There was once a time, not so many years ago when accounting could be thought of as an essentially nonpolitical subject. So wrote Professor David Solomons in a 1978 Journal of Accountancy article entitled Politicization of Accounting. In that article, Solomons argued forcefully--and I believe persuasively--for neutrality in financial reporting, for it ever became accepted that accounting might be used to achieve other than purely measurement ends, faith in it would be destroyed just as faith in speedometers would be destroyed once it were realized that they were subject to falsification for the purpose of influencing driving habits. Today, as we reflect upon the lessons learned from the recent wave of corporate-reporting scandals, I believe David Solomons' words a quarter of a century ago ring truer than ever. For paramount among the many lessons to be learned from the reporting scandals and their wider impact on the investing public and the capital markets is that neutrality in financial reporting really matters. Neutrality matters not only to the viability of individual companies and the financial well being of their employees, investors, and creditors, but also to the overall stability and vitality of the capital markets and, therefore, to our economy and our society. As I write this commentary, I am coming up to my first anniversary with the FASB as its chairman. I am grateful to the Editor of Accounting Horizons for providing me this opportunity to look back on the past year and reflect on the many challenges we faced and to look forward as we attempt to chart the future course of U.S. accounting standard setting. We are hopeful that this course will enable us to better address the issues confronting accounting and financial reporting at this moment in history. Although this article describes many new things we are doing, the fundamental principle of neutrality in financial reporting is and must be a constant and rigorous guide to our standard-setting process. THE IMPORTANCE OF NEUTRALITY IN FINANCIAL REPORTING I believe that neutrality in financial reporting is a precondition for honest, trustworthy accounting information. That means our accounting standards must be free from bias that is aimed toward achieving a predetermined result or influencing someone's behavior or designed to achieve a particular political result. It is not a process of counting votes, although constituent input is critical to helping the standard setter understand the business transactions and economic phenomena involved and the relevance, reliability, and operationality of proposed standards. The process of setting the standards must acknowledge that standards setters serve the capital markets. Moreover, the goal in standard setting must be to set standards that will provide useful information to those markets at a reasonable cost. And once set, accounting standards must be applied based on steadfast adherence to the principles embodied in those standards without regard to the effect of financial reporting on market values or human behavior. Without a doubt, the primary concern must be the relevance and reliability of the reported information, not the potential effects of the information on particular interests. THE CHALLENGES BEFORE US The recent spate of major financial reporting scandals produced real challenges for those involved in the financial reporting process. Many, if not most, of the financial reporting problems stemmed from outright GAAP violations, apparent audit and corporate governance failures, structuring of sham transactions by investment bankers, and research analysts' conflicts. These problems also prompted broader questions and concerns about virtually every aspect of our corporate reporting system, including accounting standards and the standard-setting process. I think those questions were both appropriate and overdue. These broader questions related, in part, to the propriety of existing guidance on specific technical subjects--accounting for special-purpose entities, guarantees, and broader topics like revenue recognition, pension accounting, employee stock compensation, reporting of financial performance, and the use of fair value measurements in accounting. …