Season 2, Episode 1: Big Questions for Accounting with Professor Richard Murphy

Professor Richard Murphy is not afraid of asking Big Questions for Accounting.  

He's not shy of answering a few of them either!

You might not always like his answers, but I'm sure they'll make you think.

A great start to Season 2, I hope you'll agree.

Transcript

Richard Murphy Podcast Episode

Kirsten Gibbs: [00:00:00] Welcome to the Pioneer Accountants Podcast, where pioneering accountants answer big questions about accounting. I'm Kirsten Gibbs, and I help accountants to build a scalable practice they can step up with or away from whenever they want without killing themselves or their business in the process. Today, I'm delighted to be talking to Richard Murphy, chartered accountant, political economist, and economic justice campaigner.

Richard is Professor of Accounting at Sheffield University Management School, Director of Tax Research LLP, Director of the Corporate Accountability Network, a co-founder and continuing activist for the green new deal and a columnist on the national newspaper in Scotland. Richard's work as an economic justice campaigner covers tax justice, the green new deal, new economic thinking, including modern monetary theory and accounting and audit reform. [00:01:00] He's also written one of my favorite books, The Joy of Tax 

Richard. Hello, and thank you so much for agreeing to be here on my podcast. I'm really honored. 

Richard Murphy: Thank you for asking me. 

Kirsten Gibbs: Good. So let's start with the first big question. What is accounting for?

Richard Murphy: Yeah, that's such a big question. And in a sense, it's - should be straightforward to answer. In fact, I made a submission on this very point to the government this year because they're looking at the future of accounting and audit.. And I said that accounting is about providing the information that the stakeholders of the accounts need so that they can make effective decisions.

Kirsten Gibbs: Okay. So who do you call stakeholders? Because I think that's probably the interesting part. 

Richard Murphy: In my opinion, there [00:02:00] are six, maybe seven stakeholders of any set of accounts. And of course the emphasis on them will vary, depending on how big the accounts are. And remember I work from tiny to thinking about world mega corporations.

They are the shareholders. And the other suppliers of capital, because of course, actually let's remember shareholders are normally not very significant in the supply of capital to companies anymore. Most companies are not funded by their shareholders. Very few companies now issue new shares. They actually borrow the money that they use to fund their businesses.

Shareholders and the other suppliers of capital are actually, I think, two distinct stakeholder groups. After that we've got the trading partners of the business. They are both the customers and the suppliers. Both have very distinct reasons for needing information. For example, customers might need information because they placed a deposit.

Is this company credit worthy? Is a question that a customer might want to ask, just as much as the trade supply, then the group who I [00:03:00] think are heavily undervalued the employees. I believe that all employees need to know more frankly, about their employer than they usually get as information unless their employer is pretty decent.

And so the employees past, because they're pensioners in some cases, present and future, of course, you actually might want to use your accounts as a way of luring people into work for you. Are all stakeholders. Move beyond that and we have regulators. Now regulators are different from tax authorities, but I could link those two together.

They're two distinct groups of stakeholders. Regulators will be the health and safety people, or they can be the environmental people, or they can be the competition authority or whatever it might be. It might be the local licensing authority, but they need information about your business as well. The tax authority is of course different.

They actually want to make sure that you're paying the right amount of tax in the right place at the right time, which is what I think a tax compliant business does. And finally, there's thing called civil society. Now, this obviously varies [00:04:00] as to which groups are interested in your business, depending upon its scale.

If you're tiny, there might be very few people you can really impact with your business. You might have no pollution that you create. You might have no footprint, frankly that almost anybody notices around the fact that you're working at home and yet what you produce is likely to have an impact on somebody somewhere way beyond the contractual relationships you have with people.

So, I mean, if I get very technical here the relationship is one in Tort. Now Tort is a branch of law, which is , where risk is created outside contractual relationships. And so those people for whom you create risk and businesses can, will want to understand how your business has impacted upon them.

And it could be pollution. And let's just suppose you're a drummer in a band. And that's your business. Is the band. And actually you could create a mighty, lot of noise, pollution, no contractual relationship with your next door neighbor who might, [00:05:00] however, be very fed up with you as a consequence of the fact that you undertake this business activity from home.

So this is a scalable issue. Depending upon the scale. Now, I often look at it as pollution. Of course, I often look at it as the impact of financial systems that can be both liberating and oppressive, but it can be very small. So we have to understand that there is this relationship with others when we're in business that we have to care about.

And I mentioned them as stakeholders, right across the scale, because caring about others, seems to me to be an integral part of running a good business. 

