Can’t Update Enough Today
March 04, 2002
I was thinking to myself, as I take more advanced accounting stuff and learn more advanced topics, the more I realize that accounting is pure bullshit. What is accounting? Simply put, accounting is the classification of categories and records. That’s it, it should be as simple as that. However reality is that the Canadian Institute of Chartered Accountants and the American Financial Accounting Standards Board has created monster rules that numb the mind of business and create havoc in financial reporting.
The goal of using accounting in creating financial statements is to give a user (investor, creditor, government body, etc) a good picture of the company. It’s a great goal and without it, assymetric information would cause more risk involved with investments and business. Yet, to give a user a better understanding of a company, accounting uses the most complex rules and regulations to come up with numbers – many of these rules are quite arbitrary too. I’m sure if I argue this with any of my profs, they’ll scoff at me and tell me these rules are needed in today’s complex business transactions, many dealing with voluminous data or some other obscure reason. My feeling about this is that accounting has created these monster rules to keep the accounting profession alive. That is, to be able to do accounting, you must go through years of schooling to truly understand what the hell is going on. This means people who know the stuff can keep their jobs while people who want a piece of their pie must learn it first.
Let me give you a simple example. When a company buys out another company, something called Goodwill is sometimes created. Goodwill is, simply put, the amount you purchased the company for minus the worth of the company. It’s not a tangible thing but you will see it as a dollar amount in many balance sheets. Company A’s stock prices is at $100. The next day, the stock markets fell faster than a figure skater with a broken hip. A’s stock price is now $10. The company is still worth the same as it was yesterday, that is, it still sells the same stuff, still makes money, still has factories and machines and crap but now in the market, the company is now 10% of its original standing. So, a well-off company comes up and snaps up this company’s stock (it’s a big bargain). They pay $20 for a share. Under American accounting rules, the goodwill will be $20 – $100 = negative $80 (btw, goodwill usually is positive, negative goodwill is not badwill). However, in Canada, the Canadian Institute of Chartered Accountants has arbitrarily decided that negative goodwill cannot exist- it must be zero or greater. The rationale behind this is that a company would sooner sell of all its assets at its worth instead of letting itself be taken over by another company and that managers would never sell for less than a company is worth. History has shown that in the face of a takeover, companies do not liquidate assets when price is less than worth – there’s simply a bargain available. Canada is the only country (I was told) that does this. This is just one of the many weird differences that Canada accounting principles differ.
This means if an American company sets up in Canada, they’ll either: have their accountant learn the Canadian system (not an easy feat in short time) or hire a local accountant – rationally, its cheaper and faster for the latter: thus preserving another job.
My vision of the future is that accounting cleans up and simplifies its complex rules and all countries adopt universal accounting practices – business would be so much easier. You might be thinking why would a guy in accounting bash accounting. Reason 1 – accounting was my second choice. Reason 2 – accounting is a tiny tiny part in general business – I look at the big picture instead. Reason 3 – I don’t understand any of this stuff so it makes me frustrated.
