My Accounting Students Need More Kierkegaard

I think the toughest thing to sell to the students who pick up a smidgen in my finance class is that it's only history: accountants are great at telling you where things came from or where they went to; they are no better than the rest of us t assessing where they are going.   Or, as the (other) melancholy Dane said:

“It is perfectly true, as philosophers say, that life must be understood backwards. But they forget the other proposition, that it must be lived forwards.”

Soren Kierkegaaard, Journal Entry, 1843.

What Should My Law Students Know About Accounting?

I posed that question in an idle moment the other day.  My friend Hizzoner weighs in with a response:

But they should know that, despite appearances and protestations, financial accounting is malleable.  In short, the transactional types should leave the course with doubt, and the litigators should leave with a cross-examination checklist.

That sounds spot on to me.  I could flesh it out a bit. These are the students in my corporate finance class. Exactly one of them admits to knowing any accounting (and she has 10 years' experience, as a CPA).  For the rest--well, I spend a day each on "the balance sheet" and "the income statement."  Then I spend a day giving them three examples of (well-recognized and widely accepted) accounting devices which can lead to weird results.  One, depreciation. Two, inventory accounting. And three, the expensing of R&D.  I end by stressing that in each of these, the accounting "solution" is a defective compromise which may, after all, be the best solution to an unsolvable problem.

Now, forward to cash flows.

Job Market News: Accountants

Of course I've heard the horror stories about the job market for young lawyers. I read that New York Times piece about the increasing supply (i.e., possibly reduced income) of doctors). Yesterday I chatted with my friend John the accountant (different John from the regular John). How's employment holding up in the bean-counting trade?

Pretty well these past four or five years, John reported. Indeed he and his partners (who run a small firm) have had to pay top dollar to get whatever help they can get. The main reason: Sarbanes Oxley, the post-Enron Congressional mandate to stiffen up the policing against fraud.

This year though, John said, demand for accountants seems to be slackening off--he can hire at reasonable prices again. Maybe the Sarbanes Oxley market is saturated, he speculated. Or maybe people have just figured out that there is only so much people can do to ferret out fraud. If the client is determined to cheat. he'll cheat, and you might as well reconcile yourself to that fact.

A-one and a-two etc.

Taxmom favors me with the loan of her valued Christmas gift: a copy of Bruce Marshall's The Accounting (1958), hitherto unknown to me, and surely one of the few "accounting" novels ever written. Perhaps the only real competitor is Accounting for Murder, by the inimitable Emma Lathen, of whom I have written before, although the Lathen novel (and its kin) take a somewhat broader-brush view of the business world and its attendant evils.

There are, I guess, a few successful business novels although I'm having trouble thinking of examples that I would really want to read again: people always mention The Man in the Grey Flannel Suit, which I have always studiously evaded. The late Arthur Hailey wrote a string of you-are-there novels about "the real world," as it is sometimes known. I read Wheels, about the auto industry and liked it well enough that I once assigned it to my commercial law students (they didn't see the point)--there are others, and I can't recall whether I ever read them or not. He also throws in the Godfather novels, greased with a happy face :-), but I'm not sure it is a joke. And speaking of the mob, if one were doing movies, I would surely put Casino near the head of the list.

There are, of course, a few reasonably successful novels about financial chicanery. The best that I know of is Christina Stead's House of All Nations (Amazon has a paperback on offer at $560.28) or perhaps Theodore Dreiser's Trilogy of Desire about the career of Charles Yerkes the mass transit guy. Or Trollope's The Way We Live Now--more keep coming to mind.

[My faithful readers, or reader, are/is saying--but aren't you forgetting Dickens? No, I am not forgetting Dickens; I am ignoring him. For all his maundering, Dickens seems to me to know next to nothing about the world of affairs, and to care even less.]

I suspect that I may be talking about nothing more than a special case of the more general rule that there aren't many good novels about work in any form--was it E. M. Forster who said that people in novels make love a lot more than people in real life, and work a lot less? People in discussions of this sort usually cite Life on the Mississipi, which is wonderful in its way, but not even a novel, and after that, where do you go next?

