We’re now in the homestretch of our four-part marathon explanation of the real truth about the 14 myths listed at the end of this story. We’ve previously debunked the first 11 and now turn to the final three, concluding our message that today’s financial reporting system poorly serves users, accountants, auditors, managers and society.


“Existing generally accepted accounting principles are cost-based.”

This myth has survived despite the plain truth that few balance sheet items are actually carried at cost. The rest are reported at other amounts, including market and cobbled-together numbers that people carelessly call “cost.” This list of assets and their reported attributes debunks the myth:

  • Cash — market value (at current exchange rates).
  • Receivables — undiscounted predicted net realizable value.
  • Purchased inventory — lower of cost or market, where cost depends on an assumed physical flow.
  • Manufactured inventory — lower of cost or market, where cost is an impenetrable amalgam of allocated numbers based on predictions and assumptions.
  • Investments in stock — market value or a bizarre equity method accumulation.
  • Investments in bonds — cost, amortized cost or permanently impaired market value.
  • Property & plant — depreciated book value based on predictions, unless impaired.
  • Land — cost, unless impaired.
  • Leased assets — zero, depreciated book value or (coming soon) the balance of the lease liability.
  • Intangibles — zero, cost, allocated residual of an acquired company’s purchase price or amortized book value, unless impaired.

Clearly, financial statement totals are indecipherable aggregations of numbers reflecting various attributes, all expressed in a murky mixture of different original monetary units that aren’t adjusted for inflation.

This atrocious gobbledygook can never be fully useful for any rational purposes, period.


“Market value information is not useful for private companies.”

Contrary to this myth, private companies need market values to support their three most important decisions: setting internal strategies, assessing creditworthiness, and estimating an entity’s value.

These companies’ owners have the primary objective of creating enough wealth to justify their efforts and risks. Their strategic decision turns on whether they’re earning sufficient excess returns over what they’d make from comparably valued passive investments that have tolerable risk and require no effort.

Their actual return rate is best assessed by comparing the amount of created wealth to the value committed to creating it. Because GAAP income and book values are derived through garbage-in-garbage-out processes, they cannot legitimately inform this assessment. Only market values can usefully guide these decision-makers.

For assessing creditworthiness, creditors need information about cash flow coverage for debt service and protection provided by the borrower’s assets pledged as collateral and its other unencumbered assets. Market value information is essential for the latter.

Finally, most every private business is up for sale whenever the price seems right for both buyer and seller. They each need market value information to determine what amount to offer or accept.

This myth is crushed.


“Market value-based financial statements will never be acceptable.”

Paul Miller’s first day on the staff of the Financial Accounting Standards Board in 1982 included observing a so-called “informational” board meeting with representatives from the Financial Executives Institute, who were (to no one’s surprise) lobbying for their views. One of them offered up two unforgettable comments while pointing directly at Paul and Prof. Robert Sterling.

He first questioned why FASB kept hiring academics and then prophesied that market value statements would never be acceptable in his lifetime.

So far, his prophecy has been fulfilled, because FASB has shied away from comprehensive value-based accounting throughout its 43-plus-year history. As for the first point, Paul is still honored to have been associated with Bob Sterling.

In addition, witnessing firsthand a nationally prominent practitioner’s fear of innovative thinking actually motivated Paul to develop and explain lots of new ideas over his career. Rather than being intimidated that day, he has felt empowered ever since to communicate forthrightly about ways to improve on the status quo.

Returning to the myth, we’re 100 percent confident that market value-based statements will be widely used because current GAAP statements’ completely compromised contents cannot survive the tumult of today’s disruptive information revolution.

We assert that it’s better to promote reform by encouraging wise managers to voluntarily report market value information than by compelling unwilling managers to comply with new standards. It would help, of course, if the Securities and Exchange Commission and FASB provided that encouragement.


Although we’ve made many points over the last several months, here’s a summary of our main ones.

First, we remind readers of the Four-Way Test we wrote about in November 2016. The persistence of these 14 mythical cop-outs validates our conclusion that GAAP reporting is unethical because it isn’t truthful, fair, friendly or fully beneficial to anyone, much less everyone.

