Save yourself the fifty million tuition dollars. Here’s everything I learned through one semester at Harvard Business School, summarized in concise, easy-to-read blog format.

FINANCIAL REPORTING & CONTROL (ACCOUNTING)

1. Accounting is the language of business. It’s important to understand how to speak it.

In theory, you can get a pretty good idea on the health of any business by looking at three things: A) an Income Statement, B) a Balance Sheet, and C) a Statement of Cash Flows. Respectively, these three things explain A) how much money comes in and out of a business over a period of time, B) how many assets a business holds at a point in time (and also, what the business owes others), and C) how cash, the most important asset, moves in and out over a period.

There are plenty of intricacies in creating and finely analyzing these three documents. For starters, there are really only two rules to follow: 1) More Cash/Income/Profit/whatever is GOOD, and 2) the equation Assets = Liabilities + Equity is sacred…don’t mess with it.

Not surprisingly, many line items in accounting are subject to the same faults and biases that I covered in Part I. So, be prepared to deal with that.

2) Everybody is going to act in their own best interest, no matter what guidelines and incentives you set. Somebody is bound to find a loophole in your system and break the rules—assuming they haven’t, already.

Why did Lehman Brothers go out of business? Why did Bernie Madoff end up in jail? Why did Enron collapse? Why did the subprime mortgage crisis occur? They fundamentally all had the same source problem: Somebody figured out a way to beat the accounting system to make it look like their company/asset was worth way more than it actually was.

No system will ever be perfect. It’s a numerical problem. Figure there are a dozen people who sit and make the rules…and millions of accountants in billions of situations who are looking to beat the system. There’s no way the handful of rule makers will ever cover everything.

This hardly just applies to business. When the MLB brass made the personal health rules twenty years ago, all it took was one player out of thousands to figure out that human growth hormone was an effective way to pad your stats without explicitly breaking a rule (or at least, without having a high chance of getting caught). Competitive play in the last generation of Super Smash Bros revolves around a technique called wavedashing—essentially, an abuse of the game’s physics engine that allows players to move their characters faster and less predictably.

Ultimately: when creating a rules system, never expect perfection, and always expect someone to take advantage.

3. Have a deep, innate understanding of when you’ve crossed the line.

On the other side of the coin: if what you’re doing feels wrong, it probably is. If you’re not comfortable talking about it, there’s probably a reason. Etc. Rules are going to be broken by individuals and by entire firms. Either way, if you get caught you get to go to jail.

The Milgram Experiment sheds light on how difficult it is to stop reprehensible behavior once it’s onset. Know where the line is, and be smart enough to stop yourself before you cross it.