Episode #111 Preview: Free-rider Friday - September 2016

The last Friday of every month Ed and Ron will do “Free-Rider Friday.” Most of our shows are “topic” driven, where we dive deep into one subject. Free-Rider Fridays are designed to be “event” driven, whatever issues are in the news that we (or you) find worthy of commentary. In economics, free riding means reaping the benefits from the actions of others and consequently refusing to bear the full costs of those actions. This means Ed and Ron will free ride off of the news, and each other, with no advanced knowledge of the events either will bring up. If you’d like to call-in during the live show, the listener line is: 866-472-5790. You can also participate on Twitter at #ASKTSOE, @asktsoe, or email us at asktsoe@verasage.com.

This special edition of Free-rider Friday will be recorded before a live audience from IPBC's Ignite conference in Richmond BC, Canada. 

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #110: How to use key PREDICTIVE indicators

Because economies are governed by thoughts, they reflect not the laws of matter but the laws of mind. One crucial law of mind is that belief precedes knowledge. New knowledge does not come without a leap of hypothesis, a projection by the intuitive sense. The logic of creativity is leap before you look.
You cannot fully see anything new from an old place. . . . It is the leap, not the look, that generates the crucial information; the leap through time and space, beyond the swarm of observable fact, that opens up the vista of discovery.
—George Gilder, Wealth and Poverty, 1993

We have all heard the famous saying, often referred to as the McKinsey Maxim, named after the famed consulting firm: “What you can measure you can manage.”

This bromide has become such a cliché in the business world that it is either specious or meaningless.

Specious since companies have been counting and measuring things ever since accounting was invented, and meaningless because it does not tell us what ought to be measured.

Besides, has the effectiveness of management itself ever been measured? How about the performance of measurement?

Measurement for measurement sake’s is senseless, as quality pioneer Philip Crosby understood when he uttered, “Building a better scale doesn’t change your weight.”

The Triple Crown Criteria

In his book, From Worst to First, Gordon Bethune details how he was able to turn around the failed airline (which had filed for Chapter 7 bankruptcy twice in the preceding decade) between February 1994 and 1997, turning it into one of the best and most profitable airlines in the sky.

It is a remarkable story, and it illustrates the importance of utilizing leading key predictive indicators (KPIs) to focus the entire organization on its purpose and mission.

Bethune basically tracked three leading Key Predictive Indicators (KPIs), known as the “Triple Crown Criteria” in the airline industry:

  • On-time arrival
  • Lost luggage
  • Customer complaints 

What makes these three KPIs leading is that they measure success the same way the customer does. And that is critical because, ultimately, the success of any business is a result of loyal customers who return.

None of the three indicators would ever show up on a financial statement, but, as the airlines have learned over the years—by testing the theory—they have a predictive correlation with profits.

Is there a Triple Crown Criteria for PKFs?

Now that there are well over a thousand firms that have trashed timesheets, VeraSage Institute is proud to announce, based upon empirical evidence, the Triple Crown Criteria for Professional Knowledge Firms.

We are emphatically declaring that the following three KPIs are all your firm ever needs to track to predict future customer loyalty and buying behavior.

Think about it: If an airline can run on three KPIs, why can’t a PKF?

An airline is far more complicated than any PKF, which is what makes KPIs so powerful: they are measurements (or judgments) guided by a theory.

But the theory is the senior partner. It’s not just measurement for the sake of measurement. It’s measuring—and judging—what actually matters, to customers.

It’s defining the success of your firm the same way the customer does, just like with the airline KPIs.

The Three KPIs

Turnaround Time

Michael Dell likes to refer to the time lag between a customer placing an order and the company assembling and shipping the finished product as velocity.

We believe professional firms should also be diligent about tracking when each project comes in, establishing a desired completion date, and measuring the percentage of on-time delivery.

As Ed always points out, a firm can measure “time spent” or “duration.” The latter is the only thing that matters to the customer, hence that’s what needs to be tracked.

This prevents procrastination, missed deadlines, and projects lingering in the firm while the customer is kept in the dark.

Imagine installing 360-degree webcams everywhere in a firm. Also imagine customers being able to log onto a secure Web site, type in their names and passwords, and the appropriate web camera would find their project and give them a real-time picture of it, probably laying on a manager’s floor or credenza awaiting review.

Would this change the way work moved through a firm? Would this hold the firm accountable for results, not merely efforts?

Customers don’t want to hear about the labor pains—they want to see the baby.

FedEx and UPS do exactly this; and in fact some law firms utilize intranets that provide their customers with real-time access to the work being performed on their behalf.

This one metric would go a long way towards mitigating most of the reasons customers defect from firms (not kept informed, feel ignored, and so on).

Value Gap

This measurement attempts to expose the gap between how much the firm could be yielding from its customers compared to how much it actually is.

It is an excellent way to reward cross-selling additional services, increase the lifetime value of the firm to the customer, and gain a larger percentage of the customer’s wallet.

Marriott International uses predictive analytics through its Hotel Optimization program. Marriott has developed a revenue opportunity model, comparing actual revenues as a percentage of optimal prices that could have been charged. It attributes the narrowing of this gap, from 83 to 91 percent, to this metric.

One CPA firm made this calculation part of its partner compensation model. What actions can your firm take to close the value gap?

High Satisfaction Day™

I am indebted to John Heymann, CEO, and his Team at NewLevel Group, a consulting firm located in Napa, California, for this KPI.

When John’s firm held a retreat for the purpose of developing their KPIs, the suggestion of High Satisfaction Day (HSD) was made.

An HSD is one of those days that convinces you, beyond doubt, why you do what you do. It could mean landing a new customer, achieving a breakthrough on an existing project, receiving a heartfelt thank-you from a customer, or any other emotion of exhilaration that makes you happy you got out of bed in the morning.

Sound touchy-feely? John admits it is; but he also says the number of HSDs logged into the firm’s calendar is a leading indicator—and a barometer—of his firm’s morale, culture, and profitability.

Is this too Simplistic?

No.

Compare the above KPIs to what most firms are measuring now—billable hours, utilization, realization, write-downs, write-offs, and other internally-focused metrics that have nothing to do with how the customer defines the success of their firm.

These metrics have zero predictive ability when it comes to future customer behavior. They are lagging indicators, not leading.

Stop measuring things that don’t matter, and focus on what does. The above three KPIs will work in any PKF—period.

Ron and Ed stand by this Triple Crown hypothesis for all PKFs.

Prove us wrong.

We’ll enjoy losing the argument, because it means we’ll learn something new.

Grown-ups love figures. When you tell them that you have made a new friend, they never ask you any questions about essential matters. They never say to you, “What does his voice sound like? What games does he love best? Does he collect butterflies?” Instead they demand: “How old is he? How many brothers has he? How much does he weigh? How much money does his father make?” Only from these figures do they think they have learned anything about him.
Antoine de Saint-Exupéry, The Little Prince, 1943

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #109: Trashing the Timesheet

In general, there are four defenses for maintaining timesheets:

  1. We need them to price.
  2. We need them for project management.
  3. We need them for team member performance evaluations.
  4. We need them for cost accounting.

VeraSage has proven, without a doubt, that every one of these defenses is incorrect, and that there are superior methods and tools for each of these objectives.

First, prices are set by value, not hours, even within the context of competition. After all, none of us buy the cheapest of everything, which proves there is room in all markets for price searching by sellers to take place.

Second, anyone who spends a day listening to Ed Kless teach project management cannot possibly come away thinking that “time spent” is more important than “duration”—that is, turnaround time—from a project manager’s perspective. Duration is where the bottlenecks occur, not time spent.

Time is not value, it’s not a cost; it’s a constraint.

Third, anyone who has studied nearly every single private business, or a Results-Only Work Environment (ROWE), knows timesheets are not needed to conduct performance evaluations for team members.

Yet, it’s the last defense we really want to bury, once and for all, in this post.

Timesheets are a Cost Allocation Tool - NOT!

Some claim the only way to calculate profitability per customer is with timesheets. Really?

First off, you don’t need timesheets to know your firm’s costs. Look at your income statement. Don’t confuse total costs with cost allocation.

Give me half a day, maybe less, with your income statement, revenue per customer, and allow me to interview your team, and I will allocate your costs over any time period you want, and the result will be customer profitability that’s close enough for horseshoes and hand grenades.

Let’s get over the idea that any cost accounting—be it timesheets, Activity Based Costing, or any other method—requires 100 percent accuracy. The simple truth is, cost accounting is full of arbitrary allocations and errors, and if you don’t understand that, you’ve never been a cost accountant.

Cost accounting just has to be close enough, and the important point is that your costs need to be known before you do the job, not afterwards.

This is why Japanese manufacturing (especially automobile) companies utilize Target Costing, not standard cost accounting. They are about 40 years ahead of American companies with this practice.

This is an enormous difference, since value drives price, and price drives the costs you can incur to earn a profit you can live with. It does no good to know your cost allocation to the penny if the customer doesn’t agree with your value and/or price.

Further, costs are largely fixed in professional firms. This is why airlines, cruise ships, hotels, etc., do not engage in low-value cost accounting, but rather concentrate on yield management—that is, pricing for value, not to cover arbitrarily allocated costs.

Why Your Hourly Rate is Not Cost Accounting

However, I want to dive deeper on this issue, because the above logic doesn’t seem to convince many CPAs.

Your hourly rate is not even an accurate cost allocation method. Here’s why:

  1. It includes profit. There’s no such thing as allocating profit in cost accounting. That’s profit forecasting, not cost accounting. Opportunity cost has no place in cost accounting either, as that is an economic concept, not a cost accounting concept.
  2. Even if you remove the profit component from your hourly rate, it still bears no relationship to your firm’s actual costs. Since most firms establish their hourly rates based upon reverse competition—that is, what your competitors charge—the cost component is completely arbitrary. I have yet to encounter more than a handful of firms that tie out their cost per hour to their general ledger.
  3. With the timesheet, you are attempting to run a Profit & Loss statement on every hour of work logged. This is absurd, since your firm is an interdependent system, and cannot be atomized into a series of recorded hours.
  4. The hourly cost allocation gives no weight to the lifetime value of the customer—and the lifetime value of the firm to the customer.

These are egregious errors for CPAs to commit, given our supposed fastidiousness when it comes to numbers.

And when you compare this costing method to target costing—or price-led costing—you realize timesheet allocation is suffering from what philosophers call a deteriorating paradigm—the theory gets more and more complex to account for its lack of explanatory power.

This is why many firms will allocate the same dollar of revenue three or four times, based upon different criteria—from origination to realization to cash collections—which is overly complicated and not a great use of limited executive attention.

But Wait, There’s More

Here’s a Gedanken (thought experiment).

Assume you’re a sole proprietorship, and have $100,000 of fixed overhead this year (rent, wages, pencil lead, paper, etc.).

