I found the views in “What Drives Earnings Management?” ( JofA, Oct.00, page 106) very interesting and thoughtful. The author identified many of the factors buried in GAAP that management can use to “finger paint” earnings per share.

However, when one observes the broad arena in which earnings per share are being managed with ingenuity by corporate executives, the question arises: Is it ever going to be possible to effectively limit these ploys, given the number of variables a willing management can resort to in influencing earnings per share and the degree to which the figures are blindly accepted by Wall Street as accurate measures of corporate performance?

Because of the inherent complexity of financial reporting and the many different and legitimate purposes for which financial data can be used, it would be very difficult to write standards that would adequately limit executive ingenuity in compiling the earnings per share figure for any given period. Perhaps the best that can be hoped for is to write standards that provide reasonable transparency in the report figures and to educate consumers about the numerous pitfalls that lie behind these figures and limit their accuracy.

William N. McNairn
Palos Verdes Estates, California

After reading “What Drives Earning Management?”( JofA, Oct.00, page 106) and “A Historical Look at Standards” ( JofA, Oct.00, page 16) , I offer the following comments:

There are several methodologies available to accountancy for reporting financial performance and financial status. At the extremes are

The simple and objective cash-basis model in which the only transactions reported are those that involve the receipt or disbursement of cash. The balance sheet is extremely simple—cash equals equity. Judgments and predictions are not allowed.

The complex and subjective market-basis scheme where every asset and liability on the balance sheet is appraised, reappraised and evaluated: What is the probability of bank failure devaluing cash balances? What is the present value of every liability? What are the future cash flows to be earned by each and every asset?

Most people can understand cash-basis accounting. Years in which significant productive assets are purchased might show a decrease in cash, but readers would understand something happened that might benefit the future. Disclose the facts; let the user of the information make the judgments.

Market-basis accounting would rarely measure the results of the operations of an entity. Most significant changes in equity would arise from changes in the estimated value of assets and liabilities. Profit or loss would arise depending on management’s ability to meet or better their previous predictions.

Our current accrual-basis system is designed around a set of assumptions and rules that issuers and users of financial statements, for the most part, understand. If some are so complex as to be misunderstood, then perhaps they are not useful.

A statement of cash flows is an essential part of financial reporting (cash basis isn’t dead). Simple accrual adjustments, such as “estimates” of accounts payable, accrued expenses, trade receivables and prepaid expenses, are commonly understood in the financial community. Such “predictions” and “interperiod allocations” help to display the economic decisions made by an enterprise during a specific period by more closely “matching” costs and revenues.

Accountants and the financial community should be happy that a rule book exists—that a referee can call “foul” if an infraction is observed.

I believe that blame for attempts to “smooth” earnings arises as much from the expectations of a formula-driven investment community as from industry’s desire to meet or beat those expectations. Knowledgeable investors should understand all the disclosures in financial statements, not just earnings per share. They should realize that fluctuations in financial performance are normal and that a consistent increase in earnings should be suspect, not normal. Maybe the “rule book” used for making investment decisions based on financial statements should relate to the rules used to compile them.

Today’s GAAP, while imprecise and subject to abuse by those who hope the next period will “cover” this period’s reporting “judgments,” is far better than no rule book at all. A thoughtful blending of cash-basis and market-basis theories will lead to a consistent (managed) growth in the usefulness of financial statements.

Charles S. Jennings, CPA, CFO
Kiddie Academy International, Inc.
Bel Air, Maryland

The letter, “A Historical Look at Standards” ( JofA, Oct.00, page 16) , supports retention of the “traditional theory of matching costs with related revenues, using an historic cost basis” and rejection of a “fair-value-based, balance-sheet-oriented system.” It implies that a continuing focus on matching costs might have prevented some cases of “managed earnings.”

That implication is not supported by analysis of instances of managed earnings. The common characteristic of such cases is that the matching controls have been violated. Those controls derive from the balance sheet, quite apart from whether measurement should be based on historic cost or fair value.

Oscar S. Gellein
Golden, Colorado

If the SEC is so concerned about the conflict of interest between accountants who render opinions and the consulting arms of their firms (see “The Proposed SEC Rule on Auditor Independence and Its Consequences,” JofA , Oct.00, page 26) , then why hasn’t it been concerned about enforcing the Glass-Steagall Act?

When commercial banks overlend to large corporations so their investment banking arms can collect huge fees, there is a tremendous risk to the banking system.

The worst cases of overvaluation in this stock market—the ones that would cause the greatest disaster should the market go down during a recession—are those where the fundamentals (based on an accountant’s audited statements) have no influence on the stock prices. The price of these “story stocks” is influenced instead by momentum trading, investor euphoria and optimistic projections that may never materialize.

Blaming the accountants for trivial differences in the treatment of various items is just an attempt to divert the blame for a possible disaster from Wall Street to the accounting profession.

Robert D. Moore, CPA
Jamestown, New York

The article, “CPAs Add HR to the Mix” ( JofA, Oct.00, page 67) , offered the accounting profession valuable insight into human resources. The profession is definitely experiencing a shortage of qualified workers, and we all—whether sole practitioners or partners in international consulting companies—face solid competition when trying to attract the best and brightest in our field.

With more than ten years of experience as a recruiter in the accounting and finance profession, I have witnessed the market evolve into a strategic battle for a limited number of qualified professionals. I would like to offer an additional resource for accounting executives to explore as they develop their human resource programs—the Internet.

In today’s fast-paced business environment, the Internet provides a cost-effective answer to many human resource needs of accounting firms. Career Web sites specifically tailored to the accounting and finance industry provide employers with the opportunity to reach potential employees at little or no cost compared to traditional classifieds. (See “Landing a Job in a Strange New World,” JofA, Dec.00, page 55. )

Professionals searching for highly qualified candidates save more than money by using the recruiting power of the Internet; they also save time—a precious commodity when every battle for a new employee is a race against another firm that would like to hire the same candidate. Many job seekers have noted they received offers through the Internet before other companies even acknowledged receiving their resumes. Clearly, the fast-paced hiring habits of today’s business world lend themselves to Web-based recruiting.

It is important that CPA firms harness the power of the Internet in their quest for outstanding employees. Career sites focused exclusively on the accounting profession provide firms with a valuable service that is crucial in today’s aggressive employee market.

Robert G. Epstein, CPA
President
CareerBank.com
Vienna, Virginia