No Accounting for the End of the World?

Jacob Soll’s book “The Reckoning: Financial Accountability and the Making and Breaking of Nations” makes a good case for economic progress being firmly based on the ability to account for that progress. Although he does not show direction of travel (or cause to effect) with certainty, there is a common sense from his historical analysis from ancient Greece to more recent times in the theory that progress is based partly on an ability to undertake double-entry book keeping. This measures progress but also provides the degree of transparency that ensures “buy-in” from society.


This may not be a riveting “eureka” moment for many and Soll’s dallying with more metaphysical comparisons about the debits and credits of a good life being reflected by the righteous in the way that good businesses and people (like Josiah Wedgewood of pottery fame who not just promoted cost accounting but used the principle of accounting to balance their sins and good deeds) do their accounting is somewhat stretched. However, there seems ample evidence that at both a corporate / organisational and national level, economic progress is assisted greatly by the ability to count your profits and losses – to show how progress is being made.


Soll refers to corruption in the past that resulted from both poorly kept accounts (at corporate and national levels) and those clever enough to hoodwink auditors and investors through manipulation of accounts.


From the analysis, it is clear that investors need good data to make informed decisions and that citizens need to know how governments spend their money – not just for the sake of transparency but to provide worthwhile and useable information. In the majority of developed nations, corporate accounting is subject to GAAP (generally accepted accounting principles) or equivalent; in other countries there is a wide disparity of accounting standards or a lack of them – in Afghanistan, it will hardly be a surprise that there is no accepted principle of accounting and very few qualified accountants from there.


Despite the developed world’s professional standards, this does not prevent disasters on the scale of the 2007-8 banking crisis or Enron or a host of other “accounting” failures. Often, auditors don’t see the problems and may even see them and do nothing.


On a national basis, the same is true. While it is hard to judge the efficacy of national accounts (which are the subject to revision for many years), it is hard to believe that any country which does not work hard to make its national accounts transparent is one where real economic progress is being made or where opacity is not hiding something sinister.

Back in 2010, Global Witness highlighted this in its report “Oil Revenues in Angola” which documented the problems that Sonangol (Angola’s state oil and energy company which was then considering a public stock listing) had in reporting its revenues. That report, one of the few independent reports in a sector that is riven with corruption, argued for greater transparency, improved systems and independent auditing to the highest standards for an organization through which Angola’s wealth derives. Soll would argue that its secrecy and lack of transparency and independent auditing shows all the hallmarks of a corrupt society. But, pressure on Sonangol to provide more and better information (better accounting) is a key approach.

Numerous, other examples exist in many countries – many where natural resources exist that should benefit the population but where the “resource curse” is made possible by lack of proper accounting to high standards, properly audited and verified.

Similarly, the Dodd-Frank Act in the USA opened up country-by-country reporting to reveal how much revenue was entering such countries. The USA (and hopefully with the EU to follow) are attempting to go around the opacity of nations (and their lack of accounting capability) to find the real accounting data through those that have that ability and are subject to our own norms of accounting – the major energy companies. In this way, good accounting may be accessible by the back door to show citizens of the affected nations just how their Governments provide for them (or don’t).


A recent example of this is shown by an analysis made by Richard Murphy (the progenitor of country by country reporting) on recent data issued by Barclays Bank. It shows, through analysis of that data, how Barclays shields its profits from the UK Exchequor.





Value accounting – can we properly Account for Natural Resources?


One of the latest “opportunities” for accountants is accounting for natural resources – our natural capital. It is believed that if we make up a balance sheet of all our assets (and liabilities) then we will better know by valuing them what impact we are making on them. We naturally sympathize with a society that is striving to understand its failings and what to do about them. There is no question that if it was possible for governments (nationally and internationally) to properly assess value in our natural capital, then we could (somehow) impose some sort of value adjustment to problems caused by companies and governments when doing the things they do that adversely impact our natural capital or trade-off costs and benefits and make better decisions.