Further, let’s assume you plan to work 3,000 hours, and expect one-half of this to be “billable,” and the other half “nonbillable.”

The first question is do you divide the $100,000 of costs by 1,500 or 3,000 hours? Forget adding your desired profit, as that’s not cost accounting but profit forecasting.

The theory of hourly rates says you’d divide by the number of hours you expect to bill, not work, so that’s $100,000/1,500, or $66.67 per hour of allocated costs per hour worked.

Let’s also assume that you’ve billed 1,500 hours between January and November 30th of the current year, and you’ve completed all of your work, looking forward to your month off (you were able to get all your work done early because you took Ed Kless’s excellent project management boot camp).

Now, on December 1st, a new customer engages you to perform 100 hours of additional work that month.

Your cost allocation now becomes $100,000/1,600, or $62.50.

Therefore, you’ve been over-allocating your costs by $5 per hour for eleven months of the year.

[It’s even more absurd if you originally divided the $100,000 by 3,000 hours worked (not billed), even though you no longer have the $5 per hour over-allocation issue. Why? Because, then, to which customers do you allocate the 1,400 “nonbillable” hours? And how do you determine that allocation? This is why cost accounting is full of arbitrary assumptions].

Multiply that by more and more employees, customers that are constantly being added and subtracted, account for all the lies in timesheets, the eating of time, non-recorded time, and all the other games played, and you have an egregiously incorrect cost allocation scheme that is incredibly elastic, not accurate.

And, to add insult to injury, timesheets are not helping you price better, conduct project management more effectively (or even efficiently, for you Taylorite disciples), qualify your customers better, predict the performance of your team members, or measure what matters to your customers, or improve future performance of your firm, as with After Action Reviews—and, even more absurd, they are lagging indicators that give us the illusion of control.

By definition, once you see something on a timesheet, it can longer be managed.

Moreover, they cost a fortune to maintain—usually the biggest customer in the firm. What’s the ROI from this investment in tracking time? We believe it’s negative.

All this said, what’s the point of timesheets?

As Ed says, “If you suck at what you do, bill by the hour…”

And I would add, given the logic of the above, “…and keep timesheets.”

If you think the above is flawed, please let us know where.

This debate is getting stale, and we should have moved on a long time ago, since there are many more important issues for the professions to deal with rather than wasting time on a deteriorating paradigm.

Additional Resources and Mentions

Jamey Johnson - The Dollar

For a comprehensive Q&A on timesheets, see the VeraSage post, Ask VeraSage: All About T&A.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #108: The True Professional Ideal

Life is not worth living if we exercise our profession only for the sake of material success and do not find in our calling an inner necessity and a meaning which transcends the mere earning of money, a meaning which gives our life dignity and strength–Michael Novak

 

We must hold a man amenable to reason for the choice of his daily craft or profession. It is not an excuse any longer for his deeds that they are the custom of his trade. What business has he with an evil trade? Has he not a calling in his character? –Ralph Waldo Emerson

The term profession comes from the Latin noun professio, which is derived from the past participle professus, or the verb profiteri, denoting “to declare publicly, own freely, acknowledge, avow.” Professionals are said to “profess” something, they stand for something. The noun professional didn’t appear in American dictionaries until 1861.

In the 18th and 19th centuries “professions” referred to theology, law, medicine, and education. From the early 17th till the mid-18th century, theology was considered the preeminent profession. Sociologist Bruce Kimball, in his book The “True Professional Ideal” in America, suggests three eras of professionals: religion through the mid-18th century; polity (law) through the mid-19th century; and science through the 1910s. It took until 1925 until the first public opinion survey of vocational status showed that doctors had passed lawyers and ministers (though not professors) in public esteem.

It’s interesting to note that a trip to the doctor didn’t do much good until the 1920s or 1930s with the introduction of antibiotics. Before then, most visits were ineffective and a large number were downright harmful. The Hippocratic principle of primum non nocere (“first, do no harm”) continues to be an essential guideline for all professional conduct.

Scholars have traced regulation of the professions to ancient Babylon and the Code of Hammurabi. Written about 1800 B.C., the Code set predetermined fees for surgeon’s services and imposed penalties for malpractice (including the severing of a surgeon’s hand if the patient died from an operation). The first law to regulate a profession in America was in 1639 in Virginia, where the purpose was to control fees physicians could charge. Ten years later, Massachusetts passed a law regulating the quality of medical care.  Under the U.S. Constitution both professional licensing and education are “residual powers” and deemed state prerogatives, which is why occupational licensing is under the jurisdiction of the states. 

The Characteristics of a Profession

According to Kimball:

By the beginning of the twentieth century, the term [profession] denoted a dignified vocation with three fundamental characteristics. One topic concerns the body of functional knowledge, or expertise, associated with a profession and involves issues of epistemology, utility, and education. A second topic concerns the profession’s organization into an association and involves such issues as autonomy, exclusion, licensing, and certification. The third fundamental topic is the ethic of professional service.
Needless to say, these three basic topics––expertise, association, service––have often been subdivided by scholars into lists of six, eight, ten, or more characteristics. But such characteristics are often redundant or may easily be aggregated on grounds of parsimony. Meanwhile a good deal of testimony affirms that “there are three ideas involved in a profession:  organization, learning...and a spirit of public service.” ...the “collegial, cognitive, and moral,” that is, “autonomy, service, and knowledge”––are characteristics of the “ideal” of a profession (Kimball, 1995: 323-24).

Let us explore these three characteristics as they relate to the CPA profession.

Expertise

Because professionals possess a specific body of knowledge, obtained through education and on-the-job training, the belief is only those with this knowledge are able to regulate the activity. Also, professionals provide advice and intangible knowledge––as opposed to offering tangible goods––and therefore the technical competence and quality of those offering this advice need to be ensured in order to protect the public.

CPAs obtain this specialized knowledge through formal education in college, and demonstrate their competence by passing the Uniform CPA Examination, and also by on-the-job training and continuing professional education.

It is interesting to note that in June 1898, Christine Ross (a native of Nova Scotia) passed New York CPA exam, but certificate No. 143 was withheld till December 21, 1899, after the Board of Regents decided whether or not a woman should be certified. What this delay had to do with her technical competence and expertise is an interesting question.

Autonomy and Exclusion

Autonomy is from the Greek words for “self governance.” One of the hallmarks of a profession is its ability to self-regulate itself.  Because information in professional markets is asymmetrically distributed––that is, sellers know more about the quality of the services rendered than do the consumers––this further enforces the need for professionals to regulate who may enter, and continue to remain, in the profession.

The CPA profession––through the voluntary association of the AICPA, various state societies and the state board of accountancies––engages in self-regulation by: administering the Uniform CPA Examination process and the requirements necessary to qualify for it; granting and administering licenses to practice; promulgating a Code of Professional Conduct; requiring peer review of firms providing attest services; enforcing continuing professional education requirements; carrying out disciplinary actions against members of the profession who violate the Code or laws, or engage in acts discreditable to the profession.

Exclusion––or monopoly status––is granted to the profession through licensing and certification requirements. Society grants monopoly status to a profession in order to protect the public from unlicensed practitioners. The only monopoly status the CPA profession possesses is in the attest function. One must be a CPA in order to render an opinion on a financial statement. The other services CPAs provide––from tax services to management advisory services––are not covered by this monopoly status. Approximately 15% of the CPA profession is engaged in auditing activity, which is why many states have now developed separate avenues to get certified without providing audits.

Monopoly status is not a right of a profession, it is a privilege granted by the state. Theoretically, if society believes the profession is not properly servicing it, monopoly status can be revoked. Also, increased regulation and legal liability are other methods that can be used to ensure a profession is fulfilling its obligations to society. Expansion of legal liability of CPAs and recent legislation such as the Sarbanes-Oxley Act of 2002 is a manifestation of this reality.

It should also be noted that most economists are against monopoly status being granted to any professional, because it reduces innovation, raises prices to consumers, and hinders the dynamism of a free market. The deregulation of the professions that has occurred over the past few decades reflects this view. 

The Spirit of Service

Two Latin phrases sum up the ethic of service that is another core value of a profession: Non sibi sed allis, “Not for ourselves but for others” and Pro bono publico, “For the public good.” Because society grants professions monopoly status, it expects members of that profession to put the interests of the public ahead of its own member’s interests. 

In fact, the AICPA Code was modified January 12, 1988 and a public interest principle was added, which states that conflicts are to be resolved in favor of the public. Even in the absence of codes and principles promulgated by a professional body, individual members and firms have been known to hold themselves to higher standards. 

For instance, George May, a British Chartered Accountant born in 1875, and a senior partner at Price Waterhouse, insisted on financial independence from clients thirty years before the idea occurred to accounting’s professional bodies.

Prior to 1978, some legal and accounting professional ethical codes placed limits on advertising, and soliciting clients––known as afferent ethics, since they deal with relationships among professionals. But since these regulations affect the public, they can also be thought of as efferent ethics, which deal with how the profession shall act in the public interest.

An example of this is the famous 1977 Supreme Court Case Bates & O’Steen v. State Board of Arizona, 433 US 350 (1977), wherein the Court ruled that attorneys could market their legal services. Prior to this landmark case, the AICPA Code of Professional Conduct explicitly proscribed advertising, stating:

Solicitation to obtain clients is prohibited under the Rules of Conduct because it tends to lessen the professional independence towards clients which is essential to the best interests of the public. ...Advertising which is a form of solicitation is prohibited...Promotional practices such as solicitation and advertising, tend to indicate a dominant interest in profit.

Infamous “Bates” Ad

Th ad that started the controversy. It went all the way to the Supreme Court of the United States.

Th ad that started the controversy. It went all the way to the Supreme Court of the United States.

In 1978, the CPA profession responded to the Bates decision by amending this rule to read, "A member shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive."

Many economists have argued that advertising has had a salutary effect on professional services by providing more information to consumers, more competition, more choices, new innovative services, better client service, and lower prices. Some members of the profession dispute this and have a tendency to look upon this deregulation as one of the problems causing the alleged compromises to auditor independence, which may have contributed to the recent accounting scandals.

The True Professional

A professional is someone who is responsible for achieving a result rather than performing a task ––Michael Hammer

In The Experience Economy, Joseph Pine and James Gilmore posit a progression of economic value. We believe professionals are poised at the top of their curve: transformations:

If you charge for stuff, you are in the commodity business (fungible)

If you charge for tangible things, you are in the goods business (tangible)

If you charge for the activities you execute, you are in the service business (intangible)

If you charge for the time customers spend with you, you are in the experience business (memorable)

If you charge for outcomes the customer achieves, then you are in the transformation business (effectual—the customer is the product)

Listen to our interview with Joseph Pine from March 6, 2015.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Upcoming Encore Presentation: Interview with Daniel Susskind

Hi all, Ed here. 

