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I’m writing this article while watching the President give his “major speech” at Georgetown University on what is needed to do to create a new foundation for the economy.  He has rearticulated how busy he and his administration have been and a number of core beliefs they are bringing to their efforts.  He has suggested five new “pillars” to the U.S. economy:

1.     New rules for Wall Street designed to “drive innovation” and discourage “reckless risk taking”

2.     New investments in education “to make our workforce more skilled and competitive”

3.     New investments in energy and technology that “will create new jobs and new industries”

4.     New investments in health care that “will cut costs for families and businesses”

5.     New savings in the federal budget that “will bring down the deficit for future generations.”

Very nice.  Great principles.

But there is one step he did not discuss that I believe is crucial if we want to establish a new foundation for a new economy.  That would be:  change the balance sheet.  The current balance sheet is outdated and flawed for the Knowledge Economy, which is replacing the Manufacturing Economy for which the current balance sheet has been created.

In the manufacturing economy, hard assets – property, plant and equipment – are the most important assets, and that is what our banking system uses as the basis for lending decisions.  But those assets depreciate over time.  They rust and they need maintenance and eventually they become outdated.  That’s an exact mirror of the most important assets of a Knowledge Economy business: human brains and skills.  Those appreciate with time.  When part of a collegial team, those assets are even greater than they are when in solitude.  But where do those assets show up in the GAAP balance sheet?  If anywhere, they only show up as part of “goodwill,” but that happens only if there was an acquisition at a value greater than hard asset book value, and goodwill is broadly disliked and dismissed as a balance sheet negative.  

I do not see how this nation can move forward with a new economy if something as fundamental as the balance sheet is so fundamentally flawed.  President Obama has intruded – perhaps correctly, perhaps not – on the management of our nation’s auto industry; he’s about to reshape the health care system; the nation’s energy grid is on the agenda for change; there’s about to be a radically new level and detail of regulation on U.S. financial services companies; on and on.  Couldn’t he send a message to the AICPA to urge the accounting profession to figure out some way that the instrument that is designed to give a picture of financial health be structured so that the picture can be accurate for Knowledge Economy businesses?