Bruce Stokes goes Vizzini on "bully pulpit"

We'll never get lean manufacturing right in this country until we change the way we do accounting.

Current accounting rules were developed for a model of the firm in liquidation -- inventory is an asset because it can be sold in liquidation.

American corporations are not competing as well globally because they're not measuring the things that actually lead to sales and costs.

We’ll never get lean manufacturing right in this country until we change the way we do accounting. Current accounting rules were developed for a model of the firm in liquidation — inventory is an asset because it can be sold in liquidation.

Say what? The definition of an "asset" isn't "something that can be sold in liquidation." (If that were true, how could goodwill possibly be an asset?)

IFRS defines an asset as "resources an entity controls as a result of past events and from which future economic benefits are expected to flow to the entity." I can't find the definition of an "asset" under U.S. GAAP (maybe the bean counters among us can help), but future economic benefits are the gist of it.

So, if inventory isn't an asset, just how do you propose to treat it?

Also, if your theory were true, IFRS and other national accounting systems would have to be accounting for inventory in a manner *different* from U.S. GAAP. They're not. They all treat inventory as assets. So it's hard to see how this treatment handicaps U.S. competitiveness.

Michael Martin is exactly correct. Temoc94--research what you are writing about before making such comments. There is a vast difference between GAAP and reality, which Mr. Martin touched upon concerning the valuation of inventory. There is a huge body of literature dealing with the way standard cost accounting has handicapped American manufacturing. The handmaiden of this has been the way American firms have been so willing to turn the operation of enterprises over to the accountants instead of those who know how to run a successful business. Yes, there is a difference. Manufacturing is much to serious and important to be left in the hands of cost accountants or politicians.

Manufacturing is much to [sic] serious and important to be left in the hands of cost accountants or politicians.

Whenever I read statements like this one, my immediate inclination is to think that the author is grandstanding or playing to the gallery, rather than genuinely trying to persuade his audience. Is this always the case? No, but the red flags sure are visible in this post.

First off, if there's such an extensive scholarly literature about how cost accounting has handicapped American manufacturing, how about *citing* some of it? Or even setting forth some of the arguments it makes?

Second, I repeat my original questions.

I'm not aware of major differences in how U.S. GAAP and IFRS treat inventory. Both treat inventory as assets. So how do American firms, which operate under U.S. GAAP, suffer from a competitive disadvantage vis-a-vis foreign firms, which operate under IFRS or a national accounting standard? The same rules should have the same effects.

Furthermore, given that foreign firms that file SEC reports must reconcile their statements to U.S. GAAP, why do they not similarly face competitive disadvantages?

And finally, how do you propose to account for inventory, if not as an asset?

Third, you observe that there's a vast difference between GAAP and reality. This is a strawman, since no one has argued the contrary. Of course there's a difference between conservative and aggressive accounting. The subject of discussion, however, is whether the treatment of inventory as an asset undermines manufacturing competitiveness.

Finally, your invectives against firms that have allegedly turned operations "over to accountants, rather than those who can run a successful business" similarly make you look like you have an axe to grind. It's wild hyperbole and does not comport with the reality of most companies I've come across.

I can't think of any subject in which public policy intellectuals or the elected officials who listen to them have less to add than telling businessmen how to run their companies more efficiently. Does anyone with an IQ in double digits really think that the "Lean Enterprise Institute" and the commenters here who are writing total nonsense about accounting and how it is used in the management of manufacturing operations really have anything to tell General Electric, Boeing, Deere etc. how to be more competitive?

As to the continuing decline in manufacturing employment, that says nothing about American competitiveness in manufacturing. Agricultural employment has been declining since the invention of the reaper, and nobody would say that American agriculture is not a competitive business.

Sorry folks, lost track of this thread for a while.

In response to the skepticism, there are, in fact, plenty of smart folks who believe in lean manufacturing. To wit, the Toyota Production System is one implementation of it.

In a nutshell, accounting theory is based on time-averaged measures of profit and loss. Frequency-averaged measures of liquidity are just as important to the health of a firm when supply and demand are fluctuating. This is why investors like Benjamin Graham and Warren Buffett have outperformed the market -- they pay more attention to how what's on the balance sheet translates into cash. It's also why firms like Toyota have been able to weather economic cycles better than many American manufacturers -- they haven't laid off hardly any employees.

Check out the most recent edition of the Harvard Business Review for more:

http://harvardbusinessonline.hbsp.harvard.edu/hbsp/hbr/articles/article.jsp?ml_action=get-article&ml_issueid=BR0806&articleID=R0806F&pageNumber=1&ml_subscriber=true&uid=24494473&aid=R0806F&rid=24580495&eom=1

And feel free to check out my blog as well:

brokensymmetry.typepad.com

By the way, American Apparel is manufacturing clothes here in California at a profit by implementing lean manufacturing.