JARAF Editorial, Volume 1 (1) December 2006

CONSIDER FOR A MOMENT the work of three men – the first an auditor, the second a professor, the third an analyst. Standing before an audience in Chicago on April 19 1956 Leonard Spacek - then managing partner of Arthur Andersen & Co delivered a speech titled “Accounting has Failed to Prevent Major Misrepresentations.” During his speech, he expressed concern that the application of a sequence of then conventionally accepted accounting norms was producing results which were untrue, misleading and completely contrary to common sense. He expressed particular concerns about the financial statement treatment of tax, asset valuation and depreciation as well as leasing transactions.By the early 1970s, it seems, not much had changed. Surveying the lay of the land as he then saw it in his iconic work Unaccountable Accounting, Professor Abraham Briloff quipped that balance sheets were best seen as being very much like bikinis. What they revealed was interesting – what they concealed, vital. The art of concealment still involved financial statement treatment of issues such as taxation, asset valuation and leasing transactions contrary to common sense – or as Briloff forcefully put it, to the application of substance over form.Similar concerns emerged at the commencement of the 1990s, when Terry Smith – London’s top rated bank analyst from 1984 through 1989 made the decision to publish his highly controversial book Accounting for Growth in which he laid bare the trickery inherent in so many sets of accounts he encountered – and paid for his candour with his job. Smith had been brave enough to name names in his book – an apparent career limiting move when the names in question include clients or potential clients of the investment bank for which one works. Worse, the accounts of each of the organisations he named had been certified as GAAP compliant. As Professor Briloff would no doubt inform him were the two ever to meet – “that plus 10 cents and you get a ride on the subway.” But any individual wishing to make sense of the systemic scandals which emerged in what seems to have commonly become known as the Enron era and the likely efficacy of the responses engendered by so cathartic an event could be easily forgiven for not being aware of any of this. Iconic or not, the works of Spacek, Briloff and Smith are all out of print – and very difficult to come by.Yet not everyone suffers from short memory in relation to the types of problems to which we have alluded above. After more than forty years devoted to what might be termed activist research in accounting and financial management, Professor Briloff is still reminding us of the same types of problems as those he railed against in earlier days. Now however, his greatest concern lies in the type of work done by those conducting research in accounting and finance and how that translates to both teaching and ultimately, to practice. His call is for a turning away from gross abstraction, from the deeply esoteric, from the ephemeral and from the fetish of aestheticism towards a more practical rubric. All of this points to the need for the production of research which while robust in its methods and execution, is capable of directly engaging an audience far beyond the academy. Bearing this in mind, it should be clear that our citation of the contributions of an auditor, an analyst and an academic was not the result of some fuzzy symbolism – but rather a tangible signal of aspiration for JARAF and the function we hope it will serve within the accounting and finance community. With this in mind we are incredibly fortunate to be able, in this first edition of the journal, to present the results of some of the latest work by another iconic figure – Professor Ed Altman, whose endeavours in the field of financial distress prediction have had enormous influence on both the world of the academy and the world of practice over a span of more than four decades. His paper is complemented by two pieces devoted to the currently topical issue of hybrid financial securities – including a highly thought provoking piece on the role of taxation on the design of such instruments by Gordon Mackenzie.So we beat on, boats against the current but refusing to accept the inevitability of being borne back ceaselessly into the past.