I have always thought of paid search (and even SEO) as a mistake in the consulting profession because it tends to lead to poor customer acquistion. In other words, it produces more D and F customers than A or B customers.
By their very nature web search prospects are in the gather information step in the buying process. They tend to be tire kickers who are generally looking at buying more on (pun intended) low price rather than a long-term relationship.
I think social media has the potential to change this because it turns search on it head. Instead of looking for people who already have their hand in the air (an intercept lead), social media allows the providers to look for people who have unrecognized need.
In my opinion, it is a much better place to spending marketing dollars.
He recently read the AICPA’s ”CPA Horizons 2025” report, and was inspired to write this post.
Since we here at VeraSage love a great debate, we’d love to hear your opinions with respect to this report, and Richard’s comments on it.
From Richard:
I just finished reading the recent report titled “CPA Horizons 2025,” which was put forth by the American Institute of Certified Public Accountants to describe both the current state as well as the future of the CPA profession.
Please allow me a couple of minutes to stretch my 6’2” frame, because to be able to read this report, I had to cram myself into a very small box.
The CPA Horizons 2025 report concluded that “the services that CPAs provide have become so varied and diverse that the concept of core services is no longer representative of the profession.”
This conclusion was reached based on interviews with approximately 5,600 CPAs.
To test the veracity of this conclusion, I emailed 17 customers, and asked them: Excluding me, since I am special (well, at least according to my mother...), what services to you think of when you think about what CPAs do? I received 14 responses.
13 customers said, in effect, that CPAs prepare income tax returns and financial statements. One customer said CPAs help their business customers to sleep better at night.
I like this last answer, but this particular customer never follows instructions, so I will disregard it in context of my specific question. I am glad, however, that this customer sleeps better since we started working together.
So the next question: if the AICPA-interviewed CPAs say that core services (preparing tax returns and financial statements) is no longer representative of the profession, then why do customers of CPAs not seem to know that? Let’s look for answers by reviewing the conclusions in CPA Horizons2025.
The first conclusion: the world is now driven by technology, and CPAs need to change how they do business to accommodate this fact. Really, the AICPA needed to interview 5,600 CPAs to conclude that?
The second conclusion: the CPA profession must find solutions to offer investors and stakeholders up-to-date, real-time financial information, because of how fast the business world now moves due to technology.
Okay, I’ll give the AICPA credit for pointing out that having financial statements that are current as of yesterday is an improvement over having financial statements that are only current as of last month of last quarter.
However, in both cases, both of these results are the recitation of history. Whether you are looking at last month’s bank reconciliation or yesterday’s bank reconciliation, in both cases you are looking at the past.
How about CPAs helping their business customers to predict how much cash the business will have in the bank at the end of next week, next month, or at September 30, 2012?
All of the technology in the world does not matter if CPAs cannot start to help their customers by looking through the front windshield of their car while they are driving, as opposed to trying to drive the car by looking through the rear-view mirror.
Objects in the mirror are closer than they appear: could that object be the irrelevance of the CPA profession in the economy of the future?
If CPAs cannot help customers to peer intelligently into the future, then irrelevance of the CPA profession will certainly be the result.
An additional benefit should result, that is to say, fewer accidents will happen. And for those of you who have forgotten Enron and Qwest, I offer you the recent explosion called MF Global.
The third conclusion: CPAs must embrace mobile technologies and social media to modernize and enhance interaction and collaboration with clients (AICPA’s word, not mine) and colleagues.
I flat out disagree, because my customers want consistent and repetitive face-to-face interaction, which includes ideas for value creation. The technology is merely how we transmit certain information.
I will in fact argue that the most valuable resource a CPA can create is a vast and talented and multi-disciplinary network of complementary professional (and other) services providers, that can assist customers with virtually any need that the customer may have, CPA service-centric or not.
This is not accomplished through spending one’s days typing emails and playing with the latest and greatest technology, it is accomplished through constant contact and face-to-face interaction.
I will further assert that tremendous improvement in technology has caused “reverse delegation” in the CPA industry, that is to say, multitudes of CPAs are now performing data-input based tasks because of the ease of use of technology, and given how much compliance work exists in the profession, many CPAs I know are so “busy” (man I hate that word...) that they have no time or energy to actually think about the future, whether their own future or their customers’ futures.
The thought occurs at this point whether perhaps the AICPA should have interviewed 5,600 customers (or in the AICPA’s words clients) of CPA firms instead, because it doesn’t sound like very many of the 5,600 CPAs who were interviewed asked their customers what they want (not “need") from the CPA profession.
But perhaps that would have been difficult, I suspect some of the answers may have been hard to listen to, let alone to meaningfully respond to.
All of these conclusions beg the same question for any individual CPA: what business am I really in?
