May 04, 2005

The blogosphere is talking about Outback Steakhouse CFO Bob Merritt's resignation over "the increasingly negative regulatory environment" (Smith; Bainbridge). There's plenty to complain about in the new regulatory regime, but I have to disagree with Professor Bainbridge that new lease accounting rules issued by the SEC in February are appropriately in that category. An accounting rule, such as the old lease accounting rules, whereby a company can take steps that make it unambiguously worse off economically (because of transactions costs) but improve the appearance of its balance sheet is exactly the type of accounting rule that policymakers want to discourage. There's no reason to establish incentives to engage in such shell games. There were good discussions of these issues a few years ago in Forbes. (Elizabeth McDonald, "False Front", Forbes, Oct. 14, 2002; Seth Lubove and Elizabeth MacDonald, "Debt? Who. Me?", Forbes, Feb. 18, 2002). Companies and executives that engaged in "synthetic leases" weren't dishonest, just taking advantage of the rules, but, as in tort reform, one wants to abolish rules that encourage inefficient behavior. One sympathizes with Merritt's complaint "of the growing presumption that all business people are dishonest" in press coverage of the resulting restatements.