Accounting Basics: A Guest Post From Robert B. Walker

Robert B Walker, Chartered Accountant is a sole practitioner undertaking insolvency work, in Wellington and Auckland New Zealand.

Robert advises NZ Customs and Inland Revenue on credit control and debt collection. He has provided expert witness services, particularly with regard to the application of section 194 of the Companies Act.  He has advised a variety of Governments and NZ Government departments and agencies on application of financial reporting law, including the Government of Botswana, the Lesotho Revenue Authority and the National Bank of Georgia (that country’s central bank).

Mr. Walker trained in London in a small firm, worked for Peat Marwick Mitchell & Co at the time of the financial revolution in the City.  He then worked in shipping and, on returning back in New Zealand, worked at the Bank of New Zealand as group accountant until it collapsed in the last recession.  He then went into audit in a small firm that, he told me, “…was crushed by predatory pricing and the depredations of the Auditor-General who subsequently went to prison!”

He also audited solicitors’ trust accounts. “What a mess!” is his characterization of that period.

He then went out on his own to specialize in financial reporting, following the enactment of a statute in that regard.  He attracted no business, sustained himself by working in Government (at the time of the bold experiment in government accounting) and then into insolvency where he tried to create the risk in financial reporting that was not present in the minds of my potential clients.  That is where he is today. I recommend going to his site and reading through some of the cases documented there.  It’s an interesting financial history of New Zealand during the past thirty years.

A guest post from Robert  B. Walker:

I am about to give expert evidence in a civil matter in respect to the failure or otherwise of a company to maintain proper records.  In this particular matter the accountant, or accountants to be more precise, cobbled together a final set of financial statements that were wholly self-serving for the directors of the company.  This entailed significant convolution and, I would say, corruption of accounting.  This has been done shamelessly and I think that applies literally.  The accountant, I surmise, doesn’t know that accounting is not to be manipulated for self-serving ends.  The lawyer is searching the (English speaking) globe for precedent.  This is proving difficult.

Simultaneously I am involved in another matter, criminal in nature, about which I am legally constrained from giving detail.  However I think I can say that the case has a disturbing element to it.  Four insolvency practitioners and three government agencies have raked over the embers of this particular fiasco all the while bemoaning the lack of records.  I became involved and asked if there were any general ledgers.  There were.  They had existed all the time and were set out in complete detail yet no one bothered to look at them!

In a third matter I am the liquidator of a company to which a bank had appointed a receiver months before.  The receiver is a chartered accountant of good reputation.  When I asked for the accounting records initially the receiver and his lawyer attempted to block me.  After a good deal of battering with the legal powers that fall to me I was provided with the records and a confession that reconciliations had not been prepared nor a general ledger from the time of appointment.  The receiver’s lawyer’s argument was that it was ‘convention’ to fail to maintain proper records.  I did point out that it is impossible to control receivables, for instance, without proper records including a GL but that is what they attempted to do.  The burden of fixing the records falls to me and what a profound mess it is, involving bizarre goings on with respect to GST (the NZ name for value added tax).

I see many such instances as these.

I said to the lawyer in the first matter, partially in jest, that I seemed to be the only person in insolvency that cared about accounting records.  He replied, in all seriousness, that this was probably true.  I have thought about that since and I fear he is correct.  I have begun to fear that I am truly alone, a voice crying into a void.  Something, seen from my perspective, is very badly broken.

Assuming that I am right, I think about the causes.  Leaving aside the general lawlessness that prevails amongst accountants due to their adversarial stance to the State’s tax collectors, I believe there are two causes: the manner in which accountants are trained and the fragmentation of accounting due to standard setting.

NZ follows an American model in which people who are to become accountants are ‘educated’ in Universities.  There is minimal emphasis on double entry.  Most of the courses are dedicated to theory, bullshit sociology, complex management accounting, auditing and so on.  None of this makes any sense to a student if they first do not know the basics of accounting and that can only be gained by actually practicing the discipline.  Large numbers of accountants, to use the term loosely, are produced who do not understand that the centrality of accounting is double-entry bookkeeping and the prime record is the general ledger.  In NZ, accountants insist on calling themselves ‘chartered accountants and business advisers’ as they are ashamed on being accountants alone.  This disease began about the same time as the Cognitor travesty was perpetrated.

What has happened with standards, whilst well intentioned (the road to hell probably), has resulted in fragmentation of a discipline that should be approached holistically.  As the complexity grows inexorably, practitioners are being left behind.  Indeed the current chairman of the government body that approves standards has spent 20 years trying to ensure that standards only apply to big government and big business.  He wants to exclude SMEs, being closely held companies, from the scope altogether.

