Copyright © 2006 by Thomas A. King. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

King, Thomas A., 1960-

More than a numbers game : a brief history of accounting / Thomas A. King.

p. cm.

Includes bibliographical references and index.

ISBN-13: 978-0-470-00873-7 (cloth)

1. Accounting—United States—History. 2. Accounting—Standards—United States—History. 3. Accounting—Law and legislation—United States—History. I. Title. II. Series.

HF5616.U5K53 2006

657.0973—dc22

2005037200

To Yvonne, Amanda, Alex, and Emily

ABOUT THE COVER

The U.S. Postal Service and predecessor Post Office Department have released four thousand stamps to remember key people, places, and events in U.S. history. Stamps offer tiny windows into America’s past. Six examples, presented from upper left to lower right on this book’s cover, commemorate events discussed in this book.

Scott #1920. Issued September 21, 1987, to honor the 100th anniversary of the founding of the trade group that would become the American Institute of Certified Public Accountants. 22c; multicolored. Pen tip and ledger book, designed by Lou Nolan.

Scott #2361. Issued June 16, 1981, to observe the 100th anniversary of the founding of the Wharton School of Business. 18c; blue and black. Portrait of Joseph Wharton, designed by Rudolph de Harak.

Scott #3184o. Issued May 28, 1998, as a pane of 15 stamps in the Celebrate the Century series’ 1920s collection. Stock market crash of 1929. 32c; multicolored. Torn stock certificate, designed by Carl Herrman. Printed by Ashton-Potter (USA) Ltd.

Scott #922. Issued May 10, 1944, to celebrate the 75th anniversary of the completion of the first transcontinental railroad. 3c; violet. Based on Golden Spike Ceremony, painted by John McQuarrie.

Scott #1380. Issued September 22, 1969, to observe the 150th anniversary of the Dartmouth College case, where alumnus Daniel Webster argued before the Supreme Court that the government could not impair private contracts. 6c; green. Daniel Webster and Dartmouth Hall, designed by John R. Scotford Jr.

Scott #2630. Issued May 17, 1992, to honor the 200th anniversary of the founding of the market that became the New York Stock Exchange. 29c; green, red, and black. Stylized stock certificate, designed by Richard Sheaff. Printed by the Jeffries Bank Note Company for the American Bank Note Company.

Source: Scott Specialized Catalogue of US Stamps & Covers. Sidney, OH: Scott Publishing Company, 2000.

PREFACE

The world suffers no shortage of accounting texts. The many I’ve read over the past 25 years have helped me audit, prepare, use, and explain corporate financial statements. Missing in this lettered journey has been a work that provides context for accounting’s six divisive issues: inflation, volatility, intangibles, debt, options, and earnings. A brief history of accounting can fill this void.

Students and practitioners study textbooks designed to explain the how’s of accounting. Readers consequently learn the mechanics of, say, calculating earnings per share without understanding that statement preparers and users often work at cross-purposes to cope with nonrecurring items and costs of equity-based compensation. This short book’s contribution is to discuss the major why’s of accounting practice.

More Than a Numbers Game was inspired by Arthur Levitt’s landmark 1998 speech delivered at New York University. The Securities and Exchange Commission chairman described the too-little-challenged custom of earnings management and presaged the breakdown in U.S. corporate accounting three years later. Somehow, over a hundred-year period, accounting morphed from a tool used by American railroad managers to communicate with absent British investors into an enabler of corporate fraud. How this happened makes for a good story.

This book is not another description of accounting scandals but rather a history of ideas. Each chapter covers a controversial topic that emerged over the past century. Historical background and discussion of people involved give relevance to these concepts. I show how economics, finance, law, and business custom contributed to accounting’s development. Use of anecdote, example, and light humor make More Than a Numbers Game easy to read.

Thoughts presented come from a career spent working with accounting information. I have designed and used cost accounting systems in manufacturing and service settings, argued with tax and regulatory authorities, and participated in design of compensation systems. Experience has shown me how numbers on paper influence careers, projects, and business prospects.

