Since the 19th century, consistent principles of financial reporting have enabled investments in businesses run by strangers. This, in turn, has led to the rise of publicly traded corporations.
Public company accounting assesses the financial health of a business as an ongoing concern, not how much money it has. That philosophy can cause some confusion, but like a photo taken from a moving car, each "snapshot" of a company's financial status will incrementally describe different facts, assumptions and realities.
Accounting is a remarkably sophisticated discipline, which takes into account the difficulty of accurately assessing a complex, organic entity.
Consider the metaphor of medical care. A doctor monitors a patient's heartbeat, temperature and blood pressure, and the ratios one with another, rather than rely on a single indicator of health.
Similarly, modern accounting is a multidimensional system for financial record-keeping, a rigorous yet flexible "gestalt" framework for assessing the health of a business.
A financial statement records revenue, profits and cash flow in and out of the company. Any of these measures can be manipulated. The three together make it more difficult.
Accounting insists that transparency is achievable through this imperfect system, even if perfect visibility is not. In doing so, it implicitly rejects postmodern notions that objective assessment is futile.
Indeed, the "pro forma" accounting practices of the dot-com era, which justified arbitrary calculations of profitability, were essentially postmodern accounting. Though intellectually complex, the end goal was to blur the financial status of the company, rather than illuminate it.
Accounting's battle with complexity has had a direct connection to society's ability and willingness to assume risk in the face of the unknown.
The appropriate application of accounting standards is not always obvious. Recent issues of contention include the expensing of employee stock options and how to assess the value of corporate intellectual capital. But the guiding principle is that the financial statement should enhance the visibility, rather than obscure, the fiscal status of the firm.
Cheifetz, a Twin Cities executive recruiter, can be reached through catalytic1.com.
