Evolving Excellence

Boeing's About Face Runs Smack Into Traditional Accounting

By Kevin Meyer

Just the other day I told you how Boeing has apparently learned a lesson and is making an about-face on its outsourcing strategy by buying the assembly operations of a key supplier, Vought.  Well yesterday the deal happened, and the writeup in the Wall Street Journal itself explains why companies continue to go down the path to outsourcing hell.

Boeing Co. agreed to acquire manufacturing operations from one of its key suppliers on the delayed 787 Dreamliner aircraft at a cost of $1 billion. The purchase of a plant in North Charleston, S.C., from Vought Aircraft Industries would mark the second time Boeing has taken over a key part of the Dreamliner's supply chain. Boeing is paying $580 million in cash and will forgive $422 million in cash advances paid to privately held Vought for work on the 787.

The move gives Boeing additional control over a sprawling global supply chain that has created numerous problems for the 787, leading to delays in testing and production.  Those delays have cost Chicago-based Boeing millions of dollars in penalties and concessions and have damaged the companies credibility with customers.

Let's repeat some of those negatives, as they'll soon provide the 2x4 we'll use to smack some people upside the head.  Cash costs, sprawling supply chain, delays, penalties, concessions, damaged credibility.  Pretty expensive, eh?  Since it's almost always overlooked, we'll also tack on the human cost of tens of thousands of years of experience, knowledge, and creativity that Boeing shed as part of their outsourcing adventure.

But some people just don't see that.  In the same article whiz-bang analyst Robert Spingarn at Credit Suisse had a slightly different perspective.

"While such a transaction should afford Boeing greater control over 787 production, we see another negative in that Boeing is bringing more fixed cost into the company."

What rock has this dude been living under?  In what universe has moving "fixed cost" outside of the company been a good thing for Boeing?  So you shed some massive assembly operations, tens of thousands of years of knowledge and experience, but you've somehow created a good thing because if times get rough the assembly operation is magically "flexible" because you can demolish a supplier instead of yourself?  In the words of Dr. Phil, "how's that working for you?"  I know, stupid question.

But here's the really scary part:

Robert Spingarn, aerospace and defense analyst at Credit Suisse (nyse: CS - news - people ), ranks first among all his peers on Wall Street in Forbes.com's 2008 survey of America's best stock analysts. Spingarn earns the award with solid judgment, as measured by our data partner Zacks Investment Research, in both forecasting earnings and picking stocks over a three-year period.

And now you know one reason why it's so hard for public companies to implement lean manufacturing.  Not only do they have to come to grips with the often counterintuitive nature of lean, but they have to battle the traditional accounting and short-term mindset of the capital markets... and the analysts and investors that reward companies that play by traditional rules.

After years of telling them they were going down a very expensive path, I do have to hand it to Boeing for changing direction.  I just hope their shareholders also recognize it's a good move.

Lean Accounting Is The Key

by BILL WADDELL

You may have noticed that the pace of my writing slowed over the last few weeks as the demand for my one day assessments took me to North Carolina, Tennessee, Ohio and Michigan, giving me a chance to get a pretty good look at 11 different manufacturers across a good range of industries.  The experience convinced me that companies pursuing lean can be divided into two distinct categories - those that have embraced Lean Accounting, and those that haven't.  The lean accounting companies are in the big leagues - they are making improvements at a much greater rate and they have a keener grasp of where their improvement efforts will bear the most fruit.  Those that aren't are doing a lot of lean things, but bringing far less to the bottom line, and making fewer improvements in ares critical to achieving their strategic objectives.

The reason for the divide between the high achievers and the rest of the pack is pretty simple.  If your company is using a standard cost system, you don't really know what your costs are.  You're using bad data based on flawed assumptions and illogical ideas of allocations, as well as assumptions about fixed and variability that make little or no sense.  When you are trying to reduce your costs - but your cost data is as bad as that - your improvements are pretty much a crap shoot.  It is a stroke of luck when you actually do something to make a meaningful improvement to an significant cost area.  For the most part, your improvement efforts are fighting against the cost system.  On the other hand, if you are driven by lean accounting principles you are using "real numbers", as my friend Jean Cunningham puts it, so you don't suffer through all of the muck previously described.

