The Role of Tomorrow's Accountant
The role of tomorrow's lawyer, surgeon, engineer, will, I suppose, be little
different from the role of today's. The way these people go about their business
may be different, but not vastly different. All may have the help of computers
and statisticians and other new brands of experts. But I don't think this makes
a great difference to their roles. And for good reason. They have a clear task,
an established body of knowledge and generally they stick to their specialised
businesses. And they are clearly respected and wanted for these reasons.
Is it any different for accountants? It is difficult to suppress the idea
that there is at least a tinge of apprehension in many quarters about the role of
tomorrow's accountant. There has for some time been a certain amount of breast-
beating. We are told, for example, that, unless we are able to do the same tricks
as operations researchers and their kind, they will edge us out of business. We are
told that unless we can master computers and programming and all that, the computers
will push us aside. We are told that unless we are competent systems analysts and
management advisers, this come-lately breed will have the better of us, indeed the
bread and butter of us. We are told that machines and mathematics are making all
that double-entry stuff out of date. And what is worse, we are told all this by
Notwithstanding all this, I want to assert that the role of tomorrow's accountant
will be no different from the role of today's. But unless he plays it better, someone
else will play it, and today's accountant will have no role tomorrow. This is not a
visionary assertion. All the evidence lies before us. We will explore some of it.
Facts and Decisions
Every deliberate decision men make is based on some facts or on what they
believe to be facts. Some of these facts are part of the everyday knowledge of men
in their chosen fields; they are persistent; they are descriptive of the general
nature of things; they do not have to be rediscovered every time they occur in
experience. Every surgeon knows there are just certain kinds of muscle, sinew,
nerve, blood-vessel and bone in every normally healthy limb. Some of the facts men
use are immediate facts; they are not generally unique, though they may be; the are
descriptive of the specific nature of things upon which or about which a decision is
to be made; and they do have to be discovered, even if discovery is just looking.
These are generally temporal (occurring at a specific time) and temporary facts. In
many cases it is sufficient to discover them at intervals; the pulse add temperature
of hospital patients is usually taken at intervals. But for some purposes or on some
occasions we need to have at least some facts continually, as when a patient is
undergoing an operation. And where the needed facts are numerous and impossible
for any one person to discover, it is necessary to have some scheme for bringing
all the facts together, like with like, so that the person making a decision can
see the effect of them in total.
The financial aspects of business affairs are describable in these terms. A
company, say, has certain shares and fixed liabilities outstanding; certain general
rights attach to them. It has certain powers and duties which in their general
form remain constant. But the thingsit does are continually changing its specific
relationships with other parties and with the rest of the world in general. The
effects of some of these changes must be kept under continual scrutiny its access
to cash, for example. The effects of all changes must be brought under attention
now and then. Finally, most companies have more assets and equities than can be
seen directly at any time by its managers or anyone else. Getting at the present
facts about these is the job of the accountant.
It is an expert job. There is no one else than the accountant in business or
anywhere near business, who is engaged in getting the aggregate financial facts about
a company from time to time. And today's accountant does not do it!
Pick up any balance sheet. You will find the paid up capital, the liabilities
and the cash all facts as at the date of the balance sheet. But seldom is there
another statement of present fact in the whole balance sheet. Oh, yes there is;
one statement in parenthesis the market value of listed securities, if the
company has any.
If your car has a flat tyre, an empty tank or a run-down battery, you do not
say: 'Well, it was all right when I bought it', and then get into it and expect it
to run. It's the same with the assets of companies. We cannot assume that, if
things cost so much when we bought them, the initial price has anything to do with
the present financial characteristic of the aspet or the present financial state of
the company. If you are well-informed you will object: 'The greater part of the
companies on the stock exchanges have revalued their assets'. Yes, indeed, some of
their assets; but how many assets and their proportion to all assets, no one can
say by looking at balance sheets. No one looking at any balance sheet today can
tell what is the present financial state of a company, for a balance sheet is only
partially present fact; the greater part is something else.
The justification for the "something else", which is either out of date
information or guesswork about the future, lies in two quite opposite lines of
argument.. On the one hand it is said that the cost of an asset is a going concern
value. I've no doubt many bankrupts could have fervently hoped it was so. On the
other hand it is said that managers and investors want to have some idea of future
prospects, and that therefore it is proper to bring into account some things which
are reasonably certain to happen in the future. But the prospect of the future
depends substantially on the facts of the present. Whether your gas-tank is full
or empty now determines what prospect you have of driving away now. Again many
bankrupts and failures have found themselves where they are, for paying so much
attention to the future and not enough to the present.
