Accountancy Is the Priesthood of Modern Life (2020)
blind-spots.org
blind-spots.org
If you like N. Taleb's fooled by randomness the book "confronting managerialism" by Locke & Spencer is a great followup.
I've only ever heard this term used derogatorily (this millennium at least).
> At another employer, I managed teams of salespeople who generated subscription revenue for the organisation. My role was simple enough when you zoomed out: manage a budget that pays staff and logistics to bring in enough subscription income to cover the budget spent 3-5 times over. We hoped to bring in €3-5 for every €1 we spent. As a fleet of vehicles we used was approaching the end of a lease-hire agreement, we had the option of buying them out for a lump sum worth about 5 month’s worth of lease – let’s say €3k each or, getting a new fleet for another 3-year contract at €600/each per month. As someone whose responsibility it was to own a profit and loss account, I was happy to get maybe four or five years of use from the fleet at a vastly reduced cost as all we would have to do was fuel and maintain them. The accountants, however, were more worried about the abstract and frankly imaginary concept of depreciation that would come from us technically now owning these assets and them losing 10% of their value per year on paper. This theoretical drawback was seen as more important than the real-life cost-effectiveness of being able to win revenue for the organisation with this logistical cost stripped out. Compared with €600 per month, 10% of the value being lost off each car each year would only have amounted to €300 anyway! This means we paid 24x more just to be able to say we didn’t own the vehicles. An academic concept from the accountancy scriptures won the day against real-life cash flow. But accountancy always knows best when it comes to anything to do with money, right?
Depreciation for a car is obviously not imaginary. They have a specific resale value based on how much they've been used and they break down and need maintenance. Whether the old cars were purchased or the new cars were leased the business was presumably going to sell the same amount of product, so the only difference was whether or not the purchase or the lease made the company technically come out ahead... and when the accountants factored in the fact that the cars break down it allegedly wasn't a good deal. What am I missing here?
I'm trying to picture the car that is worth only 5 * monthly-lease-price when it is 3 years old, and the only way that makes sense is if the car is expected to require very significant maintenance costs beginning after year 3.
Monthly leases are usually a small percent of a car's new value (e.g., 3% over 36 months would exceed the cost of buying it new even ignoring lease downpayments, fees, etc).
Over 36 months the car should depreciate and the lease costs as percent of current value will naturally rise, but this scenario presumes monthly lease price reaches 20% of the car's value which is absurd.
A 10-year depreciation schedule is ... not one of those legit reasons. This guy has no ideal what finance does lmao
Cheers
By the time I got to the first point about accounting, I was already bored. In reading the first point I realized it is too vague to be persuasive. Stopped there.
Decided to look for author to see if they even have a background in accounting. ... author not identified
why do these comments pop up on HN all the time? why is it so critical that we get feedback from haughty readers? this is basically a tldr dismissal. how is that "curious" or "good faith" or whatever it is that HN bills itself as? if you think the article isn't high quality then just downvote. instead these comments become rallying points for people to have their biases reaffirmed.
The article also does include a note about their studies: "undergraduate in marketing and a postgraduate in finance." Though it seems more of a philosophical piece.
The justification to purchase the cars was idiotic. The capex spent on leases is corporate tax deductible, not so much when you buy them and they become depreciating assets (yes the paltry depreciation is tax deductible but the capex used to buy the cars isn’t). Organisations also use leases so they don’t have to manage the wear and tear maintenance on vehicles. Even when an organisation has a fleet manager logistically picking up broken down cars and taking them to garages is very expensive. For you techies this is similar to tech debt, imagine you cut corners on a project you did and left the organisation the person picking up after you will have to redo quite a bit of the work to finish it.
I would argue an organisation should never be held ransom to a pay rise. You simply acknowledge they are valued and promise to address at the next review. It sets a bad precedent to manage these processes adhoc.
>The accountants, however, were more worried about the abstract and frankly imaginary concept of depreciation that would come from us technically now owning these assets and them losing 10% of their value per year on paper. This theoretical drawback was seen as more important than the real-life cost-effectiveness of being able to win revenue for the organisation with this logistical cost stripped out. Compared with €600 per month, 10% of the value being lost off each car each year would only have amounted to €300 anyway!
