4 of 4 people found the following review helpful:
5.0 out of 5 stars
A BASIC BOOK, October 5, 2006
This review is from: Smoke & Mirrors, Inc: Accounting for Capitalism (Cornell Studies in Money) (Hardcover)
Smoke & Mirrors walks the reader through the arcane, bewildering world of the modern corporation, showing how contradictions suffuse the accountants motives and corporate morality--or immorality in most cases. It is a basic introduction to the limits of numbers, whoever issues them, and highly critical of conventional wisdom. No review does justice to its subtle account of numerous basic issues, but it shows how one must be beware of fiction in today's global economy.
It is an excellent read, short and well-written, and very sophisticated regarding the corporate world. Its a basic read even for the most advanced analyst.
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1 of 1 people found the following review helpful:
5.0 out of 5 stars
The Impact of Accounting Standards on Business Policy, May 29, 2010
This review is from: Smoke & Mirrors, Inc: Accounting for Capitalism (Cornell Studies in Money) (Hardcover)
This book began as a students' project. As the three authors state in the introduction, they are not professional accountants, nor business school graduates, but engineers with a keen interest in the functioning of the market system. As part of their practice-oriented curriculum, graduates from the elite engineering corps known in France as "X-Mines" have to team up together and complete a thorough study on an issue with direct business policy relevance. Their choice of topic was nonconventional at the time, as the authors note that "even today, the accounting literacy of many French business executives is worrying low." The report was completed shortly after the Enron scandal erupted, and the book was first published in French in 2004 under the title: L'Information financière en crise.
Several adjustments were made for the US edition, starting with a new, more catchy title. Smoke & Mirrors, Inc. is the name of the fictitious company, a struggling producer of fireworks, which features as vignettes at critical junctures of the book. Its CEO, John Smith, is lured by consultant John Wills into a binge of creative accounting, which causes the distress of individual shareholder James Littleman, who then complains to standard setting authorities. They all band together to form a consulting firm in a happy end, while an annex presents the financial statements of Smoke & Mirrors, Inc. under the various accounting schemes.
The immediate motivation for the book version was the Enron accounting scandal of 2001, which led to the bankruptcy of the energy-trading company and, as a collateral damage, to the disappearance of its auditing firm, Arthur Andersen. The scandal shook the faith in the foundational principles of US-style capitalism. Accounting issues were suddenly brought to the fore. They were no longer the preserve of professionals that the standard joke describes as "people who solve problems you didn't know you had in a way you don't understand". The whole matter also became heavily politicized. The US Congress passed the Sarbanes-Oxley legislation, introducing sweeping changes in corporate governance, while in France President Chirac wrote to Brussels about seemingly obscure issues of fair value accounting.
Beyond book-keeping and accounting rules-setting, the authors are preoccupied with broader issues: the mutations of capitalism, the growing role of finance, the future of corporate governance, and the global governance of standard-setting institutions. They argue that the popular distinction between "Anglo-Saxon capitalism" and the "Rhine model" no longer corresponds to today's reality. Germany has adopted features of the US model of corporate governance, while in America the growing role of business elite networks, the rise of private equity and venture capital are more akin to the "relationship-based" financing system than to "arm's length" finance. Similarly, the distribution of shares among all employees of US technology startups contributes to a corporate culture of consensus which, although very different from the German co-decision system, also marks a new kind of relationship between managers and employees.
The authors exhibit a knowledge of financial engineering and accounting culture that go well beyond the level of an average CPA. They note that the distinction between principles-based and rules-based standards, with US GAAP more representative of the former and IFRS closer to the later, is less clear-cut than sometimes claimed. The rules-based nature of US accounting does not reflect a deliberate choice, but is the result of their longevity in a country with a rich legal culture, as FASB amendments to close loopholes and court rulings to interpret standards have accumulated over time. Being relatively new, IFRS have been less stress-tested, but their mandatory adoption by large European companies since 2005 will most likely lead to the addition of clarifications and corrections in order to reduce the legal insecurity that may apply from their application.
The authors do not shy away from addressing hotly disputed issues head on. They note that stock options were originally supposed to align the interests of shareholders with those of managers, but that in practice their widespread distribution "seems to have led a large number of executives to abandon prudence, to focus on short-term targets, and to implement highly aggressive accounting policies": in short, the incentive device turned an incentive into fraud. But on the other hand, they note that "stock options are an important device for start-up technology companies, which themselves are widely considered one of the key drivers of long-term growth in the United States: such companies often lack sufficient immediate resources to pay their employees in cash, but they enjoy a high growth potential and therefore the prospect of considerable value creation for shareholders."
Compared to this balanced assessment, they are more inclined to take sides on the debate about the shift to fair value accounting and mark-to-market. Remember that President Chirac pointed out the supposed "increased dependence of the economy upon finance" in his 2003 letter to the Commission about the adoption of IAS 39. As the authors note, "it is easy to identify some shortcomings of fair value accounting, but it is much more difficult to find an alternative method that would generally be preferable." In a similar fashion, they argue that the interests of the consumers of financial information should be better represented in the process of standard-setting. Although they don't state it so bluntly, they clearly favor the adoption of IFRS by all main jurisdictions and the creation of a global level playing field in accounting.
The chapter that I found the weakest in comparison with the rest is the analysis of global rule-setting by the International Accounting Standard Board. The IASB is a unique and fascinating experience of private sector-led, network-based global governance regime. The authors do present the governing mechanisms and the main debates associated with the growing power of this global standard-setter. But the reader doesn't get a sense of the forces in presence and the issues at stake, and the discussion elaborates on technical points instead of focusing on the big picture. But this minor shortcoming, which may be linked to the lack of transparency of the IASB as an institution, should not diminish the interest of the book. On all other aspects, Smokes and Mirrors, Inc. was so much ahead of the curve that four years after its publication by Cornell University Press, and more than eight years after the research work that led to it, it remains entirely valid, even prescient in some respects. Published shortly after Enron and with an original focus on French business policy concerns, it was born on the spur of of the moment, but with sufficient depth and ambition to outlast the circumstances that led to it.
As a final word, I feel it is my obligation to disclose that I received this book as a gift from one of the authors, whom I feel privileged to have befriended.
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