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My example tax is only a conversation starter. You would be right to say that the reality is a little more complex. But not much. I worked in the bond, fx, and commodities end of Wall Street for nearly 20 years and an average guy from my old department would know how to set, implement and administer such a tax for each product. It's not that hard. In fact a similar system existed for regulatory capital for a very long time.

The Communism comparison is really a red herring. The principles of the price system, the central feature of a free market, are under constant assault from informational asymmetries and externalities of all kinds. Before our era of jargon, they were simply called fraud and rumor mongering. HFT is 21st century micro-rumor mongering.

To protect the functioning of markets these are appropriate objects of regulation--even for a free marketeer like me. I merely suggest we modify the the regulation of an already regulated market.

Unfortunately the style of regulation we keep opting for punishes bad behavior of individuals--when it does anything at all--and ignores the systemic causes. This repeatedly plays into the hands of industry interests every time. The public interest requires more information, to reduce the tendency for fraud that our regulators have proven they cannot control.

"And anyway, if there's one thing banks are great about, it's passing on the fees to their clients. A one cent per-share transfer tax doesn't mean Wall Street is out of business. It means you won't have enough money in your 401k to retire."

While I agree with the rest of your criticisms, this is off base. You have to consider the second-order effects; banks will not simply continue to trade at the exact same volume as before whatever (presumably somehow fixed-up) tax is imposed, then pass the costs on to hapless consumers who have no choice but to just fork over the cash. They will have to trade less. Which is the point; however good or bad it may be, at least the core idea is making some account of second-order effects. When you tax a thing, you get less of it.

(My specific opinion is that it isn't necessarily a net gain as written, it is after all just an HN comment, but that the general idea of carefully re-inserting some friction back into the market as a damping factor may be a useful line of inquiry. But it's not going to be easy.)

I'm with you aside from this: "why should accounting be automatically less creative than painting?"

I'm sure you don't mean what it looks like, but I can't imagine what that could mean.

Why can't your "gut" be involved in forecasting the success of your company? People often come up with the right answer without knowing how; making them write down every assumption they made while coming up with an answer would make coming up with an answer impossible.

The real world is not 9th grade math.

People often come up with the wrong answer without knowing how, too. They just forget about those times.

It's been well documented— your perception of the "real world" is heavily distorted. That's why we have math— to figure out the right answer despite human biases.

My point was about forward looking statements and inducing companies to reveal their rational processes.

So by all means, use your gut. Then show your work. People can then bet on your gut. Or somebody else's work.

Just forcing a company to say "We expect X amount of growth in the next financial quarter, and the reason we expect this amount of growth is - even though we are an international financial corporation - guesswork and gut feeling, rather than any kind of formal model" would be a step forward.

You have two companies. Both predict X growth. One provides a full model which backs up their prediction. The other flat-out states that they made the number up. Which would you pick? It doesn't actually matter - the point is that their operations are more transparent and your choice is more informed.

I think he means that if you force every company into the same financial mold, you're not going to get anything interesting in the public markets. Anyone outside the box will not play in the public arena because the rules will be so restrictive as to be unworkable.

Most people think of accounting as being like math. It's more like writing.

Creative accounting?

How can something that is supposed to report 'reality' be 'creative'. It's analytical, and highly objective... where is the creativity?

It's analytical, and highly objective

Is it? The deeper you look, the more arbitrary it gets, in my view.

Could you expand on that?

From my point of view, it's money in vs money out... I'm not sure how "creative" you can get before you are "lying".

It's been a while sine I felt comfortable discussing the details of accounting, but sometimes the need to classify things gets in the way of the truth. Do you capitalize a cost or expense it? Often you can argeue both sides of the coin, but ultimately, you're forced to choose.

The quantitative nature of accounting masks a nuanced and imprecise language meant to help communicate the overall financial story of a company. It's not like physics where there is a right and wrong answer.

You could use "creative" methods of describing and classifying transactions that aid in telling an accurate story (as defined by who?). You can also twist the truth. But there is no set of rules you can universally follow that will result in The Answer.

Upvoted.

While financial accounting (statements for shareholders, taxes etc) is governed by GAAP and meant to be as standardized across orgs as possible, managerial accounting (internal statements for the purpose of decision making) require a lot more decision making about how you measure things in the interest of providing the most accurate financial picture of the decision at hand.

I am very rusty so anyone who has some real experience in accounting, please correct me. That said, consider a simple example: a manufacturer which sells two types of windows and creates the glass which is used in them.

Line A of windows is selling at lower than expected prices and in financial accounting terms it is loosing money. On the other hand, line B is selling well and appears profitable. With this in mind, the company kills line A expecting to increase their profitability by the amount the line was previously loosing. Unfortunately, the subsequent decrease in the amount of glass the organization is producing reduces the scale of their glass making operation and drives up their per-pane cost. At these higher input costs, line B is no longer profitable at it's current selling price and the company looses even more money than they would have had they continued to run the "unprofitable" line A.

Of course, any competent management team would be able to forecast this scenario and devise a host of other solutions (sell glass to a competitor, for example). But the question here is: how should they present this reality in financial accounting? Decrease the recorded cost of glass used in line A? Add some sort of subsidy from the profits of line A?

All of a sudden it becomes extremely "creative".

Think about assets. What is the worth of your car, your house, your furniture, etc.? E.g. the car cost 20k initially, after two years of use, you discount 20%, so you put 16k into your books. Is that objective? Essentially, you have to predict the money-out and there is happing a lot between money-in and money-out.

I think their point is that you don't put the car on the books as worth anything. Instead you declare you own it and someone else can decide what they think it is worth. Anything that requires interpretation would be up for discussion.

How much is your car worth?

    * What you originally bought it for?
    * What you could buy that exact model year for today? From whom?
    * What you could buy a similar car for today?
    * What you could sell it for? To whom? In how much time?

And that's for something as tangible as a car, listed on the market with easily searched prices. This is a simple example, but I recall that some types of assets (land?) are valued at their original purchase price, which is far deflated from the current market value.

I think of accounting similar to benchmark tools for software -- it's all about what you want to measure, and depending on assumptions you have some wiggle room.

Good points but I think the answer is to pick one (I'd vote #4 but I'm open to debate) and enforce it at a regulatory level. Issues arise when you're allowed to change how you value assets based on what's most favorable at the time.

Ah... but if you do that, you'll be forcing companies to pick an arbitrary measure, regardless of how well it describes the underlying economics. The goal of accounting is description, not conformance.

As a practical matter, this would require the enforcement agency to publish the correct price for every asset regulated.

Publishing a formula for this calculation wouldn't be good enough, because then you would be required to value things based on the formula and that leads you back to...accounting.