Metaphors and reform

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.