Sunday, December 18, 2011

Accounting class comes to the real world

I'm no CPA.  When I entered business school I know pretty much nothing about accounting.  My understanding was that accounting for companies was something like balancing your checkbook or what Mint spits out.  Oh how wrong I was.  First step was becoming acquainted with accrual accounting.  Cash in, cash out was no longer enough to merit saying your company had earned money.  Then I had to figure out all of the different ways that that data is presented: balance sheets, income statements, statement of cash flows.

It sounds incredibly boring and sometimes it was but the financial statements released by companies are read by thousands of people around the world in minute detail.  Those financial statements, seemingly mind numbing tables of incomprehensible numbers, are scrutinized by analysts in funds controlling trillions of dollars.  So when something is noted there you may not know about it but the right people listen and their money talks.

Before business school, tantalizing headline aside, I would have ignored this Wall Street Journal article about annual reports, a company's yearly overview of their financial statements.  I would have been missing out.  Congress last year slipped a little new requirement in for companies' annual reports: disclosing if they do business in the Democratic Republic of Congo. This doesn't sound like a big deal in a mammoth document that you and your neighbors or friends don't read, but it could potentially drive out of business Congolese mining that supports "kidnapping, child labor, rape, mutilation and murder." 

Companies are leery of reporting any inaccurate information on their annual reports.  Doing so can have major legal reprisals and, more importantly, cause a large drop in their stock when inaccuracies become known.  No one wants to invest in a business that doesn't tell the truth since there's no way to know what you're really getting for your investment.

So when companies are legally obligated to report if they use materials that originated in Congo mines they take it seriously.  This new regulation will hopefully drive a system for better tracking supply chains and will give companies a better system, which is also more transparent to consumers and investors, to see where their materials come from.  Once that happens, few companies will want to make the disclosure on their annual report that they are still using tainted materials and there will be a strong reason for them to switch away from the mining businesses that finance the warring factions committing atrocities in Congo. 

A conflict which the best diplomatic efforts haven't been able to reason with, human suffering that aid efforts can't begin to assuage much less stem, and a mess that is well funded so that outside governments couldn't shut it down.  Until now.  One little slice of an 850 page banking regulation that affects paperwork that few regular Americans actually read might cut off the life blood of the whole thing and degrade the backbone of funding to the point where conflict in Congo comes to a grinding halt.

It's by no means a done deal; the Securities and Exchange Commission hasn't hammered out the details yet and they're already taxed to enforce existing rules.  But even the prospect of disclosure has companies thinking and there a glimmer of hope for efficacy and real change.  And if this works, still a big if, it may provide a template for other change in the world.  Conflict diamonds, child labor, you name it.  Companies won't just be held accountable by consumers who lack the leverage to get real information but by their own supply chains and major customers - the core of their business. You may be able to really know which companies do business you don't agree with.  Socially responsible investing might have more data, more participants and more teeth. 

All through accounting. Write it off as a dull subject for nerds with pocket protectors at your own risk.

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1 comment:

  1. There definitely is much more to accounting and finances than meets the eye. While it can be nerve-wracking due to all the information that has to be correct, it is definitely not boring.