This post #2 in my summary of a recent edited book. This chapter by Alonso Moreno analyses the narrative information disclosed by a Spanish brewery, El Alcázar, from 1928–1992. The objective is to determine if the tone of the corporate reports is related to profitability. Today, the brewery belongs to the Heineken group.
The study focuses on a document entitled Memoria which is, in essence, similar to the Chairman’s Statement. Software was used to analyse the words in this report to determine the tone of the words. The tone (positive or negative) was related to other variables such as performance (profit) and the person acting Chair of the board. Over the full time period, there were more positive than negative references, irrespective of the actual performance of the company. This is a phenomenon called impression management and is something a lot of companies engage in still today. The interesting thing about this study is that overall, a positive tone dominates, despite many political events during the timeframe.
Just a short post today – I will get back to more regular posts soon.
I have written before about several aspects of cloud accounting – see here for example. But we can also think about what cloud accounting providers can do for their clients.
Simply, these providers have lots of data and insights on their clients. The Intuit group seem to have been quite clever in recent years with such data – mainly in the US market though as far as I am aware. Here is their latest offering, offering loans to small business. If we assume the potential market is users of Intuit’s Quckbooks, then I could easily surmise that data – even aggregated – from the software could be used to assess the ability to repay and so on. If you are thinking there may be privacy concerns on the data, well I think any bank or lender would ask for financial statements regardless.
In my daily work as an accounting academic, income across many papers and articles which explore the broader role of accounting in society and out daily lives. Lisa Jack from the University of Portsmouth writes about the role of accounting in the food supply chain. This is a very interesting area, as information on costs and margins is crucial in the food sector. She has just published an article on the recent contamination of eggs in some
European countries – you can read it here. It gives a good overview of how accounting is entwined in this and other food issues, and how it could help.
So, I was looking through Google News search to find something to quickly write for this post.
I found this article about the differences between IFRS and GAAP. I don't know much about the website, but the article has two incorrect statements. First IFRS does classify assets as current and non-current. Second, the term GAAP is more widely used that just referring to US rules. So, we could say UK GAAP or German GAAP.
Okay, so it's not fake news, but it's incorrect 🙂
My colleague Michael Farrell has written a nice post explaining the dodgy accounting transactions at Anglo Irish Bank – the bank that was a big part of the Irish financial crisis in recent years.
Former executives from Anglo Irish Bank (“Anglo”) and Irish Life and Permanent (“ILP”) are alleged to have conspired to mislead investors by setting up a €7.2bn circular transaction scheme to bolster Anglo’s balance sheet in 2008.
The simplified debits and credits (from Anglo’s perspective) for the “circular transaction” as it’s being called are as follows:
1) Amount put on deposit with Anglo by ILP:
Dr Cash €7.2bn
Cr Customer Deposits €7.2bn (shown as a liability)
2) Amount “lent” to ILP by Anglo:
Dr Loans and Advances to Banks €7.2bn (shown as an asset)
Cr Cash €7.2bn
Per the above, the transaction is cash neutral, so what’s the big deal? The issue is that the €7.2bn recorded as a customer deposit with the bank would be (and was) incorrectly interpreted by the bank’s wider stakeholders as a measure of customer confidence in the bank.
So where do the accounting rules stand on…
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A few weeks ago, the annual Academy Awards took place. At some point in the run up to the awards, I found a nice post by Cheryl Meyer in the Journal of Accountancy. The post “5 films to inspire CPAs” was not only a reminder of some great movies, but also a reminder of the varying and broad role accounting and accountants play in society.
On favourite on the list is The Shawshank Redemption. If you have never seen it, do. The lead character Andy Dufresne (Tim Robbins) makes life a little more comfortable for himself while serving time through doing tax returns for prison officers and keeping accounts of the Warden’s corrupt dealings. The good accounting allows Andy to take all the corrupt cash for himself on his escape from prison.
