And now for something completely different…

Here’s a portion of filmmaker Werner Herzog’s 1999 “Minnesota Declaration” on truth and fact in documentary cinema:

• 1. By dint of declaration the so-called Cinema Verité is devoid of verité. It reaches a merely superficial truth, the truth of accountants.
• 2. One well-known representative of Cinema Verité declared publicly that truth can be easily found by taking a camera and trying to be honest. He resembles the night watchman at the Supreme Court who resents the amount of written law and legal procedures. “For me,” he says, “there should be only one single law: the bad guys should go to jail.”
• Unfortunately, he is part right, for most of the many, much of the time.
• 3. Cinema Verité confounds fact and truth, and thus plows only stones. And yet, facts sometimes have a strange and bizarre power that makes their inherent truth seem unbelievable.
• 4. Fact creates norms, and truth illumination.
• 5. There are deeper strata of truth in cinema, and there is such a thing as poetic, ecstatic truth. It is mysterious and elusive, and can be reached only through fabrication and imagination and stylization.
• 6. Filmmakers of Cinema Verité resemble tourists who take pictures amid ancient ruins of facts…

It’s beyond the scope of this blog to pursue the specific issue of documentary cinema (suffice to say that Herzog’s declaration is useful in engaging with his own films, and in identifying the limitations of some people’s others): instead I’m going to bounce off the one aspect of his declaration that he may have considered incontrovertible, that the truth of accountants is a merely superficial one. It occurred to me while writing this recent post that we may have identified the perfect exemplar of Herzog’s thesis: an accountant who recoils from most uses of fair value and estimation, who trusts cash above most else, and indeed (to make the fit even better) spends many waking moments quaking with thoughts of the bad guys not yet behind bars. Such an accountant, we may submit, would end up sowing only the most stonily unrevealing financial reporting, factual on its own meagre terms, but largely irrelevant in informing most forward-looking decision-making.

I realize that even the readers willing to take that step with me may balk at the next one, of claiming that any aspect of effective financial reporting might constitute an “ecstatic truth,” reachable “only through fabrication and imagination and stylization.” I should modify that – the accountant I mentioned (having for instance labeled financial statements of marijuana entities as “audited hallucinations”) would actually rush to sign onto the “fabrication” piece of it, but as evidence of damnation, not of blessed illumination. Obviously, an analogy can only be stretched so far. For this purpose, perhaps we can stop at proposing that financial statements will better serve a reader who presumes their inherent mystery and elusiveness than one who approaches them as cold records of fact.

Attitudes toward fair value may provide the clearest means of distinguishing between the two types of accountant. Particularly when they’re based on “level 3” inputs subject to a high degree of judgment and possible variation, they may indeed owe as much to imagination (albeit hardly an unfettered one) as to science. The second type of accountant regards this as a virtue, because the only reason to study the past is to provide a basis for forming expectations about the future, and this is (or perhaps should be) an inherently poetic project. For example, consider the frequently-cited statistics on the percentage of corporate acquisitions and mergers that fall short of stated expectations, or that outright destroy shareholder value (60% according to one source). You might say this reflects a submission by management to poetic imagining, allowing optimism to overtake rationalism. Actually, it’s more likely the opposite – an imagination-deficit-driven surrender to hackneyed methodologies for identifying synergies and upsides (perhaps supercharged by perverse individual incentives). The more impressionistic and complex the form of financial reporting, the greater the engaged user may get trained in informed skepticism, sensitizing him or her to such over-extrapolations. Put more simply, we know that managing a business isn’t purely a matter of glumly tracking historical costs, so why would that be the primary basis for investing in them?

There’s no doubt that the first type of accountant taps into some of the prevailing currents of our time, recoiling from complexity, happiest when retreating into a tight-fisted but safer past (albeit more illusory than real). There’s little broad-based prosperity in such a route, but some may find an austere moral satisfaction. It would be stretching a point to say that the second type will find ecstasy: Herzog says the ecstatic truth is “mysterious and elusive,” but sometimes it’s not available at all, at least not until it’s too late. Some companies, that is, may never be worth the price you’re being asked to pay for them, and all the truth in the world, whether that of the accountants or of anyone else, won’t reveal that to you…

The opinions expressed are solely those of the author