Second, market value information is undeniably relevant to all financial analyses, such as predicting future cash flows, valuing firms, gauging creditworthiness, and assessing management performance. Proof that sophisticated users demand this information is provided by these comments (among many others) in the AIMR’s 1993 monograph on financial reporting and its 2007 update:

  • “It is axiomatic that it is better to know what something is worth now than what it was worth at some moment in the past.”
  • “There is no financial analyst who would not want to know the market value of individual assets and liabilities.”

Third, market values can be reliably measured because they’re actual historical amounts, not predictions, and they’re based on multiple recent observations, not single past transactions. Further, their auditability is validated by their frequent presentation in GAAP financial statements.

Fourth, up-to-date market values for many assets are already available and their breadth and accessibility will accelerate when entrepreneurs begin serving the tremendous pent-up demand for them.

Finally, market value accounting will actually decrease share price volatility because it will reduce the uncertainty that makes capital markets jittery.


Despite these facts, everybody keeps reporting the same old way, which is why we know that many of you are saying, “Look, professors, if market values are so wonderful, why aren’t they already being reported?”

Our explanation rests on the principle that closed cultures obstinately resist changes that clash with deeply embedded concepts, even when they’ve lost validity.

Here’s what we observe about the closed accounting culture:

  • Accounting instructors teach only from accounting textbooks.
  • Accounting textbooks disparage market values.
  • The common accounting curriculum doesn’t address how accounting information is (or isn’t) actually used by financial analysts.
  • Alternative accounting theories are seldom researched, taught or well understood.
  • Practicing accountants train newly hired graduates by indoctrinating them in existing practice, no questions allowed.
  • Practicing accountants communicate exclusively with other practicing accountants without interacting with financial statement users.
  • Accounting standard-setters are simplifying and tweaking existing practices, not replacing them lock-stock-and-barrel with new ones that would embrace market values.

In addition, we believe history reveals that today’s standard-setting system was not originally created to initiate change but to help accountants slow down and discourage change. We have observed that FASB’s political power has evolved since 1973 from its initial dependence on auditors to domination by managers to now being fully empowered and obligated to support the public’s interest in capital market efficiency.

However, the board remains unwilling to fully engage with crucial measurement issues that could lead toward progress in meeting statement users’ needs.

We personally cringe at that fact because we each worked on FASB projects in the 1980s that, if they had been earnestly pursued to completion, could have put market value into widespread use in the 1990s.

Instead, today’s board members seem to be held back by the same political anxieties that corrupted Concepts Statement No. 5 three decades ago. Specifically, its guidance on measurement asserts that five different attributes were then in use and would continue in use.


Even though market value accounting remains controversial, it’s past time to overcome the resistance. But how?

We applaud the CFA Institute’s January release of two reports on non-GAAP information, and urge the user constituency to more actively exploit their considerable economic and political power by demanding more useful financial reports. They should not have to keep trying in vain to satisfy their information needs through GAAP reports and biased non-GAAP disclosures. Instead, they should continue pounding on FASB’s door until they’re heard.

However, their best bet and real hope for progress lies with innovative entrepreneurs who will disrupt the status quo by developing new ways to gather and deliver truly useful information to them outside the usual channels. Once that disruption gains traction, everyone will be compelled to come along.

In light of all the money, talent, effort, time and attention that the SEC and FASB have applied toward ostensibly improving financial reporting, it’s ironic, and frustrating, that users, their most important constituents, are still looking elsewhere for useful information.

There are no good reasons or valid excuses for these regulators’ inability to achieve more progress.


1. The market value of an asset or liability is a single number.

2. Assets’ original costs (or liabilities’ original proceeds) equal their market values on the date they’re acquired (or incurred).

3. Users don’t want to know market values.

4. Market values for assets (or liabilities) are irrelevant if management doesn’t plan to sell (or settle) them.

5. Market values are unreliable because they’re hypothetical predictions.

6. Market values can be reliably calculated.

7. Market value information is too costly to update.

8. Unrealized losses are real but unrealized gains are not.

9. Market values cannot be safely audited.

10. Reporting market values makes real income volatile.

11. Reporting market values makes stock prices volatile.

12. Existing generally accepted accounting principles are cost-based.

13. Market value information is not useful for private companies.

14. Market value-based financial statements will never be acceptable.

Paul B.W. Miller

Paul B. W. Miller is an emeritus professor at the University of Colorado at Colorado Springs.

Paul R. Bahnson

Paul R. Bahnson is a professor at Boise State University.