My second favourite is The Untouchables. The model used to imprison Al Capone in this movie is still widely used today – get the criminals on tax laws or “lack” of earning to match their lifestyle. For example, the Irish Criminal Assets Bureau uses this concept quite effectively. I’m a big Sean Connery fan too!
A recent quote from Pope Francis to the World Congress of Accountants captures the broader role of accounting quite well:
” everyone, especially those who practise a profession which deals with the proper functioning of a country’s economic life, is asked to play a positive, constructive role in performing their daily work, knowing that behind every file, there is a story, there are faces.”
This quote reminds us that behind the numbers are real jobs, real people and real effects. It may be easy to forget this as you trawl over a ledger audit trail or provide information to managers, but reminding ourselves of the broad reach of our accounting numbers can only be a good thing.
The full text the address by Pope Francis can be found here.
In December 2014, the media (see here for example) noted how millions for euro were “off-balance” sheet. According to reports from the Vatican “some hundreds of millions of Euros were tucked away in particular sectional accounts and did not appear on the balance sheet”. So how can this happen, and what does off-balance sheet actually mean?
Let’s go back to basics first. A balance sheet shows assets, liabilities and equity. Assets are essentially something an organisation own’s or has use of like a owner; a liability is a claim against the business. Both must be measurable in monetary terms. So for example, many large firm’s brands have values in $billions put on them, but these are off-balance sheet assets which are off-balance sheet because the value cannot be measured accurately in money terms.
In other cases, such a the Vatican example, assets can be seemingly omitted from the balance sheet. This is of course not a recommended practice. How is this done? Well, it is a little bit more complex than this, but essentially something is omitted from the books of the organization. Remember, now matter how complex an organization is, underneath its accounting system is the good old double entry system of accounting. If a transaction (e.g. bank account) is omitted from the double entry accounts, that’s it, it does not appear on the balance sheet.
Yes it’s true, anyone – in Ireland at least – anyone can call themselves an accountant. And, this has been the case for as long as I have been an accountant. I was reminded of this recently by an article in the Irish Times. To quote from the article:
“Don’t fret, because no qualifications are necessary to trade as an accountant. Anybody can open up a practice, no matter how innumerate they may be – there are no absolutely restrictions on the use of the term “accountant”. Remarkable, isn’t it?”
I guess it is remarkable. Yes, there are professional accounting bodies whose members must pass examinations and keep their training up to date. And yes, to be an auditor you must generally be a member of such bodies. But after that anyone can claim to be an accountant. As noted in the Irish Times, even an upcoming review and consolidation of Irish company law has failed (as yet) to include a provision of who can use the term accountant.
- So, you think you are an accountant? (irishtimes.com)
A few weeks ago, my daughter asked me what exactly is it I do in work. My reply- I teach accounting. Now as, any of you with kids will know it never ends with a single question. So the next question: “What’s accounting?” And I think, damn. Ok, deep breath – how do I explain it. My reply: it’s about finding out how much money you make. Am I out of jail? Of course not. The next question was: how do you make money? Can you not just print more?. So, I ignore the second question as I don’t teach economics. My reply: you make money by selling something for more money that you bought it for. So the next question came back – can you always do that and make money? My reply: no. Next came a rhetorical question: well why do you need accounting then? If you don’t always make money, you don’t need accounting as you said accounting only tells you how much money you make.
Young minds – the clarity they have sometimes!
Last month, I asked were accountants sexy. I walked by a chartered accountants practice (see the pic) in Maida Vale (London) recently and decided at least some accountants must have a sense of humour – despite the stereotype. If the owner is called Charlie ( as in Charlie’s Angels ) wouldn’t that be just great. Or maybe it should read financial angles?.
