9 June 2005 - From 14h00 to 16h00
Transcription
9 June 2005 - From 14h00 to 16h00
Doctorat HEC Spécialisation : Information, Comptabilité, Contrôle et Organisation ATELIER DE RECHERCHE Jeudi 9 juin 2005 Contribution du Professeur David J. COOPER University of Alberta, Canada (Co-Rédacteur en Chef de Critical Perspectives Accounting) Professeur responsable du séminaire : Eve CHIAPELLO ______________________________________________________________________________________________________________________________ Ce document ne peut être utilisé, reproduit ou cédé sans autorisation du Groupe HEC SÉLECTION D'ARTICLES : - M. Barrett, D. J. Cooper, K. Jamal, "Globalization and the coordinating of work in multinational audits", Accounting, Organizations and Society, 2005, 30, pp. 1-24. - B. Townley, D. J. Cooper, L. Oakes, "Performance measures and the rationalization of orgaizations", Organization Studies, 2003, 24(7), pp. 1045-1071. - A. G. Puxty, H. C. Willmott, D. J. Cooper, T. Lowe, "Modes of regulation in advanced capitalims: locating accountancy in four countries", Accounting, Organizations and Society, 1987, vol. 12, n° 3, pp. 273-291. - A. M. Preston, D. J. Cooper, D. P. Scarbrough, R. C. Chilton, "Changes in the code of ethics of the U.S. accounting profession, 1917 and 1988: the continual quest for legitimation", Accounting, Organizations and Society, 1995, vol. 20, n° 6, pp. 507-546. - D. J. Cooper, M. J. Sherer, "The value of corporate accounting reports: arguments for a political econmy of accounting", Accounting, Organizations and Society, 1984, vol. 9, N° 3/4, pp. 207-232. - D. J. Cooper, "Rationality and investment appraisal", Accounting and Business Research, summer 1975, pp. 198-202. - T. Hopper, D. Cooper, T. Lowe, T. Capps, J. Mouritsen, "Management control and worker resistance in the national coal board: financial controls in the labour process" (document disponible uniquement en version papier et à la demande). Accounting, Organizations and Society 30 (2005) 1–24 www.elsevier.com/locate/aos Globalization and the coordinating of work in multinational audits Michael Barrett a, David J. Cooper a b,* , Karim Jamal b Judge Institute of Management, University of Cambridge, Trumpington Street, Cambridge CB2 1AG, UK b School of Business, University of Alberta, Edmonton, Alberta, Canada T6G 2R6 Abstract This paper examines how the processes of coordinating a multinational audit impacts, and is effected by, the structuration of globalization. Using a detailed field study of an audit involving multiple locations, we argue that the coordination of work in multinational firms links the local and the global in a dialectical manner. In particular, we analyze the relationship between the global and the local through an examination of two key coordinating mechanisms used by audit firms––inter-office instructions and the firm’s risk based audit methodology. In so doing, we discuss the local appropriation of global systems, as well as the importance of trust and professional identity in the coordination and management of the multisite audit. Our study suggests two key globalizing tendencies associated with reflexivity in audit––the increased risk of litigation and the commercialization of the audit industry. These changes are intimately linked at the work practice level to changes in documentation, new technologies and methodologies, and a diversification in business advisory services requiring new skills and client relationships. We discuss the implications of these changes for the future of auditing, audit work and large audit firms. 2004 Elsevier Ltd. All rights reserved. Introduction Accounting and auditing research has a longstanding interest in internationalization and globalization. This has largely been focused on national systems of financial reporting, their standardization and harmonization, or on studies of the impact of ‘national cultures’ on the use of management accounting or auditing techniques. We take a different, but we believe important, approach to accounting and globalization by asking the question: ‘‘how is globalization produced and re-produced in everyday managerial * Corresponding author. Fax: +1-780-492-3325. E-mail address: [email protected] (D.J. Cooper). practices?’’ Specifically we examine the inter-relation between coordination of audit work and processes of globalization in a multinational accounting firm. Globalization is not just a process involving nation states, international trade rules, multinational organizations (firms and non-governmental organizations) and transnational institutions, important though these features might be (Annisette & Neu, forthcoming; Arnold & Sikka, 2001; Caramanis, 2002; Catchpowle, Cooper, & Wright, forthcoming). Globalization is a process that also involves detailed everyday activity in the context of diverse local institutions. Attention to how management coordination processes affect the shape and experience of globalization is an important issue for accounting research, particularly when those coordination processes involve 0361-3682/$ - see front matter 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.aos.2004.02.002 2 M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 multinational accounting firms and a core product of accounting, namely audit. Much analysis of globalization has been fairly abstract and based on limited systematic evidence, leading to accusations of ‘globalbaloney’. Beck argues that, ‘‘the pill to be used against abstractness, including the abstractness of the ‘global’, is examples’’ (2000: 26). Accordingly, in this paper we explore globalization process through a detailed, empirical, analysis of some key work practices (Barley & Kunda, 2001) in global coordination. We are also concerned to link this detailed empirical analysis to wider organizational and social transformations. 