Author: Robert Hodge
Publisher: Cengage Learning
When Bruce Wasserstein, the CEO of Lazard, was interviewed by Fortune magazine in October 2008, he warned that: "What we see is the world getting much worse." This important trend, he thought, could be attributed largely to accounting rules, because they allow banks to overstate their asset values - "accounting has become a new exercise in creative fiction". In January this year, a commentator described the loss announced in the 2008 accounts of Royal Bank of Scotland as a "mind-boggling amount ... a hammer blow ... really beyond the imagination". The credit crunch has done many bad things, but it has also helped accounting to redefine itself as moral subversion and turned annual reports into blood-curdling horror preying on the nerves and the synonyms of the financial media.
But Robert Hodge's Accounting: a Foundation gives no hint that this has happened. Accounting, Hodge says, is there to enable investors to "strengthen their position, reduce their anxieties and impose some degree of control over their directors and (the) managers they appoint". Accounting standards are there to "help accountants use their judgment wisely and consistently". The possibility that accounting standards might help to reduce control and ultimately impose anxieties - as in fair value accounting, which allowed banks to write up the value of securities and then pay dividends (and bonuses) out of unrealised profits - is not admitted.
It is very good to teach students to debit and credit accurately, and Hodge supplies a series of what he calls drills to reinforce their technique, but at no point does he give them a hint of the size and complexity of the reports that result from compiling individual transactions, nor of the ways in which a report can transform bookkeeping data. Mark-to market accounting is one of these transformations; another is the creation and reporting of intangible assets such as product brands. This practice, based on a fluent literature about the worth of consumer relationships, has the potential to create a complex muddle, with hypothetical brand values based on projected sales or profits and projected lives in the balance sheet alongside the costs of plant and machinery. Again, Hodge has nothing to say apart from noting that saleable intangibles "will have a value that can be recognised".
It would help to let students see a set of published financial statements, or extracts from these, to understand how companies report, not through a balance sheet of a dozen lines but through a massive collection of quantitative and descriptive information (some 250 pages long for a UK bank, for instance). Without this link, Hodge's text leaves students with a view of accounting as a craft skill, a series of problems in debiting and crediting.
Who is it for? First-year undergraduates.
Would you recommend it? Yes, but not as the only course textbook.