Now there are many who say that the balance sheet contains only statements
of opinion, that asset values are matters of judgment and opinion and so on. This
is utterly misleading. No one who ventures an opinion which he expects will be
taken seriously does so without first getting some facts; "facts are the only raw
material from which we can derive a change of mind". And nobody (manager or
investor) who must form an opinion about a company can properly do so without the
facts. This view of balance sheets as sets of opinions, forces managers and
investors to form opinions on the basis of opinions. And if these latter opinions
are based largely on out of date facts and guesses about the future, the opinions
of managers and investors may be as misguided as anyone can possibly be. And they
Misleading and Incomplete Information
About a year ago it was reported that there were over 100 legal actions
pending against accounting firms in the United States, some of them involving
millions. The causes of these actions are various, and no information has been
published to the best of my knowledge digesting the causes. Or the outcomes, for
many of them have been or are likely to be settled out of court. But there are some
things we do know about these cases, or some of them.
The actions against accountants have not been brought because accountants
traded in securities and made privileged gains from inside knowledge. They have
arisen from alleged defects in the quality of information contained in audited
financial statements, information claimed to be false or misleading in material
particulars. The S.E.C. has stated quite clearly its views on the intention of the
laws it administers:
"It should be understood that the securities laws were designed to
facilitate informed investment analyses and prudent and discriminating
investment decisions by the investing public. It is the investor, not
the Commission, who must make the ultimate judgment of the worth of
securities offered for sale. The Commission is powerless to pass upon
the merits of securities; and assuming proper disclosure of the financial
and other information essential to informed investment analysis, the
Commission cannot bar the sale of securities which such analysis may
show to be of questionable value".2
Notice that informed investment analysis is the end in view. This is just
not a matter of knowing how a company has spent the money which came into its hands,
which is the only justification for preparing balance sheets on the basis of the
costs of assets. The past costs of things have nothing to do with informed
investment analysis. On the other hand there can be no doubt that the state of
a company at any given time, its financial relationship with the rest of the
world, is a material particular to anyone having dealings with it. Its present
state is an indicator of what it can borrow, and therefore an indicator of the
possible extent of increased gearing and the possible necessity of increased equity.
Its present state shows the monetary extent of the net assets presently working for
shareholders. The present amount of the net assets is the only guide to the
adequacy of the profits currently earned by the company, the only proper basis for
a rate of profit calculation.
When balance sheets contain information which is obviously not up to date,
they constitute an invitation to readers to speculate about what they fail to disclose.
Or they force companies to make additional disclosures when, and to the extent that,
it pleases them. Take a few examples:
I.: "the nearest thereis in the accounts (of H. & Son) to a valuation of
the properties is that, in the opinion of the directors, the present
market price exceeds the balance sheet figure by substantially more
than the 3.6m by which the total of valuations at various times since
1955 exceeds the balance sheet figure of 6.9m. Certain properties have
been revalued in 1959, 1962, 1965 and 1966 for debenture issue purposes ..."
(Editorial comment, The Accountant, 14 December 1968).
Notice the wistfulness of the writer's first sentence, and the company's self-
interest in disclosure in the second.
"As the bulk of the assets (of H.W.) has not been revalued for twenty
years, they almost certainly are considerably understated at book values.
The directors do their best to play down this possibility. They condede
that certain London office buildings would probably be worth 2.3m more
than their $l.lm book value, but say that other properties, figuring at
10.5m in the accounts would probably not be worth very much more if
valued on a going concern basis. On the other hand, if requisite
development permission could be obtained, there is no doubt that the
true worth of land bordering the Upper Pool of London would be substantially
higher than book values At what could be a substantial discount on
underlying asset potential, the shares should be retained." (Analysis,
Investors Chronicle, 14 March, 1969).
Whatever "going concern value" may be, the directors say nothing about market
value of the "other properties." The analyst is left guessing: "at what could be".
