I’ve just sent this off to the FT, having
been mightily irritated by Madison Marriage’s piece on Saturday.
“A vivid metaphor can illuminate
understanding of an issue but metaphors can also block thinking by reinforcing
stereotypes and distracting from deeper analysis. Solutions to perceived
problems with audit (“Time to rebuild flimsy foundations of accountancy”, 23
February) may be compared to a sticking plaster placed over a suppurating
wound: such solutions will probably be ineffective until the underlying problem
is properly addressed. Audit is only one part of an inadequate framework of
corporate reporting. Addressing its foundations requires a return to the
fundamental questions: Who is corporate reporting for? What information do they
need? What is the best way of supplying this information? How can the
credibility of the information supplied be assured? “
But she did at least prompt me to reflect a
bit more on why these issues were seen as important in the 1970s and 1980s and
have now vanished from debate.
One factor could be accounting standards. At
that time, the accounting standards project had yet to be fully
institutionalised and the FRC was new. The few critics of the project predicted
that the most difficult area to standardise would be around measurement (see Professor Will Baxter’s views; Shyam Sunder’s paper on Will Baxter is also worth reading).
The protracted attempts to deal with the
problem of accounting in inflationary conditions is a good illustration of the
challenge, and similar problems arose with accounting for goodwill and other
intangible assets. A changing economic environment rendered the issues less
pressing but the problems have never been resolved: the construction of the
conceptual framework provided further obfuscation. And the impact of accounting
standards on the education of the profession has no doubt constrained thinking.
Baxter’s comments on this are worth quoting in full here (from the source
linked above):
“The study of standards now plays a big
part in any accounting curriculum. They must have a profound influence on
students, just when these are at their most impressionable and uncritical. You
have only to look at an up-to-date textbook to see how much weight is given to
official pronouncements, how little to the economic reality that accounts are
supposed to show. Standards are a godsend to the feebler type of writer and
teacher who finds it easier to recite a creed than to analyse facts and to
engage in argument. If an official answer is available to a problem, why should
a teacher confuse examination candidates with rival views? Thus learning by
rote replaces reason; the good student of today is he who can parrot most
rules. On this spare diet, accounting students are not likely to develop the
habits of reasoning and skepticism that education should instill.
And the student will have little cause
to abandon his passive attitude when he leaves the university and enters
practice. Here too he must be the respectful servant of standards. We may
indeed envisage a brave new world in which an accountant spends his whole life
applying rules pro-pounded by others -- unless at last, full of years and
honors, he himself ascends to the Accounting Principles Board, and then for the
first time must face reality. I am sorry to end so glumly. But the trend in
accounting education must make one pessimistic. For many years, academic
critics viewed accounting -- wrongly, to my mind -- as unworthy of a place in
higher studies. It got in at last. Now that we are substituting rule-of-thumb
for reason, one must sadly admit that our critics were right.”
But, at the same time as these issues
were challenging the profession, two important discussion papers were
published: “The Corporate Report” in 1975 and “Making Corporate ReportsValuable” in 1988. They stepped back from the standardisation issues and took a
much broader view. We need to return to the ideas in those papers but there is
a leadership vacuum. Neither the FRC not the professional accountancy bodies
seem to stepping up to the plate and academic accountants have other
preoccupations in the stressful world of higher education.
Back to metaphors. I was wondering how to link all this to
the concept of the Overton Window, which I have just discovered, but I think
Chesterton’s Fence may be more appropriate. According to Wikipedia, Chesterton's fence is the
principle that reforms should not be made until the reasoning behind the
existing state of affairs is understood. Chesterton wrote:
“In the matter of reforming things, as
distinct from deforming them, there is one plain and simple principle; a
principle which will probably be called a paradox. There exists in such a case
a certain institution or law; let us say, for the sake of simplicity, a fence
or gate erected across a road. The more modern type of reformer goes gaily up
to it and says, 'I don't see the use of this; let us clear it away.' To which
the more intelligent type of reformer will do well to answer: 'If you don't see
the use of it, I certainly won't let you clear it away. Go away and think.
Then, when you can come back and tell me that you do see the use of it, I may
allow you to destroy it.”
Perhaps we could call this “informed
reform”: policy makers should only make changes when they understand why what
they want to change exists in the first place. This would apply even to
apparently marginal changes which could avoid the sort of tinkering which
Kingman refers to in his description of the FRC, which the FT article quotes approvingly:
“What
this spotlight has revealed is an institution constructed in a different era –
a rather ramshackle house, cobbled together with all sorts of extensions over
time. The house is – just – serviceable, up to a point, but it leaks and
creaks, sometimes badly. The inhabitants of the house have sought to patch and
mend. But in the end, the house is built on weak foundations.”
Maybe an
“informed reform” approach could have called for a structural survey much
sooner.
