Of course, there are incompetent and even venal accountants, and thus the profession must accept a major share of responsibility and blame for many of the corporate scandals--Enron, WorldCom and the others--that have recently been in the news. But in order to apportion blame fairly, it is important to understand fully what accounting and accountants can and cannot do. It is also important to understand how technology and economic change are affecting accounting as well as every other aspect of our lives.

Last November, the American Assembly sponsored a conference on the future of the accounting profession. This was an absolutely inspired idea, and the American Assembly deserves applause and thanks for undertaking this thoughtful and constructive effort. As important as accounting is to the functioning of our financial system, I am not aware of any other group outside the accounting profession itself that has ever made an effort to look into the question of whether the profession has the tools and resources to meet the challenges of the future.

In fact there are major questions here. Accounting is an intellectual profession; one of its central purposes is the furnishing of information to managements and investors about the financial condition of companies. This requires two things--that accounting measure the correct things in formulating the information it provides, and that those who use financial statements understand the limitations of the information they receive. As it turned out, there was general agreement at the conference that deficiencies existed in both areas.

The agenda of the conference was broad. It encouraged the participants to avoid day-to-day concerns such as the structure of the industry and to focus instead on looking over the horizon at the challenges ahead--to the issues that are likely to shape accounting in the future.

The participants in the conference, listed in the final report that is in your folders, came from accounting firms, academia, government, policy organizations and businesses, and in three days of discussion they identified the most important issues the profession will face in the future, and made recommendations for how these issues should be addressed.

For me, two issues stood out.

First, what changes in accounting concepts would be necessary to address the increasing importance of intangible assets in the creation of value? Since the early 1990s, accountants have been worrying about the fact that GAAP financial statements cannot adequately capture the balance sheet value of intangible revenue-producing assets such as designs, brands, subscriber lists, computer programs and employee skills. In other words, in performing its function is accounting prepared to measure the correct things? The report addresses this issue.

Second, and perhaps of more current interest, the report discusses the widespread misconception that GAAP accounting produces a reliable, bottom line, Earnings per Share (EPS) number that can be relied upon as an accurate description of how well a company has performed over a given period. Most accountants know this is impossible. In the preparation of financial statements, management has to make so many judgments about the future--amortization and depreciation rates, recovery rates for receivables, allowances for product returns and the like--that the company’s EPS is at best only an approximation.

The report refers to this misconception as “the brittle illusion of exactitude,” a recognition that many users of accounting information do not actually understand its limitations. The report makes recommendations for addressing this problem, too. In fact, it is this brittle illusion that is at the root of many of the accounting profession’s problems today. As long as investors and the public generally believe that the EPS number has some inherent precision--that accounting really is at bottom only the accurate summing of a column of numbers--the profession will continue to incur liability for things it really cannot control.

There are many other important ideas discussed in the report, and we are fortunate to have with us today an extraordinarily qualified group--many of whom attended the American Assembly conference and participated directly in the preparation of the report--to discuss their perspectives on the report and its recommendations.

Ultimately, all the issues discussed in this report will have to be addressed--if they are addressed at all--by the organizations, public and private, that most directly affect the standards applicable to accountants. These include the Securities and Exchange Commission, the newly created Public Company Accounting Oversight Board, and the Financial Accounting Standards Board (FASB). The purpose of this conference is to alert the policy community in Washington to the fact that there are important issues here, in the hope that this will stimulate greater attention by the relevant and responsible agencies.

Peter J. Wallison is a resident fellow at AEI.