... and remembered all the people saying that the major "benefit" of AWS (and related services) was that they get to purchase all their computational resources as operational expenditures rather than face the downsides from a capital purchase and its depreciation accounting. And the "only pay for resources as needed" was just icing on the cake.
> Our organisation’s accountants, in their infinite wisdom, had hardwired rules about maximum increases in pay for existing employees which blocked this engineer’s manager from being able to give them a raise in line with their market rate
Escalate the pay issue of that soon-to-be college grad up your chain. Why are you making this Finance's call? If there's no escalation path (or sympathietic exec), then it's a management problem, not a finance problem.
> As a fleet of vehicles we used was approaching the end of a lease-hire agreement, we had the option of buying them out for a lump sum worth about 5 month’s worth of lease – let’s say €3k each or, getting a new fleet for another 3-year contract at €600/each per month. ... The accountants, however, were more worried about the abstract and frankly imaginary concept of depreciation that would come from us technically now owning these assets and them losing 10% of their value per year on paper.
Those numbers do not pass the most cursory of accounting logic from a finance perspective. You'd reduce Opex 86% by buying & depreciating over 3 years. If you depreciate on a 10 year schedule you're looking at 95%+ opex reduction. There's legit reasons not to do that (is the company's cash position weird? What are this quarters #s looking like? What else is in capex this year? What costs might you be forgetting?), but this guy seems to wildly misunderstand those reasons.
They pray that their message will be heard on the platform they use.
They pray that the gods won't smite their business from its platform.
They pray the algorithms will choose a match that will love them and see them for who they really are.
They pray that their resume is kept by the filters and shown to a human who might understand it.
God is dead and the platforms have killed him.
The Medicine Men, the Beancounters, the IT Department, the Lawmen, the Brokers and all the other professions which act as a transactional cost for doing business, who communicate primarily via standardized forms, and who try to keep evil specters from haunting you.
But really, mostly to make the Taxman go away. If Uncle Sam finishes his colonoscopy so thorough that you’re still getting the taste of rubber off the back of your tongue a few weeks later and only charges you a couple hundred dollars for his time, that’s about the most you can really hope for.
I reckon in this article you could replace 'accountant' with any varied number of professions (lawyer, banker, science expert, IT expert etc. etc.) and the article would seem equally veracious.
This is similar to folks who say "Western medicine makes mistakes, so you should try the healing powers of crystals." The point of science is that we know it is wrong, but try to make it less wrong all the time. Economic thought definitely isn't always scientific, but this essay doesn't help.
Yeah, the accountants cracked the case...we can finally ignore the aviation engineers. Whoops...plane went down. Engineers fault.
The SEC clamping down on "non-GAAP" KPIs (even though a Nobel was won for the concept) represents that tension. Further there's a professor at HBS and I believe he argues certain network effect heavy tech companies they have negative depreciation (book value incrases with scale and time, versus say anything else which almost universally declines or at best stays flat). Negative depreciation implies the current tech P/Es are more sensigle, which in and of itself is an interesting phenomenon that arises from the professors work.
So the author is dabbling near some interesting currents, but unfortunately missed the mark here.
Caveat emptor.
I believe Clinton is the only president in the past 50 years who has ever presided over a government surplus.
GOP; gaslight, obstruct, project.
George W. Bush, not Clinton, presided over most of FY2001; but he inherited the FY2001 budget from Clinton.
Source: https://www.govinfo.gov/content/pkg/BUDGET-2021-TAB/pdf/BUDG...
(To be fair, during my lifetime, that's been about half the time.)
I've listened to many arguments about MMT and everyone who supports it boils down to the theory that if governments can just tax enough to hold off inflation they can spend as much as they want, and deficits in your native currency don't matter as long as inflation is unaffected.
The definition of inflation has gotten conveniently flexible. We see stock, real estate, healthcare, and education prices rising while some goods and services have gone down.
I think some of the deflationary pressure is from technological innovation (for example, a mobile phone does everything that thousands of dollars worth of equipment would do 20 years ago). Some of it is due to the deflationary pressure of globalization and the exportation of goods production to less developed countries (namely China). That trend won't last much longer though as those countries become more affluent (if it hasn't already reversed).