If for example 90 % of your revenue comes from preparing income tax returns and financial statements, then you are not a CPA you are a historian.
The larger question becomes: how do I differentiate myself from my CPA competition? What is exactly at stake if I am unable to differentiate?
The fact is, most CPAs could not even sell cheeseburgers to the Donner party. I looked at 8 CPA firm brochures (yes on paper, not on the computer) and they all basically say the same thing: “we provide full-service income tax and financial statement preparation services that are of very high quality.”
They also all have a lot of pictures of men 55 and older wearing dark suits. No differentiation there.
How can consumers of CPA services know what CPAs are actually capable of when most CPAs cannot differentiate among themselves or away from traditional services? You are what you do (not say) every day, and consumers respond accordingly.
Next time, may I suggest to the AICPA that you interview 5,600 customers of CPAs? I’ll bet your conclusions would be different.
As the to relevancy of my profession in the economy of the future, if this report is the best that the AICPA can do, then I think I will call my stockbroker to buy short against my profession’s stock.
The article discusses how audit fees have fell by an average of 5% to 8% in 2008 (depending on company size), and have continued to fall in 2009, albeit at a slower pace.
Lynn Turner, former chief accountant with the SEC is quoted: “We don’t view audits as a commodity. We don’t want the Wal-Mart audit.”
He went on to say that lack of confidence among investors in financial statements has been a significant factor in the poor performance of investment markets during the past decade.
Really? This is economic illiteracy at its highest (or lowest).
You mean the burdensome Sarbanes-Oxley legislation, onerous corporate taxes (the second highest corporate tax rate in the world), costly and useless regulations, and uncertainty over government policy didn’t have more to do with the stock market’s poor performance?
Turner is blaming the thermometer for the temperature. Financial statements are nothing but lagging indicators, and to claim anything else is the equivalent of timing your cookies with your smoke alarm.
The article also discusses pushing audit efficiency, but that’s not what makes an audit effective.
Efficiency is no basis for competitive advantage, since your competitors can adopt the same tactics.
I don’t want an efficient audit; I want an effective one.
The only reason people focus on efficiency is the built-in incentive of the billable hour to reward inefficiency.
The other point the article misses is that the audit is an insurance product.
As actuaries have taught me, you can’t price risk by the hour. But look at how audits are priced.
One other interesting point: the last paragraph talks about banks not really caring about audited financial statements. They send in their own auditors to document the existence and value of assets they are lending against.
This is an example of why the audit monopoly that CPAs have needs to be relinquished.
If you really want to improve the audit, along with investor confidence, open it up to competition. There is no better protector of the investor than a robust competitive market.
Exact measurements of the wrong things can drive out good judgments of the right things.
The illusion of certainty in our measurements creates—to borrow an important concept from the insurance industry—a moral hazard. If people are insured, they may just act carelessly and cause the very thing they are insured against.
Fire insurance causes arson; unemployment insurance allows people to not be as diligent in finding a job; life insurance causes suicide, or worse, murder; auto insurance can cause reckless driving.
Our current cult of calculation, perpetuated by the infamous McKinsey maxim—"What you can measure you can manage"—creates the same type of risk, offering today’s business executives the illusion of control and mastery of knowledge.
It allows them to substitute statistics for thinking. It gives them a false sense of security where there should exist more doubt.
The United State’s attempt to measure the Soviet Bloc economies during the Cold War was the largest social-science project ever undertaken, yet the various governmental agencies involved consistently overstated the size and growth rate of the communist countries.
In the CIA’s Handbook of Economic Statistics 1989, per capita output in 1988 in East Germany—one year before the Berlin Wall was pushed over—was placed at roughly seven-eighths of the West German level.
But as any Berlin taxi driver crossing through Checkpoint Charlie after the fall of the Wall could have told you, the economy of East Germany was manifestly inferior to that of West Germany, yet somehow—due to the moral hazard of measurement—those in the know got it precisely wrong rather than approximately right.
Efficiency is always a measurement, but effectiveness is always a judgment.
Efficiency and effectiveness cannot be “balanced” like tires, because they are entirely different things.
Taking into account the following seven moral hazards of measures may assist executives in avoiding putting efficiency ahead of effectiveness.
The Seven Moral Hazards of Measurements
Moral Hazard 1: We Can Count Consumers, But Not Individuals
Stalin’s famous remark that “One death is a tragedy, whereas a million is a statistic” illustrates the danger of lumping individuals into aggregate, amorphous lumps as if they did not have a soul.
Because benefits and costs are inherently personal and subjective, aggregation misses the individual. We can measure the objective temperature in a room at 70 degrees, but any one person may feel either warm or cold, and the differences cannot be used to cancel each other out.
We simply cannot mathematically manipulate people.