1 Specifically, we analyze how a project involving multiple locations (in this case, the audit of a multinational client) is organized and coordinated. In so doing, we discuss some of the impacts of these detailed processes on the audit firm and the individuals who work in it. This paper contributes to an exploration of what globalization means to auditors as managers––how it impacts them and affects their identity, decisions and practices. Many people around the world have confidence that the audit product has integrity and legitimacy, even in the face of audit scandals and abuses. The range and diversity of the people involved in its production, the different interests that they may have, and the complex processes needed to produce the service, suggests to us that a credible audit is a considerable management achievement. We thus seek to explain how firm wide systems of coordination of the audit are differentially used and made sense of in different locales, and yet yield an acceptable global product. In this way, our paper builds on the international management literature, for example Bartlett and Ghoshal (1989), particularly its focus on coordination mechanisms (Martinez & Jarillo, 1 There are many examples of accounting research that has linked the specifics of accounting to wider social transformations––Burchell, Clubb, Hopwood, Hughes, and Nahapiet (1980, 1985), Tinker, Merino, and Neimark (1982), Berry et al. (1985) and Miller and O’Leary (1987) are influential examples. Mainstream organization and management literature has rather belatedly re-discovered the importance of such linking––see Stern and Barley, 1996. 1989). We offer a perspective, however, that is informed by social theory rather more than the political and economic understandings that underpin the literature in international financial accounting and management. The focus of social theory is on understanding the processes of globalization and the impacts on nations, communities, corporations and the individual. The emphasis is on interaction, sometimes described by the shorthand of the ‘global–local dialectic’ (Giddens, 1991). The question is whether, and how, globalization, variously defined in terms of the perceived shrinking of the world, the separation of time and space, or the interdependence of major national economies, has simultaneously impacted nations, communities, corporations and the individual. The focus on the impact of globalization addresses the question of whether, and in what ways, globalization has resulted in increasing homogenization and convergence at all levels of society (Guillen, 2001). The particular insight of Giddens has been on emphasizing the structuration of globalization, that is how global tendencies are produced and reproduced through the actions of individuals, how individual actions are informed by local understandings and experiences of globalization, and yet simultaneously affect how globalization subsequently evolves. 2 We concentrate on the firm, professional and individual levels identified by social theory, and leave the community, national and transnational levels to future analysis. Thus, we limit our examination to how a global audit, perceived as satisfactory by the auditors and the client, is produced, and some of the effects on the producer firm and individuals. Our analysis of the structuration of globalization is not intended to celebrate the empirical detail, but to draw out how globalization works, and what some of its implications might be for the management of audit work and the identity of auditors. 2 Note that an examination of globalization processes using our perspective does not necessitate study of many countries or involve what is sometimes referred to as international accounting or management. M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 Our research studied the management of a multinational company audit in multiple offices of what was at the time a Big Six 3 accounting firm, which we subsequently refer to as AuditFirm. We examined the technologies and methodologies used to manage a complex, multisite audit. A particular focus of the study was to examine how an accounting firm coordinates work. At the time of our empirical work the then Big Six accounting firms each operated with about seven to eight hundred offices across the world. These firms are concerned to ensure consistency across offices, particularly in relation to major projects, including audits. While these firms have expanded into a wide range of business services, audit work remains a significant element of these firms, provides an important basis for their claims (across all areas of work) to be professional and objective, and is said to fundamentally influence the ‘culture’ of these organizations (Hanson, 1989). We provide an in-depth examination of audit production across multiple offices in the US and Canada, and between these countries and the lead office in Europe, which manages the worldwide audit. 4 We focus on two key coordinating mechanisms at AuditFirm inter-office instructions and its audit technology, known as REDESIGN. The former reflect the hierarchical nature of an audit involving multiple sites, outlining how the audit is to be consolidated. Inter-office instructions specify, for example, the scope of the audit, what is to be audited, likely critical elements and timelines for major reporting. A series of inter-office instructions cascade through the hierarchy, from the world- wide lead partner, to country engagement partners, and thence down to partners responsible for local subsidiaries within a country. Individual partners at each level use a variety of planning 3 Since the empirical component of the research was completed, mergers have resulted in the Big Six becoming the Big Four. Our descriptions of these firms relate to the time when there were six major firms, but we have no reason to believe the processes analyzed in this paper are dependent on the number of large, multinational accounting/audit firms. 4 We were unable to gain access to study other offices involved in this audit outside of the lead European office and those in North America. 