Friends of VeraSage know that we have major problems with Generally Accepted Accounting Principles. We refer to the financial statements as the “three blind mice,” a term used by Harvard Business Review editor Thomas Stewart. Dan Morris and I teach an entire course entitled When Debits Don’t Equal Credits.
It’s also why I always enjoy reading Paul Miller and Paul Bahnson’s The Spirit of Accounting, their regular articles featured in Accounting Today. In the Aug 18-Sept 7, 2008 issue, they reprinted an older article they had written, proposing the following thought experiment: what if keeping score in golf was similar to GAAP?
The article is excellent, illustrating how—more and more—GAAP is becoming irrelevant. Where I disagree with the authors is they believe it can be reformed while I emphatically do not.
For a fundamental reason: Accounting is not a theory. It cannot be a source for “predicting the future,” as the authors say, because it is simply an accounting of the past. Data can only shed light on the past, it cannot peer into the future. For that, you need a theory.
Unless, of course, your theory is the future will equal the past, a perilous assumption in a dynamic, capitalist economy.
If you are a golfer and a CPA, you will enjoy their analogy. It may sound tongue-in-cheek, but it conveys a serious message: GAAP is deeply flawed. Rather than being supplanted, it needs to be supplemented with more meaningful information, such as Key Predictive Indicators.
All we can hope for blind GAAP is that someone yells “Four.”