There is a natural and realistic desire in some governments to properly account for their natural capital. For example, The Scottish Forum on Natural Capital aims to focus on its natural capital and


“To deliver on its goals, the Scottish Forum will:

  1. Calculate the monetary value of Scotland’s natural capital and the cost of depleting it. This will involve coordinating experts including accountants, people from business, academics and policymakers.
  2. Communicate to a broad range of businesses and other stakeholders the risk of depleting Scotland’s natural capital and the huge economic value from protecting and enhancing it.
  3. Set up collaborative projects to deliver tangible action to protect and enhance Scotland’s natural capital.”



The calculation of that value and the link between that and effective action are major challenges. This is because the pricing mechanism for such resources does not exist. Accounting is based on the ability to reach a value determination on goods and services. It is not always right but much of double entry book-keeping methodology is based on market prices – the prices actually paid for goods and services. Market prices provide information on those goods and services that allows a profit and loss account and balance sheet to be derived.


Now, even existing and well understood basic accounting is often flawed or wide open to judgement. An example from the recent past: in the days of high inflation, companies (that anyway provide accounts that are usually out of date by the time a user receives them) were encouraged to undertake inflation-based accounting in addition to actual costs. Oil companies still provide two sets of accounts (one takes the data back to the latest oil prices). Which is correct? Neither (although only actual costs are used by taxation authorities)– but, they may be aids to better informed decisions.


Accounts are always an approximation of reality. So, for example, accounts show labour costs (the costs of people who work in a business or organization) as costs. Yet, of course, people are only recruited to add value. Unfortunately, there is no balance sheet valuation of the benefits that they can provide. Back in the 1970’s, it was fashionable to consider whether people should have a value assigned to them on the Balance Sheet (much like footballers used to be valued on the Balance Sheets of football clubs). This proposition lasted only a short time and people are not valued on a balance sheet – except in those companies with traded shares where “goodwill” (the difference between the stock value of the company and its balance sheet value) contains an undefinable figure for people. Google’s share price (usually viewed as a multiple of earnings – its P/E which is currently around 30) takes account of its extraordinary people talent – but, in a way that the market is willing to trade – a form of market pricing.


When the accounting mechanism is brought to natural capital, it is much harder to “account” for it – there are limited pricing mechanisms.


At a micro-level, companies can provide information on where their natural risk lies (e.g. how they source materials upon which they survive, where the risks are and what they are doing about it) but some of this is pricing, much of it is risk analysis. From the latter (just like any risk analysis) actions can be taken to minimize risks and maximize opportunities.


Companies also produce “externalities” – they impact the environment, for example, through CO2 emissions, use and abuse transportation systems, can destroy environments. So, clean-up costs need to be established when developing projects along with the minimization of health hazards and environmental degredation. Governments in many countries can work with businesses to save the environment and recast it. In the developing world, this is harder. Many instances occur whereby companies ravish areas of natural beauty and poison locations with the side effects of their production processes and do not pay the consequences. This is often a corrupt bargain but becomes the norm where natural resource extraction and its “value” overcomes the perceived value given to those dependent for their lives and health on the land: from China to DRC, from mining to forestry.


The key problem is linking the micro activities to the macro (governmental) responsibility for the environment. The notion of valuation at least focuses the mind. The question is whether valuing natural capital (and the wide range of – usually erroneous – assumptions that have to be made in a non-market priced environment) is useful and whether such valuations can be used to make decisions – even whether there is a use for such decisions on a quantity basis at all. For decisions based solely on price (where all the risks are not taken into account) will be wrong except where there is a market-based pricing formula available (and, of course, perfect pricing relies on perfect information on both sides – which never occurs). We can “see” how Barclays used low tax jurisdictions (see the TJN report referred to above) to shield profits and decisions can, in future, be made as a result. Valuations of natural capital are far more tenuous.


The drive to valuing our “natural capital” in business jargon (through pricing) is centering our attention on this critical area. However, at this early stage of natural capital ideas development (although not at an early stage in the degradation of the planet) we should be understanding what we want out of it.


What if all the alligators in the world were to be destroyed because enough people were willing to pay the price for alligator skin handbags and shoes? Would this be acceptable because we “paid the price”? Clearly not as the value of preserving such an animal is not easily factored into the price – who assesses it and who sets it when the “value”of having alligators is unpriceable. That is why ivory sales are (in the main) banned. There is no price allowed in the system for the elimination of elephants from our natural environment – we have made a collective decision to try to stop it rather than pricing it.


