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More Than a Numbers Game: A Brief History of Accounting
The world certainly suffers no shortage of accounting texts. The many out there help readers prepare, audit, interpret and explain corporate financial statements. What has been missing is a book offering context and discussion for divisive issues such as taxes, debt, options, and earnings volatility. King addresses the why of accounting instead of the how , providing practitioners and students with a highly readable history of U.S. corporate accounting. More Than a Numbers A Brief History of Accounting was inspired by Arthur Levitt's landmark 1998 speech delivered at New York University. The Securities and Exchange Commission chairman described the too-little challenged custom of earnings management and presaged the breakdown in the US corporate accounting three years later. Somehow, over a one-hundred year period, accounting morphed from a tool used by American railroad managers to communicate with absent British investors into an enabler of corporate fraud. How this happened makes for a good business story. This book is not another description of accounting scandals. Instead it offers a history of ideas. Each chapter covers a controversial topic that emerged over the past century. Historical background and discussion of people involved give relevance to concepts discussed. The author shows how economics, finance, law and business customs contributed to accounting's development. Ideas presented come from a career spent working with accounting information.
256 pages, Hardcover
First published January 1, 2006
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Displaying 1 - 9 of 9 reviews
September 30, 2013
I bought and started to read this book while in junior year when Intermediate accounting classes were causing some pain. These classes introduced a large amount of complicated and obscure rules, and I refuted to accept them without deeper explanation of why they are what they are. Thus, in the hope to gain some insights of accounting, I started to read history of GAAP in the US, and it certainly helped me a bit.
This book covers the historical development of key FASB concepts as well as issues surrounding accounting aka. corporate financial reporting in the US. Some of these topics are familiar among accounting students and professionals, such as the origin of doubt entries, LIFO vs FIFO, disclosure and treatments of inflation, debt and intangibles. One can distinct this book from other accounting story books in a way that social forces attribute to shaping the accounting rules are given adequate attention or even thorough examination in this book. Among them, I personally found economical, legal, business and investment forces as the most prevailing ones to the establishment of these rules, since they are fundamentally related to financial reporting.
Bookkeeping practices are the ancestors of modern accounting rules. The former has a long history rooted in the origin of commerce in Western history. Later, the origin of modern financial reporting accompanied the development of private corporations. Private business entities seeking financing could sell their assets to the public, and then the public could trade floating shares representing the ownership to these assets. But, all of these security activities and liquidity desired by the market had to be safeguarded by public scruntization of these companies. Over the years, quantitative methods of examination were preferred to qualitative methods, since the formers could partially eliminate management's subject and self-interested opinion and gave rise to the first public accounting rules. Thus, public accounting essentially involve rules that quantifies business communication to investors, market, regulators and the general public.
However, in 19th century when US security market started to development and demand for auditing surged, auditing professionals heavily engaged in practice of summarizing accounting transactions into simple terms. Although variation of such practices still prevail to some extent today, In my humble opinion, this phenomenon at least partially explained why the investment classic books from that period or later period such as "Security Analysis" or "The Intelligent Investors" would emphasize on EPS, PE earning estimates, whiles modern equity valuation involves DCF-alike more fundamental approaches. This was also reviewed in later discussion of double entry.
The problems associated with aggregating accounting information into simple terms came to life when several circumstances emerged: conformance of different practices by various auditing firm was needed, management bowed to pressures of increasing earning estimates and inflation and future-oriented adjustments are needed for accurate reporting which considered the advance in economic. These problems existed throughout the history of accounting and contributed to well-known financial turmoils in history.
For the topics depicted in the book, I selected three interesting ones, and gave my amateur reviews of each in the following.
Chapter 1 deals with double-entry.
Chapter 9 deals with volatility.
Chapter 11 deals with debt.
In the book of "The Decline of the West (1928)" German philosopher Oswald Spengler described double-entry accounting as the decisive event in European economic history. However, the philosophy of double entry evolved over the years. In 1894, the industries started to adopt the practice of classifying assets in descending orders of liquidity. Thus balance sheets could be more useful to creditors.
In 1920s, with increasing stock ownership, another evaluation took place. Income statements became more important to investors than balance sheets for evaluation purposes. At that time, professionals started to view balance sheets as holding banks of unallocated debits and credits yet to flow through future income statement. By the mid-twentieth century, the US accounting firms treated computation of earnings for valuation as their primary business, and accounting earnings became the dominant valuation information for stock prices.
For volatility, it refers to reporting volatility, the variation of reported figures, especially earnings. Managers generally believed that a smooth earning history is favorably viewed by the market, and they would utilize accounting knowledge to polish earnings. But regulators, investors and the public want the true stories of earning, including fluctuations. So the issue of volatility can be seen as a battle between management and outside stakeholders.
