep blue sea ... or in the case of corporate accounting statements, between freedom and a term in the federal slammer
"Many people assume that individuals and businesses should have no problems in producing financial statements," Rahn explains. "To do an income statement, you merely have to list revenues and deduct expenses to measure profit or income, right? To do a balance sheet, you merely list your assets and deduct liabilities to get net worth, right? Perhaps it is not so simple.
He illustrates the difficulty corporate executives will face when attempting to put together a financial statement when there are special circumstances that leave room for different interpretations that can lead to an innocent decision to report facts as seen from the executive's legitimate perception being viewed as a crime by federal authorities.
One example he cites to show how risky attesting to the validity of a financial statement can be: - "Question: If, for $100,000, you bought 100 acres of timberland 20 years ago, and the tax assessor now claims it is worth $200,000, while your real estate agent tells you he thinks he can sell it for $400,000, what number do you put on your balance sheet?"
Another: "Question: If you pay $5,000 for a computer that is useful for more than one year, you are supposed to "depreciate it" when you list it on your balance sheet (i.e., show its reduction in value as it is used). Assume that the computer will be technologically obsolete in three years, at which time you will replace it. Yet the Internal Revenue Service might say you need to depreciate it over five years according to the tax law, and the computer will physically work for 10 years. To be truthful, what value do you put on your balance sheet for a 2-year-old computer?
"The lesson is, Congress ought to be very careful in placing executives at risk for accounting and tax judgments that are not clear fraud," Rahn warns. "If you are going to fine or imprison business executives for honest miscalls, many will correctly demand that members of Congress and government executives be subject to the same standards. Given the deplorable state of the federal government's books and congressional misstatements about the cost of government programs, we might find many Washingtonians in jail - hmmm."
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.