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.
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