Originally, Ron and I planned to air an episode which was an edited version of a video conversation he and I had a few years ago. Sadly, I misremembered the "quality" of the recording from a technical perspective. I muddled through editing and producing about 30 minutes and decided it just was not up to the quality you would normally hear from both us and the great folks at VoiceAmerica.

With Ron visiting Australia, it was too late and too difficult to pull something together, so we have decided to run an encore presentation of our interview with Daniel Susskind, co-author of The Future of the Professions.

If you have not listened to this episode, you are in for a real treat. Daniel is as engaging as he is knowledgeable. If you have heard it before, listen again, I promise you will take some new away with you.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #107 - Free-rider Friday - August 2016

Ron’s Topics

Ten ways to tell you might be sitting next to an economist,” May 9, 2016, The Economist

Those incredible flying machines,” The Economist, June 25, 2016

Maximin,” The Economist, June 25, 2016

Stay with me,” The Economist, May 7, 2016

  • May 3, Hyatt profits up 55% over same QTR 2015
  • REVPAR (revenue divided by rooms available in a given period) has risen last 6 years in America
  • Booking from online sites increased to 1/5 rooms, up from 1/10 in 2006
  • AIRBNB valued at $25B
  • One solution: get bigger. Marriott buy Starwood $13B, 1.1 million rooms, get lower fees from online sites
  • AIRBNB has even more rooms than 1.1M
  • Sued SF over $1K/day fine for each renter not registered (8-%). Airbnb not responsible for failure to comply?

Brexit

July 2, 2016 The Economist

  • Breversal: 4m+ signed petition for a re-run of vote
  • Support for EU is collapsing, esp in France (Germany feels reparative responsibility)
  • EU buys ½ UK exports
  • Norway option: continued access to Europe’s “single market” in return for the free movement of people, and cont to EU budget
  • Article 50 is about Exit, not trade (has to be separate negotiations). Trade requires approval of members
  • Canada-type trade deal, or WTO rules
  • Will Brexit undermine NATO?
  • English may no longer be language of European business
  • Airlines divert investments to EU, Pharma R&D, too
  • Morgan Stanley says 1.5% off Britain’s growth rate 2016-17, half as much for EU, .5% off global growth (UK 4% of world GDP?)
  • Boston Beer Company (Samuel Adams) applied for the Brexit trademark—cider!
  • European Parliament announced a proposal to tax robots as “electronic persons.”
  • Ronald Reagan. Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.

Artificial Intelligence: The return of the machinery question

The Economist, Special Report: June 25, 2016

David Ricardo first posed “The machinery question” in 1821, "The influence of machinery on the interests of different classes of society, and in particular the opinion entertained by the labouring class, that the employment of machinery is frequently detrimental to their interests."

Thomas Carlyle, 1839, railed against the “demon of mechanism, oversetting whole multitudes of workmen.”

During the Industrial Revolution, John Stuart Mill said, "There cannot be a more legitimate object of the legislator’s care than looking after those who livelihoods are disrupted by machines."

1930s: Keynes coined “Technological unemployment.”

JFK issued a domestic challenge: “to maintain full employment at a time when automation…is replacing men.”

1964 Nobel winners formed the Ad Hoc Committee, on the Triple Revolution, which sent president Johnson a memo warning of the "Danger of the combination of the computer and the automated self-regulating machine that would divide society into skilled elite and unskilled underclass."

2013 Oxford study, 47% of jobs in America were high risk (overblown?)

Merrill Lynch by 2025, $14T-33T impact?

McKinsey Global Institute, transformation is happening 10X faster and at 300 times the scale (3000x) impact of Industrial Revolution.

Stephen Hawking, Elon Musk, Bill Gates: AI poses an existential threat to humanity.

2015: $8.5B spent on AI companies.

Long-term goal: Artificial General Intelligence (AGI), capable of solving a wide range of tasks, rather than a new AI system for each problem. AI experts can still publish after joining industry.

Companies ok with this transparency, since they can give away AI systems because they have access to the data. Elon Musk co-founded OpenAI, $1B, with the goal of openness for AI research.

Daniel Susskind quoted: “We compare machines to perfection, not to humans doing the same tasks (driverless cars).”

Will AI get its own regulatory agency (FDA, FAA)?

Pessimists vs. optimists? The Economist is somewhere in the middle.

Governments need to make it easier for workers to retrain and switch jobs. MOOCs, Udacity, Coursera will help. In future, learning to relearn will become the skill needed.

What determines vulnerability to AI?: whether work is routine.

Jobs will be redefined rather than destroyed.

Impact won’t be as great as epochal shift from agricultural to industrial economy.

After AI’s dark winter, and the slow rate of progress, it’s ironic that many now think it’s moving too quickly.

Ed's Topics

Travis Kalanick on Uber's bet on self-driving cars: 'I can't be wrong'

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #106: Interview with Professor Steven Landsburg

This week Ron and Ed are thrilled to have had Professor Steven E. Landsburg, professor of Economics at the University of Rochester, where students recently elected him Professor of the Year. He is the author of The Armchair Economist, Fair Play, More Sex is Safer Sex, The Big Questions, two textbooks in economics, a forthcoming textbook on general relativity and cosmology, and over 30 journal articles in mathematics, economics and philosophy. His current research is in the area of quantum game theory. He writes the monthly “Everyday Economics” column in Slate magazine, and has written regularly for Forbes and occasionally for the New York Times, the Wall Street Journal and the Washington Post. He appeared as a commentator on the PBS/Turner Broadcasting series “Damn Right”, and has made over 200 appearances on radio and television broadcasts over the past few years.

Segment One

Ed and the Professor discuss quantum game theory. Well, Professor Landsburg talks about it, Ed is still confused.

Quickly, they move on to Presidential politics wherein the following blog posts from Landsburg's blog, The Big Questions, get elaborated upon:

Ed then asks what advice the Professor would give the next future President. 

Segment Two

Inscribed on Karl Marx’s Tomb: "The philosophers have only interpreted the world in various ways. The point is to change it." In The Armchair Economist, Steven Landsburg writes, "The economist’s greatest passion is not to change the world but to understand it."

Ron asks why economists have not given up the assumption of rationality?

Also, in The Armchair Economist, Landsburg writes, "Most of economics can be summarized in four words: People respond to incentives. The rest is commentary."

Does behavioral economics shed light on the, perhaps, one-half of human behavior that is “irrational”?

The last chapter in The Armchair Economist is titled, “Why I’m not an environmentalist: the science of economics versus the religion of ecology.” 

You write about being lectured to by 4 and 5 year-olds about safe energy sources, mass transportation, and recycling (you also mention attempting to throw away your recycling bin), so why aren’t you an environmentalist?

Landsburg’s Rules of cost-benefit analysis:

  • Only individuals matter, and
  • All individuals matter equally

Are you optimistic about mankind’s ability to adapt to any climate change?

Segment Three

Ed asks about income inequality based on a speech the Professor gave three years ago in Dallas at an event for the National Center for Policy Analysis. There was no wealth inequality in the 16th century because everyone was starving and "it all sucked."

Since 1965, the average American has gained 6.5 hours of leisure per week, and low-income people have gained 14 hours per week, leading Landsburg to ask, “Why do we tax an hour of work but not an hour of leisure?” Should we “redistribute” leisure?

Healthcare today is a better bargain than it was in 1965. Ignoring AIDS, the quality of healthcare in America in 1975 was the same as what were seeing in the poorest parts of the third-world today. That’s how much better it has gotten in America, and the third world, in the last 40 years.

Segment Four

Fair Play
By Steven Landsburg

In Fair Play Landsburg writes, "There’s nothing less interesting than a fact unilluminated by a theory. Theories make knowledge possible."

Ron asks what is the premise in your book, More Sex Is Safer Sex? For the record, Ed had to put his mic on mute because he was laughing uncontrollably. 

Is the death penalty a deterrent? My economics professor at San Francisco State made us read Isaac Ehrlich’s research, which shows that for every execution somewhere between 8 and 24 murders are deterred? (And professor Ehrlich is opposed to the death penalty on moral and religious grounds).

Landsburg does write that there is a difference between the enactment and the enforcement of the death penalty. Could we run an experiment where if you commit murder on Monday, Wednesday and Friday, you get life in prison with no parole, but if you commit murder on Tuesday, Thursday, or the weekend, you get the death penalty, and see if changes behavior?

An FDA commissioner can make two types of errors: Type I error: approve a harmful drug that kills people, thereby losing his job; or a Type II error: don’t approve a drug that could save many lives, but the dead patients won’t ever know. To reduce the likelihood of a Type II error, you suggest paying the FDA commissioner in pharmaceutical stocks for every drug he approves. Would this work?

Thank you Professor Landsburg for appearing on The Soul of Enterprise. It was an honor to speak with you.

Steven E. Landsburg’s Books and Blog

Blog: www.thebigquestions.com

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #105: The Eight Myths of Capitalism

Ed and Ron recapped their experience at Sage Summit, discussing speakers such as Richard Branson, Ashton Kutcher, and Daniel Susskind.

Click Image to Register and view these sessions on Sage Summit Live

Click Image to Register and view these sessions on Sage Summit Live

Ron and Ed are presenting a workshop in Niagara Falls on “The Post-Professional Society,” October 16-18.

Then, based on the book by Jay Richards, Money, Greed, and God: Why Capitalism Is the Solution and Not the Problem, published in 2009, they discussed the eight myths of capitalism.

Richards' book was also the inspiration for the January 22, 2016 show, Episode #73: Lessons from the Trading Game.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #104: Interview with Gregory LaFollette

Ed and I were honored to interview Gregory L. LaFollette, CPA, CITP, CGMA

Biography

Greg is one of the most recognized and respected voices on technology within the accounting profession. He has a broad background in the field, having spent time in private practice, as an executive with a top-tier technology vendor and as an editor of a leading publication keyed to accounting technology. He is also a sought-after speaker at trade shows and conferences.

Prior to joining CPA.com, Greg was a consultant to public accounting firms and to technology vendors with a focus on the accounting profession. Additionally, he was the Executive Editor of TheTechGap — the country’s first blog specifically created for the tax and accounting profession and for vendors who seek to serve that community, and Senior Manager of Tax and Technology Consulting with the Top 25 firm of Eide Bailly, LLP.

Earlier in his career, Greg served as the Executive Editor of The CPA Practice Advisor (formerly The CPA Technology Advisor), VP of Product Strategy at ThomsonReuters Creative Solutions, and founding partner at LaFollette, Jansa, Brandt & Co., LLP in Sioux Falls, SD. He served on the AICPA’s CITP Credential Committee (Chair), the National Accreditation Commission (ad hoc via the Credential CITP Committee), the Top Technologies Task Force, the TECH+ Planning Committee, and the Journal of Accountancy Technology Advisory Board.

