Counting on Trouble (Part 2)

So what is wrong with accounting?

I know. As soon as I mention accounting, most people’s eyes glaze over. It’s like those dreadful, interminable Algebra 2 classes: the teacher talked to the board and went on and on and on while everyone else got to go outside and you were stuck with this boring class forever! Or that’s what it seemed like. And accounting seems like that.

The problem is there are these really strange rules in Accounting-land. It’s like Math-world, only it pretends to be part of our everyday life. For example, people in business are always trying to control risk. One of the big risks in international commerce is currency fluctuation. So companies purchase or sell foreign currencies on a forward basis, or even enter into long-term swap agreements.

But some firms have used these contracts to speculate. (I know: you’re shocked, shocked.) When things went wrong, they hid their losses temporarily in some hedging reserve or deferred payment bucket. Eventually, though, the truth came out and investors got hurt.

So the accounting board has set up elaborate regulations governing when a contract is a hedge and when it’s a speculation. There’s even a small sub-industry to help firms deal with the mystical world of swap-land, so that they don’t fall afoul of the rules.

The problem with accounting is people want simple answers when life is too complicated for simple answers. What gets measured gets done, and we need to figure out how to put investors back in charge of the measurement.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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