Bragg's Laws of Accounting (#173)
/In this podcast episode, we discuss three human conditions that relate to accounting problems. Key points made are noted below.
Bragg’s First Law
Expenses will continue into the future unless acted upon by an outside force. This is a major cost management point, since expenses tend to recur unless specific action is taken to stop them.
Bragg’s Second Law
When financial statements are stretched to make the numbers, future results always decline. The reason is that reserves are reduced in order to generate current profit figures, and then have to be replenished in later periods, which reduces profits in those periods. This can result in shareholder lawsuits for misrepresenting profits.
Bragg’s Third Law
The quality of financial statements begins to degrade as soon as they are perfect. This is because the error-tracking functions of the accounting department are dismantled once perfect results are achieved, leaving room for new errors to cause problems in the statements. This is a particular problem when the underlying systems evolve, since the revisions may contain flaws that result in more errors being introduced into the financial statements.