Moral Hazard 2: You Change What You Measure
Scientists call it Heisenberg’s Uncertainty Principle, which applies to all measures: that the observer in a scientific experiment affects the result.
Central bankers call it Goodhart’s law: Any target that is set quickly loses its meaning as it comes to be manipulated.
People will always find ways to make their numerical targets, even if it leads them to ineffective or, sometimes, unethical behavior.
When you use numbers as the basis for payment, they become irrelevant to the broader objectives of the service.
Moral Hazard 3: Measures Crowd Out Intuition and Insight
Once a measure becomes entrenched as part of the conventional wisdom, it is usually impenetrable to logic, intuition, critical thinking, or better ways to do something.
If you have ever been bribed off an oversold airplane—with a free flight voucher, upgrade, or airline money equivalent—you have economist Julian Simon to thank.
Until 1978, and before the airlines were deregulated, travelers were bumped off overbooked planes rather capriciously (the airlines preferred to bump old people and military personnel on the theory they would be least likely to complain) and this caused enormous amounts of customer complaints and ill will.
This caused the airlines to increase bookings even more to ensure decent load factors, which of course were measured very precisely. But the measures didn’t help solving the problem—that took an outsider with a theory.
A flight attendant friend who worked for United Air Lines told Simon of this problem:
The next day when shaving it occurred to me that there must be a better way; indeed, an auction market could solve the problem by finding those people who least mind waiting for the next flight. The practical details fell into place before the shave was complete.
Simon did not analyze countless numbers and statistics, but used his intuition, grounded by the economist’s theory of human behavior being rational, to solve a quite vexing problem.
Daniel Boorstin, librarian of Congress, wrote: “The greatest obstacle to discovery is not ignorance—it is the illusion of knowledge.”
Moral Hazard 4: Measures Are Unreliable
A country’s per capita gross domestic product increases when a sheep is born but decreases when a child is; and divorce actually increases the GDP since almost two of every commodity must now be purchased rather than just one.
Yet these measures mask the joy of a child and the agony of divorce.
We know how generally accepted accounting principles (GAAP) do a pathetic job of measuring—or even acknowledging—intellectual capital.
Why would we want to put so much faith in these numbers? Picasso once said, “Art is a lie that tells the truth.” It seems in some instances, measurements are truths that tell lies.
Another example of the unreliability of measures is illustrated by the consulting firm Bain & Company’s home page on its Web site, where it proudly proclaims: “Our clients outperform the market 4 to 1,” shown over a graph from 1980 to 2009 depicting the S&P 500 Index and Bain clients.
This is the equivalent of the rooster taking credit for the sunrise because he crows every morning. One expects this type of unscientific hyperbole from politicians, not management consultants.
I would be willing to bet that Bain’s clients perform better than the S&P 500, thus have more money to spend on consultants.
Moral Hazard 5: The More We Measure the Less We Can Compare
Engage in this gedanken: You (or a loved one) need(s) heart surgery. You talk to nurses, friends, and other people you trust and respect, and two surgeons are consistently recommended to you.
You go online to do some research on these two practitioners and discover their mortality rates (i.e., the risk of dying from surgery): surgeon A = 65 percent; surgeon B = 25 percent. Which surgeon would you choose?
I have conducted this gedanken in seminars attended by various educated professionals—who certainly have taken a statistic class or two—and, astonishingly, the overwhelming majority select surgeon B.
But wouldn’t you want to know what type of patients the two doctors serve? What if surgeon A takes a disproportionate share of hard cases and thus has a higher failure rate? He or she just may be the better surgeon.
The point is, we simply do not know without gathering more information, both quantitative and qualitative, and making further judgments based on our own risk profile.
Seeing the two numbers side by side seems, though, to give people a false sense of precision and, in this case, could lead to a deadly decision.
The is the major problem with benchmarking studies and best practice reports—you are studying the results of a process, not the process itself.
It tends to confuse cause and effect, and we are back to man trying to fly by strapping on wings and jumping off of cliffs rather than studying the theory of aerodynamics.
We simply cannot compare two doctors, two universities, or two hospitals based on measures alone. It takes subjective evaluation, discernment, and intuition.
History is the science of human biography, not measures, and we can no more compare two countries’ cultures by examining their GDPs than we can compare two people by the size of their bank accounts.
Moral Hazard 6: The More Intellectual the Capital, the Less You Can Measure It
Ideas only come from sentient beings, not inanimate objects or pets.
Since 75 percent of any country’s wealth-creating capacity resides in its human capital, how could it be otherwise?
To complicate matters, a lot of that knowledge is tacit, which is hard to capture in spreadsheets and pie charts.
We may be able to count the physical assets of a Google or a Microsoft, but traditional accounting pays no attention to its human capital, what has been labeled the “invisible balance sheet.”