3 tools to determine the audit steps to implement the instructions. REDESIGN is a recent enhancement to the firm’s risk based audit technology (which the firm describes as a methodology), which has been rolled out across audit offices worldwide that not only facilitates, but also raises new challenges for, coordinating work. As an integral part of AuditFirm’s general strategy, the audit technology seeks to improve the efficiency of audit processes (to enhance the profitability of this business) and to further develop its business services to audit clients. This strategic audit approach provides a re-engineered approach to auditing and focuses on encouraging auditors to identify and provide additional, non-audit services, to the client. These are two prominent examples of the mechanisms used by Big Four firms to ensure the coordination, standardization and control of work not just in auditing, but also in many other aspects of their work. Such mechanisms have enabled them to promote an image of a seamless organization, and this view is reinforced when researchers focus on the formal systems of management, such as organizational structures, strategies, incentive schemes and production systems. There have been few in depth field studies (Power (2003) offers a useful review) that shed light on the detailed work practices of audit. Our study of a large multinational audit––where work is done by many auditors, located across multiple locations, and with the engagement partner relying on the work done by other, perhaps remote or even unknown, partners and their local teams–– suggests that the coherence and effectiveness of the audit is an ongoing, but always problematic, achievement. For example, lack of familiarity and various forms of stereotyping can reduce the confidence that one auditor can place on the work of another, even when the ‘other’ is a partner in the same firm (Cooper, Brown, Greenwood, & Hinings, 1998). Systems of peer review and inter-office review, as well as fears of litigation, can mitigate the difficulties of coordinating work, but not completely. By examining actual work practices, our field study of audit work supports the argument of Barley and Kunda that ‘‘significant shifts in the nature of work should coincide with significant changes in the way organizations are 4 M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 structured and in how people experience work.’’ (2001, 77). In particular, we track the inter-connections between globalization of the management of the audit and shifts in the identity of auditors. Thereby, we show that auditors are not passive followers of instructions, but exercise considerable discretion in response to local relationships and risks. Local responses impact the global audit, and affect the ways in which auditors conceive of themselves as professionals, of who is the client and how they identify with the globality of their own firm. The shifts in the nature of work affect how the major accounting firms are structured. Our study suggests an intensification of both globalization and localization. All levels of auditor seem to recognize how local audit work fits into the global, but they also are sensitive and proud of some local audit specificities. This causes some problems for the audit firms themselves. They seek to balance the desire to be responsive to multinational clients, international standard setting and capital markets, and litigation pressures with a wish to allow local autonomy in developing clients and local markets. For local markets, local offices and smaller clients can still be extremely profitable. This causes significant strains within the multinational firms themselves. Audit work is itself changing, beyond the much-hyped technological changes and shifts to a strategic audit approach (Bell, Marrs, Solomon, & Thomas, 1997). Auditors are expected to develop new skills, not only in such obvious dimensions as marketing and business consulting but also in interpersonal skills such as presenting themselves well in face to face interaction and being able to ‘read’ body language of clients and juniors. Furthermore, managing evidence and documentation is increasingly important. At the same time, the boundaries between auditing and services previously considered to be consulting are increasingly confused (as well as inflected by local traditions and rules), as are the boundaries between professionalism and commercialization. The rest of the paper is organized as follows. The next section outlines the empirical study at AuditFirm and its multinational client, ABC. Our research method, a year long observation of the annual audit cycle, is then outlined. In the fol- lowing section we discuss those aspects of Giddens work that are central to an analysis of the structuration of globalization. We can then proceed to our analysis of how two mechanisms are used in the coordination and control of the audit, emphasizing the implications for globalization. We conclude by highlighting the usefulness of our theoretical approach in making sense of our case study, and discuss the implications of our findings for auditing, auditors and audit firms, as well as wider processes of globalization. Research methods Field sites The present study involves a Big Four firm we call AuditFirm. We obtained agreement from the Canadian member firm of AuditFirm to conduct a detailed study, in real time, of the audit over a period from July 1996 to September 1997. Through the Canadian firm, we also obtained access to the worldwide engagement team and the US audit team. We had full access to the current (and past) audit working papers and files of ABC, AuditFirm’s audit client. ABC is a fairly decentralized, multinational manufacturing company operating in eight countries with revenues in 1997 of approximately US $1750 million. ABC’s corporate headquarters are in a European country, referred to as Ruritania, 5 and the worldwide engagement partner and controlling audit team of AuditFirm are also based in Ruritania. Country engagement partners report to the worldwide engagement partner, and where there are geographically dispersed operations of ABC (as in the USA and Canada), partners of local offices within each country report to the country engagement partner. Our study focused on the audit of the Canadian and US subsidiaries of ABC, which are consolidated at the North American headquarters, located in the US. In 1995, the North American operations had revenues of about US $600 million, 5 The condition of our access to ABC’s working papers was that we maintain the anonymity of the firm. M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 somewhat below the revenues of the previous year. The Canadian engagement partner took over this role in 1996, although she was very familiar with ABC, having been manager of this audit before she had become a partner, a few years previously. The worldwide and US engagement partners had been working on the ABC audit for many years. ABC has been involved in a series of mergers and amalgamations