Kirsten Gibbs: Okay. So that's a very comprehensive list of stakeholders but I think even a small business would recognize quite a few of them. I mean, they are generally the shareholder and the supplier of capital or their family might be the people who lent them the money to get going. And they'll have customers, they'll have suppliers, they'll have sub-contractors, they'll have [00:06:00] employees and they will have neighbors. So yeah, it makes perfect sense to me. 

Richard Murphy: And each of those has to have confidence. Now, if I come back to that employee group, but you also mentioned sub-contractors and I think that's just as important because in small business, very often the subcontractors are as important as the employee group, they might fit into the trading partner group, but the reality is that you have relationships upon which people are really dependent. And to me, relationships of dependency are pretty significant. 

You know, that implies that I have a, not just a contractual obligation, but a moral responsibility. And as an employer, I always felt that very keenly, I hope I have always been a good employer. I hope I've always honored my contractual commitments, but it's something beyond that. 

So can you fulfill your commitment? 

And I think that accountants and accounting and accounting data and published accounts, which I happen to believe should be on public record for companies of all sizes. 

Where you enjoy the [00:07:00] benefit that society gives you of limited liability. And it's a massive benefit that society gives you that if you make a complete and utter mess up, you are protected from having to settle your obligation to those, to whom you owe money.

I mean, God. Its a fundamental to the underpinning of many businesses that, that actually provides effectively another form of capital, but it does transfer the risk to others. 

I think therefore you have to account for that risk to those other people, whoever they might be, because it's not just 'Will I be paid or not?', but 'Can I rely on you to provide me with a continuing business relationship or work relationship in which I can place the trust, in you?'

I always remember when I set up my first ever business and took on my first ever employee- and I was in my twenties at the time,- that person who actually placed that level of confidence that I could pay them in me and that I will continue to pay them, not just this month, but next month and the time to come had the most massive [00:08:00] risks that she took. In me as a really quite young person who was saying, 'I can pay you'. 

I didn't show her accounts. She didn't ask for them, but it is about fulfilling that relationship of trust to me and accounts help that. That's why I say it's about providing useful information and the useful information that many people want to know is simply 'Can you afford to pay me, but not just now, but can I invest in this relationship with you?'.

Kirsten Gibbs: Yes. That's an interesting term as well, investment. So most accountants that I talk to would answer that question, I think much more narrowly, but it is actually the same answer, which is accounts are about giving people the information they need to make decisions. Now they are usually talking about the business owner, but actually that's true of all the other stakeholders too.

Richard Murphy: It is true of all the other stakeholders as well. I actually have a really fundamental and deep grudge with the accounting profession. 

Kirsten Gibbs: Okay. 

Richard Murphy: About [00:09:00] this question of who are the stakeholders and what is decision-useful information. And the accounting profession. I think quite a number of them know it certainly the Institute of Chartered Accountants do and I'm unapologetic about that.

They, and let's be clear about this. The people who really make this decision are actually not the English institutes whichever or Scottish or Irish or Welsh institutes, whichever one they might be, but this is the international financial reporting standards foundation. An extremely odd body because it reports to no government, but it sets the rules for accounting in over a hundred countries around the world, which is bizarre in its own right.

It's not accountable to anyone, but it sets the accounting rules. And it says in its conceptual framework, that accounts are actually only prepared for the benefit of the suppliers of capital to a business.

So the shareholders plus the other loan providers, and only with regards to the decision as to whether to engage with or disengage with the business. 

Now that's completely and utterly bizarre because their assumption is that [00:10:00] actually you can engage and disengage. And actually once you formed your own business, you don't normally think about selling it every day.

Kirsten Gibbs: No. 

Richard Murphy: There comes a point where you do, but it's a rare day when that moment comes. Really are accounts only about that? Surely not, they are about a much bigger ongoing relationship, in most cases. The idea of stewardship of assets is forgotten inside accounting. It isn't in the conceptual framework that is supplied by the international financial reporting standards foundation.

I think that's fundamentally flawed. I think that there should be this idea that we are there to steward the business towards it's success, which in the longterm might involve its sale to others, but that's incidental almost. And to place this focus upon engagement and disengagement, something so blunt, something so crude, something that assumes that you actually have a quoted company is bizarre.

It's also utterly [00:11:00] inappropriate because in my career I've been involved with quite a number of businesses that actually don't have a share capital. They're companies limited by guarantee they're charities, they're foundations or they're actually government owned in a sense. They have quite different ownership structure.

One was a higher education establishment. I was governor of schools for many years. They had accounts, they had stakeholders and all that information was still relevant. But no, there was no owner who was making a decision to engage or disengage. So that focus, which the accounting profession has put upon the business owner and this relationship of 'Shall I, shan't I?' Is just wrong.

It is just so much more complicated than that in reality. And we need to recognize that, cause then we ask better questions and we come up with better answers and that's what accountancy should be about finding the right questions and the right answers.

