In 1978, the book value of the physical assets -- the property, plant, and equipment -- of all publicly traded non-financial corporations was about 83% of their market value. By 1998, these physical assets accounted for only 31% of market value. (These figures come from the work of Vanderbilt Law Professor Margaret Blair. See, e.g., Unseen Wealth and Clarifying Intellectual Property Rights for the New Economy.)

At least one respectable source says the trend has continued, putting the value of physical assets circa 2004 at only 15-25% of total market value.

The consequences of this shift are many and profound, but for the moment we will stick to one -- the shift from tangible to intangible wealth means that the accounting tools used to value and monitor corporations are hopelessly out of date because they are very bad indeed at assessing intangibles.

Therefore, the current fad for requiring intensified application of those tools as the response to various perceived problems -- a fad manifested in Sarbanes-Oxley and in the recent FASB rule to expense stock options -- is madness. At a time that needs maximum creativity in accounting (yes - "creative accounting" is not usually a compliment, but this pejoration is part of the problem), the SEC, the Congress, and Eliot Spitzer are terrorizing the corporate world into uncreative, counterproductive, and expensive rote.

Furthermore, I see little countervailing force. The estimable Brookings project on corporate value and intangibles has been shut down. So has the FASB project on Disclosures About Intangible Assets. The accounting profession is too busy porking out on SarOx money and anticipating the windfall from producing and then litigating over spurious valuations of stock options; it has about as much interest in tackling difficult conceptual accounting issues as the corporate defense bar has in tort law reform.

So the tech world better begin paying attention to these issues, and more effectively than it has dealt with the options issue. No one will fight its battles for it, and in this area it is getting rolled.

We need less, or at least different, regulation rather than more -- let 100 flowers bloom as people experiment with different approaches to accounting for intangibles, and other people critique them. Move Beyond GAAP -- let entrepreneurs develop new sets of tools and let the market of companies, investors, and intermediaries choose the best. Or put the open source people to work -- it might be interesting, and it would keep them out of mischief dealing with software.

But for heaven's sake, tech world, do something! Remember, the 401(k) you save may be your own.

posted by James DeLong @ 9:31 AM | Accounting

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