At any rate it seems when inflation does occur, MMT seems to think that governments can and will levy higher taxes at will to stem it off. And will subsequently lower taxes when inflation subsides.
I've rarely seen the government willfully lower taxes if they have a surplus. And I've rarely seen a politician run on a platform of raising taxes at will. It seems like such an unworkable theory in practice that it should be dismissed outright. However, we've already spent ourselves into a corner and we have massive deficits that are going to drag on our economy for a long time. So the MMT theory is alluring, as it allows for a level of irresponsibility we have not previously seen before. I don't predict this ends well, but I still see it as the last hail Mary of the fiat dollar regime.
It will either lead to a golden era or cause a world of hurt and pain.
Also, to me, taxes have nothing to do with inflation control. Or maybe it helps, but it is also not the main lever. From what i've tested anyway.
Production deficit is creating inflation. Every single country that went through hyperinflation saw a deficit in production the years prior and wasn't self-sufficient in food and/or basic amenities. And normal inflation is close to the same. Inflation comes when the production is strained: it was the case in the 30s, it was the case from the 50s until the 70s, it is still the case in China.
This can be caused by a positive effect (people are hopeful and want to consume more than what is actually produced and/or sold) or a negative one (drop in production, or in price of an asset/ressource that a country exploit heavily and use to buy food and amenities).
I don't think money supply have a huge impact on inflation, except maybe on asset inflation? Anyway this will be the MMT crash test.
Stock and real estate prices are assets, so have always been excluded from definitions of inflation, they're essentially inversely proportional to the interest rate. Rent (or the owner's equivalent rent) is included in CPI.
I share your concern about rising healthcare and education costs though, but that is largely a political choice - other developed countries are able to provide them for substantially lower proportions of GDP. (Healthcare costs will inevitably increase over time as countries populations age, but other countries spend much less on healthcare and achieve better outcomes.)
Good post from Noah Smith on inflation: https://noahpinion.substack.com/p/your-local-price-changes-a...
The three main drivers of deflation:
> But Inflation is not inevitable. There are numerous countervailing forces that have been at work for much of the past 50 years. The three big Deflation drivers: 1) Technology, which creates massive economies of scale, especially in digital products (e.g., Software); 2) Robotics/Automation, which efficiently create more physical goods at lower prices; and 3) Globalization and Labor Arbitrage, which sends work to lower cost regions, making goods and services less expensive.
* https://ritholtz.com/2021/02/stop-stressing-about-inflation/
For (3): the entire continent of Africa can be further developed.
Generally:
> Put into this context, Inflation is periodic, driven by specific events; Deflation is consistent, the background state of the modern economy.
It doesn't boil down to that. That's looking at it from the wrong angle.
The line is that to spend there has to be something to buy. If it is available to buy and nobody else wants it, then why not bring that item into use (largely the unemployed). Spending stops automatically when you run out of things to buy priced in your currency at a price worth paying.
If you see somebody talking about raising tax rates and lowering tax rates in relation to MMT on a counter stabilisation basis, then that person either doesn't understand MMT, or you've misunderstood what they are saying.
The primary stabilisation mechanism of MMT is the Job Guarantee and the secondary one is government demanding a lower price for goods and services it purchases, which it can force on people because otherwise the system will run short of spending.
Taxes are a very distant third or fourth in the control stakes. In MMT they are essentially a garbage collector. There to ensure we don't overcommit the system.
Also, very few have familiarity with management accounting or are versed in thinking about incentives, two traits that help prevent against the biases highlighted in the article.
And that got me thinking how in "the west" companies have to hire lawyers (and accountants) for legal compliance reasons.
I see a parallel there.
Companies need to hire lawyers because we live in a society that places a high value on playing by the rules and regulations that come down (idealistically) from an elected body.
So if I am a company that "has to" hire lawyers and accountants, I only "have to" do so because there are rules in my country about how I (for example) represent my financial situation to unsophisticated investors so they don't lose their shirts.
You can see how that's a different form of "have to" from hiring someone's uncle so your business doesn't get closed by the corrupt government?
Also, I have this perspective in which, given the case that this is a corrupt practice, it ends up as a form of taxation (corrupt taxation, but same thing from an certain business perspective).