The whys of accounting
One of my favorite questions to ask and be asked is why. In professional accounting the answer to that question is not always exact or consistent. Sometimes our answers may seem defensive if not totally unconvincing.
I would like to share some of my favorite whys with you to see if my whys are your whys.
1. Why do clients engage and pay for audits?
Out of tradition? I do not think audits of public or regulated companies should be paid for by the client to the CPA firm. I believe the SEC or whatever regulatory agency should engage the audit firm, and their fee should be paid out of a pool of funds collected by the SEC or the regulator. I believe such an arrangement would avoid issues of independence or perceived conflicts of interest. Unfortunately, the attest function has become a business commodity that has lost its significance to the acquiring company.
2. Why do income statements show all revenue first?
Is that how business functions? I recall an incident many years ago when I was presenting a financial report to the board of directors of a non-public company. I had asked an assistant to list on a flip-chart some of the key revenue and expense items. He dutifully followed my directive. On the first page he listed three revenue sources and then listed five or six expense items. At the end of page 1, he subtotaled to a net gain of $1,000,000. Continuing to the second page, he listed additional expense items. At the end of page 2, the final net result was a loss of approximately $200,000. During my presentation to the board I went through every material account title on both the balance sheet and income statement. Following my presentation I asked if there were any questions. Not a one. As the board was leaving the room the chairperson asked the company’s CEO and me to remain. The chairperson asked me to go back to the first page of the flip-chart and asked the CEO why he did not stop when the net result was at $1,000,000 rather than continue spending to a loss of $200,000. What this vividly showed me was that many non-financial statement readers do not see statements as we the preparers do. In the chairperson’s mind her company collected all the revenue and then proceeded to spend. Scary!
3. Why are bad debts not a contra revenue rather than an expense?
In health care accounting we went from bad debts as a contra revenue account to bad debts as an element of expense and back to bad debts as a contra revenue account. Have you thought about bad debt accounting recently? Should bad debts be a contra revenue account as a reduction of sales or a cost of doing business?
4. Why are there accounting adjustments?
Because there are accounting periods.
5. Why do we estimate “book’ values?
Statements are, at best, interim in nature, and there are inherent limitations and accounting periods.
6. Why do we show earnings per share?
There is basic EPS and fully diluted EPS (did not happen). Why not depict the EPS impact of a stock buyback or repurchase?
Here are a few other questions to ponder:
7. Why do we discuss the “going concern” concept?
8. Why is a firm’s “brand” not an asset?
9. Why is a firm’s “assembled staff” not an asset?