within the last twenty years, and during this time has used a number of audit firms as its principal auditor. At the time of our research, AuditFirm were confident about their continuing to act as auditors of ABC, although the audit of some operations of ABC were conducted by other audit firms. The audit we observed is regarded by the Canadian audit team as fairly straightforward and low risk, raising few contentious matters. The Canadian auditors regard the accounting staff in the Canadian subsidiaries of ABC as very competent, and AuditFirm and ABC have a very cooperative relationship. Clearly our study may be of a particularly smooth audit, enabling a straight forward application of the firm’s ‘risk based’ approach to auditing, but as such, this only serves to accentuate key issues about challenges in audit planning and coordination. Both the client and AuditFirm believed the audit ‘went well’; there were no major contentious issues, and the audit went according to plan. Of course, we are unable to determine whether the audit was successful for external stakeholders, and there are certainly public interest concerns about modern audit approaches (Cullinan & Sutton, 2002; Francis, 1994). But there have been no subsequent lawsuits or other controversies for ABC relating to their financial statements in the year under examination. Research process Between July 1996, when we formally obtained access, and January 1997, we spent considerable time interviewing the Canadian audit team in their offices, examining AuditFirm documentation about their audit systems, attending firm training sessions about these systems, obtaining clarifica- 5 tions and interviewing the management of ABC and examining and learning about their financial records and systems. Table 1 provides a chronology of our data collection, including our initial interviews to gain access. In December 1996 and January 1997 we intermittently observed (usually for periods of about three hours at a time) one local Canadian audit team as it audited the files of a number of Canadian subsidiaries of ABC. Conversations between members of the audit team were tape recorded and transcribed, as were our periodic questioning of what the audit staff was doing, and their reasons. These visits also involved brief, but repeated, interviews with the three members of the local audit ‘field staff’, and tax and IT specialists from AuditFirm who visited ABC. In February 1997, after most of the local audit work was done on ABC’s Canadian subsidiary, one member of the research team spent a week living and working with four members of the Canadian audit team when they were ‘out of town’ at the client’s North American headquarters. A second member of the research team accompanied the lead Canadian partner when she joined the auditors for the last three days of the ‘out of town’ work. For three days, a specialist tax manager from Canada also joined us, working on some tax issues relating to inter-corporate transfers. While we were accompanying the audit team ‘out of town’, we all worked together in the client firm’s boardroom. This enabled us to observe interactions between the Canadian audit team, and discuss with them what they were doing, and why. We noted our observations as they occurred, and then developed our analysis after the work-day of the audit team. During this week long period, we interviewed the US engagement partner, the manager responsible for the US audit and two other members of the US audit team. We shared all meals and informal social activities with both the Canadian and US auditors. For both audit teams, their time was spent completing the audit of the Canadian and US subsidiaries, consolidating results for North America and preparing special reports for the worldwide audit team. We also interviewed three senior financial officers of ABC, their chief internal auditor and observed the 6 M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 Table 1 Data collection Date Person/event Length (h) June 1996 July 1996 September 1996 October 1996 December 1996 Canadian Engagement Partner (2) Canadian Engagement Partner and Manager Canadian Computer Auditor Canadian Engagement Partner ABC CFO, Canadian subsidiary 3 Visits to Audit Team at ABC, Canada 2 Visits to Audit Team at ABC, Canada AuditFirm Training Workshop Canadian Engagement Partner and Manager Canadian Engagement Partner Canadian Engagement Manager Audit Senior, Canada Audit Junior, Canada Computer Auditor––regional specialist (2) ABC CFO, Canadian subsidiary Tax accountant––Canadian regional specialist ABC Controller, North America ABC Accounting Director, US subsidiary ABC VP Finance, US subsidiary ABC Internal Auditor, US subsidiary US Engagement Manager (2) US Engagement Partner US Audit Team (combined) Observation of closing meeting between US and Canadian Auditors and senior ABC Managers Canadian Engagement Partner AuditFirm Training Workshop Canadian Audit Partner, Office 1 Canadian Audit Manager, Office 1 Canadian Audit Manager, Office 2 Audit Senior, Canada Audit Junior, Canada Audit Junior, Canada ABC CFO, Canadian subsidiary Audit Senior, Canada Observation of planning meeting of Canadian Audit Team Canadian Engagement Partner Canadian Engagement Partner and Head of Audit Worldwide Engagement Partner, Ruritania Worldwide Engagement Manager, Ruritania (2) Canadian Engagement Partner 1.5 each 2.0 1.0 2.0 1.0 3.0, 2.0, 3.5 2.0, 2.5 6.0 1.5 1.0 2.0 0.5 0.5 1.5, 1.0 1.5 1.5 1.0 1.0 0.5 1.5 1.5, 1.0 1.0 1.0 1.5 January 1997 February 1997 April 1997 May 1997 August 1997 September 1997 formal closing meeting between the North American auditors (the Canadian and US engagement partners and managers) and three members of the North American senior management team of ABC. We continued with regular research visits to the Canadian office and the ABC subsidiary in Canada throughout the period July 1996–September 1.5 3.5 1.5 2.5 1.5 0.5 0.5 0.5 1.5 1.0 2.5 1.5 3.0 4.0 1.5, 1.5 1.0 1997. These visits included formal interviews with all members of the Canadian audit team, as well as attendance at formal training sessions about new audit support technology. In May, we visited two other Canadian offices, and interviewed three members of the local teams involved in the ABC audit. In addition, all members of the research team had an extensive interview with the Canadian