Five Myths About Accounting
The Bob Cratchit Stigma
Accounting is all about math. Is it? Little could be further from the truth. Do you recall the math courses you took in school; calculus, geometry, algebra, and trigonometry? They gave me nightmares. But accounting somehow made sense. When it comes to the number part of accounting, it’s more addition, subtraction, multiplication, and division. Those are not advanced mathematical topics. It’s more arithmetic than high-level math.
Accounting is about concepts and principles, analytics and organization, simplifying complex situations, clarity, and concise communication. True, it may borrow from statistics in certain areas, such as selecting sample sizes for audit testing. But in the end, accounting is about taking what appears to be an overwhelming amount of data and analyzing, organizing, summarizing, and simplifying that information whereby management can make sound financial decisions. It’s about using sound judgment to apply the appropriate accounting principle to a complicated situation. And all of that is done without relying too much on math.
An audit assures that the financial statements are 100% accurate. Does it? Not really. Auditors perform audits under the concepts of materiality and fair presentation. The auditor gives his/her opinion after obtaining a high level of assurance (called reasonable assurance) that the financial statements are not materially incorrect. Put another way; the auditor renders an unmodified opinion when the financial statements are presented fairly in all material respects. Misstatements or omissions in the financial statements are immaterial when, in the auditor’s professional judgment, those misstatements or omissions would not reasonably be expected to influence the end-users’ economic decisions. Therefore, it’s possible, even likely, that many audited financial statements have immaterial misstatements or omissions that would not affect the end-users’ conclusions. From a practical standpoint, to audit financial statements to the point that the auditor concludes they are 100% accurate would be unnecessary and cost prohibited.
Also, under professional standards, the auditor uses sampling and is not required to test every transaction. Therefore, the financial statements may have undetected material misstatements. The auditor must only obtain reasonable assurance, but not the absolute certainty that the financial statements are fairly presented.
Accounting is an exact science that leads to one correct answer. Not exactly true. Accounting is an art, not a science. While clients and company management expect accuracy in the end product, ideas and creativity are what’s truly appreciated. The Financial Accounting Standards Board has, for the last several years, moved the profession toward a principle-based approach instead of a rules-based approach. A principle-based framework creates guidelines rather than the rigorous rules found in a rules-based approach. Accordingly, under the principle-based approach, reasonable accountants may arrive at different conclusions when faced with similar facts and circumstances.
Additionally, many accounting transactions inherently have more than one appropriate treatment. Significant judgment is required for accounting estimates surrounding revenue recognition, depreciation, accounts receivable valuation, self-insurance liabilities, and warranty liabilities. The path to a fair presentation is often more art than science.
Financial statement materiality can be expressed as one number. Maybe yes and maybe no; it ain’t necessarily so. The bottom line is that materiality at the financial statement level is a matter of the accountant’s professional judgment. It involves both a quantitative and qualitative analysis. Many auditors use a quantitative approach to determine materiality for purposes of planning the audit. Planning materiality is used to determine sample size and to evaluate variances found during test work. However, they will use a combination of quantitative and qualitative analysis to assess materiality at the financial statement level. For example, a potential adjustment that would decrease pre-tax income by a relatively small immaterial amount (quantitative analysis) may be very material if the adjustment results in a loan covenant violation (qualitative analysis).
Accounting is boring. Not really. Well, it’s not performing a spacewalk, but it’s not Bob Cratchit either. Sure, there are number-crunching episodes, tight deadlines, and some long hours. However, the nature of the work will also bring you face-to-face with mission-critical issues for the business. As a trusted advisor for the company, the accountant will find himself/herself a significant player in management/stockholder meetings. Communication is vital in any organization, and the accountant is often central in channeling information throughout the company. The accountant is in a pivotal position to interact and understand the company and its industry from top-to-bottom. It’s a balance of people-to-people interaction, number crunching, and research. And at times, it will be anything but boring.
