(2023-03-14) Davies Every Accounting System Is A Mental Prison

Dan Davies: every accounting system is a mental prison. A few weeks ago, it was announced that a British government Department was going to be forbidden by the Treasury from undertaking any capital expenditure without prior permission

Controversial decision! Not least because this planned capital spending included the grants to renovate social housing which was in such bad repair that mould was causing fatal respiratory illnesses in children. And also a decision which laid bare some complicated facts about control and power.

...hidden power of the “value for money” exercise, in which important decisions are concealed under innocuous looking assumptions

perhaps less obviously, there is much significance to the fact that only capital spending was going to be made subject to this constraint. What is special about capital expenditure versus current, and how are they defined?

At some point in the past, a convention has been adopted, by sensible people who understood what they were doing, to the effect that presenting numbers in this way rather than that way would give the best chance of making the right decisions.

That’s what an accounting system is; a set of principles for organising information for the purpose of decision making. And a key problem – perhaps the key problem – for this particular kind of organising system is the lack of a natural unit of time.

Back in the days when double entry was invented, accounting for a merchant venture was a matter of recording the cost of what you bought, the price you sold it for, and your expenses along the way. The time period for the accounts was the length of the journey there and back

The accounting period was matched to the time horizon of the decision making process.

For anything more complex, which persists over multiple periods and where you can change your mind at any moment, using the double-entry concept requires you to distort things, like squashing a globe onto a flat map... Hardly anything is truly “current” expenditure. Almost everything any organisation does is meant to have at least some lasting effect... A lot of the time, the stipulations are made for reasons of convenience for the accountants rather than accuracy. Because managing information is expensive, and in this context “convenience” means “possibility”.

And the reduction in information is not even necessarily a problem. The information has to be reduced

Selecting what you will pay attention to is, necessarily, selecting what you are going to ignore. (Stafford Beer said that “ignorance is the information processing system of last resort”).

But things change

This is a problem, because the accounting system is the system which represents information to the decision maker. It cannot be assumed that it will communicate the fact that it has ceased to accurately represent. This piece of information might not be something that it is capable of expressing.

In too many cases, you find out that the accounting system has drifted hopelessly from the reality it was meant to describe in “the bad way”. (Map Is Not The Territory)

It might be better to review assumptions ahead of time, and spend effort on understanding what kind of information is being attenuated.