Reviewed by Paul Shoemaker University of NebraskaLincoln
This book is a 30year anthology of selected writings by the author delineated into six sections, or themes. The common threads tying the themes together are the concepts of estimation and measurement in accounting and the impact of their errors. Much of the debate contained in this book is documented to date back at least 100 years.
The first theme highlights the theoretical foundation of measurement and uncertainty which has plagued the profession since its founding over a century ago. This foundation, called “first principles,” sets the rhetorical stage for the remaining sections of the book. Beginning with Dicksee’s pedagogical trademark, the agency of a ship in which the life of the entity is one shipping venture, the concepts of depreciation and profit determination are explained with emphasis on the inaccuracy (error) of interim reporting (i.e., any reporting period less than the life of the enterprise).
Brief refers to the old adage “history repeats itself” when discussing controversies surrounding full disclosure, alternative accounting choices, and auditor responsibility. These unresolved controversies were as relevant a century ago as they are today. According to Brief, these controversies persist “because profit calculations involve uncertainty about the future” [p. 25]. Moreover, he posits that uncertainties cannot be mitigated through regulation.
The second theme deals directly with the book’s title: The Continuing Debate Over Depreciation, Capital and Income. A discussion of depreciation theory of 100 years ago is presented as well as evidence of internal economic and external institutional forces affecting depreciation methods. Brief shows that the argument of valuing assets at cost, replacement value, market value, etc., were alive 100 years ago and remain unresolved today. The choice of depreciation methods is analytically shown to affect the growth in financial capital and ultimately to impact capital and income measurement. A corollary issue is that depreciation is an allocation problem, not a valuation problem.
Given that depreciation is an allocation problem, the third theme addresses the theory of cost allocation under uncertainty. Each succeeding article in this section builds on the former. Using statistical properties, Brief begins with a simple least squares model to estimate proper cost allocations by minimizing squared measurement errors. The two succeeding articles build on this concept to develop more sophisticated models. An applied concept of measurement error is first introduced in this section.
The fourth theme, interest rate approximations, at first seems incongruent with the flow of the book. However, interest rate approximations appear to be the first formal attempts at estimations for business purposes; and the Rule of 69 [p. 182], an actuarial approximation of the number of periods in which a sum will double at a given interest rate, was first articulated using a depreciation problem.
The fifth theme is comprised of financial reporting practices, past and present, and the intentional and unintentional errors contained in them. First, financial reporting practices at the turn of the century are chronicled. These included diverse practices and inadequate disclosures. This time period was also characterized by an increased awareness of fraud and increased distrust for business. The heightened public concern mandated the need for uniformity and adequate disclosure in financial reporting.
The remainder of this section deals with normative theory regarding measurement and valuation in financial reporting. A graphical alternative for cumulative reporting is presented which, in the author’s view, shows more accurate reflections of rates of returns as income and cash flows change over time. In another article, a valuation model is developed using pseudo IRR which is a longterm (i.e., constant) IRR estimate. The pseudo IRR proxies economic IRR using accounting data under a comprehensive income concept.
The final theme focuses on accounting error with a review of the nature and behavioral consequences of accounting error in the nineteenth century. Accounting error is defined as “the failure to systematically distinguish between capital and revenue expenditures and the failure to periodically allocate the original cost of fixed assets to expense” [p. 254]. The lack of a regulatory environment in the nineteenth century allowed unscrupulous businessmen to present financial positions favorable towards shareholders to attract investment capital. Much of the financial reporting deception of this era revolved around asset accounting. Businessmen appeared only to be concerned with showing the highest possible rate of return per annum available on invested capital. “The rate of profit became the dominant concept” [p. 271].
Accounting error has been described as intentional — serving selfinterests and therefore having economic consequences, and as unintentional — by “disinterested, independent scorekeepers” [p. 284]. Cause and effect relationships are difficult to identify in accounting and accounting error is difficult to identify because one first must know what is “correct” accounting. Brief considers the “true” (“correct”) value of accounting as that method which produces the lowest reported profit among alternatives. Using the conservative method as the “correct” method, Brief discusses the historical nature of accounting errors and their potential behavioral consequences for productcosting and fixed asset accounting.
In summary, Brief historically documents the economic and institutional forces surrounding measurement and reporting and reminds readers that the accounting controversies of today are not new but were relevant 100 years ago. As long as uncertainty exists, interim reporting will contain errors. The best we can do is develop and rely on artificial measures of correct accounting measurement and allocation (perhaps based on conservatism) and statistically minimize their errors. This is a prerequisite for uniform reporting and adequate disclosure. We would be remiss as accounting practitioners and researchers if we did not learn from past errors so as not to repeat them.