Kirsten Gibbs: Okay. So I know I'm talking about small businesses mostly cause that's mostly [00:12:00] who I deal with and who my accountants deal with. But. Do you think then that small companies get what they want? From their accounts? 

Richard Murphy: No, in a straightforward word. No. First of all, they don't get them what they want from accounts. Let's just talk about the fact that not only do they look at their own accounts, but I actually think they should be looking at the accounts of other businesses as well.

So I think it's quite important that we actually put this in a broader context, as well as the narrow context I'll come to the narrow context, but I'll actually put it in the broader one first of all. 

It absolutely galls me that when I started as a professional accountant, every set of accounts for every limited company was required to be filed in full at company's house. And I felt that that was absolutely appropriate. Now, again, I'm dismissing for the moment, the self-employed and I'm dismissing partnerships for the minute. And the reason why I dismiss them is it actually there, of course, you can go to the owner and say, you owe me come hell or high water, whether your business can afford to pay [00:13:00] me or not. Whatever else you've got is on the line I think there is a difference in the scale of disclosure required in those cases. 

I actually don't think it would be inappropriate for. And, and indeed I was involved in this, disclosing partnership information to employees to give them the relationship with trust, they needed to understand.

For example, my staff always knew that actually we ran the firm I ran without an overdraft. There was no overdraft. We had an overdraft facility. Therefore, they always understood that there was a reserve available to pay them if necessary, part of that relationship of trust and confidence. There's a buffer here, guys.

You know, we actually have cash in the bank to pay you. And they were aware of that. We made them aware of it quite deliberately. It was an important basis of, you, you will be paid at the end of this month. But if I talk about companies and a lot of small businesses are run through companies, I actually think we need to look at other companies to understand where our business is, how it compares to their business, who our competitors are.

And I have taught economics Sad, but true as a chartered accountant I've taught undergraduates about economics. So one of the [00:14:00] assumptions within economics is that to have a perfect market, a good market even, you need data. And actually accountancy since I started training in 1979, which seems like a lifetime ago but also a blip of an eye We've lost a lot of data.

We don't now see what's happening. If I go and look at the accounts of most small companies, I can't see their income statement. I don't know how much they turn over. I don't know their impact on their community. I don't know the scale of their activity and how much risk they create. I don't know how many employees they've got, I don't know what their average pay is.

I don't know so much about that company that I therefore can't assess it as a stakeholder, but I can't assess it is another business owner. Do I have the information to be able to appraise whether I want to take the risk of supplying this company, frankly, who knows? 

Kirsten Gibbs: Yeah, I agree.

Richard Murphy: The only long-term measure I've got is, well, they appear to be in business for six years and they're still filing accounts and they look solvent. So maybe I'm okay. That's an inadequate criteria. 

So first of all, if you as a business person ask what do you need to know from somebody else?. [00:15:00] Is my question. And if you can't get that data from other people's accounts and your accounts look like their accounts, are your accounts sufficient? Are you actually really building the relationship with other people that you want? I suspect you're not.

What is the problem of disclosing more information about the scale of your business? 

Oh, I'm always told, 'the landlord will ask us for more rent'. I'm sorry, that's a hopelessly inadequate comment. The landlord can decide whether they want more rent or not on the basis of what is the prevailing going rate for rent in your area, not on the basis of how much you're turning over or whatever, when that's just a ridiculous comment, but I'm told it frequently

'oh, my privacy matters to me.' Yeah. But actually you're getting this advantage from society. You're not actually having to make a payment if you go bust. So I'm sorry if you want it to be private, accept the liability that goes with it, you'll pay, come hell or high water, even if things go wrong.

So I don't buy that one. So actually my argument is understand what it is that others want of you. But what do [00:16:00] you need? Again, I actually look at accounts and think what do I know? One of the things I find very bizarre is it, some people say, well, I I only have the accounts prepared to keep the tax authorities happy. 

These days, I can't even work out from a set of accounts. And this is whether it's large or small, whether the tax in a set of accounts is correctly stated or not. 

Kirsten Gibbs: Yeah, 

Richard Murphy: one of the most basic questions I would have if I was looking at a set of accounts is well, I hang on a minute, how much tax did I pay? How much tax do I owe? How much of that is outstanding?. 

In fact, there's a basic accounting equation inside a set of accounts, which is opening balance sheet tax liability, plus tax liability I owe for this year less amount of tax that I paid in this year should equal the closing balance sheet tax liability. 

Do you know what? That's never disclosed in a set of accounts to show that the basic accounting logic exists.

