I recently finished reading The Templars by Dan Jones. The Templars are the stuff of legend in many texts movies, and Jones’s book is a great and detailed read on the history of the Templars.
As I did not know a lot about the Templars – outside of movies – I was surprised at how good they became at accounting. The Templars were a military order, founded in 1119 and remained active for about two centuries until their papal suppression in 1312. They were involved in several Crusades to the Holy Land, all of which entailed military and financial resources. It seems as a result of this and their well structured organisation, they became not only good at accounting, but so good they were trusted by others to hold cash assets on their behalf and act as a bank.
Jones’s book gives many insights from an accounting perspective, here are just two examples. A letter from 1220 written by Pope Honorius wanted to ensure that taxes collected to fund the Crusades did not flow via Rome. The Templars were thus used as agents to account for and deliver cash from tax collected to the Holy Land. A second example which appears throughout Jones’s book is how the Templars accumulated wealth as an order over time. They acquired land and similar immovable assets, and these were used productively to generate moveable assets – oil, wine and grains for example. All of this has to be accounted for and controlled. Jones also mentions how ultimately one way the Templars were hurt as an order – their wealth was attacked.
You may have read about the scandal at Wirecard AG (see here for example), where about €1.9 billion in cash probably did not exist. As a result, the German regulators are calling for more oversight. While I agree that more oversight may be useful, I also think it is worthwhile reflecting on the absolute basics of bookkeeping, accounting and auditing that seem to not get much mention in the media. As is often my style here, I’ll relate to my own experience.
Close to 30 years ago now, I started to study accounting (September 1990). The first few weeks of the class covered bookkeeping. This was a bit repetitive for me, having done accounting as a subject at secondary school. One of the things I learned was how to prepare a bank reconciliation. In Summer of 1990, I got a summer job at a small audit firm. For my very first task, I was presented with two books (pre computer days 🙂 ) from a company – their cash receipts and cash payments. From these, I had to manually check every payment or receipt to the bank statements to make sure they matched. Some transactions had errors, some were missing, but at the end I could explain – or reconcile – the balance of cash per the company’s books and per the banks records.
Just pause for a moment. The act of doing this bank reconciliation means that the accounting records of a business agree with an external information source – the banks records. Thus, as either an auditor or an internal accountant at a business, I can be somewhat confident that the financial statements to be prepared from the accounting records are reasonably accurate. This assumes of course all transactions ultimately go through the company bank accounts. A bank reconciliation was one of the first things I learned to do as an accountant, but also one of the first things I looked for when doing an audit.
Following from the above, how can I be sure as an auditor that a company is disclosing all their bank accounts? I cannot speak for every jurisdiction, but usually the client signs a letter addressed to the bank(s). The letter is sent by the auditor and requests the cash balance at year end plus a list of all accounts held in the name of the entity/entities being audited.
Thus, if 1) a company accountant does a bank reconciliation, 2) the auditor checks it is done and 3) the auditor sends a letter to the company’s bank, then all should be fine and cash balances easily verified. I can only presume something very untoward was happening at Wirecard, but how it was allowed to continue beggars believe. Any auditor should be able to do the simple tasks I have described and surely a bank letter should have revealed the €1.9 billion did not exist.
However, as an educator, I rarely teach bank reconciliations. This is somewhat disappointing perhaps, and I often think should we (or I) be at least reminding students of the absolute basics. They will of course learn it quickly in practice. It is also worth pointing out that accountants (when part of a profession) are also bound by codes of ethics. Not every jurisdiction has a legally recognised accounting profession which educates and guides members.
A fairly obvious title to this post, but it is something we may often forget. As a management accountant you need to know how your business works, and this means getting out to the factory floor, to the process or working with those people doing the necessary tasks.
So why the old tyres Martin you may ask? Well, I recently read a two-page feature in Financial Management on how tyres are made and what happens the old ones – see here. This reminded me of some of my roles in industry. I knew nothing about making clothes or making cardboard when I joined my respective past employers. It is not that I became a technical expert in these areas, but I understood the process, what needed to be done, how the factory worked etc. And how did I learn you may ask? I learned mainly by talking to people, observing how things worked, determining how much things costs, where revenues came from etc. Then, as we updated various systems over the years, my knowledge became deeper and I started to question how some things were done, could they be improved for example. Having read the article in Financial Management, I was thinking based on my experience, if I started to work for a tyre company this would be my day one reading material.