Traditional book value accounting—assets minus liabilities equals equity—can only explain about one-sixth of the value of the market capitalization on the nation’s stock markets.
Accountants call the difference between market value and book value goodwill; but that is just a label for their ignorance.
Data, reason, and calculation can only produce conclusions; they do not inspire action. Good numbers are not the result of managing numbers.
Dr. Martin Luther King did not deliver the “I have quarterly objectives” speech.
Moral Hazard 7: Measures Are Lagging
Imagine driving your car with your dashboard gauges informing you of last month’s speed, fuel level, temperature, oil pressure, RPMs, and the rest.
This is precisely the status of accounting information: it is like walking into the future backward. It is a lagging indicator—or at best coincident, assuming real-time accounting takes place.
This type of information can only tell us where we have been, never where we are going.
Enron and the other spate of accounting scandals from the early 2000s were not so much about fraud, malfeasance, misfeasance, or other crimes, but rather the increasing irrelevance of the traditional accounting reporting model.
Enron’s legerdemain is not what caused it to fail. Its financial deception allowed it to remain in business for longer than an otherwise similar firm engaged in accurate financial disclosures, but this is a question of timing alone and not causality.
The Future Cannot be Measured
The Danish philosopher Søren Kierkegaard wrote: “Life is lived forward but understood backward.”
Certainly measures help us reflect on past events and aid us in improving our theories.
But they can never take the place of dreams, imagination, passion, and the spirit of enterprise where entrepreneurs toil and struggle to create our future.
No measure is capable of capturing the richness of free minds operating in free markets dreaming of better ways to improve our future, and it is folly to believe otherwise.
It may even lead us into moral hazards, or a world where we are so preoccupied about measuring past performance we do not take the time to dream about the future.
I’ve been having a dialogue with a consultant for the last two years, and we recently had a very interesting discussion on intellectual capital (IC).
I thought you might find it of interest, since IC is what the professional knowledge firm is all about.
Our exchange focused on whether or not it is possible—or even desirable—to attempt to value IC, and perhaps placing that value on the financial statements, or a set of parallel statements.
Doug was not advocating this approach, just questioning the validity of doing it, and what the impact would be. I’ve had many other discussions with consultants and CPAs about, for instance, placing the value of a company’s brand on its balance sheet.
Should we account for IC, like GAAP accounts for transactions? Should IC be on the financial statements?
We both conclude no. Here’s why.
Hi Doug,
We do use IC as an integral part of a professional firm’s business model, which is why we refer to them as Professional Knowledge, not Service, Firms. PKFs sell IC, not time.
As for measuring IC, I find the work of others in that area interesting, and have met my share of firms that offer formulas and frameworks to value IC. All fascinating, but I’m still trying to answer, “What’s the point?”
Some insist they want IC to be put on the firm’s financial statements, which will and can never happen, since accounting is designed to capture value after a transaction, not value it before hand.
You certainly could devise parallel financials for IC, but again, what’s the point? The argument is to force managers to think about it, value it, etc.
But it seems to me that this is the “What you can measure you can manage mentality,” and with IC, effectiveness is always and everywhere more important than efficiency (the latter of which is always a measurement, where the former is always a judgment).
Since value is subjective, any formula or model for IC will be flawed from the get go. Not that it’s not a worthwhile exercise, such as how Interbrand values the world’s leading brands, but it’s the illusion of accuracy and precision. I’ve seen companies pay well over IC value calculations because value is subjective.
So, I come back to what’s the point of this? What’s the service being offering by valuing IC? What’s the value of doing so? I don’t think it’s as obvious as IC folks make it out to be. As you know, I wrote an entire book, Mind Over Matter, on this topic, but didn’t try to value IC—it can’t be done with any reliability.
Thanks Doug, look forward to your thoughts.
Ron
Thanks very much, Ron.
This is exactly the kind of response I was hoping for—informed and critical. I’m slowly committing Mind Over Matter to memory, so I have deep respect for your opinions.
I have a lot of skepticism myself. I take your point about accounting being the trail of the past. I have heard the argument that by putting NPVs on assets, is bringing the future into the present, and isn’t it true that IC is exactly about the future, and that is why [we need] a breakthrough in accounting? It is supported by IASB standards on intangible assets and impairment, which also track with FASB standards 38 & 38.
But the IC side intrigues me, because so many people believe there is such a need to recognize (and quantify and monetize) your subtitle (intellectual capital is the chief source of wealth). I think this belief is even more strongly held in the wake of the debacle over people pumping up risky underpinnings (lousy mortgages, among others) into highly leveraged clouds of crap. A wealth creation engine based on human knowledge, experience, relationships, performance, and results seems like a more positive economic foundation. But how to capture, how to harness?