Lean accounting is driven by a couple of key principles, but perhaps the most important in the current economy is that the 'real numbers' are based on cash.  Traditional accounting - GAAP accounting - has things so screwed up that profits and money almost cease to have any relation to each other.  Lean companies view cash flow and profitability as just about one and the same.  That is why the traditional companies are way up a creek without a paddle and are laying off in droves in the current tight credit economy, while lean companies are relatively unfazed.  Taiichi Ohno summed up the Toyota Production System rather succinctly when he said, "All we are doing is looking at the time line, from the moment the customer gives us an order to the point when we collect the cash. And we are reducing the time line by reducing the non-value adding wastes"  Do that and you will have a lot of money in the bank.  Chase after some convoluted concept of theoretical book profits based on matching principles and fully absorbed overhead inventory valuations and you will find yourself standing hat in hand in some bankers office begging for help, or hiring lawyers to file your bankruptcy petition.

Every member of your management team has to read Practical Lean Accounting - no ifs, ands or buts if you are going to get lean.  It really is the most important lean book you will ever read. Then your CEO and your CFO have to get to Orlando for the Lean Accounting Summit.  It's the difference between playing in the lean major leagues or fooling around in the minors.  And for many companies, it is apt to mean the difference between being in business a year or two from now ... or not.

And On And On We Go

by BILL WADDELL

For those who haven't dug into lean deeply enough to understand how accounting is the real problem, and Lean Accounting is an absolute prerequisite to becoming truly lean, I'll give you a brief primer.  (if you really want to get immersed in this stuff you have to get your hands on a copy of my book)

The accountants have decided that inventory is supposed to be valued at "the lower of cost or market".  "Market", however, is a concept they defined, redefined, then virtually threw out long ago.  With the exception of a trivial fop they throw at inventory to write down the little bit of stuff that exceeds even the most unreasonable expectation of demand, they value inventory at what it cost to make it.  So if your company has 50,000 wigiclips - a custom designed component that serves no purpose and has no value other than to connect the whatchathingy to the doodad in a product only you make - the fact that no one in the world would buy those clips from you far anything above scrap value is ignored.

You have a standard cost for the wigiclips of $1 each, so you put $50,000 of the money your company spent into inventory and onto the balance sheet instead of on your income statement where it would have the effect of reducing profits. 

The "market" side of the equation is determined to be the cost of the wigiclips embedded in the price of the end product, so the market is essentially the cost. If you were to go under, imagine the surprise of your stockholders or lenders who thought they really had $50,000 worth of assets when they find that there is no market for those assets and the $50,000 is actually worth pocket change.  But never mind that for now. 

Now in addition to the philosophy of valuing inventory at what it cost to build it instead of its value, the accountants throw in the matching principle and the idea of full costing.  With these cockamamie thoughts, they decide that all of your costs are really there to make stuff and allof them should be assigned to inventory instead of deducted from profits now.  Then the costs will stay on the balance sheet until the products are sold ... if they are sold.  Those cost include the light bulbs in the men's room and the cost of the thumbtacks back on your loading dock the boys use to pin up the girlie calendars they put up in violation of all of the sexual harassment laws.  In fact, they include just about everything, no matter how removed from making wigiclips those costs may be.

It doesn't take a real stretch of creative thought to figure out that the more wigiclips you build and put into inventory, the more irrelevant cost you can get out of the profit calculation and onto the balance sheet in the form of an asset.  Do that and - VOILA - your profits are higher and the book value of your business is greater.  Overstating the real worth of inventory is a great way to create wealth, on paper anyway.  So long as the books are kept this way, lean can never be any more than a superficial shop floor exercise.  Waste is actually good under this scenario - it is an asset.

So you gotta get your top management and accounting folks to the Lean Accounting Summit if you are ever going to get lean.

All of this is just a long-winded intro to telling you that collectively the United States of America has rejected these core principles of lean and has decided that creating wealth out of waste on paper is a good thing and honestly valuing assets is for suckers.

The Financial Accounting Standards Board has given a big old thumbs up to the Bankers to value the assets against which they lend money the same way the failing manufacturing companies value inventory.  Playing games with inventories in pursuit of short term profits is a one way ticket to ruin, and it lies at the root of GM's problems and every other big publicly traded manufacturer.  However, Wall Street loves paper profits and short term numbers games because investors on Wall Street think the long term can be measured in weeks, so any erosion of real value these practices lead to will be someone else's problem.  Now the heart of the US financial system has been licensed to play the same game.