I hope a local distillery near my home does not mind me using their graphic above. As we are all dealing with the effects of the Covid 19 pandemic, I was really impressed to see how small local distilleries in Ireland (and indeed elsewhere and some large ones too) have changed to producing alcohol based hand sanitiser.
Many businesses cannot adapt their products to the current scenario, but the example of distilleries is a really good one. The Listoke Distillery is manufacturing and selling hand sanitiser at cost. Not only is this a good thing for society, it also in my view makes business sense. As the header of this post suggests, it is better to be “ticking over” and covering costs than losing money and not covering fixed costs. I would also bet that many of us (and certainly yours truly) will remember these local small businesses that helped us out in these strange times and, hopefully, they will see increased revenues and growth. Meanwhile, with costs covered, at least they have a good chance of surviving.
By the way, I’ve just bought my second bottle of sanitiser – accompanied by a bottle of gin of course.
Telecommunication services in Ireland used to be provided by the State, through various entities. The most recent entity is eircom, now a private firm. eircom were one of the earlier providers of free email accounts, but that is about to change as the company now wish to charge €5.99 per month for email accounts. Well, there is no such thing as a free lunch as the saying goes.
But let’s put on our accounting hats for a minute. There is of course a cost involved in hosting email accounts – servers, cooling, power, buildings. This may have been okay when eircom was a state company and there was less of a profit motive. Gmail is free I hear you say; it is not, you give your data to them to make money from. So eircom probably need to recoup some of their costs, and that seems like a good accounting decision, The price does seem a bit high though – about €4.86 next of VAT will be earned by eircom. To me, it seem more like a prohibitive price, and the real objective to force email account holders to move to other providers.
One of the fundamental accounting concepts is that of going concern. In simple terms, this typically means a business is unlikely to be able to continue in operation for the next 12 months.
It is not very often the examples come to light, but recently in Ireland we had one. The national football association, the Football Association of Ireland, has their auditors state the organisation could not be deemed a going concern. According to the RTÉ news website, the auditors noted:
“While the company has received some advanced funding from UEFA during 2019 to enable the company to meet some of its current liabilities there is not sufficient audit evidence that the company will be able to meet its liabilities as they fall due. Therefore we are unable to obtain sufficient audit evidence to support the assumption that the company will continue as a going concern.”
The piece also notes the levels of debt and losses over several years. The statement above provides a nice clear understanding of what going concern means. Do have a read of the RTÉ article and other coverage to get more insights on the association.
Being an accountant is sometimes portrayed as being a boring path in life, but like all professions and jobs, it has its moments when you feel like you may have helped someone. It is great to see a business take your advice and see them grow and become a success. Of course, as you deal with businesses or clients, quite often you may give general advice which may also yield some fruit. At the end of July, The Guardian had a great little feature on Mick Jagger, and it seems he heeded advice from his accountant when he was younger. Seemingly, Laurence Myers was his accountant – and the accountant of many other famous rock stars of the era – and in a new book written by Myers, he outlines the business sense the young Rolling Stones had. This sense would, of course, be nurtured by a good accountant. And indeed, the Rolling Stones have been a financial and business success (see more here), certainly thanks in some part to the advice and partnering of a good accountant over the years.
In recent years in Ireland, business insurance costs have been increased dramatically due to increasing volumes of claims against them. In some cases, the costs have increased so much that the businesses have simply closed. This post is more about the smaller claims, claims for refunds or costs incurred because a product or service was not up to scratch.
I will use Ryanair as the example here. Despite all the criticisms levelled against it, it remains one of my favourite airlines. They run a tight operation and keep costs to a minimum. They also do not payout refunds or claims unless they have to, this is the fun part for me. In a recent Irish Times article, there are details of a customer claiming €222 for taxi fares incurred due to a Ryanair mistake. The company fought it, but the passenger pursued through a small claims court and got their money refunded. Fair play to the passenger.
Recently I was subject to a delay on a Ryanair flight from Bristol. Some passengers, those who were UK citizens I later found out, were offered £5 refreshment vouchers. I was not, and followed up. To be fair to Ryanair they said if I could produce a receipt, they would refund me.
Now the accounting part. In both examples above there are a lot of costs already incurred in having a customer service function to deal with such issues. Let’s deem these as sunk costs. Once a claim is initiated, then I think we could see the situation as an instance of activity based costing perhaps. In my own case, I sent three emails and I can guarantee the cost of dealing with me was way more that the price of a cup of coffee I was seeking to claim. In the case of the passenger taxi fares, costs of engaging solicitors by Ryanair would have far exceeded the cost of the refund had they simply paid it based on the passengers receipts.
