My best insights (but who am I to judge?) come from reading something for which accounting is the furthest thing from the author’s mind:
“My own view is that people tend to underestimate the pace of technological change but they tend to overestimate the pace of human change. That is, if you go back to past visions of the future as they were displayed in world fairs, for example, they generally fail to anticipate how quickly we will invent things like wireless communication, but they always imagine that social structures will change faster than they actually do. They imagine people living without nuclear families, without dysfunctional political squabbles. They imagine that technology will streamline and rationalize social institutions. That never happens.” [emphasis added]
David Brooks, a moderate conservative, and his liberal colleague, Gail Collins, are widely read NYT columnists in their own rights. A couple of years ago, they decided to collaborate on “The Conversation,” a series of columns that is adequately described by the series title. That these two can have a humorous and constructive give-and-take in this polarized political climate is worth noting all by itself.
But, more to the point, the above statement from Brooks struck the nerve that got my accounting juices flowing. Double-entry accounting was a great technological advancement when it was conceived however many centuries ago that was. Further advances in technology have reduced costs associated with financial reporting, but other costs have increased because needed ‘rationalization of social institutions’ has been hindered by “dysfunctional political squabbles.”
For example, in her popular book on the history of accounting, Jane Gleesen-White cited research claiming that when externalities are taken fully into account, McDonald’s consumes $200 worth of resources in order to produce one Big Mac.
Yikes! I know what your thinking — two hundred bucks? Let’s just say that the full, full cost of a Big Mac is merely $10. That’s still an astounding number.
Accounting by the Corporation is not the Same as Accounting for the Corporation
Although the problem of accounting for externalities has always existed, it had been less significant than a flea on a horse’s hindquarter until about one hundred years ago. That corporations—a social institution designed to promote large-scale investments—would consume so much without accounting for that consumption is surely an unintended consequence of its establishment in the law.
When resource consumption is portrayed by financial reporting standards as if it were free—or merely under-costed—corporate decision makers will inevitably find value-creating projects from the corporation’s standpoint, even when aggregate costs exceed aggregate benefits.
I’m sure that everything I have written to this point has been a huge understatement; yet no accounting standard setting body has ever seriously considered any of this. The implicit reasoning goes something like this: it’s not our job. Accounting standards are largely the creature of the federal securities laws; which are intended to prevent public companies from misleading its investors, and to provide information that puts investors on a level-playing field with respect to available information. As long as investors get adequate information to value a company, and not be mislead by unscrupulous management, then let the chips fall where they may.
It is simply not in the job description of the standard setter to prevent the use of accounting standards to make kings while destroying families, much less soil the air we breathe, or determine where the Atlantic Ocean stops and New Jersey begins (a tip of the hat to Gail Collins for that bit of imagery).
I’ll be the first to admit that the problem of adequately accounting for externalities is hard. My grad school advisor, the late Tom Burns, once remarked that defining the entity of account—roughly speaking, drawing the line between events that affect the corporation and everything else—is the thorniest problem in accounting. I suppose I should summon up some empathy for accounting standards setters who haven’t even paid lip service to this problem—but I can’t.
I can’t, because accounting standards setters are richly paid, and they serve at the pleasure of oligarchs, who require that more attention is paid to their predilections and ideologies than to the plausibly deniable costs of mis-pricing resources. We can all recite the litany of problems that have occurred in our generation alone, and precisely identify who has benefitted while most everyone else has lost: treating stock options granted to employees as if there is no cost to other shareholders; not recognizing the implications on pension plans (private and governmental) when assets fail to grow as hoped; or misrepresenting the economics of banks and the loans they make. Trust me, I can think of many more.
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I wonder how much David Brooks actually knows about accounting. I’ll bet it’s far more than he realizes.
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