“In this bright future you can’t forget your past”
Bob Marley
I like
accounting terms…
It’s funny how we can call differently certain things that seem the same, with the aim to give some spice to our days.
For example, everybody knows that our tangible assets (such as buildings, cars and machines) are victims of depreciation when we prorate its cost over that asset's life.
But if you happen to have a great deal of intangible assets (patents, trademarks, goodwill, etc.) you’d better call it "amortization" in your books.
And wait! Let us not forget the depletion, which refers to the allocation of the cost of natural resources over time such as oil wells, mines and wood.
Now I wonder which of these terms best describe the current situation for us? Our profession has been practically unaltered for almost 500 years until the introduction of computers, and after that, the only major dynamics come from slight changes in accounting norms or obligations in internal controls. For how long can we keep the status quo of our profession? Aren’t we suffering from some kind of devaluation of our purpose in society? And if that’s the case: how should we record it in our books?
If we take into account that our job is clearly based on our
knowledge of the accounting norms, which slowly goes fading away until the end
of our careers, there we may register that as an amortization expense. However, 95% of our job is done
by using computers, ERP programs or filling-in taxes online. There comes the
depreciation. And finally, aren’t humans some kind of natural resources, part
of a greater environment? Now you can deplete me, s’il vous plait.
Let us go briefly over our story to see if we can decide
which accounting line suits us best.
Accountants and auditors (as well as our attorney colleagues)
may be proud to say we are members of one of the first recognized professional
group. Accounting
and law were jointly practiced by the scribes. Will Durant remarks that the first attempts to reduce transactions
to some medium more permanent than memory probably took a semi-mechanical form.
“Some tribes used notched sticks to help the memory or to convey a
message; others, like the Algonquin Indians, not only notched the sticks but
painted figures upon them, making them into miniature totem poles, or perhaps
these poles were notched sticks on a grandiose scale. The Peruvian Indians kept
complex records, both of numbers and ideas, by the knots and loops made in
diversely colored cords; Lao-tse, calling upon the Chinese to return to the
simple life, proposed that they should go back to their primeval use of knotted
cords.”
A more formal recording system of
transactions commenced when trade between tribes and cities increased. Flinders Petrie, a famous British archeologist, found
graphic symbols on shards, vases and stones in the prehistoric tombs of Egypt,
the Near East and as far West as Spain. Most of three hundred different signs
were common to all countries. He realized these were not pictures but
mercantile symbols for various types of goods, quantities and business
memoranda.
They constitute our
first written language!
Of
course that now we have a way to register transactions, it won’t be long for the
Auditors to step in and deliver their first invoice. Though maybe in those ages
they only charged a sheep and some food for the winter, instead of
6-or-7-digits bills.
An early Mesopotamian civilization, the Sumerian recorded commercial
transactions on stone dating back to 3.600 BC and on clay tablets beginning
about 3,200 BC. It is here that the auditor first gives concrete evidence of
his existence and that we find the first examples of internal control. It was
customary for summaries to be prepared by scribes
other than those who had provided original lists of payments. Further, the
documents of the period reveal tiny marks, dots, ticks, and circles at the side
of the figures, indicating that checking bad been performed.
A
similar situation occurred in Egypt
in the Pharaoh’s central finance department, where there were at least 3
scribes: one auditing the recorded papyrus of the other two.
In
both civilizations, the scribes were among the very small percentage of the
population trained in reading, writing and arithmetic, and accordingly occupied
positions of importance both in business and society.
About 549 BC, Persia became one of the biggest
empires in the Ancient World. Darius, a great organizer, used government
scribes called the "king’s eyes and
ears," to perform an important function in the control of his
extensive empire. For convenience of administration the empire was sectioned
into satrapies each with a "satrap" as the civil administrator
and tax collector. Government of these provincial units was divided; the troops
were under a general and a royal secretary performed the duties of an internal
auditor, reporting to the king's minister on the activities of the satrap and
the general. The royal secretary accounted for taxes collected and remitted to
the king. The "king’s
eyes and ears," accompanied by a military escort, made surprise audits
of the affairs of the provinces.
And
here we have the origins of the IRS!
Years
went by and we found similar figures in the main civilizations:
In
the middle ages, accounting, along
with the other arts, suffered a decline because of the general disorganized
condition of government and the economy throughout Europe. Gradually, however,
accounting was reestablished.
The
accountancy methods of imperial Rome,
lost in Western Europe in the seventh century, continued in Constantinople,
were adopted by the Arabs and were revived in Italy during the Crusades. A fully developed
system of double-entry bookkeeping
appears in the communal accounts of Genoa in 1340.
Pacioli’s system included most of today's
accounting routines such as the use of memorandums, journals and ledgers. His
ledger included assets, receivables and inventories, liabilities, capital,
income, and expense accounts. He described the year-end closing entries and
proposed that a trial balance be used to prove a balanced ledger. He also made
reference to the certification of books, ethics and cost accounting.
There would be little modification to
Pacioli's system for the next 500 years,
until the advent of computers change the whole nature of accounting.
The present day trial balance sheet did not
get its form until 1868 and the income statement was developed before WWII. In
the 1980s, statements of financial position were developed with the purpose to
provide relevant "information about
the operating, financing, and investing activities of an enterprise and the
effects of those activities on cash resources" (CICA 1540).
Even though the shift in accounting
technology started with the introduction of Visical (1978), a simple spreadsheet program, the real revolution
started in 1998…
After the introduction of QuickBooks, many
ERP systems broke through in our offices, and many famous names started to pop
up: SAP, Oracle, Sage, Dynamics, Intacct, Peachtree, etc.
The double-entry accounting system, which used
to rely on historical information and traditionally provided financial reports
and statements two weeks after the month-end closing period, was replaced by
immediate information at the push of a button.
Under this new scenario, accountants must take a more active
role in the organization. We cannot keep saying that “we have no time”. Maybe our parents and grandparents could shield
themselves behind that excuses, when they had to fill in ledgers manually and
take weeks to issue a financial statement.
Accountants must turn into business or financial consultants
more than a simple data processor. It is vital for us to:
- Interpret data
- Give good financial and tax advice
- Suggest business decisions to maximize business profitability
- Understand and be involved in our client’s business
- Recommend best-practices to avoid fraud
- Keep up-to-date with new practices and accounting norms
- Empower our teams to increase motivation, reduce turn over and avoid drainage of knowledge
So now the question is, are we prepare to face the new tunes
of our profession? Or shall we wait another 500 for another breakthrough to
wake ourselves up from our lethargy?
Sources:
Most of the notes here were taken from "Antecedents of the
Accounting Profession" by Willard E. Stone
http://www.accounting-degree.org/technology/
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