It seems that money is used more and more as a way of keeping score, of comparing income, wealth or influence. Perhaps accountants should bear this in mind when presenting financial information to decision makers
Standard economics holds that there are three uses of money: money as a unit of exchange, money as a store of wealth, and money as a unit of account. This is verified by the shamefully dusty economics textbooks that sit on my bookshelf at home.
The three uses of money all represent ways by which money serves society, and they are the fundamental basis of all accounting. A set of published accounts tells you about the transactions the organisation has entered into, at least in total, indicating the scale of its economic activity. It also tells you how much money the organisation has within its control, either in the form of cash and deposits or other assets, and how much money it owes to other people.
The whole set of statements tells those people who want to know – normally the people who provided the capital – just how the organisation is getting on financially. This is what young trainee accountants are taught and the basis on which they make their way out into the world.
Once they are there, of course, the real world starts to tell you a subtly different story. It isn’t that the textbooks are wrong, but simply that they are looking at the world through their own lens. The problem is that there are at least four uses of money, and probably always have been, and the fourth is the one that appeals to the way human minds work much better than the other three. It is money as a way of keeping score. As economic psychologists have put it, money is the most addictive game ever invented.
Anyone who doubts this needs only to consider the following newspaper and magazine headlines from the last two years;
‘Messi overtakes Beckham as the world’s best paid footballer’ Daily Mirror, March 2010
‘Emma Watson is named Hollywood’s highest paid female actor’ Guardian, February 2010
‘Billionaires react to Steve Jobs’ death’ Forbes, October 2011
Taking the three uses of money alone, there is something very strange about all of these headlines. Arguably, accountability is involved – we consider we have a right to know who is earning what – but in reality there is no sense in which Lionel Messi and Emma Watson are financially accountable to readers of the Daily Mirror or Guardian; they are both private individuals earning money that they are entitled to, and there is no suggestion that it has not been acquired legally through hard work and application.
In any case, the need for accountability does nothing to explain the third headline. Is the suggestion that we should be more interested in the views of billionaires about the late Steve Jobs than we would be if the reactions were coming from people who were less well heeled? Or is it that billionaires as a group can be expected to have a particular slant on the story? Either way, what is it that makes it worth building the fact of their extreme personal wealth into the headline?
Consider also the purpose of the familiar Sunday supplement ‘Rich List’. Surely, the only reason why anyone would be interested in a league table of wealth is out of curiosity. The presumption is that the richest are our most successful individuals and therefore our most worthy – perhaps the only people worth listening to when it comes to assessing the life of a fellow entrepreneur.
With that in mind, consider the following headline:
‘9,000 public sector staff earn more than the PM” Daily Mail, September 2010
The fact that public sector staff are accountable to readers of the Daily Mail and to all non-readers as well for that matter, may turn out to be a bit of a distraction – what is happening here is in many ways similar to the Lionel Messi and Emma Watson examples; the creation of a hierarchy of reward. It is a use of money as a scoring system; something which doesn’t fit any of the three traditional ways in which money is supposed to be used.
What is more, the use of money as a scoring system is ubiquitous and not confined to the private sector. If you have ever heard a manager or a politician casually mention the size of the public budget for which he or she is responsible, they may of course simply be inviting scrutiny. Or, then again, they may be drawing attention to the relative importance of the services they oversee.
This obsession with scoring is not necessarily a bad thing; perhaps it fosters a sense of competition that helps drives value creation in our economy as a whole. After all, it is better that people understand money on their own terms than not understanding it at all. As for why money should be the measure of choice, well it happens that one of the powerful characteristics of money is that it provides a readily convertible medium with which to measure. The challenge is to make sure we measure the right things.
A league table, meanwhile, is an excellent way of showing one organisation’s performance relative to another’s, with the benefit that most people (certainly most small boys) grow up having learned how to read a league table much more easily than they can read a set of accounts.
What is more interesting is the way we deal with this as finance professionals. Accountants and financial managers are the people in any organisation who are supposed to understand the money and how we can put it to best use. How can we do that if we have a grip on only three out of the four uses of money? What if we are assuming that people are making decisions based on the three classical uses of money, when actually they are taking more than a passing glance at where they seem to be on the league table?
Perhaps when it comes to presenting financial information to decision makers and to the public, we need to make more use of our tendency to use money to score, for example by showing the most financially advantageous business case at the top of the table.
As finance people we need to be as concerned with how money actually understood and used as with how we would like it to be understood.
Alan Finch is senior financial analyst at Tower Hamlets Council
