The Business Book

121121

See also: Hubris and nemesis 100–03 ■ Profit before perks 124–25 ■ Making money from money 128–29 ■ Accountability
and governance 130–31 ■ Morality in business 222 ■ Creating an ethical culture 224–27 ■ The appeal of ethics 270

turned out to be $3.3 billion,
demonstrating that the company
had erred on the side of caution.

Accounting for profit
An accountant who follows safe
practices sleeps well, but may
struggle to climb the corporate
ladder. When the stock market is
full of optimism (a “bull market”),
there are intense pressures within
companies to push the stated profit
level to the highest feasible point.
This could be considered an odd
statement, since profit might seem
to be a simple matter of fact.
However, the calculation of profit
(which is effectively an estimation)
is underpinned by a series of
assumptions, and a company’s
stated profit is effectively a
moveable figure. Different
accounting teams may come

up with different figures, even

though the underlying data that

they are analyzing is the same.

In 1992, British banking analyst

Terry Smith published a book

called Accounting for Growth.

This publication set out the

remarkable array of opportunities

for publicly traded companies to

provide an artificial boost to their

stated profit levels. The book had a

huge impact, and influenced the

UK’s newly formed Accounting

Standards Board, which in turn

developed new accounting rules

in an attempt to minimize the

scope for “creative accounting.”

Today, most countries around the

world follow the rules laid down by

the International Financial Reporting

Standards (IFRS). As a consequence,

the income statements and balance

sheets of companies in most

countries follow the same format. ❯❯

MAKING MONEY WORK

But without statutory

protection, individuals can

ignore principles and profit

from immoral actions.

Good companies and

accountants consider

rules plus morality.

The rules set out

minimum standards...

...but some rules

ignore morality—

“playing by the rules”

may not be enough.

The alternative to

rules is a principled

approach based on a

“true and fair view”

of a company’s accounts.

Accountants must decide how
cautious they are going to be when
reporting a company’s financial status,
since they may be under pressure to
boost the stated level of profits.