Friday, July 31, 2009

General Accepted Ambiguousness

I write this entry sitting in a classroom learning the various ins and outs of accounting. Perhaps I should be more closely paying attention, but I can assure you that I am a superb multitasker. I have not written a blog entry in months, but I felt that filling this time with writing would be more productive than endless trawling of news on the internet. The main reason I am writing this entry is because of what I have learned in accounting and the effect of this knowledge on my outlook of the business world; in short, learning how companies keep track of their finances has shown me just how contrived and open to dishonesty accounting practices really are.

Accounting practices do follow guidelines which are supposed to keep them honest. The guidelines are referred to as the Generally Accepted Accounting Principles or GAAP and companies in North America have to follow them by law. Unfortunately, due to a total lack of transparency, the accounting practices of a company are very difficult to uncover. Each company puts out various financial statements, but because they are able to control and shift their own revenues and costs around from year to year, they can easily present a much rosier or poorer picture of what is actually occurring at the firm. This leads outside accountants and analysts to perform forensic accounting in which they attempt to dissect the financial statement and more or less guess at what has been occurring at the company. This analysis is the public’s view of the company and what affects the company’s stock price. So, in the end, a company’s stock price is more or less dependent on statements which may or may not tell the whole truth about a company and this lack of transparency can have a huge effect on the stock market overall. This system has been improved over the years after such several companies twisted and contorted these rules to publish completely misleading financial statements. The most notorious of these companies was Enron, who literally made their crumbling shell of a company look like solid gold.

Luckily history tells us that dishonest accounting practices eventually catch up with you, but only after hurting lots and lots of people in your downfall. Full transparency of accounting, perhaps disclosed to a government run auditor, could help keep companies truly honest while maintaining some degree of discretion. Either way, the rules are set up to cover manager’s interest rather than all the other stakeholders in the company, from the private investors to the receptionists. Governments of advanced economies need to establish strong transparency guidelines to avoid crippling crisis in the financial system due to gross misinformation.

-DG