The Vital Role of the Accountant (Part 2 of 2): Some Implications When This Role Is Ignored

Tax Notes economic consultant Gene Steuerle concludes his two-part series on the role of the accountant, discussing the implications of when that role is ignored. Tax Notes economic consultant Gene Steuerle concludes his two-part series on the role of the accountant, discussing the implications of when that role is ignored.The Vital Role of the AccountantPart Two of Two Parts: Some Implications WhenThis Role Is IgnoredThrough accurate accounting, vital economicdecisions are made more efficiently by individual in-vestors and firm managers on how to channel re-sources to their best and highest use. The need for goodaccounting involves far more than mere bookkeepingand arises from the fluid and vibrant nature of themodern economy. Administrable systems of account-ing develop mainly when individuals and firms needto exchange information in the midst of their transac-tions — whether unloading boats, selling goods andservices, or paying workers for their labor. Since taxaccounting latches onto the accounts required forfinancial purposes, it should not be surprising thatmost taxes have as their base some portion of the finan-cial accounts of the modern firm.There are several implications for some ongoingdebates over tax and economy policy:(1) Switching tax systems is not going to reduce therequirement for good income accounting.There is little doubt that the income tax system is anaccounting mess. Much is due to all the special excep-tions to accounting accurately for income. There is alsoa good case for taxing some people on the basis of theirconsumption rather than their income. In particular, itis hard to justify taxing more the earner who saves thanthe equally situated earner who does not. However,many consumption tax advocates stretch these argu-ments to suggest that great simplification in account-ing will come simply by abandoning the income tax infavor of a consumption tax.This view generally fails to reflect the requirementfor good financial accounting. Firms still need to mea-sure depreciation and inventory gains. They mustfigure out which foreign operations generate incomeand which do not. It is still worth knowing whichsubsidiaries are adding to profit, and which wageearners are being paid compensation according to thevalue they add to final product. If the abandonment ofincome tax accounting simply encourages firms to bemore lazy and less informative in their financial ac-counting for income, then the economy becomes lessproductive, not more. But one thing is sure: The com-plexity and need for income accounting would not goaway — and should not go away simply because theincome tax was converted to a consumption tax.(2) Deviations from good accounting for income rep-resent threats to economic growth.Consider next recent debates over items like stockoptions. One can reasonably debate whether or not itis possible for some firms to price options well, but acorresponding point is not debatable. Paying compen-sation in a form that is hard to value imposes a cost onsociety. The cost may be imposed on stockholders ingeneral, who cannot figure out well how to allocatetheir saving according to the profitability of differentfirms; on stockholders of the option-providing firm,who cannot figure out how diluted their shares arebecoming and, hence, delay demanding reforms whena company becomes less profitable than it may firstappear; or on workers, who may be unfairly compen-sated by managers who cannot allocate rewards ac-cording to their productivity. Simply put, if the totalamount of income and its allocation is made less cer-tain by the offering of stock options, then there is aneconomic cost to both the firm and society. Such a costcan only be justified if one can prove some offsettinggain relative to all other, more accurate, forms ofproviding compensation.There is plenty of fault to go around. Silly provisionsin the tax code that discourage accurate accounting forincome, such as the $1 million cap on the deductionfor cash compensation, may have an economic costbeyond their potential tax consequences.(3) Accountants should be trained to identify theirown professionalism with accurate and transparent ac-counting for income — not so much for their own sake,but for ours.I cannot emphasize enough how important account-ing is to growth and the efficient functioning of themodern economy. I wonder, however, the extent towhich accounting schools today call on their graduatesto attain the highest level of professionalism possible.Accountants can be trained to sell tax shelters or tohide total compensation of corporate executives fromshareholders or to lobby for new tax breaks for clients.But their first and p