The point I am trying to make is that while I fully agree that firms should not just pay refunds without any basis, there is likely some value at which it costs more to defend a refund claim than simply pay it – with vouched receipts of course, not like me and my coffee. But, if you are not getting satisfaction from a company if you feel you should get a refund, apart from legal options, you can always waste their time a little and get some satisfaction that way.
I am sure you have read or heard stories in your country about political leaders or CEOs spending large amounts of money on expenses – hotels, meals etc. I have read a lot of such reports in recent weeks and just wanted to give a view on it.
To me, and much of this is based on experience, the first principle to me is simple – no receipt or invoice, then any expense should not be reimbursed. Doing this sets a basic principle which is easily understood. I have heard some comments over the years that there is a cost is running an expenses reimbursement system, which may exceed the value of the expenses, so why bother. This may be true in some cases, but I do not agree.
A second principle to me is a basic accounting one – business expenses only. The idea of say using a business credit card for personal lunches or whatever at a weekend goes against the entity principle. This principle means only items for the business should no part of the accounting for that business.
Third, the expense, once for the entity should be reasonable, but what is reasonable? This is where common sense must apply. Let’s take hotels as an example. It may be that a room for €100 per night is ample for any business person, but in some cities this may not be enough for even a basic hotel. But, if I were to say €1000 per night, you would probably think that is a bit too much. Of course you may have read reports of business leaders and political figures spending many thousands of Euro/Pounds/Dollars per night on hotels. Is this reasonable? Personally I do think some of these people could be a bit more modest!
This is a brief summary of chapter 12 in our book, written by Stéphane Ouvrard, Hervé Remaud and Ian Taplin. The chapter describes the so-called Bordeaux Place, the organizing principle by which much fine wine from the region is sold. It is a marketplace with key actors (winery owners, brokers, négociants [merchants] and the officials within the city) interacting both contractually and on trust.
The authors note some form of organisation of the Bordeaux wine trade since the 1400s. The year 1745 saw the first classification of Bordeaux wine, which reflected quality and price. In 1855, the Paris Exhibition (promoting French products) first awarded medals to Bordeaux wine. This classification system has only changed twice since 1855. Today, the Bordeaux Place utilises the en primeur system. This is a futures system whereby customers (wine merchants of Bordeaux, distributors, final buyers) buy (and pay for) wine today, to be delivered about 18 months later. Deciding on the price from the producers perspective is, of course, a difficult one. The price has to cover the cost of producing, but for a substantial number of estates, marketing plays a more critical role in price setting than accounting. Wine producers can get help from brokers, obtaining indications about the price the market is willing to pay. But this is partial and somewhat biased, as merchants and the market prefer cheaper prices. In essence, wine producers base their decision on six main aspects (Remaud et al., 2015): vintage quality; how prices of similar quality wine have evolved over time; the level of stock on the market); the global economy at large, including interest rates, stock exchange prices and confidence in the economy; the status of the brand; and the extent to which an estate has been able to build a brand and not just a (high-quality) wine. This sounds like a great task for management accountants!
This is a summary of chapter 8 in our book, written by Julie Bower. The chapter explores accounting history in and around the Scotch whisky industry, looking at managing consumption, production and maturation. As the author notes, the whisky industry has some peculiarities around inventory management, financial management and even tax planning.
On the tax planning side, the author notes that “traditionally, the producers of spirits brands have shipped their products from their own, or shared, home market bonded warehouses to overseas distributors on fixed terms, splitting the profit between them on an ‘arm’s-length’ buyer–seller transaction basis”. Of course, this does not always apply, with the tax regime in Ireland for example, offering advantages to Irish whiskey (as opposed to whisky). With inventory, the time spent to mature creates issues too. The Immature Spirits (Restriction) Act 1915 stated whiskey must mature for a minimum of
two years, extending to three years in 1916. This three-year bonding (maturation) rule has remained in place ever since, meaning the industry’s stock maturity profile is significantly longer than other sectors. Finally, the chapter notes the chapter notes the issue of being able to finance the required inventory levels – the author cites the example of the value of maturing stock in Diageo as being around £4 billion – which of course has to be financed somehow.
