Globonomics!

Cross posted in http://www.acc101.com

While there was talk of the Enron controversy and the accounting practices of other such leading corporations such as WorldCom, Tyco International, Martha Stewart, Freddie Mac etc., there has been a lot of emphasis on accounting practices in recent years.

There were the big 5 accounting firms till a few years ago. Now there exist only 4 (http://en.wikipedia.org/wiki/Big_Four_auditors) because one of them got wiped out simply because of accounting irregularities/misgivings. This company in question was Arthur Anderson’s accounting practice which was looking into the accounting practices of Enron where they are infamously accused of shredding important accounting information and misappropriations and giving rise to a false bloated stock price for the Enron stock.

So, where does the buck stop? My guess is that the CEO/CFO’s should come out and take responsibility.

Now, why is accounting so important for businesses – is the crux of the matter.

Well, simply put, this one concept can swirl the stock price of the company around its fingers. You declare a higher than expected profit from the street and the stock price goes up and vice versa. This part of it is simple. There are other ramifications though. Its not just the stock price. Executive compensation is based on how well or badly the company is doing. We have classic cases of CEO’s drawing ludicrous amounts. There is an agency problem.

I think fair accounting practices are good for everyone – the shareholders, the management, the owners, the public at large. It brings in transparency into the system. People will be able to reward a company stock based on the company’s true performance than on artificial bloated figures.

How does this impact SMB’s – you might ask? Many SMB’s might not be maintaining proper books either because they are privately held or because they don’t have a compulsion to disclose proper accounts and one of the first things one hears of in management accounting is in keeping books.

Also, in countries such as India, proper book keeping and fair accounting are critical to the success of any company – given the increasing penetration our companies have in the export market and global arena where they need to follow GAAP (generally accepted accounting practices) and other such standard accounting practices.