Historically, three main schemes affected report volatility. They are, in my opinion, also the most difficult topics in the intermediate accounting classes that I attended. They made low level accounting classes look like a child play.
The first one is fluctuation due to exchange rate. For any companies that have oversea operations or trading activities, they are all subject to gain or loss due to exchange rate fluctuations. In 1975, FASB mandated Statement 8, which required reporting exchange gain and loss in the income statement. Thus, currency market can greatly influence earnings without affecting cash flows. To avoid the currency risks, companies often engaged in currency forward to hedge risk and smooth earnings trends.
A second scheme of reporting volatility regards interest rates. A slight change of Interest rates can significantly affect the size of employee pension obligation. Defined pension plans tend to have long time span and discounted indirectly based on risk-free interest rates. FASB statement 87 did a good job smoothing such big swings. It permitted companies to spread changes in pension plans, allocate actuarial gains and losses over many years and use the "accumulated other comprehensive income" section of shareholders' equity as a holding tank so that adjustments did not flow through the income statement immediately as they occurs.
A third case concerns valuation of financial securities. It involves mark to market practice. Initially, financial securities tended to valued by historical costs. But this practice invited problems. Management can make profit by selling securities at favorable time so as to smooth earnings. To dodge managerial opportunism, FASB regulated three lanes of security classification for management to choose and stay in it. If management intends to sell a security in the near future, the asset will be classified as "trading" and will be marked to market, and any unrealized gain or losses will be reported. But most firms hold securities not for trading purpose, and therefore, they can put securities in "held to maturity" category, without worrying about their changing market values.
Overall, I have to admit that existence of accounting jagons would narrow the readership for the book. However, the expository narrative style and chapter selection with distinct topics allow no-accounting-background readers to select a particular topic they feel interested in and understand the creation and evolution of the topic without knowing its technicality.
This book covers the historical development of key FASB concepts as well as issues surrounding accounting aka. corporate financial reporting in the US. Some of these topics are familiar among accounting students and professionals, such as the origin of doubt entries, LIFO vs FIFO, disclosure and treatments of inflation, debt and intangibles. One can distinct this book from other accounting story books in a way that social forces attribute to shaping the accounting rules are given adequate attention or even thorough examination in this book. Among them, I personally found economical, legal, business and investment forces as the most prevailing ones to the establishment of these rules, since they are fundamentally related to financial reporting.
Bookkeeping practices are the ancestors of modern accounting rules. The former has a long history rooted in the origin of commerce in Western history. Later, the origin of modern financial reporting accompanied the development of private corporations. Private business entities seeking financing could sell their assets to the public, and then the public could trade floating shares representing the ownership to these assets. But, all of these security activities and liquidity desired by the market had to be safeguarded by public scruntization of these companies. Over the years, quantitative methods of examination were preferred to qualitative methods, since the formers could partially eliminate management's subject and self-interested opinion and gave rise to the first public accounting rules. Thus, public accounting essentially involve rules that quantifies business communication to investors, market, regulators and the general public.
However, in 19th century when US security market started to development and demand for auditing surged, auditing professionals heavily engaged in practice of summarizing accounting transactions into simple terms. Although variation of such practices still prevail to some extent today, In my humble opinion, this phenomenon at least partially explained why the investment classic books from that period or later period such as "Security Analysis" or "The Intelligent Investors" would emphasize on EPS, PE earning estimates, whiles modern equity valuation involves DCF-alike more fundamental approaches. This was also reviewed in later discussion of double entry.
The problems associated with aggregating accounting information into simple terms came to life when several circumstances emerged: conformance of different practices by various auditing firm was needed, management bowed to pressures of increasing earning estimates and inflation and future-oriented adjustments are needed for accurate reporting which considered the advance in economic. These problems existed throughout the history of accounting and contributed to well-known financial turmoils in history.
For the topics depicted in the book, I selected three interesting ones, and gave my amateur reviews of each in the following.
Chapter 1 deals with double-entry.
Chapter 9 deals with volatility.
Chapter 11 deals with debt.
In the book of "The Decline of the West (1928)" German philosopher Oswald Spengler described double-entry accounting as the decisive event in European economic history. However, the philosophy of double entry evolved over the years. In 1894, the industries started to adopt the practice of classifying assets in descending orders of liquidity. Thus balance sheets could be more useful to creditors.
In 1920s, with increasing stock ownership, another evaluation took place. Income statements became more important to investors than balance sheets for evaluation purposes. At that time, professionals started to view balance sheets as holding banks of unallocated debits and credits yet to flow through future income statement. By the mid-twentieth century, the US accounting firms treated computation of earnings for valuation as their primary business, and accounting earnings became the dominant valuation information for stock prices.