It seems bizarre, but it doesn't even work in large companies accounts. I did that for Tesco's recently. I actually published it on my blog. You can't make that work in Tesco's accounts for the last three years. They had to provide me with extra data for every [00:17:00] year to make that equation work. And they got really quite annoyed with me that I asked the question.

I said, I just want to work out whether your accounts add up with regard to tax. So there's basic credibility questions around accounting. But if I actually look at a set of accounts to me, What doesn't get included in there is for example, anything long-term. Anything visual. Anything, which actually explores how your business is really doing. 

At the last company where I had an auditor the auditor's wanted to minimize the amount of disclosure they could on every occasion.

And I said, our job is to actually say how good we are. So I wanted to say look at the growth. Look at the fact that our margin has grown. Look at our geographic spread it's grown. Look at the information on who our customers are and their quality has grown because we're now working for a lot more high-quality customers than we used to.

Can't we actually present that data? Couldn't we do that data graphically? Couldn't we actually do this because if we'd written a report for a client, we'd have put all that data in there.

Kirsten Gibbs: So what you're saying [00:18:00] is: one of the things we could do with our published accounts, is use them as marketing material.

Richard Murphy: Absolutely. Accounts are split into two parts and I've written this today as a proposal for an academic paper, because that's the s ad sort of thing I get excited by some of the time, but yeah. And I talked about the front end and the back end of a set of accounts. There's a difference between the front end, the back end of a pantomime to donkey.

There's also a difference between the front end and the back end of a set of accounts. The front end is actually narrative. Go and look at the account to Tesco, it's a company, you know, what they do you think? And then the front end has a hundred plus pages of stuff about what Tescos does.

And the back end is actually the hardcore numbers. There's things wrong with the hardcore numbers, but let's just worry about this particular point at the moment, the front end is full of information about how great Tescos is, why aren't small businesses telling the world how great they are?, why isn't there a link to their website?

Why isn't there a link to their online store? Why isn't there a summary? It will say during the course of the last year, we [00:19:00] engaged in the business of software. What type of software engineering did you do, who did you do it for? What are your specialists in? Why are you distinct? Why are you so good?

They probably won't even be the company logo from the head of notepaper on the front page of the accounts. Why not?

Kirsten Gibbs: And imagine some of their amazing stories that could be after this last year, where companies have said, we lost almost all our income. But we made a decision to change to this.

And so we've been able to recover and all the rest of it. And some companies have pivoted, if you like and done very well, or you could say it pushed us into adopting technologies and ways of working that we never thought of. And actually it's so much better, I that would be brilliant, wouldn't it? I know some of those companies, I know a company where, they had an office, they own their own office. Now nobody works in the office. They've got no plans to go back to it. Everybody's happy working at home and they've supported people to do that.

That's all good. 

Richard Murphy: Isn't that a fantastic story to sell? 

Kirsten Gibbs: Yeah, 

Richard Murphy: [00:20:00] you can put what you like in your set of accounts so long as you meet the minimum requirement. Now the minimum requirements and most sets of accounts now is pretty rudimentary is around the balance sheet. It's around the notes to the balance sheet.

Now your accountant can prepare those minimum notes. You can put in any profit and loss information you like, you can disclose your level of sales if you wish, you can disclose your level of profit if you wish you don't have to because the law doesn't require you to. So what you want to disclose in that is up to you. If it helps you tell your story. 

Now if there's one thing that I have done throughout my entire career, it's tell stories. I believe that accounts are just a part of a narrative. They're a short-term narrative. What happened in the last year, they're a long-term narrative. How's our business developed?

How's it grown? How have we cared for people? How have we done this? How've we done that? So not only do we have to restrict ourselves to this year, last year in a set of accounts but if you look at a large [00:21:00] companies accounts, they will have five years of data or 10 years of data in there. Some nice charts or diagrams or whatever to show the way the business has developed. 

I love the business I went into once in America, which was a bookshop which said "serving the community since a week last Tuesday",

which I knew was not true, but it was a brilliant bookshop, but I just thought there was something deeply humorous about that. But if you've been going for a bit longer than a week, last Tuesday, you will have a story to tell. Why aren't your accounts telling that story? 

Kirsten Gibbs: Yes! That's a really, actually, you know what, it's a really interesting service that accountants could add, which is we will help you market your business through your accounts.

It's not just about giving you data and information to make decisions about what you do next year. It's about. Helping you market yourself. 

Richard Murphy: Now I will go back and actually tell a real story. I'm not telling you something here, which I [00:22:00] haven't done. In the 1990s when I was computerizing, my firm heavily it's always been computerized, but we were actually becoming much more standardized in the way we approached.

We couldn't find software, which actually did what we wanted in those days. The world of software now and the world of software, then it was so different. I actually wrote the software that we used for our accounts production for most of our clients. And it was Excel driven, embarrassing, deeply, but actually it worked really well.

