About time for another blog I reckon...
I even have something to talk about. Really. You see, at the moment I am reluctantly studying financial accounting as part of the chartered accountants program that you are required to suffer through if you want to become a ca. Now notwithstanding the obvious shortfalls with the program in general I have a few beefs with this topic in particular.
Firstly, why the fuck do I have to do it. I am an insolvency accountant. I will never, ever do a consolidation or care a wit about tax affect accounting. The proper treatment of revenue and cost accruals is irrelevant to me. All I care about is cash. Real, hard, cleared funds in my bank account, cash. Assets are really only worth what cash I can flog ‘em for and accruals aren't worth anything.
This brings me to what I see as a larger problem with the accounting profession as a whole (and it is particularly relevant given the current 'crisis' and the excessive accounting trickery that led to it). The whole accounting profession has lost its touch on reality.
Most of the standards that make up the modern rules of accounting are simply theoretical crap. The current crisis has shown that perfectly. A debtor isn't profit. It 'might' be an asset but a piece of paper sure isn't cash. The current accounting standards allowed the excess that allowed the crisis to happen. For instance, why can I revalue up an asset and book the revaluation to profit. For starters a valuation is, in my experience, a bad guess. And for second how is it profit. I haven't done anything except move some numbers around on a piece of paper.
It is the same with a lot of other accepted accounting methods. In my experience, when push comes to shove, most debtors are bad, work in progress is worthless, assets are invariably worth vastly less than their valuation, half the stock is obsolete and there are a raft of hidden and contingent debts that really are owing (despite the CFOs decision that they were to unlikely to warrant recognition.
The addition of cash flow statements really helped this problem a bit but they are still a little to open to interpretation.
Now I am not suggesting we throw away the old accounting establishment. I just think we should add another statement to the reports. The 'Liquidation ERV' report. It would be a simple statement that would give cents into the dollar estimate of how much an investor would likely get back if the company went tits up on balance day. A true reflection of where the Company REALLY sits. Investors have a right to know how things will be from a worst case scenario as well imo.
There is also the question of how you get these reports to be accurate. Simple!
You get a Liquidator to provide the report. Then if the thing does go tits up, they have to do the wind up and are personally liable for any shortfall on their prediction. Most IP’s are ridiculously risk averse so that should keep them in line. Makes perfect sense to me.
Cheers
G.