Banks have been under requirements to value the assets they hold by a similar lower of cost or market principle, only their market value had teeth.  They have used what they call "Mark to Market" to continually value the real estate assets that serve as collateral for the loans they have outstanding.  The recent downward spiral of real estate has made their books look pretty ugly.  That house you paid $200,000 for, and borrowed $160,000 from the bank to finance, is now only worth $150,000.  So the bank has an outstanding loan to you that is $10,000 more than the worth of the collateral they hold.

This means that their stockholders have too much exposure, and they have a great deal of risk.  It also means that the government restricts them from lending any more money until the situation gets fixed.  The solution - get rid of Mark to Market, and let the bankers decide for themselves how much to say your house is worth.  With a stroke of the pen, your house is back to being worth $200,000, the banks are profitable again, and Wall Street is ecstatic.  Never mind that no one on this planet will pay you $200,000.  And if you default, the bank's stockholders are way up a creek.  That is not a worry, because it won't be these stockholders.  They will have sold their shares and moved on to some other game before the truth of the value of your house becomes a problem.  And when it does, the federal government will bail out the bankers and their stockholders again, and Wall Street will roll on and on and on.

Lean, value, waste reduction, truth, the future of the country, right and wrong ??? All of them are apparently concerns for working class chumps not bright enough to get on the next bus to New York and get in on the paper wealth game.

“Annual Expenditure Twenty Pound Ought and Six”

I read articles and listen to commentary about the bailout of the US financial industry and wonder, “Does giving people money solve their problems?” I’m not an economist or a financial guru so I won’t try to pontificate too much in this post, but I am a concerned citizen of both the United States and the World. Each of us has a relative or a friend that has been bailed out on multiple occasions and then chooses to spend the bailout funds unwisely. Eventually this same person manages to slip back into the same hole that their beneficiary just dug themselves out of.

Why? Why do we help? And why do they fail to improve?

I don’t know. I just sit back in awe at the spectacle that is before us. You have to admit that it is a very interesting and tragic conundrum that we find ourselves in. How can the financial industry be spending the Federal Aid package by providing bonuses?

How? Easy. Someone internally just wrote the checks and it was done. This is the same thing that our dysfunctional family and friends do with the money we provide them. They write a check just the way they did before we gave them the money. And the great thing for them is that once you give somebody money they can do whatever they want with it. After all, it’s their money now isn’t it?  If you didn't think the money would be spent wisely maybe you shouldn't have given it away.  Or maybe you should have been more careful about how much, to whom, and under what conditions it could be spent.

In Charles Dickens classic, David Copperfield, he wrote,

"Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery."

This was written in 1849. 160 years ago and yet it is as true now as it was then. In the book David Copperfield learns this valuable lesson from Mr. Micawber who is thrown in jail for spending “twenty pound ought and six”. While visiting Mr. Micawber in jail young David is promptly told by the man that spending beyond his means would make him “miserable”. Immediately following this statement Mr. Micawber convinces David to lend him a shilling for Porter. The Micawber family moves into the prison with Mr. Micawber and enjoys a more luxurious life than before thanks to friends and family that feel bad for them and send assistance to them in their “dire” circumstances.

We are a society that has annual expenditures of “twenty pound ought and six”. This is not limited to just the financial sector. It goes across many sectors and even into personal finances. The long-term result of outflows exceeding inflows, according to Mr. Micawber, is misery.

So what do we do now?

Stop the Fake Sales Already

A short blurb in yesterday's Wall Street Journal tweaked my sensibilities yet again.

Health-care giant Johnson & Johnson braced investors for its first revenue decline in 76 years in 2009, in a sign of the toll the recession is taking on what is usually one of the most resilient sectors of the economy.

The anti-inflammatory drug Remicade posted sales of $886 million, down 2.4% from a year earlier.  Remicade's sales were hurt by lower customer inventory levels and increased competition from Abbott Laboratories' Humira and Amgen's Enbrel.

Sales hurt by lower customer inventory levels... presuming that increased inventory creates increased sales.  Now where have I heard that before?

After a deep slide in sales in the fourth quarter, Chrysler LLC now faces a new obstacle in its battle to survive: Many dealers are loaded with inventory and aren't ordering new vehicles.