M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 engagement partner and the head of AuditFirm’s audit practice in August 1997. At that time, we also observed the planning meeting for the following year’s audit of ABC, and had a further meeting with ABC’s senior Canadian financial officer. Finally, in September 1997, two of the research team visited Ruritania, spending two days at AuditFirm’s offices, including four hours with the worldwide engagement partner, a further three with the worldwide senior audit manager, and had access to their working papers for the worldwide ABC audit. Data analysis Together, the interviews, documentary analysis and observations helped us understand the audit methodologies and technologies, and to better understand how AuditFirm is organized and managed. We also had a series of interviews with the accounting staff of ABC in order to better understand its history, how it is organized and the locus of decision making (e.g. around who should be the auditor). Except for one occasion when a partner declined to be recorded, all thirty-seven interviews were tape recorded and transcribed. It was impractical to tape record the days of field observations, but we kept extensive notes. We started our analysis by searching all our transcripts for key words and themes suggested by our theoretical perspectives and research questions. By using an embryonic version of Table 2 as a means to structure our analysis, we provide theoretical generalizability, while remaining committed to our in depth empirical material. We started this project with a concern with the role of space in processes of globalization, the use of technology in planning and control, and the changing nature of professional work and expertise. We were influenced by the ideas of Giddens, who integrates these themes in his broad social analysis of contemporary society (Giddens, 1984, 1990, 1991). Our early interviews were structured around these issues, notably what we now refer to as ‘abstract systems as coordinating mechanisms’ but as our fieldwork progressed we became more sensitive to issues of the local–global dialectic. Issues of reflexivity and identity became more apparent when we observed the auditors at the client, and as a result of some of the later, de-briefing interviews. The researchers periodically met to try to minimize the tendency to find examples in the data that merely confirm our ideas (Silverman, 1985). Indeed, our approach has been to immerse ourselves in the data analysis and to collectively reflect on, and discuss, our observations. As researchers we must remain skeptical about what was said to us, while at the same time remaining tactful so that those we observed had some trust in our competence and good will. By nearly always working in pairs, discussing our impressions about the reliability of what was said to us and developing interpretations of our observations, we were able to sustain our skeptical attitude in data collection. Our involvement inevitably affected the conduct of this audit, but we believe our presence did not materially affect the way they worked or inter-acted. De-briefing interviews with the audit staff in Canada confirm this impression. We have also discussed our Table 2 Key theoretical concepts for understanding globalization as a structuration process Theoretical elements Main themes Local–global dialectic • • • • Abstract systems as coordinating mechanisms Reflexivity and identity • • • • 7 The global reproduced in the local Local appropriation of the global Local appropriation feeds into and shapes the global Abstract systems facilitate standardization across contexts and provide a key coordinating function Coordination mechanisms understood as processes of disembedding Importance of trust, understood as confidence in persons and abstract systems Institutional reflexivity is interrelated with the ongoing construction and reflexivity of identity Local appropriation of abstract systems can both facilitate and undermine their use 8 M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 findings (including earlier versions of this paper) with representatives of the Canadian AuditFirm firm, which led to some modifications. Theoretical approach We draw on Giddens (1990, 1991, 2000) social theory on globalization in analyzing our empirical fieldwork. Giddens emphasizes the importance of the local–global dialectic as being fundamental to the process of globalization. He defines the local– global dialectic as ‘the oppositional interplay between local involvements and globalizing tendencies’. Rather than viewing globalization as involving linear convergence or a unilateral, onedimensional analysis, Giddens (1991) suggests that the local both feeds into and shapes the global, and the global constrains and enables the work done at the local level. Furthermore, he highlights that globalization as a process involves intensification of the interconnections between the globalizing tendencies and the transformation of self-identity. As we show in later sections, this conceptualization of globalization and the local–global dialectic is particularly useful in our study of managing a global audit by focusing on the inter-connections between processes of globalization of audit work and transformations of the identity of auditors. Giddens suggests that globalizing tendencies are inherent in the dynamics of modern life and involve the disembedding of social institutions–– ‘‘the ‘lifting out’ of social relations from local contexts and their rearticulation across indefinite tracts of time–space’’ (1991: 21). The separation of time and space, which Giddens refers to as time– space distanciation, is facilitated by the development of abstract systems, and discussion of these is central to our analysis of the coordination of audit practice. Abstract systems are mechanisms that enable disembedding, ‘separating interaction from the particularities of locales’ (Giddens, 1991, 20). He further suggests (1991, pp. 149–150) that modern institutions are increasingly globalized through mechanisms of administrative power (notably surveillance) and control (including self control). Thus abstract systems encompass much more than formal organizational systems: they include issues of self-control. The idea of self control, first introduced in the accounting literature through Miller