What’s going wrong with accounting?

A big problem with accounting is that the process is so opaque and complicated that very few people understand it… or even have the time to try to understand it! Fewer eyes on the books makes it easier for mistakes or frauds to slip under the radar, even at companies with large and/or involved boards of directors. These financial problems can then end up costing businesses and their stakeholders massively. 

Take the case of Autonomy, a software company. Back in 2011, it was bought by Hewlett-Packard (you may know it as HP, the printer company) for £8.4 billion. HP thought Autonomy was worth this much because when they’d looked at its books everything seemed to be going really well; lots of sales, not many costs, etc. After buying it, however, HP said they realised they’d been hoodwinked by Autonomy’s founder, Mike Lynch, who had deliberately falsified the accounts. (Lynch, who personally made about £600 million from the deal, denied this, but lost the subsequent court case over it.) The upshot was that HP had to write down the value of Autonomy by almost £5 billion. 

It’s a bit hard to say for sure how much the Autonomy drama was responsible for what happened next at HP, because the company was having a lot of other problems at the time: printers and ink were going out of fashion and the CEO was being criticised and replaced. But having those extra billions around presumably would have helped when the company found itself in financial trouble. As it was, HP laid off tens of thousand people. It also saw its share price slide dramatically, meaning anyone who owned shares in it (including pension funds) lost money. 

For some critics, the biggest concern with accounting’s incomprehensibility is that it seems to have been deliberately designed to be that way. And there may not be much interest within the profession to change this state of affairs. Accountants arguably benefit from the status quo, because increasing the barriers to entry of their profession means there’s fewer people who can do the work, and employers subsequently have to compete with each other to hire good accountants by putting up wages and offering other perks. 

Company executives, meanwhile, may appreciate the ways that hard-to-follow accounting reports turn people off reading them, resulting in fewer potentially-critical eyes on what they’re getting up to. Of course the flip side of this situation is that it is harder for stakeholders, including employees and investors, to determine what their company is up to. That in turn makes it harder for them to lobby it for any changes they wish to see. 

Alongside it’s confusing-ness, accounting has been criticised for not being thorough enough. People pushing for accounting reform say that accounts - even correct, fraud-and-mistake-free ones - are not including all the relevant information about a company. For example, they may not tell you much about the business’ green credentials or their treatment of staff.. That means they’re not helping stakeholders as much as they could. 

The argument is therefore being made that it is time for societies to debate and then reform what accounts should look like. The hoped-for upshot is a world where all company stakeholders find it easier to shine a light on whether a business is living up to their expectations and values.