The End of Accounting and the Path Forward for Investors and Managers

Chapter 9Accounting: Facts or Fiction?

Accounting information is generally believed to be factual (the company purchased 500 units), but nothing could be further from the truth. Accounting items—like revenues, expenses, and assets—are increasingly based on managers’ subjective estimates and projections, which sometimes amount to sheer guesses. We expose in this chapter the detrimental effect of these estimates on the usefulness to investors of financial information, by documenting the steep rise in the frequency of estimates, due to accounting regulations, and linking this rise empirically to the deterioration in accounting’s usefulness. We thus identify the second major cause of accounting’s relevance lost.

“GE Brings Good Things to Life,” But Not to Accounting

General Electric's 2013 earnings per share (EPS) from continuing operations came at $1.47, compared with $1.38 and $1.23 for 2012 and 2011, respectively. Don't you marvel at the exactitude of accounting? Computing the earnings of a worldwide company with 307,000 employees and annual revenues of $146 billion to the last penny? EPS of $1.47, not $1.46, or $1.48. No uncertainty (“around $1.50”), or range (“between $1.40 and $1.50”). Exact and incontrovertible measurement of business performance. No wonder the accounting system has endured for so long; where in life will you find such resoluteness and reliability?

But scratch the shining surface a bit and you'll find that all this exactitude and definitiveness is ...