By Bruce H. Nearon

Beginning in the early 1970s, market values began to diverge from book values. That trend continued for the next 30 years and still continues today. For many leading companies, the result is that book values represent a fraction of market values. Why is that? Why do financial statements not capture the value that the market sees?

One answer is that, around 1970, information assets started to become more important than physical and financial assets in determining the winners and losers in the market. However, information assets, referred to in accounting literature as intangible assets, and by the legal profession as intellectual property, are by and large excluded from corporate balance sheets. Because they are excluded, income statement expenses related to intangibles are overstated, which depresses current earnings, but bolsters future earnings. Meaningful disclosures about intangibles also are not found in financial statements, so it is difficult for investors to compare the mix of investments in intangibles between companies and over time, as well as the return on investment in them.

Why isn’t there more disclosure of intangibles? Do preparers and auditors have reasons to maintain the status quo? The lack of transparency in the financial markets about intangibles resulting from current accounting standards has both macro-economic and firm-specific effects. Because the costs of most intangibles are immediately expensed, the nation’s gross domestic product is understated. On the firm level, only management knows the true state of a firm’s investment in intangibles, while the investing public is left in the dark. This can result in abuse by insiders trading on information about intangibles, as well as greater cost of capital due to uncertainty. Should accounting standards be changed to require standardized reporting on intangibles? Should there be changes in government policies to encourage research in intangible asset reporting? Or are these matters best left to a market solution?

CPAs, auditors, CFOs, controllers, regulators, standard setters, academics and others interested in improving the reporting of intangible assets and creating greater transparency in capital markets should consider attending the Sept. 26 continuing professional education (CPE) presentation organized by the New York State Society of CPAs (NYSSCPA) Emerging Technologies (ET) Committee. This one-hour CPE session is based on the ideas presented in Prof. Baruch Lev’s book Intangibles: Management, Measurement, and Reporting (The Brookings Institution, 2001) and in Margaret Blair and Steven Wallman’s book Unseen Wealth: Report of the Brookings Task Force on Intangibles (The Brookings Institution, 2001).

Date: Thursday, Sept. 26, 2002
Time: 6:00 p.m. to 6:30 p.m.: registration, networking, free refreshments
6:30 p.m. to 7:30 p.m.: CPE session
Presenter: Bruce H. Nearon, CPA, J.H. Cohn LLP, Roseland, N.J.
Location: NYSSCPA headquarters, 530 Fifth Avenue (between 44th and 45th streets), fifth floor, New York City

About the Presenter

Mr. Nearon is the director of IT security audit for The Cohn Consulting Group, a division of J.H. Cohn LLP, and is chair of the NYSSCPA Emerging Technologies Committee. He also is a member of the NYSSCPA Auditing Standards and Procedures Committee, the Information Systems Audit and Control Association, and an associate member of the Information Security Committee Science and Technology section of the American Bar Association.

He received the American Institute of CPAs’ Elijah Watt Sells Award for performance with high distinction on the May 1989 CPA exam and holds a bachelor’s degree in accounting and a master’s of accountancy from the University of Florida.

His career experiences includes working for Auchincloss, Parker and Redpath, brokers on the New York Stock Exchange, and the Space Vehicle Office of the Apollo Program at NASA headquarters, Kennedy Space Center.

Mr. Nearon is a frequent speaker at professional auditing and information technology seminars, and has published numerous articles in professional publications on IT auditing and network security.

Additional Information

This NYSSCPA/Foundation for Accounting Education (FAE) CPE evening presentation is free to NYSSCPA members and $15.00 for nonmembers to qualify for one hour of CPE credit. At the session you will get the chance to network with other professionals and industry leaders interested in improving financial reporting.

Advance registration is recommended because seating is limited.

For additional information, contact Gary Carpenter at (315) 487-4567 or gcarpenter-cit@worldnet.att.net or Bruce H. Nearon at (973) 403-6955 or bnearon@jhcohn.com.

To register: contact FAE at (212) 719-8383 or (800) 537-3635 or visit the Society’s website at www.nysscpa.org. Select the Find Committees link at the left of the screen, scroll down to the Emerging Technologies Committee, select it, and then select “9/26/02 – Intangible Assets: Economics, Politics and Consequences of Accounting” located under the FREE IT CPE banner.

Acknowledgments

J.H. Cohn LLP helped provide the funding and resources for the sandwiches and soft drinks, marketing and publicity, and administration of this event.

Gary Carpenter, of Carpenter Information Technologies, helped administer this event.