The End of Accounting

As a change from ploughing through the Man Booker prize shortlist, I recently read this. Once you get used to the style – a bit matey, very slightly patronising - and structure - rather like a text book, short chapters with more complex material in appendices and chapter endnotes into which some of the more interesting information is tucked away – it’s readable and, indeed, a quite convincing polemic.

The authors set out their case clearly, first demonstrating the declining usefulness of the accounting information in corporate reports and then assessing the information investors really want: on the basis of this they propose a new form of statement – the Strategic Resources and Consequences Report – which they illustrate using case studies. This report is more closely aligned to the business model perspective and focuses on the strategic resources of the business, identifying the way they are used to create value (their creation, preservation and deployment) using a cash basis and thus stripping out much of the estimation that underpins current financial reporting. You can see an example of the proposed report here.

A couple of things irritated me about this book,  As usual with US authors, little attention is paid to what goes on in the rest of the world. The reader is told that accounting is pretty much standard everywhere and the only past suggestion for change was Ijiri’s triple entry bookkeeping proposal. This ignores the very thoughtful debate in the UK prompted by “The Corporate Report” (1975) and “Making Corporate Reports Valuable” (1988)  The debate at that time addressed the usefulness of financial reports to a wider range of stakeholders than investors: this book takes a narrower approach. And that debate did generate a new form of report: the Value Added statement. Its rise and fall are discussed here.  Secondly, the authors seem to treat accounting and financial reporting as synonymous. I don’t think they are.

The first few chapters of the book set out the data and analysis which support the authors’ contention that the usefulness of published financial information has declined. They attribute this decline to three factors: the increased importance of intangibles and the problems in accounting for them; the increased level of estimation underpinning accounting numbers; and delays in reporting important business events. It seems to me that these are all linked to the inexorable rise of the accounting standardisation project but they don’t seem to discuss that much.

They extend their argument by attempting to assess what information investors want, basing this on a content analysis of conference calls, identifying a major focus on questions on the use of strategic resources.  They then develop their proposed report (asserting that it is based on economic theory but this basis was not at all clear to this reader). And then they provide illustrative case studies of how the report might be constructed in practice.

The proposed report is certainly interesting. It includes both quantitative and qualitative information. It is industry specific. I think it would be difficult to make comparisons between companies (or across time periods) but then relying on the reduction of complex information to standard KPIs which appear to allow comparison can also be misleading.  But with the best will in the world, I can’t see boards of directors wanting to adopt this very different way of reporting, because disclosing information about their strategic resources could damage their competitive advantage. The authors argue that much of this information is already public but not readily available in a coherent form, and they propose a further incentive in the reduction of other regulatory reporting requirements. Convincing investors to demand change might be a more effective approach but it’s taken a very long time for investors to take an active role in demanding corporate governance change.

It will be interesting to see if this book prompts any significant debate.