More Than a Numbers Game: A Brief History of Accounting
By Thomas A. King
Published by John Wiley & Sons, 2006; ISBN: 978-0-470-00873-7, 242 pages, $29.95.

By Stephen A. Zeff

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The author is at his best when telling stories, whether of the twists and turns in specific accounting standards from the 1940s to the present, of the accounting transgressions of Enron, Global Crossing, WorldCom, and HealthSouth, or of the factors leading to the demise of Arthur Andersen. The 15 chapters make for easy reading. King is a concise writer, yet he never sacrifices accuracy or completeness. He effectively uses numerous tables and diagrams to illustrate his points. Throughout, he places accounting developments against the backdrop of economics, finance, law, and actual business decisions. If ever a book on accounting could be described as lively and entertaining, this one comes close. It should prove edifying not only to financial analysts, financial executives, and regulators, but also to accounting practitioners, academics, and students. King’s gift for rendering complex ideas into easily understandable explanations, all in a conversational style, makes this book accessible to the general investing public as well.

King begins by examining the 19th-century development of corporate financial reporting, including the impact of the growth of the railroads, followed by a chapter on the impact of the income tax on financial reporting. He discusses deferred tax accounting and provides a full and insightful treatment of the emergence of LIFO. He then devotes a chapter to tracing the evolution of management accounting.

King then discusses the formative years of modern accounting and auditing, chiefly in the 1930s, including a brief treatment of auditors’ liability. Oddly, he says nothing of the inadequate financial disclosure requirements of the state corporation laws, which made national securities legislation all the more imperative to promote the disclosure of financial information to both shareholders and the securities market. He then reviews, with his usual flair for divining historical antecedents, the evolution of the U.S. standards-setting process from the 1930s to the 1970s. Among the controversies he covers are the uniformity-versus-flexibility debate in the 1950s, accounting for the investment tax credit in the 1960s, and accounting for troubled-debt restructuring and oil and gas exploration in the 1970s. He then explains how accounting research has moved from debates over theoretical models to empirical research, fueled by recent pioneering work in finance theory.

Probably the core of the book is a set of topics that King characterizes as “accounting’s six divisive issues: inflation, volatility, intangibles, debt, options, and earnings.” In the chapter on inflation, he traces the series of accounting responses to the inflation following World War II and during the 1970s, finally leading to the SEC’s Accounting Series Release 190 and FASB’s SFAS 33, which mandated supplementary disclosures. He might well have placed blame on the SEC for having continually opposed any reform in the body of the financial statements to reflect general or specific price changes. Finally, in 1978, under intense pressure from Congress and other powerful quarters, the SEC broke with precedent and called for “reserve recognition accounting,” a version of current-value accounting, for oil and gas reserves

Volatility entails corporate management’s misguided quest to report a smoothed trend of earnings. King frequently presses the point that preparers, as well as accounting practitioners and even FASB, do not believe in the efficient markets hypothesis.

In the chapter on intangibles, King complains that “accounting standard setters have not determined how to value internally developed intangible assets other than software,” a huge problem in the postindustrial society.

Most of the chapter on debt is devoted to preparers’ resourcefulness in keeping debt off the balance sheet. The chapter on options recounts the long and fractious debate over whether to record expense in the income statement for employee stock options, which “shows management’s continued preoccupation with reported earnings and disdain for economic research.” Much the same mentality permeates the chapter on earnings, which attests to the perverse consequences of analysts’ consensus forecasts of earnings per share on management behavior. King points out that the widespread corporate practice of “earnings management” led an exasperated SEC Chairman, Arthur Levitt, in a famous 1998 speech at New York University, to attack the view that accounting was little more than a “numbers game.”

This book is an excellent addition to the literature on accounting. It will do much to educate nonaccountants as well as accountants about how we got where we are today.

Stephen A. Zeff, PhD, is the Herbert S. Autrey Professor of Accounting at the Jesse H. Jones Graduate School of Management, Rice University, Houston, Texas. His two-part article, “The Evolution of GAAP: the Political Forces Behind Professional Standards” (January and February 2005), won The CPA Journal’s 2005 Max Block Distinguished Article Award in the area of Informed Comment.

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