There is a crisis of accountability. Rebrand Accounting!

accapr —  2 June 2014 — 3 Comments

Jacob Soll

By Jacob Soll, Professor of History and Accounting at the University of Southern California and author of The Reckoning, published by Basic Books US and Penguin UK

For accountants, financial crises and scandals can seem bewildering. While some financial crises have roots in accounting fraud, many others stem from what we might call accounting blindness.  From ordinary citizens to bankers and politicians, people do not like to face their books or discuss accounting.  Indeed, with all our crises, we rarely hear about accounting or from accountants themselves.

A 2005 study by Lloyds Trustee Savings Bank of Britain showed that accounting anxiety has led to “balance denial syndrome,” in which bank customers so fear being in the red that they systematically ignore their bank statements. Ignoring accountants, however, is more than a syndrome. It is a long historical tradition that goes back to the very beginnings of finance.

Early pioneers of financial management recognised the inherent anxiety brought on by keeping account books. One of the richest merchants in late-medieval Italy, and a famed practitioner of double-entry bookkeeping, Francesco Datini (1335-1410) complained that keeping complex books was a “vexing” challenge that almost drove him out of his mind. He noted that other businessmen simply ignored their books, as the stress of keeping them, and facing their financial challenges were too much. The only way to face the challenges of keeping good books was by iron discipline. One would have to write in their books “all night” if necessary and not even get up from their chair “until all is done.”

One fact overlooked by historians was that both accounting education and public accounting took six hundred years to catch on in Europe.  In 1340, the Genovese government kept a central ledger to manage state affairs. Throughout Renaissance Italy, a financially literate population kept good books and used these skills for business, but also for public administration.  Yet with the decline of the Italian Republics and the rise of monarchies in 1500, this tradition faded.

This was often due to the fact that account books were a source of political accountability. Louis XIV, known as the Sun King of France, did learn bookkeeping from his finance minister, Jean Baptiste Colbert.  And at first, he was deeply interested in it as a tool of management.

For 20 years Colbert made miniature ledgers that Louis kept in his pockets. But as the building of Versailles and the maintenance of his army and navy during his wars against Holland and Spain strained the royal finances to the point of collapse, Louis stopped keeping the ledgers. His books began to reflect his own poor management and he chose not only to discontinue his miniature ledgers; he also undermined financial administration within the state so that no one could keep clear books.  Louis could not stand facing his books and considered himself only accountable to God. By the time he died in 1715, public debt was nine times the annual royal revenue.

In countries with more open government and with more business-friendly cultures, there was a higher degree of accounting literacy and government accounting. And yet, with hundreds of years of experience, Western governments did not adopt systematised double-entry financial management until the 1830s. Accounting doesn’t work unless societies engage with it and work for it to bring financial clarity and transparency.

With the bumpy history of accounting in mind, it is not surprising that we are back, in many ways to the old crises in accounting of the old European monarchies. The general population is, for the most part, ignorant of basic accounting techniques and even the US government does not use accrual accounting. Accountants have a tarnished image and little place in public discourse. Few would name accounting as a necessary element for good government.

Our own crisis in accounting, I believe, is one reason we have financial crises. The general population cannot understand accounts and few call for audits and demand higher standards as both shareholders and voters.

One way to stabilise private and public finance across the world would be not only to sponsor and promote accounting literacy, but also to try and improve the image of accountants. Indeed, leaders in accounting need to be more outspoken about financial standards and events. And we need to get to a point where, when there is a crisis, the public asks, “what do the accountants think?” For that to happen, the very profession of accounting needs to be rebranded and refocused towards public advocacy, education and service.  Only then can we move towards higher standards of transparency and accountability necessary for sustainable capitalism and democracy.

3 responses to There is a crisis of accountability. Rebrand Accounting!

  1. 
    Ana Paula Ferreira 2 June 2014 at 12:30 pm

    Liked. Very interesting.

  2. 
    Ana Paula Ferreira 2 June 2014 at 12:56 pm

    Professor Jacob.
    Enjoyed the article. I took the liberty of replicating it on the blog of the students of our University (Pernambuco-Brazil).

    http://cienciascontabeisufpe.blogspot.com.br/2014/06/there-is-crisis-of-accountability.html

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