Business, Legal & Accounting Glossary
Accounting reform is an expansion to accounting rules that goes beyond the realm of financial measures for both individual economic entities and national economies. It is advocated by those who consider the focus of the present standards and practices wholly inadequate to the task of measuring and reporting the activity, success, and failure of modern enterprise, including government.
The basic bookkeeping concepts underlying contemporary accounting date back about 500 years to Renaissance Italian practices. Obviously, the vast majority of articulations by modern standard setters have little in common with the accounting practices then used.
Real debate concerns concepts such as whether to report transactions, such as asset acquisitions, at their cost or at their current market values. The former, traditional approach, appeals for its reliability, but can quickly lose its relevance due to inflation and other factors; the latter, increasingly common approach, is appealing for its relevance but may be less reliable due to its resort to appraisals or other subjective measures. This trade-off is essentially impossible to overcome. The relative virtue of either approach depends on the subject matter in question.
Limited reforms within professional management circles have led in the past to activity-based costing, economic value-added, regret and risk measures.
Not only do most businesses raise capital based on numbers derived from current standards, but there are also extensive lobbying efforts by the accounting industry to keep those standards roughly as they are: complex, loopholed, and unable to be applied or audited easily by laymen.
Heads of the U.S. Securities and Exchange Commission since the 1980s have consistently complained that this lobbying makes it impossible for them to apply meaningful reform, even in the wake of accounting scandals, e.g. that which felled Arthur Andersen in 2002.
Any comprehensive scheme of accounting reform is a major professional and academic enterprise; Typically it requires examination of the role of each of the fundamental factors of production, an analysis of capital indicating how many types there are and how each supports each factor of a production process.
A comprehensive scheme that would affect, for instance, the United Nations standards for national accounts, the rules of the Bank for International Settlements, or listing requirements on the major stock exchanges, would have to defend any change against critics that advocated lesser reforms – making it extraordinarily difficult to achieve simultaneous consent.
Marilyn Waring, who deeply criticized the UN account system for systematically under-valuing the social and economic contributions of women, stated also that she had to read literally an entire room full of books in order even to understand the standards applied today. It seems unlikely that most advocates of reform have the stamina to do so, nor the background required to debate each issue with economists or accountants that build their careers on the detailed extension and improvement of standards that already exist. Most critics considered reform prospects bleak.
The critique from ecological economics was even more fundamental, claiming that most means of measuring well-being indicated that the developed nations were in a state of “uneconomic growth” through the 1980s and 1990s, due mostly to failures of measurement, most or all of which could be traced back to the practice of using the Gross National Product as a means of making money supply decisions. This is perhaps the most obvious and widely-held critique of current national accounting and economic growth reporting systems – the creators of the GNP and GDP measures themselves advise against its use as a single measure of economic growth – but politicians and press typically do so without caveat nor apology.
Robert Costanza, Paul Hawken, Amory Lovins and others who advocate a consistent global system for valuing natural capital, note that failures in this area are particularly grim: promoting extinction, loss of biodiversity, climate change and destructive weather for the sake of such “growth”. John McMurtry characterized this as “the cancer stage of capitalism”.
What makes “economic sense” under current standards, they argue, is in fact leading to ecological catastrophe, social conflict, and economic chaos.
One barrier to accounting reform are governments themselves. They have the authority to determine what are accepted accounting principles, while using questionable accounting practices themselves. Governments, for example, pay off operating costs with longer-term debt and thus overstate budgetary surpluses or conceal operating deficits. This is not unlike the allegedly fraudulent practices of some corporations.
Notable advocates of accounting reform:
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This glossary post was last updated: 18th April, 2020 | 1 Views.