An auto maker books sales when vehicles are shipped from its plants to its dealers, so a slowdown in orders reduces a car company's revenue.

Chrysler is probably not a company that J&J wants to emulate, not that they're really doing that.  Unfortunately it is all too common to book a sale once the product leaves the plant, regardless of whether demand exists by the final customer. 

AutoNation, the country's largest chain of car dealerships by revenue, estimates that 3.2 million vehicles are now sitting on dealer lots across the country. At the current retail sales pace, that is enough to last more than four months.  Chrysler vehicles sold in December had been on dealer lots for 142 days, the most of any maker, compared with 82 last year.

What is truly the value of that product if the demand is soft?  No where close to what the "sale" was booked at.  That value distortion then cascades up the supply chain, leading to completely erroneous decisions to keep factories operating, cranking out even more product completely unlinked to true final demand.

Most automakers are starting to see the real picture and are idling plants and postponing investment in increased capacity.  But are they doing enough?  When will they truly link production with demand?  Anyone want a four month vacation?

Myopic Views of Efficiency

Once again we have someone, this time ostensibly a professor of economics, looking at a concept from an unfortunately narrow perspective.  From a letter in The Washington Post last Monday:

The Jan. 5 editorial "Terms of Trade; Why the U.S. Lost Manufacturing Jobs, and How It Can Replace Them," was on the mark. The bailout of U.S. automakers will not save their industry in the long run.

True.  Let's go on.

Manufacturing by the Big Three represents the remnants of an industry that has been relocating to other places for 30 years. The subsidy would only slow this trend, which is likely to follow the pattern set by other manufacturing industries. At the turn of the 20th century, the heart of American textile manufacturing was in New England. Throughout the century, it relocated to the South to take advantage of non-union labor, and it eventually migrated offshore to find even cheaper labor.

True from a historical perspective, but I'm sure the more enlightened among you are starting to perceive the problem.

As foreign carmakers in the South erode the market share of the Big Three, burdened by high labor costs and low-efficiency cars, the pull of relocation will become stronger. The solution is moving substantial parts of the industry to the South or to low-cost foreign sites, where U.S. subsidiaries are already producing cars more efficiently.

Boom.  Yes union labor costs are considerably higher than non-union, although not as great as some will say.  And definitely not enough to change the competitive balance.  Are most foreign cars made in cheap labor countries?  No.  Japan isn't exactly cheap. 

The real competitive problem, the real driver of differences in efficiencies, is the difference in work rules that constrain change, agility, and flexibility.  If the unions really wanted to survive, perhaps even hold on to their lavish pay and benefits, they would simply eliminate their ridiculously narrow job functions.  Not try to skew a democratic process via promoting the idea of non-secret ballots as "fair choice."  Become a brain instead of just a pair of hands.  I realize that this was originally brought about due to a management that also treated the employees as just hands, but it's time for a change, on both sides.

Efficiency is created by using brains to improve the process, not by just focusing on the cost of the pair of hands.

The Myopic Misfocus of Labor Time Standards

"The largest cost in business is not labor, material, or overhead... it's unnecessary complexity."

Who said that?  I did.  I use it almost every time I'm asked to speak to industry groups, and even last week to a bunch of almost disturbingly smart CalPoly students.  The students immediately understood, the business executives often don't.

Now we hear of another industry that is embracing time standards, looking for savings in one area while ignoring the impact in others.  And most notably ignoring the unnecessary complexity all around them, thanks to the blinders of pathetic leadership.

Daniel A. Gunther has good reason to keep his checkout line moving at the Meijer Inc. store north of Detroit. A clock starts ticking the instant he scans a customer's first item, and it doesn't shut off until his register spits out a receipt.  Each week, he gets scored. If he falls below 95% of the baseline score too many times, the 185-store megastore chain, based in Walker, Mich., is likely to bounce him to a lower-paying job, or fire him.

At least 14 major chains have sought bankruptcy protection over the past 12 months, and many others are struggling. With nearly all of them under the gun to cut costs and improve profit margins, "labor-waste elimination" systems like the one used by Meijer are sweeping the industry.

Now where have we heard of this before?

