How many sets of books?

Most privately held companies only have one set of books. Their accounts are set up to minimize the tribute extracted by tax collectors of all stripes. The unfortunate side effect is that poor decisions are made, and opportunities passed up, to achieve the goal of the lowest possible tax bill.

Many publicly held companies have two sets of books. The first, and most important, contains the happy lies that GAAP (Generally Accepted Accounting Principles) and SEC Regulations permit to be told to the shareholders. These happy lies are used to justify the gigantic bonuses and massive stock option grants awarded by senior management to itself.

See also conflict of interest and failure of management to act in the interests of shareholders.

The second set of books contains the gloomy lies that the company is legally allowed to tell the tax collector. In this set of books, the company claims not only that it should not pay any taxes this year but that it should be refunded all - and more - of the taxes unfairly extracted in previous years.

Just a few, very well managed, companies have a third set of books. The objective of this set of books is to answer the question: "what the *&^$%% is going on around here?"

If management does know - as opposed to just thinking that it knows - what is going on, then chances are that the company is well managed and capable of rebounding from the inevitable bumps in the road.

Although he was talking about scientists, and the process of doing theoretical physics, this quote from Nobel Prize winner Richard Feynman is applicable to management:

"The first principle is that you must not fool yourself - and you are the easiest person to fool. So you have to be very careful about that. After you've not fooled yourself, it's easy not to fool other scientists. You just have to be honest in a conventional sort of way."