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Monday, 04 December, 2017

Why are they trying to pull the wool over our eyes?

Summary: For more than three decades the accounting profession has known we have a problem with our Accounting Model - it’s not fit for purpose as a business measure. They have also known for as long what the requirements for a solution should be. However, only now have they acknowledged the problem, but what they suggest as a solution in no way meets our needs. How can these so called “experts” get it so horribly wrong? Are they trying to pull the wool over our eyes?

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For three decades we’ve known of all the shortcomings of the Accounting Model. There has been a lot of water under the bridge since then, but none of these things, as tumultuous as they have been, have added any new shortcomings to the list. They have certainly accentuated existing problems and made the situation considerably worse, but nothing new.

If you have a clear understanding of the problem, then you should have a clear understanding of what the solution should entail. Therefore, for as long as we’ve known about the problems, we have also known what we should do about it.

Accountants, their associations, institutions and academics, as well as those involved in business performance measurement are those most closely involved with this problem. They, as professionals, should have known of the problems and of the requirements for a solution.

So given the above, we can confidently conclude:-

  • They have known of the problem for 3 decades (or thereabouts)
  • They have also known what’s needed to fix it for as long.
  • Yet, they have done nothing, thus far, about it.
  • Now, that they can no longer hide from, or deny, the effects of the problem,
  • They say they want to fix it.
  • However, their proposed solution in no way resembles our needs.

This does beg the question - “What’s going on?” Perhaps they’ve just got this whole thing horribly wrong, in which case they aren’t experts at all, or perhaps they are trying to pull the wool over our eyes?

By them acknowledging the problem that our measurement standard is inadequate and inappropriate, we think they are on the side of change, that the problem will now be addressed. We feel reassured as the “experts” are on the case. However, by showing a total lack of understanding of our requirements for a solution, you have to ask yourself are they really “experts”? After all they’ve done nothing about a major problem that’s been right under their noses for 3 decades, and then when they finally acknowledge it, they show they have no understanding of our needs whatsoever.

That’s one conclusion, but perhaps another is they are simply playing for time. What they are trying to do is extend the life of their outdated measures and practices, which serve their needs not ours. They establish a smokescreen of “doing something about the problem”, when they know (or should know) it will fizzle out in what they hope will be a decades time. Bear in mind they are the ones who promote capitalism as being the source of our problems despite knowing (or should know) that their Accounting Model (as a business measure) is the problem, and that it has nothing to do with capitalism. The capitalism smokescreen has effectively hidden their bad practices for decades and diverted attention away from the real problem.

So, we are left with these two obvious conclusions. Either they are not experts and therefore not suited to lead change, or they are playing a devious game and therefore not suited to lead change.

Here, you decide if they have misidentified our requirements for a new measurement standard, because, it all revolves around this, as they have finally, after 3 decades, acknowledge the problem.

Our requirements fall into two section.
1) Our broad understanding of business as it affects our business measurement needs.
2) Specific requirements.

1) Broad requirements.

Our broad requirements are based on some fundamental understanding of business, such as:-

  • Business functions as a cause-and-effect (causal) model.
  • A causal model is fully inclusive of all constituents, based on their interrelationships.
  • Value creation is the common denominator of business (i.e. it is the common objective of all business processes.)
  • We need a clear understanding of this model; it’s structures and interrelationships, to be able to measure and manage business effectively, so as to optimise value creation opportunities for all constituents.

2) Specific requirements.

A new measurement standard must meet these specific requirements.

  • Comparable: Our economy relies on comparable measures across all businesses irrespective of sector or size. Incomparable measures are valueless to the market (investors.)
  • Relevant: It has to solve our need - to provide insight into the value creation potential of business for all stakeholders, including shareholders.
  • Reliable: Our new measurement standard needs to be prescriptive. It needs to be specific on what to measure and how to measure. It needs to establish the rules and standards and they need to be assured.
  • Simple/easily understandable: It has to apply to all. Therefore, it has to be simple and easy to understand.
  • Useful: It has to provide a roadmap, which even the smallest business can understand and use to help unlock value creation for all constituents.

Let’s have a look at the major “solutions” on offer currently and see how they shape-up in meeting our requirements. To do that, all I’m going to do is ask two questions, one each from our broad and specific requirements. The questions are:-

1. Is your solution based on any understanding of the value creation causal model?
2. Is you solution comparable?

If both questions are not positively affirmed, it’s no solution.
If both questions are negatively affirmed, it’s a complete waste of time.

The “solutions” we will look at are as follows, with their answers shown next to them.

Solution Question 1 Question 2
Global Reporting Initiative No No
IIRC (International Integrated Reporting Council) No No
UN Reporting Framework No No
Ernst & Young LTV (Long Term Value) No No

Although the list is not extensive, none of the other less well known solutions fare any better. All these solutions are backed by the “leading lights” from the Accounting fraternity - International accounting associations, academics and all the leading practitioners.

We can be thankful that at least they have finally got around to acknowledging the problem; that our inadequate and inappropriate business measures (i.e. Accounting Model used as a business measure) is the root cause of our most serious social, environmental, economic and business problems. Capitalism isn’t the problem, but rather our business measures. It’s taken them three decades for them to do this, but now they cannot identify our requirements for a solution correctly. Whatever the reason, it strongly suggests they are in no position to lead change.

When you’ve played a dominant role for so long as the “expert”, it makes embracing a new world that more difficult, for you have neither the knowledge nor skills to do so. You are an expert in by-gone knowledge and thinking. What we need is a paradigm shift in thinking and approach. It does not involve the rearranging of the deck chairs on the Titanic, as our “experts” suggest.

Adrian Mark Dore

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Posted by Adrian Mark Dore at 11:22 AM
Edited on: Monday, 04 December, 2017 12:07 PM
Categories: Problems with current measures.