March 30, 2010

MEGAN MCARDLE: Henry Waxman’s war on accounting.

Accounting basics: when a company experiences what accountants call “a material adverse impact” on its expected future earnings, and those changes affect an item that is already on the balance sheet, the company is required to record the negative impact–”to take the charge against earnings”–as soon as it knows that the change is reasonably likely to occur.

This makes good accounting sense. The asset on the balance sheet is now less valuable, so you should record a charge. Otherwise, you’d be misleading investors.

The Democrats, however, seem to believe that Generally Accepted Accounting Principles are some sort of conspiracy against Obamacare, and all that is good and right in America.

I think when they planned for ObamaCare’s costs to come online post-election, they didn’t know enough to realize that accounting rules (and SEC regulations) would require companies to act now. Just another example of the “knowledge problem” confronting economic planners and regulators . . . .

UPDATE: Reader Bill Hesson emails: “Would somebody please explain to the gentleman from California that the incessant prosecution of business executives for nothing more than excessive optimism is likely to have consequences that include pessimistic accounting?”

And reader Brant Hadaway writes:

I’m not usually this petty, but every time I see a link to another piece by Megan McArdle in which she (correctly) calls out the Dems on deficits, accounting rules, Obamacare, etc., I have to grit my teeth to prevent myself from yelling at the screen, “But you voted for him! You and every other sentient being on the planet should have seen this coming!”

I can respect the true believers in Obama. After all, they have their agenda.

But I cannot abide those who act like they were duped. The only people who were duped by Obama were those who wanted to be duped.

Well, everyone can be fooled by somebody. If you think you’re immune then you’re fooling yourself. But it’s true that in Obama’s case there was a strong will to believe, pushed by the hope — apparently false, based on current race-baiting aimed at Tea Party protesters — that Obama’s election would lead us to a post-racial America. Not so much, as it turns out. But better to point this out now than to remain silent, even though it would have been better still if more people had noticed it before the election.

ANOTHER UPDATE: Reader Brad Garton writes: “What’s really funny is that among other things Sarbanes-Oxley requires them to make the impacts public, and Waxman voted for that. Apparently he didn’t read that bill either.”