The End of Accounting Book Review – Part One

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Recently I read an excellent book called “The End of Accounting and the Path Forward for Investors and Managers” by Baruch Lev and Feng Gu. I highly recommend this book for investors, analysts, accountants, and those with a general interest in business. The book is very well written and researched in that it:

1. Describes the current situation in depth
2. Aligns the situation across an historical context and with relevant research
3. Makes specific recommendations about how to improve the situation

If you’d like to read more about this topic on your own (will help to frame out these posts), here is an excellent Wall Street Journal article titled “The End of Accounting” (if the link doesn’t work because you don’t have a subscription you can probably find it elsewhere on the internet). Here is a link from Accounting Today and an interview with the author from CFO magazine.

The first post in this series is going to be my personal insights and journey in the area of accounting information, financial and investor relations analysts. This context is relevant because I, too, have seen the problems that the authors outline in the series and come up with my own “hacks” to attempt to gain better information and insights.

I started out my career as an accountant, and I used to help create the footnotes that you see at the end of the financial reports. This wasn’t creative work per se – you would start with last year’s footnote as a template and insert new numbers, unless it was a new requirement, in which case it was a lot of work and we would turn to specialists. At that time (20+ years ago) there were only a few footnotes and the financial statements themselves weren’t that long; you would be able to read from the Chairman and CEO’s letter all the way through to the last footnote in a couple of hours.

This was also before the internet; we would go into the company library and look at microfiche sometimes to do research or you’d pull up the hard (printed) copy from the files. At that point an annual report was also somewhat of a marketing document; companies put a lot of thought into the cover, for instance.

At various points in the history of accounting there has been a focus on the balance sheet (assets and liabilities), the income statement (earnings per share and price / earnings ratio) and on cash flows (cash generated from the business). Each of these views are important and have their merits and their drawbacks. The statements were generally the “GAAP” view which focused on financial statement presentation and used taxes at official rates (many companies pay almost nothing in taxes in actuality by deferring them indefinitely) and held assets at historical costs. Both of these assumptions made the financial statements less useful for certain types of companies and industries.

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A Great Concert – SRV at Champaign IL 1987

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Dan is much smarter than me and he holds on to all the ticket stubs for concerts and sporting events that he’s attended over the years.  He recently sent me a rug and a coffee mug that he created based on the ticket stub for a special concert we attended almost 30 years ago when we were at the University of Illinois.  The show was Stevie Ray Vaughan at Foellinger Auditorium.

At the time I was in college and had almost no money.  I saw that Stevie Ray Vaughan was coming to campus and thought I would get up early and stand in line to purchase tickets before class (I rarely got up early in those days when I could avoid it).  Alas, the line was already long and I pretty much gave up right away.  There was a guy who was scalping tickets, however, so I went up to him and bought two tickets for what I remember was about $50.

The tickets were up front in the first couple of rows as it turned out but way, way on the left side of the stage.  Dan and I got rip roaring drunk before the show (which was the custom, back in the day) and we headed to Foellinger.  Note that Foellinger was a lecture hall and I had many classes in that room – the room had bolted-down desks with the fold out panels that you could write on, so it was kind of odd that they had concerts at that same room (I also saw the punk band Husker Du in that same lecture hall, which seemed even odder).

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Jargon, Proverbs, and Memes

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Texan99, writing at Grim’s Hall, discusses the ‘thick fog of buzzwords’ that pervades the educational arena in this country. My comment is that buzzwords and jargon are worst in education, government, and the ‘nonprofit’ world, but increasingly are also pervading the world of business and having a malign effect therein. Many of the posts I see on LinkedIn, for example, represent attempts by people who have never had a creative idea or insight in their lives to posture a deep thinkers and business intellectuals by maximizing their use of the buzzwords du jour.

Sarah Hoyt draws a distinction between memes and proverbs:

Of all the ways people have come up with to avoid thinking, I like memes the most.   They are so ridiculously easy to fall into.   You see the words, you see the picture and you go “ah ah, that’s so true.” Even when on a minute’s reflection it makes no sense whatsoever…I think in a way it follows the same pattern that proverbs followed in more ancient cultures…While proverbs were ways not to have to think or short cuts around thinking, they weren’t, by themselves, pernicious…Proverbs are in a way, the encoding of societal wisdom into short cuts to lead people into ways that have worked before…Memes are similar, but you have to remove societal wisdom and put in “the commanding forces of culture and mass media”.  RTWT

Andre Beaufre, who in 1940 was a young captain on the French General Staff (later a general, he commanded the French contingent in the Suez attack) commented on his impressions when he first breathed the refined air at the General Staff level:

I saw very quickly that our seniors were primarily concerned with forms of drafting. Every memorandum had to be perfect, written in a concise, impersonal style, and conforming to a logical and faultless planbut so abstract that it had to be read several times before one could find out what it was about…”I have the honour to inform you that I have decided…I envisage…I attach some importance to the fact that…” Actually no one decided more than the barest minimum, and what indeed was decided was pretty trivial.

Entirely consistent with Beaufre’s observation was a interchange between the artists Picasso and Matisse which took place in the midst of the collapse of 1940:

Matisse:  But what about our generals, what are they doing?

Picasso:  Our generals? They’re the masters at the Ecole des Beaux Arts!

…ie, men possessed by the same rote formulae and absence of observation and obsessive traditionalism as the academic artists.

The decline in clarity of writing and speaking presages nothing good.  Confucius pointed out that “If language be not in accordance with the truth of things, affairs cannot be carried on to success.”

See my earlier post When Formalism Kills and the ensuing discussion thread.

Regina Spektor, Older and Taller (2016)

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This is beautiful.

Pop music of the older sort, which reached a peak in the 1960s, is about beauty and joy, and their usual antecedents, youth and love. As these things have faded out of our civilization, pop music turned to the shit we have now. But occasionally some of the old vintage shows up and surprises us and reminds how it can be. And Regina’s lyrics are clever and funny and sweet.

Here it is live:

Regina Spektor

Lyrics below the fold.

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