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Accounting / Disclosure / Financial Reporting Intro

“Accounting…and…accountability” – these are clearly linked terms with common meaning that emerged along with the modern capitalist system, deriving from Middle European languages and cultures.  “Accounting,” (says Webster’s New Collegiate) is derived from the medieval, “to tell…” -- as today’s accounting systems are designed to “accurately tell the story” of an organization’s financial condition. 

The term, “accountability” emerged at the same time…the early and still relevant meaning: to consider or judge the value of…and important elements of organizational and individual accountability are based today on the quality of the story told by the accounting practices, policies and procedures of the organization (be it in the corporate, social or public sector).  And how stakeholders and stockholders judge the story -- Truthful?  Misleading? Accurate?  Incomplete? Full and Fair disclosure…or something less?  Accounting practices can well tell a story about an organization’s culture!

Accounting as we know it, emerged with more widespread European global trading in the mid-15th Century. The father of modern-day accounting is considered to be one Fra Luca Pacioli, a mathematician who in the late-15th Century toiled for the wealthy Venetian merchant-princes, advancing theories that included the advantages of double-entry bookkeeping.  (His most famous work:  “Summa de Arithmetica, Geometria, Proportioni et Proportionalita” – the Collected Knowledge of Arithmetic, Geometry, Proportion and Proportionality – we know it as “Summa.”)

Fra Pacioli suggested:  journals, ledgers, “assets” and “liabilities,” trial balances, balance sheets, and other methods and processes that we continue to use (and expand on) in the 21st Century.  (See endnotes for excellent resources on accounting history and development.)

The British a few centuries later fine-tuned such approaches as “effective cost accounting” and birthed the modern accounting profession during the early days of the Industrial Revolution.

More recently, the American Congress put corporate (financial) accounting, financial reporting and the accounting profession squarely in the corporate governance reforms of the 1930s (in the adoption of statutes and rules following the market crash of October 1929, the spectacular failures of many banks, and after the onset of the Great Depression). 

The work of Certified Public Accountants is specifically mandated in numerous U.S. securities laws, and the adoption of Sarbanes-Oxley statutes in July 2002 reaffirmed in various “titles” the importance of accounting and accountants to corporate financial reporting and corporate governance. (Lawyers and consultants are not included in the key federal public laws governing financial reports – accountants are!)

Accounting (and the use of accounting principles in corporate, social and public sector financial reporting) has become very sophisticated, as business and financial markets innovate and create ever more complex ways to go to market.  (Think about the dramatic effects of the accounting for “Special Purpose Entities,” a once obscure means to account for a non-traditional business practice or operation that was enthusiastically adopted by the Enron leadership…disaster followed!)

In their new book, “The New Capitalists,” authors Steven Davis, Jon Lukomnik and David Pitt-Watson challenge the “old ways” of capitalism and traditional financial reporting and set out 10 rules in their “New Capitalist Manifesto” (a play on the Karl Marx “Communist Manifesto” of the 19th Century that affected hundreds of millions of people).

Relevant to Accountability:  In the ten rules for corporate boards is Rule #10, with the authors suggesting:  Communicate and be accountable.

Write the authors: “Companies should seek an open and honest dialogue with their shareowners and others affected by their plans. They should be clearly accountable for their actions.

“There are two (important) reasons why new capitalists require companies to be transparent.  First, efficient markets (particularly capital markets) depend on information.  Second, even more important, is that if companies are to be accountable to citizen investors, such owners need the information necessary to make accountability work.”

In 2005, Professor Baruch Lev at a financial reporting symposium asked, “Are Our Modern Accounting Systems Out of Date?”  The NYU professor noted that “in 500 years of accounting, nothing much has really changed…” He suggested that as much as two-thirds or even three-quarters of the real value of a company is based on intangibles…resulting in investors not getting the information they need.

It is not just large public companies that are affected by changes in accounting rules and principles – private equity investors and business managers will be watching the American Institute of CPAs (AICPA) task force – “the Committee on Private Company Financial Reporting” – to see what recommendations the body makes to the primary accounting rulemaker in the United States – the Financial Accounting Standards Board (FASB).

The Editors will present news, views, research findings and other relevant information related to “accounting” and financial reporting in Accountability Central.

We welcome your views on Accounting and Financial Reporting – send emails to:  editors@accountability-central.com.

 

Notes:  (book quotations,) “The New Capitalists,” published by Harvard Business School Press; authors Stephen Davis, Jon Lukomnik, David Pitt-Watson; © 2006 by the authors.

Web sources for Accounting History:

www.ensign.ftlcomm.com/history/Acc/ResearchPaperFin.htm (James deSantis)

http://.acc.tamu.edu/giroux/history.htm -- “A Short History of Accounting & Business,” by Gary Giroux (1999)

www.acaus.org/acc_his.html


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