The End of Accounting
Tom Pryor
BOOK REVIEWED
Lev, Baruch, & Feng Gu, 2016.
The End of Accounting and the
Path Forward for Investors and
Managers (Hoboken, NJ: John
Wiley & Sons).
Dan Morris, CPA, recently
asked Barry Melancon, presi-
dent and CEO of the American
Institute of Certified Public
Accountants, what kept him
up at night. He replied, “My
biggest worry is the relevancy
of our core products.” The
End of Accounting, authored
by Professors Baruch Lev and
Feng Gu, should contribute
many sleepless nights to the
entire accounting profession.
The author’s targeted audi-
ence for this book is not the
CPA. In the opening pages
of the book, Lev and Gu say,
“While the intended readers of
this book are mainly investors
and lenders, alerted here to
the hazards of using outdated,
inadequate financial report
information in making invest-
ment and lending decisions,
the implications of our find-
ings are far reaching and of
considerable interest to wider
audiences: corporate manag-
ers, accountants, and capital
80
market regulatory agencies”
(p. xvii).
Much has been written over
the past decade about the grow-
ing weaknesses of corporate
balance sheets, income state-
ments, and cash flow reports
adapting to rapidly changing,
dynamic business world. Many
of those weaknesses have been
documented and discussed in
this journal by a wide variety
of authors from a wide variety
of countries. An example of a
significant weakness deals with
human capital; that is, people
are our most important asset.
The World Bank has stated that
80% of the developed world’s
wealth resides in human capi-
tal, yet the monetary value of
human capital is not found on
traditional generally accepted
accounting principles (GAAP)
balance sheets. This reviewer
addressed the human capital
issue and a proposed solution
in the August 2015 issue of the
Journal of Corporate Account-
ing and Finance in an article
titled “Finance and Account-
ing’s Glaring Omission.”
In their new book, authors
Lev and Gu have accumulated
and organized weaknesses pre-
viously discussed in JCAF plus
several new ones. For example,
Published online in Wiley Online Library (wileyonlinelibrary.com).
the authors address the human
capital issue on pages 86–87 of
the book.
The book is organized in
four sections:
1. What Is Relevance Lost? …
The widening chasm
between financial informa-
tion and stock prices.
2. Why Has Relevance Been
Lost? … Primarily the
inability to monetize intan-
gible assets, such as human
capital.
3. How to Return Relevance? …
A list or proposed solutions
to renew relevance.
4. How to Implement the
Return? … Headwinds to
be expected.
The professors reviewed
hundreds of corporate financial
statements before concluding
that relevance has been lost:
Based on a compre-
hensive, large-sample
empirical analysis,
spanning the past half
century, we document
a fast and continuous
deterioration in the use-
fulness and relevance
of financial infor-
mation to investors’
© 2016 Wiley Periodicals, Inc.
DOI 10.1002/jcaf.22232
The Journal of Corporate Accounting & Finance  /  November/December 2016 81
­ ecisions. The pace of
d Goodwill is booked after
this usefulness deterio-
ration has accelerated
in the past two decades.
Our analysis indicates
that today’s financial
reports provide a tri-
fling 5–6 percent of the
information relevant to,
and used by, investors.
One amusing and sadden-
ing illustration the authors
use in the book is to compare
U.S. Steel Corporation’s 1902
and 2012 financial statements.
The former is 40 pages; the
latter is 174 pages. Yet both
reports focus on the same pre-
cisely useless information.
Another indictment of the
accounting profession is their
increased propensity to use pro
forma (non-GAAP) earnings.
Disclosures have doubled from
2003 to 2013, and now are over
40%. The Economist stated,
“The real Enron scandal is that
so much of what Enron did
conformed to GAAP.”
The authors document
three major reasons why
accounting reports have lost
relevance:
1. The inexplicable treatment
of intangible assets—the
dominant creators of cor-
porate value. Intellectual
­capital—such as brand
development, human ­capital,
and research and develop-
ment are all expensed by cur-
rent accounting standards.
2. Accounting isn’t about facts
anymore but more and more
about managers’ subjective
judgments, estimates, and
projections.
3. Unrecorded business events
increasingly affect corpo-
rate value (i.e., competitor
moves, regulatory changes,
restructurings, alliances).
© 2016 Wiley Periodicals, Inc. DOI 10.1002/jcaf
a business has been sold. Brit-
ish chartered accountant Paul
O’Byrne used to say that good-
will is the name accountants
give to their ignorance.
The authors point out that
there have been initiatives to
supplement the traditional
financial statement report,
such as with key performance
indicators, the Value Reporting
Revolution, intellectual capital
reports, the Enhanced Business
Reporting Model, integrated
reporting, and so forth.
Lev and Gu do not believe
previous initiatives have
amounted to much and are not
grounded in solid economic
theory. As an alternative,
Lev and Gu propose adding
“The Strategic Resources &
Consequences Report” to the
financial statements. The pres-
ent an example on page 128 of
the book, but I found it very
theoretical. The intent of this
new report, to connect strategy
to financial outcomes, holds
merit. The Strategic Resources
& Consequences Report is
the cornerstone solution the
authors propose to address the
issue of relevance lost.
On page 130 the authors say:
The Strategic Resources
& Consequences
Report proposed in this
chapter aims to provide
the essential informa-
tion investors need to
evaluate the strate-
gies (business model)
of businesses and the
extent of their execu-
tion by management, to
assure the company is
on a course of sustain
competitive advantage.
The authors are not fans
of more regulation. In fact,
they advocate lessening the
disclosure rules. They believe
their proposals could be volun-
tarily adopted, perhaps with a
“nudge” by industry trade asso-
ciations and the Securities and
Exchange Commission.
The authors advocate
eliminating quarterly reporting,
since frequency and reporting
quality are substitutes, making
it semiannual, such as in the
United Kingdom and Aus-
tralia, among other countries.
This reviewer can already hear
the hip-hip-hoorays coming
from corporate controllers
with this proposed change. The
authors propose a simplified
reporting of quarterly sales,
cost of goods sold, and gross
margin.
Finally, professors Lev and
Gu propose three reforms to
GAAP:
1. Treat intangibles as
assets (at cost) and improve
disclosures such as separat-
ing long-term research from
short-term development.
2. Reverse the proliferation
of accounting estimates—
such as marking-to-market,
leaving fair market value
to investors since accoun-
tants have no expertise in
valuation. On page 220 the
authors argue, “Financial
reports should stick to facts
and ‘near facts,’ namely,
highly reliable and verifiable
estimates.”
3. Mitigate accounting
­complexity—regulatory
complexity now exceeds busi-
ness complexity. A 15-year
Financial Accounting Stan-
dards Board (FASB) revenue
recognition project resulted
in a 700-page rulebook! It’s
futile to have a rule for every
scenario. We need more
­principles and professional
82 The Journal of Corporate Accounting & Finance  /  November/December 2016