My credentials include tours of duty in financial statement auditing (auditor at a Big Eight accounting firm), preparation (corporate controller of a Fortune 500 firm), use (general manager with profit and loss responsibility at a corporation plus board member of a nonprofit), and explanation (accounting teacher and investor relations officer). Perhaps most significantly, I witnessed a major audit failure.

Accounting viewed from these perspectives taught me that the so-called language of business is best understood as a collection of dialects. Most accounting books spend too much time on financial reporting. Consideration of the purposes and limitations of cost, tax, and regulatory accounting makes the field more understandable to the informed layperson.

The reader who sticks with the text will be rewarded with a thorough grounding in accounting’s major issues. By the final chapter, he or she should be able to engage in accounting debate on almost any topic. Accounting can be both a vocation and an avocation. It’s fun. Really.

Book prefaces, where authors thank others, seemed vacuous until I tried to put thoughts to paper. This book would not have been possible without generous support offered by colleagues. Marion Brakefield endured endless requests to modify charts. John Burchard and Scott Gould tracked down arcane articles and cases. Jeff Basch, Don Chew, and Tom Forrester provided helpful comments to improve presentation. John Wiley & Sons’ Stacey Farkas, Bill Falloon, Pamela van Giessen, and Laura Walsh coached me with patience as I learned about the world of publishing. Their copyeditors possess a deft touch.

Thanks also to my father, who encouraged an accounting career. I hated my first job but slowly learned to appreciate accounting’s hidden beauty. My grandfather exposed me to the craft of history and taught there are only three ways to know something: you experience it directly, someone tells you, or you figure it out. He also pressed the importance of active voice, strong verbs, and few prepositions.

The Ohio Library and Information Network, which delivered volumes from Ohio’s college and university book collections to our neighborhood public library branch, made research possible in light of concurrent work and family commitments. Finally, my superiors chose not to fire me as I devoted increasing amounts of company time to complete this effort, a further illustration of Michael Jensen’s agency costs.

Opinions and conclusions expressed herein represent personal views. No practitioner, academic, or regulator will agree with all points made in subsequent pages. I took liberties condensing ideas and events to keep this work brief. Responsibility for resulting errors and omissions rests with me.

Chagrin Falls, Ohio

November 2005

1

DOUBLE-ENTRY

What advantage does he derive from the system of bookkeeping by double-entry! It is among the finest inventions of the human mind.

—Johann Wolfgang von Goethe,
Wilhelm Meister, 1824

On Sunday, April 8, 1984, the phone rang in my Hoboken apartment. A Big Eight audit manager, my boss’ boss, shared in a raspy voice that we had an accounting crisis.

Accounting crisis? Jumbo shrimp, gunboat diplomacy, gourmet pizza, and other snappy phrases came to mind. Hey, let’s book another entry.

The manager had learned that a client had amassed a sizable bond position and sustained adverse interest rate changes. Financial statements recently filed with the Securities and Exchange Commission (SEC) made no mention of the investment or holding loss. One could argue that investors relying on the statements had been misled.

My first accounting professor, New York University’s George Sorter, taught there was no such thing as an accounting mistake. Estimates used to make timely journal entries create inevitable misstatement. Errors reverse as more information comes to light. Nothing goes wrong over the infinite life of the firm. Consistent with Dr. Sorter’s teachings, the client’s estimates were indeed corrected.

In addition, the firm reshuffled management, filed restated balances, weathered unflattering publicity, and sustained an SEC investigation. My employer paid a sizable malpractice settlement. And I learned that sterile accounting numbers could make all the difference in the world.

Two decades later, accounting scandal rocked American business. In just 12 months industry giants Enron, Global Crossing, and WorldCom imploded. Arthur Andersen & Company—their auditor, my old employer, and once the planet’s mightiest certified public accountant (CPA) firm—ceased to exist. And Congress enacted the most sweeping securities law since the Great Depression. This spectacular meltdown sparked the following effort to chronicle American corporate accounting’s history from the age of railroads to Sarbanes-Oxley legislation.

Lesen Sie weiter in der vollständigen Ausgabe!

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Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!