The End of Accounting

Published date01 November 2016
Date01 November 2016
DOIhttp://doi.org/10.1002/jcaf.22232
80
© 2016 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22232
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the hazards of using outdated,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
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,
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 nancial 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’

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