Accounting practices and government oversight

Great Debates
1

Another one bites the dust.

Apparently accounting tricks and failures have caused Xerox to overstate its revenues as well, to the tune of about $2 billion. While this isn’t going to plunge Xerox into insolvency as it did Worldcom and Enron, it’s still not too good. This time, however, the culprit is not AA, but KPMG.

While recently discussing this problem with a friend of mine who is an accounting student, she informed me that a lot of this happens because there is no set accounting practice. By this I mean, there are a number of different ways of accounting for inventory, depreciation, etc. and different methods can yield different methods.

Seeing as how these scandals are not only bringing down the stock market (and people’s retirement funds), the value of the dollar, and causing unemployment, is it not time that the government stepped in and set up one universal accounting method, with each type of thingie having its own required method of depreciation/inventory/whatever and no other?

Why wouldn’t this be a good idea?

2

It’s now $6,400,000,000.

3

There are multiple accounting methods because there is no such thing as a one-size-fits-all solution. Accounting standards are supposed to ensure a true and fair set of accounts; that’s why it’s inappropriate to force (say) an electrical goods shop to account for stock the same way as a grocers. LIFO, FIFO and weighted average stock valuation have different pros and cons; depreciation can be calculated on a straight-line or reducing balance depending on when you’ll get the most value from the fixed asset.

There is definitely room for a tightened accounting regulatory framework, but individual accounting standards have to allow flexibility to represent the differences between lines of business.