Thanks again for your quick and thoughtful response. One of these days I’ll buy you a beer, or a glass of your favorite wine
Cheers, and great thanks,
Doug
Hi Doug,
I understand the argument, my problem is knowledge is also a social construct—it simply cannot be quantified, tracked, and put into a formula.
There is certainly value in valuing IC for a business sale, and indeed that is what happens. This is why accountants call the sales price over the book value “goodwill"—just a word that describes their ignorance, i.e., their inability to value an enterprise, only capture it after a transaction takes place.
But even formulas for IC won’t capture the subjective value of an enterprise. How many times have you seen a company pay way above a company’s value, as assessed and computed by business valuators? It happens a lot, and that’s because value is subjective.
And no, I do not think putting NPVs on assets is bringing the future into the present. Accounting can’t do that, and even if there existed formulas, they would be full of errors and inaccuracies.
Here’s another reason: knowledge is actually about the past, whereas entrepreneurism is about the future, and you can’t capture the Black Swans of entrepreneurialism by formulas. No amount of sophisticated IC formula could have predicted, captured, or harnessed eBay or Google. It takes the
risk-taking of entrepreneurs to create new wealth. Anything we can capture, measure and harness is almost by definition about the past that is already dying.
I’ve come to the conclusion that we’ll never be able to measure IC. So what?
We know it’s there—like dark matter in the universe—but there are too many variables. It’s spiritual, not material—meaning you can’t measure it.
To believe otherwise is the materialist fallacy—that everything needs to be measured to be understood. It doesn’t work—see the USSR, Cuba, North Korea and any other communist country.
This doesn’t mean we should ignore IC, only that trying to measure and value it is futile—like plunging a ruler into an oven to determine its temperature. It’s the wrong device.
There’s lots more to say on this topic, but it does make my brain hurt.
Ron
Doug made the final salient point about IC, what Joseph Schumpeter called the Creative Destruction of capitalism:
The key point is that the value does not arise from the accounting of it, however elaborate the accounting scheme might be, but rather in the context of a marketplace that is focused on performance and results, enhanced by a skunkworks generator, etc.
You know who you are. You LEAN, six sigma, black belt, ninja turtles.
Explain to me (and the world) how any of you and your methodologies would have come up with the idea of putting a piano in the atrium of the Mayo Clinic where this could happen?
Nothing comes from nothing; nothing ever will. - Oscar Hammerstein
Boy, is that lyric ever wrong. (Bonus points, if you can name the song without Googling it.)
Recently, I read Charles Seife intriguingly titled book, Zero: The Biography of a Dangerous Idea and while I know it was recommended to me, I
cannot recall who provided me with the recommendation. I thought it was Ron Baker, but no, he has not read it. So, in a sense, even this review comes from nothing.
In this short, but fun read, Seife traces the history of the zero from its humble beginnings as an idea, through its use as a placeholder, to its current status as the only number capable of destroying everything (including temporarily disabling the USS Yorktown on the high seas. The humble zero shook the foundations of philosophy, caused arguments, even wars, and now is beginning to play its part in understanding the very origins and substance of the universe.
While I highly recommend reading the book, I did extract a few nuggets for reading here.
First, there are at least three ways that we can prove that something comes from nothing or to express it mathematically that 0 = 1.
Proof A:
Let a = 1 and b = 1; therefore b = a.
b2 = ab, Premise 1
a2 =a2, Premise 2
a2 - b2 =a2 - ab, subtract premise 1 from premise 2
(a + b) (a - b) =a(a - b), Factor
a + b = a, Divide both sides by (a - b)
b = 0 Subtract a from both sides
Since a = 1 and b = a, therefore 0 = 1.
Proof B:
Let a = (1 - 1) + (1 - 1) + (1 - 1)… = 0
Let b = 1 + (-1 + 1) + (-1 + 1) + (-1 + 1)… = 1
The ellipses in the previous two equations indicate the infinite repetition of the parenthetical express. Therefore the two are arithmetically the same, they are just grouped differently, therefore a = b, therefore 0 = 1.
Proof C: (hat tip to Joe Santoro)
00 = 1, therefore 0 = 1.
Why is this so important? Well, because if you can prove that 0 = 1, you can then prove that 0 = anything, certainly any number. For an example of this simply replace the 1 that leads the Proof B, let b example with any whole number, fraction, or decimal number. (By the way, there are an infinite number of decimal numbers between any two whole numbers.) In short, proving that 0 = 1 is the ultimate in understanding the idea of subjective value - value is what the customer says it is.
What is fascinating about the book was learning that some of the foundational mathematical concepts that we accept today are based on this idea that 0 = 1. Calculus is based on the idea than we can compute the area of an irregular object as long as we allow our estimations to set 0 = 1. Had this been explained in this manner to me back in high school or college perhaps I would not have dreaded the course so much. I equated calculating the area under a curve to torture. Theory is important.
