I wrote yesterday about my proposal for sustainable cost accounting. One commentator, in particular, engaged with me on this issue. In several lengthy exchanges it became apparent that he did not like the proposal. I think it fair to say that Julian, which was the name my opponent gave, had three principle objections.
The first was that accounts should be objective reports on what has happened.
The second was that accounts are not instruments for change, which he thought government should deliver. He too, especial exception to my suggestion that sustainable cost accounting assume no offsetting without government licence.
Third, he wants a carbon tax. I have major reservations about carbon taxes. I will not be addressing that issue here.
I wrote this comment in response to the first two objections and thought it worth sharing more widely.
What we are seeing here is a clash of world views.
Let's start with accounting. Nothing in a set of accounts is neutral. Nor can a set of accounts ever just be a report. Accounting is always about providing decision useful information. And the framing that accounting supplies is of course determined by the decision that we want to make.
It is my suggestion to you that there is no chance that many businesses will survive in their existing form in thirty years time. That's not really very surprising. Just think back thirty years and imagine just how different things are now. But, and there is a massive but in this case, that change has now to be directed to ensure we reach net zero carbon. We cannot rely on random change any more, when so often this has been bad for the planet.
That, necessarily, requires that direction be given. It requires engagement by government. And precisely because I use the word ‘net' to preface zero carbon I recognise that offset is going to happen, because of course it is. But your own commentary shows that this is not going to succeed without regulation: there is no chance that all those claiming they will offset can do so. My suggestion on this issue is in this case recognition of a necessity.
But so too is the fact that I suggest that the need for reform be recognised now, and so upfront, a necessity. The fact that this will indicate that many businesses will not survive is inevitable. Over thirty years that is what happens. But we have never lived in an age where understanding who might have the capacity to survive that process of change has been more important.
That is because of the scale of financialisation within our economy. That is not a strength in my opinion, but is a weakness. We have over invested in intangible financial wealth and not real capital. The consequence is that we have to know with some reliability in which financialised product we should have confidence over another. To put it bluntly, we need to know which shares might have the likelihood of long term value, and which do not. The intention of my work is in no small part to assist investment decision making. It's at the core of one of the purposes of accounting. All I am suggesting is that be made plain. How can you object to that?
Another purpose of accounting is to influence management behaviour. For example, the focus on profit is not by chance: it is to direct management.
Again, the focus on tangible assets is a historical legacy, recognising that these represented realisable capital in the event of insolvency. Intangibles have always been of more dubious use for this purpose, and so have been, until, very recently of lower significance.
The refusal to recognise human capital has its own significance.
As was the assumption that externalities were of no consequence - and so therefore unpriced. The choice within accounting was to permit and encourage the plunder of nature for profit by assuming it was there to be used. To pretend that accounting is neutral when this is the case is just wrong.
In my opinion the climate (and biodiversity) crisis that we are facing is of immense proportion. Governments do at least pay lip service to that. But lip service or not, they are also making it clear that transformation is required. The demand that we cease producing petrol and diesel cars is obvious indication of that. But it is, very clearly the case that the transformation must be faster than many contemplate, and more comprehensive.
The issue implicit in what I propose (which despite your claims is more than adequate for an accounting standard, which are always principles based) is that accounting has to be integral, in itself, in that process of change. You can disagree with that, but what I propose is wholly consistent with the long term goal of much of accounting.
Accounting's aim, as stated by the International Financial Reporting Standards Foundation is to direct capital to those most likely to be able to use it to best effect on behalf of society. All I am seeking to do is aid that process by targeting attention on those best able to use capital as we go through a period of great change.
That change will require radical business re-engineering. Since accounting is, by necessity, a forward looking discipline since the going concern concept requires that, what objection can you have to the focus of that forward looking dimension on the issue of greatest importance now in determining whether or not an entity might survive, which is its ability to work within a net zero carbon framework?