This suggests that the “value” placed on part of our “natural capital” is not quantifiable in business terms – even if the costs of certain degradations (and “externalities”) are.


Not only do we need to ask the right questions, we have to start with the answers we want or the history of Easter Island is just repeated on a massive scale.


There is a place for good accounting – and good accounting should know its place.



Country by Country reporting – a strong Socionomical trend

Country by country reporting is about to be put into effect i the EU as reported by Richard Murphy – see

Real progress since I wrote an article in 2010 – Mines of Information

First, through Dodd-Frank in the USA based on energy companies operating in resource-cursed nations and now through the EU, country-by-country reporting for all companies that will begin to unravel where tax should be paid is spreading.

This is a social phenomenon that is a sign of the times: recessions are not just for lower hemlines – but, focus attention by those exploited on to the exploiters – nowadays, the tax havens and those using them. A Socionomical trend is well under way.

See-through Society – transparency

Cleaning Up

Chuka Umuna, the Shadow Business Secretary, recently called for companies in the UK to declare their tax payments to Her Majesty’s Revenue and Customs (HMRC). This followed the widely reported, bad publicity surrounding the minimal tax payments made in the UK by Amazon, Google, Starbucks and many others. Whilst not wishing to name and shame, he believes that all companies should glory in the tax they pay. Justin King, head of Sainsbury’s, one of the big four food retailers in the UK, made a similar statement, suggesting that consumers could make change happen through their custom. International Corporations have been cleaning up by transferring their tax liabilities to low tax regimes and tax havens – they can virtually choose where to pay tax.

Nick Clegg, the leader of the Liberal Democrats and Deputy Prime Minister, states in his most recent letter to LibDem members: “The idea of combining a strong economy with a fair and transparent society is something that will also be seen in an international context this year when we host the G8 in Northern Ireland.”

Transparency is becoming the mantra of the well-meaning in society and many would say “about time, too”. While not the answer to all of societies’ ills, it is a precursor to re-directing society towards solving some of the greatest problems we have – because transparency of key information allows people (civil society) to make informed decisions – either on their own (through the marketplace) or through their government.

Sweeping away the leaves

For years, organisations like Transparency International have campaigned for dramatic improvements in the way governments, publicly owned organisations and companies provide important information. The danger with secrecy (and the UK remains a very secretive country) is that beneath the opacity of information lie secrets that those with vested interests wish to keep hidden. Whilst secrecy is always claimed by Governments to benefit all of us where they wish to enforce it, the evidence is usually to the contrary. The benefits of secrecy accrue to vested interests and results in economic mismanagement at best – at worst, in countries which are, for example, resource-rich and economically poor, it leads to mass corruption, impoverishment of the mass of people, illness and suffering.

Economics and economies thrive on the open availability of good information and only monopolies thrive on secrecy. It is only when information is made available that proper judgments can be made by the mass of participants in the marketplace.  In a world population of billions, markets can only work where information is not controlled from the top down. Stockmarkets and financial markets depend on the freest possible flow of information to the widest audience and there has been a progressive move towards freer access to information along with the spread of technology that enables it to be used. The driving force is the same human one that drives freedom and democracy. There is an inherent motor behind individual freedom and the right to self-govern and the same motor drives transparency because it is with transparency that the potential can be seen and with transparency that informed decisions can be made.

Transparency is not closing your eyes when the wind blows

In the UK, a nation that always appears to be governed by a conservative mindset where change is difficult, where the Official Secrets Act dominates, where GCHQ and CCTV appear ubiquitous, where the challenge to maintain a fairness between an open society and a society that bears down on terrorism often seems so far weighed in the latter’s direction, the motor for transparency often seems to be running in neutral. Conservatism (especially in England) means keeping things the same and with direction from the centre. This often means that vested interests operating from the centre or with the centre will disallow the move towards more openness. The Labour government provided a Freedom of Information Act, for example, to the chagrin of its then leader, Tony Blair., who was and remains a centrist. In a sense the provision of the Act was odd, because Labour remains as much a centrist party as the Conservatives. Nevertheless, the human motor for more transparency was stronger than the urge to opacity in this case – even if the Act is not itself allowing the freedoms desired.

