A recent Wall Street Journal article reported that Congress is stepping up its efforts to delay "controversial changes" proposed by the FASB; namely, the elimination of the pooling of interests method of accounting for mergers and acquisitions. The article reported that both Republicans and Democrats are putting tremendous pressure on the FASB, and have even introduced legislation to block implementation.

Why? There's no difference between pooling and purchase except a journal entry. Is a journal entry really that powerful that it should attract the attention of the United States Congress?

Congress is involved because they are receiving political heat from "prominent technology-industry executives" who are upset about the potential impact of the accounting rule change. In a letter to the FASB, 13 senators parroted back the arguments they have received from these executives, concluding that the proposed changes "will make mergers and acquisitions very difficult for high-technology companies."

Say again? Make mergers and acquisitions difficult? How can a journal entry do that?

This is the latest warning salvo in a war that Congress has been threatening and blackmailing the FASB with for more than a decade. It started with pensions, then post-retirement benefits, then stock options, and now mergers. Every time the FASB proposes to do something that makes it more difficult for companies to hide the truth from investors, executives of those companies who have been lying about that particular issue -- at the expense of their investors -- exert political pressure on the FASB to abandon their "evil" designs. This pressure takes the form of Henny Penny-type "the sky is falling" arguments to Congress that their companies - and thereby the economy - will be "hurt" by the proposed rule. (Apparently, the high profile of the whiners obscures the absurdity of their arguments and induces a bizarre sense of credibility.)

But accounting is not reality. Financial statements are merely a model of reality. Like any simplified representation of a complex, real-world phenomenon, the model is imperfect. However, anyone who understands the free market system knows that the ONLY correct objective of a rule-making body is to make the model as close to reality as possible, within the constraints of cost versus benefit, in a format that is useful for decision makers.

Suppose I have two maps of New York. Map X says it is 80 miles from Rochester to Buffalo, while Map Y says it is 70 miles. Does it make any sense to say, "I'm going to use Map Y so I'll get there faster!"? Certainly not! The map could say it is one mile or 1,000 miles, and it wouldn't change reality. No matter which map you use, the actual length of the journey will be the same. Changing a map does not change a road. That's because CHANGING A MODEL DOES NOT CHANGE REALITY.

Suppose Map X says it is a shorter distance from New York City to Albany than does Map Y. FASB critics would have us using Map Y for the trip from Rochester to Buffalo, and Map X for the trip from New York City to Albany -- whichever shows the shorter distance is the map we should use. Furthermore, they would have us believe that if we use the "wrong" map, people's journeys will actually take longer and the country will run out of gasoline.

The truth is, a journal entry cannot change reality, any more than a map can change a road. All the FASB is trying to do is make rules that force companies to tell the truth about economic reality. They cannot change the truth itself; they can only force companies to stop lying.

Some might say, "If you make us stop lying, our stock price will drop, and that will hurt the economy." Admittedly, in a free market whose ultimate goal is efficient capital resource allocation, forcing a company to stop lying to its investors may hurt that particular company. However, this will not hurt the economy; it will help it. What the doomsdayers fail to point out is that other, more deserving companies are currently being hurt by the status quo, because investors are being fooled by the lies and are therefore inefficiently allocating too many resources to the liars and not enough to the truth tellers. The harsh truth is, the motivation of companies who are exerting political pressure on the FASB is to obscure and hide the truth from investors, so that they can profit unfairly at the expense of other companies who are more deserving of the capital they have obtained through their deceit.

If you don't buy this argument, and you really believe journal entries have power to alter reality, and that the economy can really be hurt by "bad" accounting rules, then why don't we just have the FASB pass a few "good" rules and make everybody rich? Why, we could just have the FASB make a rule that says every company has to be solvent. In fact, let's lobby Congress to pass a law that forces the FASB to make a rule that every company must debit cash and credit retained earnings for a million dollars. Surely, that would eliminate the backlog in the bankruptcy courts! (While we're at it, let's have Congress solve the oil shortage problem by passing a law that says it's 10 miles from New York to Los Angeles.)

Oh, the power of a journal entry! In the Wall Street Journal article referenced above, James Barksdale, former chairman of Netscape Communications Corp., stated that "America Online Inc.'s $10 billion purchase of Netscape never would have happened if pooling wasn't an option." Silly us. We thought mergers and acquisitions were based on sound, strategic business factors, not on how the transaction will make the financial statements "look." If a $10 billion purchase is dependent on a journal entry, something is very, very wrong.

Congress should back out of the accounting rule-making business, permanently, and let the FASB get on with its job And exactly what is that job? To destroy the economy? To cause America to lose out to foreign competition? No, the FASB's only objective is to make financial statements fair, transparent, and comparable. The executives who are making the noise are shooting the goose that laid the golden egg. A look at the Internal Revenue Code should make the prospect of Congressional involvement in accounting rule-making send a shiver down their spines.

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