Who Has An Interest In Changing Accounting

Baruch Lev and Feng Gu, accounting professors, ask a simple question. “Why are managers and auditors so blasé about accounting for intangibles?” (Lev and Gu, 2016, page 90). The way intangibles are accounted for clearer violates the concept of matching. This concept says we should charge expenses to the profit and loss statement when what is “bought” is  used up but we currently expense brand costs when they are spent not when the brand is used up. This is clearly inconsistent with matching that is central to much accounting theory.

The classic defence to this violation of matching is that there is no problem free solution. To be fair this argument is true; however we account for intangibles is going to encounter problems. That said Lev and Gu have a point when they say that accountants seem unwilling to even try and come up with a better way.

Lev and Gu argue that this lack of interest in even considering change is that change isn’t in managers’ or auditors’ interests. Managers don’t want intangibles on the balance sheet because if they are recorded intangibles can be a stark reminder of mistakes when managers make them. If you have an asset on the balance sheet a manager needs to explain what happened if it is impaired, (i.e. the value written down). Nowadays spending on intangibles can be justified verbally by the manager as an investment when it is made but no one sees a record of the investment. Because there is no record if the value of the brand is frittered away no one needs to explain it. Similarly, auditors don’t want to add anything to the accounts that is hard to point to as such values are likely to be tempting for law suits.

Lev and Gu seem to have a good argument to me. They argue the people who would benefit most from change are investors and they are being shortchanged in order to preserve a status quo that benefits managers and auditors.

Read: Baruch Lev and Feng Gu (2016) The End of Accounting and the Path Forward for Investors and Managers, Wiley