Margins of Error in Accounting

186 Pages·2009·16.693 MB·English

by  D. R. Myddelton (auth.)

Margins of Error in Accounting
Also by D. R. Myddelton
ACCOUNTING AND FINANCIAL DECISIONS (1993)
ACCOUNTING DECISIONS (1983)
ACCOUNTANTS WITHOUT STANDARDS? (1994)
DENATIONALISATION: The Problem of Recapitalising (1970)
THE ECONOMY AND BUSINESS DECISIONS (1983)
ESSENTIAL MANAGEMENT ACCOUNTING (1983, 1992) (with M. W. Allen)
FINANCIAL DECISIONS (1983)
MANAGING BUSINESS FINANCE (2000)
THE MEANING OF COMPANY ACCOUNTS (8'h ed. 2006) (with Walter Reid)
ON A CLOTH UNTRUE: Inflation Accounting, The Way Forward (1984)
THE POWER TO DESTROY: A Study of the British Tax System (1969, 1994)
THEY MEANT WELL: Government Project Disasters (2007)
UNSHACKLING ACCOUNTANTS (2005)
WE'RE ALL NAZIS NOW (1970)
Margins of Error in Accounting
D. R. Myddelton
* © D.R. Myddelton 2009
Softcover reprint of the hardcover 1st edition 2009 978-0-230-21991-5
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First published 2009 by
PALGRAVE MACMILLAN
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registered in England, company number 785998, of Houndmills, Basingstoke,
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ISBN 978-1-349-30539-1 ISBN 978-0-230-59501-9 (eBook)
DOI 10.1057/9780230595019
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managed and sustained forest sources. Logging, pulping and manufacturing
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country of origin.
A catalogue record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
Myddelton, David Roderic.
Margins of error in accounting I D. R. Myddelton.
p. em.
Includes bibliographical references and index.
1. Accounting. 2. Errors. I. Title.
HF5636.M93 2009
657-dc22 2008037606
10 9 8 7 6 5 4 3 2 1
18 17 16 15 14 13 12 11 10 09
Transferred to Digital Printing 20 II.
Contents
List of Figures viii
List of Tables ix
Acronyms
X
Preface xii
Postscript xiv
1. Introduction 1
1. Accounting rules 1
2. Inputs and outputs 3
3. Is too much expected of accounts? 4
4. Quantifying margins of error 6
5. Causes and types of error 8
6. Simple mistakes 10
2. The 'Interim-ness' of Accounts 12
1. Introduction 12
2. Fixed assets - tangible 16
3. Current assets 23
4. Liabilities 26
5. Sales revenue 29
6. Revenue investments 30
7. Taxation 33
8. Conclusions 35
3. Basis of Measurement 36
1. The purpose of accounts 36
2. Realised and unrealised profits 40
3. Technical aspects of Current Value accounting 41
4. Implications of Current Value accounting 44
5. Revaluation of tangible fixed assets 51
6. Goodwill 52
7. Cash and liquid resources 55
8. Executive stock options 56
v
vi Contents
9. Provision for pensions 57
10. Discounting long-term liabilities 58
11. Derivatives 59
12. Conclusions 60
4. The Unit of Account 61
1. Money and inflation 62
2. Constant Purchasing Power accounting 69
3. Lucas Industries pic, CPP accounts 1969-94 79
4. Foreign currencies 82
5. Conclusions 84
5. Accounting Profit Versus Economic Income 85
1. Economic income 86
2. Historical cost accounting profit versus economic 89
income
3. Interest on equity capital 91
6. Creative Accounting 95
1. What is 'creative accounting'? 95
2. Incentives and pressures on managers 98
3. Profit and loss account 101
4. Balance sheet 104
5. Presentation and trends 107
6. Politics 109
7. Fraud 112
8. Non-public and non-profit-seeking entities 113
9. Conclusions 114
7. Spurious Accuracy 116
1. Accounting 116
2. Finance 122
3. Economics 128
4. Miscellaneous 131
8. Near Enough 134
1. Accounting 134
2. Sports 136
3. Weather 139
4. Political elections 140
5. Transport 141
Contents vii
6. Miscellaneous 142
7. Back to accounting 143
9. Conclusions 145
1. Introduction 145
2. Interim-ness 146
3. Basis of measurement 147
4. The unit of account 148
5. Accounting profit versus economic income 150
6. Creative accounting 150
7. Spurious accuracy 151
8. Near enough 152
9. Mis-reporting profit 152
10. Preventing avoidable error 153
Bibliography 155
Glossary 159
Name Index 160
Subject Index 163
List of Figures
3.1 Realised and accrued profit 40
3.2 Sharing the surplus of value over cost between consumer 45
and producer
3.3 Implied capitalisation of internally-generated goodwill 54
a. Cost and net book value of purchased goodwill,
amortised over time
b. Notional build-up of 'internal' goodwill
c. Implied changing composition of apparently
constant book value of 'goodwill'
4.1 Combining different units of account and bases of 74
measurement
5.1 The process of valuing an asset 86
viii
List of Tables
2.1 Various time-based methods of depreciation 19
2.2 Aggregate net book value for five fixed assets 19
2.3 Depreciation charge varying with asset life 21
2.4 Possible build-up of GSK 'applied research' asset 31
3.1 Possible margins of error basing profits on 50
differences between valuations of shareholders' funds
4.1 The Retail Prices Index from June 1947 to January 2008 64
4.2 Example of loss on net monetary assets 73
4.3 Understatement of HMC depreciation compared with 76
CPP depreciation
4.4 Understatement of HMC depreciation compared with 77
CPP depreciation as a percentage of HMC depreciation
charged
4.5 Understatement of HMC depreciation for UK fixed assets 77
over past 50 years
4.6 Lucas Industries plc 1969-94: HMC versus CPP 80
profitability
5.1 Differences between accountants' and economists' view 85
of income
6.1 Contents of 'Accounting Health Check Table' 98
6.2 Situations which may lead to suspicions of fraud 113
7.1 Price/earnings ratios of six large UK-listed companies on 124
14th December 2007
9.1 Differences between HMC and CPP results from 149
Lucas Industries plc, between 1969 and 1994
ix