Business

Tax gaap: the impossible gap?

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In life there are only two certainties: death and taxes.

So it was said, but in uncertain days an accountant might need some imagination.

It has often been said that GAAP (Generally accepted accounting principals) were introduced in order to ensure:certaintycomparabilitycorrelation andcorrespondence

between one set of financial statements and another. This is more certainly the opinion of many a man who has sat on a Clapham omnibus, and the judges who have introduced him from time to time to justify their extraordinary abilities to understand the law in a way which would rather mystify the other man on the said omnibus.

Good accountants (and I would refer you to the later article in this series Numbers cannot fail for another example of this kind) have long since known otherwise.

Before any form of GAAP was imposed upon the profession, by the profession of course, accountants were quite free to make up their own minds about what a true and fair set of accounts should look like. The book keeper presented them with a trial balance and the accountant would make of it what he would, or rather what his masters, and in particular the Chairman of the company required.

The introduction of GAAP changed all of that, and imposed a number of constraints upon how the numbers that the book keeper presented could be interpreted. This made the life of the accountant, by now called the financial director of the company, just a little harder, but by the careful application of GAAP he was still able to ensure that the gap between what the Chairman had promised at the beginning of the year and what the bookkeeper presented to him was narrowed and eliminated. The most profitable area that the financial director had for this enterprise was the valuation of stock.

Sadly his life and freedom were going to come to an end. There were a number who thought that the approach taken to the valuation of stock was not careful enough and a little bit of precision, not to say concision was required in the methods being used. The life of the financial director was becoming increasingly difficult.

But on the horizon was a rising star in the form of the company tax department. They had been pretty dull and boring individuals for many years, doing endless calculations based upon the numbers that the finance director produced to please the Chairman, and churning the numbers out quite mechanically without any particular thought given to what they meant.

As the finance director found it increasingly difficult to ensure that the Chairman kept his promises, he had to look to the tax department for help. New tools were required and they came in the form of new standards of GAAP. Accounting for taxation, in particular deferred taxation, became a new and big thing. This was not an area that the finance director understood, so his colleague in charge of those dreadfully dull tax people was elevated to the directorship as a Tax Director.

It became the job of the Tax Director to apply UK GAAP in so far as it related to taxation in such a way as to ensure that the gap between what the Chairman had promised and the Finance Director could not provide and what the book keeper presented was minimised. This was a job which required a great deal of imagination and a nimble exercise of the mind. His judgement had to be exercised at times in contradictory ways concerning the need to provide or the ability to recognise deferred tax assets and liabilities. Such things did not come easily to him, but as bridging the gap by judicious use of GAAP brought hearty and healthy praise, not to mention stock options and bonuses, he was ever willing to exercise his judgement appropriately.

The world is however an unforgiving place. A number of scandals coupled with poor economic circumstances, caused his colleagues, who it should be noted generally did not work in firms which could give stock options, thought that accounting for taxation was a little too much of an art, and required perhaps a little more science and robustness to be applied in the form of FRS19.

The Tax Director went to speak with the Finance Director about the problems that they would jointly face. Time was short, before long a new year would begin and the Chairman would make new promises. The new and tighter standards would make it increasingly difficult for either of them to bridge the gap by careful use of GAAP between his promises and the book keeper’s figures. They had been doing this for so long, there really was quite a bit of bad news that they had somehow between them managed to sweep under the carpet. The new world threatened to bring all of that home to roost.

They formed a plan and a strategy by which they would persuade the Chairman that he would have to moderate his words and somewhat lower the expectations of the shareholders. They were very much afraid that their strategies would fail completely and not only would the Chairman continue to his own ruin this time to promise more than would be delivered, the time would come almost immediately for them to cash in their stock options. They wondered how they might be able to do that without falling foul of insider dealing regulations before the bad news broke.

They were both deeply in despair as they walked slowly down the hall towards the Chairman’s office, when they chanced upon one of the new recruits in the accounts office. Why was she there they wondered, should she not have been sitting one of those wretched new exams that actually examined your knowledge of accounting standards. So they enquired of her circumstances. Yes, she had sat an examination, that very morning. The whole thing was about International Financial Reporting Standards. She was very exicted about them and they really found it both quite hard to get a word in edgeways to shut her up. They really had no time for this, but because they had expressed some interest, she thought that that was permission to go into every detail of the exam, how IFRS should be applied and what the effect of the transitional rules were. At first the Finance Director and Tax Director were thoroughly put out by all of this, they had to go to a difficult meeting with the Chairman for which they had no heart, and really none of this was going to be of any interest or use to them ever!