What I am suggesting is wholly consistent with best accounting practice. The uncomfortable fact that you do not like is that it will expose the lack of preparedness in many businesses for what is to come. But what would you rather? That we have accounts that face the truth, or that we stick our heads in the sand?
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Julian, if he is an accountant, has probably been brought up in a very conservative cultural background – small or capital C, so is very suspicious of any innovation that may disturb his embedded notions of probity and tradition. He is probably wedded to the business managerial principles of maxim profit extraction and not letting diversion by what he thinks are irrelevant externalities affect the main business mission. This is a kind view, he may be a more subtle climate denier troll.
I’ll reply here rather than on the previous thread.
“The first was that accounts should be objective reports on what has happened.”
Yes indeed. Accounts are backwards looking statements of what has occurred. They are written within a rules based framework. You do not account for predictions of the future, such as accounting for unknown future tax changes or unknown future profits.
“The second was that accounts are not instruments for change”
Not in the way you are describing. Accounting and the rules it is based on are designed to try to give the most accurate representation of a situation at a given point in time. It is up to government to create the economic policy the accounting framework resides within.
“He too, especial exception to my suggestion that sustainable cost accounting assume no offsetting without government licence.”
It’s a truly horrible idea. It creates a huge barrier for entry to new participants in a market. It also means that those companies with this license have an insurmountable competitive advantage. The potential for favoritism and corruption would be vast. Or if the licenses are easy to get, what is the point of them?
There is literally no positive from this idea. I think you only suggested it as a way of getting around the problem of some industries and processes having no possible way of becoming net zero – you you invented something to get around your own accounting rules. That in itself points to them being flawed.
“Nothing in a set of accounts is neutral. Nor can a set of accounts ever just be a report. Accounting is always about providing decision useful information.”
Accounts are supposed to be neutral. It is a rules based system, trying to eliminate or minimize subjectivity. Useful information in accounts does not mean predictions.
“Just think back thirty years and imagine just how different things are now. But, and there is a massive but in this case, that change has now to be directed to ensure we reach net zero carbon. We cannot rely on random change any more”
Two things to note here. Firstly, your accounting plan removes time as a mode of change. By front loading all costs, it dramatically shortens the time necessary for transformation. To the point where very few firms would survive. This is not sensible. Secondly, why do you assume change is random? Government policy has already changed how companies operate and the result is a huge decrease in emissions. There doesn’t seem to be anything random about it at all!
“because I use the word ‘net’ to preface zero carbon I recognise that offset is going to happen, because of course it is.”
You specifically say offset cannot happen outside the individual company. Which means that in practice offset can’t happen for most companies as they would not be able to afford the huge upfront costs in doing so.
“But your own commentary shows that this is not going to succeed without regulation: there is no chance that all those claiming they will offset can do so.”
There already is regulation. Typically, the simpler the better in terms of effectiveness. Which points to a carbon tax. You also seem to be wedded to the idea that each company must be net zero. It doesn’t matter to the world if an individual company produces emissions, as long as they are offset elsewhere. In your model, that company would be forced to shut down. in the carbon tax model, they simply end up paying for the emissions they produce.
“But we have never lived in an age where understanding who might have the capacity to survive that process of change has been more important.”
This is one of the main problems with your plan. You are trying to pick who is going to survive now, out of all available companies. Which by definition means the ones with the biggest balance sheets. This means all the unknown future potential in all those businesses you have caused to collapse is instantly destroyed.
It’s a unbelievably bad idea.
“To put it bluntly, we need to know which shares might have the likelihood of long term value, and which do not. The intention of my work is in no small part to assist investment decision making. It’s at the core of one of the purposes of accounting. All I am suggesting is that be made plain. How can you object to that?”
It’s pretty easy to object to what you have said actually. Accounts are not predictors of long term value of a company. They are a statement of the most recent position. Not the future. What do accounts tell you about the future value of Amazon or Tesla? Their accounts looked disastrous ten years ago, and now look at them.
