All singing to the same hymn sheet?
Sir Peter Kemp challenges the ASB's view of reporting financial performance.
Sir Peter Kemp challenges the ASB's view of reporting financial performance.
Frozen desire, by James Buchan, is a witty and readable book whichrformance. has just been published. It is about the meaning of money, encapsulated as frozen desire. There is not enough room here to go into all of Buchan’s insights, but anyone who has anything to do with money – that means all of us – ought to read it.
One part of Buchan’s discussion ties in with another, more widely read document, which has also just been published – the Accounting Standards Board’s recent study, Reporting Financial Performance.
Buchan questions whether double-entry bookkeeping created capitalism, or whether it was the other way round. His conclusion is that capitalism came first and double-entry bookkeeping was no more than an important tool in its operation, in the same way perhaps that the speedometer did not create the motor car but rather the other way round.
And for very many concerns at the individual level this remains so today; bookkeeping is an adjunct to help in the running of the business in the broadest sense.
But taken on a global basis, which, after all, is what capitalism is, Reporting Financial Performance raises serious doubts at a wider level, and leads one to wonder whether it is double-entry bookkeeping that is now driving capitalism.
Reporting Financial Performance is, in itself, a most disappointing document.
You would think that a document with this title would actually be about reporting financial performance, but it is not. Financial performance connotes some kind of effort to get at the heart of the operation.
It suggests seeing which bits made money and which bits did not, which investments paid off and which did not, and trying to bring to the table all the elements that add up to that very broad phrase, financial performance.
It would present this information, whether or not highlighted by the double-entry, and with some recognition of the quality of what is involved.
It would, among other things, be an effort to turn back the clock. Turn from today – when a set of financial statements gives you perhaps one-tenth of what you need to know about a company – to the situation, say, 50 years ago when – if you were lucky – you might get about half of what you knew from the financial statements. Even that would be an advance.
But Reporting Financial Performance is not like that. Indeed, it is almost childish in some of its argument and layout. There is bickering about whether sums should be laid out as to 2 + 3 = 5, or 3 + 2 = 5.
In other words, to come back to the arguments in Buchan, it could be seen as the ultimate in the triumph of a double-entry system. Take the numbers that double-entry throws up and then lay them out on a bit of paper, so that the only person who really matters is the printer.
In addition, Reporting Financial Performance does not say anything about some of the nuts and bolts of actually reporting numbers in a meaningful way. It ignores, for instance, the fact that most people cannot take in more than two significant figures when they are looking at a series of numbers, that there are perils of approximation and that what makes numbers meaningful is where you come at them from.
The authors of Reporting Financial Performance aren’t fools. They know there is no absolutely right answer to vexed questions of what is capital, what is profit, what are liabilities, and so on, so they dodge these issues.
What they do know is that, in a mechanical sense, double-entry bookkeeping works. And that is where they come from. Their standpoint purports to be academic but is really that of a competent bookkeeper.
Seeking to standardise, they want everyone to understand the same words and music, even if the words and music do not, in themselves, make sense.
They want to set out an Esperanto of the numerical world – that belongs precisely to no-one but in a general sense is common property.
The failures, misconceptions and omissions that the mechanical adoption of double-entry bookkeeping introduce are overlooked, in the way that standard-setters trained in double-entry find it so hard to understand the concept of notions without double-entry – for instance, leases, PFI and goodwill.
A mad Cartesian adaptation arises: I sum, therefore I am. What we have is a document that reports not financial, but bookkeeping performance.
Where does this leave the argument about capitalism versus double-entry?
What it means is that Buchan’s conclusion, which was right originally, is now suspect. A mad chain of causality arises.
Capitalism is based on absolute information about individual entities and also comparative information between different entities. Information has to be provided in a standardised form, which means resorting to money with all its weaknesses.
Money is the province of the accountants who produce the statements required.
And the accountants are always trained as they are: in basic mechanical procedures of recording, rather than reporting, obsessed to the depths of their very bones with double-entry and the idea that both sides must add up.
This is the witch’s brew that leads the technicians to drive the direction of capitalism. These technicians have lost – indeed, they never had – any sense of movement, value, achievement or wealth creation, all these things being at the heart of constructive capitalism. The lunatics have truly taken over the asylum.
That is the message that Reporting Financial Performance delivers. Buchan writes that modern practitioners of double-entry accounting affect a comprehensive tedium of manner as if to conceal the atrocious intellectual technology of which they are secret masters and mistresses.
He goes on to say that we would be wise to imitate them and to keep our heads. The trouble is that it is almost too late. Standard-setters, mad-eyed from stating the obvious, to quote another distinguished modern writer, are boxing us into this world of their own petty-cash-minded invention.
They cannot measure, or do not want to measure, what it is really all about, but their power forces us into buying their picture nevertheless.
What we need now is to find a better way of doing things, something that can support rather than distort capitalism and the proper allocation and rewards of global resources, and can provide the full information that constructive wealth creation needs.
We must be able to display the real essentials of the total financial picture, and hopefully other aspects too, of the performance of companies.
Has a particular concern done better or worse? Has it created net wealth?
What sort of mistakes has its board of directors really made? Has it supported society and the environment into the 21st century or is the reverse true?
In all these things, has it done better or worse than others in the same walk of business, or indeed others generally? What is the quality of what the company has really delivered and is really all about?
It cannot be beyond the wit of the accountancy profession to set about producing answers – approximately right, as one might say, rather than precisely wrong, as at present – to these sort of reporting requirements.
All they have to do is get away from their obsession with double-entry.
To call the vision of the authors of Reporting Financial Performance blinkered is to flatter them; in fact, it is about as real and useful as the vision of those earnest folk who spend their time bird-nesting or collecting postage stamps.
Sir Peter Kemp is chief executive of the Foundation for Accountancy and Financial Management.