By Ian Harris, manging director, Z/Yen Group
The financial crisis has knocked many peoples’ confidence in the whole financial system. Much of the understandable concern and criticism is valid, but rarely does the criticism question the ways most finance professionals crunch and present numbers – how they measure money. In our latest book, The Price of Fish, Michael Mainelli and I make a fundamental observation on measurement; most numerate financial professions do not practice measurement science; they report “point estimates” rather than “interval estimates”.
Audit and accountancy, for example, is all about measurement. But financial accounts are virtually bereft of the scientific terminology one expects to find around measurement. Confidence intervals, range estimates, sampling techniques, probability distributions; these are vital measures of uncertainty, but they are hardly ever mentioned in published accounts. This simple observation raises a number of concerns about the approach to financial reporting. We believe that financial accounting and auditing, as disciplines, need to be more scientific. If auditors were to “balance the odds”, i.e. present ranges for values in balance sheets, that would give a truer and fairer view of financial statements than simply “balancing the books”. We call the approach confidence accounting. Confidence accounting is gathering traction as an idea. Earlier this year, the Association of Chartered Certified Accountants (ACCA) commissioned our firm, Z/Yen Group, to provide a consultation document and some worked examples of how audited accounts prepared under confidence accounting might look. This paper has now been published by ACCA in collaboration with the Chartered Institute for Securities and Investment (CISI) and the Long Finance Initiative. In the foreword to the paper, Confidence Accounting: a Proposal, Andy Haldane, the Bank of England’s executive director for financial stability says: “My hope is that this proposal moves our thinking a step closer towards a set of accounting standards for major entities that put systemic stability centre stage. In the light of the crisis, anything less than a radical rethink would be negligent.” Confidence accounting is but one of several ideas we put forward in The Price of Fish. Other ideas include index-linked carbon bonds and options markets for intellectual property rights. We examine the world’s most abiding and wicked problems – sustainability, global warming, overfishing, overpopulation, the pensions crisis; all of which are characterised by a set of messy, circular, aggressive and peculiarly long-term problems. We take a broad view of real commerce, blending four streams of knowledge: choice, economics, systems and evolution. We believe that combining those four streams is fundamental to making sense of the world of commerce as it actually is, making better decisions and in turn, potentially finding answers to the world’s most pernicious problems. Lack of science in accounting might not be the most wicked or pernicious problem the commercial world faces, but confidence accounting would be a relatively straighforward way to improve financial decision making, once we can have more confidence in our financial information. I believe that better financial decision making would, in turn, help towards solving the world’s more fundamental problems. Ian Harris is manging director of Z/Yen Group and author, together with Michael Mainelli, of “The Price of Fish: A New Approach to Wicked Economics and Better Decisions”, winner of the 2012 Independent Publisher Book Awards Finance, Investment and Economics Gold Prize.