#FOWC Archives – Page 75 of 104

April 8, 2021April 8, 2021

F is for Fraud

Enough of the accounting philosophy, let’s talk about something more fun. Fraud!

If accounting is as old as the hills, so is fraud. If you recall my post about Clay Balls a few days ago, you may remember that they were storage for tokens carried by tax collectors. The tokens were stored inside hollowed balls to “prevent tampering.” In other words, tampering–tax collectors collecting a few of the tokens to barter for their own purposes–was already a common practice in 3000 B.C.E. Where there are tax collectors, there are corrupt tax collectors, apparently.

Oops! My Warehouse Burned Down…Insurance Fraud

There was also ancient insurance, and with that came ancient insurance fraud. Ancient merchants purchased “bottomry” contracts (now there’s a word!) in Babylon as early as the third millennium BCE, as did Hindus, Greeks, and others. A trader would get a loan for his cargo and pay an extra fee for insurance, with the interest on the loan also helping cover the loss. When the ship came in, if he defaulted on the loan, the insurer would keep the cargo.

The Greek merchant Hegestratos decided to try an end run around his bottomry contract, in 360 BCE. He had received a cash advance and figured to keep it–and the corn–and claim an insurance loss. He put the corn in secret storage and sailed the ship, but empty. However, there were other passengers on the ship, and they were not too keen when they noticed him trying to scuttle the empty vessel. They chased him off, and he drowned. So much for early insurance fraud!

April 6, 2021April 7, 2021

E is for Earnings

While we look for harmonious balance, we are also creatures of change and achievement. We yearn also to count. Any youngster who approaches a pond with pebbles will toss them in and count the skips or try to hit the lily pad ten times. Or a crew rows by us on the river and we count the strokes. Well, maybe I just do because I was raised on Sesame Street. Remember The Count? Vun…doo…tree bats… ah.ah.ahh…

The river of time flows by, but we are compelled to stop and take reckoning every so and often, after a month, the year. What comes in, what goes out? Are we draining our resources or building a surplus?

Drawing by Leonardo Da Vinci, “study of water passing and falling,” shown in kensycooperrider.com.

That’s the purpose of an Income Statement.

April 2, 2021April 3, 2021

B is for Banking

Banks are like good hygiene, like brushing teeth and wearing underwear. A thankless resource, though someone needs to do it. People don’t like bankers, but they need them. People don’t like bankers because they need them. I explained why in the second post I ever wrote. But how does banking work?

Gringott’s Vault at Warner Bros. Studio tours, London

What Is a Bank?

Essentially, banks take your money and give it to somebody else. You could put your money in a sock under the mattress, but it’s a bit safer to choose someplace with big steel vault doors and complicated locks. Like Gringott’s. A bank might hold a Philosopher’s Stone, the royal treasury of the Lannisters, or the wealth of the InterGalactic Empire (who had Storm Troopers handling security). Modern banks spend huge sums on strong encryption systems–online vault doors–to keep your money safe.

Suppose your cousin Marvin wants to open a business, a combination sushi and ice cream store. Hey, they both need ice, right?! That’s Marvin’s business plan. The bank gives your money to Marvin as a loan.

Two problems here. First, Marvin may need more dough than your puny deposits, so the bank has to convince more friends and gather enough deposits in order to give out loans. Secondly, you may need some of your money back before Marvin can attract enough customers. He’s trying–he’s got the slogan: Come for the Eels, Stay for the Sprinkles! This is called a problem of liquidity.