The Keepers of Economic History

Typical Balance Sheet

by Cherileigh Leavitt

The language of business: a fictional tale or a reliable report?  What do investors and businesses really want?

The technological innovations of the Digital Age caused people to question and sometimes abandon traditional methods.  For example, CBS News released an article last year reporting that over fifty percent of U.S. households no longer used landlines and only had cellphone service.  Flash back just over a decade to 2004 and over ninety percent of U.S. households had landlines, but they’re now considered a “dying breed.”  Just as traditional systems have been challenged in the past, a traditional accounting system is being challenged today.  Assets and liabilities are traditionally reported at historical cost, but historical value also has a competitor: fair market value.

Accounting: Past, Present,...but Future?

The first records of accounting were taxes recorded on clay tablets in Egypt and Mesopotamia.  As the economy adopted a monetary system years later, accounting was also used to record transactions.  One of the most significant events in the history of accounting is the development of the double-entry method in 1458 which consists of recording transactions with both a debit and credit value.

Evolution of Accountants

An Italian mathematician named Luca Pacioli published this idea using the Gutenberg press in 1494, and because his twenty-seven page lecture on double-entry bookkeeping was accessible to many, Pacioli’s book was a frequent reference for accounting for several hundred years.

The industrial revolution created a greater need for more efficient and accurate bookkeeping.  As companies grew and became more competitive, they needed to communicate who were the shareholders in the corporation.  During the information age, many accounting organizations were created to create general principles that would establish constituency across the board regarding how values were to be reported on financial statements.

And the digital age would change it even more.  The rapid progress of technology has enabled the invention of computerized accounting systems that contain the transactions of a business—they even comply with the Generally Accepted Accounting Principles (GAAP) required by the US Securities and Exchange Commission.  So if the computers can run the numbers, then what’s our job?  While accounting is clearly useful and necessary, do we still need the accountants? 

Image Credit: Evolution of Accountants (via i Edu Note)

Hot Spots in Accounting

Auditor Disclosure

A recent rule requires auditing firms to include signatures of the audit engagement partners and names of other involved firms on the auditing report.  It’s been met with some resistance since the name of the firm carries a reputation with it which could enhance or decrease the credibility in the audit report and/or financial statements that investors read.  (See https://www.accountingweb.com/aa/auditing/pcaob-adopts-new-rules-on-naming-audit-engagement-partner)

Responsibility Accounting: Good or Bad?

Responsibility accounting is a networking system that businesses use to delegate assignments to managers in subsystems to make goals and be held accountable for specific costs and revenues.  Some advocate this method because it allows specialization, more accountability on the manager, more motivation, etc.  Others argue that this method “promotes subsystem optimization” and therefore prevents “inter-functional cooperation.” (See number 6 in https://maaw.info/ArticleSummaries/ArtSumMartin94.htm)

           

Earnings Management vs. Earnings Manipulation

Many decisions are based on the reported accounting numbers, including whether or not an investor decides to invest in the company.  Therefore, managers have various motivations and incentive to manage the earnings reported on the financial statements.  Some of the financial accounting is left to the say of the accountant, which allows for earnings management.  However, there’s a difference between earnings management and earnings manipulation—that is, ethical strategic timing versus fraud.  But where do you draw the line?  (See https://smallbusiness.chron.com/ethical-issues-facing-accounting-profession-18307.html)

I’m most opinionated about this third topic.  Accounting is the “language of business” which makes the financial statements a sort of medium not only for internal purposes but it serves as a link between the company and investors.  A lot depends on the numbers reported, so I see where the motive comes to manage the numbers to the company’s benefit.  However, I value integrity more than these other incentives, and I think accountants can be strategic in their reporting without being deceptive.