AB3A's Journal: The uncertainty principle of accounting

I don't get as many interesting insights as I used to. However, this is one of those "AHA!" insights I get sometimes when I wake up in the shower. I've been noodling around with it for the last year or so. I thought I'd share...

The idea goes like this: The more effort (either money or time) you spend collecting financial data in your company, the greater the probability that it will be wrong or seriously misleading.

Think of it as the Heisenburg Uncertainty Principle applied to accounting.

My reasoning goes like this: The more time you have to spend trying to puzzle out which account to charge your activity to, the more likely it is that you'll document it wrong --either honestly or deliberately. The more onerous the accounting system is, the more likely it will be that people will modify a decision because it's too damned difficult to account for.

In theory, accounting is usually looked upon as a very high impedance load across a low impedance circuit. In practice, I am finding that this assumption isn't as true as it is often assumed. People behave differently when they think they're being watched. They find ways of lying about activities because the truth is that most people spend only an hour or two a day in a productive capacity and the rest of the hours of a day we just spin our wheels.

What all this leads to is a certain degree of noise in business accounting. Accountants often like to cite figures with five or six significant digits --as if they really believe their information is that good.

There are few things which are really that accurate, however. And any measurement of human activity is bound to have loads of error in it. Be happy if you get three significant digits of data.

In other words, it usually doesn't pay to go chasing a projected savings of less than one percent. Yet, many do. And in the end, it just re-enforces our beliefs that the management doesn't have a clue what it's doing.

I wish colleges would teach this principle to MBA students. It seems they are the ones who fall prey to this sort of thing the most.

And if there are any accountants or even book-keepers out there (I know this is not your native sort of forum) I'd love to hear your side of the story...