Choosing Accounting Rules.

I believe that users of a firm's financial statements want them to emphasize a single figure that summarizes the accounting information related to the value of the firm's equity; and that the firm wants to emphasize a single summary figure to reduce damaging disclosures to competitors. Under current U.S. accounting rules, scaled earnings is closer to such a summary figure than such alternatives as book equity and scaled cash flow. Certain changes in the rules can increase the information in the earnings figure without sacrificing objectivity and practicality. Perhaps the most radical change is giving up conventional articulation between the income statement and the balance sheet (the "clean surplus" relation). The simplest way to make the earnings figure more informative (and more objective) is to make accounting choices that improve the association between earnings and value without giving managers more discretion. If we make explicit the goal of reducing variation in the ratio of earnings to value, we can greatly speed our responses to new accounting issues and changes in the business environment.