Peeling away financial reporting issues one layer at a time

No Escaping the Politics of Information

It's one thing to rely on misleading financial statements and invest in a company that soon thereafter goes bankrupt; and quite another to invest in a hip replacement operation that turns out badly because your doctor had misleading information concerning the artificial joint he chose for you. Or is it?

Even if you are too young to think about swapping bone for metal, you will be surprised to know that a recent article in the New York Times, "A Call for a Warning System on Artificial Joints," contains some interesting food for thought for us accounting policy wonks. If I were still teaching accounting, I would share and discuss this story with my students, be they freshmen, accounting majors, MBA or doctoral candidates. The principles of information economics are universal, and unfortunately, so it would appear are the politics.

The article is motivated by one doctor's experience in trying to understand why he had a spate of patients who suffered from post-surgery complications requiring corrective surgery. Of course, the device manufacturer blamed it all on the doc, until he got his colleagues to share their own sorry experiences with the same device. The lesson he learned is that valuable answers to his questions could have been identified much earlier if the United States had a national joint replacement database. But, despite the efforts of a very few good Samaritans, we're not even close. Sweden has one because its government saw fit to establish it, and Australia has one because the surgeons themselves took the initiative to set one up.

The cost of maintaining the database system is estimated to be $10 -$15 million per year. That's a drop in the bucket compared to the needless suffering caused by not having one, not to mention the billions of dollars spent on premature "revisions" to knee and hip replacement surgeries. The article states that the risk of complications in countries without databases can be double those of countries that have them.

Getting to the accounting lesson, the stupid reasons why we don't have a joint replacement database sound a lot like why we are stuck with some of our stupidest accounting standards. So, anyone familiar with the politics of financial reporting could probably guess what the problems are in the medical field:

  • Doctors won't go through the effort of submitting information on their procedures unless they are forced to do it – Sounds like any number of FASB battles where issuers and auditors fight tooth and nail against improved financial reporting standards.  The almost complete absence of reliable information even harkens back to the conditions leading up to the federal securities laws in '33 and '34.
  • Doctors are also concerned about jeopardizing their relationships with device manufacturers, who may be compensating them to use their product – Sounds like issuers attempting to influence auditors with large fees for non-audit services. A database could separate the pigs, kicking and squealing, from their troughs. 
  • Device manufacturers are afraid that transparency will increase exposure to product liability lawsuits, and doctors of malpractice lawsuits along the same lines – Sounds like the U.S. auditors and issuers who are cheerleading the adoption of IFRS as a way to decrease their exposure to litigation.
  • Most depressing is that government agencies, who could solve the problem with a stroke of the pen, are babbling nonsense.  Medicaid says it's not their job; the Food and Drug Administration says it would open the door for other medical procedures to be registered and tracked. Sounds eerily similar to the SEC's pandering to auditors and/or issuers with barely lip service to investor protection.  Don't get me started on recent examples.

Bottom line for me is that the reasons we should not leave the medical database decision to private interests are the same as why we can't do it with accounting.  As to my aching knees, as things currently stand, I would prefer to have my them replaced in transparent Australia or Sweden.  On the other hand, I would prefer to invest in stocks listed on the New York Stock Exchange instead of the Australian Securities Exchange where opague IFRS is the coin of the realm.

But, the sad part is that if the U.S. switches to IFRS and I'm a beer-drinking, beach-and-tennis-loving investor in need of a joint replacement, I just might be better off moving to Australia.

Postscript

My good friend and former colleague, Jim Noel, had this to say about my post:

"Your post raises the question of whether databases providing information on items will become available worldwide.  Of course, the US can suppress data by allowing different products (statements) or enforcement in this country, but commuting for information is pretty cheap these days.  When I read the hip replacement comments by you, I was thinking that the financial statements problem is even easier to solve.  All that is required is one country giving adequate disclosure.  For reasons that the USA should try to remain that country, I would refer you to one of many articles about getting care abroad, so-called 'medical tourism', in the Economist.  A URL is:

http://www.economist.com/opinion/displayStory.cfm?source=hptextfeature&story_id=11920756

While enforcement mechanisms will differ across countries for financial statements (possibly the information that is allowed in the court system), information flows will not.  The world is potentially changing, and the question is whether we in the US want to give up the premier position as provider of financial information." [italics supplied by me}

1 Comment

  1. Reply Independent Accountant August 18, 2008

    The classical agency problem appears in many guises.

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