"There is little to get one's teeth into in the full accounts from W.
despite a wealth of information about the progress of particular contracts
... It is known that 0 itself (an investment in which W has a 40 per cent
stake) is worth quite a bit more than the 72m disclosed in connection with
the abortive merger talks with City of London Real Property. At 90m,
W's stake would be worth 22s 8d per share" (Analysis, Investors'
Chronicle, 11 April 1969).
The investment in 0 is only part of the business of W; yet the net assets per share
of W are shown to be only 19s lid.
Guessing is inevitable when the facts people expect to learn are just not
given. And guesses may be wild. However, in some places and in some circumstances,
parties who are not shareholders are able occasionally to find out more about the
present prices of assets than shareholders are told. Underwriters, lenders and their
officers and legal advisers may have access to some of this information, may require'
it as indicating the strength of a company or the cover for a proposed issue of loan
securities. Security analysts may acquire some such information. If the information
is pertinent to any class of investors it is pertinent to any other class, for the
rights of any class affect the rights of other classes. And if the information is
not in the accounts for all to see, it puts some persons in privileged possession of
information which all should have.
In the U.S.A., the constraints on "insiders" are tightly defined. But disparity
between the published information and the present facts, and the necessity to operate
on the facts as they are, means that any privileged information may lay managers,
directors, underwriters, lawyers, accountants, open to stockholder suits, if
subsequently the disparity turns out to have been a material fact upon which stockholders
should have been informed. There has been considerable uneasiness about this; to the
point where one attorney said it is not worthwhile to serve as a director anymore:
"The risks of being sued are too great for what you get out of it". As a result
of the Texas Gulf Sulphur case, decided a year ago, it seems clear that the withholding,
or the privileged release, of material information is likely to be actionable. And
from the Bar Chris case it seems that, even if a director hasonly recently joined a
board and is ignorant of matters then in progress which are subsequently found to be
defective, he may still be held to be responsible. There have been some sanctimonious
noises across the Atlantic, of relief that "decisions of the U.S. courts do not
constitute precedents for British courts".4 But self-respecting professionals can take
no comfort from this. A professional ethic is not based on minimum legal performance.
Every man in the street is expected to respect the law. A profession is expected to
have higher standards than the minimum standards of the law. And in any case what
comes to be accepted as necessary in one developed community sooner or later is
endorsed in others. There can be only short-lived relief, here and there, for those
who choose to live on the lower margin of professional performance.
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But in what role do these events cast the accountant? Certainly not in the
role of a master of a sufficient repertory of bookkeeping tricks to serve whatever
ends managers have momentarily in view. It is customary enough to suppose that
verified financial information enables investors and creditors to protect their
interests. But it now seems as though managers and directors also need the
protection of verified financial information. For if what they publish periodically
is complete and up to date, the possibility of leakages and the need for additional
releasese is correspondingly reduced. There is no need for analysts to be given
information which is not freely available to all, and less room for analysts and
others to speculate about the differences between the disclosedi'figures and their
guesses about present prices of assets.
The Truth of a Matter
Indeed the whole business community is made more trusting and more
trustworthy if the truth must be told and is told from time to time. We engage in
no pious moralizing. And we pass judgment on no particular behaviour. We simply
invoke a few of the laws of all sensible conduct. First, if we act on information
which, without our knowledge, is inconsistent with the facts represented, we cannot
make decisions consistent with the facts. Second, we will place confidence in our
sources of information only if they are found to be dependable. Third, if our sources
of information fail to produce reliable information they will be case aside. These
laws are not written in any statute book. But the history of the failure of systems
which have sought to cut man off from the facts they needed to know demonstrates
We have not ourselves invented this idea of getting at the truth of the
financial affairs of business. Only the truth can be "true and fair" to all parties
alike, buyers and sellers of securities, managers and directors, brokers, analysts
and advisers. The courts have ruled, when occasion arose, that financial statements
should be-truthful. An impressive body of exponents of accounting have set up as an
objective of accounting the reporting of the true results and positions of companies
- Spicer and Pegler, Cole, Hentley, Hatfield, Paton, Sweeney, Macneal, Sanders,
Wilcox and Hassler, Vatter. The habit of truth is the ideal of all reportage, all
history, all science in communities in which individual freedom to judge and act
Writing in an entirely different context which shows that the problem is not
a problem of accounting only Bronowski has some words which are particularly to
our present point:
A society cannot remain lawful when many members break the laws.
