Technology Killed Conservatism

I have blogged previously on the demise of conservatism and how the view is now that overly conservative accounting is just as bad as overly aggressive accounting. As companies continue working through the implementation of the new revenue standard, technology solutions are increasingly critical in making a contract by contract standard work, when organizations have literally millions of such transactions to record in a year, quarter or month. In fact, one of the reasons cited by the FASB for proposing a delay in the new revenue standard was the need for more time to develop and implement software solutions related to the revenue standard.

While software certainly allows the use of complex mathematical models to precisely estimate a result, that precision is really just an illusion. The model is only as good as the assumptions that go into it. Let’s think about a simple example of trying to estimate the “value” of a bonus that changes based on the date work is complete. We can certainly put together a model that will precisely estimate the outcome, but that model is dependent on our “judgement” (maybe we should call it a guess) about the likelihood of getting the work done by a certain date.

So technology has provided us the illusion of precise estimates. This has supported the position of many that say that because of such precision we no longer need to think “conservatively.” I say that is a false premise. Precision in accounting due to technology just allows us to move the judgement to a different point in the computation; it doesn’t allow us to use any less judgement than we did before. In our above example, the conservatism would come into play in making sure your estimated likelihood of meeting a date is “conservative” – that is weighted to the outcomes that in your judgement are probable, not simply more-likely than not.

So those of you who think conservatism still has a place in accounting, don’t fret. It still does have a place; it just occurs in a different place in the process.

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