Accounting reform
Encyclopedia
Accounting reform is an expansion of accounting rules that goes beyond the realm of financial measures for both individual economic entities and national economies. It is advocated by those who consider the focus of the present standards and practices wholly inadequate to the task of measuring and reporting the activity, success, and failure of modern enterprise, including government.
Real debate concerns concepts such as whether to report transactions, such as asset acquisitions, at their cost or at their current market values. The former, traditional approach, appeals for its reliability, but can quickly lose its relevance due to inflation and other factors; the latter, increasingly common approach, is appealing for its relevance, but is less reliable due to the need to use subjective measures. Accounting standards setters such as the International Accounting Standards Board
attempt to strike a balance between relevance and reliability.
circles have led in the past to activity-based costing, economic value added
, and risk
measures.
Not only do most businesses raise capital based on numbers derived from current standards, there are extensive lobbying efforts by the accounting industry to keep those standards roughly as they are: complex, loopholed, and unable to be applied or audited easily by laymen.
Heads of the U.S. Securities and Exchange Commission since the 1980s have consistently complained that this lobbying makes it impossible for them to apply meaningful reform, even in the wake of accounting scandals
, e.g. that which felled Arthur Andersen
in 2002.
, an analysis of capital
indicating how many types there are and how each supports each factor of a production process.
A comprehensive scheme that would affect, for instance, the United Nations standards for national accounts
, the rules of the Bank for International Settlements
, or listing requirements on the major stock exchange
s, would have to defend any change against critics that advocated lesser reforms - making it extraordinarily difficult to achieve simultaneous consent.
Marilyn Waring
, who deeply criticized the UN account system for systematically under-valuing the social and economic contributions of women, stated also that she had to read literally an entire room full of books in order even to understand the standards applied today. It seems unlikely that most advocates of reform have the stamina to do so, nor the background required to debate each issue with economists
or accountants that build their careers on the detailed extension and improvement of standards that already exist. Most critics considered reform prospects bleak.
The critique from ecological economics
was even more fundamental, claiming that most means of measuring well-being indicated that the developed nations were in a state of "uneconomic growth
" through the 1980s and 1990s, due mostly to failures of measurement, most or all of which could be tracked back to the practice of using the Gross National Product as a means of making money supply
decisions. This is perhaps the most obvious and widely-held critique of current national accounting and economic growth reporting systems - the creators of the GNP and GDP measures themselves advise against its use as a single measure of economic growth - but politicians and press typically do so without caveat nor apology.
Robert Costanza, Paul Hawken
, Amory Lovins
and others who advocate a consistent global system for valuing natural capital
, note that failures in this area are particularly grim: promoting extinction
, loss of biodiversity
, climate change
and destructive weather for the sake of such "growth". John McMurtry
characterized this as "the cancer
stage of capitalism
".
For giving importance to natural capital in accounting, we can study from this small example
For example, you have made building where were large number of trees. You cut all the trees and you made your building. You should show the amount of loss of natural capital with this. You have to show how much loss of living place of birds, animals and oxygen. In accounting every should be counted and planning for securing natural capital should be done.
What makes "economic sense" under current standards, they argue, is in fact leading to ecological catastrophe, social conflict, and economic chaos.
Real debate concerns concepts such as whether to report transactions, such as asset acquisitions, at their cost or at their current market values. The former, traditional approach, appeals for its reliability, but can quickly lose its relevance due to inflation and other factors; the latter, increasingly common approach, is appealing for its relevance, but is less reliable due to the need to use subjective measures. Accounting standards setters such as the International Accounting Standards Board
International Accounting Standards Board
The International Accounting Standards Board is an independent, privately funded accounting standard-setter based in London, England.The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee...
attempt to strike a balance between relevance and reliability.
Business
Limited reforms within professional managementManagement
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...
circles have led in the past to activity-based costing, economic value added
Economic value added
In corporate finance, Economic Value Added or EVA, a registered trademark of Stern Stewart & Co., is an estimate of a firm's economic profit – being the value created in excess of the required return of the company's investors . Quite simply, EVA is the profit earned by the firm less the cost of...
, and risk
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
measures.
Not only do most businesses raise capital based on numbers derived from current standards, there are extensive lobbying efforts by the accounting industry to keep those standards roughly as they are: complex, loopholed, and unable to be applied or audited easily by laymen.
Heads of the U.S. Securities and Exchange Commission since the 1980s have consistently complained that this lobbying makes it impossible for them to apply meaningful reform, even in the wake of accounting scandals
Accounting scandals
Accounting scandals, or corporate accounting scandals, are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations...
, e.g. that which felled Arthur Andersen
Arthur Andersen
Arthur Andersen LLP, based in Chicago, was once one of the "Big Five" accounting firms among PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG, providing auditing, tax, and consulting services to large corporations...
in 2002.
National economies
Any comprehensive scheme of accounting reform is a major professional and academic enterprise; Typically it requires examination of the role of each of the fundamental factors of productionFactors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
, an analysis of capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
indicating how many types there are and how each supports each factor of a production process.
A comprehensive scheme that would affect, for instance, the United Nations standards for national accounts
National accounts
National accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
, the rules of the Bank for International Settlements
Bank for International Settlements
The Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...
, or listing requirements on the major stock exchange
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
s, would have to defend any change against critics that advocated lesser reforms - making it extraordinarily difficult to achieve simultaneous consent.
Marilyn Waring
Marilyn Waring
Marilyn Waring, CNZM, D.Phil., D.Litt. is a New Zealand feminist, a politician, an activist for female human rights and environmental issues, an author and an academic, known for her contributions to feminist economics....
