Is Everything Wrong With Accounting All the Time?

What happens when you ask six researchers to list the most incorrect beliefs of modern accounting? You get a heavy dose of reality.

CFOs think accounting is a “tick the box” compliance exercise, academics are “naive” about its real world implications and regulators know less about accounting “then they pretend.”

And those aren't the harshest points.

If you are looking for a critical look at modern accounting, you needn’t look further than a set of papers published by a group of researchers challenged to take apart their own industry.

The panel of six accounting academics were asked to write an essay on “the most incorrect beliefs of accounting experts” and the results  were recently published in the American Accounting Association’s journal.

The results paint a bleak picture of an accounting system divorced from the real economy and used by a group of stakeholders with little expertise, according to Sudipta Basu, a a professor of accounting at Temple University’s Fox School of Business.

“There is a struggle to marry accounting theory and practice and I was trying to solicit what researchers feel are the most incorrect beliefs in today’s environment,” says Basu. “Essentially, what comes out is an economy that is too complex for modern accounting to follow and stakeholders just don’t know enough about what is happening in the actual economy.”

When it comes to teaching accounting, the research argues that much of what is being offered in the classroom is divorced from real world practices. “A common theme running through the presentations is the naıvete and gullibility of accounting academics, especially when it comes to the role of financial reporting in the economy,” according to a summary of the research, which also argues that accounting professors “spend their careers in ivory towers” with little insight into how managers are employing modern accounting methods.

“As a result, they cannot critically evaluate the more fanciful claims in journals, textbooks, and regulatory pronouncements, which often promote myths and fables with little empirical backing,” the paper says.

The harshest criticism of the research, however, falls on accounting regulators and practitioners. The papers argue that CFOs are growing increasingly frustrated with a system that is separated from their own needs, and that the regulatory system is becoming increasingly bureaucratic with no real benefit for communicating information to investors.

“Accounting regulators do not know enough to set good standards nor evaluate them, and like researchers, they engage real-world complexity with naıve models and simplistic metaphors,” according to the research summary. “No wonder CFOs increasingly treat financial reporting as a compliance activity rather than as useful communication with stakeholders.”

What is the answer to fixing the modern accounting system? Basu argues, in his view, that little or no accounting regulation is likely the best answer.

“Before [the creation of modern accounting regulation] firms kept what worked and threw away what didn’t. It was an environment where each firm was experimenting and if something went wrong it suffered its own consequences and nothing else was affected,” Basu says. “We are moving away from 'generally accepted' — where the true meaning is that anyone can use it — into an environment of whatever the regulators accept. I don’t know if they system is broken, but it is very damaged.”