The approach is rooted in the time-motion theories of Frederick Taylor from the early 20th century, which were used to break down tasks into units to determine the maximum work a person could do. Harold B. Maynard, the company's founder, began his career in 1924 as a time-study engineer at Westinghouse, then formed his own company. For 70 years, that company worked primarily for manufacturers. In 2000, after demand from manufacturing industries declined, the company shifted into retail.

Of course it declined in manufacturing because factory managers woke up and realized that it didn't work.  Sure, direct labor might become more efficient, but at what cost?

Interviews with cashiers at 16 Meijer stores suggest that its system has spurred many to hurry up -- and has dialed up stress levels along the way. Mr. Gunther, who is 22 years old, says he recently told a longtime customer that he couldn't chat with her anymore during checkout because he was being timed. "I was told to get people in and out," he says. Other cashiers say they avoid eye contact with shoppers and generally hurry along older or infirm customers who might take longer to unload carts and count money.

Worker stress goes up, customer service goes down.  Contrast that with the philosophy of Saishunkan, the cosmetics company in Japan that I wrote about a couple weeks ago.  They go the extra mile to engage the customer, as happy customers both create sales and create ideas for improvement.  But how about some more examples of the impact of a focus on labor productivity:

Linda Long, 58, who shops at the Okemos store weekly, says of the cashiers: "Everybody is under stress. They are not as friendly. I know elderly people have a hard time making change because you lose your ability to feel. They're so rushed at checkout that they don't want to come here."

So you're losing the elderly customer base.  That's some nice brand image, not to mention lost sales.

Customers at several Michigan stores said managers appeared to be opening fewer checkout lines than before, relying on faster-moving cashiers and self-checkout systems to pick up the slack. "I do notice that the cashiers go a little faster, but it doesn't necessarily matter because there aren't that many cashiers," says Melissa Shoe, 20, a regular shopper at the Lansing store.

Faster cashiers, but the customer experience suffers as there are fewer cashiers.  Don't forget, the purpose of an organization is to create value from the perspective of the customer...

At Bob's Stores, a Northeastern clothing and footwear chain, the software revealed that shaving one extra second from the checkout process for each shopper would produce $15,000 in annual labor savings across its 34 stores, according to Kevin Campbell, assistant vice president for store operations.

How does that $15,000 compare to the lost sales from customers that used to appreciate a more friendly attitude, or the improvement suggestions that used to be created by interaction between the cashiers and the customers?  I bet one small suggestion could offset that $15,000 pretty easily.

Two shoppers interviewed in front of the Okemos store said they were told by cashiers that they were being timed. "There was one particular cashier that was in so much of a hurry," recalls Ms. Long, the regular customer at that store. "And he was saying, 'When you're afraid you're going to lose your job, you're going to make more mistakes.' "

Saving a second by adding a mistake will wipe out $15,000 pretty quick as well.

Ms. Barry, the DeWitt cashier, who says her weekly score usually hits or exceeds the baseline, admits to using a few tricks to improve her times. She makes heavy use of the register's "suspend button," which stops the clock. The system detects when remote scanning guns are used, automatically allowing slightly more time to scan big items that stay in the cart. Ms. Barry sometimes uses the remote scanner for nonbulky merchandise.

Gaming the system always happens when there are unreasonable requirements.

This myopic nonsense needs to stop, and the absurdity of Taylorism put in the grave once and for all.

Compensating Risk

I've long been at odds with many of my lean compadres in that I don't advocate controls or caps on executive pay.  Instead I'd like to see more active investors and boards creating compensation systems that match the particular business vision of a particular company in a particular industry.  I'm concerned that artificial caps or constraints could actually create the unexpected effects... now where have we heard that before?

There have been some exceptionally egregious examples of incredibly bad compensation plans, with some failed execs getting nine figures just for leaving.  But perhaps there's more at work than meets the eye.

The $700 billion financial-rescue law attempts to curb executive pay by barring incentives for "unnecessary and excessive risks," among other steps. That will be easier said than done, say pay experts. It's "a very noble thought, but administering it will be very difficult," says Paul Hodgson, senior research associate at governance tracker Corporate Library and a frequent critic of executive-pay excesses.  Pay experts say the vague language of the new law will make it hard to implement. The provision doesn't specify how to determine what "unnecessary and excessive" risk is, says Mr. Hodgson.

