Last week, I mentioned the private investment trust study on the lack of consistent pension contributions to defined benefit plans being one of the culprits in their underfunding, aside from poor asset performance and rising obligation values.
This morning, the New York Times ran an interesting story on United Airlines’ contribution history which paralleled the findings of the GAO.
According to the article, the GAAP financial figures showed that the plans were only about half-funded last year; had the ERISA funding rules been based on that particular version of economic reporting, the company would have been required to fund things much more quickly. (Kind of a moot point: the firm was operating under Chapter 11, and if it wasn’t, there probably wouldn’t have been the kind of idle cash needed for funding the plan.)
At the same time, the ERISA basis figures “allowed United to say its pension plans were fully funded, or nearly so, and therefore no more money was needed.” When contributions were required in 2001 and 2003, United was allowed to use its accumulated contribution credits from prior years to count as contributions.
It’s a crazy system based on historical costs instead of current fair values. Would investors like it if their mutual fund managers were allowed to use their gains from say, 1999, to count in their performance calculated in 2002, for purposes of figuring a management fee – while they were stuck with the fair value of the assets at the end of 2002? Of course not. The federal funding laws should eliminate the smoothing process from the contribution requirements, just as smoothing should be eliminated from the GAAP reporting. At least the GAAP reporting doesn’t have direct implications for the health of the plans. While the GAAP reporting of pensions does have an effect on investor decisions, there’s enough information available for investors to sort out the volatility-smothering – if they want to do it.
ast Thursday, while most of the investment world fixated on the choice of Christopher Cox as the replacement for William Donaldson as chairman of the SEC, chief accountant Don Nicolaisen gave a speech at an accounting conference at USC that went pretty well unnoticed. There were a couple of points in it that were pretty interesting, mostly from a “coming attractions” standpoint.
The main coming attraction was the mention of the SEC’s forthcoming report on the use of off-balance sheet financing as required by the (now-demonized) Sarbanes-Oxley Act. Mr. Nicolaisen mentioned that the long-awaited report would be released by the end of this month. Quote: “Our work on that report, combined with my prior experiences, confirms for me the need to reduce complexity while at the same time improve both the transparency and usefulness of financial reporting for investors.”
Those opponents of Section 404 internal control reporting and staunch accounting principles probably take heart in his view. “Reducing complexity” can easily be construed as “lightening up on the rules.” Not if you hear him out:
“Much of what I describe as complexity is the direct result of (1) a desire to reduce volatility in the income statement, (2) the development of numerous exceptions to basic principles or (3) the application of detailed rules. When I talk about reducing complexity, I am not talking about dumbing down accounting or implying that accounting or auditing will be simple.”
I think Mr. Nicolaisen has nailed it: the root of much complexity in today’s financial reporting isn’t necessarily the accounting. It’s in the transactions taken to make volatile transactions look like what they really aren’t, and in the accounting that follows afterwards. Let’s hope that the Office of the Chief Accountant won’t be pushed to “dumb down the accounting” under the next chairman.