and O’Leary’s discussion of the ‘governable person’ (1987), also means that systems of management affect the dilemmas of the self (Giddens, 1991). We are all affected by a multitude of abstract systems, and, since these systems are increasingly produced by specialist experts, we can only partially understand their technicalities. These systems thus depend upon trust for their operation, where trust is defined as having faith in the working of systems, despite possessing only limited knowledge of these systems (Giddens, 1989). As we will show, people can have confidence in differing systems at different times and places, so trust has multiple dimensions and emphases, yet some form of trust is crucial in both social and system integration. Social integration refers to social relations in conditions of co-presence, which in contemporary society is augmented by forms of system integration, involving coordination and reciprocity across time and space. Our study demonstrates how concerns about social integration simultaneously contribute and undermine the firm’s mechanisms of system integration. Whilst acknowledging the development and spread of abstract systems in modernity, Giddens suggests that the individual, in appropriating these systems, does not necessarily succumb to them; rather there is a genuine transformation of the nature of the personal itself. The self has become a reflexive project in modernity, involving changes in self-actualization and anxiety (for example, about what it means to be an auditor, and what is the nature of audit work). This reflexive project extends to, and connects with, institutional reflexivity, the idea that in modernity people and organizations not only attempt to ‘know themselves’, but constantly strive to change as a result of this self-knowledge. Institutional reflexivity affects use of abstract systems such as common audit systems, since these may both be facilitated and undermined by local knowledge and practices. For example, knowledge about the local audit client and an auditor’s confidence in local client management can undermine abstract systems such as M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 formal instructions from the engagement partner through local appropriation by the auditor. In addition, changes to what constitutes the audit and ‘audit work’ can create anxiety; the reflexive auditor actively seeks to construct his/her identity in developing new roles and performing new work practices (e.g. consulting on business advisory services in addition to performing traditional audit work). Drawing from the above discussion, Table 2 summarizes some key concepts for understanding globalization––the local–global dialectic, abstract systems as coordinating mechanisms, reflexivity and identity. In the next two sections we examine the role and use of two abstract systems, namely interoffice instructions and a new risk based audit methodology, REDESIGN, as key aspects of the globalizing process and their interrelation to coordinating of work practices in the accomplishment of a global audit at AuditFirm. In so doing, we also discuss the dilemmas of the auditor, how their self-identity is affected by these systems. 9 overruns, and further details of reportable items and the report packages. As the Canadian manager put it: ‘‘Our office in Ruritania would coordinate the audit at a world wide level and they would issue instructions to all the AuditFirm offices around the world that will be helping out in the audit. What we actually do is we issue a report to our office in Ruritania saying what we have audited and they specify the levels they want us to report, problems and issues and things. We clear to them and they issue a report on. . . the world-wide financial statements, of the ABC group.’’ Notice that the inter-office memos are a system of instructions that cascade through the organization. The national engagement partners specify to each office within their own national partnership what work should be done, with a budget for the amount of hours to be spent on the job. The Canadian lead partner elaborated the material required from local offices: Inter-office instructions (Re)producing the global in the local Inter-office instructions are used to coordinate audits that involve multiple partners and offices. Typically, these instructions are produced by the engagement partner, and provide the basic framework for the coordination of work. They enable the expertise of engagement partners and teams to be deployed in multiple places around the world. In this section we focus on how these well-established systems facilitate the coordination of audit work across time and space, which both include opportunities for local reappropriation of the global, and the shaping of the local by the global influencing work done at the local level. The audit team in Ruritania specify in the instructions the scope (full or limited review) of the audit examination at each subsidiary and the level of materiality for global consolidation. The engagement office in Ruritania also requested to be informed about a range of issues, notably critical internal control points, significant budget ‘‘You would detail things such as when we expect them to report, what we want the report to look at, what we expect the memorandum to include, what the fees you are allowed, what we want to see with respect to internal control points.’’ The codification and standardization of instructions is an integral part of the management of the audit, allowing for a ‘stretching’ of these audit practices across the different offices, which are dispersed in time and space. The global audit can be seen as a highly integrated process, driven by the worldwide audit team in Ruritania. In this view, the ultimate client is the headquarters of ABC in Ruritania, and AuditFirm conducts an audit on the consolidated accounts of that corporation, consistent with the legal requirements in Ruritania, and consistent with the reporting requirements of the Ruritania stock market (where ABC’s shares are traded) and other regulatory agencies. Accordingly, the inter-office instructions ‘stretch’ the regulatory 10 M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 conditions of Ruritania to the offices of North American auditors. They also ‘stretch’ the negotiations between the Ruritanian engagement team and the management of ABC about the scope of work and deadlines for reporting. In short, the instructions communicate to offices spread throughout the world how the engagement team wants the audit conducted and what financial issues they want examined. However, the North American auditors appeared to have little appreciation of the differing institutional structures in Ruritania, structures that meant that the nature of the Ruritanian governance and reporting requirements were quite different than those faced by a North American multinational. It was only when we visited the worldwide engagement partner that we realized the dramatic differences in the institutional structures that affected his inter-office instructions to the rest of the world. The worldwide engagement partner defined his role as follows: ‘‘. . . We have got 3, no 4, reporting lines. 