Smoke & Mirrors, Inc.: Accounting for Capitalism » (ANN)

Enron, Arthur Andersen, Parmalat, AIG: business headlines over the last few years have stimulated worldwide interest in accounting responsibilities and standards. Smoke & Mirrors, Inc., is a remarkable introduction to contemporary accounting and its central importance for the operation of modern capitalism. Beginning with the financial status of the eponymous fictional company-a fireworks manufacturer-Nicolas Véron, Matthieu Autret, and Alfred Galichon dissect the ways in which manipulation of financial reporting can convert a rotten balance sheet into a picture of robust financial health.

After deftly establishing the ease with which accounting sleight-of-hand may paint a different and rosy financial prospect, Véron and his coauthors provide a brief history of accounting's emergence and its key concepts, focusing on the scope for manipulation (including a detailed account of some tricks with which Enron cooked its books). They then shift their focus to the political economy of various actors involved in the preparation, assurance, and use of financial information and the new challenges facing regulators as capital markets spread across national boundaries. The authors challenge standard beliefs that accounting practices are neutral and involve the mere reporting of objective data. They trace how different accounting rules, which alter the calculus of what counts as a "fair representation" of business dealings, can change economic behavior.

For students of business finance, practicing accountants and businesspeople, and general readers who have followed a seemingly endless parade of financial scandals with disbelief, Smoke & Mirrors, Inc., provides a clear and concise overview of the use and abuse of accounting.

Author Bio: Nicolas Véron is a research fellow at Bruegel (Brussels) and an independent consultant on financial services. He is coauthor of L'Architecture des villes. Matthieu Autret is a national expert at the European Commission in Brussels. Alfred Galichon is a Ph.D. candidate in economics at Harvard University. George Holoch is a professional translator and lives in Vermont.