"Our accounting department is the office that has the little red box on the wall saying: 'In case of emergency break glass.' Inside are two tickets to Brazil."

>- Robert Orben

COOKED books have been all over the news this year. The public profile of accountants has taken a series of hits as various accounting scandals have hogged the headlines and we have suffered a litany of public company financial restatements.

It can be difficult to understand why accountants don't get the figures right every time. How hard can it be? The joke has it that if you ask an accountant what two plus two makes, he will reply: "How many would you like it to make?" What the joke doesn't make clear, because it's not funny, is that accounting is both an art and a science.

I'll give you a simple example from everyday life, in the hope that you'll see that there is no definitive answer to the question.

Let's say that you decide to set up a home business, selling, oh, a nice line of birthday cards, or children's toys that you have made, or anything you like - to keep us focused, let's call them widgets. I don't know what widgets are either.

Let's say you buy 1,000 of them at a dollar each, and you hope to sell them for $5 each.

A year goes by, and you count up what you've achieved, and it amounts to this:

You bought 1,000 widgets at $1 each, for a total of $1,000; and you sold 130 widgets at $5 each, for total sales of $650.

We'll ignore any other costs you might have incurred, such as advertising or postage or the cost of storing the widgets in a widget warehouse.

So you spent $1,000 and got back $650. Your loss for the year is therefore $350, right?

Maybe.

You have $350 less than you started with, and have therefore undeniably made a loss. If the widget warehouse had caught fire and all your widgets were burned beyond repair, your loss would $350 and that would be the right answer.

However, if you were a company whose purpose was to sell widgets, the rules of accounting (referred to as GAAP for "generally accepted accounting principles") would require you to do a different set of sums.

GAAP presupposes that your business is a going concern. GAAP applies rules to all companies to provide a basis for comparison, between years and between companies. GAAP says that (a) you received $650 from the sale of 150 widgets and (b) since the widgets cost $1 each, you made a profit of $500, being the $650 you earned, less the $150 that the sold widgets cost you. If this were Canada, the United Kingdom or any other place that taxes income, you would then pay tax on your "profit". In cash, you have made a loss (spent $1,000, got back $650), so you would have to pay the tax out of your own pocket.

You certainly have less money than you started with, and a pile of 850 unsold widgets that, right now, aren't worth anything until you sell them. How can you be said to have made a profit? Which answer is right? Did you make a profit or a loss?

Since an income-taxing authority would send you a bill stating clearly that you had made a profit of $500, that number must be the right answer. Since your widgets are a business activity, the same rules will apply next year and every other year. But there's a hole in your pocket where your money used to be that is just as empirical as the tax demand. Both answers are right.

In the end, once you close your widget business, everyone would agree on your situation. Let's say that on the first day of your second year in business, you get a job in Honolulu, so you give your remaining widgets to charity and close the business.

GAAP says that in the second year of your business, you lost $850, being the value of the 850 unsold widgets you have now given away. In reality, nothing happened in your second year, so you made neither a profit nor a loss. But your business has made a GAAP loss.

If you look at the entire history of the business, you lost $350. GAAP agrees with that, by saying you made a profit of $500 in the first year and a loss of $850 in the second. Net, everyone accepts that over the two years you made a loss of $350. Two plus two eventually equals four.

Accounting rules allocate income and expense to financial years for individuals (for tax purposes) and for corporations (for shareholder and regulatory purposes, as well as for tax purposes). As a result, in the day-to-day operations of business, two plus two can equal a wide range of numbers.

Think how uncomplicated that little widget business was, and yet it amounted to all that trouble. Now multiply those numbers up to millions or billions, and you will see that the question, "How much does two billion plus two billion make?", is really wide open.