So, it is time to make my central point about accounting: The more work that the accountants do, the less work that the user has to do.
Accountants could just give investors the raw books and records. (As discussed in an earlier post, modern computers probably could handle this info if in a standard format, but something still would be missing: analysis by those familiar with the day-to-day of the business) Accountants analyze, compress, and format all this information so as to make it usable by investors and other consumers of financial information. It is work hard making a lot of data tell the kind of story that the users need. Business managers do not want to pay for this hard work. Unfortunately for them, their bosses, the shareholders, need for this work to be done in order for them to be able to police management’s stewardship effectively.
Unaccountable accountants below!
To be useful, accounting must be comparable across companies. If 2 otherwise-similar firms use different accounting rules, it is hard to figure which is better run and which is the better investment. Yet accountants want fewer and less detailed rules. Of course, detailed rules can be arbitrary. But, the accountants do not argue that current accounting principles are arbitrary. No, the accountants argue, the current rules are just too hard to work with. Trust an accountant’s judgment rather than make-work rules. But, it is unlikely that accountants across the country will exercise their judgment in a uniform a fashion in the absence of detailed guidance. In the current debate, simplification is the enemy of comparability — and therefor is the enemy of usefulness.
Tomorrow: Accounting rules and Enron’s shell entities.