Yet, it was a step towards a more open society and towards transparency that many countries would relish. A free press (the subject of so much discussion following and before Leveson) has helped to unearth the secrecy in banking, for example, that has plagued the UK for centuries. Manipulation of LIBOR, money laundering, sub-prime casino banking and support for tax havens may have helped to make London a key banking centre but it did not insulate the UK from the collapse in 2007 – it made it far worse – and “only when the tide goes out do you discover who was swimming naked” (Warren Buffet commenting on naked transparency). Sometimes, opening our eyes hurts.

Nothing to Hide?

One example of eye strain concerns the opacity of the banks and their cozy relationship with Government (not just in the UK). The secrecy allied to the special relationship has hindered the UK to an intolerable degree. Under Nigel Lawson (one of Margaret Thatcher’s Chancellors) the post-manufacturing society was hailed as the future as banks gained more freedoms and we all kept our eyes closed. Yet, we now see Germany as Europe’s economic motor because of its manufacturing prowess and the revitalization of the British motor industry (although hardly any it owned by Brits) is now lauded much louder than our “success” in financial services. The illusion of banking remains, though – as a key driver of the economy rather than what it really is – a provider of services that should assist the real economy. And the illusion has been propped up by a lack of real transparency which enables banking to remain a secret society.

Transparency is the ability to be strong enough to reveal information because there is nothing to hide. The true strength of transparency is the confidence that it portrays. So, the opportunity for companies and Governments to be open, to be transparent, only exists where there is not much to hide. Clearly, international companies that are paying virtually no corporation tax on sizeable UK earnings have something to hide; clearly, those (companies and individuals) who put money into offshore tax havens or to secrecy jurisdictions may have something to hide.

If banks and individuals had nothing to hide, Wegelin, the oldest Swiss bank, which is closing as a result of its plan to take on all the clients of Swiss banks that had decided to be more transparent with the US authorities over tax evasion would still be open for business. Their clients, who wished anonymity, made their way to Wegelin – which had been founded in 1741. They knew they were doing wrong and Wegelin knew the same – and the bank is closing after a hefty fine from US regulators and after 271 years. Secrecy was in the bank’s DNA – it could not evolve to the realities just beginning to dawn in the 21st Century. It became extinct.

So, lack of transparency in a world with eyes opening can be also hurt and be expensive and the US executive is now proving to be vigilant on  behalf of transparency on a world-wide basis – as is the US Congress which passed legislation in 2010 called Dodd-Frank. Part of this related to section 1504 which requires extractive industry companies registered with the SEC (Security and Exchange Commission) to disclose their revenues and taxes paid on a country by country basis worldwide. This includes all companies registered on the NYSE no matter where they are based. The EU looks to be following this example so that the people of resource-rich, economically poor countries will know how much money their precious natural resources raise in annual income and then can follow through what their Governments do with that money.

However, the American Petroleum Institute and the US Chambers of Commerce (vested interests if ever there were) are trying to fight back and have initiated a law suit in the US to nullify section 1504

How curious that libertarians fight on behalf of secrecy – the proponents of a free market arguing against a main tenet of economics – free information.

Battle lines are being drawn – the light and the dark.

21st Century Schizoid Man, King Crimson’s take on Spiro Agnew, was written in 1969 but the 21st Century does even now witness such schizoid tendencies characterized by corporate and governmental secretiveness, emotional coldness and apathy that typifies the illness. The lack of openness is world-wide and exhibited by the Chinese authorities’ suppression of its Southern Weekly newspaper when an editorial criticizing Chinese leadership was thrown out and one supporting the leadership was superimposed. Anyone reading Martin Jacques book “When China Rules the World” would not be surprised at the suppression. It characterizes the central leadership of this “civilization state” but Jacques argues that we see it too much with western eyes. But, what if we in the West are right and democratic freedom and openness are the motors that drive our human endeavours? What if the Chinese have, for 2,000 years, actually got it wrong. As China grows stronger, the move away from freedom for information will intensify and Chambers of Commerce will battle against laws for transparency that they will argue provides Chinese firms with advantages. This is a battle that has to be fought world-wide.

