Why is it so hard to get reliable data from accounts?
I was in discussion with a reasonably heavyweight fund manager recently. He was bemoaning the state of accounting. His complaint came in three parts. The first was that accounting was unreliable. The second was that it was inconsistent. And the third was that it was hard to identify when this mattered. I admit that I probably assisted him to reach these conclusions: all are opinions I have held for a long time. Let me explain.
First, accounting is unreliable because current accounting standards provide too many occasions when costs may be deferred. Revenues may be brought forward, revenue costs can be capitalised and capital costs can be written off to create a distorted view of revenue generation over time.
All of these are essentially because the idea of prudence has long since departed the accounting profession. With it went the willingness to use an adequate ‘true and fair over-ride’ on the part of auditors. The result is data that cannot be relied upon to be true and fair any more. That means it is unreliable.
Second, accounting presentation is inconsistent. Although there is not an accountant who does not know what shape a profit and loss account, cash flow, balance sheet and notes to the accounts (I use the terminology deliberately because these terms have meanings that their replacements do not) should take when it comes down to published data the variations in presentation are far too great. And this matters.
In an era when technology should make the interpretation of accounting information easier and not harder that’s not happening precisely because, as anyone who tries to do this in-depth knows, translating company accounts into a database format is exceptionally hard once you move beyond the headline figures.
The loss of research funds as a result of the MiFID II rules on charging for investment research have only exacerbated this problem: the money to transcribe accounting data to permit its analysis simply does not exist anymore.
The result is that it’s getting ever harder to spot accounting irregularities. And when more and more cash is invested through tracker funds no one seems to have the incentive to look.
This matters for the integrity of financial markets. The primary purpose of accounting data, according to the International Financial Reporting Standards Foundation, is to assist those engaging in buy and sell decisions in those markets.
Right now though, I agree with the fund manager mentioned at the start of this piece: accountancy is failing miserably in this regard. But it’s even more important than that. If the data we produce is of no use to anyone the status of our profession is under threat. And that, I think, is precisely where we’re headed.
And it’s not just in the financial markets that this matters. Whilst I spend most of my time on research these days, I still do client-facing work. I was trying to do a quick appraisal of a company I’d been asked to look at recently. The problem was finding readily accessible comparatives to establish a benchmark industry norm to determine whether the data I was looking at was reasonable or not. This was hard, and overly costly, simply because every set of accounts I looked at seemed to make it as hard as possible to secure the data in a reliable form for comparison. So this is a problem all accountants can face.
However, it’s not my style to moan without suggesting a solution to the problem I’m looking at. And in this case, the solution is quite straightforward. Given the advances we have seen in IT, accounting standards and company law, I think it is entirely possible that all accounts could be subject to a standard coding framework to ensure that the data in them can be automatically uploaded to standard, and I would hope free-to-access, databases that will permit easy interpretation of data.
What sort of data interpretation? Simple stuff would do for starters. Debtor day ratios. Stock turnover ratios. Creditor days. Productivity data like turnover to assets, and employee cost and headcount. This stuff is not rocket science. And if we could also do some decent tax analysis at the same time, plus some comparison of group and parent company accounts, much of the information needed to spot accounting crises coming would be readily available to all users of accounts.
Downscale it to the sorts of accounting software most of us use and we could deliver pretty standard added-value products for clients at limited cost to help them make that most useful of things, called profit.
That’s what this profession should be about. Why is it being made so hard to do?