A LARGE RETAIL OUTFIT that I know – sorry, no names on this one – noticed that at certain times of year it received a lot of orders to small items (what us accountants might call “fungibles”) from one particular organisation. Further investigation revealed that most of those items were returned; and credit notes issued again the sales invoices, a few weeks later.

It transpired that the buying organisation need to spend some of its budget before a particular date or it lost the money. They clearly had no system to budget properly for any type of future expenditure. These cod purchases weren’t fraudulent; they were an accepted process within the company to circumvent an unhelpful budget system.

A frustrating case of the accounting tail wagging the commercial dog, then. In that case the results were comic, and no harm was done apart from the time wasted.

But there are times when accounting policies shape the direction of the whole business community in unintended ways – the most high-profile example being pensions. When the Accounting Standards Board (ASB) insisted on forcing FRS17 Accounting for Retirement Benefits on corporates, many saw the standard as an assault on civilisation. Politicians, unions and business leaders still seem to believe defined benefit (DB) pension schemes is a direct result of reporting (something like) the true cost of pension liabilities and assets at year end.

Other reasons for the present crisis – Gordon Brown’s £5bn a year dividend tax windfall, poor investment returns, our failure to save and our selfish habit of not dying early – often end up taking a back seat.

But I do have a sneaking sympathy for those who want to shoot the accountants. Why? Well, to find an estimated present cost of pension fund liabilities, you have to apply a discount rate to how much pensioners are owed over time. The rate used – worked out by actuaries – is crucial. The lower the rate, the larger the present estimate of the liability. So a quick way to reduce your alleged liabilities is to use a high discount rate.

The simplest way to do that? Change your asset portfolio out of unfavourable discount rates. And that generally means exiting bonds. But this completely flies in the face of trying to match pension fund assets with pension fund liabilities. Here’s the sting: the bonds discount rate is lower than other asset classes, such as equities, but only because bonds have historically under-performed equities. So if you are invested in bonds for a good reason – you think you should match your pension fund assets to liabilities – then your company is penalised. And all thanks to a reporting standard.

This is circular nonsense only we accountants would accept. It happens even though the other factors determining the size of fund needed – the number of pensioners, their salary and years of service, how long before they shuffle off this mortal coil – are not affected one jot by whether you invest in bonds, equities or vintage cars.

It is not only pensions where logic deserts accounting. Take IAS39 Financial Instruments: Recognition and Measurement. Under this recently applied rule, you must disclose more information about the derivatives you use, by either booking them at market value (marking to market) or explaining how they manage the related risk. So while in economic terms your approach to hedging may not have changed, as a result of the new accounting treatment the admin burden of using hedges is now onerous – and some of the accounting results may not fairly reflect the approach of many finance directors to risk in any case. Because IAS39 increases the reported volatility in the p&l, some companies have contemplated abandoning their traditional hedging methods altogether. That would, of course, actually increase the exposure of a company to, say, a sharp movement in currency – and increase its risk of taking a material loss.

The answer is, in theory, simple: you have to carry on using sensible hedging strategies and (the difficult bit) educate users of the accounts that changes in fair values of assets or liabilities arising are impossible to forecast – and have no direct bearing on underlying perfor-mance.

It would be good to hear your examples of the accounting tail wagging the commercial dog, no matter how small. What decisions in your business are driven by rules rather than reality? No one pattern seems to emerge from these accounting absurdities. Sometimes it’s the fault of accountants; sometimes it’s others in the organisation; and sometimes the ignorance of outsiders.

The bottom line is that accounting should mirror economic and commercial reality, not distort it. Whether it’s to be returned fungibles, or not wanting to upset the City over the present value of derivatives, accountants must make sure that they don’t get too involved in making the technical detail right while leaving the bigger picture looking absurd.