Greg completed his professional training at Augustana College (SD) and is a CPA, a CITP, and a member of the AICPA Information Technology Division. He is a graduate and former staff lecturer at the AICPA’s National Tax Institute.

He and his wife Kaye have one grown daughter and choose to live in their hometown of Sioux Falls, SD.

Discussion

We had a wide-ranging discussion, including:

Why Greg changed his mind on no timesheets (it wasn’t Ron’s screaming at people to trash them).

The #1 Issue facing the profession?

Some of the major trends happening in the accounting profession?

The implications of the Richard and Daniel Susskind book, The Future of the Professions.

The impact of Blockchain, Bitcoin, AI, Deep Learning, and PriceWaterhouseCooper’s HALO audit software—that runs algorithms through entire data sets—no more audit sampling.

On driverless cars, Greg thinks his grandchildren will be alive when the Supreme Court has to decide whether humans should be allowed to drive, since we are so unsafe.

He also proposed a ratio to determine if an industry (or firm) is being disrupted by a new business model driven by technology:

            Legal Expenses / Technology Exp

If you were to run the music industry’s ratio during the Napster imbroglio, Greg’s point is an excellent one!

Thanks, Greg, for appearing on The Soul of Enterprise.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #103: Black Swan Friday

Ed’s son, Sean, had a baseball game, so rather than doing Free-Rider Friday alone, Ron did “Black Swan Friday” by interviewing two of the Canadian bookkeepers who have been through the Black Swan Mentoring Program.

Cindy Kindret, founder and owner of Kindret Business Solutions, Inc., started her business from scratch 14 years ago with 2 clients and grew it by year 8 to over 100 clients. Her home-based business today includes 3 employees, and 2 contractors. Nothing has more positively changed her business than The Black Swan Program. 

Today she has less than 40 clients and generates more profit than when she had over 100 clients, has more time to think and enjoy her clients and more time to plan for a better future. 

Cindy is a Certified Professional Bookkeeper through Institute of Professional Bookkeepers Canada, is a Distinguished Financial Advisor “Bookkeeping Services Specialist” through Knowledge Bureau, and is both a Sage50 and QuickBooks Pro Advisor.

Melissa Michalski, B.Comm(Hons), CPB

Melissa is one of the co-owners of CertPro Accounting Team in Winnipeg, Manitoba Canada. Her love of accounting started during high school when her mom and grandpa encouraged her to take an accounting course as an elective. She holds an undergraduate degree from the Asper School of Business at the University of Manitoba. Before joining CertPro, Melissa worked in public accounting.

She is a proud member of IPBC and a Certified Professional Bookkeeper.  Melissa volunteers her time as the IPBC Regional Developer for the province of Manitoba.

Melissa was lucky to be part IPBC’S BLACK SWAN program in 2014.

She also teaches competitive dance to children ages 9-18. In her teens she represented Canada on the World Tap Team where she brought home the bronze medal.

When she isn`t crunching numbers you can find Melissa travelling to California and Disneyworld and spending time with her two cats.

Topics discussed

  1.  Why did you want to change your business model?
  2.  How scared were you? No hourly billing, no timesheets?
  3.  What’s the most critical component of pricing?
  4.  What’s your approach to the value conversation now?
  5.  Did you get pushback from your customers? How many customers did you lose?
  6.  We recommend pricing the customer, not the service
    1. How do you craft your options?
    2. What are the advantages of options?
  7.  Have you become more selective about customers you take on?
  8.  Explain how you manage your emotional capacity vs. your physical capacity?
  9.  What advice would you give to a bookkeeper who is thinking of making this change?
  10.  Give an example of where you created and captured extraordinary value.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #102: Interview with David Barrett - CEO of Expensify

Ed and I were honored to interview David Barrett, Founder and CEO of Expensify, whose purpose is “To improve the world one expense report at a time.”

David is a wine aficionado, and all around alpha geek. He started programming when he was 6 and it has been his primary activity ever since, with a brief hiatus for world travel, technical writing, project management, and now running Expensify.

Since 2008, David and Expensify have been making the world a better place, one expense report at a time.

Expensify was recently named one of the Most Innovative Companies in 2015 by FastCompany. A pioneer in the expense management space, Expensify has become the model for all similar solutions.

David is married to an opera singer and has the cutest beagle in the world. David loves third world travel and first class wine, but hates expense reports.

Expensify does "expense reports that don't suck!" by importing expenses, and receipts, from your credit cards and mobile phones, submitting expense reports through email, and reimbursing everything online.

It has raised over $6 million in venture funding, has hundreds of thousands of users, has won awards aplenty, and is basically taking the small-business expense reporting space by storm.

tardigrade.jpg

We discussed his “Please Don’t Call Us “Cockroaches post, where he suggests the name Tardigrade instead of cockroach.

History/Biography

How’d you get here?

Company almost never happened? Started as prepaid debit card idea?

Expensify’s Non-Enterprise Sales Model

It sells to the end user and is thus pulled into organizations from the bottom up, getting around IT and procurement!

Since it started in 2008, it has spent nothing on promotion and grown to 4 million users.

As Robert Stephens, founder of Geek Squad, says, “Advertising is a tax companies pay for being unremarkable.”

Expensify uses a Freemium Pricing Model, which has led to 600,000 companies using it for free.

David’s Blog Posts and Articles

David’s blog posts, along with those discussed:

David Barrett on BitCoin

 

What’s your advice for entrepreneurs?

Stop getting distracted by the bad advice from others. Most advice you get is awful. You can only be an “expert” on the past.

What’s your favorite California wine?

 Little Vineyards, Glen Ellen, CA

What’s been your favorite travel destination?

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #101: Interview with Baruch Lev

Ed and I were honored to have on Baruch Lev, co-author of The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance) by Baruch Lev and Feng Gu, 2016.

The book is divided into four parts, which we asked Professor Lev about.

Part One: Relevance Lost

The End of Accounting is divided into four parts:

  1. Relevance Lost
  2. Why is Relevance Lost?
  3. So, What’s to Be Done?
  4. Implementation

Like a Consumer Reports evaluation, they provide an unsatisfactory report. Based on a comprehensive, large-sample empirical analysis, spanning the past half century, we document a fast and continuous deterioration in the usefulness and relevance of financial information to investors' decisions. The pace of this usefulness deterioration has accelerated in the past two decades.

Our analysis indicates that today's financial reports provide a trifling 5-6 percent of the information relevant to, and used by investors.

One amusing illustration they use in the book is to compare United States Steel Corporation’s 1902 and 2012 financial statements. The former is 40 pages; the latter is 174 pages. Yet they focus on the same information. Uniformity has lead to less experimentation and innovation as the world moved from an industrial/service economy to a knowledge economy.

Another indictment that what the accounting profession is peddling is the Edsel of our day, proforma (non-GAAP) earnings disclosures have doubled from 2003 to 2013, and now are over 40%.

As The Economist stated, "The real Enron scandal is that so much of what Enron did     conformed with GAAP."

How much of stock prices are attributable to earnings and book values? It was roughly 80-90% in the 1950-1960s, the authors say it’s 50% today.

Part Two: Why Is the Relevance Lost?

 The authors document three major reasons for why accounting reports have lost relevance:

1.    The inexplicable treatment of intangible assets—the dominant creators of corporate value. Intellectual capital—such as brand development, human capital, R&D, etc., are all expensed by current accounting standards.

2.    Accounting isn’t about facts anymore but more and more about manager’s subjective judgments, estimates, and projections.

3.    Unrecorded business events increasingly affect corporate value (competitor moves, regulatory changes, restructurings, alliances, etc.).

Just one example, the prevalence of Mark-to-Market rules is a clear case of asking GAAP to do something it is constitutionally incapable of doing—project value into the future, because accounting is not a theory, it’s an identity equation. GAAP can only record value once a transaction has taken place.

This is why the “goodwill” of a business is booked after is has been sold. It is why our late colleague, Paul O’Byrne, FCA, used to say that goodwill is the name accountants give to their ignorance.

Warren Buffett remarked, “This is not marked-to-market, rather marked-to-myth.” As the authors point out, Enron was marking-to-market 30-year gas contracts in which they were the main market-maker.

Much of this is due to the Financial Accounting Standard Board’s obsession with the “Balance sheet approach,” adopted in the 1980s, with the prime objective to value assets and liabilities at fair (current) values. These adjustments spill over into the income statement, making it less relevant. If balance sheet is flawed, so is income statement.

Part Three: So, What’s to Be Done?

There has been initiatives to supplement the traditional financial statement report, such as with Key Performance Indicators, the Value Reporting Revolution, Intellectual Capital reports, the Enhanced Business Reporting Model, Integrated Reporting, and so forth.

They haven’t amounted to much, and they are not grounded in solid economic theory. Lev and Gu propose adding “The Strategic Resources & Consequences Report” to the financial statements. As they explain:

The focus of this Resources & Consequences Report is on the strategic, value-enhancing resources (assets) of modern enterprises, like patents, brands, technology, natural resources,    operating licenses, customers, business platforms available for add-ons, and unique enterprise relationships, rather than on the commoditized plant, machines, or inventory, which are    prominently displayed on corporate balance sheets.
Our proposed disclosure to investors is primarily based on nonaccounting information, focusing on the enterprise's  strategy (business model) and its execution, and highlighting fundamental indicators… more relevant and forward-looking inputs to investment decisions than the traditional accounting information, we grade the ubiquitous corporate financial report information as largely unfit for twenty-first-century investment and lending decisions, identify the major causes for this accounting fade, and provide a remedy for investors.

They illustrate this report in four separate industries—media and entertainment, property and casualty insurance, pharmaceutical and biotech, and oil and gas, using real examples from various companies.

It’s an innovative and empirical approach, as the authors studied investor calls, earnings disclosures, etc., to learn what educated investors were asking to help them peer into the future potential of companies.

This is enlightened way to develop Key Predictive Indicators—that is, theories that can be used to peer into the future, rather than merely looking backwards with data that comprise most Key Performance Indicators.

Part Four: Implementation

The authors are not fans of more regulation. In fact, they advocate lessening the disclosure rules. They believe their proposals could be voluntarily adopted, perhaps with a “nudge” by industry trade associations and the SEC.

What about the retort that some of the information they want to see disclosed would lead to a competitive threat? The authors are sympathetic to this fear, but point out examples where companies have voluntarily disclosed “sensitive” information, such as one Drug company’s disclosure of pipeline info, FDA filings, clinical trial status, marketing info, etc.

The authors also advocate eliminating quarterly reporting, since frequency and reporting quality are substitutes, making it semiannual, such as in the UK and Australia, among other countries. They would still require quarterly reporting of sales, cost of goods sold, and gross margin.

Finally, they propose three reforms to GAAP:

1.    Treat intangibles as assets (at cost) and improve disclosures (such as separating Research from Development)

2.    Reverse the proliferation of accounting estimates—such as marking-to-market, leaving Fair Market Value to investors since accountants have no expertise in valuation. Compare the top five to seven key managerial estimates and projections to actual.

