The Hindu Business Line : Too tongue-tied to speak the language of value

WHAT is as noisy as an n{+t}{+h} generation bootlegged tape, or as unrecognisable as the last whisper in a game of broken telephone? "The accounting process called `consolidation'," writes Chris Westland in Financial Dynamics, from Wiley (www.wiley.com). The book is subtitled "A System for Valuing Technology Companies" but is "A synthesis of history, technology, accounting and finance," as Aswath Damodaran would describe it.

The author, a CPA, with a degree in mathematics, an MBA in accounting, and a PhD in information technology, begins his preface thus: "Technology businesses today are unlike anything we have seen in history. They are fluid, reactive... and greased by the greatest communication system in history." What is unfortunate is that "our current `language of value' — the vernacular of financial accounting — has grown inarticulate in the past decades."

When business with investments primarily in intangible assets contribute over 80 per cent of GDP in developed economies, we need a better `language' to track the performance of businesses. For the casual browser, chapter and topic heads are provocatively titled. Such as: Confessions of a CPA, accountants of the cave, thinking outside the nanobox, where GAAP is mute, can accounting improve itself, high crimes and double-entry, soap operas and management accounting, untidy accounting, the value clone, the trouble with audit sampling, and so forth.

"There is no true number in accounting, and if there were, auditors would be the last people to find it," said Harvey Pitt who once headed the Securities and Exchange Commission (SEC). Citing this, the author adds, "Only charlatans would claim to speak a language in which only the truth is ever told." This is because "there is no such thing as a faultless account valuation". Thus, "assessments of corporate value without an estimate of the error in that value also must be the work of charlatans."

Thus, there is more risk than meets the eye. "Embracing uncertainty will make the job of ascertaining risk an integral part of accounting," Also, companies need "greater tolerance of uncertainty." This is an area that CAs should not to shy away from, because "accountants and auditors are in a good position to assess risk, as they have access to proprietary information that investors, banks and securities firms do not."

A taste of new technology awaits readers in the chapter titled, `The End of Scarcity". The age of the nanobox is near, declares the author. "The conundrum of modern valuation is the trend toward unstorable wealth — wealth is becoming solely a function of your future ability to generate value."

Ever thought how `matter will become software' or if we will be able to `use the Internet to download hardware'? "The ultimate goal of matter-as-software research will be the nanobox — sort of futuristic copy machine that combines nanotech fabrication with flexible desktop-manufacturing methods used today for quick prototypes of new products."

Do analysts understand value better than accountants? This is a question that the book raises. The former look at future earnings and the latter historical perspective. "The result was a theatre of the absurd — securities analysts assigning fantastical valuations to companies that accounting statements claimed had negative net worth." As for analysts, "Error is not the only problem; the potential for moral hazard is obvious." And, "they are seldom independent."

Wryly, the author adds: "Things change less than we often believe. The business of forecasting has a long and dodgy history. In the ancient world, sorcery came in four forms: (1) divination; (2) sympathetic magic based on imitation, or by making use of associated objects; (3) thaumaturgy, or wonder-working; and (4) incantation, or the chanting of spells, verses, or formulas."

A book that can save accountants from spells and curses of the doomsayers.

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