Our pursuit of progressively greater freedom (whether press freedom, open markets, democracies, freedom of speech) and equality (of race, religion (or non-religion, sex, sexual orientation and more) appears to be the real motor rather than the schizoid tendencies of the centrist control of monopolies, dictators, and vested interests. Transparency is a hugely important base upon which this basic human drive can persist. In a post-2007 world where the risk is that wealth is being driven to the top 1%, the drive for transparency is fundamental.


Hard Times – from 1854 to 1504 (Dodd-Frank)

Masters and “Quiet Servants”

Charles Dickens wrote “Hard Times – For These Times” (usually known as “Hard Times”) in 1854. This was a bleak analysis of mid-19th Century factories and the mechanistic drive for material reward.

The world of the Industrial Revolution saw immense material improvement within a 19th Century mindset that saw business develop on the back of “resources” – whether they were natural resources (like coal) or human resources – Dickens’s “quiet servants”. Resources were resources and how they were discovered, whose they were, the conditions under which they were mined, how they were shipped or the conditions under which they were placed into the manufacturing process were not much of a consideration.

Britain and other developing nations of the time grew wealthy on their own drive, ingenuities, financing and trading and manufacturing instincts but the whole process would have collapsed if access was not obtained to raw materials from the rest of the world and the use of “human materials” from all over (including their own countries). The terms “human resources” is still with us along with natural resources – but the “quiet servants” grew louder.

Gradually, from 1833 when Britain enacted laws that children under nine should not work in factories, throughout the second half of the 19th Century and into the 20th, our human resources (people working in factories and mining, for example, in the industrializing nations) campaigned and secured rights over income, health and safety, length of the working day and age restrictions.

Developed countries worked out that, to work well and succeed, we had to develop ways that we all could share to some extent in the benefits that material gain provided. This is the basis of free and fair societies based on successful economies.

From nation to global

The last thirty years has seen a vast shift from developed nations using the rest of the world merely to buy from and sell to, to a shift to manufacturing and now development and R&D throughout the world. Trade has grown internationally and the so-called integrated “global economy” is in place. We are no longer merely the industrialised west and the under-developed rest, but an inter-connected web of nations within one, world economy.

Yet, the strains are clearly showing. Allied to the vast changes in internet communications (similar to the vast increase of communications that shaped 18th Century politics and the 19th Century – the telegraph and the phone), all peoples of the world now see themselves as part of this world (or global) economy in the same way that 19th and early 20th Century factory workers saw themselves vis a vis factory owners. They then, understandably, demand rights and safeguards.

This is now happening on a world scale as we develop our global nation (economically).  The changes are profound and, if done properly, will be of enormous benefit.

21st Century Responses

This week saw the approval after two years of the US SEC (Security and Exchange Commission) of articles 1502 and 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The two measures could have major implications for all of us in that (properly implemented) they set a real standard for the globalized economy in two, crucial areas:

  1. the willingness of all of us to buy items cheaply no matter how the raw materials were obtained
  2. the willingness of all of us to buy items from wherever in the world, no matter what corruption was employed in their provision.

Article 1502 refers to the mining of key raw materials in Africa such as tantalum, tungsten, gold and tin. It will (after an implementation period) require all suppliers and manufacturers to state that their products do not contain raw materials that financed war or bloody conflict. So many years after blood diamonds were headlined, there is now a statute that demands that companies step back and consider what they are buying. Manufacturers that buy such raw materials have had to count the cost of reputational disaster if they continue to sidestep basic human responsibilities in this global market. Now, there will be a legal imperative in the USA.

Article 1504 is the Cardin-Lugar rule which sets rules for country-by-country reporting of companies in the extractive industries concerning the revenues and profits they make in all countries where they do business (on a project by project basis).

Both articles require all companies that are listed in the USA to comply (although not immediately), wherever those countries are based. The European Union is expected to pass similar laws.