One last idea I had while reading this book was to create a new formula (tongue in cheek of course) for computing value. Seife clearly points out that calculating speed in the old “A train leaves New York” type word problems is not always as simple as distance = rate times time. What train moves at an absolute constant speed? Any train would begin slowly, speed up, slow down around curves and crossings, etc. It does no good to calculate speed at a constant rate, i.e., 140 mph for 3.5 hours. What was required for mathematicians was a higher degree of understanding. They achieved this through Newton’s calculus. (Remember 0 = 1.)
An example would be calculating the velocity of a falling object, which falls at 32 feet per second per second. After one second, the object is falling at 32 feet per second after two seconds it is falling 96 feet per second and so on. This is expressed as v = gt2/2 where v is velocity, g the force of gravity and t is time. As Seife puts it, “Rate times time equals distance is not a universal law; it doesn’t apply under all conditions.”
Look at the last sentence again and replace the word distance with value. See where I am going. Imagine a formula for a professional firm using the “falling object” model (which, by the way, while still wrong, is less wrong than value = rate x hours). It would look something like this — value = rate x hours2/2. Picture explaining this to a customer, “Well we bill you $150 for the first hour, than $300 for the second, $675 for the third, etc., since we spent a total of ten hours on your matter, our bill comes to $7,500, any questions.”
Again, while still wrong, the above is less wrong. What is needed is for professionals to make the leap that 0 = 1 (that value is subjective). VeraSage has been sounding the alarm on this for years. Dare I say Ron Baker = Issac Newton.
We now have the math! Worshipers of the ABH give up! We have proven you wrong again, this time with your own beloved mathematical formulae.
Yesterday, the United States government agreed in principle to provide almost $8 trillion on behalf of American taxpayers. The complete story is available on Bloomberg and various other sources. The amount is more than one-half of the value of everything produced in United States last year alone.
The question of who is going to pay is settled. The citizens of the US are. This agreement is tantamount to repealing the Thirteenth Amendment to the United States Constitution which reads in part, “Neither slavery, nor involuntary servitude, except as a punishment for a crime...shall exist within the United States.”
If you think this is extreme consider this question, can I opt out of contributing without being put in prison? The answer of course is, no!
As a reminder the $8 trillion mentioned above does not include the unfunded liability for Medicare, Medicaid and Social Security. Our lives and our fortunes have been pledged to the government. We, in the United States, are all slaves.
For those of you, like me, out there with little financial understanding, I submit this quick video which helped me understand the concept of collateralized debt obligations or CDOs. It is my understanding that mortgage-backed securities (MBS) are at the heart of the trouble we are seeing.
If those of you with a better understanding of this topic have thoughts on this, I would love to hear about them.
Paul Miller and Paul Bahnson did it again in their regular article series “The Spirit of Accounting,” in Accounting Today. I wrote previously about their Sept 8-21, 2008 article, “The perils of clinging to the status quo—Part 1.”
In the September 22-October 5 issue, they are back with Part II of their response to the status-quo CPA, “Tom,” who is defending the increasingly irrelevant historical GAAP financial statements.
They slaughter more sacred cows in this article, such as comparability—the argument that GAAP produces consistent and comparable financial statements. This, of course, is nonsense. What it actually produces is a mindless adherence to principles that produce results valuable to no one.
As they say, GAAP never asks the auditor to question if the financial statements are useful for making decisions; they only ask if they comply with GAAP.
This point especially resonates to those of who understand GAAP is increasingly outdated for a knowledge economy:
Tom and the many who agree with him miss the point that the whole purpose for accounting is to provide useful information that facilitates rational and productive economic and other kinds of analyses. Rather, they seem to think that accounting’s purpose is to help accountants do the same riskless things over and over again.
As Ed Kless taught me this last week, project management can sometimes suffer from the same problem. It becomes the ends, rather than a means to an end.
CPAs seem to be doing GAAP because they can, with a historical legacy to justify their decisions. But they are ignoring the fact that these principles are virtually worthless to users of financial information for making future economic decisions.
If all the profession wants to do is to be scribes with respect to the past, then perhaps they should be relegated to that role, while letting others enter the market of providing financial statement attestation to interested users, willing and able to pay for knowledge they value.
This path would be far more challenging and full of opportunity rather than to continue playing historians with lousy memories. Miller and Bahnson seem to agree:
Our suggestion to [Tom] and others like him is to channel their energy and talent into achieving progress, instead of trying to protect and preserve the deeply flawed status quo. They deserve a better purpose for their professional lives, specifically leading the way into the new paradigm. We have nothing but best wishes for them and high hopes that they can see the world in the same new light that we encountered ourselves only a short decade or so ago.
