Wednesday, 31 October 2012

Accounting for truth

It is essential in running a business, public service or charity to have sound annual accounts reflecting financial reality. Only with these is it possible to effectively and fairly


  • Invest in research and development

  • Allocate money to loan repayment, shareholders, salaries and recruitment

  • Raise money from investors and donors

  • Buy materials, goods and services for the organisation

  • Distribute, sell and promote the outputs (e.g. clothes, energy or medical services)

  • Levy taxes

Trying to guide and take forward an organisation without good accounting is like driving in a fog.

Yet there seems to be a growing tendency to lose sight of this basic reality. Balance sheets, profit-and-loss accounts, cash flow statements and projections of these which accurately reflect the financial state of an organisation are, I suspect, but can’t prove, becoming less rigorous.  There is growing pressure from the financial derivates industry and financial journalists to make money or cut costs quickly to the exclusion of anything long term or intangible and this puts pressure on the company to make the accounts, including short term projections, look good  rather than reflect the real cost structure, business environment and sales trends. Even departments within a given company are constantly trying to hide information from the directors when things go wrong. Charities and public services are also subject to these pressures.


Not all distortions of financial truth derive from overt dishonesty. In the western world this is still mercifully rare (especially N Europe and N America). More insidious is the growing pressure for the individual to assert himself or herself, advance his or her career, make an impact, impress the boss, gain wealth for its own sake and status to impress his or her peers. It runs through secular society and conflicts with the ideals on which social and economic advances have been built: truthfulness, mutual trust throughout a hierarchy and recognition that there is a dimension to reality beyond the market economy or the models and equations of science and engineering. Not that the ideals were always followed in practice but they were at least recognised as ideals that it would be good to live up to - good for everyone. My fear is that the ideals themselves are beginning to disappear in a fog of self-obsession and postmodernism.


In other posts I’ve lamented the damage being done to science by those scientists who are oblivious to the epistemological limitations of science and fail to regard the search for truth as sacred within a  reality  greater than it can ever encompass. If peer-reviewed science loses its way it will have dire consequences for civilisation in the long term. But if people in the institutions of society, be they  wealth generating, or providing a tax- or charity-financed service, continue to lose respect for truth the effects could be more immediate as reality catches up with practice based on financial illusion.


The kinds of distortions I have referred to above are within conventional accounting systems used by chartered accountants. For instance, company X may be able to boost its share capital by transferring a capital appreciation such as a rise in value of a property owned by X, from the balance sheet to the profit-and-loss account. This would be dishonest and give an illusory picture of the profitability of X.


However, the accounting conventions themselves need to be revised because even when done with rigorous honesty they fail to reflect reality. When a factory producing small family saloons switches to manufacturing large 4x4 vehicles it is incurring extra costs which do not appear on any accounts. Material and energy have definite prices and can be quantified. What does not appear is the drain on resources which have always been regarded as free and limitless, such as air, water and minerals. These, and the destruction of them (e.g. in the case of air, carbon dioxide emissions into the atmosphere during manufacture of a car dwarf those produced by its operation over the lifetime of the vehicle)  are not easily quantifiable financially but there are definite moves in this direction.


Essentially what I’m trying to say is that to improve the real world we need to be realistic. Recognising reality depends on values not so highly venerated as they should be: honesty, integrity and devotion to the pursuit of truth. And given the importance of money to the functioning of society these values need to be fundamental to the ethos of chartered accountants.

Author 2077 AD
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