The implementation of the two articles will help to drive change on a global scale, where individual nations (e.g. where the resources are extracted) are unable to do so. Why? For several reasons:

  1. Developing nations (especially resource-rich and economically poor) are prone to corruption and often unable or unwilling to enact these laws themselves;
  2. Developing nations (especially in parts of Africa) use resource revenues to fund conflicts and wars;
  3. Corporations operating in those areas need to show global sensibilities – where treatment in their overseas subsidiaries and employees is brought up to levels that we believe are credible and reasonable. It is hard to do that without legal change as competition is too high to expect corporate ethics (whatever that means) to work on its own.

To Ayn Rand libertarians Dodd-Frank is an economic travesty and many in the US are waiting for Romney and Ryan to get elected and reverse these laws. That would be the travesty. It is enough that in developing nations, the gaps between the rich and the rest are widening; it is enough that nations like Greece are now collapsing economically. There is potential for real strife in nations where inequality is too widespread.

But, we now live in a global economy where we are all dependent on each other. That means simply that best practice (that works on a national scale) has to be introduced globally wherever feasible. The intricate balance of trade, manufacturing, design and the need for natural resources (as well as the need to work together on climate change issues or disease control, for example) dramatically increase the need to treat the global economy as one economy – which it is. This means that national rights have to be respected but that is not enough.

Article 1504, for example, takes the trust element away from many nations like Equatorial Guinea, where the leadership is a kleptocracy and where riches from oil revenues do not go to the people in any meaningful form. Country by country reporting will, eventually, put an end to opaque deals between companies and those who have taken over the ownership of natural resources in those countries by showing transparently what profits are made and revenues generated on a project by project basis. Citizens in those countries will begin to be able to see how those revenues are used or not. Information is valuable and a first step to more equitable conditions.

21st Century Ethics

As we enter the fifth year of the post-sub prime recession (with economic collapse in Greece and high youth unemployment in Spain), we remain much more concerned with ourselves than with people and nations thousands of miles away. The change that global economics has wrought, however, is that we can no longer ignore the plight of those so far away even if we (wrongly) wish to do so. Their plight is ours just as the impoverishment (economically and educationally) of our inner cities is a blight and our plight.

The Chinese view things differently, of course. A thousand years of relative impoverishment has left it hungry for economic growth and its hunger leads it to plunder the natural resources of Africa. China’s legalist centre, its Confucian heart and its loathing of western imperialism means that it is content to leave governance issues aside. Its own internal corruption (the corruption of a centrist and legalist government, where bribes are the common currency of the status quo) means that it is unlikely to require good governance in return for its acquisition of raw materials. In fact, its non-linkage of governance requirements gives China a distinct trading advantage in Africa.

It is to be hoped that this is a short-term business expedient and a long-term mistake for the Chinese. Just as the best manufacturers in the 19th and early 20th Century were leaders in improving conditions for their employees (notably, Henry Ford who wanted his own staff to be able to afford to buy his cars) and just as the US spearheaded safety rules in the 20th Century, it is likely that the best companies will understand that improving the safeguards overseas (whether in their own companies or those of suppliers) will be important, medium-term investments.

Reputational loss is now potentially huge (as Apple realized when suicides at one of its biggest suppliers in China, Foxconn, began to rise and changes in working practices were required by Apple). The raw materials that we require for so many of the goods that we buy are obtained under horrendous conditions in Africa. It is not just blood diamonds but all those naturally occurring elements that the SEC has just regulated into law.

In addition, the country-by-country reporting will shine a light on the regimes that take in billions of dollars of income and disburse so little to their people. Pressure will mount from outside and inside.

Organisations like One, Transparency International, Global Witness and Enough and the Publish What You Pay coalition deserve huge credit for a relentless drive over many years to enact such positive changes. The US Congress deserves huge credit for bringing it into law in the powerhouse of the US economy. The EU should follow and they should all work within the OECD and elsewhere to ensure that these measures, providing an ethical underpinning to the global economy, are made global.

We live in a globalized economy and comparative advantages should be developed through intelligence, hard work and ingenuity – not via the impoverishment or hardship of our global neighbours.  The bringing into implementation of Dodd-Frank’s articles 1502 and 1504 suggests that the global economy is waking up to the fact that our “quiet servants” deserve respect wherever they are – close to home or further away. The global economy (and climate change and air travel and the internet….) means we are all neighbours now.