That may sound pretty dire even though the title of the new book Baruch Lev has co-authored is called “The End of Accounting,” and suggests the finale of financial reporting as it stands currently, he cautions that he really isn’t calling for its absolute elimination. In an interview with David M. Katz and printed in CFO, Mr. Lev explains exactly what he is suggesting.
“We don’t recommend getting rid of financial reports. Financial reports as an historical document will always be important. You need to have some kind of an historical perspective of the business,” Lev, a professor of accounting and finance at New York University’s Stern School of Business, acknowledged.
“There is some importance in knowing the past,” he adds. “I don’t completely disregard it. But it doesn’t give you linear information about what will happen in the future.”
“What we are saying is that current financial reports don’t provide a clear guide with respect to the future. And that’s what we set out to change,” says Lev, referring to the book he wrote with Feng Gu, a professor of law and accounting at the University of Buffalo.
In their book, recently published by Wiley, the authors contend and attempt to prove that “those voluminous and increasingly complex quarterly and annual reports… [have] lost most of [their] usefulness to investors….” They cite the Financial Accounting Standards Board’s 700-plus-page 2014 revenue recognition standard as an example of such length and complexity.
Based mainly on non-accounting information, the report would focus on a company’s business model and execution of it. The document would highlight such “fundamental indicators” as Internet and telecom companies’ new-customer and churn rates; car insurers’ accident severity and frequency and policy-renewal rates; biotech and pharmaceutical company clinical trial results; and energy companies’ proven oil and gas reserves.
These indicators “are more relevant and forward-looking inputs than … traditional accounting information” like earnings and asset values, according to the book.
At least since the accounting scandals of the early 2000s, Lev has been a well-known advocate for more extensive corporate reporting of intangible assets. Following are edited excerpts from CFO’s interview with the financial reporting luminary.
What does your title, “The End of Accounting,” actually mean?
The end of accounting in the current way it is conducted, meaning the constantly increasing, extremely complex regulations that fewer and fewer people understand. This, in our opinion, should come to an end.
How practical would it be to put your system in place?
Very practical. We demonstrate our disclosure paradigm on four specific industries: media and entertainment, oil and gas, pharma and biotech, and insurance companies. The Strategic Resources and Consequences Report is not another 60- or 70-page report on top of the financial statements. It’s a one-page or, at most, two-page report which focuses on all the things which are missing from the financial statements.
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