Accounting has failed us as investors and managers. Accounting should be about generating sufficient statistics to assess the state of a firm. It is more than simply taking numbers and putting them in the appropriate bin based on generally accepted accounting principles (GAAP). In an ideal world, the role of an accountant is to take the mass of all the transactions of a company- from the purchase of raw materials to the sales of products, from money that is borrowed to wages that are paid- and boil them down to a set of statistics that provide a picture of the company’s performance sufficient for the equity holders to make investment decisions. And the accounting statistics should not only have a high correlation with the company’s value and prospects; they should also be standardized across firms for comparison purposes. Accountants have not been doing a very good job of this, and if anything they are marching backwards, doing worse and worse over time.
From A Demon of Our Own Design by Richard Bookstaber
HKO comments: The accountants have a conflict of interest since they are paid by the company they must review. The series of economic catastrophes have provided a market solution, even if it is an expensive once, by driving those firms who breeched their professional ethics by driving them out of business. Arthur Anderson as an accounting firm is no more after its negligence in the Enron debacle in 2002. The Big Eight is now the Big Four (Deloitte Touche, Price Waterhouse Cooper, Ernst and Young, and KPMG- only Deloitte is headquartered in the U.S.). The accounting profession was destroyed by the same short term oriented pragmatism that destroyed their clients.