ACCOUNTING - IT’S IN EVERY ONE OF US!

Kieran Lyons, director of publishing, talks with June Menton, author of a new ICAI text, on her mission to simplify book-keeping and accounting standards for the general public An oft-repeated accounting story concerns three hopefuls being interviewed for an important position. The accountants are asked one key question: “What’s 2 plus 2?” The first candidate answers, “It’s 4, of course,” and is told, “Don’t call us, we’ll call you.” The second answers, “Well, most of the time the answer is 4, but sometimes it’s 3 and sometimes it’s 5.” The third interviewee thinks before replying: “What do you want the answer to be?” Guess who got the job? According to June Menton, that’s often the perception of accountants by those outside the business – bean counters who can sometimes get creative depending on the time of year and the whim or clout of their clients. In her role as financial controller of The Irish Sports Council, she’s had to throw light on the profession and its procedures for a wide constituency of non-finance professionals and volunteers. In 2004, she wrote a guide which showed the demand for a clear, uncomplicated book on double entry and accounting concepts. So, many late nights and working holidays later, Crack the Books: Accounting for Non-Accountants, will be launched to the general market next month by ICAI Publishing. For June, the key hurdles to understanding are jargon and fear. “If you’re trying to simplify the basic elements of accounting, there’s no point lecturing non-accountants about accounting standards and audit procedures.” She finds that once the numbers are put in a real-life context, people quickly grasp the principles. “The penny drops when you tell clients that when they make entries in their cheque books and fill out their tax returns, they’re carrying out an accounting function. As finance professionals, we sometimes forget the same is true of us too. When we sign a mortgage on our home we should understand the accounting method the lender uses to calculate the interest charged in each loan period.” Broadening out the theme of simplifying the profession for a wider base of sole traders and people starting their own businesses – especially as audit exemption thresholds change the nature of the auditing profession – the need to explain the theory of accounting and finance becomes even more pressing. “Individual investors and businesspeople have to understand some accounting rules in order to figure out the return on capital invested,” she says. Every organisation, profit-motivated or not, needs to know how it stands financially. Put simply, accounting supplies all that information. June says showing clients how to prepare basic financial statements won’t mean that practitioners are teaching themselves out of business. Rather it’ll make life simpler if accountants equip their clients with the tools to help themselves, as opposed to having them arrive on their doorstep panic-stricken on the 30th of October with bursting shoe-boxes of receipts and invoices under their arms. In terms of other financial reports, again it’s real life scenarios that are the best tutors. People have their eyes opened when they see how a profit-and-loss account summarises the inflows of assets from the sale of products and services during the period as well as the outflow of assets for expenses – leading down to the final profit or, heaven forbid, loss for the period. “Clients are seriously interested in the bottom line,” June says wryly, “particularly when you explain that the bank or their financiers will pounce on this as evidence of viability.” Understanding the profit and loss account is also crucial if non-accountants are to determine a business’s revenues, and June goes to great lengths in her book to offer simple, clear examples in graphs and illustrations. Taken together, the balance sheet and profit and loss account constitute the hard core of data for people without a financial background who need to stay informed about their business’s or activity’s financial affairs. June has particular sympathy for those people involved in start-ups. “They have invested capital in the business, or the business owes them money and, obviously, they have an emotional as well as a financial interest in how well they’re doing.” Once they come to appreciate how key financial statements are absolutely essential to help them control the performance of a business, identify problems as they arise, and plan the future course of a business, she finds you can feel the waves of relief. “In effect, they come to see accounts as the drivers and the watchmen. You can’t stress enough to people outside the profession, that the internal controls provided by a basic understanding of financial statements are the gram of prevention that’s worth a kilo of cure.” Crack the Books also treats double-entry bookkeeping, and not only for the general public but for those practitioners who have qualified with a less-than-perfect appreciation of its importance. The need for this topic was identified by ICAI past president Cecil Donovan, who helped steer the book’s outline and review the text. Although the importance of double entry has been highlighted in the new ICAI syllabus, some contemporary thinking argues that, in an IT age, the teaching of debits and credits is a waste of training time. For instance, Rick Elam of the AICPA has stated that “traditional double-entry bookkeeping is becoming the Latin of business school - interesting to study and useful from a historical perspective, but not in demand in everyday practice.” Despite such criticisms, June firmly believes double-entry accounting remains crucial. Taking the language analogy, she maintains it offers the key foundation. “Although Latin and double-entry accounting have been derided as immaterial for everyday business, both provide a knowledge platform. Even though few people speak Latin today, it’s the basis for many western European languages, including English, French, Spanish and Italian. Having a firm grounding in Latin can only enhance your ability to master these languages. Similarly, accounting IT is rooted in double-entry accounting. It provides the bedrock for understanding the workings of virtually all accounting information systems.” For June and Cecil, double-entry accounting is not an artificial, historic construct but the natural representation of business events. The fundamentals of accounting are the same whether a manual or computerized system is used. “A euro amount is assigned to each impacted account; the processing system aggregates all those transactions that affect particular accounts. When processing is complete, balances are determined and presented as financial statements.” They are correct in saying that the accountant should be in command of the system, not the system in command of the accountant. One of the themes of the books is that accounting software packages aren’t and shouldn’t be treated as "black boxes" that produce analyses and financial statements. Even though debits and credits may not be formally used in many computerised systems, software developers are all too awar that double accounting are the traditional systems used by organizations to accumulate, analyse and present financial information. They must understand its theoretical underpinnings, as must chartered accountants. So, nobler mission to teach the world aside, how did she dream up the title, Crack the Books and what does it mean exactly? Like any sound businesswoman, June smiles and tells us we’ll have to buy the text and read the introduction. Suffice to say, it’s a phrase uttered by a complicated, fictitious businessman with a mixed portfolio of activities, who quite literally had his final outing in a dramatic television show earlier in the year. Was he an exponent of double entry? “Well, he understood that when you give with one hand, you take with the other!” Something for all budding accountants to think about. Crack the Books: Accounting for Non-Accountants will be available in Eason’s and all good bookshops in the New Year. It can also be ordered at www.icai.ie

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