Why Financial Statements Fail “Digital” Companies

I regularly comment on the way marketing is treated in accounting statements. Many of the issues raised are, however, applicable outside marketing.

Vijay Govindarajan and his colleagues look at the provides of accounting for “digital” companies. The basic thesis is that accounting statements do a poor job of accounting for the new economy. Approaches that might have worked in the past no longer cut it for companies that drive the digital economy.

An Artifice of Regulatory Compliance

These business school professors  don’t mince words about the problems in accounting statements. They say that “Our research has found that Intangible investments have surpassed property, plant and equipment as the main avenue of capital creation for U.S. companies — which further suggest that the balance sheets have become an artifact of regulatory compliance, with little or no utility to investors.” (Govindarajan, Rajopal, and Srivastava, 2018). This is pretty tough stuff. Accounting statements that are just done for the sake of compliance (not use) are an awfully expensive waste of time.

Change Is Due

These professors are useful advocates for change. They recognize that it is important for accounting statements to be useful to their supposed key users, investors. They make, the seemingly reasonable, point that as business plans change the way accounting is done should change with it. As is widely taught the origins of accounting go back to the middle ages but it’d be nice to think that when the world changes the way we account for it does too. As they say: “To summarize all this, as firms become more digital and spend more on intangible investments, and as digital companies come to represent the new face of corporate America, they will also have to dramatically alter the manner and ways by which they convey their value to investors” (Govindarajan, Rajopal, and Srivastava, 2018).

I look forward to hearing more about their plans for change.

Read: Vijay Govindarajan, Shivaram Rajopal, Anup Srivastava (2018) Why Financial Statement Don’t Work for Digital Companies, Harvard Business Review, Feb 26 2018, https://hbr.org/2018/02/why-financial-statements-dont-work-for-digital-companies