How Accounting, Stop Groaning, Will Save the World
When Louis XIV’s stern finance minister Jean-Baptiste Colbert died, the king thanked the lord and never replaced him.
Mauvais pas! By the time the Sun King took off his wig for the last time in 1715, France was bankrupt.
In Jacob Soll’s enchanting “The Reckoning: Financial Accountability and the Rise and Fall of Nations,” Louis leads the parade of royals maddened by double-entry bookkeeping.
Philip II, for instance, tried to set up proper ledgers only to get hate mail from nobles who did not wish to be audited. Spain went bankrupt, too.
“Over and over again,” writes Soll, “good accounting practices have produced the levels of trust necessary to fund stable governments and vital capitalist societies, and poor accounting and its attendant lack of accountability have led to financial chaos, economic crimes, civil unrest, and worse.”
I spoke to Soll, 45, the recipient of a MacArthur “Genius Grant" and a professor of history at the University of Southern California, over lunch at Bloomberg’s world headquarters in New York.
That was a few days before Bank of America had that big oops -- a $4 billion accounting error.
Balance Your Books
Hoelterhoff: Should accounting be a required course in high school?
Soll: Yes! It was part of the curriculum from the Renaissance onwards, dropping out of the curriculum, I think, after the war.
My grandmother is 95. She still does her books every single night.
Hoelterhoff: Millennials seem to have powerful accounting apps. Think that might provoke a rebound in daily attention to finances?
Soll: Medieval accountants thought you actually had to go over the mountains -- it was all about personal discipline and a semi-religious activity, really, until the mid-19th century.
Hoelterhoff: No shortcuts. I love the portraits you include of accountants in your book. They had stature in society. What happened?
Soll: In the 1960s, in the U.S., it was still a sought-after job. But I think Andersen, by taking accounting out of the Ivy League schools and making it Midwestern and non-elitist, in some ways damaged it culturally. It was no longer this elite thing.
Hoelterhoff: Enron and the scandals over the last 30 years didn’t help.
Soll: Who paints an accountant today? Yet, a lot of the great Botticelli paintings are actually of accountants who were around the Medici firm.
Hoelterhoff: Botticelli painted accountants?
Soll: Of course. The Medici started as accountants. Cosimo was a very good one. I’ve been through his books. They’re balanced and they’re bright and beautiful. You need good handwriting to keep books.
That’s part of the discipline. If your books are not clear, you’re not clear -- your relationship with finance and with God, it’s all messed up.
Hoelterhoff: But you write that eventually bad accounting did in the Medici and their banks.
Soll: They stopped paying attention. They got grand. They read Castiglione’s ‘‘The Courtier,” in which accounting never gets mentioned.
Hoelterhoff: How did you get started on this book?
Soll: I was watching “Frontline” about Bear Stearns, when they have the accountants go in at night and clean out Bear Stearns and they find out that the whole system is rotten.
I thought: How is this possible?
The New York Fed is across the street. Everybody goes to the same gym. Everybody is in the same club. Everybody went to the same school. I mean, it’s crazy.
Hoelterhoff: Things haven’t changed much it seems. Your book is titled “The Reckoning.” Hardly optimistic.
Soll: The accountants I talk to say our hands are tied behind our back. We can’t even do good balance sheets. We’re not allowed to talk about how we value things or our doubts in the valuation process.
And they say we believe that whatever we produce is imperfect and it should always have a footnote at the bottom of it explaining the problems we think are involved with the valuation. They say we’re not allowed to put that in.
No one is talking about accountability right now. It’s amazing. You don’t want to see 2008 again.
Hoelterhoff: What did Louis XIV’s accounting books look like? Colbert had them designed to fit into his coat pockets?
Soll: They were small, like commonplace books. Gold and blue. Beautiful. He had the best calligraphers in the world. They aren’t in my book because the French National Library is so dysfunctional that they couldn’t even respond over two months to getting the images. France is in such bad shape.
He would look at them on Fridays at 9 a.m., for the Council of Ministers. When Colbert dies, he doesn’t just get rid of the books, he cracks the financial system that allows you to do good accounting in the state, by breaking up these ministries so they can’t communicate.
That’s the moment when England is making its financial reforms and France should have taken over the world, but it’s in chaos.
Remember, the Mississippi was once called the Colbert River. Think of the vineyards, the goats, the goat cheese we could have had there. It would have been much more culturally interesting.
Hoelterhoff: Intentional ignorance. Not so much different from bankers creating intentionally complicated financial instruments. You call them “ever-mutating, bacteria-like financial tools and tricks of banking.”
Soll: It’s hard for the government or auditing companies to keep up.
(Manuela Hoelterhoff is an executive editor at Bloomberg News. All opinions are her own. This interview was adapted from a longer conversation.)