Why Is the Relevance Lost?
“There are three kinds of lies: lies, damned lies, and statistics,” said Mark Twain in reference to the use of numbers; that is, drawing on statistical evidence to bolster weak arguments.1 The extensive statistical evidence on the fast-diminishing relevance of corporate financial (accounting) information we presented in Part I is so counterintuitive and surely disturbing to the multitude of investors using financial information that it may conjure in mind Twain's phrase about misleading with statistics. It is, therefore, incumbent upon us to carefully identify and document the reasons for accounting's fall from grace to substantiate and support the statistical evidence and to provide the foundation for the remedial actions we propose in Part III. Numbers without comprehension are just that—numbers. That's what we do in this, Part II, of the book: carefully outline, with full empirical support, the main reasons for the continuous decline in the relevance or usefulness of financial information to investors and other corporate stakeholders. To avoid undue reader suspense, here are, in essence, the three major reasons for accounting's relevance lost:
- The inexplicable accounting treatment of intangible assets—the dominant creators of corporate value. Something remarkable happened to the US economy, and to varying degrees of similarity to other developed countries, in the past four decades: While aggregate US investment in tangible assets (things ...