In an orderly society an imposter now and again gains an advantage:
but he gains it only so long as imposture remains occasional so
long, that is, as his own practice does not destroy the social order.
The counterfeiter can exploit the confidence of society in the value
of money only so long as he himself does not sap this confidence by
swamping the market with counterfeits; only so long, that is, as good
money remains the norm. Destroy this, and Gresham's law really takes
its revenge. The Society falls apart to suspicion and barter.
If you take as "the laws" referred to, the three laws of sensible conduct we have
mentioned, and if you substitute "trtth" or "factual information" for "money" in
this passage, you will see the present pertinence of the observation. Bronowski
There is a principle which binds society together, because without it
the individual would be helpless to tell the true from the false. This
principle is truthfulness. If we accept truth as an individual criterion,
then we have also to make it the cement to hold society together.8
You may t)ink we are taking things too far. Anyone who thinks of the horizons
of his interest as serving his management without regard for the wider impact of
what he does will think we are taking things too far. But you will know t at statements
from eminent sources have disclaimed the present factual character of the component
elements in balance sheets which bear specific dates notwithstanding the universal
dependence on present factual data from time to time. You may, of course, contest
the consequences of this. But the extent and effects of the violation of the three
commonsense laws we mentioned should be apparent from the following sample of
headlines and titles over the last decade:
"Unrealities in Accounting Reporting", John L. Hennessy before the Eighth
Annual Institute on Accounting, University of Colorado, 1961.
"Pitfalls for the Unwary", Steven S. Anderer in Barron's 24 December 1962.
"How to succeed in Confusing People without really trying", Howard C.
Greer, The Journal of Accountancy, March 1963.
"Are double standards good enough for investors but unacceptable to the
Securities Industry". Leonard Spacek before the New York Society of
Security Analysts, 30 September 1964.
"What is the Use of Accountants?", The Economist, 21 November 1964.
"The Audit Gap", J. Howard Laeri, before the American Bankers Association
Credit Policy Committee, 1 February 1966.
"Unaccountable CPAs", Forbes, 15 October 1966.
"CPAs under fire Auditors' critics seek wider, faster action in reform
of practices", The Wall Street Journal, 15 November 1966.
"Accounting profession, vexed by lawsuits, weighs responsibility to shareholders",
The New York Times, 20 November 1966.
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"What are earnings?' The growing credibility gap", Forbes, 15 May 1967.
"Cooking the books to fatten profits", Time, 11 April 1969.
Why Market Resale Prices?
There are many who still seem to think that the main information required by
the users of financial statements is the magnitude of income, or some variant of
it such as earnings per share. But when one owns a good or an investment there
are always two kinds of numbers which must be known, if one is to judge what one
should do with it. These are the expected yield and the resale price. We may
use the recent yield as a guide to expected yield, but expected yield is still a
personal judgment. It can never be anything else. We need to know the resale
price, on the other hand, so that we can consider what that sum invested otherwise
might yield. It is a magnitude we cannot do without and still be free to choose.
It is no different for companies. It has always been possible for companies
to sell off parts of their assets; and always possible for shareholders to decide
to sell off the whole of their assets, as in takeovers. But unless shareholders
know what they are selling when they sell a share or when they collectively trade
off a whole undertaking they don't know what they are losing or gaining. When
Ansett acquired Guinea Airways ten years ago, it was reported that, for little more
than lm, it acquired a portfolio which it sold shortly afterwards (and after a drop
in the market) for over 1m, nearly 200,000 in liquid assets and an a~rline.
Accounting provides no protection for investors if accountants suppose that assets
or collections of assets will not be sold, and on that account disregard present
selling prices. No one, not even its managers, can know when a company's assets
might be sold, since no one can know who might bid for them, or when. The only
general protection is to have up to date prices assigned to all assets in balance
We have been urging this for some time. But few seem to be convinced that the
date of a piece of information is a material part of it. This is quite odd particularly
when no one would think of a balance sheet without a date, and quite odd when the
timeliness of reports is said to be an important matter.0 What timeliness seems to
mean in practice is "there should be the least possible delay in getting out of date
information into the hands of managers or investors." If, in fact, up to date resale
price information is unnecessary, we find it impossible to understand a whole host of
departures from the initial cost doctrine, and a number of other things: thus,
Why do the Companies Acts require directors to state the amount that
current assets might reasonably be expected to realize in the
ordinary course of business, if the amount at which they are shown
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Why is the most generally used rule for inventories permitted,
namely the lower of cost and net realizable value? If cost is
a going concern value, why bother about net realizable value?