3.    Mitigate accounting complexity—regulatory complexity now exceeds business complexity. A 15-year FASB revenue recognition project resulted in a 700-page rulebook! It’s futile to have a rule for every scenario. We need more principles and professional judgment, and less rules.

A Deteriorating Paradigm

Abraham Briloff, late professor of accounting at Baruch College and irritant to the auditing profession, used to say that accounting statements are like bikinis: “What they show is interesting, but what they conceal is significant.”

The accounting model is suffering from what philosophers call a deteriorating paradigm—the theory gets more and more complex to account for its lack of explanatory power.

Not Final Words

We are very curious to see the profession’s response to this book going forward. Our guess is, for the most part, it will be ignored, which would be tragic, and a missed opportunity.

The number one issue facing the accounting profession is loss of relevance. Does anyone doubt that using financial statements to run—or invest in—a modern-day intellectual capital organization is the equivalent of timing your cookies with your smoke alarm?

Thank you, Professor Lev for having the courage to challenge the profession , and offering a better path forward.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #100: Celebration

We thanked our listeners, sponsors, VoiceAmerica Team, including our sound engineer Matt Weidner, the founder of VoiceAmerica, Jeff Spenard, and our Executive Producer Robert Ciolino, our “dreammaker.”

Ed and Ron talked about the 30 guests they’ve had on since the first show ran on July 4, 2014. Two of those guests have been on twice (Rabbi Daniel Lapin and Doug Sleeter).

A special thank you to all of the following guests for appearing on TSOE:

  1. Deirdre McCloskey, August 8, 2014
  2. Rory Sutherland, August 29, 2014
  3. Howard Hansen and Steven Geske, September 12, 2014
  4. Father Robert Sirico, October 17, 2014
  5. Reed Holden, Oct 31, 2014
  6. Rabbi Daniel Lapin, Nov 14, 2014 (twice: April 1, 2016)
  7. Tim Williams, Dec 5, 2014
  8. Jody Thompson, ROWE, CultureRx, Dec 12, 2014
  9. Thomas Sowell, December 19, 2014
  10. Adam Davidson, Jan 9, 2015
  11. Jules Goddard, Jan 16, 2015
  12. Dan Morris, Feb 6, 2015
  13. Joe Pine, March 6, 2015
  14. Robert Cross, March 13, 2015
  15. Anthony Clark, March 20, 2015
  16.  Dan Ariely, May 8, 2015
  17. Brad Smith, May 22, 2015
  18. Kevin Mitchell, PPS, June 12, 2015
  19. Lee Cockerell, Disney, June 19, 2015
  20. Greg Tirico, July 17, 2015
  21. Jennifer Warawa, August 14, 2015
  22. George Gilder, Sept 11, 2015
  23. Daniel Susskind, Jan 8, 2016
  24. Mark Koziel, AICPA, Jan 15, 2016
  25. David Wells, Matthew Burgess, John Chisholm, Feb 19, 2016
  26. John Jantsch, Duck Tape Marketing, March 11, 2016
  27. Paul Kennedy: The OBK Story, March 18, 2016 (done live in UK)
  28. Rabbi Daniel Lapin, April 1, 2016
  29. Dr. Mark Miller, April 22, 2016 (Books: The Moral Case for Fossil Fuels, and Fueling Freedom)
  30. Astronaut Rick Searfoss, May 6, 2016
  31. Doug Sleeter, Part I, June 10, 2016
  32. Doug Sleeter, Part II, July 1, 2016

Access to all of these shows can be found on our archive page

Memorable Shows

  • Scroogenomics, Nov 28, 2014 (“Black Friday”)
  • Business Lessons from A Christmas Carol, December 18, 2015
  • Our First Free-Rider Friday, January 30, 2015
  • Live from Sage Summit July 28-30, 2015
  • Famous Last Words, October 9, 2015
  • Live at the VeraSage Symposium, Nov 20, 2015
  • Live at the Texas Libertarian Party Presidential debate, April 9, 2016

Carry-Over Items from Last Two Shows

Ron eat crow for wrongly predicting Brexit vote would lose. www. predictit.org and a lot of the polls got it wrong, too.

Proposed referendum names for other countries thinking of leaving of the EU:

  • Quitaly
  • Dumpmark
  • Byerland
  • Withdrarsaw
  • Portgugone
  • Madriddance

As a follow-up to our shows with Doug Sleeter on the blockchain, Ron discussed the “Bitcoin Knowledge Podcast” hosted by Trace Mayer. Two shows he listed to and enjoyed: an interview with Jeffrey Tucker and one with Dr. Adam Back, a legend in Bitcoin developer circles.

Dr. Back discussed his innovation of Sidechains, which is one of the pet projects on the developer’s wish list of “cool features.”

A sidechain essentially suspends your Bitcoins on the main blockchain, then sends them to a smart contract guided sidechain, with proof of suspension, and grants you equivalent use of the Bitcoins on the sidechain.

It’s a way for them to add new features in a modular way. For instance, a sidechain could be used to run an airlines’ frequent flyer program, or for anything where you might need a ledger with special features.

If anyone is planning on attending the Sage Summit, use promo code FOE (Friend of Ed) for special pricing.

As always, we’d love to hear your favorite guests, shows, topics, and/or guests/topics you’d like to hear on The Soul of Enterprise.

Thank you everyone for listening and on to our next 100 shows!

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #99 - Interview with Doug Sleeter, Part II

We had such a good response from our first interview with Doug Sleeter on the Blockchain, we got him back to take a deeper dive on this fascinating meta, and disruptive, technology.

Doug’s Biography

Doug Sleeter (@dougsleeter) is a passionate leader of innovation and change in the small business accounting technology world. As a CPA firm veteran and former Apple Computer Evangelist, he has melded his two great passions (accounting and technology) to guide developers in the innovation of new products and to educate and lead accounting professionals who serve small businesses.

Doug has been named one of the “Top 25 Thought Leaders” by CPA Practice Advisor for several years, as well as one of Accounting Today’s “Top 100 Most Influential People in Accounting” from 2008 through 2015. He was recently awarded the Small Business Influencer Champion award. Doug is the founder of the Sleeter Group, an active member of the Accountex Leadership Council, author of numerous books, and writes regular columns for the Sleeter Report and CPA Practice Advisor. Doug and his family live in Pleasanton, CA.

Segment One

We discussed:

  • The Trust Protocol, or Trust Machine—trust the math, not the people
  • “In Math We Trust”
  • Blockchain holds institutions more accountable for their actions. Imagine if you could track each dollar you gave to the Red Cross from its starting point on your smart phone to the person it benefited
  • What is a distributed autonomous enterprise (DAE)? Essentially it is a cooperative owned by its members.
  • Blockchains automate away the center
  • Puts Uber out of a job and lets the taxi drivers work with the customer directly
  • https://slock.it has potential to disrupt lots of business models, including airbnb and uber

Segment Two

Is it all too complicated?

How many people know there are seven layers to the Internet?

Micah Winkelspecht, CEO of Gem, nation’s first blockchain solution providers said, “In the future, people won’t talk about blockchains any more than they now talk about the lower level architecture that makes the Internet work. We’ll just use them every day without thinking about it. Their presence will be ubiquitous.”

Philosopher Alfred North Whitehead said, “Civilization advances by extending the number of operations we can perform without thinking about them.”

What is Triple Entry Bookkeeping?

Today, companies record a debit and credit with each transaction—two entries, hence double-entry accounting.

They could easily add a third entry to the World Wide Ledger, instantly accessible to those who need to see it—the company’s shareholders, auditors, or regulators.

Blockchain can also deal with micropayments—those going beyond merely two decimal places. It would also mean no more “float.”

How disruptive to CPAs?

Auditing is a multibillion-dollar industry controlled by four massive audit firms.

According to the book, Blockchain Revolution: “Traditional accounting practices will not survive the velocity and complexity of modern finance. New accounting methods using blockchain’s distributed ledger will make audit and financial reporting transparent and occur in real time.”

“Accountants are like mushrooms—they’re kept in the dark and fed shit,” said Tom Mornini, CEO of Subledger, a start-up targeting the accounting industry.

If every transaction globally distributed ledger, who need public accountancies to translate for us?

Deloitte Touche now has 100 people in its cryptocurrency group, spread out in 12 countries.

Eric Piscini, who heads up the Deloitte cryptocurrency center, tells clients that the blockchain is “a big risk for your own business model because now the business of banking is to manage risk.

Overripe for disruption is the audit business, and audit is a third of Deloitte’s revenue. Piscini said, “That’s a disruption to our own business model, right? Today we spend a lot of time auditing companies, and we charge fees accordingly. Tomorrow, if that process is completely streamlined because there is a time stamp in the blockchain, that changes the way we audit companies.”

Or perhaps eliminates the audit firm altogether?

Deloitte has developed a solution called PermaRec (for Permanent Record) whereby “Deloitte would record those transactions into the blockchain and would then be able to audit one of the two partners, or both of them, very quickly, because that transaction is recorded.”

Will investors demand triple-entry accounting to meet corporate governance standards?

After all, he argues, “Who is going to invest in a company that shows you what’s going on quarterly, compared to one that shows you what’s going on all the time?”

Is the Blockchain the beginning of the end for auditors and bookkeepers?

Segment Three

Bill Gates once said: “We overestimate technology’s short-term impact, and under-estimate its long-term impact.” Are we doing the same with Blockchain?

Could we have several different blockchains, for different purposes? This is Doug’s biggest fear.

He envisions one, trusted, public blockchain. Many blockchains could fail due to incompatibility. There would also be more innovation due to the open source nature of the code, since there would be only one target to improve (like Wikipedia).

Check out https://github.com, for the open-source code for blockchain.

There are skeptics

Don and Alex Tapscott lay out ten showstoppers that could derail blockchain in their book, Blockchain Revolution:

  1. THE TECHNOLOGY IS NOT READY FOR PRIME TIME.
  2. THE ENERGY CONSUMED IS UNSUSTAINABLE.
  3. GOVERNMENTS WILL STIFLE OR TWIST IT.
  4. POWERFUL INCUMBENTS OF THE OLD PARADIGM WILL USURP IT.
  5. THE INCENTIVES ARE INADEQUATE FOR DISTRIBUTED MASS COLLABORATION.
  6. THE BLOCKCHAIN IS A JOB KILLER.
  7. GOVERNING THE PROTOCOLS IS LIKE HERDING CATS.
  8. DISTRIBUTED AUTONOMOUS AGENTS WILL FORM SKYNET.
  9. BIG BROTHER IS (STILL) WATCHING YOU.
  10. CRIMINALS WILL USE IT.

Segment Four

Doug discusses “Big Bad Data” and how blockchain can overcome this problem.