Which is where we have one of the big problems with your idea – which I have already touched on. Your plan essentially entails picking a few winners from all companies, and destroying the rest. The ones closed down because they are currently carbon insolvent now can’t compete and innovate, and all that potential is wasted. Tesla would have never made it off the ground under your rules. The ones that do remain would be in such strong positions of market dominance that the need for them to innovate would be greatly reduced.
“Another purpose of accounting is to influence management behaviour. For example, the focus on profit is not by chance: it is to direct management.”
Finally something I can agree with. But then why not use a carbon tax to channel that profit seeking behavior into seeking new ways to maximize profits by minimizing emissions? Sounds a lot better to me than just arbitrarily shutting firms down because their balance sheets are not large enough to pay upfront for transformation to net zero.
“Intangibles have always been of more dubious use for this purpose, and so have been, until, very recently of lower significance.”
Emissions are an intangible. Not only are they very difficult to measure for a single entity (I challenge anyone to measure their own emissions to any degree of accuracy) you then make the problem even more impossible by saying that the company has to account for all the (variable) use of it’s products over their variable useful lives as well.
That’s before you consider that technology will alter both the amount and cost of reducing emissions over time – making any cost placed on the balance sheet for net zero, a massive guess. It’s an intangible. And as you say, intangibles can be very dubious.
Again, why not simply avoid all of these headaches by charging taxes directly for creating emissions?
“which despite your claims is more than adequate for an accounting standard, which are always principles based”
Sorry but no. What you presented is not an accounting standard. You can’t even tell us how you get to simple outputs, or how things would in practice be treated. Then when issues are pointed out you create new rules on an ad hoc basis to try and head off the questions. What you’ve got is not an accounting standard, it’s barely an idea – and an awful one at that.
“You can disagree with that, but what I propose is wholly consistent with the long term goal of much of accounting.”
You are mixing up accounting with politics here.
“Accounting’s aim, as stated by the International Financial Reporting Standards Foundation is to direct capital to those most likely to be able to use it to best effect on behalf of society.”
Really not the case. Accounting’s aim is to record and present financial information. Not direct capital on behalf of society. I think that might be your aim, but not accounting.
“Since accounting is, by necessity, a forward looking discipline since the going concern concept…..”
Accounts are not forward looking. They are statements of the recent past. The going concern concept (apart from not being defined in GAAP) means only that the company will remain in business for the forseeable future. Forseeable being the operative – not for ever.
“What I am suggesting is wholly consistent with best accounting practice. ”
This statement is laughable. What you have suggested is unworkable and inconsistent. It relies on huge assumptions which you give us no indication of how they are reached, then dumping a huge cost on every balance sheet whislt at the same time removing every realistic way of covering that cost. It is also economically illiterate. I’ve pointed out the effects on competition and innovation it would have, and it would create monopoly positions with massive potential for corruption. It would destroy jobs. It totally ignores the basic concept that some production can never, by simple laws of nature, be zero emissions, but ignores any benefit from that production. It demands net zero within a company, when that is only necessary in the system as a whole. It wants to count end user emissions – essentially impossible, not to mention the likelihood of double counting. It arbitrarily targets some firms by size alone. It ignores the evidence of achievements already made through incentives, legislation and taxation – which have been significant – then tries to frame (all 11 pages of it) as the only solution to the problem, totally ignoring all it’s many, many inherent problems.
I could go on, but I hope you get the picture.
It’s just not a sound idea, let alone a policy.
It is very hard to argue with someone who has so little idea about accounting
The whole of accounting is future focussed – that is the whole basis for asset and liability valuation now
And going concern – the ability to survive – is its real bottom line
And for the record, if you think it’s rules-based you have never prepared a set of accounts
With respect, you have not got a clue what you are talking about
This debate is over: you are talking complete nonsense and I have no time to waste on that
It seems I have caused you to throw your toys out of the pram, because I think your sustainable cost accounting idea is flawed to the point of uselessness. I’d go as far as to say it would actually be counterproductive.