It was, it was a bizarre combination of what people have been taught to do 16 column analysis paper, most accountants won't know what 16 column analysis paper looks like now, but it was actually a computerized form of that with lots and lots of controls around it, which basically meant it was extremely hard to break this Excel spreadsheet, which is of course their standard weakness and heavily macro driven.

So some really pretty accounts came out at the end of it. And it was all those things like putting the client's logos in and if they wanted it and everything else, but we also produced charts. And because we actually were building up a database of these over time. Of course we can actually [00:23:00] produce the chart, which wasn't just this year and last year, but you know, longer term and trends.

Now, some clients hated it. I'll be honest with you. Some clients hated it because they said I'm not in business to make money. Now I should add that. I ran an accounting practice that focused heavily on the arts design things that ended up in print media and so on. And some of them were a bit sniffy about the fact that I don't do this to make money.

So you couldn't tell them that you could increase your productivity or whatever else? Yeah. What's the productivity of an artist. Literally, we had some artists who put oil on canvas. They didn't actually go too heavily on the productivity basis, but some businesses really liked it. They really liked seeing this data and we would include it in the accounts.

And we'd trial it with clients, do you want to see this sort of data or not? And it all just fell off the end of the same accounting package. 

Kirsten Gibbs: Yes, it's all just data, being reported on. 

Richard Murphy: All we were doing was actually using the data we already possessed. 

Why did we do it by the way? Because we wanted to see if the client was doing something aberrational because I actually didn't want to end up with having [00:24:00] to do tax investigations with HM revenue and customs, because they're extremely boring and you don't make money out of them as an accountant..

So you actually want to keep a track of what your client's up to. And this was basically what an accountant would call analytical review bluntly. Is this client consistent with other clients?

One of the advantages of being quite specialized in the focus we looked at, we knew what margins television companies made.

We knew what margins lighting cameramen made. We knew what margins we would expect to see in print, which was then one of our activities and so on. And we knew, all the sort of ratios, the pricing and everything else and I wanted to see who was normal and who was aberrational, because the aberrational ones had to be able to explain why their accounts were aberrational and therefore to mitigate the risk of there being a tax investigation on this, because the revenue do the same thing. So I was not only mitigating my risk, and understanding the client, but I was also selling that back to the client as a service.

Those who liked it, loved it. 

Now, you could include that in your front end. I go back to that point. If you want to tell [00:25:00] a story about your business on Companies House. Free of charge. It's an opportunity for anybody to come and ask questions about your business, and for you to plaster your success story to them.

Kirsten Gibbs: That's really interesting. That's brilliant. So the next big question I like to ask is can accounting help solve some of the big problems we face as humans today, inequality, climate crisis. 

Richard Murphy: Yes. 

Kirsten Gibbs: I knew you were going to say that. Of course it can.

Richard Murphy: But it doesn't because those flipping accountants in international financial reporting standards foundation has said, we shouldn't do that.

Now. I've been trying to do this for a long. And I've engaged with them for a long time. You know, they know me. I have a weird claim I can make, which nobody else in the world I think at present can make, which is that actually I created an accounting standard concept, wrote it in my case to celebrate my younger, son's sleeping through the night, which is [00:26:00] very weird.

I wrote my version of an international financial reporting standard. I published it, thinking that two friends were going to read it. And it's now the law in 90 countries that is country by country reporting, which is a tax reporting standard for multinational companies.

And the whole aim of it was to actually work out were Google, Amazon, and Starbucks paying the tax in the countries where they should? In 2015, the OECD took on this idea. As a consequence as I say, it's the law in 90 countries.

It's a very simple concept. It only uses seven pieces of data, which can be organized turnover. Third party turnover with intra-group companies, a number of employees, profit before tax, tax paid, tax liability due, assets invested, and you can create a decision matrix out of that to decide is it likely that the profit declared in this particular country is appropriate in proportion to the underlying genuine economic activity of the entity or not and therefore is the tax due likely to be the one that is really payable? It is a risk [00:27:00] assessment tool. It uses the minimum amount of data to highlight the maximum amount of risk. That was why I designed it the way I did. It sounds likea big claim, but nobody else has literally ever done that at the moment made up their own accounting standard and delivered it.

So am I sure that accounts can change things? Yeah, because actually multinational companies not paying tax in the right place was a big problem and actually a lot more are now paying the right amount of tax in the right place than they used to. And the more accounting data we now see from those companies, the more we begin to believe - it's not there yet, - but tax havens are much less popular than they used to be.

And I am not a fan of tax havens and tax havens are not a fan of me. It's fair to say. 