The Economist had a story that a doctor is attempting to use blockchain for clinical drug trials, making the data from them more accurate and less susceptible to manipulation.

What do we mean by trust? The Tapscott’s list four principles of integrity: honesty, consideration, accountability, and transparency.

There’s a Chinese Proverb that teaches: “When the wind of change blows, some people build walls, others build windmills.”

Should we be investing in Bitcoin and blockchain companies?

Venture capital is pouring into startups in this area, destined to be an enormous growth area in the coming years.

You can learn how much from www.coindesk.com, which has a listing of the amount of venture capital being invested at http://www.coindesk.com/bitcoin-venture-capital/.

Resources

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #98 - Free-rider Friday - June 2016

Ron’s Topics

Sighing for paradise to comeThe Economist, June 4, 2016

  • Our June 3 show, A Check for Everyone? The Basic Income Idea, discussed Charles Murray’s “The Plan”—to pay everyone from the age of 21 $10,000 per year.
  • The Economist is against this idea, saying it’s “an answer to a problem that has not yet materialized.”
  • Thomas Sowell and George Gilder are also against it.
  • The oft-cited study by Oxford that 47% jobs are going to be automated is too gloomy.
  • The Basic Income could encourage the first-world to shut off immigrants, or create second-class citizens if they allow immigration but don’t let them participate in a Basic Income program.
  • The costs are too high, and the risk of tax avoidance/evasion is also troubling.
  • It could also be alienating, socially corrosive, and create individuals with no purpose in their lives.

How the FAA Shot down “Uber for Planes”, FEE, June 2, 2016, by Jared Meyer

  • Jared Meyer is a Fellow at Manhattan Institute
  • Boston to Martha’s Vineyard cost $70 using the Flytenow app (by comparison, $1,000 for a charter)
  • FAA ruled Flytenow was a “common carrier, subject to the same regulations as major airlines
  • Private pilots simply can’t comply with this many regulations
  • Nothing new. It’s still legal to find people to share flights with on bulletin boards or telephone calls
  • FAA worries an app will go beyond friends and acquaintances
  • FAA said it’s permissible to advertise on Facebook if you had a few friends, but not a thousand
  • Not possible to know legal from illegal
  • Existing law, pilots can’t profit, only recoup costs
  • Founders of Flytenow say it’s not Uber, it’s more like carpooling for aviation
  • It’s legal in the EU
  • Not rationally related to safety, as Captain Sully couldn’t share, so it has nothing to do with pilot qualifications or safety
  • FAA was pressured by private charters and airlines
  • Flytenow has filed a Petition for Certiorari to US Supreme Court
  • Mark Sanford (R-SC) proposed an amendment to an FAA reauthorization bill, awaiting floor vote
  • We shouldn’t have to ask for permission to innovation—permissionless innovation!

The Structure of Production: New Revised Edition, Mark Skousen, 2015

  • Cato Podcast with Mark Skousen, George Gilder, Steve Forbes
  • April 25, 2014, the Bureau of Economic Analysis (BEA) at the U.S. Department of Commerce announced a new data series as part of the U.S. national income accounts, and the BEA began reporting “Gross Output by Industry”
  • Government now recognizes the critical importance of Gross Output (GO).
  • GO measures spending throughout the entire production process, not just final output like Gross Domestic Product (GDP)
  • GO measure total sales volume at all stages of production, includes all business-to-business (B2B) transactions that GDP leaves out
  • In the third quarter of 2014, GO hit $31.3 trillion, almost twice the size of GDP, which was $17.6 trillion. GDP measures the “use” economy, GO measures the “make economy”
  • GDP is comprised of consumer spending, government spending, investment, and net exports, with the first two of these being the biggest contributors
  • GDP overemphasizes consumer and government spending as the driving force behind the economy because it ignores supply-side benefits of saving, business investment, and technological advances.
  • GDP shows Household spending generates more than two-thirds of total economic output, latest U.S. data on GDP, $17.6 trillion, consumer spending $12 trillion (68%), government spending at $3.2 trillion (18%), Private investment $2.9 trillion (16%), (Net exports at -2 percent.)
  • The GO statistic, by contrast, shows consumers less than 40 percent ($31.3 trillion), while spending by business is $16.6 trillion, more than 50 percent of economic activity
  • Consumer spending is largely the effect, not the cause, of prosperity
  • GO is over $23 trillion in 2014. GO is significantly more sensitive to the business cycle than GDP. In 2008–2009, nominal GDP fell only 2 percent, GO fell by 6 percent and B2B spending collapsed by 10 percent
  • BEA’s measure of GO does not include all sales at the wholesale and retail level.
  • Wholesale and retail trade figures are included in GO only as “net” or value added
  • Skousen believes this is a serious omission, comprising more than $7 trillion dollars in business spending in 2014
  • We need to include gross wholesale and retail trade figures. They are legitimate B2B transactions that deserve to be counted
  • Skousen created his own aggregate statistic, Gross Domestic Expenditures (GDE), which includes gross sales at the wholesale and retail level and is therefore significantly larger
  • GDE in 2014 is over $37.5 trillion, 25 percent higher than GO and 120 percent more than GDP.
  • Consumer spending actually represents only about 31 percent of the U.S. economy using the GDE statistic
  • The adoption of Gross Output is the most significant advance in national income accounting since World War II.
  • GO is a reflection of Say’s law (supply creates demand), a supply-side statistic, while GDP is a symbol of Keynes’s law, a demand-side number
  • Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts

$1B stakes on the menu The Economist, May 21, 2016

  • Berkshire purchase $1 billion in Apple shares, disclosed May 16, 2016
  • Buffett, 85, likes mature firms, ignorant about technology
  • Investment in IBM has cost him
  • Buffet made his purchase weeks after Carl Icahn, 80, sold a $5 billion stake in Apple
  • “The sight of two octogenarians grappling over the firm’s fate does not enhance its aura as a temple of innovation”
  • Apple stock is cheap trading at 11x earnings (29 for Alphabet and 72 for Facebook)
  • Apple invested $1B in Didi Chuxing, China’s Uber to curry favor with China’s government
  • It needs to do so with India!
  • There was recently an Indian ministerial decision deeming Apple’s products are not “cutting-edge” that kyboshed plans to open Apple stores in the country
  • There’s a law that states products made outside India have to be 30% sourced domestically, and Apple didn’t qualify for an exemption to this rule for being “state of the art” 

Ed’s Topics

New obsession: The Broadway play Hamilton

 

Russ Roberts EconTalk podcast where he discussed his decision-making process to attend the play even though the opportunity cost was thousands of dollars.

The song, The Room Where It Happens should be Hillary Clinton's campaign theme song.

 

We need a better capitalism or how a third way = third world

Brexit Vote?

It did pass, but we didn’t know it when we pre-recorded this show on 6/23/16.

Ron favored Brexit but predicted it would lose—time to eat crow! www.predict.org got it wrong, too, as did most of the polls.

Here’s an excellent recap by a historian of an interview Margaret Thatcher gave to Forbes back in 1992, which is prescient.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #97 - VeraSage Laws Part II

First Segment

Ron and Ed discussed the upcoming Sage Summit, where Daniel Susskind will speak on his book, The Future of the Professions.

Click on this banner for preferred pricing to Sage Summit 2016.

Click on this banner for preferred pricing to Sage Summit 2016.

Our show with Doug Sleeter from last week (#96) was very well received, so we interviewed Doug again, and went deeper on the topic of the Blockchain. This show will appear sometime in the coming months.

Ed has updated the Archive section of the website, along with the Live Events section for the speaking events we’ll both be doing in the coming months.

Our show on Basic Income from June 4th was posted on Ron’s LinkedIn Influencer blog, generating over 32,000 reads and 190 comments.

Finally, on June 7th, Ron attended a talk given at the Independent Institute by George Gilder on his recent book, The Scandal of Money. This is the follow-up book to Gilder’s Knowledge and Power, which posits an information theory of capitalism that is profound. Ron believes it is worthy of a Nobel Prize in economics. You can watch the entire talk, including audience Q&A here:

Quick Review VeraSage Laws, Part I

Our show from July 24, 2015 dealt with five VeraSage Laws:

  1. Baker’s Law - Bad customers drive out good customers.
  2. Kless’ First Law - He who liveth by the discount, shall ye also perish by the discount.
  3. Kless’ Second Law - All measurements are judgments in disguise.
  4. VeraSage Axiom - Ideas are always and everywhere more important than their mere execution.
  5. VeraSage adoption of the Second Law of medicine - Prescription before diagnosis is malpractice (First Law of Medicine: Do No Harm).

These laws spring from deeply held beliefs we have, based on empirical evidence, and have become part of our vocabulary. Peter Thiel, in his book Zero to One, offers one question he always asks before hiring someone: Tell me something you believe that defies conventional wisdom?

Some of these lies defy conventional wisdom, which tends to be far more conventional than actual wisdom.

Three More VeraSage Laws

1. Growth without profit is perilous.

We start with profitability, rather than revenue, because we are not interested in growth merely for the sake of growth—the ideology of the cancer cell. As many companies around the world have learned—some the hard way, such as the airlines, retailers, and automobile manufacturers—market share is not the open sesame to more profitability. We are interested in finding the right customer, at the right price, consistent with our purpose and values, even if that means frequently turning away customers.

Adopting this belief means you need to become much more selective about whom you do business with; even though that marginal business may be “profitable” by conventional accounting standards. Very often the most important costs—and benefits, for that matter—do not ever show up on a profit-and-loss statement. There is such a thing as good and bad profits. Accepting customers who are not a good fit for your firm—either because of their personality or their unwillingness to appreciate your value—has many deleterious effects, such as negatively affecting team member morale, and committing fixed capacity to customers for whom you simply cannot create value. Growth without profit is perilous.

2. Non-rival assets provide more leverage than rival assets.

Knowledge and Abundant ideas are what economists describe as non-rival assets—meaning more than one person can use it at a time.   Contrast this with traditional rival assets, such as a building or an airplane, which can only be used for one purpose at a time.   

If I give you the tie off my shirt, now you have it and I don’t; but when I give you an idea, now we both have it, can expand upon it, test it, and make it more valuable.   Ideas are subject to increasing, rather than diminishing, returns.

Economists have always struggled with how to explain economic growth.   Many of their models embody the physical fallacy, a world where traditional factors of production—land, labor, and capital—are rival resources, innovation and entrepreneurship are treated as unexplained luck, and ideas are ignored since they cannot be quantified.

Even Adam Smith, who did so much to falsify the physical fallacy, thought that only industrial work could be “productive.”   The work of a service provider, in contrast, “adds to the value of nothing.”   This is the hamburger-flipper argument of the eighteenth century.   

