Making Up the Numbers

What is the difference between economists and accountants in a post-Enron world?

February 27, 2002

What is the difference between economists and accountants in a post-Enron world?

In fact, U.S. economic history is “restated” at regular scheduled intervals. Yet, there is a big difference between revising GDP and revising a company’s balance sheet.

The difference between economics and accounting hit me some years ago, when I worked for an economic forecasting company. One day I had lunch with the accounting department.

Over lunch, the assembled crew complained about their jobs. Specifically, the bookkeepers discussed the trouble they had obtaining information about certain sums in the company’s books. The head of the department’s solution: “Make the numbers up.”

I pointed out, that — as an economic forecaster — making up numbers was my job — not theirs. I certainly hoped that their numbers represented actual dollars and cents in the bank. After all, if their numbers did not represent actual money in the bank, how would I be paid?

That conversation illustrates the key difference between what economists call “national income accounting” and the accounting used by individual companies. The first kind attempts to measure the total income and production of a nation. But it quickly runs into substantial problems.

One problem is that even defining the concepts of “national” production and income is difficult. (How do we estimate the “production” involved in home-based cooking, housekeeping and child-raising? Does environmental degradation figure into the ideas of “income” and “production?)

Collecting such data is also difficult. Government statisticians make heroic efforts to survey and measure various parts of the economy. But their efforts can never be perfect. New information, sometimes about the distant past, appears regularly.

Accountants for individual companies face similar problems. How do they account for revenue and cost — especially when they are apportioned among different operations?

Nevertheless, at the end of the day, a company must be measured by the money in its bank — or in the hands of its shareholders. That is why accounting revisions such as Enron’s are so shocking.

Imagine if somebody put money in your pocket — and several years later told you that you had to give it back! That is essentially what Enron’s shareholders were told.

Economists get away with making up numbers. They have to. But accountants had better make sure that the money they tally is real.