That said, it is so draconian nobody would ever vote for it, so I doubt we’ll eve get to test it in the real world.
“The whole of accounting is future focussed — that is the whole basis for asset and liability valuation now”
Future focused on valuing things today? Accounts are backwards looking. Unless you think people are filing their 2022 accounts already. They tell you little to nothing about the future, and are not prediction based.
“And going concern — the ability to survive — is its real bottom line”
GAAP has no definition for going concern. It is more often than not used to mean “not currently bankrupt”. It is not something you would try and claim for projections far out into the future. No accountant or auditor would sign off a statement guaranteeing the future position of a company – which is essentially what you are claiming here.
“And for the record, if you think it’s rules-based you have never prepared a set of accounts”
GAAP. IFRS. IAS. FASB. All accounting standards, or rules, if you like. You don’t just make it up as you go along. Or maybe you do, judging by the changing terms of your sustainable accounting plan.
This stuff is basic accounting 101. I’m surprised you seem to have it so wrong.
“With respect, you have not got a clue what you are talking about”
Yet here you are making up nonsense about accounting and all sorts of other things!
“This debate is over: you are talking complete nonsense and I have no time to waste on that”
Put the dummy back in. Throwing insults and shutting down debate is juvenile and a sure sign that you’ve already lost the debate. Which I think was already becoming apparent, as you can’t give a straight answer to anything.
The last comment reveals what I have always presumed: you were here to troll.
The rest shows you really do not understand accounting or accounts. At least I put my qualifications on the line. You do not.
This correspondence is closed.
Already there is a gaping whole in Julian’s argument.
Let’s start with ‘objective’ shall we?
Define ‘objective’ Julian in the context you have set it out. That’s what I’d say.
I’d also bet that Julian’s idea of ‘objective’ is ‘value free’ – after all it’s just numbers isn’t it Julian?
Obviously Julian’s ideas about accounting seems to be something along the lines of ‘Reductio ad absurdum’.
I did finance module in my MBA. The impression I got was that the industry standard for providing accurate financial information was malleable in the extreme. In other words it it was easier for accounts be subjective – representing the ideals of the CEO more than anything.
What I like about resource accounting is that it has the potential to connect operations to the real world. We only value a rain forest when it has been turned into developable land; only value an elephant when we’ve killed it and taken its tusks.
How is accounting ‘accounting’ when it chooses to leave so much stuff out of an operation?
That’s not being objective. That’s willful ignorance. Choice. Partiality.
That’s accounting as it is today.
Something struck me when reading the lst article and posts and now this one.
I’m guessing you are pro renewable energy, like windfarms and solar power?
Undr your rules, sustainable cost accounting, thy would all be carbon insolvent. Producing wind farms etc produces a lot of C02 emissions from the steel and concrete needed. They don’t actually remove and C02 though, so would have to offeset their C02 some other way according to your plan.
Doesn’t make a lot of sense to me. Makes your whole idea look very suspect.
You are wrong: you are assuming that the customer chain effect is ignored
Don’t think I am.
Your rules say that a company has to be net zero, including all it’s suppliers and customers.
For the windfarms, the suppliers to the company and the company itself wil create C02. From producing the windfarms and then maintaining them.
The energy those windfarms make will create no C02, so the energy customers don’t create any from that source.
But I don’t see any C02 production being removed. And you say very clearly that each company individually has to be net zero.
Which means that windfarms would still need to find other ways to offset emissions.
Not that complicated, is it?
So, the government can licence them….
Not that complicated is it?
Didn’t see government licenses anywhere in your plan.
Guessing every company in bsasically industry will need those same government licenses as well then, won’t they?
So what exactly will the criteria for those licenses be? I suppose you’ll have to make that up on the spot as well.
Or it could be that if this whole idea of yours doesn’t even make sense for green windfarms, and you have to start making things up as you go along like licenses to try and wriggle out of acknowledging the porlbem, then it’s not a very good plan?
