History of accounting shows what happens when numbers are ignored

From Louis XIV to Lehman Brothers, history serves up lessons on the need to balance the books, yet grand visions all too often get in the way

PUBLISHED : Tuesday, 06 May, 2014, 1:22pm
UPDATED : Friday, 09 May, 2014, 7:14pm

Even among practitioners of the much-mocked profession, a brand new book about the history of accountancy is unlikely to stir much interest - yet it should, because it is really interesting.

Jacob Soll's The Reckoning: Financial Accountability and the Making and Breaking of Nations does what it says on the tin. In other words, he shows the crucial role played by the development of accountancy in the management and indeed mismanagement of government and businesses.

In Hong Kong, we seem to be going backwards in the process of achieving accountability

Soll points to Luca Pacioli, a Franciscan friar and mathematician, as the father of the first system of double-entry accounting (for those at the back of the class, this simply means the process of comparing income and expenditure in a single set of accounts).

In 1494, Pacioli elaborated the benefits of this form of accounting and provided a systematic method of implementing it, although leading European merchants had in effect been practising similar accounting practices for almost two centuries.

Jean-Baptiste Colbert, finance minister to Louis XIV, took things to another level in the 17th century by bringing double-entry bookkeeping into the realm of public affairs. This orderly arrangement of the nation's coffers was invaluable to King Louis as he strove to enhance his own and his country's role in the world.

The aftermath of Colbert's efforts would leave even a novelist hard pressed to contrive a more perfect example of the chasm between providing the means of fiscal management and the reality of how these means can be cast aside. After Colbert died, Louis allowed his authoritarian tendencies even fuller expression, unhindered by the restraints of his faithful servant. The king viewed his mission to be more important than the resources available to achieve it.

The state's coffers were rapidly depleted, with the king tolerating no criticism. Accountability was not a word that had any meaning for this absolute monarch.

Four centuries on, how little has changed as governments throughout the world empty their coffers, and large companies, masquerading as public entities, find that balancing the books is a tiresome irrelevance compared with their mission of building world-dominating behemoths like Enron, not forgetting banks like Lehman Brothers. The key word is accountability, to which can be added the equally vital concept of transparency.

Governments and public companies are supposed to conduct their affairs in the full glare of public scrutiny, but these institutions regularly fall foul of a disease that starts with evasion, moves onto a level of cover-up and all too often ends with outright fraud.

Most worryingly, the information often sits unnoticed among the thick bundles of accountancy records but is ignored because of a lack of diligence or outright stupidity by those who choose to believe the story spun by grand public figures rather than the boring sets of figures that prove the story's faults.

In Hong Kong, we seem to be going backwards in the process of achieving accountability, as scandal after scandal emerges in the public sector and those responsible are quick to shift blame or hide the evidence on the most dubious of grounds. As ever, it is left to the average Joe to pay the price and pick up the tab at the end of the day.

As a cub business reporter at the London-based Investors Chronicle, I was often frustrated by the editors' frequent questioning of my stories on the grounds that I had not paid sufficient attention to the company accounts. The editor, Michael Brett, was not an accountant by training but had an extraordinary forensic ability to look at a set of accounts and extract all the inconsistencies. It took some time for me to fully appreciate the value of his approach to reporting on the affairs of listed companies.

Today I find myself running companies that, at this time of year, are busy submitting their accounts to auditors before presentation to the lovely people at the Inland Revenue Department.

Some of the auditors' queries can be tiresome, and in a business characterised by a high number of small cash transactions, an awesome amount of paperwork is generated.

However, the auditors have a job to do, and the irritation they cause is generally beneficial at the end of the day.

My companies are privately held, but like many other people, I am also a shareholder in public companies that should be operating at a rather more elevated level of transparency. Yet they get away with all sorts of mischief, because we, the shareholders, are not sufficiently vigilant in ploughing through their accounts.

Attending shareholder meetings in Hong Kong is also largely a waste of time if you think these occasions are suitable for enhancing accountability, as the highlight of these events is generally provided by a banqueting table loaded with free drinks and snacks

When Compte Rendu du Roi was published in 1781, containing the first public record of the French state's financial records, it was a bestseller. Readers were fascinated by what it revealed.

Unfortunately, it seems unlikely Soll's book will achieve the same result.

Stephen Vines is a Hong Kong-based journalist and entrepreneur