I understand why he wants to do this, but he suffers from an ahistorical perspective.  When limited liability was developed in Britain, from where we get our basic law, the notion of ‘true & fair’ was developed to ensure creditors were protected.  T&F has been found, in judicial precedent, to equate to standards.  Yet 150 years later we seek to sever the connection.

Standards are replete with vast tracts of turgid wording much of it petty in the extreme.  It is unrelated to the basic mechanisms of accounting.  It is a feat of learning and memory to cover the whole scope.  Practitioners dealing with small companies have long since abandoned the attempt to acquire the knowledge.  Even those operating large, publicly accountable entities do not attempt to master it.  In consequence accounting has no fulcrum upon which it pivots.  There is no centre.  It has become fragmented.

Words are no substitute for numbers.  Having spent 20 years attempting to put standards at the centre I have had a Pauline-style conversion.  I now believe that all that is necessary is a set of principles – the conceptual framework will do for this purpose.  It should then be left to the accountant to express these principles in the mechanics of accounting.  Standard setters should be reduced to providing arithmetic examples, at a high level, detailing how this should be done.

That is the reason why I prefer FASB to IASB.  At least FASB works out how economic events operate arithmetically before it writes its turgid, prolix nonsense.  But even then it does not show how its schemes work in double entry.  I recall many years ago working with FAS 90 (I think) in regard to acquired mortgages.  There are examples but not expressed in double entry.  They are, therefore, of limited use.

In the United States, the problem is compounded due to the fact that the most important issue in accounting, solvency determination, is left entirely to lawyers and courts.  The disintegration is complete.  I truly believe I am staring at something too awful to contemplate.  Accounting created, or helped to create, the modern economic world.  Yet in its time of crisis it is hopelessly ill equipped to respond because it has so profoundly lost its way.

These may be the delusions of a solitary raving lunatic simply reflecting the psychology of the aging – bemoaning the prospect of my own demise.

But, then again, I might be right.

8 replies
  1. Deb
    Deb says:

    So true! In our days, we used to start training for our accounting degree by actually writing accounting records. These days, the role of a ‘bookkeeper’ has been relegated to the background, and all the people basing their analysis etc. on accounting records treat those same records as manna from heaven (taken care of in the background by computers), just as small children believe money comes out of ATMs. The compulsory courses on accounting have also been reduced to a farce. Unless we strengthen our basics first, things like the suprime crisis will continue to happen, where all the people down the chain trusted implicitly the ratings assigned by the ratinig agencies. Nobody went through the actual composition of the subprime bonds and CDOs (“dirty job”!).

  2. Scott Green
    Scott Green says:

    Interesting post. I remember several years back hearing a lot about how GAAP compliance and fundamental bookkeeping had become routine (I didn’t hear much about tax), particularly because of advances in IT, so accountants should be developing their skills to be strategic business advisors. If I recall, a lot of this was coming out of the Institute of Management Accountants (IMA), who changed the name of their flagship monthly magazine from “Management Accounting” to “Strategic Finance”. Well, I do believe that accountants can provide enormous benefits to management of all aspects of business operations, but my experience, first as a financial auditor and then as an accountant in industry, have clearly shown me that many companies still have great difficulty with basic bookkeeping & GAAP compliance. I have observed lot’s of errors & lot’s of audit adjustments over my career. Accounting education cannot afford to overlook the basics.

    As for what is meant by “the basics” in the area of GAAP, I agree with Mr Walker that GAAP is so complex that there may no longer be much basics lying underneath. To have any hope of getting all their GAAP right, most medium-sized & larger (& even many small) companies would have to pay out to hire at least one full-time GAAP expert. And even then, GAAP is so complex that there are unlikely to be many individuals who know it all. I think that the FASB/IASB’s joint exposure drafts on lease accounting & revenue recognition are a general step in the right direction from a theoretical perspective, but there is a lot to fix in both US & international GAAP.

  3. JMillar
    JMillar says:

    Excellent post! I was beginning to think that I was the only person who thought this way, though I suspect I am a similar age to Mr Walker.

    I am a tax accountant and while it is always more interesting to be involved with restructuring, M&A etc, you lose sight of the basics at your peril – the number of times I have had to approach the finance department and explain that they haven’t managed to account for the fixed assets correctly, say, in more than one organisation. It seems that the basic stuff is delegated to the most junior employee, or more likely a temp, and the assumption is that technology will take care of the detail. It doesn’t. And the idea that something like a tax reconciliation should be done as a matter of course seems to come from another planet.

    None of this is difficult or even very time consuming if you understand it, but it needs to be done if you the numbers are to make any sense.

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