Why do the Companies Acts permit companies to use valuations at all?
Why are the marketable values of securities required to be shown?
Why, in some jurisdictions, is an up to date valuation of real
property required to be given on the issue of loan securities based
on charges on that property?
Why does the U.K. legislation require the dates of asset revaluations
to be given?
Why have so many U.K. and Australian companies revalued their assets
from time to time
Why did most of the large life offices in Australia recently make
known the market values or approximate market values of their
Some of these things do not go the whole distance. But they point quite clearly
in the direction of filling the fact-finding role we believe to be the accountant's role.
Anomalies or worse?
You may have observed that, in this paper, we have chosen examples and sources
sometimes from the U.K., sometimes from the U.S.A. and sometimes from Australia. This
has been quite deliberate. The laws of the three countries may not be the same. But
the basic features of commercial and financial dealing are. And the three "laws" of
sensible conduct we introduced apply in all three. What is more, local accounting
practices have spilled over and are likely to continue to spill over from one country
to others. And what is more, if we can find good indications of the bad effects of
some practices elsewhere, we may be able to avoid borrowing them ourselves. So we
dip again into Pandora's box.
Some accountants there have always been who claimed that flexible accounting
rules are necessary to accommodate the needs of company managements. Presumably this
means that when managements want to emphasize one thing rather than another they can
switch the rules. The result has been disastrous, as far as accounting is concerned.
Turn to Appendix 1. It is an American example based on the same underlying events
and state, but using two different sets of "accepted" accounting principles.11 Method
B shows a net income of $3.4m or 58% greater than method A. Which figure is true?
Which is fair? Which is true and fair? Which fairly represents? Surely they can't
both be. There are in the example 10 alternatives. Any company is at liberty to
choose either alternative in each ease. Which means that the same underlying events
could be represented by 210 1024 different net income figures every one of them
consistent with "accepted" principles. If there are 1024 net incomes from one set
of facts, accounting must surely have degenerated into just fiddling with numbers.
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Look at the figures another way. As you know, whatever the amount of net
income there must be a corresponding amount in other accounts, by way of increased
assets or reduced liabilities. It seems impossible to our simple mind that a company
can have a greater quantum of net assets simply by virtue of the way it calculates
net income. The magnitudes of the monetary representations of things companies have
to use and the liabilities they have to meet, surely are determinable. They can't
simply depend on how one does the sums. There can't be 1024 amounts for the net
assets without chaos.2 It's no wonder that the chairman of Loew's Theatres
remarked: "Accounting tricks are taking over. There's no rule on how to keep the
books. You can make up your own mind." (Time, 11 April 1969)
Cross to the U.K. for Appendix 11. We have tried to make some contemporary
sense out of the 1968 figures of two companies, as if we were proposing to invest
in one of them. The exercise forces us to guess, but as far as we can guess we
guess our guesses are conservative. Notice some differences. Instead of the rate of
return being 5 per centage points different, it may well be less than 2 percentage
points different. And instead of A having greater assets per of share capital than
B, it may well have less. If these two kinds of figures are of no consequence to
investors, the financial press is wasting its time publishing them. And if they are
of consequence to investors, the impressions obtainable of the two companies are
materially different if one attempts to guess about what one should know about.
If accountants and auditors were to direct their attention to finding out the
financial states or positions of companies from time to time, there could be no such
crudities as these examples suggest. And they would have nothing to fear from suits
of stockholders or creditors. They could then produce,inldefence, evidence that they
sought out the present prices of the assets in a company's possession. They could
demonstrate whether, and if so why, the prices assigned to assets in balance sheets
were different from what their inquiries about present prices had yielded. Independent
auditors would not necessarily have to seek this out for themselves. They would
simply have to satisfy themselves, by reasonable tests, that the officers of the
company had sought such prices. And the whole exercise would be to the point in a
way in which the mere following of original price entries through books of account
can never be, disregarding, as it does, the effects of changes in prices on the
operations, states and results of companies.
