Is truth in accounting an oxymoron?

Tim Bray repeats the usual criticisms of GAAP (generally accepted accounting principles). While he’s right, of course — GAAP is overly subjective — that shouldn’t be news to anyone. After all, its inherent subjectivity is right there in the acronym if you choose to look. The principles are generally accepted, not universally accepted, not laws of nature.


In my experience, engineers and scientists always have a hard time with the idea that accounting statements allow management to have some discretion about when the recognize revenues and earnings. As Tim does here, they usually turn to cash flow statements, suggesting those are closer to the truth. While they are one type of truth — what is happening with cash — they too distort the investments a company makes and when it can expect to earn a return on those investments.


So, cash flow statements are fine, but they are not strictly better than accounting earnings statements. It is a fiction to pretend otherwise. Scan both, and don’t get hung up on some misguided search for truth in accounting.

No related posts.