1. the shareholders of ABC, 2. the majority shareholder . . . (3) the regulatory authority [in Ruritania] and then 4. we have this special situation . . .. where the auditor has to report to the works councils.’’ These global requirements, reflecting the local in Ruritania, are amplified through the inter-office instructions to affect the local in North America. Note that knowledge of these institutional differences is unnecessary at least for routine work––the instructions guide the work. However, as we will see below, the local appropriation of these instructions also differs within and between the Canadian and US audit teams. AuditFirm, who had recently reinforced the power of the worldwide engagement partner, has strengthened these inter-office instructions as planning mechanisms. These partners now set rates, determine who should work on the job and specify how the work should be done (Greenwood, Rose, Brown, Cooper, & Hinings, 1999). The physical or symbolic distance from the head office of the client and the office of the engagement partner affects the discretion of the auditor. 6 Indeed the increased authority of the engagement partner means that the worldwide lead partner can accumulate more profit to his or her office, and similarly the country engagement partner tends to receive more profit than those partners who are doing work away from the centre: as one partner in a local office put it, ‘‘you are at the end of the feeding chain.’’ Toffler (2003) makes much the same point in her discussion of how ‘profit sharing’ worked at Arthur Andersen. The importance of the inter-office instructions and the authority of engagement partners may lead to premature conclusions that reinforces a view of the organization as increasingly global. We explore the globalization process more fully, however, showing how the abstract, but detailed, set of instructions trickle down from the worldwide engagement partner to each of the national lead partners, and how these instructions are made sense of, and acted on. We thereby identify the differential understandings and experiences of ‘the global’. Fundamentally, despite the specifications in the inter-office instructions, the North American auditors viewed the focus of their work quite differently from the perspective of the worldwide engagement team in Ruritania. Moreover, the Canadian and US auditors had significantly different views about the authority of the inter-office instructions and how the audit work should be carried out. We explore these differences to demonstrate the opportunities for local appropriation of global instructions. There is an important point that needs to be stressed at the outset of our analysis. The local appropriation of the system of inter-office instructions, while producing some variability across space, also aids in the reproduction of these global systems: ‘‘The structuring properties allow the ‘binding’ of time–space in social systems, the properties which make it possible for discernibly similar social practices to 6 Of course, this statement should not be read as suggesting a mechanical rule whereby discretion is a function of distance. Rather, it reflects a tendency related to those who are at the centre and those who see themselves, or are seen by those at the centre, as periphery. M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 exist across varying spans of time and space and which lend them ‘systemic’ form’’ (Giddens, 1984, p. 17). At the same time, ‘‘structural constraints do not operate independently of the motives and reasons agents have for what they do.’’ (p. 181). Local agents appropriate and shape the global systems, but in so doing, reproduce the basic similarity of their work. The local appropriation alters the specifics of the instructions and affects the nature and volume of work that the local auditor does, but the audit continues as the global engagement team intended. However, local actions can alter the global team’s understanding and instructions for audits in the future, and perhaps even in other places where the audit takes place. We learned that alterations to the conduct of the audit were based on the North Americans’ audit experiences, which were communicated to the worldwide engagement team, and thence to the other national engagement teams. The worldwide engagement partner informed us that the ability of the North American audit teams to feed into and shape the global reflects their higher status compared to those in other countries. Local appropriation of the global: the case of materiality levels One of the major elements in the inter-office instructions specifies the materiality levels for the audit, levels which have implications for the scope of the work. Materiality levels indicate to the local auditors the amount and type of work needed to conduct the audit. The determination of a materiality level is crucial to an auditor in terms of balancing the risk of failing to detect a major error in the client’s financial records versus doing so much work that the audit is unprofitable. AuditFirm’s Inter-Office Examination memo of 1996 set a level of materiality for group reporting purposes for ‘‘items affecting net income of 5% of reported profit before taxes with a minimum of [local Ruritanian currency, then approximately US $600,000]’’. This level was their judgment of what they needed to assure themselves that the consolidated financial statements were ‘materially’ free from error. The US and Canadian auditors used this level of materiality for reporting to Ruritania. 