On December 9th, 2012, Professor Wang Jiping from Beijing Technology and Business University gave the speech “The Accounting Allegory of Charlie Munger” at Panel 1.

 

As one of the partners of Warren Buffett, Charlie Munger created an accounting allegory “2003 Financial Fraud” which reflects serious problems in the accounting industry by describing the manipulative behaviors concerning the accounting treatment of stock options to make inflated profits. In 2002, what is described in the allegory unfortunately became reality. The most serious accounting frauds in the US history occurred in which big companies including Enron and Tyco were involved. As a result, Enron collapsed and the accounting firm Arthur Andersen, the accounting firm which provided auditing to Enron, sufferedsevereconsequences from the Enron scandal.

 

In Charlie Munger’s allegory, business owners use stock options rather than cash as dividends so that they can reduce costs and make inflated profits. According to accounting principles at that time, stock options are not required to be disclosed on the balance sheet. In fact, when members of the Financial Accounting Standards Board (FASB) are making the regulation, they must seek advice from people from different industries. Many accounting professors and certified public accountants demand that stock options be considered as expenditure while entrepreneurs in the Silicon Valley paraded and lobby the parliament to demonstrate their opposition to the idea, which give rise to a serious loophole in the accounting principle.

 

In Charlie Munger’s allegory, God gave the most severe punishment to accountants while forgave economists, security analysts, officials in the Securities and Exchange Commission and senior managerial personnel in companies. The reason is that although accountants knew the principles had loopholes, they still carried them out on purpose.

 

Professor Wang Jiping had different views on this and raised several questions. He thinks that we must firstly clarify the responsibility of CPAs in the current economic society. It should be defined if CPSs are making accounting principles, carrying out accounting principles or just supervising the implementation of such principles? Secondly, it should be clarified if we do need more independent principle-making agencies as accounting principles are manipulated by external forces, and if there is anyone else who can be blamed, besides the accountants? Other questions he arose were: What is public’s expectation of accountants? Do we give too much pressure on them?

 

According to Professor Wang Jiping, currently it is still not clear about the role CPAs play in China. Since certifying agencies of CPA are intervened by the Chinese government, it is hard to make them more independent. With high expectations from the public, accountants suffer too much pressure. Therefore, from the perspective of accountants, defining their role and responsibility should be one of the topics to be discussed in business ethics.

 

Intern reporter: Zhang Mengsha