Peter Williams pays his respects to a Franciscan friar and the groundwork laid down by SSAP 2 in summing up the philosophy and purpose of the modern finance profession
This article was first published in the November 2018 UK edition of Accounting and Business magazine.
William of Ockham was a 14th-century English Franciscan friar, philosopher and theologian who is still remembered to this day for Ockham’s razor, a methodological principle that has helped to spur work on theology, logic and physics. As we celebrate World Philosophy Day on 15 November, I am thinking the razor could sharpen the philosophy of accounting too.
A translation of the Latin Ockham’s razor is ‘plurality should not be posited without necessity’, although it is more often rendered as ‘entities are not to be multiplied beyond necessity’. The idea is that in judging between competing theories, the simplest solution tends to be the right one.
Questions continue to echo after the global financial crisis about the work of business and finance in modern society. So philosophical concepts of the purpose of financial reporting and the wider purpose of the profession need to be articulated with clarity and simplicity.
Today’s answer to those questions of purpose is the IFRS Conceptual Framework for Financial Reporting 2018 (effective in 2020, when businesses have to develop accounting policies where no IFRS standard applies to a particular transaction). The framework has many ancestors, but a key grandparent is the UK accounting standard SSAP 2, Disclosure of accounting policies. SSAP 2 was published in 1971, an early work of the Accounting Standards Steering Committee, founded the year before.
Unlike much of the 1970s, SSAP 2 stands the test of time, pronouncing a philosophy of accounting that still speaks powerfully today – perhaps because it completely obeys Ockham’s razor. It defines four fundamental accounting concepts: going concern, accruals, consistency and prudence. Maybe today we would consider adding disclosure or transparency to that list to ensure the implied duty of reporting to stakeholders is more explicit.
That aside, it is the prudence that is most likely to raise eyebrows. It has come to mean an overblown aversion to risk rather than exercising sensible judgment. Indeed the UK’s standard setter, the Accounting Standards Board, downplayed it in FRS 18, Accounting Policies, as it was argued it was a concept of financial management not financial reporting.
Perhaps in such an uncertain world prudence needs rehabilitation. It is defined by SSAP 2 as: ‘Gains not recognised until either they are realised or realisation is reasonably certain. Provide all known losses even when amount is uncertain.’ This is still sound sense when business and commerce embraces the reckless. And it does nothing to excuse the error of smoothing or kitchen-sinking.
SSAP 2 is perhaps not comprehensive enough for the mores of modern accounting, but its four pillars deserve to be recalled by financial professionals. They remain an outstandingly elegant, eloquent and powerfully simple summary of a philosophy of the contribution the finance profession’s work makes to business, economics and society. Ockham would be proud.
Peter Williams is an accountant and journalist
"SSAP 2’s four foundational pillars deserve to be recalled daily by financial professionals"