To Break Through the Accounting 'Noise,' Focus on the 'Why'

Joel's note: Both the market and Altimetry are closed on Monday for Memorial Day, so look for the next Altimetry Daily Authority on Tuesday, June 1. I hope everyone has a safe and enjoyable weekend.

Questioning what might seem to be obvious can lead to new, great insights...

My youngest has been asking one particular question over and over... and over again: "Why?"

Anyone who has been around a toddler knows this all too well. Whatever you say, there it is again... "Why?"

For parents, it can be grating... But it shows the child's deep curiosity about anything and everything.

Young children want to learn more. They haven't yet built up the knowledge to ignore what adults find obvious or inconsequential.

Still, as parents, we always have that wonderful answer in our back pockets: "Because I said so."

As adults, too often we also fall on the adage, "That's just the way it is."

Meanwhile, that kind of child-like – not childish – curiosity is crucial to becoming smarter. Being more curious, possessing a natural sense of wonder, and questioning the status quo are qualities that have pushed society to progress over thousands of years.

Children understand the first answer to "Why?" is never enough.

It's often the second or third "Why?" that propels us into a new understanding of the reality of any phenomenon, economic or otherwise.

We focused on the 'why' when developing Uniform Accounting...

Why do we have accounting in the first place? It was born out of function and necessity.

Why was it necessary? To keep track of debtors and creditors... in other words, the roots of debits and credits.

Why did folks need to keep track? Humans began engaging in transactions wherein bartering goods and sharing resources were not sufficient means of exchange.

Written language itself was born out of accounting.

The earliest forms of accounting were seashells and clay tokens. People realized that etch marks on clay tokens were more important than the tokens themselves. That led to a realization that the tokens weren't really needed, only the etchings in the clay.

Thus, clay scorecards of accounting became clay tablets for writing. And the earliest forms of cuneiform writing in the Ancient Near East were born some 5,000 years ago out of the need to account for transactions.

Ask "Why?" enough, and it will lead you to some amazing discoveries.

Why does Uniform Accounting exist? To get back to the foundations of writing and accounting – the proper accounting of transactions and commerce, which is a necessity for a well-functioning society.

Discussing 'why' works better with examples...

At Valens Research – the firm that powers Altimetry – we publish a deep-accounting report called Clay Tokens. It's geared toward hard-core financial accountants, financial academia, and institutional investors.

Each month, we highlight one of the many accounting distortions that create inconsistent and unreliable as-reported financial statements. We submit the report to the UAFRS Advisory Council, which is comprised of more than 50 members (including myself as the chair of the council). Across the globe, executives and academics have a deep interest in helping shape the future of Uniform Accounting.

If the council was an orchestra, my colleague Ralph Nach would be first chair. Ralph co-authored the bible of accounting, Wiley's GAAP Guide. Ralph conducts his annual "State of the CPA Profession" for CPA firms every year. CPA firms around the country go to Ralph to teach their people how "to do" accounting.

In this past month's Clay Tokens report, Ralph and I discussed a problematic area of accounting – leases, capitalization of leases, and the calculation of lease-related expenses.

If the only problem with GAAP and Uniform Accounting was the leases, that alone would create big distortions and inconsistencies in measuring earning power across time and even across close peer companies.

So, in the recent Clay Tokens report, we covered the high points of a detailed conversation that Ralph and I had about the inherent accounting distortions buried in every company that leases anything. And of course, we discussed how we fix the issues.

If you're intrigued about why Uniform-based data is so much more reliable than as-reported numbers, check out the deeper dive in Clay Tokens right here.

Regards,

Joel Litman
May 28, 2021