Comment by mathattack | Hacker News Reader

Comment by mathattack | Hacker News Reader

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There are lots of accounting bugs like this. The challenge is Accounting isn't as cut and dry as people think.

For example - how long do you depreciate (write down the value of) an asset that you buy? If you depreciate it too slowly, it might make it seem like you're more profitable than you really are.

Another example - If you buy a financial product to hedge a risk vs to speculate, the accounting treatment is different. (In the latter you need to mark it to market more frequently)

One more... If you're a bank, and you make a loan which you intend to hold until maturity, the accounting treatment (mark to market) is different than if you intend to sell the loan.

Accounting is more than just consistent rules followed by the green eyeshades. :-)

There are two immediate existing business opportunities:

1) Accounting companies (E&Y, Deloitte, etc) help execs understand all these rules. Their advisory (what can you do?) work is more profitable per partner than their audit (what did you do?) work.

2) Investment funds do detailed analysis of accounting statements to make "Apples to Apples" comparisons of companies, then analyze their equity and debt valuations to see if they are properly priced. Sometimes this goes by the name of "Relative value" or "Long/short".

Standing ovation.

People think accounting is just sums -- it's not. It's the interpretation of sums. Balance sheets and P&L statements don't follow some law of nature; they are careful crafts that try to convey specific concepts about how a company views itself and how it thinks other people should view it. Like all things written by humans, these documents can lie, misdirect, and bend the truth to an agenda. It takes skills to craft them and to decipher them.

Accounting is "just sums" in the same way being a playwright is "just writing". It's a shame that formal education seems to fail at communicating this to the general public; Western society is based on capital but few people understand where and how this capital actually is.

The failure you speak of is by design, I think. Discovering that there aren't hard and fast standards for how to declare everything and that balance sheets can be made to lie is rather shocking to most people.

Hard and fast standards would just re-incentivize gaming the system on the operations side. Accounting is very, very difficult. The best answers often include subjective decision making.

Consider; your project managers claim to be done with 80% of a project. You've billed and been paid for 50%. One lone ranger claims the project is only 30% done. At completion, the project will require a an expensive piece of hardware from you to launch. You have three of these pieces of hardware in stock; the first two you bought cost $50k. The last one cost $150k. The market value is $100k, and the customer will pay $100k at launch.

There is no one answer as to how to book this. You have three choices for the inventory booking (FIFO, LIFO, AVCO) -- the first one will at launch book you a net profit of $50k, the second a loss of $50k, and the last one a profit $17k or so. And, you may decide to book the expense of the hardware now, depending on the contract, so it might look like an expense until you actually launch.

If you are accrual basis, you have at least two ways to book your current revenue; 80% or 30%. Depending on your internal personnel costs, that may yield a profit or a loss. Of course, if some of the project time has been spent on things that could yield benefit to the company later, you may move some of it over to an R&D budget,...

The decisions go on. They are neither trivial nor are they unlinked from reality -- answering the questions like 'did we make money on this project?' and 'how much should we sell the hardware for?' are basic questions that yield 'it depends' type answers.

So, yes, people lie on balance sheets, all the time. But, truth is often hard to achieve for even a very solid financial officer and good management team.

It is by design but there is no way to come up with a truly 100% objective system. There are real reasons to have judgment involved. (Hard and fast rules in any subject always create strange exceptions)

>For example - how long do you depreciate (write down the value of) an asset that you buy? If you depreciate it too slowly, it might make it seem like you're more profitable than you really are.

It isn't supposed to be ambiguous, though it sometimes is (and that's a problem). At least in Canada, we have relatively straight-forward rules to follow for allowable capital depreciation rates, as seen here:

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/cptl/c...

It becomes an issue if the assets themselves depreciate faster or slower than the rules suggest.

Appreciate your informative commentary.

Bit of a tangent, but this makes me think about how personal credit scores are calculated. I find infuriating the exact formula isn't public knowledge.

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