For volatility, it refers to reporting volatility, the variation of reported figures, especially earnings. Managers generally believed that a smooth earning history is favorably viewed by the market, and they would utilize accounting knowledge to polish earnings. But regulators, investors and the public want the true stories of earning, including fluctuations. So the issue of volatility can be seen as a battle between management and outside stakeholders.
Historically, three main schemes affected report volatility. They are, in my opinion, also the most difficult topics in the intermediate accounting classes that I attended. They made low level accounting classes look like a child play.
The first one is fluctuation due to exchange rate. For any companies that have oversea operations or trading activities, they are all subject to gain or loss due to exchange rate fluctuations. In 1975, FASB mandated Statement 8, which required reporting exchange gain and loss in the income statement. Thus, currency market can greatly influence earnings without affecting cash flows. To avoid the currency risks, companies often engaged in currency forward to hedge risk and smooth earnings trends.
A second scheme of reporting volatility regards interest rates. A slight change of Interest rates can significantly affect the size of employee pension obligation. Defined pension plans tend to have long time span and discounted indirectly based on risk-free interest rates. FASB statement 87 did a good job smoothing such big swings. It permitted companies to spread changes in pension plans, allocate actuarial gains and losses over many years and use the "accumulated other comprehensive income" section of shareholders' equity as a holding tank so that adjustments did not flow through the income statement immediately as they occurs.
A third case concerns valuation of financial securities. It involves mark to market practice. Initially, financial securities tended to valued by historical costs. But this practice invited problems. Management can make profit by selling securities at favorable time so as to smooth earnings. To dodge managerial opportunism, FASB regulated three lanes of security classification for management to choose and stay in it. If management intends to sell a security in the near future, the asset will be classified as "trading" and will be marked to market, and any unrealized gain or losses will be reported. But most firms hold securities not for trading purpose, and therefore, they can put securities in "held to maturity" category, without worrying about their changing market values.
Overall, I have to admit that existence of accounting jagons would narrow the readership for the book. However, the expository narrative style and chapter selection with distinct topics allow no-accounting-background readers to select a particular topic they feel interested in and understand the creation and evolution of the topic without knowing its technicality.
March 15, 2019
I honestly believe that every accountant should read this book. The knowledge of the history of our profession, and the events that led us to where we are now, will shed light on how standards are set, and why they should be set and for whom. And more importantly a sense of pride in what we are doing.
January 7, 2016
Is this a riveting novel? No. Is this something that will change the way you look at the world? Yes. If you realize that accounting is (for better a worse) a staggering part of your world. Told through theory, history, and casebook examples, you'll understand that accounting is not a boring group of geeks sitting around, but is a theory driven world of choices, often with consequences and - just as interestingly - NO consequences...
Read it and understand the world better. Then - as I intend to - read it again to understand the understanding better.
* - Reserved for nonfiction. Worth a read if you're interested in the subject. Check out from library.
** - Good. May be inconsistent and flawed, but overall worth a read if you're in the mood for that genre. Check out from library.
*** - Very good. Recommended as a book that is either wonderfully written, informative, challenging, beautiful... but not all of the above. Check out from library or buy on Kindle.
**** - Great. Go out and read.
***** - Classic. MUST READ and should be on your bookshelf
Read it and understand the world better. Then - as I intend to - read it again to understand the understanding better.
* - Reserved for nonfiction. Worth a read if you're interested in the subject. Check out from library.
** - Good. May be inconsistent and flawed, but overall worth a read if you're in the mood for that genre. Check out from library.
*** - Very good. Recommended as a book that is either wonderfully written, informative, challenging, beautiful... but not all of the above. Check out from library or buy on Kindle.
**** - Great. Go out and read.
***** - Classic. MUST READ and should be on your bookshelf
January 2, 2025
I thought this an exceptional accounting book. I began my own accounting textbook with the suggestion one should read history, and this history explains the difficulties in accounting, particularly financial accounting--the type that Wall Street runs on. It gives insights on the other types of accounting, tax, and cost though not much on statutory which is slightly different than financial. I would recommend this for any serious accounting student as it will give context to the emphasis placed on different subjects through an accounting curriculum.
June 4, 2010
Invaluable information on the history of Accounting in the US. Takes a look back at the situations throughout time that resulted in some of the FAS pronouncements we have today; and why we have the CPA license and the AICPA. An informative journey from the dawn of double entry bookeeping to the scandals of 2001. A must have for every accountant and a must read for every accounting student
January 13, 2023
Good to read history of whatever you do for a living
Read
January 3, 2026Because if you’re only going to read a single digit number of books in a year, might as well make one of them a history of accounting.
Want to read
June 23, 2012Business Week Poolside MBA
January 28, 2013
The least boring history of modern accounting that I've read. Takeaway: Most money numbers are magical. But not as magical as they used to be.
Displaying 1 - 9 of 9 reviews