City Manager of Port Orange, responsible for any failures of his Finance Director. …. Posted www.popdradiolog.com by: Hank Springer 8:43:07 PM June 21, 2014
by Jacob Soll,
SOMETIMES it seems as if our lives are dominated by financial crises and failed reforms. But how much do Americans even understand about finance? Few of us can do basic accounting and fewer still know what a balance sheet is. If we are going to get to the point where we can have a serious debate about financial accountability, we first need to learn some essentials.
The German economic thinker Max Weber believed that for capitalism to work, average people needed to know how to do double-entry bookkeeping. This is not simply because this type of accounting makes it possible to calculate profit and capital by balancing debits and credits in parallel columns; it is also because good books are “balanced” in a moral sense. They are the very source of accountability, a word that in fact derives its origin from the word “accounting.”
In Renaissance Italy, merchants and property owners used accounting not only for their businesses but to make a moral reckoning with God, their cities, their countries and their families. The famous Italian merchant Francesco Datini wrote “In the Name of God and Profit” in his ledger books. Merchants like Datini (and later Benjamin Franklin) kept moral account books, too, tallying their sins and good acts the way they tallied income and expenditure.
One of the less sexy and thus forgotten facts about the Italian Renaissance is that it depended highly on a population fluent in accounting. At any given time in the 1400s, 4,000 to 5,000 of Florence’s 120,000 inhabitants attended accounting schools, and there is ample archival evidence of even lowly workers keeping accounts.
This was the world in which Cosimo de’ Medici and other Italians came to dominate European banking. It was understood that all landowners and professionals would know and practice basic accounting. Cosimo de’ Medici himself did yearly audits of the books of all his bank branches; he also personally kept the accounts for his household. This was typical in a world where everyone from farmers and apothecaries to merchants — even Niccolò Machiavelli — knew double-entry accounting. It was also useful in political office in republican Florence, where government required a certain amount of transparency.
If we want to know how to make our own country and companies more accountable, we would do well to study the Dutch. In 1602, they invented modern capitalism with the foundation of the first publicly traded company — the Dutch East India Company — and the first official stock market in Amsterdam. But it was through an older and well-maintained culture of accountability that they kept these institutions stable for a century. The spread of double-entry accounting to the Netherlands during the early 1500s made the country the center of accounting education, world trade and early capitalism. Well-accounted-for provincial tax returns allowed the Dutch to float bonds at dependable 4 percent interest rates. The Dutch trusted their managers to know how to keep good books and make regular interest payments, while paying off state debt.
Every level of Dutch society practiced double-entry accounting — from prostitutes to scholars, merchants and even the Stadholder, Maurice of Nassau, Prince of Orange. Painters regularly depicted merchants keeping their books; Quentin Metsys’ “The Money Changers” (circa 1549) showed that even skilled accountants could be fraudulent. In other words, the advantages and pitfalls of accounting were at the fore of public consciousness.
Not only did the Dutch have basic financial management skills, they were also acutely aware of the concept of balanced books, audits and reckonings. They had to be. If local water board administrators kept bad books, the Dutch dyke and canal system would not be well maintained, and the country risked catastrophic flooding.
This desire for accountability was what pushed the Dutch to reform their financial system when it began to collapse under the weight of fraud. The first shareholder revolt happened in 1622, among Dutch East India Company investors who complained that the company account books had been “smeared with bacon” so that they might be “eaten by dogs.” The investors demanded a “reeckeninge,” a proper financial audit.
While the state did not allow the Dutch East India Company’s books to be audited in public, Prince Maurice did do a serious internal audit, and Dutch burghers were satisfied with both company and state accountability. A cultural ideal was set. For the next century, it became common practice for public administrators to have portraits of themselves painted with their account books — sometimes with real calculations in them — open, for all to see.
These historical examples point the way toward achievable solutions to our own crises. Over the past half century, people have stopped learning double-entry bookkeeping — so much so that few know what it means — leaving it instead to specialists and computerized banking. If we want stable, sustainable capitalism, a good place to start would be to make double-entry accounting and basic finance part of the curriculum in high school, as they were in Renaissance Florence and Amsterdam.
A population well-versed in double-entry accounting will not immediately solve our complex financial problems, but it would allow average citizens to understand the nuts and bolts of finance: balance sheets, mortgage interest, depreciation and long-term risk. It would also give them a clearer sense of what financial accountability really means and of how to ask for and assess audits. The explosion of data-driven journalism should also include a subset of reporters with training in accounting so that they can do a better job of explaining its central role in our economy and financial crises.
Without a society trained in accountability, one thing is certain: There will be more reckonings to come.
Jacob Soll, a professor of history and accounting at the University of Southern California, is the author, most recently, of “The Reckoning: Financial Accountability and the Rise and Fall of Nations.”
Posted www.popdradiolog.com 8:36:16 PM June 21, 2014