Some say that market prices are volatile, they go up and down. So does the
quantity of gas in the tank of your car. It is as foolish to ignore these movements,
no less in the one case than in the other. This entails a different kind of periodical
accounting than that-now,-urrent,'and-a-different kind of:auditipg; but a kind that is
free of the follies which seem to infest the present mode.
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Our title was the role of tomorrow's accountant. There is no ground for
supposing that the economic and institutional framework will change much in twenty
years a rather long tomorrow. We suppose there will be scarce resources and
property rights in them. But we might expect firms to be larger and more complex;
they are larger and more complex than they were twenty ears ago. Now the larger
and more complex a thing becomes the greater, not the less, becomes the need for
factual information at the key points. Man could not have reached the moon without
the discovery and development of the intricate and marvellous devices which keep
track of factual conditions. Complex business needs nothing less than the best it
can get to inform its officers and its financial supporters of factual conditions.
Further, unless we as businessmen have the facts as they were and are from
time to time, we are unable to discover, much less label and attempt to rectify,
the signs of efficiency and inefficiency. Until men began to take body temperatures
and pulses by exact count, they had far less at their disposal in diagnosing bodily
conditions and their causes. Until men began to deal in the more or less exact
numbers of atomic weights, electrical charges and like notions, they had far less
at their disposal in understanding and manipulating their physical environments.
There is nothing approaching these things in the financial metrics of business today.
It is pretentious and misleading to call today's accounting a measurement device or
an information device. If tomorrow's accounting is more like one, tomorrow's accountant
will play a' significant role as generator of the present facts, the truths, which
bind together the many parties who make possible the efficient conduct of business and
of the economic apparatus generally. If tomorrow's accountant fails in this, he will
leave all kinds of specialists at the mercy of rumour and guesswork, unable to make the
best use of their skills.
You may notice I have said nothing about computers, mathematics, behavioral
science and a lot of other stuff which is currently the common talk. For good reason.
I am talking about tomorrow's accountant, not tomorrow's jack-of-all-trades-and-master
-of-none. I have not been looking around to see what "bigger" jobs accountants might
do, when one of the most crucial, the continual rediscovery of the facts of business
is going undone. The Yale Express case, the Salad Oil case, the Texas Gulf Sulphur
case, the.Bar-Chris case, the Westec case, the Reid Murray case, the Stanhill case, and
a host of others, show up the inadequacy of today's accounting. Putting their noses
in the air or burying their heads in the sand will not relieve accountants of the
possibilities of worse things to come. But tackling the task of getting at the facts
will relieve them of the fear of stockholder and creditor suits and of general
opprobrium; relieve managers and directors, underwriters and brokers of the fear
of ignorance and of unexpected twists which defeat their legitimate expectations;
and relieve investors and creditors of the fear of sudden unexpected loss through
prolonged prior concealment of what can no longer be concealed. It is not
pretended that, in a well-informed commerce, mistakes will not be made, nor that
expectations will not be disappointed. But there will be no distrust of what at
any time is the foundation of trust between all parties the representations of
present and recently past facts.
To be thus at the centre of things, a key figure in a network of relationships
based on trust because disciplined by facts, is the role of tomorrow's accountant.
1. J, Bronowski, Science and Human Values, Pelican, p 57.
2. The Work of the Securities and Exchange Commission, 1968.
3. "The Law: Trouble for the Top", Forbes, 1 September 1968. See also
Time, 18 October 1968, p 62.
4. J.M. Renshall, "BarChris and Continental Vending 1968's Legacy for
American Auditors", Accountancy, January 1969.
5. The import of the Hedley Byrne case lies in much the same general direction,
towards a wider application of the view that those who are trusted must be
frank, and careful.
6. A recent demonstration of the point was the demand for transistor radio
batteries in Czechoslovakia during the Russian occupation: if people could
not get direct news of what was going on, they were determined to get it
indirectly. For fictional examples of experience and possibilities see
Aldous Huxley's Brave New World, especially the closing chapters, and George
7. Extracts from some of the dicta areogiven in the author's "Financial Information
and the Securities Market", Abacus, September 1965.
8. Bronowski, Science and Human Values, pp 59, 62-3.
9. Submission of the Institute of Chartered Accountants in England and Wales to
the Cohen Committee, endorsed by the Committee in its Report, para 98.
10. E.g. Paul Grady, Inventory of Generally Accepted Accounting Principles,
AICPA, p 41.