This is a summary of the next chapter in our Accounting for Alcohol book, which was written by Peter Cleary. The chapter reviews the accounting information produced between 1792 and 1864 by the Watercourse Distillery and how it was used and reported upon by the firm. The distillery was co-founded by Thomas Hewitt, John Teulon and Richard Blunt, with Hewitt (along with his cousin) eventually assuming full control of the business and re-naming it Hewitt & Co. While accounting books were not generally available in the archival records, a reasonable overview of accounting was obtained from other letters and journals.
During the 17th and 18th centuries, the city of Cork expanded, driven by an increase in trade via its port and in the number of buildings within its boundary. As with all cities at this time, Cork’s merchants possessed most of the wealth and were therefore at the forefront of these developments, facilitating further increases in their wealth and influence. As a result, they became known locally as the “Merchant Princes”. The Hewitt’s were among these “Princes”. Increased investment from Cork’s “Merchant Princes” invariably required additional accounting-based information to allow them to determine if, at the end of a particular time period, their commercial exploits had resulted in a financial gain. But, at this time, regular and systematic book-keeping was still rare. As revealed by the archival records, although no accounting books survived, certainly a profit account was maintained for each partner of the distillery. Letters and journals also reveal monthly “closing of the books”. Letter and correspondence also reveal issues with giving credit to customers. From about 1850 onwards, the letters reveal loss being made, and the eventual demise of the distillery.
This post #4 in my summary of a recent edited book. Chapter 4 is written by Kazuhisa Kinoshita, and details the role of the Orion Brewery in the economy of the Okinawa region post the Second World War.
The Orion Brewery, while small in terms of the overall Japanese market, helped rebuild Okinawa and the dreams of the young. Okinawa was home to a large US air force base from the 1950s through to the 1970s, and the base became part of the local economy. Supplies to the base were a large source of income to the local economy, and in this environment, a “local” product to generate a sense of identity belonging for local people. This product came in the form of beer from Orion.
From an accounting perspective, the chapter looks at costs and output – in essence, cost volume profit analysis. The remote location of the Okinawa islands increased the cost of building a brewery, and limited the market size affected sales. There was also the effect of beer duties to be included in the decision, and the regional government were favourably disposed towards a lower beer duty. The end result was the construction of the Orion brewery in 1957, and it is still active to this day.
Okay, from my previous posts now you know a little about cryptography. And, you also know that bitcoin (and other cryptocurrencies) is managed decentrally. In the bitcoin system, transactions are verified as genuine (among other things) by cryptography – you can imagine how useless the system might be otherwise. This is achieved through a blockchain, which I will now explain briefly.
A block is essentially a transaction or group of transactions – in bitcoin, each block contains a megabyte of data (presently). When a block is full, a new block is added – hence the term blockchain. As blocks are added, the cryptography used links a block to the previous block. This means that the transactions can be verified all the way back to the original block, and it cannot be tampered with.
Also, I already wrote a little about bitcoin mining, and from that post, you can see that the blockchain for bitcoin is public – in effect a public distributed ledger of every bitcoin transaction that has ever happened.
What does blockchain mean or accountants then? Well to start, blockchain is a technology which is separable from things like bitcoin. It is the verifiable ledger that may be most appealing to business and the world of accounting. Businesses may soon be using blockchain in a less public way than bitcoin, using some form of private blockchain. Let me try to give an example of how accounting is done today, versus how it could be done with a blockchain.
I formerly worked in the paper business, in the cardboard packing part. Back then and still I would imagine, pharmaceutical companies would not allows recycled paper, due to the risk of contamination. The company I worked for had to maintain records to show the sources of all materials in an order for a pharmaceutical company. Just focusing on the accounting, there are four ledgers at play – the paper supplier, the cardboard manufacturer, the pharmaceutical company and the end vendor. All while four may have quite integrated systems within their own company, all four are likely not linked. And if they were linked, how can the truth and verifiability of the transactions be maintained. Here is where blockchain can help. Using a blockchain and its encrypted data, one single transaction can in theory flow through all four ledgers – and remain unchanged and verifiable. Also, the pharmaceutical company in this example can be sure that records are intact and full traceability of materials used maintained. This is just one example, and anything that involves traceability could benefit – I am sure auditors would have many uses for blockchain technology.
So where is the catch? If blockchain is used privately within a firm, then we can trust the hardware involved – no bitcoin miners needed. The catch at present is the energy usage. To solve the cryptography used in blockchain takes a lot of computing power and thus energy. At present, the energy used for bitcoin processing alone in a year is similar to the power consumption of a small country like Ireland. Less energy guzzling ideas are being worked on.