Confidence Accounting is a proposal to consider using distributions, rather than discrete values, where appropriate in auditing and accounting. In a world of Confidence Accounting, the end results of audits would be presentations of distributions for major entries in the profit & loss, balance sheet and cashflow statements. The proposed benefits of Confidence Accounting include a fairer representation of financial results, reduced footnotes, more measurable audit quality and a mitigation of mark-to-market perturbations.
It is important to note that confidence accounting, and the estimation of measurement error in general, deals with known unknowns: the impact of known sources of uncertainty (such as the range of discount rates used for valuing infrastructure projects) on the values of asset, liabilities, income and expense. Company disclosures can and should also deal with an assessment of the unknown (such as stress scenarios like war or natural disasters), in discussions about future plans, events, the economic environment, risk levels etc., but confidence accounting does not address those aspects of disclosure. The relationship between confidence accounting based financial statements and disclosures about risk is an area which will need further development.
Two ACCA published explanations:
Audit With Confidence: Putting Scientific Measurement Into Audit
Michael Mainelli 2011 Accounting for Confidence, Accountancy Futures, Edition 3, ACCA (March 2011), pages 56-57
ACCA Accounting and Business - Confidence Accounting
Michael Mainelli 2011 Accounting for Confidence, Accounting & Business, ACCA (February 2011), page 35
as well as a short Chartered Institute for Securities & Investment publication:
Banking on Confidence: Rethinking Audits of Financial Institutions
Professor Michael Mainelli 2011 Securities & Investment Review, Securities & Investment Institute (September 2011), pages 22-23.
Z/Yen, the City of London think-tank that initiated Confidence Accounting, has followed three themes on financial service reforms:
•confidence accounting – looking at the fundamentals of audit and accounting; •financial statements insurance – providing indemnity for audits; •being more aggressive about standards market principles as a third way between regulation and overly free markets. Additional Background - Confidence Accounting
Confidence Accounting evolved from an earlier term, "Stochastic Accounting". It gained significant attention in discussions around the 2009 publication The Road To Long Finance and the Long Finance movement. It is also introduced to the wider public and students in Michael Mainelli and Ian Harris's book, "The Price of Fish: A New Approach to Wicked Economics and Better Decisions", which won the Gold Medal in the Finance, Investment and Economics category of the 2012 Independent Publisher Book Awards.
Other related publications include:
•Michael Mainelli, "Confidence Accounting: Putting Essential Uncertainty Back Into Auditing And Accounting", Journal of Risk Finance, Volume 10, Number 3, Emerald Group Publishing Limited (June 2009); and event on same - Gresham College – "Reforming Auditing - Incremental Change or Radical Action?" – London, England (6 February 2006).
•original formal attempt to start debate - Michael Mainelli and Ian Harris, "Balancing the Odds: Stochastic Accounting", Balance Sheet, Volume 10, Number 2, pages 22-27, MCB University Press (2002).
Additional Background - Financial Statements Insurance
•Michael Mainelli and Joshua Ronen, “Put Your Money Where Your Audit Is: Financial Statement Insurance In The UK?", Journal of Risk Finance, The Michael Mainelli Column, Volume 7, Number 4, pages 446-450, Emerald Group Publishing Limited (August 2006).
•Michael Mainelli and Joshua Ronen, "Accounting: Progress May Lie In Insurance", Financial World, pages 38-39, Institute of Financial Services and Centre for the Study of Financial Innovation (May 2006).
Additional Background - Standards Markets
On the role of standards markets, e.g. what’s ISO got to teach finance:
"Standards Markets: The Free Market Response to Regulation?", Monday 16 October 2006 at 18:00, Barnard's Inn Hall, Holborn, London EC1 - "Many societal goals for markets can be achieved with more innovative regulation using standards markets that seem to bridge the market-government divide. Standards markets, such as those based on the International Standards Organisation or the International Social and Environmental Accreditation and Labelling (ISEAL) Alliance, counter Screaming Lord Sutch's sublime question. "Why is there only one Monopolies Commission?" - transcript - picked up by Peter Day at the BBC for Radio 4 - http://www.bbc.co.uk/radio4/features/in-business/peter-days-comment/20100401/
The key principles applying to standards markets:
•there is an open standard available to all - many standards do not wholly fulfil this as they frequently charge significant fees for a copy of the standard, e.g. ISO affiliates such as the BSI typically charge three figures for short documents; •certification agencies compete for audit business – thus encouraging rational interpretation(s) of the standard and controlling cost and quality via reputational risk and competition, and the system can prove exclusion, e.g. certifiers actually mark down organisations that fail to meet the standard; •outputs such as certifications and grades awarded are published; ideally some benchmarking on the degree of pass or fail is given to participants; •ideally the certifier bears some indemnity and that indemnity can, with the price paid by the buyer, be made publicly available; •development of the standard is an open, structured, inclusive process involving interested stakeholders, conflicts of interest are eliminated and comparators available; •there is an authorised, responsible accrediting body for certification agencies, e.g. the United Kingdom Accreditation Service (UKAS) or the Marine Stewardship Council in the case of sustainable fish, that helps to ensure proportionality and consistency; accreditors ensure the separation of standards development from the commercial elements of implementation and review; accreditors regulate the market; •accreditors can sanction certifiers, for instance ensuring that certification is separate from improvement, e.g. there are no conflicts of interest where firms sell consultancy services to attain a standard alongside certification services; •accreditation bodies are independent from commercial conformity assessment activities and, unless the system is seriously flawed, accreditation is probably best left to a sole entity, i.e. non-competitive.
Looking a bit wider and applying standards markets to financial services regulation:
•Michael Mainelli, "The Rules Of Practical Principles", Journal of Risk Finance, The Michael Mainelli Column, Volume 8, Number 5, pages 508-510, Emerald Group Publishing Limited (October 2007).
•Michael Mainelli, “Standard Differences: Differentiation Through Standardisation" ISO9001, SAS70 and management systems), Journal of Risk Finance, The Michael Mainelli Column, Volume 6, Number 1, pages 71-78, Emerald Group Publishing Limited (January 2005).