The rise of the bean counters

REVIEW: Veteran consultant Andrew Wileman reviews Richard Brooks' book Bean Counters: The Triumph of the Accountants and How They Broke Capitalism.

by Andrew Wileman
Last Updated: 07 Aug 2018

Yet another book on the modern-day corruptions of capitalism that might have you putting a tick against Jeremy Corbyn the next time you’re in the ballot box. Those bastards!

Richard Brooks has a great track record as an investigative journalist, writing for Private Eye and The Guardian. He has specialised in digging into financial scams and tax evasion, and knows his subject well.

In Bean Counters, Brooks has has written an engaging history and analysis of how the accounting profession has been captured by the clients – the chairmen, CEOs and CFOs of large public companies – it is supposed to be holding to account.

This was not the case in the past. In the 19th century, as the profession emerged, outside accountants were hired by investors, to check that managers and scheme promoters weren’t lying through their teeth, or to trace money gone missing. Audits were paid for by investors to serve investor interests.

But 150 years later, all large companies have to pay for regular audits. The managers have become the clients. The accounting firms earn more from consulting services to those same audit clients. Senior accounting partners depend, for their million pound profit shares and the esteem of their colleagues, on keeping their CEO and CFO clients very happy.

No surprises where that fundamental conflict of interest might lead: Enron, the world’s banks through the crash, FIFA – Brooks tells all these incriminating case studies, and many more, with relish and sharp detail.

My inner accounting nerd liked the story of how in 2007 Goldman and AIG put different values on the same credit default swap contracts. Goldman assumed AIG would have to pay up, at least a billion dollars, and put that value on their balance sheet. AIG assumed they wouldn’t, and put nothing on their balance sheet. Who were the auditors who signed off? PwC in both cases.

How should we judge the accounting partners who have presided over such professional failure? Individually, we might find them to be urbane, intelligent, thoughtful, and seriously concerned about competence, standards and integrity. Brooks interviews some of them and reflects that response in his write-up. But the truth of institutional failure is that integrity only matters in the rare cases when it is needed – when difficult messages have to be given to highly profitable clients – and against that most crucial test it has proved to be badly lacking.

On the corporate accounting front, I think Brooks missed a trick by not providing a Beginners Guide to Accounting Scams. (Terry Smith did this 25 years ago with his classic Accounting For Growth, following the Polly Peck and B&C failures – he got fired by UBS for his trouble, but went on to become one of our most successful fund managers.)

Many scams arise from discrepancies between cash and accounting profit – like recognising future revenue and profit today, or capitalising current costs and depreciating them. Or they might arise from ignoring long-tail liabilities, like predictable future loan losses or insurance payouts. An analysis of the most infamous accounting scandals against such a framework would have been useful.

Moving on from big corporate audits, Brooks follows his accountants down other profit pathways, into consulting, tax, and government work. Of course the story doesn’t get any better. The bean counters were enlisted to provide dodgy justifications for terrible PFI deals that we taxpayers will be paying off for decades. And they have supported massive global tax avoidance by companies and individuals.

On the last point, I think it is a bit unfair to blame the accountants as the root cause of tax avoidance schemes. (I trust Management Today’s lawyers are noting my careful use of the term ‘avoidance’ rather than ‘evasion’.) It is companies and individuals who drive the search for ways to minimise tax. It is governments that allow it to occur, within the EU not just in unpopulated sandy lagoons – thinking for example of Luxembourg, Ireland, and indeed the UK. The bean counters are mainly serving a legal client need – they may be hypocrites when they set up ‘Ethical Taxation Working Parties’, but they are not the prime mover, except when they actively help clients move on to ‘evasion’.

Brooks concludes with a very short chapter on What Is To Be Done. His list of remedies is a good starting point, but I could have done with this being longer and more robust, as he knows his subject so well and has thought deeply about it. For example, he proposes public (i.e. government-funded and run by regulatory bodies) auditing of major institutions, particularly big banks. This is a useful idea – but how would it be done with a global giant like HSBC? Could a mandatory levy on large pension fund shareholders, to fund an independent audit, be another option?

In conclusion, a good book on an under-covered and important topic, though I do wish the publishers had not as ever insisted on an irritating, over-egged sous-title: The Triumph of the Accountants and How They Broke Capitalism. No they didn’t. No it isn’t. And no, even though the book makes you shout ‘the bastards!’ every few pages, for those of us who can remember the 70s, state-run economies are even worse.

Andrew Wileman is a former partner with OC&C Strategy Consultants, and former partner with Coopers & Lybrand as was in the early 1990s when for a short period they combined with OC&C.

Image credit: Thanawan Wisetsin/Shutterstock

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