11. Taken from Forbes, 15 May 1967, "What are earnings? The growing credibility
12. Other examples than the one given have appeared in the literature from time
to time. In the course of the 1960 meeting of the AICPA, two leading accountants
debated the propriety of flexible rules, Leonard Spacek for uniformity, Maurice
Peloubet for flexibility. Income Accounts based on the same date for two
hypothetical but identical companies ave earnings per share as different as
$0.80 and $1.79. (See T.A. Wise, The Insiders, pp 37-8, 203-36). In an
article, "Accounting improvement": How Fast, How Far?", Leonard M. Savoie
produced an example which showed net income for the same basic facts as
different as $624,000 and $28,000 (Harvard Business Review, July-August 1963).
Take a Number .
Here's an actual case modified to mask company identity of how different
bookkeeping methods can greatly change the bottom line of the income statement.
Same company, same sales volume, same operating policies, but very different
GOLDEN FLEECE MANUFACTURING CO.
Cost of Goods Sold
Other Operating Income
Selling, General & Administrative
Other Income (Expenses):
Net Income Subsidiaries
Amortization of Goodwill
Net Income Before Taxes
State Income Taxes
Federal Income Taxes Deferred
Federal Income Taxes Current
Charges Equivalent to Tax
Investment Tax Credits
Tax Loss Carryovers
Net Income 5,958,300 9,397,700
Earnings Per Share $1.99 $3,14
SOURCE: Practising Law Institute, December, 1966, Conference on Corporate
* Material From Forbes, 15 May 1967.
Appendix 1 (p 2)
The methods A and B are:
A uses last-in, first-out; B uses first-in, first-out, Difference $1,196,500
A uses sum-of-the-years' digits; B uses straight-line, Difference 253,100
A charges as incurred; B amortizes over 3 years. Difference 191,500
A treats as purchase; B treats partly as purchase, partly
as pooling of interests. Difference
(See next 3 items)
Goodwill from Acquisition
A amortizes over 10 years; B does not amortize.
A uses "larger" base in purchase; B uses "smaller"
base in purchase and pooling of interests.
Acquisition Loss Carryovers
B applies against federal income taxes to extent
of pooling of interests.
Taxes on Subsidiary Profits
A makes provision as income earned; B makes no
provision until dividends received.
Investment Tax Credits
A amortizes over useful bives of equipment; B credits
against current taxes.
Unfunded Pension Costs
A amortizes over 18 years; B does not amortize.
A accrues and expenses prior to retirement; B does
not accrue or expense until allowances paid.
Comparison of Two U.K. Companies
Reports of December 1968
All figues in millions
Ne(t .Profit less Tax and minority
Investment grant credit included in
Net ordinary shareholders' equity
Goodwill included in equity
Provisions, apparently reserves
Land and buildings, at cost
same, revalued in last 15 years
Add to net equity
Plant and equipment, at cost
'ame, revalued in last 15 years
Add to net equity
Investments, at cost
Market or valuation
Add to net equity
Adjusted net equity a+b+c+d
Rate of Return on equity %
Tangible assets per of share capital
Share price per of share capital
1968-9 High (approx)
22 Feb 1969
A Co B Co
A Co B Co
96 114 (a)
Appendix II (p 2)
Given the balance sheets of two companies for 1968, A in a foodstuffs
industry, B in a consumers semi-durables industry, we have attempted to
put the two on an equal footing as far as accounting methods are concerned.
The two are English companies,both over 50 years old, both reporting under
the U.K. Companies Act, 1967.
First we eliminated the investment grant credit, which is strictly
not income but a grant which immediately goes to the benefit of the equity.
Second we eliminate goodwill from B, as it is not a tangible, and we add
back some items of A which though shown as provisions seem to be reserves.
In respect of A, certain fixed assets have been revalued at various
dates over the last 15 years. We take them at their face value, though this
is likely to be below current prices. We have no idea when the other assets
of A and the whole of the assets of B were bought. As a guess we suppose
their present prices are one-third higher than the book values; and that the
depreciation in respect of them should be one-third higher than the book
We substitute "market or valuation", given in the reports, for the cost
Making adjustments for these three items to the shareholders' equity
figure, the difference between the two companies turns out to be nothing
near as great as the difference seems on the published figures as they stand.
It's all guesswork; but if companies report on such diverse bases, one
can only guess.