They say that a little bit of knowledge is a dangerous thing. How about a committee of five bureaucrats with a bit of knowledge and the power to govern the financial reporting of every public company in America?

CEOs like me know that the Generally Accepted Accounting Principles (GAAP) by which public companies report their assets, profits, and losses aren’t all that generally accepted. In fact, although all public companies must give their accounting in GAAP form, many choose to supplement it with what they consider to be a more meaningful non-GAAP version. Why are so many American companies forced to work their way around a national standard? Because in many instances GAAP makes it more difficult to understand a company’s finances.

The GAAP rules are the work of five people with a small office in Norwalk, Connecticut. (As recently as this past February, the Financial Accounting Standards Board (FASB), which oversees GAAP, had seven members, not five. It conducted a nationwide public enquiry as to whether it should be reorganized. After receiving a grand sum of 59 comments, it eliminated two board members—and pressed on with its work of dictating the financial reporting rules for the largest economy in the world.)

Of these five people, not one has ever founded or run a successful company. Not one has been a genuine employer. They are, instead, theoretical accountants. And their theories, which they set down on paper to be enforced by the Securities and Exchange Commission (SEC), are doing a great deal of damage to business and to the markets.

I recently wrote a report for the CATO Institute detailing some illogical consequences of GAAP rules. Here I will present several anecdotes, which are explained more fully in the report. You will see that government mandates in the interest of “transparency” just as often make corporate accounting more arcane, investing more risky, and knowing just how well a company is doing more of an impossibility.

Item One: Consider Ian Cockwell, CEO of Brookfield Homes. In 2007 he was reported as “earning” negative $2.3 million in his company’s proxy statement. This came about because some of his “income” from prior years—which he never took home, but which GAAP required his company to report as income nonetheless—never materialized. Because Ian Cockwell had been granted some stock options, his unvested shares had to be valued with a GAAP-mandated built-in gain of at least 60%. For CEOs as for everyone else, stock market gains do not always materialize. So Brookfield Homes was compelled to release misleading financial numbers for 2007.

Or consider my own case. Cypress’s proxy statement for 2007 said that I had earned $11.3 million in 2007. I knew this was far too high; my wife and domestic CFO agreed. They reported that I had taken home $4.7 million in salary, bonus, and stock. My tax department affirmed that number. So did the IRS. Why was my company reporting my earnings to be twice what they were? It turned out that, because my retirement account held stock that had gone up over the year, GAAP rules required that that gain—which I could not realize, and which affected an account I do not own and cannot borrow against—be reported as my personal income.

In one case a CEO’s pay was reported as being negative; in another as being twice what it was. In both cases government-mandated accounting rules forced companies to issue misleading finances to their shareholders.

Item Two: My company, Cypress Semiconductor Corp. (NYSE: CY), gives all employees an equity stake in the company. But GAAP rules have had the effect of discouraging many Silicon Valley companies from granting stock options to rank-and-file employees. In fact, the FASB’s treatment of employee options is downright punitive. It requires companies to report the granting of employee options in an unrealizable worst-case scenario—both as a dilution of earnings per share and as a company expense that dilutes EPS still further. The effective cost of granting an option is thereby doubled. And that, in turn, makes giving stock options to rank-and-file employees less attractive. The theoretical accountants on the FASB aren’t playing in a sandbox: their policies are toying with the compensation of average employees.

The underlying mechanism of our success is a new economic social contract, under which the economic pie is broadly distributed to rank-and-file engineers, who can earn lifechanging wealth from the stock options. The CEOs of Silicon Valley successes like Google often brag about the millionaires created by their companies. This spreading of wealth drives a different work ethic in Silicon Valley. A job in a startup company is a personal mission, not a paycheck. Computers turn the lights off in our buildings at 7:00 p.m. to remind our employees that it’s time to go home. It deeply angers me that government lawyers and naive theoretical accountants have been allowed to impair the economic miracle that democratized the silicon chip, the personal computer, and the Internet.