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
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.