Slowly however the implication of what she was saying came home to them. On the transition to IFRS they had the opportunity to bury…. and afterwards impairment rates were lower…and the tax charge depended upon whether you were going to….They became somewhat excited by all of this, so much so that the Finance Director, with a nod from the Tax Director, asked the young zealot to come with them to the Chairman’s office. Ah! she could not come straight away, please could she tidy up first. That was of course no problem. Our pair of directors now had a few moments to scrap their original plan. They agreed now to go to the Chairman with a view to persuading him that in order to be seen to be ahead of the curve they should adopt IFRS at the earliest opportunity. They were quite sure that after their meeting he would want to ensure that he spent a more time with their new recruit to hear from her more about IFRS and how it would work for them, after all he would need to know those things in order to speak about it in his forthcoming oration to the shareholders, would he not? They were also quite sure that he would not understand a word of what she said, but at least he would enjoy having a few dinners with her.

The problem was solved. The consequences of years of planning and bridging the gap by expedient (never say pragmatic) use of GAAP between the bookkeeper’s figures and the Chairman’s would be lost in one fell swoop, and a whole new world of possibilities in IFRS lay before them.

Zoom

Scribbled on a napkin a profound truth of the 20th century lay in tatters

Numbers cannot fail

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In the ancient world, it is said, and in some modern people groups, counting was 1, 2, 3, many (not note 1 2 many). It has since long been known that there are three kinds of accountants in the world. Those who can count, and those who can’t.

I had been introduced to Take four a couple of years ago

On that former occasion the gentleman concerned was walking down Fleet Street late at night having just finished work. The frog leapt up to him, and eventually discovered that he was a software developer – probably a C++ coder.

Take five also has another guise, a man is troubled by the question what is two and two and began his search for the answer.

He started with his old arithmetic teacher at school, to whom the answer was obvious. This did not satisfy him, it was too simple an answer.

So he then moved on to ask a university mathematics professor, who held him spell bound for several hours whilst he lectured on number theory. It all sounded so perfectly reasonable and what wonderful logic, but soon after he had left the company of the great professor it began to dawn on him that the professor had not actually answered his question at all, even though he clearly knew how to resolve the problem and had provided him with all the tools he needed to do so. Nevertheless he could not figure out how to use them himself.

So his attention turned to others who understood numbers. The bookkeeper in his office seemed the next place to go.’He must be a good choice’, he thought to himself, ‘after all he spends all of his time putting numbers together in a variety of forms’. He received a swift, almost courteous, but perhaps rather more curt, reply from the bookkeeper, who did not seem to want to be distracted from his absorbtion in adding up what seemed like an interminably long list of numbers on what looked like a roll of paper. Remember, for every debit there is a credit, he said, when you add the balances up they must come down to zero. Debit 2, credit 2. Zero you see.

Well he didn’t see, and so he turned to the banker. Although the banker dealt primarily with money and not numbers, he knew it was important to keep a track of how much you have, especially when it belongs to someone else, so it seemed to him that the banker would have to do some counting and adding up. But the banker’s answer left him totally perplexed, as the banker talked about double debitting, creditor and debtor balances, borrowing and lending, so he was not sure even whether the banker thought that two and two made either something – and a rather large something at that – or when you put them together nothing at all.

The next resource he considered was the economist. Surely an economist would be able to provide him with an answer. Indeed he could, as he found out. The economist introduced him to Keynes and monetary theories, supply and demand, propensity and a host of other ideas that had never previously occured to him and before long he began to understand that the economist thought that two and two made something just a little bit less than four, because you always lost something on the way.

He was becoming rather disconsolate. Noone so far had been able to provide a satisfactory answer. He thought about asking an actuary, because he had heard that an actuary did some very wonderful and special things with numbers. His friends strongly advised him against this course of action knowing that it was an entirely fruitless expedition. Nevertheless against their better counsel, he went to an actuary who had an office in a very narrow lane towards the river. When he got there he was led up a narrow winding staircase to a rather dark room. It was rather like making your way through a monastery to the holy place where the shrine was kept. There was the actuary. It was obvious that he was held in awe by those who worked for him, the soft soled slippers which were exchanged for shoes on the way to his room, for we could hardly call it an office, and the hushed voices in the corridor outside made that very plain. The actuary sat at a high desk on a tall stool with a pen in his hand. He was completely surrounded by books which looked as if they had not been opened for years (indeed they had not for the actuary had finished writing in some of them twenty years ago, and had written on the cover of each one the date on which it was next to be opened in order to make the next entry in it). The actuary moved. It was evidently a signal to come in and sit down as a chair for a visitor was provided. The others left the room and the door closed completely silently. It was only then that he noticed that even the pen with which the actuary wrote made no sound on the paper.