It is so rare to read such candor in the accounting mainstream media. Miller and Bahnson are fearless pioneers, willing to challenge the status quo. I only wish there were more like them.
To be fair, there is one other voice in the same issue of Accounting Today, Wanda Wallace. At least in this article, “Take back the professions!” she is arguing against the check-list mentality and outside regulation of the profession.
One of the hallmarks of being a profession is autonomy—Greek for “self governance.” The CPA profession is no longer self-governed, what with the alphabet soup of regulators looking over the profession’s shoulders.
Due to rent-seeking and what economists call “regulatory capture,” the profession for the most part doesn’t have a problem with this. Witness Grant Thornton CEO Ed Nusbaum comment with respect to PCAOB being found constitutional in a recent court ruling:
Personally I think it [would be] a mistake to do away with the PCAOB, he said. The PCAOB is painful at times. We don’t always agree with their comments. They’re tough. Sometimes they even bring firms up on charges. I think they’ll continue to be aggressive, so it’s not like we love them. But, on the other hand, you need some oversight. They seem to be doing a pretty good job at that, and I think it would be a mistake to get rid of them, because then there’s no regulator.
I don’t doubt he thinks that, since his firm has benefited mightily from regulatory revenue. Even absent that, there’s enormous proof that PCAOB and SOX has hurt the very investors it was designed to help.
What happened to our profession’s belief in free markets, competition and capitalism?
We seem to be willing to run to the nanny state, hat in hand, lobbying for regulations that increasingly decrease our liberty and freedom. All under the guise of protecting the investor class. How far we’ve drifted from the signers of the Declaration of Independence.
Want to protect investors? Open up markets to competition, including the auditing profession and establishment of GAAP. Let the market sort out what are the best processes.
We do this with everything else in our lives, why not the accounting profession?
There’s nothing sacred about a profession. They can and do die, especially when they no longer add value to those they are pledged to serve.
If “Tom” is representative of the thinking among the leadership of our profession, then we may very well be at the beginning of the end.
As Henry Ford said: “The man who is too set to change is dead already. The funeral is a mere detail.”
Paul Miller and Paul Bahnson are at it again in their regular article series “The Spirit of Accounting,” in Accounting Today. I wrote here about their recent article on GAAP deficiencies, and in the Sept 8-21, 2008 issue, they have another excellent article, “The perils of clinging to the status quo—Part 1.”
The May 2008 issue of The Journal of Accountancy included some commentary by Paul Miller. In response, a CPA emailed him and defended the status quo against “the ravages of value-based accounting practices,” stating that “When we increase subjectivity, we decrease value [of the financial statements].”
Miller and Bahnson spare no contempt, or logic, for this status-quo CPA. Here’s my favorite part of their reply:
An audit cannot make GAAP statements useful any more than an alchemist can turn lead into gold or a weaver can turn a sow’s ear into a silk purse.
What we see in his premise is a reflection of the profession’s blind spot that causes it to overlook the fact that, more often than not, compliance with GAAP doesn’t produce useful information.
Amen. How refreshing to hear criticism like this coming from inside the profession.
Too often, the accounting press is like reading Pravda in the old Soviet Union. If you don’t tow the party line, you’re exiled to Siberia.
Miller and Bahnson are fearless at pointing out the deficiencies in our decrepit, ossified reporting model known as GAAP.
But it seems that the rest of the profession is happy to continue to produce information that is of limited usefulness and value to users of financial statements, for fear any change will imperil their overblown “objectivity and independence.”
We are one of the least innovative professions on the planet, the current GAAP reporting model being Exhibit A. It’s 500 years old, and all we’ve managed to do with it in that time period is add more rules—oh, and to be fair, we did innovate the financial statement compilation and review services, in 1978.
This is why Thomas Stewart, editor of Harvard Business Review, refers to the GAAP financial statements as the three blind mice. And he’s not the only one.
It’s apparent that the profession is happy with its role of financial historian with a bad memory. We don’t look outside ourselves for new ideas, innovations, and we are constitutionally incapable of self-criticism, taking each one as a personal affront to our beloved integrity.
This is precisely why CPAs are destined to become less and less relevant in the economy of the future. They simply are not adapting quickly enough to their changing environment.
There’s absolutely nothing sacred about a profession. They can and do die. They do so because they are no longer relevant, adding little to no value to those who utilize them.
Is this where the profession is at this point in time? It may be. There’s very little on the horizon that demonstrates the profession is willing to change, innovate, or experiment with new services that offer users what they are most interested in—information that helps them peer into the future rather than simply confirming the past.
The profession’s leaders, collectively, don’t seem to be up to the challenges. Perhaps the younger generation of CPAs offers more hope? But I’ve scant evidence for that wish, given that they are trained to b greyhounds in bookkeeping while paying little attention to what is happening in the world around them.
