{"id":42704,"date":"2025-01-23T08:42:41","date_gmt":"2025-01-23T08:42:41","guid":{"rendered":"https:\/\/peraltafinancing.com\/accounting\/an-economic-basis-for-honest-financial-accounting\/"},"modified":"2025-01-23T08:42:41","modified_gmt":"2025-01-23T08:42:41","slug":"an-economic-basis-for-honest-financial-accounting","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=42704","title":{"rendered":"An Economic Basis for Honest Financial Accounting"},"content":{"rendered":"


\n<\/p>\n

\n

An Honest Financial Accounting: Draft of Introduction to Preliminary Edition \u2013 Part II<\/strong><\/p>\n

Draft Table of Contents<\/a><\/p>\n

It so happens that around the time Beaver published his recommendations for the FASB, Harvard philosophy professor John Rawls took on the larger question \u2013 in which financial accounting surely plays a part \u2013 of fairness in politics and economics. His first major book, A Theory of Justice,<\/em>[14]<\/a> is regarded by many as the most influential work of political philosophy of the 20th<\/sup> century.[15]<\/a> \u00a0He was awarded the\u00a0National Humanities Medal\u00a0in 1999 for \u201chis argument that a society in which the most fortunate help the least fortunate is not only a moral society but a logical<\/em> one.\u201d[16]<\/a><\/p>\n

Rawls\u2019 philosophy is derived from a novel thought experiment:\u00a0 How would \u201csocial justice\u201d be formulated by a convention of economically \u201crational\u201d individuals who otherwise knew nothing about themselves?\u00a0 From behind this \u201cveil of ignorance,\u201d these individuals wouldn\u2019t, among every other thing, know the color of their own skin, their innate capabilities, or to whom and where they were born.<\/p>\n

Very broadly speaking, Rawls derives from his thought experiment standards of moral behavior that should be presumed to be just, given that they were derived by society\u2019s members before they knew how the standards would affect them individually.\u00a0 Of particular relevance, he reasoned that since the convention members cannot know whether they are on the giving or receiving end of any particular action, they should agree that anything less than honesty<\/em> is a prerequisite to just outcomes.<\/p>\n

To illustrate from the tale of Jack Welch, let\u2019s consider whether individuals from behind a veil of ignorance would agree that Welch should be allowed to manipulate the earnings of General Electric. Even though they can be proponents of their own personal interests with impunity, they will rationally expect that earnings management is highly unlikely to add to their own well-being.\u00a0 For a very few would attain the enviable position of CEO of a public company. Thus, presuming that earnings management does not otherwise contribute to social good, the convention must conclude that permitting earnings management puts practically everyone \u2013 except for the Jack Welch\u2019s of the world \u2013 on the short end of the stick.<\/p>\n

This book will show, among other things, that a simple honesty constraint imposed on financial accounting rules would produce a vast improvement over extant US GAAP.\u00a0 For there are a great many examples of US GAAP that fall short of an honesty standard in a great many ways.\u00a0 Notwithstanding, not all of US GAAP violates an honesty constraint.\u00a0 There are also many examples where a choice could be made between two or more honest accounting treatments.\u00a0 For those, this book is intended to be an example of a good-faith attempt to weight those relative costs and benefits from behind a veil of ignorance.<\/p>\n

Accordingly, this preliminary first edition is the product of an iterative process to develop An Honest Financial Accounting (AHFA).\u00a0 Initial chapter drafts were exposed for comment in my blog The Accounting Onion<\/em>.\u00a0 Subject to constraints on civility and relevance, all readers\u2019 comments made through the blog have been considered and published.\u00a0 A \u2018final\u2019 first edition will follow that adds extensive examples of the application of AHFA, and a tabular presentation of the differences and similarities between AHFA and US GAAP.<\/p>\n

Next section is here<\/a>.<\/p>\n

Draft Table of Contents<\/a><\/p>\n

[14]<\/a> John Rawles, A Theory of Justice, <\/em>Harvard University Press, 1971 (revised 1999).<\/p>\n

[15]<\/a><\/p>\n

[16]<\/a> Insert footnote.\u00a0 \u00a0Weinstein, Michael M. (December 1, 2002).\u00a0<\/em>\u201cThe Nation; Bringing Logic To Bear on Liberal Dogma\u201d<\/em><\/a>.\u00a0The New York Times.\u00a0<\/em>ISSN<\/em><\/a>\u00a0<\/em>0362-4331<\/em><\/a>. Retrieved\u00a0September 7,\u00a02021 <\/em>[emphasis supplied]\n<\/p>\n

\u00a0<\/p>\n<\/div>\n\n","protected":false},"excerpt":{"rendered":"

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