Could I do inequality for example? Yes!, 

let me go back to the 1980s. When I was auditing with what was then called Peat, Marwick, Mitchell, and Co., which is now KPMG. We actually had some really important things in accounts. One of which was we disclosed the number of employees and their pay by pay band. It was split by 5,000 initially. And then 10,000 as if that was, you know, [00:28:00] anybody who earned over 10 grand a year when I started was high paid I think we might need to think about the bands these days, but the point is we would understand how many people were on minimum pay. For example. 

Kirsten Gibbs: Yeah. We could look at things like how know the multiples of average that the CEO is getting paid.

And as you say, how many people are on minimum wage, how many people are part time? How many people are, it would be really, yes. You could have lots of really interesting information, which I think actually. As a consumer, I want to know about companies that I'm buying from. 

Richard Murphy: You may not ask this question, of small companies, which is about 92% of companies in the UK or more why? Because the position might be distorted by the fact that it's particular skills and odd employment profiles in small companies where there's not many people. It's very hard to understand it in that sense. Once it becomes systematized in larger companies. Medium and large companies. I think this is a completely reasonable thing to ask.

[00:29:00] I happen to also think the data should be supplied by gender. Why? 

Kirsten Gibbs: Yes. 

Richard Murphy: Because we have a gender pay gap. Why shouldn't we know this? I now know that people ask it by ethnicity as well in some situations. And actually when you're talking about a very large company, a multinational group, or do we need to know whether actually the reason why people are paid very well in the UK is because actually there's a hell of a lot of people in China who are being paid very little indeed.

Very relevant question when we're talking about international inequality and how sustainable our supply chain is. After all for the last 30 years, UK has actually fundamentally outsourced its labor to China. And as a consequence, we built unsustainable long-term supply chains as we're now learning to our cost.

So this is important data potentially. So we could tackle all sorts of inequality issues by finally having the data, to be able to appraise it and ask questions of companies. 

Kirsten Gibbs: And it's really about publishing the data because the data's there. It's just never published. 

Richard Murphy: I mean, let's be honest if you know very much [00:30:00] about how to write a database and query, and if you know that there's only a couple of database systems that are really used to drive the accounts then you can actually write those routines really easily, I mean, I can remember when I was told country by country reporting was not technically possible by the big four firms of accountants, because they didn't know where their clients traded.

And I said then you're in deep trouble then because you've broken the law about maintaining proper books and records. I wouldn't say that too publicly. If I, was you. The claim that was made, that we don't have the data, is just nonsense. 

But let's talk about something which is even more important. As if, you can imagine something more important than inequality, which I happen to think is a really big issue. My big concern is green issues, sustainability and climate change. Now we've failed dismally so far to incorporate climate change into accounting. And so far, what is being proposed to do that at the forthcoming cop 26 is dismal.

Mark Carney. I will give him his credit. He has pushed forward climate change and that's good. He's created something called the task force on climate finance and disclosures.

Now [00:31:00] unfortunately everything basically is in the front end of the accounts. Not in the back end of the accounts. Front end of the accounts is the soft bit where the narratives are. So lots of pretty charts about how much carbon the company is going to reduce, a lot of pretty charts about how they're having lots of meetings to discuss it.

And lots of discussion about soft things around governance, but actually how much is it going to cost a company to eliminate climate emissions from their processes? So that they can meet their 1.5 degree target so that they are what is now called in the jargon 'Paris aligned' accounting. That is what we expect of large multinational companies. Remember many of these companies are the size or bigger than the size of countries in terms of their economic impact. 

Do we get that data? No. Actually climate change is not on the balance sheet. 

So I've written an accounting standard again, to do this. It's called sustainable cost accounting. Literally I am writing an IFRS on this particular idea. You know, I really do know how to live. How to have an exciting time! But it's actually really important to show that these [00:32:00] things are possible so that they can happen. If you're told they can't be done the way to show they can be done is to actually do it,. 

Kirsten Gibbs: Is to do it, yes, exactly. Prove people wrong.

Richard Murphy: So I just do something as stupid as sitting down and writing an accounting standard. But we could have data on literally which companies can make that transition. and which can't and how much it will cost them, how much they need to provide on their balance sheet now for the cost of closing down the existing unsustainable business and what they will need to invest for the new sustainable business and therefore how much extra capital they want. 

Now, actually, if we really believe the international financial reporting standards foundation and believe what they say that accounting is simply about allocation of capital. Do I want to engage with this company or not? Well, actually this is at the core of the question now about the future viability. 

Kirsten Gibbs: Cause there's plenty of capital sloshing about. Why not attract it into those sorts of companies to help them make the transition and help everyone make the transition.

