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Click or tap here to listen to the show!<\/a><\/p>\n Ron and Ed welcome back Professor Baruch Lev from NYU Stern Business School. He was last on back in July 2016 and we discussed his book, The End of Accounting and the Path Forward for Investors and Managers. We talk more about that book and his more recent article in Accounting Today, The sad state of accounting standards.<\/p>\n Ron\u2019s Questions: Segment One<\/strong><\/p>\n Welcome to The Soul of Enterprise: Business in the Knowledge Economy, sponsored by Sage, transforming the way people think and work so their organizations can thrive. I\u2019m Ron Baker, along with my good friend and VeraSage Institute colleague, Ed Kless. On today\u2019s show, folks, we have our second interview with Professor Baruch Lev. Ed, how\u2019s it going?<\/p>\n Ed<\/strong><\/p>\n Ron, it\u2019s going great. The birthdays continue to run, we were together for my birthday in Dallas here on Tuesday, and my wife\u2019s birthday is today. So we just got back from lunch and we\u2019re going to dinner, and it\u2019s a birthday present getting to talk to Professor Lev. So I\u2019m pretty excited about that as well.<\/p>\n Ron<\/strong><\/p>\n Me too. Let me read his bio, even though he needs no introduction to our listeners. Baruch Lev is the Philip Bardes Professor of Accounting and Finance at New York University Stern School of Business. We just learned before we went live that he recently retired. Professor Lev taught courses in accounting, financial analysis, and investor relations. He\u2019s the author of five books, including The End of Accounting<\/em><\/a>, which was published in 2016. We had him on right after that book came out in July 2016 [Episode #101<\/a>]. Professor Lev, welcome back to The Soul of Enterprise.<\/p>\n Baruch<\/strong><\/p>\n Thank you, happy to be here.<\/p>\n Ron<\/strong><\/p>\n In The End of Accounting<\/em>, when I read that, you dropped a bombshell statistic that still rattles my cage: Today\u2019s financial reports provide a trifling five to six percent of the information relevant to, and used by, investors. What\u2019s been the professions\u2019 reaction to the book, The End of Accounting<\/em>?<\/p>\n Like you say, download doesn\u2019t mean they read it. And I would add, even if they did read it, it doesn\u2019t mean they understood it. Did you have a chance to talk to the accounting regulators, did any approach you, such as the SEC, or maybe the European Union, or other regulators of accounting?<\/p>\n Yes, maybe when Ed comes on he\u2019ll ask you about that. Unfortunately, we\u2019re at our first break.<\/p>\n Ron asks Baruch during the break<\/strong><\/p>\n Excellent, Baruch. Let me ask you this. Would society be better off without auditing?<\/p>\n Baruch<\/strong><\/p>\n I\u2019m not sure it will be much worse off. But I\u2019m definitely for an experiment. So if I wrote the SEC, for example, I would free let\u2019s say, 5% of companies from auditing on a random basis, and I would like to see over two or three years if they really lose, significantly, investors. [Would] prices be significantly affected by this? I would introduce some natural experiment. Auditing is very expensive. And the question is, perhaps we can do without it, perhaps you can do with auditing once in three years, rather than every quarter? If you look at reputable firms, like Microsoft, Cisco, I doubt whether lots of investors will dump the stock.<\/p>\n Ron<\/strong><\/p>\n Thank you, wow, that\u2019s radical coming from an accounting professor.<\/p>\n Ed\u2019s Questions: Segment Two<\/strong><\/p>\n We are talking today with retired professor Baruch Lev from New York University\u2019s Stern School of Business. You were talking with Ron about the impact on investors, and I do want to hear what you have to say about that. But one of the things that is a constant drone from some people that I talk to is how is it that Tesla could be valued at over a trillion dollars, they don\u2019t make any money? But clearly the investors get it. Share with me what the impact of the book has been on investors?<\/p>\n It sounds like your paper was far more downloaded than the actual [financial] reports so that\u2019s a good leading indicator for you. Ron is an accountant, I\u2019m not, so forgive me if this is a layman\u2019s question. Does some of this stuff that you\u2019re talking about, treating intangibles as expenses, when they should be assets, is that one of the reasons why companies like Tesla are perceived to be overvalued compared to what traditionally it would have been?