Thought Paper #3

Paul Watkins Thought Paper #3 In the final thought paper and a conclusion of our course, our class readings in Chapters 5, 7, and 9 of Double Entry How the Merchant of Venice Created Modern Finance have displayed the significance of Luca Pacioli's double-entry bookkeeping system in improving a merchant's business practices and transforming the economic growth of Venice and ultimately, the Western world. As a result of this system, the industrial revolution and the emergence of large-scale factories were a crucial part of growing business affairs and began to define the modern origination of capitalism that is evident worldwide. Throughout this paper, I am going to discuss and contribute my thoughts on the following: the factors that led to the spread of Pacioli's double-entry bookkeeping system throughout Europe, the causal relationship between the popularity of bookkeeping and the rise of capitalism, and the balance between legitimacy and fraud in reporting profits to shareholders within the Finance and Accounting industries (Collins, 1). First, it is important to recognize the factors that led to the "viral" spread of Pacioli's double-entry system in the Western world as a culmination of our course themes overall. According to the author, Johannes Gutenberg's German printing press was a major focal point in the establishment of new knowledge and ideas within Pacioli's Summa at the time and transformed written culture. The printing press had the innate ability "to produce multiple copies of identical texts served to advertise widely the power of printing itself" (Gleeson- White 116). Personally, I believe that the printing press allowed for the mass production of mathematical material including the emergence of double-entry bookkeeping, and reached a wider audience of scholars, teachers and students during this time. Also, I think there was a necessity for people to defy traditional mathematics and texts and emphasize a new, progressive way of thinking during the late 15th century. The author notes that Erhard Ratdolt "dealt the final blow" to Roman numerals when he was able to introduce the universal language of "science" that displayed shapes and figures largely attributed to the invention and widespread use of the printing press (Gleeson-White 116). As a supplement to the previous point, I believe mathematicians such as Pacioli were able to exploit the printing press given the eagerness of the younger
generation of merchants to build new knowledge and expand business practices at this time. Another factor that contributed to the spread of Pacioli's system was its wide application of concepts for many people as a result of its emergence. Generally speaking, double-entry bookkeeping could easily be implemented by a merchant as a tool for accurate financial reporting because of Pacioli's simple and detailed instructions to follow. Additionally, Italian-styled bookkeeping paved the way for 'good' bookkeeping because it was a "methodical and orderly system and the records it kept were so comprehensive" (Gleeson-White 124). The morality of a merchant's work was at stake more than ever and it improved immensely with the adoption of Pacioli's system during this time. In my opinion, there was a majority of the population that kept close ties with the Church and accounting had a greater sense of purpose through this built relationship with God. Therefore, I think this system not only provided merchants with a greater trust in their work as early accountants but it allowed customers to have a divine approval in their accounts with God, both physically and spiritually. Overall, the factors play a key role in the development of our course themes as a result of double-entry bookkeeping and its "storytelling" aspect in creating modern finance. Next, I will discuss and provide a thorough insight into the causal relationship between the popularity of bookkeeping and the rise of capitalism based on Sombart's statement. Overall, I support the statement "One may indeed doubt whether capitalism has procured in double-entry book-keeping a tool which activates its forces, or whether double-entry book-keeping has first given rise to capitalism out of its own spirit" (Gleeson-White 162). According to Sombart, capital is "the amount of wealth which is used in making profits and which enters in the accounts," which is a significant aspect of managing and tracking cash flows on a double-entry bookkeeping sheet (Gleeson-White 166). Personally, I believe that the two are hand-in-hand and are each important to the success of businesses throughout the world. I believe that Sombart was alluding to this system of record- keeping as a clear and concise way of mathematical order, organization, and reducing events to abstract numbers to introduce this new view of quantification in the world. The underlying method of measurement and accurate tracking within double-entry bookkeeping led to the industrial revolution where capitalism really sparked. Also, I have always interpreted capitalism as a way to "maximize profits" and this system allowed for income tracking and profit margins to be a necessity for merchants of this time. Additionally, I support this
statement because it combines our course theme of "storytelling" into the mix and its combination with capitalism. According to the author, Sombart and Weber argued that the new system "is not just a piece of neutral information, but also an 'account' or story" with a "rhetorical purpose" (Gleeson-White 173). As I mentioned in my previous thought paper, I claimed that part of the storytelling of in bookkeeping has been the effort of merchants framing business transactions in a way to improve throughout time. I truly believe that a major part of this storytelling aspect was the Church's reform during the mid-15th century, especially the ban on usury that no longer exists. Today, I have seen relevant examples of double-entry bookkeeping serving as a catalyst for the rise of capitalism through its cost-benefit analysis. Areas such as government corporations, health care, and educational institutions are all a key part of capitalism that would not be where they are without the implementation of bookkeeping over time. Lastly, Chapter 9 of our book focuses on the balance between legitimacy and fraud in reporting profits to shareholders within the Finance and Accounting industries through the scope of Enron prior to the year 2001. First, it is important to note that Enron filed for bankruptcy in 2001 after a massive scandal disclosed that their profits were dependent on debts that were not recorded on the company's books and instead on other entities and partnerships (Gleeson-White 195). The collapse of Enron and Royal Bank of Scotland severely damaged the culture of organizations to accurately report income and expenses according to double-entry bookkeeping and the situation took advantage of many shareholders and employees of each company. The major factor that led to these companies engaging in fraudulent behavior is the financial gain and corporate greed that lied at the helm of many corporations during the early 21st century. Personally, I think many of these companies were able to manipulate their accountant statements as a result of the employee bonuses and pension packages that overstated expectations and led many workers to "drink the Kool-Aid," for lack of a better wording. Also, the author states that another factor that generally contributed to this phenomenon was the "complex business group structures to obscure the true financial condition" (Gleeson-White 200). In my opinion, corporations that operate in complex industries with intricate figures and numbers are able to exploit their system to engage in fraudulent activities. From my research in other Finance courses, larger corporations are more subject to
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