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EDITOR’S LETTER (February 98) – Never mind what two plus two equals

There is an old joke that goes something like this: a statistician, ane that it is often forgotten that there are a lot of other lines, too. management consultant and an accountant are all asked, what is two plus two? The statistician calculates that there is a 95% probability that the answer lies within the range 3.25 to 4.75. The management consultant, armed with his “Synergy For All” toolkit, confidently states that two plus two equals five. The accountant looks around the room to make sure that no one else can overhear and whispers, “Two plus two? What do you want it to be?”

This old chestnut – rapidly showing its age thanks to the work of people such as David Tweedie, who have been busy eradicating “flexible” accounting – hints at one remaining problem with financial reporting: there is still so much emphasis put on one single number that it is vital to ensure that two plus two is equal to as much as it can possibly be made to be equal to, regardless of what the impact may be elsewhere in the system.

So the research paper produced in January by the Accounting Standards Board and the other leading standard setters is very welcome. It looks to a future where financial reporting is viewed as performance reporting.

The aim is to enable a clearer understanding as to how operational performance is affected by a wide range of factors, such as treasury activities and property price changes, for example. And by downgrading the emphasis on a single figure – be it earnings per share or pretax profits – there will also be less scope to steer a company – and its executive remuneration scheme – by a single measurement.

Financial directors should welcome this research for another reason, too. Because it highlights the complexity of financial reporting, it also highlights the complexity of the job that FDs do. Far from being the scorekeepers of sun-drenched village cricket games, they are more akin to analysts of corporate telemetry, monitoring a wide range of data, advising on tactics and strategy.

Of course, none of this is new to you, but this latest research may help to reinforce your case.

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