I made clear that offset is available under licence
Doesn’t say it anywhere in here:
https://www.taxresearch.org.uk/Blog/wp-content/uploads/2021/03/How-sustainable-cost-accounting-works-March-2021.pdf
Misses the point though doesn’t it? If your idea means that even windfarms would need licenses to avoid your new accounting rules, which I thought were supposed to be green, then they seem like pretty stupid rules.
You’ve clearly cobbled them together and have had to make this licensing stuff up on the spot to get around the problem i’ve pointed out. Seems like other people have pointed out a fiar few other problems as well. I don’t seem to be the only one.
Vrey hard to take this scehme of yours seriousy because of it.
Why not read the links, as I suggested?
If you can’t be bothered to do so, please don’t comment.
More comment on the same lines will be deleted as it does not add to debate.
I drop in to this blog because I find ideas here stimulating even though I am neither an economist nor an accountant (caveat: as a result I might write rubbish) — simply because I am a thoughtful human being. But it does seem to me you are unfair discounting your correspondent Julian who seems to be genuinely trying to debate your ideas, although it would be helpful to identify where you differ in your premises before bickering about your conclusions.
The fundamental principle has to be good: what goes in annual accounts has a strong influence on company behaviour, so creating some sort of requirement to account for environmental impact and climate change has potential for good. And accounting in narrative terms would have a small fraction of the impact of accounting in monetary terms.
So there is a genuine debate to be had. And, in relation to the current exchange of views, that debate needs to be ongoing. At this point it seems to be sensible to debate possible rules rather than less tangible processes (the idea of government licences for example, unless tightly defined in terms of rules, just seems another way for a Prime Minister to give favours to his chums).
And then there needs to be careful consideration of what unintended consequences might result from any rules. For example I don’t think it would resolve the issue simply for every cement company to be bought by a conglomerate that also owned forestry businesses. Or for a company to be able to say that because they have bought a stake in the Magic Carbon Capture Invention Company they will be carbon-neutral in 20 years without further cost.
So from my position (naïve, as stated above) it seems that carbon liability accounting on the balance sheet, or some sort of carbon tax in the current accounts, both seem to be legitimate possibilities to work through in depth. Neither, nor anything else, should be ruled out at this stage. Our planet needs people like you, with the bigger picture view of both accountancy and taxation, as part of an urgent full and proper debate.
I am happy to discuss: I did with
But then he made claims so ridiculous about accounting that further discussion was a waste of time. There is little point discussing with someone who insist fundamentally false claims are right.
Sorry.
I think that one of your correspondents maintained that even farming couldn’t be entirely carbon neutral which set me thinking about longer term forestry projects and reforestation of the rain forest. While it is true of course that timber will act as a carbon sink, it should be remembered that plants produce carbon dioxide through respiration. For the purposes of offset calculations, how would one in accounting terms treat the vagaries of a hectare of forest in its production and absorbtion of CO2?
Since you obviously know the answer, why not tell us?
Sorry, I have to admit I’m stumped. It all seems rather cumbersome to me.
For goodness sake My Byson………….
There is natural carbon dioxide production on the planet and then what humans have been chucking into the atmosphere since we became industrialised. There is nothing natural about that. It seems to me that the planet could tolerate a certain level of naturally produced CO2 and even methane and sulphur dioxide but not that from millions of cars, chimneys and factories and even cows.
In fact all that crap we’ve polluted into the system means that there is less redundancy in the atmosphere to cope with natural events.
What is cumbersome to you is getting your head around that. Even if you set a zero level, you can use that as an objective to consciously REDUCE the impact and take account of it in your accounts. ‘Zero’ is being used to reduce – not necessarily achieve zero.
Zero is also good because it reflects urgency – especially now. Have you noted the ‘climate crisis’ language now~? It’s real OK?
Zero might be achieved later with new technology. But we must make a start now.
But unless we start that journey of reduction, there will not even be a reduction or a path to reduction created.
Got that? There’s a good chap!
Oh but for bit of imagination Richard!!