This reminded me of my nascent crank theory (alright not really, mostly stolen from Hasken & Westlake's 2018 book "Capitalism without Capital") that US GAAP vs IFRS accounting standards for software development costs are an underrated variable in all the nutty stuff coming out of the US tech industry from time to time. Basically, GAAP has historically made it easier and more likely for companies to capitalize "software development costs" (SDCs) as intangible assets, rather than expensing them in the period incurred, if and when the development meets a standard for "technological feasibility" starting on page 5 here: https://storage.fasb.org/fas86.pdf
The tech industry unsurprisingly lobbied for this accounting standard because it reduced firms' cost of capital - proponents argue that this is because it reduced information asymmetry, perhaps a kind of friction: https://journals.sagepub.com/doi/abs/10.1177/0148558x0802300208
Over-capitalizing expenses is also one of the most common types of accounting fraud because it allows companies to defer expense recognition through depreciation or amortization, which inflates short-term profits and offsets future taxable income. This obviously might come in handy if you were trying to raise money by making some bad software that doesn't do anything but kinda sorta "works." In the year of our lord 2025, I don't feel good about the odds that IRS and/or SEC auditors will have the tools to consistently enforce GAAP standards for "technological feasibility" in SAFR No. 86:
"For purposes of this Statement, the technological feasibility of a computer software product is established when the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements. At a minimum, the enterprise shall have performed the activities in either (a) or (b) below as evidence that technological feasibility has been established:
a. If the process of creating the computer software product includes a detail program design:
(1) The product design and the detail program design have been completed, and the enterprise has established that the necessary skills, hardware, and software technology are available to the enterprise to produce the product.
(2) The completeness of the detail program design and its consistency with the product design have been confirmed by documenting and tracing the detail program design to product specifications.
(3) The detail program design has been reviewed for high-risk development issues (for example, novel, unique, unproven functions and features or technological innovations), and any uncertainties related to identified high-risk development issues have been resolved through coding and testing.
b. If the process of creating the computer software product does not include a detail program design with the features identified in (a) above:
(1) A product design and a working model of the software product have been completed.
(2) The completeness of the working model and its consistency with the product design have been confirmed by testing."
It's easy to imagine LLMs creating even more opportunities to deceive auditors with fraudulent software capitalization, so I guess we just have to hope auditors can stay on the cutting edge of AI and whatnot.
This reminded me of my nascent crank theory (alright not really, mostly stolen from Hasken & Westlake's 2018 book "Capitalism without Capital") that US GAAP vs IFRS accounting standards for software development costs are an underrated variable in all the nutty stuff coming out of the US tech industry from time to time. Basically, GAAP has historically made it easier and more likely for companies to capitalize "software development costs" (SDCs) as intangible assets, rather than expensing them in the period incurred, if and when the development meets a standard for "technological feasibility" starting on page 5 here: https://storage.fasb.org/fas86.pdf
The tech industry unsurprisingly lobbied for this accounting standard because it reduced firms' cost of capital - proponents argue that this is because it reduced information asymmetry, perhaps a kind of friction: https://journals.sagepub.com/doi/abs/10.1177/0148558x0802300208
Also unsurprisingly, tech stocks are notoriously "overvalued" in the US vs the EU, by traditional financial metrics: https://www.sciencedirect.com/science/article/abs/pii/S0261560605000318
Over-capitalizing expenses is also one of the most common types of accounting fraud because it allows companies to defer expense recognition through depreciation or amortization, which inflates short-term profits and offsets future taxable income. This obviously might come in handy if you were trying to raise money by making some bad software that doesn't do anything but kinda sorta "works." In the year of our lord 2025, I don't feel good about the odds that IRS and/or SEC auditors will have the tools to consistently enforce GAAP standards for "technological feasibility" in SAFR No. 86:
"For purposes of this Statement, the technological feasibility of a computer software product is established when the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements. At a minimum, the enterprise shall have performed the activities in either (a) or (b) below as evidence that technological feasibility has been established:
a. If the process of creating the computer software product includes a detail program design:
(1) The product design and the detail program design have been completed, and the enterprise has established that the necessary skills, hardware, and software technology are available to the enterprise to produce the product.
(2) The completeness of the detail program design and its consistency with the product design have been confirmed by documenting and tracing the detail program design to product specifications.
(3) The detail program design has been reviewed for high-risk development issues (for example, novel, unique, unproven functions and features or technological innovations), and any uncertainties related to identified high-risk development issues have been resolved through coding and testing.
b. If the process of creating the computer software product does not include a detail program design with the features identified in (a) above:
(1) A product design and a working model of the software product have been completed.
(2) The completeness of the working model and its consistency with the product design have been confirmed by testing."
It's easy to imagine LLMs creating even more opportunities to deceive auditors with fraudulent software capitalization, so I guess we just have to hope auditors can stay on the cutting edge of AI and whatnot.