Ehsan H. Feroz
University of Washington, Tacoma-Milgard School of Business; Vernon Zimmerman Center, University of Illinois; US Government Accountability Office
October 23, 2008
Critical Perspectives on Accounting, Vol. 7, p. 699, 1996
I highlight the simplicity as well as the misleading aspects of the double-entry bookkeeping and the Generally Accepted Accounting Principles (GAAP), especially for those who might naively believe that accountants "always tell the truth and nothing but the truth." The implicit assumptions of the alignment of managerial incentives with those of stakeholders (notwithstanding the agency problems well documented by the exegesis), and the degrees of managerial discretion provided by both the U.S. GAAP and the emerging body of International Financial Reporting Standards (IFRS) are sufficiently large so that even a 'camel' can be described as a 'horse' with appropriate disclaimers.
Ever since Rev. Paciolli passed down the double-entry bookkeeping framework, the accounting profession has rarely seriously addressed the issue as to whether this simplistic framework is the best way to record some rather very complicated and sophisticated transactions such as the accounting for derivatives involving some rather speculative transactions. Occasional calls for revisiting the double entry bookkeeping by the late Abraham Briloff, MORE DEBITS THAN CREDITS and Yuji Ijiri, MOMENTUM ACCOUNTING AND TRIPLE ENTRY BOOKKEEPING among others were greeted with a cold response.
After all, there is little managerial incentive to change a recording device that allows so much hidden discretion for managers. Even worse, it leaves the naive investors (99%) thoroughly confused about the intricacies of elaborate managerial accruals and deferrals taught painstakingly in an accounting degree program! Of course, from the point of view of the proponents of the very efficient market hypothesis (EMH), market can appropriately discount for any flaws in the accounting recording or measuring device. However, the empirical evidence to date is at best inconclusive. This limerick hopes to stimulate some serious discussions about the utility of the double-entry book keeping framework in today's environment of sophisticated financial engineering and principles based fair value accounting.
Keywords: Double Entry Bookkeeping, GAAP, IFRS, SEC, Agency Theory, Cognition, Communication, Deception, Linguistics, Numbers, Art, Critical Pedagogy, Accounting History, History and Philosopy of Science, Financial Literacy
JEL Classification: M41Accepted Paper Series
Date posted: October 28, 2008 ; Last revised: July 29, 2014
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