THE ACCOUNTANCY profession is in denial, betraying its past and endangering the present. Five years after the dotcom bubble, three years after the collapse of Enron and the evaporation of Arthur Andersen - then one of the globally pre-eminent audit firms - the business world is no nearer any reliable means of valuing the intangible assets that are critical to the way things are made.
In fact, says Clive Holtham, professor of information management at Cass Business School in London, the situation is worse than five years ago. 'The issue of measurement and reporting of intangibles is not only being ignored, there are active efforts afoot to play down its significance by the accountancy profession,' he claims.
When, in the late 1990s, UK companies were given greater flexibility to report intangibles, not one top-100 finance director showed any interest, according to a Loughborough University report. Most companies are indifferent or hostile to new measures, Holtham believes.
The result is a dangerous paradox. With 75 per cent of wealth-creation now reckoned to be attributable to intangible assets such as knowledge and information, rather than physical assets, the numbers accountants give to investors, bankers and indeed their own managers are increasingly irrelevant.
Failure to come up with a robust way of measuring intangibles was at the heart of the dotcom boom and bust, the most spectacular miscalculation and misallocation of capital since the South Sea Bubble. A convention of fortune tellers would have blanched at the analysis used to justify some investment decisions, says Holtham. 'Yet the accountancy profession appears to be using the Enron scandal to retreat into seeking reliability of traditional tangible financial statements, and paying even less attention to extending reporting.'
This can only increase the risk of the same thing happening again.
The accounting retreat betrays not only investors, but companies too. Whether companies choose to report on 'soft' issues - brand, reputation, human capital, learning, innovation - or not they do, like investors, have to allocate resources. That's hardly made easier when the accountancy stance gives credence to the view that measuring intangibles is both unimportant and impossible.
The absence of agreed overarching accounting principles at least has the advantage that companies can choose how they measure intangibles internally, points out Holtham, since they don't have to satisfy formal stock exchange requirements.
As to importance, consider Shell, whose current travails are a classic case of knowledge mismanagement. Some high-level officers were clearly aware of the discrepancies in reserve estimates and the dangers they posed to the company's reputation, but their doubts were suppressed. There also appears to have been a strong element of groupthink on the board. Shell has always prided itself on being a socially responsible company, but it evidently didn't devote enough resources to nurturing the cause.
'At some stage something happened to Shell's values that made it acceptable to put up figures that weren't completely above board,' Holtham says.
On the other hand explicitly managing intangibles, as elusive and unpindownable as they seem, can bring substantial benefits. This is because, as the Shell and Enron cases demonstrate, managing intangibles is closely linked to issues of risk and sustainability.
In a report entitled Unlocking the Hidden Wealth of Organisations, Cass researchers have developed a framework for looking at intangibles and identified a group of organisations that, despite the lack of official encouragement, have decided to cultivate their intangible production factors.
They include B&Q (sponsor of the report), Whitbread ('from manufacturer to brand manager'), Bloomberg, the UK Fire and Rescue Service, MMO2, Italian cosmetics company Intercos, the Austrian Research Centres and Swedish learning consultancy Celemi. Together they chart some of the different ways in which companies can cherish their invisible assets and use them as a source of competitive advantage and wealth creation.
But it shouldn't be left to practitioners to pioneer new accounting methods, says Holtham. He contrasts the timid approach of accountants and most managers to devising measures for the things that matter with physicians' commitment to accumulating a deepening evidence base. 'Medicine as a profession has a deep belief that it can use evidence to develop better ways of making decisions than in the past,' says Holtham. 'You can't but marvel at that compared with what's not happening in business.'
Holtham, himself accountancy trained, notes that the first written script, cuneiform, was devised in Mesopotamia 5,000 years ago not by storytellers but (in effect) by accountants, to record transactions and stock levels for an increasingly settled society - a brilliant social and economic inven tion. Other accounting innovations such as double-entry bookkeeping in 15th century Venice and today's financial accounting were equally daring intellectual advances.
We're now desperately in need of a new cuneiform for the knowledge era, but there's little chance we shall get it from a profession that seems determined to disavow its illustrious intellectual heritage.
The Observer, 4 Julay 2004