<\/p>\n I think that\u2019s correct. They\u2019re perceived to be overvalued, but clearly I think that\u2019s a mistake. One of the things that the company that sponsors this podcast, Sage, we have some accounting programs, and one of the things that we have been working on for the last number of years is artificial intelligence that would allow for what we\u2019re calling a continuous audit. Through AI being able to find challenging transactions and things like that. Do you think that that\u2019s one of the other things that could happen that would make the audit, the annual audit, of less import?<\/p>\n Great stuff, we\u2019re up against our second break.<\/p>\n Ron\u2019s Questions: Segment Three<\/strong><\/p>\n Welcome back, everybody. We\u2019re here for the second time with professor Baruch Lev, accounting professor at New York University. Baruch, I want to ask you about an article you wrote that was published in Accounting Today, July 21 of this year, titled, \u201cThe sad state of accounting standards<\/a>.\u201d You conducted a study, and it\u2019s about earnings expectations. I thought it was a another bombshell finding of yours. Can you explain what you found?<\/p>\n Yes, you pointed out in that same article that 2.5 trillion dollars was invested, I think it was 2019, in intangibles, twice as much as physical assets for that year. I have to ask you [based on what you say about the irrelevance of financial report] that tells me that if I want inside information from a company, don\u2019t talk to the CFO, go to the HR director, see how many job posts they\u2019re listing, or something other than talking numbers. Because that\u2019s an astonishing finding, I think. And it brings up a question, I\u2019ll ask you again\u2014I asked you during the commercial break\u2014but I just want our listeners to hear your answer to this. If what you say is true, and I have no doubt that it is, would society be better off without auditors?<\/p>\n Do you think that there are other products that could take the place of an audit, such as financial statement insurance offered by insurance companies, or having the stock exchanges decide and pay for the audits of companies that they think need them for some reason?<\/p>\n I\u2019m curious, Baruch, with this knowledge that you have shared, and the continuing irrelevance of auditing of these financial reports, what advice would you give to an aspiring college student that wanted to become a CPA?<\/p>\n Wow. Real quick, we\u2019ve only got about a minute, maybe two. Why are you skeptical with respect to ESG standards? You had made a comment in the article in Accounting Today about being skeptical about it.<\/p>\n Right, that\u2019s a brilliant point. Thank you so much, maybe Ed will follow up with you on that.<\/p>\n Ed\u2019s Questions: Segment Four<\/strong><\/p>\n From the article in Accounting Today, Baruch Lev writes, \u201cConsider, for example, the current rush of investors to ESG-intensive companies. Whatever you think of the environmental, social and governmental reporting (and I have my doubts about it), a reliable information system which will report on corporate investment in ESG, and particularly on tradeoffs.\u201d And that was just the point that you were making with Ron. I love when authors of articles have parentheticals near the end of the article, because it\u2019s clear that you have a whole other article. So keep going on ESG, and the other challenges with it.<\/p>\n Just what you read sounded to me like a word salad. How you could even understand what that meant, and then, by the way, be accurate about it, and complete. Oh my goodness. Well, Baruch, it\u2019s been a pleasure having you on. I don\u2019t want to ask you another question because I don\u2019t want to have you run out of time. But are you working on some other things? Is there going to \u00a0be some more from you?<\/p>\n I\u2019m sorry, we\u2019re not going to have time for the example, but we look forward to the article or book that you\u2019re working on for it. It\u2019s going to be fun for us to dive into that when it comes out. Professor Baruch Lev thanks so much for being a guest on The Soul of Enterprise. Ron, what do we got coming up next week?<\/p>\n Ron<\/strong><\/p>\n I don\u2019t know, Ed, you tell me.<\/p>\n Ed<\/strong><\/p>\n You don\u2019t know, Ron, you\u2019re supposed to know these things. We have Matthew Feeney from the Cato Institute to talk about drones and drone policy. So we\u2019re on to another subject, further down the I-95 Corridor. We were at in Boston last week, so we\u2019re working our way down to Washington. Alright, well Ron, I\u2019ll see you in 167 hours.<\/p>\n Note: This article first appeared on Nov<\/em>ember 7, 2021 on the TSOE (The Soul of Enterprise) herein<\/a> and Apple Podcasts herein<\/a>.<\/em><\/p>\n \t\t\t<\/p><\/div>\n\n","protected":false},"excerpt":{"rendered":" Click or tap here to listen to the show! Ron and Ed welcome back Professor Baruch Lev from NYU Stern Business School. He was last on back in July 2016 and we discussed his book, The End of Accounting and the Path Forward for Investors and Managers. 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