After what seemed like eternity but was in fact only twenty minutes, the actuary spoke and asked what his enquiry was. The question was placed, and silence followed for another twenty minutes. The actuary spoke for a second time. He had never heard a man speak so clearly. Every word was elucidated with the utmost precision. Every syllable was given exactly the correct amount of inflexion. He was awestruck and began to understand how the actuary had come to be held in such high regard. Then silence, and in the silence he realised that he had not heard a single word. He had listened to the sounds of the actuary’s voice and had been so entranced by it that he had forgotten to put the words together to form sentences, which had meaning intended for his understanding. Then the actuary spoke for a third time. This time he listened. He refused to be put off by the quality of the sounds and tried to devote himself to understanding the content. Three hours later the actuary was still talking in the most eloquent way you could ever imagine. He had not repeated himself, and he had not strayed from his subject, rather he had laid out the foundations of his arguments and established the framework in which he would proceed, rather like a grand Mahlerian symphony only much, much longer. He eventually concluded his analysis and presented the main points again in a recapitulation which itself took well over an hour. So, what was the answer? An answer is available, but the actuary had already closed the book in which he had been writing, for all the while he had been speaking he had written every word, every syllable, every accent into a book on the cover of which he wrote a date. ‘Only time will tell the outcome of all things’, he said.

Well he had had two slightly different answers to his question and been utterly perplexed by the others. Where could he go then, and it suddenly came to him, ask an accountant. He reckoned that because that was all they ever did, add numbers together, an accountant would be able to provide the answer. So he found one.

He had to wait in the accountant’s reception what seemed to him to be an interminably long time, during which time he thought about all the important counting and adding up the accountant would be doing. But eventually the partner’s secretary came down to take him up to his office. He went in and was immediately put at his ease by the quality of the furnishing, the deep carpets, the heavy curtains and leather chairs. The manner of the accountant also commended itself to him. The man was not at all overbearing but quite diffident, even shy, and yet somehow exuding an air of confidence that could only come from someone who knew exactly what he was doing and why he was doing it. He felt sure he was going to get the answer that he so desparately wanted here.

The accountant introduced himself, spoke a little bit about his practice and then started to get to know his visitor by asking appropriate questions. Eventually the accountant asked what business had specifically brought him to his office. By this time he was perfectly at rest in the comfort of the accountant’s office and had no difficulty explaining his question and the responses he had already had to the accountant. The accountant hardly seemed troubled by any of this, almost as if he understood so much better than he did how frustrated he had been by the inadequacy of these answers and expressed much sympathy with him over the matter, which gave him even greater confidence that he would now receive the answer that more than ever he knew he wanted.

And as he waited in great expectation, the accountant slowly leaned across his wide leather topped desk and spoke almost inaudibly, not in a whisper but rather with great resolve and penetration, Let me see now, what answer do you want?

His words hung solemnly, majestically, authoritatively in the air:

What did you have in mind?

Zoom

Scribbled on a napkin a profound truth of the 20th century lay in tatters

Andersen

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Andersens Enron verdict quashed

This post has been obtained from an external source which does not permit its pages to be embedded here (at least Coco has not successfully found a way to do it), it has been necessary to take a suitably edited version of the original page to embed here. As a consequence updates made by the writer may not appear here. If you find anything that is different in a significant manner, please notify Coco using the comments section below. Thank you.

Andersen too

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Coco has written only a small part of the content of this page.
He hopes by it to suggest an answer to the question that everyone is asking but afraid to voice:
Did it really happen?

On the day of the issue of the indictment Coco was monitoring the DoJ website for the press release, searching for Andersen took him to this press release: FBI Study. Interesting he thought, so he asked the DoJ by email whether a copy of the report were available. Do I need to mention that he has not had a reply? Perhaps his note had been shredded by a firewall somewhere. Now I wonder:

  • What was it that changed their opinion of us?
  • What stones did we turn over that would have been best left alone?
  • On whose feet did we tread?

The apposition of these questions may lead you to think that there is some connection between them, but then if that were my suggestion Coco would be here to praise Cæsar not to bury him, would he not?

On Tuesday 31 May 2005 a verdict of not guilty of illegal shredding was returned by the Supreme Court of the USA.
The honour, but not the livelihoods, of the many who were affected has been restored.