Theaccountingstandards thatareonthebookstodaywere
originally written for manufacturing firms that dominated
business 40 yearsago,andhavebeenamendedandmodified
tofittheverydifferentfirmsthatexistinthemarkettoday.
Theaccountingrulesdeveloped fortheindustrial agehave
nottraveledwellintotheinformationage.Thewayinwhich
theintangibleassetsoftechnologyfirmsarevaluedinbalance
sheets offers some of the most visible examples of the
shortcomings and contradictions that bedevil current-day
accounting. To illustrate, a firm that buys a patent from
anotherfirmwillshowthepatentasanasset,whereasanother
firmthatdevelopsasimilarpatentbasedoninternalresearch
will not show the patent as an asset at all.
3 But thereareotherexamples. Aretailfirmthatborrows
moneyand buysitsstoresiteswillshowthesitesasassets
andtheborrowingasdebt,but acompetingretailfirmthat
leasesthesestoresiteswilloftennotshowanyoftheleasesas
debt and will also report no assets.
4
Thewaysinwhichaccountingstatementsdealwithemployee
options and acquisitions have also created problems for
investors. Firms that use options to reward managers and
employeesclearlyusethemasmanagementcompensation.It
stands to reason, therefore, that these options should be
valued and treatedas operating expenses in theperiod in
whichtheyaregranted.Undercurrentaccountingstandards,
weignoretheseoptionswhentheyaregrantedandconsider
them only when they are exercised.
5 Theuseofpoolingandpurchaseaccountinginacquisitions,
whichwaspermitteduntil2001,allowedfirmsthatqualifyfor
poolingtoessentiallyhidethecostofacquisitionsfrommost
investors.