I've read a few of what to be "economics" novels that strike me as just dreadful (but cf. link). Taxmom and I would agree that accounting has its moments of excitement, although I admit it may be a challenge to get it down on the printed page. Still, there is promise in a beginning like this:

In 1933 the thirty-first of December fell on a Sunday, and so the cash count at theBank had to be done on the Saturday.

At half past nine that morning the auditors' senior London partner, Sir Eric Stugby-Wharton, F.C.A., walked into the offices of their Paris branch.

The only local partner at his desk was Morven, and his rough Scots voice could be heard bawling behind the closed door of his room "As usual, it's a pig's breakfast, Mr. Urquhart.

Sir Eric grinned with approval. The best way to train audit clerks was to shout at them. ...

Sir Eric Stugby-Wharton, you gotta love it...

Update: Joel is all over this one. He suggests Rise of Silas Lapham, about the Vermont merchant who discovers a paint mine. Good point. Also Moby Dick--but is this "business?" Or "work," a la Life on the Mississippi? Also Sinclair Lewis, but on this issue I'd put Babbitt and Main Street in a class with Dickens: I don't think Lewis knew much about business or business people except that he didn't like 'em. Joel also gives us a Google search with 28,700,000 hits, so I guess there is room for more research.

Update II Ignota says Balzac. Oh, dear me, yes, Balzac. They certainly are about scheming, hustling, positioning, etc. Oddly enough, I've probably read more novels by Bazlac than by any other author--testimony not so much of the degree in which I enjoy him as of the number he wrote. Of my exposure, I guess the one that comes closest to being a business novel per se is Histoire de la grandeur et de la décadence de César Birotteau--about the parfumier hornswoggled and bankrupted by an underling (and his own guileless incompetence).

Accountancy Reform

Well, that's nice. I had been assuming that the prospective revolution in financial statement presentation would be the one last innovation in my syllabus that would drive me into retirement. Looks like it may not be coming as fast as I thought (link). It's beginning to remind me a little of the dustup back towards the other end of my career over what finally became the "Cash Flow Statement"--but only after an inglorious and time-consuming false start.

In Which I Soften on Mark to Market

Here's a quick summary of all debates in accounting: how much truth can you stand? Translated: it's had to remember any major controversy over accounting rules that didn't involve (at least) one side trying to keep something out of the financials, because investors or creditors might not like it. Contingent pension liabilities? Options? Oh, dear god, don't book 'em; end of Western Civilization as we know it. None of this has ever made much sense to me: if the truth is too awful to bear, than that is just the sort of truth the users should have.

My attitude to mark-to-market has been pretty much in character. Of course you should mark to market. Not marking to market is like (I read this somewhere) the doctor not telling the patient he is sick.

I'm beginning to soften: wiser heads than my own are persuading me that maark-to-market may not work when there isn't any market--as pretty clearly seems to have been the case lately in, oh I dunno, short-term money, real estate, whatever. Marking to market assumes a market; if there is an exogenous collapse in the market structure, then mark to market doesn't make a lot of sense.

And so? Well, it does not follow that we just default to book value. We might be able to cook up some sort of red-flag system that will warn the reader that the usual bets are off. Or maybe we could do some kind of "price smoothing," where we assimilate the market meltdown over time--providing an opportunity for the crisis to pass.

By corollary, I don't see any need for regulators to hew blindly to mark-to-market decisions in situations where the market simply isn't working.

But the core point remains: accounting is about information, and information includes bad news as well as good. Every debtor always thinks his assets are undervalued and if only he gets a little time blah blah something will turn up. God love 'em, some unknowabale number of these straitened debtors may be right. But there is really no way of telling for sure, and in default of a confident judgment, the market's judgment is likely to be the best judgment we have.

A couple of useful links: here and here.

Optimist

"Some readers will find this book very readable."

--The first sentence of the Preface in
Robert B. Dicke, Financial Statement Analysis
and Business Valuation
for the Practical Lawyer (ABA 2006)

Fn: Actually, he may be right. It's a very good and helpful book. Not as good as this one, though, heh heh, and a lot more expensive.