The Accounting Standards Board’s Draft statement of principles has stated that the highest merit of accounting information is objectivity.
This is a complete nonsense, of course, since the draft then goes on to define objectivity subjectively.
Although the ASB recognises there are seven major interest groups which might wish to read a set of accounts, it only considers the interests of one – the investors. And while the ASB accepts that there could be a wide range of performance indicators which might be of interest to potential user groups, it ignores them all except for investor return.
It’s not surprising, therefore, that the ASB’s proposals have met with such little enthusiasm.
Subservience to economics
This is another example of accountancy blindly following economics. Why does the profession do it?
For anyone with eyes to see, it is clear that profit maximisation is not the sole objective of economic activity. It is equally clear that it is impossible to differentiate economic and other activity. No one only pursues economic goals while at work. No one is capable of being sure when an economic goal starts or stops. And no one pursues just one goal, measurable in one way, for any one activity. To use a term now prevalent in engineering, but almost unknown in accounting, we have fuzzy objectives.
There is nothing wrong with fuzziness. It appropriately describes what we are. We go to work to make money. But not entirely. All of us have given up cash on occasions for job satisfaction or something else we think important. We weigh our objectives. The outcome is fuzzy. A bit of this, a bit of that, and we are never quite sure where the divide is.
It’s the same for organisations. They weigh their objectives to suit the interest groups they are serving. So please – don’t ever think they try to maximise profit subject to a constraint. They don’t. They wouldn’t even know how to.
Like everyone else, an organisation does not know where the dividing lines are. Because, to be blunt, organisations are like people. They are fuzzy.
And, if that’s the case, the ASB’s assumption that only one interest group is of importance, and only one reporting criterion is relevant, is entirely false. Simple, common logic proves that.
So what does this mean? In practice, the ASB’s decision to focus on one interest group, and one criterion of performance is rather like the manufacturer of an automatic camera deciding that focusing on one single subject seen through the viewfinder is the only criterion of a successful camera. Everything else, be it exposure, shutter speed, camera shake, depth of field, and so on would be irrelevant if the ASB designed such a camera. Of course, the outcome would be that you would be unable to tell whether they had succeeded in getting the focus right, because everything else would contrive to ensure that the picture was unusable. And so it is with accounting.
If you focus on one objective for one interest group when there are other objectives and other stakeholders who must also be taken into consideration, then you are unable to ascertain if you achieved anything – which entirely rules out the objectivity that was sought in the first instance.
Accountancy is subjective
In practice, accounting is a human activity and humans are subjective.
So our accounts should be as subjective as we are.
What is important is not a false pretence of objectivity but a practical recognition of our subjectivity. Every set of public interest accounts should state what interest groups the ASB recognises as having a valid concern in the information they produce, how they are trying to satisfy the objectives of those users and what the weighting of the importance they have given to that objective is. This will take accounting into areas it has not visited before and ensure that the charade which currently prevails will be dropped. This will enable all users of accounts to know far more about the firms they deal with. And that has to be of benefit.
Richard Murphy is senior partner with Murphy Deeks Nolan.