Richard Murphy: The [00:33:00] world is awash with capital at the moment, there are so many savings which have no use. It's unbelievable the money is available, but it's not going to the right users. So my belief is that we need the accounting data to tell us who that is. It will also tell us something deeply uncomfortable as well, which is why, of course it's being resisted.

And that is that some of these companies can't make this transition. There are some businesses, some business models that are simply not sustainable. I mean, if I just think about it, one of those is most likely to be, you know, the cheap airline. At the moment. I can't see how people are knocking people around Europe for next to nothing in Boeing 737s are going to adapt their business model to actually make it to a new future. A, because they don't make enough money to actually invest in the capital in question and B, nobody yet knows what the alternative to a Boeing 737 that is sustainable is, and it doesn't appear as though the resources are being invested.

Now, there may be companies, therefore that are what I call carbon insolvent. Literally, they're not insolvent in the conventional [00:34:00] sense of can they pay their bills at the moment cause they can, but underpinning all accounts and very few accountants seem to understand this is something called a capital maintenance concept.

The capital maintenance concept has actually changed in the lifetime of most accountants because historic cost accounting put a focus upon what was called physical capital. Can you keep the business going? International financial reporting standards, which now actually inform accounting standards right throughout the UK focuses upon the maintenance of financial capital, which is literally, can you keep the money in the business, which is not the same as can you actually keep the business going? 

I'm suggesting something else, which is actually, can you run this business and be 1.5 degrees compliant? Now, frankly, for most small businesses, this is, I wouldn't say it's an irrelevant question. It's a difficult question to answer, because if I look at my own business, my biggest actual output is stuff which is read on people's computers.

Now I can't [00:35:00] control the emissions from that. That can only be controlled if I can persuade large energy companies to actually change the way in which they generate electricity. So it's beyond my control. So really the focus of this has to be in large companies, but nonetheless, I know from discussion with some very large companies what they're now interested in is seeing, yeah, fine, but actually we've discovered that our emissions.

Not only are in what our customers do with our product, by the way, this does involve asking questions about what customers do with products. Or we end up with the stupid outcome where Gatwick Airport claim to be a carbon neutral airport, because they ignore the fact that planes run down their runways and their business is to let planes run down their runways.

What a stupid claim that is!

Kirsten Gibbs: I've come across that before with, I have a client in that space. And we were laughing at a presentation about, biomass boilers, which claimed they were green. You thought what? with Eddie [00:36:00] Stobart driving this stuff up and down? Because the line they drew was between producing the wood chips and transporting them, which is, it was just ridiculous. 

Richard Murphy: Yes they drew the line in the wrong place.

So that's called your scope one emissions and what you generate. And that does include your supply chain. So there will be pressure in due course. We, are going to get new accounting standards for climate change. Beyond question that's going to happen.

The approach, which is going to be run by my dear friends, international financial reporting standards foundation. And I deeply regret that. Is going to be approved by cop 26. So now I'm working on how we influence that those accounting standards to require numbers in the accounts, which show us which companies can and cannot make it.

So if we did, could we change the future of the planet as accountants? 

Yeah, we could. Yeah, we really could. So to me that's really fundamentally important. 

Kirsten Gibbs: And if we can do it, if you like on that dimension, which is, a critical, fundamental dimension for our future. [00:37:00] But if we can do it on that dimension, we can do it on other dimensions too, where we say, how much is this company contributing or not, or destroying human wellbeing.

You start to look at things like how can a tobacco company survive? How can a gambling company survive? For example. Once you've created a model for one dimension of one figure, if you like, or one, I don't know what I'd call it. You can do that for all sorts of others. Now that I think could be very applicable to small businesses.

Richard Murphy: I can remember early in my career and I'm not going to disclose the full details of this, but I was a director of a company where I was asked to agree to a contract with a supplier who also produced products to which I had a pretty major ethical objection, but which was entirely legal. But I certainly had major objections to that supplier and actually the person who ran it, who went on at one point to run a [00:38:00] national newspaper, which I didn't like either.

But and I just said, no, I won't agree to a contract from this company, with that supplier, even if they're the cheapest supplier, because I think it's the wrong thing to do. And actually, I left over it because I didn't agree with it, that supply chain. And it was a pretty bizarre thing to do when I was relatively young, you'd have thought, but actually, it was fine. I went and got another part-time directorship somewhere else but I wasn't going to do that.

And I think there are a lot of issues which people need to know about. Tobacco is one but carbon obviously is another, and I can think of others. For example, does this company sell pornography is a question which you may or may not want to know about, but actually if you look at a hotel group, by the way, quite a lot of them sell pornography.

