George Ritzer’s rationalization principles include efficiency, predictability, calculability, and non-human control through the use of technology, all of which have changed and improved vastly, with several clear examples of each throughout the history of accounting. Increases in efficiency can best be noted by decreases in the total amount of energy required to produce something or perform a task; energy can also equate to length of time when correlating to efficiency. Predictability can be described as knowing the outcome of something before it happens, and increases in predictability can be observed through more exact outcomes being predetermined. Calculability refers to determining how much things such as raw material or time are needed to receive the same result. Increases can be seen through decreases in wasted material. Non-human control refers to replacing humans with technology to improve efficiency. These four concepts together make up Ritzer’s definition of rationalization, which have revolutionized accounting.
Ancient Mesopotamian clay tablets are the earliest examples of accounting, dating back to over 7,000 years ago. These artifacts are evidence of increased rationalization of accounting. These tablets allowed for advancements in efficiency through uniformity and utilization of a standard record-keeping method, calculability through the ability to calculate overall assets, and control through the shift of oral record-keeping to written predictability through accurate record-keeping allowing for comparisons.
Ancient Egyptian currency in the form of tokens and clay balls, followed by further sophistication, led to the development of papyrus balance sheets. These antique balance sheets increased efficiency in ancient accounting and are one of the earliest examples of the single-entry system.
Ancient Iran tracked the income and costs of almost all members of the community, similar to modern annual tax filing. This was another example of further rationalization within accounting as a form of control. Stored records and related skills helped further other aspects of rationalization, such as predictability and calculability.
Hammurabi's Code
Hammurabi's Code included nearly 300 governing rules, several of which related to accounting and further rationalized it. Examples of these include the following:
Section 7: "if a man purchases silver or gold, manservant or maidservant, ox, sheep, or ass, or anything else from a man's son, or from a man's servant without witnesses or contracts, or if he receives in trust, that man shall be put to death as a thief."
This section relates to the importance if contracts and records of transactions, a form of non-human control.
Section 48 " If any one owe a debt for a loan, and a storm prostrates the grain, or the harvest fail, or the grain does not grow for a lack of water; in that year he need not give his creditor any grain, he washes his debt-tablet in water and pays no rent for this year."
The combination of debits in the form of a loan and credits in the form of a harvest while accounting for potential loss improves calculability. This rationalizes calculability because the written and posted rule expands how the total owed to lenders and others can be determined when factoring in adverse conditions and losses.
Luca Pacioli the "Father of modern accounting"
In his published work Summa de Arithmetica, Geometria, Proportioni et Proportionalita, Pacioli described several aspects of accounting including ledgers, journals, and the system of double-entry. This is one of the longest running examples of rationalization in the form of control, as the double-entry system has been used by all accountants since the publishing of his work.
Certified Public Accountants (CPA), are modern licensed accountants. Although there are some accountants who are unlicensed, successful accountants dominate the occupation. The process of certification exhibits rationalization regarding all four aspects. Overall the aspect of control is best seen, due to the schooling and necessary exams that are required to become a CPA which control how those within the accounting field behave. Calculability is increased drastically within accounting by this certification and required education, which educates accountants on what processes and formulas to utilize considering the various available data. Predictability and efficiency are increased because the most effective methods are taught and utilized; increasing efficiency and the similarity of methods and information taught over long periods of time allow for previous and present records to be utilized to predict future finances.
The US Generally Accepted Accounting Principles (USGAAP) relies on ten main principles to prevent stock manipulation and fraud.
- The principle of regularity
- The principle of consistency
- The principle of sincerity
- The principle of permanence of methods
- The principle of non-compensation
- The principle of prudence
- The principle of continuity
- The principle of periodicity
- The principle of materiality
- The principle of utmost good faith
These principles being followed by all CPAs in the U.S. is an example of rationalization and its four aspects.
- The principle of regularity shows rationalization through increases in all four parts. Increases in efficiency can be seen over time by CPAs honing their skills and the processes for completing their job. With the regularity and repetition, they become masters at the process and can do it faster and with fewer resources diverted to referring to the various rules and regulations lists. Increases in predictability can be seen by referring to previous years' reports that have followed the same guideline. By following the various rules and regulations, predictions can be made based on current data and reports and previous ones. Increases in control can are found in this principle; however, they are more apparent in other principles, such as the principle of permanence of methods and the principle of consistency.
