Is 'accounting think' ruining the boardroom - and the economy?

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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.”

For Fleming, a lecturer at the University of London’s Cass Business School, these private bureaucracies have helped facilitate the Uberisation of jobs. That seems counter-intuitive at first: how could rules and formalisation simultaneously create deregulation and informalisation of the workplace?
 
But Fleming deftly illustrates how these bloated private bureaucracies perpetuate the cheap, precarious labour practices of the gig economy while also acting as a protective membrane against workers seeking redress. For all Uber’s talk of flexi-working, for instance, it’s terms of agreement - there are no ‘contracts’, of course - and financials are opaque.
 
Fleming’s writing echoes that of the anthropologist David Graeber who refers to the "age of total bureaucratisation". As Graeber sees the rules and regulations don’t apply to everyone equally. Instead, the bureaucracy acts as "instruments through which the human imagination is smashed and shattered".
 
Neither of these authors takes direct aim at accountants. But their criticism of bureaucracy is definitely a flesh wound. It’s clear which members of staff comprise the bureaucracies that Graeber and Fleming are critiquing: the money men, bean counters, the grey suited people of popular imagination that stifle innovation, retrench, suppress and cut.

Accounting think

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.

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.”

About Francois Badenhorst

Francois

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

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By DJKL
06th Sep 2018 10:09

Wrong target

The guilty are I suspect the institutions holding the shares etc on our behalf, insisting that quoted companies return x to shareholders etc, and their acolytes the analysts, moulding company behaviour to their whims.

One has to ask is such short term behaviour as described as prevalent in private companies?

If it is not one asks what is the difference, they both have accountants, so that is not the distinguishing factor?

Imho the distinguishing factor is the clamour from shareholders and wunderkid city analysts .

Imho accountants in accountancy roles are often merely weak facilitators , so needy that they produce what is asked from them by others, they are not the prime movers.

Thanks (7)
06th Sep 2018 10:21

I agree with DJKL re short-termism in private companies. When we are advising on strategies for tax efficiency, that will typically take into account everything when entry into, to exit out of the company (whether that is likely to be in 2, 10 or 50 years).

Whilst, of course, such advice has to carry the caveat that it's based on current legislation, clients rarely want to maximise the short term gains at a longer term, potentially more significant cost.

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06th Sep 2018 11:44

I'm not sure what this story is about, but if the general public did not vote in the useless governments who fail to intervene as appropriate in our capitalist system we would not have these so-called problems in the 1st place, so arguably it's the fault of the general public. Also, in Japan engineers are revered and highly paid and bankers/accountants etc. are looked down on and not highly paid, whereas here it's the opposite. Why do you think that is? It's no more & no less a cultural thing, so again the general public can be blamed.

The same can be said about the glut of pointless and overrated academics and economists of course who tend to write mostly garbage - as shown above.

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By tedbuck
06th Sep 2018 12:30

I agree with your correspondents the problem isn't with accountants it's with the investors and the Boards of Companies all looking for a quick buck.
When I started as an accountant many years ago perceived wisdom was to invest to build future wealth. Then Big business and greed got involved and the invested businesses became targets for the asset strippers encouraged by the Governments (both sorts) of the time on the basis that big is good which it often isn't. Then the foreigners got into the act and now many UK companies are just UK bases for foreign Companies. What sort of mentality allows strategic things like water and power to fall into overseas hands? Nobody says anything about it unless it is Germany and Russia but Russia isn't the only country inimical to the UK - how about the EU for starters?
DJKL has it right - wrong target.

Thanks (1)
06th Sep 2018 12:35

We report the numbers, not make them.

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07th Sep 2018 12:09

I, not sure it is completely right to blandly say "Wrong Target" with blanket effect.
An ENORMOUS amount of working time, especially in SMEs, goes into into 'accounting' which happens for two reasons only . . .
1. Accountability to shareholders. Companies exist to manage the resources contributed by the shareholders in such a way as they increase in worth. That worth is distrubuted back either as dividends or increase in shareprice.
2. Accountability for taxation. Arguably, for the good of the citizens, HMG requires a share of that increase in wealth. It confiscates this in two ways - as transactional taxes during the processes of increasing wealth such as VAT, PAYE, StampDuty, excise duty etc. -or confiscatory taxes upon the wealth that is created such as dividendtaxation, inheritance tax etc.

Who thought up these taxes? My bet is that it was Accountants.
Who is responsible for assessing what is to be taxed? - Accountants.
Who do parties turn to for advisement in optimal use of value when addressing these issues? - Accountants.

So whilst I am in agreement that the tenor of the discussion is somewhat accusatory, I also think we have to be careful not to set the profession up as victims of the bad old world out there.
IMHO the truth is that all parties are equally culpable.

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By trecar
07th Sep 2018 16:19

Governments legislate, bureaucrats administer, owners instruct and collect, accountants report, advise and sometimes manage. It is only in the management function that accountants are in a position to steer the outcome, When giving advice they influence but they do not decide. We may have a high number of accountants in this country but the claim is that we still have a shortage. So I think it is unfair to blame them for the investment ills of the country.
Many of the accountants I trained and studied with have left accountancy as such and now have full time managerial rolls. Accountancy is recognised as a good training ground for managers in a country that suffers from woefully short management training. I think the spotlight belongs more on the institutions that have short term investment horizons or rent seeking behaviour as their ethos. I don't think it is a coincidence that the fall away of industry and business in this country has happened as the power of the city has risen.

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