As usual, Thomas Sowell explains in Knowledge and Decisions the impact on a country’s standard of living between generating ideas and the physical act of carrying them out:

Many of the products that create a modern standard of living are only the physical incorporation of ideas—not only the ideas of an Edison or Ford but the ideas of innumerable anonymous people who figure out the design of supermarkets, the location of gasoline stations, and the million mundane things on which our material well-being depends.   It is those ideas that are crucial, not the physical act of carrying them out.   Societies which have more people carrying out physical acts and fewer people supplying ideas do not have higher standards of living.   Quite the contrary.   Yet the physical fallacy continues on, undaunted by this or any other evidence.

George Gilder has a wonderful way to sum up these concepts: Wealth = Knowledge, and Growth = Learning.

3. In the real world, debits don’t equal credits.

In any transaction, both the buyer and seller must believe they profit. However, when the transaction is booked on both sides, it’s booked at the same dollar value. However, transactions are not equal, they take place precisely because of the inequality of the perception of value.

Traditional accounting ignores the customer’s profit, which economists call the consumer surplus. This is why, in the real economic world, debits can’t equal credits.

The following is from Ron’s book, Mind Over Matter: Why Intellectual Capital is the Chief Source of Wealth:

But Ric, in the real world debits don’t equal credits. -Dan Morris, in an inspired moment at dinner with Ric Payne, founder of Principa, and Ron Baker
Goodwill is the word we use to label our ignorance. –Paul O’Byrne, chartered accountant, partner, O’Byrne and Kennedy; senior fellow, VeraSage Institute (RIP)
A lot of rules have been added since the Venetian monk Luca Pacioli published the first accounting textbook, Summa de arithmetica, geometrica, proportioni et proportionalita, in 1494, introducing double-entry bookkeeping. It was a creation for future accountants that was as big as the invention of zero for mathematicians.
Unfortunately, one could also make the argument that it was the last revolutionary idea to come from the accounting profession. As quoted in Intellectual Capital, David Wilson, CPA and partner at Ernst & Young:
“It has been 500 years since Pacioli published his seminal work on accounting and we have seen virtually no innovation in the practice of accounting—just more rules—none of which has  changed the framework of measurement.”
The balance sheet dates from 1868; the income statement from before World War II. Generally accepted accounting principles (GAAP) fits an industrial enterprise, not an intellectual one. Currently, GAAP measures the cost of everything, and knows the value of nothing. As Robert K. Elliott pointed out in an essay entitled “The Third Wave Breaks on the Shores of Accounting”:
 [GAAP] focuses on tangible assets, that is, the assets of the   industrial revolution. These include inventory and fixed assets: for example, coal, iron, and steam engines. And these  assets are stated at cost. Accordingly, we focus on costs, which is the production side, rather than the value created, which is the customer side.
The traditional accounting model is over 500 years old, and it is in bad shape. Financial statements presented in accordance with GAAP are based on a liquidation value of a business, essentially historical cost assets less liabilities—a heroic attempt to assign static value to a dynamic and going concern.
Even though intellectual capital is the main driver of wealth, you will look in vain to find it in the traditional GAAP statements—the balance sheet, income statement, and statement of cash flows. Increasingly, these statements are being referred to as the “three blind mice.”
Abraham Briloff, a professor of accounting at Baruch College and irritant to the auditing profession, contends that accounting statements are like bikinis: “What they show is interesting, but what they conceal is significant.”
According to Dr. Margaret Blair, in a study for the Brookings Institution, in 1978, 80 percent of a company’s value could be attributed to its tangible assets; by 1988, only 45 percent; in 1998, only 30 percent.
In effect, 70 to 80 percent of the average company’s value cannot be explained by traditional GAAP financial statements. Adding more arcane and picayune rules to GAAP, or converging existing GAAP with international accounting standards, will not solve this problem.
The accounting model is suffering from what philosophers call a deteriorating paradigm—the theory gets more and more complex to account for its lack of explanatory power.
In all fairness to accounting, it never was meant to predict value prospectively, only to record transactions retroactively. In effect, accounting can only measure exchanges after they have taken place.
This is why accounting can only record the “goodwill” of a business until after is has been sold. Accounting has no way to place a value on that goodwill until a transaction takes place. That is why our colleague Paul O’Byrne says goodwill is the name we give to our ignorance, since to value goodwill before a business is sold would require a theory, since theories are the only way to peer into the future.
The accounting profession proffers little help in achieving this objective, for a very fundamental reason: Accounting is not a theory. The best an accountant can do is to extrapolate the past into the future, and unless one believes that the future is going to be the same as the past, this technique is fraught with hazards.
Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #96 - Interview with Doug Sleeter

This week Ron and Ed interview Doug Sleeter, founder of the Sleeter Group and self-professed blockchain-obsessed entrepreneur. 

Doug Sleeter (@dougsleeter) is a passionate leader of innovation and change in the small business accounting technology world. As a CPA firm veteran and former Apple Computer Evangelist, he has melded his two great passions (accounting and technology) to guide developers in the innovation of new products and to educate and lead accounting professionals who serve small businesses.

Doug has been named one of the “Top 25 Thought Leaders” by CPA Practice Advisor for several years, as well as one of Accounting Today’s “Top 100 Most Influential People in Accounting” from 2008 through 2015. He was recently awarded the Small Business Influencer Champion award. Doug is the founder of the Sleeter Group, an active member of the Accountex Leadership Council, author of numerous books, and writes regular columns for the Sleeter Report and CPA Practice Advisor. Doug and his family live in Pleasanton, CA.

Blockchain Definitions

Bill Gates observed that we overestimated technology’s short-term impact, and under-estimate its long-term impact.

The Blockchain has been labeled “The Trust Protocol,” by Don and Alex Tapscott. Other labels include, the World Wide Ledger of value, and a public (distributed) ledger, or distributed (decentralized) database.

The Economist labeled Blockchain “The Trust Machine”—trust the math, not the people (“in math we trust”).

Either way, Blockchain is a Meta Technology—that is, it affects other technologies. It is not a process improvement technology—it is a disruptive technology.

It could track anything to do with following (ATOMIC): Assets, Trust, Ownership, Money, Identity, Contracts.

For example, it could record birth and death certificates, marriage licenses, deeds and titles of ownership, educational degrees, financial accounts, medical & criminal records, insurance claims, voting rolls, provenance of food, and anything else that can be expressed in code.

The World’s first blockchain-recorded wedding took place at Walt Disney World, Florida, in August 2014.

More Accountable institutions

“We’re quite confident,” said Marc Andreessen in an interview with The Washington Post, “that when we’re sitting here in 20 years, we’ll be talking about [blockchain technology] the way we talk about the Internet today.”

Blockchain holds institutions more accountable for their actions. Imagine if you could track each dollar you gave to the Red Cross from its starting point on your smart phone to the person it benefited.

Triple Entry Accounting?

George Gilder thinks the blockchain is the eighth layer of the Internet—a trust and transactions layer.

Today, companies record a debit and credit with each transaction—two entries, hence double-entry accounting. They could easily add a third entry to the World Wide Ledger, instantly accessible to those who need to see it—the company’s shareholders, auditors, or regulators.

Foreign Repatriations

The largest flow of funds into the developing world is not foreign aid or direct foreign investment. Rather, remittance money repatriated to poor countries from their diasporas living abroad.

Abra and other companies are building payment networks using the blockchain.

In effect, this turns every user into a teller.

Wiring money via Bitcoin (or other cryptocurrency) takes approximately one hour vs. a week—at a cost of 2% versus 7%--compared to, say Western Union.  It takes less time to ship an anvil to China than to wire money there!

Dead Capital

In The Mystery of Capital, economist Hernando de Soto posits that $10 trillion of dead capital is inaccessible to the poor (now estimated to be $20 trilliion).

The poor don’t lack capital but rather the ability to monetize it.

Blockchain holds the potential to bring five billion people into the global economy, change the relationship between the state and citizens—a powerful new platform for global prosperity and a guarantor of individual rights.

Future, diffusion, growth of blockchain?

Some say healthcare will be the area where blockchain technology expands most rapidly.

In 2014, there were approximately 18.5 million software developers. As of 2016, 5,000 of those work in cryptocurrency and blockchain.

Matthew Roszak, co-founder, Bloq (the Red Hat of Blockchain):

Think of blockchain technology adoption as a freight train. The train may look like it’s moving slowly right now, however there’s an incredible amount of momentum building given the       financial and intellectual capital jumping on board—the momentum and innovation will continue to unfold at a significant pace.

Micah Winkelspecht, CEO of Gem, the nation’s first blockchain solution providers:

In the future, people won’t talk about blockchains any more than they now talk about the lower level architecture that makes the Internet work. We’ll just use them every day without thinking       about it. Their presence will be ubiquitous.

The philosopher Alfred North Whitehead said “Civilization advances by extending the number of operations we can perform without thinking about them.”

Books and Other Resources

The Business Blockchain: Promise, practice, and application of the next internet technology, William Mougayar, 2016

Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World, by Don Tapscott, Alex Tapscott, 2016

Magazine, yBitcoin + Blockchain, www.ybitcoin.com

Doug mentioned www.coinbase.com for Bitcoin, and Ed uses www.Xapo.com.

2 Comments

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #95 - A Check for Everyone? The Basic Income Idea

According to Wikipedia, an unconditional basic income (also called basic income, basic income guarantee, universal basic income, universal demogrant, or citizen’s income) is a form of social security system in which all citizens or residents of a country regularly receive an unconditional sum of money, either from a government or some other public institution, in addition to any income received from elsewhere.

Milton Friedman called it a Negative Income Tax, and Charles Murray dubbed it “the Plan” in his 2006 book, In Our Hands: A Plan to Replace the Welfare State. Murray posits, “Imagine that the United States were to scrap all its income transfer programs—including Social Security, Medicare, and all forms of welfare — and give every America age twenty-one and older $10,000 a year for life.”

Some Definitions

A Basic Income Guarantee would be means-tested, meaning you’d lose some of it after reaching certain income levels.

A Universal Basic Income would not be means-tested, and needs to “sufficient” in order to live on.

The Earned Income Tax Credit is subject to certain qualifications (having children, married or single) and is refundable on the personal income tax return, subject to being phased out as income rises.

The Negative Income Tax is also means-tested, and is what Milton Friedman proposed in his books, Capitalism and Freedom and Free to Choose.

The FiveThirtyEight Article

We’d like to give a shout out to Landon Loveall (@landonloveall) for sending along this article, and suggesting this show topic.

Basic Income. A Check for Everyone: What Would Happen If We Just Gave People Money?,” by Andrew Flowers, April 25, 2016, FiveThirtyEight.

On June 5, Switzerland will hold a referendum on a basic income that would provide 2500 Swiss Francs per month to each individual over 21 ($1700/mo, $20,400 USD).

The article says that this is the “most audacious social policy experiment” in modern history.” Really? I would suggest so was the USSR, China, Cuba, North Korea, etc.