They're big suppliers and they make a lot of money out of it. Do you want to invest in a company which actually pumps pornography into hotel bedrooms? Now I would ask that question and it is something that some people would think is utterly irrelevant and some people will think is very significant. And I think that the person who's looking at an engagement with the company might want to know about.

Kirsten Gibbs: But [00:39:00] also there's the thing you talked about earlier. There's no reason why, you know, the companies that proactively market on the basis of that kind of transparency are going to do better. I would have thought 

Richard Murphy: my belief is that simply yes. 

I've set up a company to do that. I'm no longer involved in any meaningful way, but I set up something called the fair tax mark. The whole point of the fair tax mark was to say, actually, this is a company that pays the right amount of tax. 

Kirsten Gibbs: Yeah. 

Richard Murphy: And there are now quite a number of companies who signed up to that. And many of them say there has been an outright commercial advantage to us to having a audited standard that says we pay the right amount of tax and we're happy to prove that. We are examined and we get this mark as a consequence. It adds value because people think we're a good company.

Kirsten Gibbs: Where I'm coming from on this is I'm a big fan of doughnut economics and the idea of the safe and just space where you're either lifting people into that space from below it.[00:40:00] From below the social floor if you like, or you're pulling us back through the environmental boundaries or you're just doing nobody, any harm in the middle. And I think, being able to demonstrate that is going to be valuable. 

Richard Murphy: What is wrong with actually doing good?

Kirsten Gibbs: Yeah, because I know a lot of people think, oh, you want us to have life be miserable? No, there is loads of work to be done enriching. I would call it enriching people and planet there's loads of work to do, and money can be made doing it. 

Richard Murphy: Well, I would actually entirely agree with that. I genuinely believe you can actually make money doing the right thing.

I also don't have any qualm. And I'm going to go back to this point, tell the world that you're trying to do the right thing because. It really annoys me. I might criticize businesses and I do criticize businesses sometimes, and I think fairly criticize. [00:41:00] But, at my core, I'm a chartered accountant.

I became one in 1982. I'm still happy, very happy to be a member of the Institute. I have a practicing certificate. Whilst I criticize business, at my core, I also fundamentally believe that business is essential to what we're doing. 

This idea of exchange between people, of things that they want in a way that is fair, because each party to that contract is open and honest about what they bring to it. So that actually both benefit is something which seems to be pretty fundamental to the way in which we can live.

I don't believe that we have yet found any viable alternative to that. I don't think we are going to find any viable alternative to that for a long time to come. And I happen to believe that government is a perfect partner to that by being the referee who makes sure that things take place on a level playing field.

And, you tell me you can play a football match without a referee and without rules. And I'll tell you no you can't. I've seen school playgrounds and they don't work. [00:42:00] Not long-term only when the bell resolves the punch up, that comes when people dispute whether there's a goal or not. So let's not pretend we can do it without the rules and the referee, we need that. Government is the perfect partner to make sure that those markets function.

But I believe that business has a really fundamentally useful role to play in society. And therefore businesses should not sit back and apologize and try to hide behind minimum disclosure and say, sorry we're here, which is almost the apology that exists within most sets of accounts now, but should be bragging about what they do, which is so darn good. Put your logo on the front of your accounts, put your web address on there, tell them how they can buy from you. Tell them what you're selling, tell them why it's so good. Tell them how you add value to society. Tell them why you're a great employer to work with. Tell them how you pay your tax.

Tell them how you're planning to be carbon compliant. Tell them whatever you think is fundamental to keep your customers happy, but don't sit and hide that away. And these accounts could then become a marketing tool. 

Kirsten Gibbs: Yeah. And then it [00:43:00] becomes a tool for changing culture. 

Richard Murphy: Yeah. Within and without the organization.

Kirsten Gibbs: Exactly. 

Richard Murphy: Because you're then going to have to ask yourself the question, what is it that we do that's good? 

Kirsten Gibbs: Yeah. 

Oh, that's brilliant. So I think we've nearly got to the end here because we have come to the conclusion that accounting can and really should try harder to make the world a better place.

Richard Murphy: Yes. 

Kirsten Gibbs: It can certainly, but we need to try harder. So. I think the one thing to take from this podcast is that your accounts are a piece of marketing and you should use them as such.

Richard Murphy: I agree. 

Kirsten Gibbs: I think we could end there. Thank you ever so much. That's been really interesting and given me plenty more to think about. Yeah. Thank you. 

Richard Murphy: Thank you very much for asking me. I've enjoyed it. 

[00:44:00] Thank you for listening to the pioneer accountants podcast. Where pioneering accountants answer big questions about accounting with me, Kirsten Gibbs. If you're a pioneering accountant and you'd like to be part of this podcast, just head over to my website, www.gibbsandpartners.com and send me a message. I look forward to hearing from you.