Accounting’s Golden Age is Over

When I first heard of the golden age of philosophy, I wondered how there could be such a thing. How could it be that the century of the most outstanding work in a field would be followed by centuries of mediocrity? You would think that the ancient secrets were lost or that people lost interest in the field, but neither is the case. As I eventually learned, the golden age ended when people got so good at using the tools of philosophy — tools such as deductive reasoning and dialog — that they started to use them in ways that undermined the very purpose of philosophy. A skilled philosopher can apply logic to support any assertion at all. Philosophers realized they could pick the conclusion they wanted, and then construct the logical premises that would “prove” the conclusion they had started from. One of the most popular schools of philosophy used the “fact” that the universe is made of atoms to “prove” their belief that a man should pay attention only to his own selfish concerns. The real conclusion to draw from that kind of logic is that the tools of philosophy are not so infallible that they can help you arrive at the true nature of things if you twist them around to the point of applying them in reverse, starting with the conclusion and working backward from there. Indeed, when this kind of thinking became the norm in philosophy, the field had lost its way, and the golden age was over.

If it is hard to imagined how this could have happened so many years ago, you might want to take a look at a similar historical event that is happening right now: the end of the golden age of accounting. You need only look at the latest spectacular corporate bankruptcy to see that accounting, specifically public accounting, has lost its way. The same way that philosophers twisted the techniques of philosophy, accountants are now applying the tools of accounting in reverse, and doing so in a way that undermines the purpose of accounting.

The public accounting of a corporation is supposed to be a way to cut through the usual hype and bluster of business to provide an accurate portrayal of the corporation’s financial condition. The tens of thousands of accounting standards, principles, and rules are supposed to ensure that the resulting financial statements are accurate.

This approach worked for the last two or three centuries, but no more. Accountants are so skilled at the tools of accounting that business executives can simply decide what financial condition they want their financial statements to show, and the accountants can use the rules of accounting to create exactly that. The corporation’s financial statements no longer need to have the slightest connection to the corporation’s actual financial condition. Accounting, to be blunt about it, has been swallowed whole by the business hype and bluster that it was originally intended to overcome. This is most shockingly evident in a fabulously profitable business that is suddenly found to be bankrupt, but on closer inspection, you can find the exact same misdirection at work in businesses that have not been so boldly drained of cash by their managers. As long as they avoid bankruptcy, their true financial condition can remain unknown. And when that statement can be made, accounting has become as empty an exercise as philosophy became when its golden age was over.

It may still be possible to learn the financial state of a corporation, but accounting, even with the reforms that have been suggested, will no longer provide that information. When the golden age of philosophy was over, people who wanted to arrive at the true nature of things still did so, at least sometimes, but they could no longer use deductive reasoning to do so. To this day, deductive reasoning is not a reliable way to arrive at the truth — and in the current age, we must face the new reality that accounting will never again be a reliable way to arrive at the truth. No reform can change this. The high level of accounting skill is what created the current state of accounting, and skill only increases. Amid the current call for accounting reform, we must not delay in searching for alternatives to fill the void that accounting has left.

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