Civilization Is Based on Accounting

You and University of Western Australia’s Philip Brown coauthored a paper in 1968, when you were both PhD students at the University of Chicago, that linked earnings to market value, revolutionizing our appreciation of accounting. How fast was the reaction?

It was not fast, and in fact the only fast reaction was sort of negative. The old way of thinking was that numbers produced by accountants were meaningless. We shot that down, and in doing so we wiped out a generation of academics and made their work obsolete, so the negativism was understandable.

Soon after the paper came out, Phil and I were in Australia. Bear in mind that the only way of communicating with North America at that time was by telephone, which cost an incredibly large amount of money, or by letter. Academic journals would arrive in Australia three to four months after publication. So we were unaware of the reaction. Then a whole generation of doctoral students and assistant professors thought this would be a nice area to work in, and the paper started taking off.

What’s happening now to the accounting revolution you started?

Databases are larger. Economies are larger. But in terms of accounting research on the stock market, there’s not a whole lot more to discover. There’s a point at which you get too many studies on one set of data. People claim to have something new, but the finding is a rearrangement of something we know already.

Among our students, Wall Street has lost some of its luster. And at undergraduate institutions that churn out people who take the certified-public-accounting exam, enrollments are dropping precipitously. Becoming a number cruncher in an accounting firm has lost some of its appeal. I think part of that is because of the way accounting is taught. Most CPAs don’t learn how it makes the world better. We would do better if we paid attention to the role of numbers in the economy and the ways we are better off as a result.

Civilizations have been built on good accounting and lost on bad accounting. The world couldn’t run without it. Just think of what would happen if no one knew what was and was not working in terms of profits. It would be like every airline pilot flying blind.

Where does it go from here?

Every introductory accounting student should learn the history of accounting and understand the developments that have created wealth. When in London, I go to the National Gallery and view Crivelli’s The Annunciation, from 1486. It’s usually interpreted as a religious painting, but the late historian Lisa Jardine, in her book Worldly Goods, points to commercial and political transactions shown in it. Great wealth was generated during the Renaissance due to advances in communications and accounting, and it was this wealth that allowed the creation of such a fine painting. Today’s students should have some notion of accounting’s contribution to aggregate welfare, especially in the modern era.

There’s an increase in demand now for information about a variety of environmental, social, and governance outcomes. A lot of companies have been voluntarily putting out ESG numbers, but there are no standardized rules. The auditing of it is not as strong as it could be. How it will proceed is unclear. It will take a while to get sorted out. That’s going to be a substantial part of accounting.

Ray Ball is Sidney Davidson Distinguished Professor Emeritus of Accounting at Chicago Booth.