Bean Counters or Soothsayers
The backbone to financial accounting is the matching principle, or the “accrual” of accrual accounting. Students typically grapple for awhile with this concept; they would much rather snuggle up to cash accounting because it is so comfortably logical.
But the SEC has commanded so the filings of public companies acceptably comply with making the numbers fit within the fair and full disclosure parameters as defined by father FASB. But don’t be misled into thinking FASB has it all figured out.
By definition, accrual accounting deals with expectations of future cash consequences of current events. What? Yep, that’s right. Accrual accounting is all about guessing how today’s events are going to translate into future cash transactions…lots of guessing going on here. Will customers really pay their bills? How long will our equipment really last? What will be the cash outlays required to meet pension obligations? And so on…
Given that we live with a business or financial language of guessing, let’s think about the value of the communication as represented by the accrual accounting language and the financial statements produced thereby. It probably makes more sense to study literature than business, given that we’re reading fiction.
But here’s the real kicker: before you buy that next share of stock, ask yourself , who’s the author of the fiction? That is, whois in charge of guessing?
That should put a little “shake and bake” in your 401k!
Posted on Thu, June 24, 2010
by Timothy E. Moffit