COVID19 highlights the limitations
of modern accounting systems

The higher the standard of an accounting system, the less possibility there is to build up reserves for bad times. During Corona, several companies would have been happy to have reserves to draw on.

 

Modern accounting systems are based on the true and fair view. According to this, publications should give a clear view of the current state of the company and be alimented only by the past period. Combined with speculative behavior on stock exchanges, where future developments are already anticipated, this can have fatal consequences in the event of a crisis. We were fortunate that Corona did not put entire markets or economies in distress. In that case, and with a lack of reserves, we would have had to reckon with devastating consequences.

 

Nature shows us how it is done. In good times, reserves are built up to survive the bad times. This principle has proven itself over thousands of years. Owners of small and medium-sized companies take this principle to heart. In good times they do not spend everything again, in the form of dividends or the like. In bad times, they are also more reluctant to lay off employees, because the knowledge of their employees is in demand when the good times come again.

 

I think reserve building to bridge future shortages is legitimate and necessary. This can certainly be built into sophisticated accounting systems. With a clean declaration in the balance sheet and income statement, the principle of true and fair view is not lost. Only the distributions in the form of dividends are lower. This is the price to pay to support a long-term basic attitude. Less greed leads to less volatility and that is a desirable state for a large part of humanity.