The article points out that we simply don’t have data on how this proposal would work, or what would happen. We shouldn’t let anecdotes run ahead of facts, as happened with the microfinance movement.

History

Thomas Paine in a 1797 essay, proposed to provide 15 pounds sterling to everyone from the age of 21.

Martin Luther King in his 1967 book, Where Do We Go From Here: Chaos or Community? endorsed a guaranteed income.

Milton Friedman supported the Negative Income Tax from the 1950s, while president Richard Nixon proposed a guaranteed income type plan that passed in the House and stalled in the Senate.

Friedman’s plan in 1978 would have provided a family of four with $3,600 per year ($13,200 in today’s dollars).

Matt Zwolinski, Philosophy professor at University San Diego, is a prominent libertarian advocate, “There’s something objectionable about paternalism: treating adults as children who need to have their decisions made for them.”

But isn’t government providing an allowance to all “its children” the essence of paternalism?

The Empirical Evidence

The United States has ran four experiments on providing a basic income between 1968-1980. These studies took place in NJ, PA, IA, NC, IN, Seattle, and Denver. There was also a famous one in Manitoba, Canada (1974-79).

These studies did report a modest 5-7% decrease in work, and even more for secondary earners. So it appears that one of the strongest arguments against providing a basic income—that people won’t work—doesn’t hold.

But it bears repeating that these studies were a very limited sample size, were not randomized, and didn’t provide a “basic income” (i.e., sufficient to live on).

Yet the social scientists claimed, “We learned an enormous amount.”

Our question: about what? Studying poverty? What will we do with that learning—spread more poverty?

The only antidote to poverty is wealth creation, and that seems to missing from this entire discussion.

The US Government spends almost $1 trillion per year on a patchwork of welfare programs: SNAP, TANF, CHIP, EITC, WIC, SSDI, etc.

The article does point out that for any experiment to be valid is must meet four requirements: Universal, Randomized, long term, and basic (sufficient to live on). No experiment to date has yet to meet all four requirements, limiting the conclusions we can draw.

Interestingly, the political lexicon is starting to change from “basic income” to “Trust experiments” or “Citizen’s wage.” Isn’t a wage earned?

Advocates also claim that innovation would flourish since this would free the tinkerer-in-the-garage and poet to pursue their dreams.

The appeal of this is idea is very Utopian—and a utopia is an imagined place or state of things in which everything is perfect, and exists nowhere.

Charles Murray’s Plan

There’s probably no better thought out plan than Charles Murray’s, as detailed in his short book, In Our Hands: A Plan to Replace the Welfare State, published in 2006.

Murray posits, “Imagine that the United States were to scrap all its income transfer programs—including Social Security, Medicare, and all forms of welfare—and give every America age twenty-one and older $10,000 a year for life.” [$11,868 in 2016 dollars, from the age of 21 to death.

The Framework

  • Constitutional Amendment—this is required to dismantle the programs that we now have, and make sure they aren’t reintroduced.
  • Universal Passport at birth.
  • A bank account (ABA routing number; no bank, no grant).
  • Reimbursement schedule: at $25,000-$50K earned income, 20% tax on amount above $25,000, to a maximum of $5,000 reimbursment. For example, if you earned $40,000, you’d be required to reimburse $3,750 (40,000 – 25,000 x 25%).
  • Eligibility. Regardless marital status or living arrangements.
  • Changes. Link increases to median income growth, productivity, or an inflation indes.
  • Tax revenues. Murray assumes revenue neutrality—that is, the government raises the same level of tax revenues.
  • Programs to be eliminated: Social Security, Medicare, Medicaid, welfare programs, social service, agricultural subsidies, corporate welfare, student loans, and scholarships. Students could use future grants as collateral for loans.
  • Leaves state funded education, transportation infrastructure, and even the Postal Service.
  • Immigrants, incarcerated criminals are not eligible.
  • You must buy health insurance at 21. (approximately $3,000 per year).
  • Privatize health insurance, repeal employer tax deduction, and repeal medical licensing laws, and enact tort reform.

In 2002, the population of 21 year-old and older was 202.3 million. In 2011, Murray calculates we would be breakeven with what spend now (by 2005 we were at $7,000/yr for everyone 21+).

Murray points out that if stock market doesn’t grow 4%/yr, the government can’t pay for all its promises now.

Murray argues The Plan would end “involuntary poverty”—that is, for people who do right and are still poor.

What About Work Incentives?

Murray points out most people who stay out of the labor force with the grant will be the same as who don’t work today. More likely, people will work fewer hours, not fewer people working. Murray believes the net decrease will be acceptable to our economy.

Purpose

How to live meaningful lives in the age of plenty and security.

Murray also wants to revitalize institutions that lead to satisfying lives, especially marriage, mobility, changing jobs to vocations.

Mark Twain

Don’t go around saying the world owes you a living; the world owes you nothing, it was here first.

Well, Mark Twain never said it. But in 1880, an essay by Robert J. Burdette (a popular humorist) titled “Advice to a Young Man,” ran in an Iowa newspaper:

No, my son, the world does not owe you a living. The world does not need you, just yet; you need the world… But don’t fall into the common error of supposing that the world owes you a living. It doesn’t owe you anything of the kind. The world isn’t responsible for your being. It didn’t send for you; it never asked you to come here, and in no sense is it obliged to support you now that you are here…
When you hear a man say that the world owes him a living, and he is going to have it, make up your mind that he is just making himself a good excuse for stealing a living. The world doesn’t owe any men anything son. It will give you anything you earn…

Ed and I believe, on pragmatic grounds, Murray’s Plan is better than what we have now, and we could support it, if it was accompanied by a constitutional amendments repealing the existing infrastructure.

With cryptocurrencies and the blockchain it could be much easier to manage.

What’s interesting is to think about the Bootleggers and Baptists coalitions that will form both for and against this idea, with the public sector unions being the major opponent (like public school teachers against vouchers for education).

The August 2014 edition CATO Unbound (online debate forum) was dedicated to the Universal Basic Income. Click the image below to access it.

We would love to hear your thoughts on the Basic Income idea!

Just Because

 

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Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #94 - Free-rider Friday May 2016

More evidence for the premise of the book by Richard and Daniel Susskind, The Future of the Professions. Ross is built on IBM’s cognitive computer Watson.

Tax transparency: When less is more, The Economist, April 16th, 2016

Norway, Sweden, Finland puts everyone’s tax return online. Creates a conflict between transparency and privacy. Argument for: reduces bad behavior. Sunshine is the best disinfectant. For example, business owners in Norway declared 3% more income in 2001 because of the policy. Argument against: nosiness (“tax porn”), bullying kids because of their parent’s income, rich become the target of thieves and kidnappers.

When Norway stripped anonymity of searches, the number of them fell by 90%. We hold politicians to a higher standard, making the top ones disclose their returns. The Economist doesn’t think the benefits of this transparency outweigh the costs. Neither do Ron and Ed.

Envy at 30,000 feet: Resentment of first-class passengers can be a cause of air rage, The Economist, May 11, 2016

Passengers are more prone to misbehavior if they see other passengers having a better experience (3.8 times more likely to be unruly, to be precise). Katherine DeCelles, University of Tornonto and Michael Norton, Harvard, published this junk science study in the Proceedings of the National Academy of SciencesThey suggest Boeing, Airbus install middle entrances so coach passengers don’t have to see first-class being pampered. Grow the hell up.

Too much of a good thing: Profits are too high. America needs a giant dose of competition, The Economist, March 26, 2016

  • Profits are at near-record highs relative to GDP
  • In 2014, the top 500 listed firms made 45% of global profits
  • They’ve become more focused; and have achieved some pricing power
  • Market the size of USA, prices should be lower than they are (how does The Economist know this? USA is also richer)
  • Companies earn 40% higher returns in USA than abroad
  • Profits are suspiciously persistent
  • Today, 80% chance of still being profitable 10 years later; it was a 50% chance in the 1990s
  • Tax system encourages companies to park profits abroad
  • The article does mention how regulations keep competitors out
  • Abusing monopoly positions; lobbying (rent-seeking), Alphabet among largest, $17m spent last year on governmental lobbying)
  • Microsoft making double profits now than during its antitrust suit
  • 900-odd industries more concentrated since 1997
  • Rate of small-company creation is at the lowest levels since 1970s

Reforms Suggested

  • Modernizing antitrust
  • Copyright and patent laws loosened
  • Occupational licensing reforms

Crony capitalism and the spigot of government subsidies, April 28, 2016, Veronique de Rugy, senior research fellow at George Mason University

Elon Musk is worth $14.3 billion. He’s also a Welfare Queen. He used his profits from the sale of Zip2 (first online yellow pages) to found X.com, which merged with Confinity to become PayPal. He has received $4.9 billion in government support and subsidies. None of his three companies are yet profitable:

Tesla Motors. $1.3 billion subsidy from Nevada, while the US Department of Energy provides a $7500 federal tax credit, $2500 from CA, for each Tesla sold. The Model S sells for $80,000 to $115,000. Do buyers at this level really need a tax credit?

SolarCity has received $300 million in federal grants and tax incentives.

SpaceX received $20 million from Texas to open a facility there, in addition to $5.5 billion in government contracts from NASA and the Air Force. The ultimate goal of SpaceX is “enabling people to live on other planets.” Should the government be paying for this?

Ed’s Topics

Professor at GA Institute of Technology uses IBM’s Watson as a teaching assistant.

Bitcoin has reached a 52 week high, at approximately $480. (Now over $500. Click for current price.)

Sean hits his first home run over the fence, and the story is written by an app.

The Royals seize victory thanks to late double, drop the NTX Eagles 10-5

The Royals outlasted the NTX Eagles on Tuesday after four lead changes, squeaking out a 10-5 win.

Sean K racked up two RBIs on two hits for the Royals. He singled in the third inning and homered in the fourth inning.

The Royals jumped out to an early 1-0 lead in the top of the first. A triple by Jackson J, scoring Hudson Z started the inning off.

The Royals never surrendered the lead after the third inning, scoring four runs on a two-run double by Hudson and a groundout by Cody C.

The Royals increased their lead with four runs in the fourth. Nathan's single got things going, bringing home Pearson E. That was followed up by Colton W's single, plating Nathan F.

A one-run fifth inning helped bring the NTX Eagles within four. A steal of home by Jake sparked the NTX Eagles' rally. The Royals closed the game out when Nathan F got Cameron to strike out.

"Powered by Narrative Science and GameChanger Media. Copyright 2016. All rights reserved." Any reuse or republication of this story must include the preceding attribution

Apple is making a pivot in its R&D spending, project to reach $10 billion in 2016, a 30% increase over prior year (it spent $3 billion in 2012).

Virtual assistant at x.ai

Second Nexus website story: IBM researchers created a macro-molecule, could treat multiple types of viruses.