judgment and fewer rules.
Reduce accounting complex-
ity, primarily by avoiding
ruling on industry-specific,
infrequent transactions.
This reviewer is curious to
see the profession’s response
to this book. Because of the
accounting profession’s pro-
pensity to be the cornerstone,
unchanging part of business,
my guess is, for the most part,
the book will be ignored, which
would be tragic and a missed
opportunity.
The number one issue fac-
ing the accounting profession is
loss of relevance. Following the
development of activity-based
costing (ABC) by CAM-I in
1988, Professors H. Thomas
Johnson and Robert Kaplan
wrote Relevance Lost: The
Rise and Fall of Management
Accounting (Harvard Business
School Press, 1991). While both
ABC and the issues presented
in Johnson and Kaplan’s book
were sound and successfully
implemented by many corpora-
tions, few of those implementa-
tions still exist. Accounting sys-
tems and procedures returned
to methods of old.
It’s time for the accounting
profession to step up its game,
and stop what one blogger
described as “being historians
with bad memories.”
That same blogger, Ron
Baker, said after reading Lev
and Gu’s book, “It’s past time
to bring some innovative disrup-
tion to the auditing profession,
such as having the stock mar-
kets select and pay the auditors
of its listed companies, once
and for all, tackling the sham
that is ‘auditor independence.’
The End of Accounting is
the most important book this
reviewer has read in recent years
on the irrelevance of account-
ing. The finance and accounting
profession better pay attention
to its diagnosis and the author’s
prescriptions, or it deserves all
of the irrelevance and loss of
value it will surely suffer.

Tom Pryor’s diverse career includes founding an activity-based costing software, consulting and training
business in 1988, serving as a Certified Family Business Advisor, Director of UTA’s Small Business Develop-
ment Center, project manager of the global research project that developed Activity-Based Cost Manage-
ment, plus 19 years of financial management with General Motors, Johnson & Johnson, and Motorola.
Tom has written hundreds of blogs, teaches at several universities, and serves on the advisory boards
for Baylor’s Institute for Family Business and the Journal of Corporate Accounting & Finance. He may be
contacted at TomPryor@icms.net.

DOI 10.1002/jcaf © 2016 Wiley Periodicals, Inc.

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