The excessive-risk language applies to financial firms in which the government takes a "meaningful" debt or equity stake under the terms of the bailout. Other provisions limit corporate-tax deductions on executive compensation at some firms, bar "golden parachutes" for some executives, and allow companies to recover compensation based on inaccurate results.

What's the problem with risk?

The excessive-risk provision is aimed at what some consider a contributor to the Wall Street meltdown: pay plans that gave executives outsize rewards for taking big risks.

Few dispute Wall Street firms took too much risk, but there is little consensus on the role of pay packages in encouraging that behavior -- or how to prevent it from happening again. Some experts say that banks such as Wells Fargo & Co. avoided the worst of the mortgage mess, even though their compensation plans were similar to those at banks that suffered big losses.

So similar compensation plans, but different results.  Hmmm... what's happening?

Alan Johnson, managing director of pay consultancy Johnson Associates Inc., blames unrealistic performance targets for much of the risky behavior. He says executives of some financial firms he advised had to produce a return on equity of 20% to earn their full annual bonuses. A more realistic goal might have been around 15%, he says.

I could see that.  Goals must be tied to acceptable risk levels.

Ira Kay, head of compensation consulting at Watson Wyatt, contends that linking pay to performance, particularly through granting stock, is still the best way to avoid excessive risk-taking. The problem on Wall Street, he says, may have been overly large cash bonuses that made the stock seem like "gravy."

Yep, another good point.  Who cares about risk-related goals when you'll get a boatload of cash even if you miss them?

Others suggest tying more pay to long-term results. Richard Ferlauto, head of corporate governance and pension investment at the American Federation of State, County and Municipal Employees, suggests companies delay paying annual bonuses for a few years -- until they are sure that good results will last. Consultants say some companies tried such deferred-bonus plans in the 1990s, but later abandoned them because they were hard to administer. Mr. Ferlauto also wants more companies to require top executives to hold a significant amount of stock until they leave, forcing them to think longer term.

And that's probably the most important point: distinguish between long-term risk and short-term risk, and reward appropriate long-term results.

How many of you work for companies that focus on monthly or quarterly results, and perhaps tie rewards to those short-term numbers?  How many of you work for companies that almost compell you to change jobs every two years if you want to be on "the ladder?"  I've been there too, and left a Fortune-50 because of it.  Ok, I also left because that next assignment would take me to (brrr!) Buffalo... the wrong direction from Salt Lake.

Focus on long term results from appropriate long term risk.  It takes real leadership to buck the traditional accounting and demands of the Street, but that's where the opportunity is. 

Time - The Online Truly Finite Resource

Time has value.  Those of us in the manufacturing world are distinctly aware of this as we deal daily with production schedules, output, and cycle times.  In the realm of lean manufacturing, time takes on an even more critical quality: the ability to produce exactly and only what is needed, when it is needed.  Unfortunately the traditional world, and especially the skewed world of politics, is not as sensitive to time as we are.

Calls for a 55 mph speed limit -- and for that matter most other government energy conservation plans, such as urging people to ride a bus or a bicycle rather than driving a car -- reflect a mindset that oil and gasoline are more valuable than human time.

Those of us who lived through the 70s remember the horrors of the 55 mph speed limit.  Especially if you lived out west.

It didn't seem possible that politicians could think up a sillier energy proposal than Barack Obama's windfall profits tax on oil companies, but Republican Sen. John Warner of Virginia has done just that. Earlier this month, Mr. Warner suggested a return to the federal 55-mile-per-hour speed limit on America's highways, as a way to save on national gasoline consumption.

Hey look at that: they called both parties silly in the same sentence!  Fair and balanced...!  Apparently the lessons of the first time this was tried have been forgotten.  For one thing, it was simply disobeyed.

Mr. Warner may be willing to drive slower to save gas. The vast majority of Americans surely are not. The original 55 mph speed-limit law, enacted in October 1974 after the OPEC oil embargo as a way to save energy, was probably the most despised and universally disobeyed law in America since Prohibition. As an energy saving policy, the double nickel was a bust. The National Motorists Association reports that about 95% of American drivers regularly exceeded the federal speed limit. Does it make sense to resurrect a law that 19 out of every 20 Americans disobeyed? In the 1970s and '80s, the federal speed limit was a daily reminder of the intrusiveness of nanny-state regulation.