Few CPAs we’ve met around the world even know there is a debate about the usefulness of GAAP, or what the criticisms are.
A good proxy is to look at what they read, if they read at all—since most firms don’t give their knowledge workers the time to read because it impairs billable hours. And we wonder why we’re in the mess were in.
At least their is a light at the end of our tunnel vision. For now, it’s Miller and Bahnson—and others like them—who have the courage to say the emperor doesn’t have any clothes.
Be sure to tune into the next issue of Accounting Today for Part 2 of their response to the status-quo CPA.
Friends of VeraSage know that we have major problems with Generally Accepted Accounting Principles. We refer to the financial statements as the “three blind mice,” a term used by Harvard Business Review editor Thomas Stewart. Dan Morris and I teach an entire course entitled When Debits Don’t Equal Credits.
It’s also why I always enjoy reading Paul Miller and Paul Bahnson’s The Spirit of Accounting, their regular articles featured in Accounting Today. In the Aug 18-Sept 7, 2008 issue, they reprinted an older article they had written, proposing the following thought experiment: what if keeping score in golf was similar to GAAP?
The article is excellent, illustrating how—more and more—GAAP is becoming irrelevant. Where I disagree with the authors is they believe it can be reformed while I emphatically do not.
For a fundamental reason: Accounting is not a theory. It cannot be a source for “predicting the future,” as the authors say, because it is simply an accounting of the past. Data can only shed light on the past, it cannot peer into the future. For that, you need a theory.
Unless, of course, your theory is the future will equal the past, a perilous assumption in a dynamic, capitalist economy.
If you are a golfer and a CPA, you will enjoy their analogy. It may sound tongue-in-cheek, but it conveys a serious message: GAAP is deeply flawed. Rather than being supplanted, it needs to be supplemented with more meaningful information, such as Key Predictive Indicators.
All we can hope for blind GAAP is that someone yells “Four.”
BEW was founded by Lee B. Salz to bring together a community of business experts comprised of best-selling authors, award-winning speakers, and business gurus, designed to share their secrets of success.
I was honored when Lee invited me to participate. The Webinars are designed for a generic business audience, not just professional firms; the type of program professionals could recommend their business customers attend.
I don’t know Michael J. Daillak, CPA, from Bakersfied, California, but he recently wrote a letter to the editor of Accounting Today (June 16-July 6, 2008) that I found quite interesting, especially in light of my previous posting of Tim Williams’ article on the death of the advertising agency.
Essentially, Michael is arguing for audit-only firms, otherwise the CPA profession could slip into irrelevance (a condition I would argue, along with others—such as Thomas Stewart, Editor of Harvard Business Review—has already happened). He states the case for the CPA profession having a monopoly on audits:
The given for this profession is that the only thing—I repeat, the only thing—that a CPA can do that no one else can do is perform and report on an independent certified financial audit.
This is our raison d’être, our reason to be!
From there he leaps to this conclusion:
Audit fees should be sufficient to pay CPAs who choose to be so employed an attractive, competitive professional income to do the only thing that they can do that no one else can do. The future of the world’s financial system may be at stake.
This is hyperbole at its finest. I have a thought experiment: which would be noticed by society first—1) if garbage men went on strike; or 2) if CPAs stopped doing audits?
To believe that the world’s financial system would grind to a halt unless auditors continue to publish historical financial data is beyond belief for anyone who understands economics. Using audits to run a company—let alone a financial system—is like timing your cookies with your smoke detector. Audits are lagging indicators, and they can only explain about 15% of a company’s market capitalization. Coca-Cola’s brand is worth some $65B dollars, but you’ll look in vain to find it on its GAAP-based audited financial statements, which is why Thomas Stewart of Harvard Business Review refers to the traditional financial statements as the three blind mice.
But what’s worse is that Michael actually believes that auditors having a monopoly in auditing is a good thing. Economists don’t like monopolies; we prefer competition. Why not remove the attest monopoly from auditors and open them up to competition from banks, insurance companies, etc. The market would innovate new and better financial models, audit insurance, and a host of other innovations we can’t even fathom since we are constricted by a one-size-fits-all government granted monopoly.
But it’s really the second comment that disturbs me the most. It appears that Michael believes simply because some people choose to be CPAs who perform audits they should be guaranteed a living wage. That’s not how capitalism works, but it is how the former Soviet Union operated, as well as Cuba, and North Korea today.
We could have government mandate oil companies drill using corkscrews and create all sorts of employment, but it wouldn’t be very effective, nor would it create any wealth.
If auditors can’t make a decent living providing a government backed monopoly service it’s a testament that they aren’t adding much value. Innovation and competition are the answer, not a further mandate for audit-only firms.
Ignorance in economics is one of our most expensive commodities in this world, as this letter attests.
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