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Margins of Error in Accounting
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was an articled clerk half a century ago I remember being
amused by the letters ‘E&OE’ which used to appear on invoices, stand-
ing for ‘Errors and Omissions Excepted’. They are a down-to-earth
reminder that numbers in business are not always correct. Accounts
themselves can hardly ever be more than rough-and-ready interim esti-
mates of a company’s financial progress. It was some years before I came
to realise that they didn’t need to be anything more.
Accounting is an art not a science; and over-ambitious standard-
setters, especially in the English-speaking world, have sometimes raised
expectations in recent years beyond what is possible. Too often ignor-
ing what the users (and preparers) of accounts want, they remind us of
Douglas Jay’s arrogant claim: ‘The gentleman in Whitehall really does
know better what is good for people than the people know themselves.’
The inspiration for this book was
On The Accuracy of Economic
Observations
(1962) by Oskar Morgenstern, a distinguished US-based
Austrian economist. I came across it early in my career, when I was
already concerned about the impact of inflation on accounts expressed
in terms of money.
During my teaching career the pound lost well over 90 per cent of its
purchasing power – the most devastating currency debasement in ster-
ling’s thousand-year history. It had an extremely serious effect on
accounts using money as the unit of account. Partly due to government
interference, leaders of the British accounting profession failed to effect
an adequate solution.
I have tried to quantify margins of error, usually in the form of per-
centages where possible, though this is often difficult. Real-life examples
are given throughout the book. Their dates have no special significance:
happen to represent the occasion when I was writing the par-
ticular passage.
Chapter 1 discusses the accounting background and what is meant by
‘material’ and by ‘margins of error’.
The core of the book is Chapters 2 to 6, which deal with the main
reasons why accounts and accounting measurements are often likely to
be subject to a significant margin of error.
Chapter 2 identifies the many inevitable kinds of error arising from the
‘interim-ness’ of annual accounts in the ongoing life of most businesses 3 discusses the use of various kinds of estimated current
values (rather than actual historical costs), and the errors likely to arise
therefrom.
Chapter 4 describes the significant impact of currency debasement on
accounts expressed in terms of money, even when rates of inflation
appear to be fairly ‘low’.
Chapter 5 outlines the different approaches taken by accountants and
economists and the resulting distinction between accounting profit and
‘economic income’.
Chapter 6 deals with ‘creative accounting’: what pressures lead to it
and what it entails.
Each of these chapters is more or less self-sufficient, but they are prob-
ably best read in the order in which they appear. To a small extent there
may be some overlap between them.
The book focuses mainly on financial accounting, on published com-
pany accounts, though there is some discussion of the accounts of pri-
vate companies and other entities, of government financial reporting
and of internal management accounting.
Chapters 7 and 8 also refer to statistics more widely; Chapter 7
discussing ‘spurious accuracy’ and Chapter 8 describing many aspects of
life where we are content to tolerate less-than-perfect ‘accuracy’.
Is this book intended for experts or for ‘non-experts’? The answer is
both. It is for everybody interested in company accounts or in the results
that analysts and others discuss. No doubt experts will be able to skip
passages where I have spelt out the basics in some detail; but there may
be other aspects of accounting where even they have something to learn.
With permission from the respective publishers, I have drawn on
parts of earlier books of mine, sometimes more or less word for word.
Several chapters use material from
Unshackling Accountants
; with the
agreement of my co-author Professor Walter Reid, Chapters 2 and 3
incorporate passages from our textbook
The Meaning of Company
Accounts
; Chapter 4 includes the gist of discussions about inflation and
the unit of account from
On A Cloth Untrue
; and the Lucas Industries plc
example of inflation accounting adjustments in Chapter 4 comes from
my chapter in Ward and Grundy’s
Strategic Business Finance.
I am most grateful to the following for agreeing to comment on an
interim draft of the text: Professor Adrian Buckley, Henry Gold, Ralph
Hulbert, Malcolm Raiser and my brothers Roger and Alexander
Myddelton. In various ways they all helped to improve the final version
of this book. I should make it clear, however, as some of them did, that
they do not agree with everything I have written.
D. R. Myddelton - Personal Name
ISBN-13: 978-0-230-2
NONE
Management
English
Palgrave Macmillan
2009
London
1-183
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