A few months ago, I was at a workshop which consisted of publishers/editors and accounting academics. I was a bit late and when I arrived one of the editors asked me to introduce myself as follows ” tell us a little bit about yourself, where you are from and what makes accounting sexy?” First two questions, no problem. The last one, well thankfully I am a CIMA member and remember the series of adverts in 2004 from their Financial Management magazine. The ads (see the picture to the left) were for accounting software and featured a dominatrix and the caption “is your procurement strict enough”. I loved that ad! In one foul swoop it got rid of the dull and boring stereotype of accountants. Of course, some CIMA members did not like it at all and wrote to the editors. This complaining perpetuated the dull image of accountant and inspired a further article entitled “Miss Backlash” – see here.
So now for a completely unscientific experiment – I show just a few examples by the way
1. If I Google “is accounting sexy”, I get a good few interesting results:
A blog, accountantsaresexy.com – a bit dated
A blog post with the title The Surprisingly Sexy Chart of Accounts
A you tube video, JustThrive Makes Accounting Sexy – YouTube
2. If I google “sexy accounting”, I get some similar results to #1
I also get some pretty dodgy stuff.
3. If I google “sexy accountant”
The results are getting to beyond a PG rating! But a quick glance at the image search result throws up this ! You can decide for yourself on the sexiness (or otherwise).
So is accounting sexy? I don’t know to be honest, but I hope this short reflection puts a smile on your face. Now back to those ledgers……
(If you want to know more on the images of accountants, check out the work of Baldvinsdottir et al)
Some time ago, I read a blog post on the Zoho website about double entry accounting. Zoho provide a number of business related applications. The essence of the Zoho blog post is conveyed in the title of this post. Double entry accounting has been around for the last six centuries and has been embedded in the most simple and most complex accounting software. And there are no signs of it disappearing. The have been some proposed alternatives, such as the Resources, Events, Agents model (which is sometimes used in teaching). But like the DVORAK keyboard, even if some alternatives may be an improvement on the double entry system, they are likely never to catch on. Why you might ask? Well, in my institutional theory thinking the answer is probably because the practices around double-entry accounting have been repeated so many times by so many people, that they have become the accepted way of doing things in business. In other words, the double entry system of accounting is a routine. And, not only that, there are also rules about double entry. I regard rules as written, and there are plenty of written rules of the double entry system – in text books, in software for example. If a practice has both been repeatedly performed for 600 years or so, and it has been written as a rule, the as the Zoho blog post says ” the traditional double-entry model was deeply ingrained in the business person’s and accountant’s psyches, and it was never going to be easily changed”. And it will probably remain so.
In business, a partnership refers to the coming together of two or more persons to conduct a business. Normally, there is a maximum number of partners with exceptions made in cases like accounting practices and legal practices. A partnership is usually formed to take advantage of the combining of skills and resources. The objective is normally to make a profit, and this profit is shared out in some agreed way among partners. Losses too are borne by the partners.
As essential element in the formation of a partnership is the Partnership Agreement. This is a legal agreement (which ideally should be written) which contains items such as the following:
- the capital to be contributed by each partner
- how profits are to be divided
- any interest to be paid on capital contributions
- any interest to be paid by the partners on monies withdrawn
- salaries to be paid to partners
- arrangements for admission of new partners
- arrangements to dissolve the partnership, and procedures on the retirement/death of a partner.
In the absence of a partnership agreement, in the UK and Ireland, the Partnership Act 1890 applies (see here).
In terms of preparing financial statements, there are some differences. First, any adjustments to profit are made in a profit and loss appropriation account – which is in effect an addendum to the income statement/profit and loss a/c. For example, any interest due to or to be paid by partners, salaries etc are made here. The resulting adjusted profit is then shared among the partners as agreed. In the statement of financial position (balance sheet), each partner will have their own separate capital account. Some partnerships used a combination of capital and current accounts. The former shows only the fixed capital contributions, the latter shows profits, drawings, interest, salaries etc. This approach is probably better as the any negative balances on the current account will signify that perhaps a partner is taking out more from the business than they should.