Accountability and Valuation
An Old Challenge in the Future of Accountancy

By Robert H. Colson

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OCTOBER 2005 - In 1994, after almost a 15-year hiatus, I again began preparing students for the CPA exam. On the theory portion of the exam, I persistently got the question about the purpose of financial accounting wrong until I read the review book’s explanation. Whereas the financial accounting texts I used, my education, and my experience had left a pretty definite impression that financial accounting was concerned as much with management performance as with entity performance, by 1994 the only correct answer was entity performance.

This incident came to mind recently because of the intense interest in the current FASB and IASB conceptual framework projects. There is a flurry of activity and discussion right now from many quarters about accounting fundamentals, and in past editorials I have reflected on the concerns that have come across my desk, into my e-mail inbox, and through conversations with a wide range of individuals.

Some of these communications are very curious. “Fair value” accounting was a muddle to one caller, while “accountability” had no meaning to another caller just a few minutes later. Just as curious, those who do not understand “accountability” have no problem understanding the concept of “fair value,” and those who do not understand “fair value” have no problem understanding “accountability.”

With regard to the long-term core issue about the purpose of accounting, accountants have been divided about equally over accountability and valuation. At any specific time, however, one view is usually in ascendance, tacitly supported by a silent majority while a vocal minority protests the status quo. At times, a few have tried to seriously consider both.

Differences in Orientation

Accountability systems are focused on management performance in the recent past. They are similar to what each of us does at the end of the day when we try to explain how we started with $100 and ended up with $5. What did I spend that money on?

Valuation systems, on the other hand, focus on the entity and its future. They are similar to what I might do at the end of the day when I have only $5 left in my wallet and I begin wondering whether this particular $5 bill might happen to have a president’s autograph on it and therefore be worth a lot more. Accountability and valuation systems articulate in situations where the day’s activities were purposely oriented toward acquiring the autographed $5 bill.

It might be easy to analyze and assert how I spent money and somewhat more difficult for someone else to verify my statements, but if I knew that I would be held accountable, I would be careful to spend wisely and document appropriately—or to lie convincingly. On the other hand, if there is an active market in such autographed bills, it would be relatively easy for everyone to agree on its value. In the absence of such a market, or for a variety of other reasons associated with future events, on the other hand, it could be quite difficult to establish a mutually agreeable valuation for the bill until it is sold.

Perhaps because American culture values individualism more than many other countries’ cultures do, we tend to internalize accountability rather than making it public. How many of us actually relish accounting to others: punching the time clock, filling out the time card, or completing and justifying the expense report? On the other hand, almost every American is ready and happy to broadcast how much an asset (often carefully selected) has appreciated in value. Psychologically, it could well be that there is more comfort among more people with valuation than with accountability, especially our own.

The Accountability Age

While during the 1970s there were many reasons (many still valid) why accounting was not adequately oriented to asset and liability valuation changes, today there are growing indications that Americans are becoming more interested in accountability issues, especially as they relate to the managements of powerful social institutions, whether in the government, business, or nonprofit sector. Comptroller General of the United States David Walker recognized this trend when he initiated the renaming of the General Accounting Office to the Government Accountability Office. Sarbanes-Oxley Act section 404 is another indication of this interest, as are various efforts by individual states to achieve more accountability through new regulation or legislation.

How can accounting professionals contribute to this renewed interest in accountability, however, when the principles under which they account remain focused on entity valuation? Even the application of financial reporting qualitative characteristics (e.g., decision usefulness) precludes serious consideration of past performance. The responsibilities for the standards setters are clear as long as accountability’s place in the conceptual framework is limited to a one-sentence allusion to “stewardship,” while the rest of the framework, along with the authoritative statements and interpretations that flow from it, focuses on entity valuation.

Time will tell whether accountancy will rise to the challenge of dealing constructively with both management accountability and entity valuation.

Robert H. Colson, PhD, CPA, is a partner of Grant Thornton LLP. From June 2000 to August 2005 he was Editor-in-Chief of The CPA Journal. This essay completes a series of related columns he began earlier this year; it was replaced in the September issue by his farewell column. The editors welcome other editorials and commentaries, which can be submitted to




















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