- The two previously mentioned principles include completing their jobs and various financial documents consistently without significant deviation from routine. They must also follow once established methods without deviation. Increases in calculability can be found in the principle of regularity; however, the principles of permanence of method and consistency can be more easily examined and noted through these principles. These principles show that methods used to calculate financial numbers will be consistent and remain the same. These principles allow accountants to collect more pertinent data related to their duties and divert excess resources from collecting data on financial aspects that are not used to create their various reports.
Other principles, such as the principle of continuity, also exhibit rationalization. However, they predominately have a strong case for a single one of the four parts of rationalization. The focus on continuity can be closely tied to increases in predictability because it allows accountants to make better predictions under the assumption that the business will continue to operate as it currently is while making predictions. The US GAAP, which has weathered the storm of time, and grown in size and strength with the demand for CPAs ever increasing due to the growth of larger and larger companies and more complex finances associated with such large-scale development, is a predominant example of rationalization. It exhibits rationalization, but the positive aspects such as uniformity across the career as CPA’s work can be typically understood very quickly by another with the correct financial information due to the ever-increasing levels of efficiency, predictability, control, and calculability.
Asset Rationalization
Asset Rationalization refers to how conglomerate corporations such as P&G review their total assets to raise their bottom line. In light of recent economic turmoil such as the Coronavirus, shifts in shopping mentalities, and fraud, asset rationalization is no longer an option but a requirement to remain profitable; accountants are essential for this task. Although this task mainly performed by accountants appears exceptionally rational, numerous irrationailites can occur. These include reduced efficiency through outsourcing and reliance on cheaper, inexperienced workers and reduced predictability regarding forecasted sales due to disenfranchisement of customers.
Artificial Intelligence is ever increasing in use in all occupations as technology advances at unprecedented speeds. In the accounting occupation, A.I. is currently used to perform basic data entry quicker and more efficiently than humans, data sampling, and algorithmic analytics. While some, typically older generations, feel that this will replace accountants, that is not the case. A.I. is and will be utilized by accountants as a tool or aid instead of a replacement. For example, data entry performed by A.I. does not entirely remove the accountant from their work. Instead, it decreases the amount of low-skilled work that must be performed, increasing efficiency and allowing accountants to focus on more complex, in-demand tasks. Data sampling performed by A.I. will enable accountants to complete audits at an unprecedented pace and review information in greater detail due to the reduced amount of work sampling. Data sampling by A.I. is an increase in calculability in accounting. In accounting, algorithmic analytics performed by A.I. enable accountants to formulate more likely and precise outcomes. Analytics performed by A.I. are typically broken into two categories, predictive and prescriptive. Predictive analytics is the driving force behind increased predictability in accounting, whereas prescriptive is more closely related to calculability, increasing the accuracy of demands for financial decisions. While there is pushback against A.I. and further rationalization in accounting because it is taking some jobs from lesser skilled accountants or those who refuse to utilize A.I. in their work, there is also an increase in applicable skills performed by accountants who embrace A.I. and use A.I. to their advantage.
The increased complexity of accounting and subsequent rationalization has overall been positive. Accountants can earn higher wages due to increased workload and demand for their skills. Although accounting has become more complex and challenging rationalization, it has reduced certain aspects of accounting and made them manageable. This includes increased efficiency in the form of A.I. tools or Increased predictability through US GAAP principles such as the principle of permanence of methods and consistency. While there is some pushback to the rationalization of accounting, seeing as it can limit the opportunity for uncertified accountants as well as the use of A.I. in fear that it will replace accountants, the negatives do not outweigh the positives. The increased opportunity with proper education and certification ensures that accountants will provide higher quality service. The utilization of A.I. in accounting allows accountants to perform their jobs in a manageable way with increases in the complexity of finances. The rationalization of accounting, while inevitable, is not a negative for accountants but rather an opportunity to continue to increase their worth.
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