Blaming the Credit Crisis on Double Entry Accounting
Sigurd Rinde believes that double entry accounting is a root cause of the current economic calamity. He's got a point. Check this out:
[except – read the whole post here]
Is there a root cause? And if so, why is it not discussed?
So why is it not discussed? Because sometimes we take some things for granted, we cannot imagine the world without that something, we in fact forget or even cannot answer this simple question:
What assumptions are we making that we do not know we’re making?
And the root cause could be what? Allow me to posit that it is:
Not the accounting reports as such, I’m fine with those, it’s the method of capture and representation of facts that I see as the culprit.
Double Entry Book Keeping uses transaction representation to capture and store "what happened", the ubiquitous invoices, bank statements and many more types of paper based or electronic documents. When captured the representation is assigned as per accounting principles and rules to a single "account", or slot if you will. Those principles and rules are differing from place to place of course making it all so much easier (insert hollow laughter).
This how far that technology has come in 515 years.
With that in hand reports can be produced – cash flows, P&Ls, balance sheets and more.
- That is how the gentlemen at Parmalat could use Tipp-Ex [white-out for those of us in the USA] on a piece of paper and suddenly show that they had in excess of € 4 Billion on some Cayman bank account. Except a few extra naughts [zeros] on one piece of paper does not make much sense the day you need the cash.
- That is how a few well placed misplacements or closed eyes at Satyam could make them pretend to be much richer than they were.
- That is how reports has errors, always, and is delayed, always, making the whole thing a charade similar to driving a car by a dirty and cracked rear view mirror.
- That is how layers of rubber stamping or at best, wild guessing using statistics, by rating agencies is needed to give a whiff of reality for the nifty Wall Street repackaged packages – the quality of which we now know too well.
- That is why changes to a house owner's economic status never have a chance to trickle through the layers of CDOs and whatnots all the way to the holder of the debt in some far away municipality on the other side of the world.
- When you keep the same information in different places, in different formats, you will, and be in no doubt – you will have errors and doubt. To fight that queasiness we have the usual band aid mechanism named CPAs, reconciliation and regulation.
Be sure to catch the discussion at Dennis Howlett's Irregular Enterprise, too.