Dark Accounting Matter

Physicists calculate that approximately 85% of the matter in the universe is composed of “dark matter” that “does not absorb, reflect, or emit electromagnetic radiation and is therefore difficult to detect.” The S&P 500 currently trades at a price to book value of 4.2, suggesting that book value accounts for less than 20% of the S&P 500’s market value. The remaining 80% appears nowhere in these firms’ balance sheets—it is invisible to contemporary accounting techniques and constitutes “dark accounting matter.”

Some “dark accounting matter” is composed of factors commonly described as components of “ESG.” Human capital, for example, is an intangible asset omitted from balance sheets, and is commonly categorized under the S in ESG

Other intangible assets do, however, appear on the balance sheet. This asymmetric treatment is increasingly difficult to defend as the divergence between book and market value increases, especially as some intangible assets, such as intellectual property, may or may not appear on the balance sheet depending on how they were financed.

This article seeks to stimulate discussion about how accounting and disclosure rules apply to ESG and other intangibles. I highlight the increasing irrelevance of traditional Generally Accepted Accounting Principles (GAAP) and urge that accounting practice and policy expand to capture at least some factors contributing to dark accounting matter. More precisely, issues can be asked to describe and discuss factors that contribute to the difference between their market and book values, and to provide tailored disclosures that seek to shed light on that difference.

About the Law and Economics Workshop

Michigan’s Law and Economics Workshop provides an opportunity for faculty and students from across the University to engage with cutting-edge law and economics research by leading scholars on a wide range of legal and policy topics.

Professors Adam Pritchard ([email protected]) and Gabriel Rauterberg ([email protected]) organize the workshop. If you would like to receive workshop announcements, please contact Alex Wroble ([email protected]) and ask to have your name added to the workshop’s email list.