Is 'accounting think' ruining the boardroom - and the economy?
Woe betide the bean counter. It’s become a political sport to attack accountants for their complicity in labyrinthine tax schemes and chronic short termism. But how fair are these accusations - and even if they are true, why should accountants care?
In his yet to be released book, Sugar Daddy Capitalism, the academic Peter Fleming notes: “It is ironic that the private sector - so lauded by neoclassical economics for its entrepreneurial vim - is today where we find a lot of bloated bureaucracies.”
Prem Sikka, a professor of accounting at the University of Sheffield, has been more literal in his criticism than Fleming or Graeber, addressing the profession directly. The UK, he said, has too many accountants. It’s hard to deny that the UK does, indeed, have many accountants. The country has over 360,000 professionally qualified accountants out of an estimated global total of almost three million.
The UK has virtually the same company law as the rest of the EU but has more accountants than the rest of the EU put together.”
The UK has the highest number of accountants per capita in the world, said Sikka. “We have virtually the same company law as the rest of the EU but has more accountants than the rest of the EU put together.”
Britain’s accountants exert enormous influence over boardrooms and senior leadership. To the detriment of the country, according to Sikka. The swollen accounting bureaucracy has accelerated ‘short termism’, neglected “the long term prosperity of companies and the economy”, and, weirdly, it has done little to stem the flow of corporate accounting scandals.
“Accounting think is rife in boardrooms,” Sikka told AccountingWEB. “Accounting calculations are geared towards short term gains.
“In terms of investment in R&D as a part of GDP, we are in the bottom two in the EU, for example. Our investment as a fraction of GDP is very low, too. And our productivity because businesses don’t invest in assets. People can’t be digging the Channel Tunnel with a toothpick.”
Sikka, as many AccountingWEB members know, aligns with the political left. So his concerns with capitalist economics aren’t a surprise. But his arguments in relation to ‘shareholder value’ (and the role accountants play as bureaucratic shock troops enforcing its whims) do hold water.
Andy Haldane, the Bank of England’s chief economist and hardly a Marxist, has openly criticised the deleterious effects of “corporate short termism”. In an interview with BBC Newsnight, Haldane said sharply increasing dividends had eaten into investment and that companies risked "eating themselves".
In a recent FT article detailing Sage’s recent troubles, Xero’s Gary Turner - without even a whiff of schadenfreude, I’m sure - argued the company had been hobbled by investors that refused to sacrifice profitability to drive innovation, forcing the company down an “intermediate route” to nowhere.
There are the arguments around the socially ruinous aspects of short termism - which many on the left are preoccupied with - but then there’s the less political question of whether it’s simply bad business.
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Accounting and accountants push short term interests which resonates with shareholders because shareholders are only interested short term goals.”
“Accounting and accountants push short term interests which resonate with shareholders because shareholders are only interested short term goals,” said Sikka. “The shareholding period may well only be a month in public companies, and the tenure of chief executives is shrinking which means there’s a pressure to collect your nuggets and move on.”
Companies are being strip-mined for short term gain. And in the end, it kills the proverbial golden goose. The numerous failures and collapses we’ve witnessed, of which Carillion was the most explosive example.
Carillion more than £727m to shareholders since its establishment in 1999. The fallen giant raised its payout to shareholders every year of its existence, taking its dividends from 4 pence-a-share in 1999 to 18.45 pence-a-share in 2016 as it shambled into oblivion.
A parliamentary report detailed Carillion’s “aggressive accounting” policies, dutifully facilitated by its own finance team and approved by auditors. The short termism is glaring: accounting for revenue for work that had not even been agreed, using its early payment facility for suppliers to conceal its drastic cash flow situation, and not accounting for it as borrowing.
Short termism and shrinking ice sheets
But it’s hard for the conversation not to drift into a somewhat political territory. As the oldest and thickest sea ice in the Arctic cracks and breaks up for the first time on record, it’s difficult to see a future where the focus on the short term is sustainable.
Although, it’s certainly not fair to lay the fault entirely at the door of accountants. Many accountants have taken a vocal stance on issues like the environment. Richard Carter, the CFO of the Adnams, has helped transform the brewer into a zero waste to landfill business.
Sometimes these difficult choices will involve a short term financial cost. A recent AccountingWEB story detailed the story of Boston Tea Party, a coffee house chain that’s banned the use of single use takeaway cups.
Rebecca Wadey, the company’s FD, was charged with modelling the cost of the choice. And it was clear: banning the cups would cost the company money. But she explained it was a cost that was right to bear. “Often, not always, it’s slightly more expensive,” said Wadey about doing the right thing. “We could make more profits - but we have families and we want futures for our families.”