Ah... but lower speeds are safer, right?  Nope.

Mr. Warner repeats the myth that a lower federal speed limit will increase traffic safety. Back in 1995, Naderite groups argued that repealing the 55 mph limit would lead to "6,400 more deaths and millions more injuries" each year. In reality, National Highway Traffic Safety Administration data reveal that in the decade after speed limits went up (1995-2005), traffic fatalities fell by 17%, injuries by 33%, and crashes by 38%.  The evidence is overwhelming that traffic safety is based less on how fast the traffic is going than on the variability in speeds that people are driving. The granny who drives 20 mph below the pace of traffic on the freeway is often as much a safety menace as the 20-year-old hot rodder.

And the free market is already creating changes.

Retail gasoline stores report that Americans have already reduced their gas purchases by about 5% this year -- presumably by driving less and buying more fuel-efficient cars. At $4.59 a gallon, motorists don't need to be lectured by politicians on the financial savings from cutting back.

I've noticed that even LA traffic has been lighter the last few times I've had the misfortune to have to drive down that way.  And the flow of tourists flocking to my one-light town on the cool California coast to escape the intense inland summer heat is also down... exactly how I like it.

What is in short supply -- the only truly finite resource, as the late economist Julian Simon taught us -- is the time each of us spends on this earth. And most of us don't want to spend it sitting longer than we have to in traffic.

It's about time someone realized this.

GAAP RIP

It's been over a year since we first told you about how the Generally Accepted Accounting Principles (GAAP) will be replaced by the International Financial Reporting Standards (IFRS).  The project is still on track.

The Securities and Exchange Commission signaled the demise of U.S. accounting standards, kicking off a process Wednesday that could ultimately require all publicly listed American companies to follow an international model instead.

Sounds good, especially since GAAP has some pretty onerous requirements.  But it won't be easy.

Introduced in two steps, the shift could eventually cut costs for companies and smooth cross-border investing. At the same time, investors worry it will create confusion, especially during the transition. Other critics worry that the international system offers too much wiggle room for companies, compared with the more precise rules enshrined in U.S. standards.

The feared "wiggle room" results from the difference in philosophy between the two standards.

The U.S. accounting system, which is ingrained in textbooks, business schools and company treasuries, is based on detailed rules, while the international system expects companies to follow broad principles. In practice, the systems differ on smaller matters, such as the timing of when a company should note any change in the value of an investment.

Rules versus principles.  Where else do we see that type of situation?  FDA cGMP vs. ISO perhaps?  Principles create a thoughtful and hopefully logical framework, while rules create barriers that are continually attacked for workarounds.  In this case the rules have been hurting U.S. companies.

The SEC says the change will help the U.S. to compete globally because many other nations use the international standards or plan to do so. Larger companies, especially those with overseas subsidiaries, have urged the SEC to move in this direction. They hope a single accounting standard will enable U.S. investors to more easily compare a retailer in the U.S. with one in France, for example.

SEC Chairman Christopher Cox noted that 100 countries around the globe use IFRS and two-thirds of U.S. investors currently own securities of foreign companies. "The increasing world-wide acceptance and U.S. investors' increasing ownership of foreign companies make it plain that if we do nothing and simply let these trends develop, comparability and transparency will decrease for U.S. investors and issuers," he said.

An example of how principles will govern instead of rules includes the following.

Under U.S. GAAP, for example, research and development costs are generally treated as expenses when they occur. Under the international standards, once a project gets to the development stage the costs are spread out over time. GAAP also provides specific instructions for industries such as oil and insurance. IFRS doesn't.

And another has a direct relationship to something near and dear to the lean manufacturing world: inventory.  GAAP considers inventory an asset, lean considers it a cost and a potential waste; IFRS considers it... well, I don't exactly know.

Arnold Hanish, chief accounting officer of Eli Lilly & Co., said he wouldn't recommend that the drug maker adopt the international standards earlier, assuming it was eligible to do so. "We wouldn't be ready," he said, since the company estimates it will take two and a half years to make the shift, which he called "a massive effort." A major issue that remains to be resolved, he said, relates to how inventories will be treated for tax purposes.

It will be interesting to see how a profession steeped in rules changes to deal with principles, and how that resolves itself with Sarbanes-Oxley and other recent legislation.