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Accounting is a human system
November, 30th 2006

Balance sheets, P&L (profit and loss) accounts, and cash-flow statements. Do you believe that these are `beyond the understanding of the normal human being'? Such a belief, though persistent, is `nonsense,' says Trevor Sykes, in his foreword to Financial Statements Demystified, by David Hey-Cunningham, fourth edition of which is out from Viva (www.vivagroupindia.com).

Once you have `a grip on the jargon and the underlying concepts,' financial statements are "no more mystifying than the racing form in the weekend newspapers," he assures. "Failure to grasp their essentials may more properly be attributed to a lack of interest rather than any inherent mystique."

Accounting is a human system, not a natural one, writes Hey-Cunningham. "As such it is not an absolute truth. Indeed, it is a representation in dollars of what an organisation has done. Thus it is an analogy used to represent reality, and no analogy is perfect." Interestingly, owing to the elaborateness of the accounting system, it has `grown from clerical bookkeeping into a professional social science'.

The author traces the complexity in accounting to principles and rules, which in turn are the result of `academic recognition and legislation, particularly under company laws'. He sees common threads across countries, though the frameworks are varied. "In the last decade of the twentieth century, the internationalisation of accounting accelerated to the point where accounting principles are now more universally similar than business and taxation laws." Another `world uniting influence' has been `the use of the company as a very common legal structure'.

Hey-Cunningham empathises with the plight of non-accountants, who have `little influence on accounting theory and financial statement presentation', even as the accounting profession makes the principles `more and more complex, and less and less intelligible and useful'. An example he cites is of `tax-effect accounting' something that accountants in industry may find so hard to understand that they may often let the auditors work it out!

Non-accountants are major users of the information produced by accountants, Hey-Cunningham notes. "I believe that accounting profession should seek substantial input on presentation from informed non-accountants, as I have to come to respect the `lay' view. Non-accountants usually take a simpler view than accountants, particularly those accountants setting the standards."

The book has chapters on basics and rules, assets and liabilities, equity and profit/loss, cash flow and ratios. An important chapter is `warning signals' where the author provides a list of red flags that can exist and be seen in financial statements. Such as: "Is the net cash flow from operating activities negative or relatively small? Are the current and acid test ratios declining while the days creditors ratio is increasing?"

Since accounting is often recognised to be an art, one may wonder if figures can, in fact, lie, while liars figure. "The more you know about the subject, the less chance the liars have of succeeding," cheers up Sykes.

Ideal read to help straighten out the lying numbers!

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