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The Tyranny of the Task!

Lies, damned lies, statistics ... and accounts?

Accounts - a class of statisticsYou are probably familiar with the quote about the three classes of lies – “lies, damned lies and statistics.” But I recently had reason to question whether accounts might not constitute a fourth category (or at least a special subset of statistics.) 

Why would I say that? After all it is a strange thing for an accountant to say and it certainly doesn’t come easy. My faith, however, has been called into question by some analysis I did.

Dabbling in that dangerous activity called thinking, I found myself unable to reconcile the current near-record levels of unemployment with the fact that:

  • More people than ever before are in employment; and
  • Stocks are trading higher than they were before the financial crisis, which means they are pretty close to, if not at, an all-time high.
What on earth does that tell us? Perhaps it is an indication that there are too many people: that the world is over-populated. Yet even if the answer is as simple as that – and I don’t think for a moment it is – it is not a problem that is going to go away overnight. In any case I wanted to probe a little deeper. So I took the annual accounts of one of the world’s largest companies and started to analyse them over a 10 year period. And that is where my misgivings started.

You see these accounts showed that operating profits had grown by 1.487 billion currency units over the 10 years. Pretty impressive, I am sure you will agree. However, during this time – the same 10 years - the accounts showed that the staff costs had decreased by 2.014 billion currency units. That means the staff cost savings were 136% of the increased profits, due largely to average employee numbers being reduced by 110,000 people.

Of course you cannot blame the directors for this. Their role is to maximise profits and reducing costs is one of only 3 ways they can do this. Conventional wisdom thus makes it perfectly legitimate for reduced staff costs to be a valid investment criterion. Thus they are quite entitled to claim the credit for this phenomenon and attribute it to their sound investments. And the accounts are not wrong for disclosing it in this manner.

In fact accounts cannot lie any more than statistics. It is only the use to which they are put. As ever it is a matter of interpretation. I managed to complete this analysis using only what I could glean from the published, audited accounts and the accompanying notes and reports. However, it took some digging. So you have to ask if the accounts are wrong by omission for not including this kind of analysis?  

Once again it boils down to the divide between commerce and economics. Commercial conventional wisdom says it is always right to minimise costs even if it is at the expense of people. But economically putting people out of work only transfers costs – it does not reduce them. Thus, ignoring the more conventional arguments about the demoralising, destabilising and depressing effects of laying off people, and the inevitable decline in productivity through reduced employee engagement as a result, one has to question the long-term wisdom of such decisions. It is an approach that jeopardises the sustainability of both the business and society.  

Two-sides iStock_000018792164XSmallThis demands looking at both sides of the coin. The initial scenario is evidence of that. So as a society we have to change. We cannot continue in this manner. We have to think of new approaches to management and how we account for our people. Sustainability is about more than just “being green.” To be serious about sustainability we must think more economically and consider Corporate Social Responsibility (CSR) more widely.

And maybe accounting can actually lead the way!  

Comments

Jacqui Hogan

Intruiging article Bay. I used to work for a large global company that each year would discuss at some length just what figures they would use in their reports. It was quite an eye-opener for me! There are just too many ways global companies can use things like transfer pricing to slant the figures.

I do agree though, with the need to value people better than we do currently. I wonder if some of the rot set in once we developed 'Human Resources' rather than Personnel departments, which served to reduce people to other resources like desks or supplies. When in fact, they are the key enablers of any business.

Bay Jordan

Denis,
Your comment about people being the ONLY asset strikes a massive chord with me, philosophically. However, from an accounting perspective it is not possible to treat them as such. Think about a capital intensive businesses like mining or airlines - without the equipment those people would have no job. You have to recognise both from a financial perspective. The problem is that while we account for the tangible things as assets we don't account for the human as such.

Thanks, for taking the time to comment, it is appreciated.

Bay

Denis Bourne

Interesting stuff! Sounds to me that the company had actually gone backwards, but somehow managed to celebrate a success. I see what you mean about accounts that do not represent the 'truth'.

What happened to 'people are a company's greatest asset'? Which is, in any case, wrong. 'People are a company's ONLY asset' - all the other stuff that gets listed is just the consequences of work done by people.

Ronmci

I recommend any business person take the time to read & discuss this with others.

ron@rwme.com

Does open some interesting but serious questions that we are not willing to discuss in many areas of business or society. Thanks for sharing.

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