, who deeply criticized the UN account system for systematically under-valuing the social and economic contributions of women, stated also that she had to read literally an entire room full of books in order even to understand the standards applied today. It seems unlikely that most advocates of reform have the stamina to do so, nor the background required to debate each issue with economists
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
or accountants that build their careers on the detailed extension and improvement of standards that already exist. Most critics considered reform prospects bleak.
The critique from ecological economics
Ecological economics
Image:Sustainable development.svg|right|The three pillars of sustainability. Clickable.|275px|thumbpoly 138 194 148 219 164 240 182 257 219 277 263 291 261 311 264 331 272 351 283 366 300 383 316 394 287 408 261 417 224 424 182 426 154 423 119 415 87 403 58 385 40 368 24 347 17 328 13 309 16 286 26...
was even more fundamental, claiming that most means of measuring well-being indicated that the developed nations were in a state of "uneconomic growth
Uneconomic growth
Uneconomic growth, in human development theory, welfare economics , and some forms of ecological economics, is economic growth that reflects or creates a decline in the quality of life. The concept is attributed to the economist Herman Daly, though other theorists can also be credited for the...
" through the 1980s and 1990s, due mostly to failures of measurement, most or all of which could be tracked back to the practice of using the Gross National Product as a means of making money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
decisions. This is perhaps the most obvious and widely-held critique of current national accounting and economic growth reporting systems - the creators of the GNP and GDP measures themselves advise against its use as a single measure of economic growth - but politicians and press typically do so without caveat nor apology.
Robert Costanza, Paul Hawken
Paul Hawken
Paul Hawken is an environmentalist, entrepreneur, and author.-Life:Paul Hawken had a Swedish grandmother and a Scottish grandfather with a farm. His father worked at UC Berkeley...
, Amory Lovins
Amory Lovins
Amory Bloch Lovins is an American environmental scientist and writer, Chairman and Chief Scientist of the Rocky Mountain Institute. He has worked in the field of energy policy and related areas for four decades...
and others who advocate a consistent global system for valuing natural capital
Natural capital
Natural capital is the extension of the economic notion of capital to goods and services relating to the natural environment. Natural capital is thus the stock of natural ecosystems that yields a flow of valuable ecosystem goods or services into the future...
, note that failures in this area are particularly grim: promoting extinction
Extinction
In biology and ecology, extinction is the end of an organism or of a group of organisms , normally a species. The moment of extinction is generally considered to be the death of the last individual of the species, although the capacity to breed and recover may have been lost before this point...
, loss of biodiversity
Biodiversity
Biodiversity is the degree of variation of life forms within a given ecosystem, biome, or an entire planet. Biodiversity is a measure of the health of ecosystems. Biodiversity is in part a function of climate. In terrestrial habitats, tropical regions are typically rich whereas polar regions...
, climate change
Climate change
Climate change is a significant and lasting change in the statistical distribution of weather patterns over periods ranging from decades to millions of years. It may be a change in average weather conditions or the distribution of events around that average...
and destructive weather for the sake of such "growth". John McMurtry
John McMurtry
John McMurtry, PhD, FRSC, Professor Emeritus of Philosophy at the University of Guelph, Canada. Most recently, he has focused his research on the value structure of economic theory and its consequences for global civil and environmental life...
characterized this as "the cancer
Cancer
Cancer , known medically as a malignant neoplasm, is a large group of different diseases, all involving unregulated cell growth. In cancer, cells divide and grow uncontrollably, forming malignant tumors, and invade nearby parts of the body. The cancer may also spread to more distant parts of the...
stage of capitalism
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
".
For giving importance to natural capital in accounting, we can study from this small example
For example, you have made building where were large number of trees. You cut all the trees and you made your building. You should show the amount of loss of natural capital with this. You have to show how much loss of living place of birds, animals and oxygen. In accounting every should be counted and planning for securing natural capital should be done.
What makes "economic sense" under current standards, they argue, is in fact leading to ecological catastrophe, social conflict, and economic chaos.
Governments
One barrier to accounting reform are governments themselves. They have the authority to determine what are accepted accounting principles, while using questionable accounting practices themselves. Governments, for example, pay off operating costs with longer-term debt and thus overstate budgetary surpluses or conceal operating deficits. This is not unlike the allegedly fraudulent practices of some corporations.Notable advocates
Notable advocates of accounting reform:- Baruch Lev
- Lawrence A. Cunningham
- Marilyn WaringMarilyn WaringMarilyn Waring, CNZM, D.Phil., D.Litt. is a New Zealand feminist, a politician, an activist for female human rights and environmental issues, an author and an academic, known for her contributions to feminist economics....
- Robert Costanza
- Amory LovinsAmory LovinsAmory Bloch Lovins is an American environmental scientist and writer, Chairman and Chief Scientist of the Rocky Mountain Institute. He has worked in the field of energy policy and related areas for four decades...
See also
- Philosophy of AccountingPhilosophy of accountingThe philosophy of accounting is the conceptual framework for the professional preparation and auditing of financial statements and accounts. The issues which arise include the difficulty of establishing a true and fair value of an enterprise and its assets; the moral basis of disclosure and...
- standard accounting practices
- economic value addedEconomic value addedIn corporate finance, Economic Value Added or EVA, a registered trademark of Stern Stewart & Co., is an estimate of a firm's economic profit – being the value created in excess of the required return of the company's investors . Quite simply, EVA is the profit earned by the firm less the cost of...
- riskRiskRisk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
- Inflation accountingInflation accountingInflation accounting is a term describing a range of accounting systems designed to correct problems arising from historical cost accounting in the presence of inflation. Inflation accounting is used in countries experiencing high inflation or hyperinflation...