11 But, as the materiality guidelines in the AuditFirm Examination Instructions allow, the Canadian auditors chose a level of materiality for Canadian statutory accounts (CAN$ 3 million) which was nearly four times the level requested by Ruritania. This higher level represented the Canadian lead partner’s assessment of the relatively lower risk of the Canadian subsidiaries. The Canadian engagement partner saw minimal risk in the audit, and the work done in Canada was increasingly different from the global requirements specified in the inter-office instructions. The Canadian partner reflected on the changes she had made: ‘‘This year our instructions are pretty much the same. I changed some when I took the audit over and I wanted to personalize it? we changed the materiality [at the individual account level] and bumped it significantly and a few things like that, but other than that they are essentially the same.’’ (Emphasis added) Her personalization of these instructions reproduces the local autonomy of partners in AuditFirm. It is also made possible by the reputation of Canada and AuditFirm’s internal control system as having a mature, well developed and reliable set of audit institutions and practices. The world-wide engagement in Ruritania could trust the judgment of the Canadian auditor: ‘‘I know they are applying AuditFirm standards, they are going through quality control processes on a regular basis. So, I expect the quality is there on the assignment.’’ (World wide engagement partner) These changes were incorporated into the audit instructions and subsequently sent out by the Canadian managing office to the branch offices participating in the audit. The branch partner remarked: ‘‘We received the inter office instructions. I had virtually no involvement in planning as the scope of work is predetermined.’’ This partner seems not to feel close enough to affect the overall planning of the Canadian audit, but, in a manner equivalent to discretion of the Canadian lead partner in relation to Ruritania, the branch 12 M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 partner does determine the level of detailed audit work in relation to his/her local client. Two points about materiality levels in interoffice instructions need emphasizing. First, the Canadians have the discretion, the local autonomy, to make this decision. All they must do is provide a report to Ruritania indicating that, in their judgment, the financial statements of the Canadian subsidiaries are ‘‘presented fairly in all material respects’’. The lead Canadian partner discussed her approach as follows: ‘‘Ruritania gives some guidance, but at the end of the day we are giving a GAAP opinion. What Ruritania asks us to do is to report to them on a given levels of materiality. That’s within the range of the scope that we do our work, but for our Canadian GAAP statements we are guided by our Canadian materiality guidelines, our auditing guidelines.’’ Second, that materiality levels significantly affect the amount of work that needs to be done on the audit. If an auditor is checking a small subsidiary, then a higher material level may result in what is known as a ‘desk review’, checking the reasonableness of the client’s statements by comparing key ratios with previous years and with the auditor’s knowledge of similar types of business. So, increasing materiality levels, drives the amount of hours on the audit down. As a manager in one of the branch offices of the Canadian audit commented, ‘‘I regard the materiality level as so high on this job that it’s almost a review job.’’ The dialectic between abstract systems and local identities Auditor appropriation of abstract systems such as the materiality levels specified in the inter-office instructions was further influenced by the client relationships developed between local engagement partners and the managers of client subsidiaries. For example, the Canadian audit team consistently talked about their client being the local ABC management, even though these managers had no involvement in decisions about the scope of the audit, or even which firm should be the auditor. This is not surprising since the AuditFirm partner leading the audit in each country would negotiate the fees and work to be done with the management of their respective subsidiary of ABC. As a member of the Canadian team put it to us: ‘‘It’s [the CFO of the local ABC plant] who we take to the hockey game. He’s my client.’’ To reinforce the point, the Canadian auditors pointed out that they have never met the auditors from Ruritania. Maintaining relations with the local managers of ABC was much more salient for the Canadian auditors. The local client managers shared a sense of place with the Canadian audit team, a pride in the local community, their pre-occupations, and a concern with local issues. The auditors resented many of the demands coming from Ruritania, or regarded them with passive indifference: ‘‘Ruritania, is I guess, an internal client––we have got to keep them happy but it is the external client that’s critical. The way we view the inter office correspondence is you have got to meet their needs. Generally you try to satisfy that within the GAAS audit work––if they ask you to go over and above, then you will do it. I am not going to take their instructions and build my whole audit around that. I will build my own audit and look to what they want, and see if there is anything extra.’’ (Canadian engagement partner) Similar sentiments were expressed by the (relatively new) US audit manager, who also felt distant from Ruritania: ‘‘[Our] relationship with Ruritania is nonexistent. All they do is send us a package. [The US Partner in charge] talked to [the Worldwide engagement partner] a bit at the beginning of 1996. But they have no contact with me.’’ (US audit manager) In general, however, the US firm viewed Ruritania as their client and conducted their audit around the inter-office instructions. This contrasted with the Canadian partner’s approach, as she explained: M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 ‘‘I think there are some differences between the Canadian and the US firm. I think at the end of the day we get the same product out, but we might go about it a little bit differently. Why they are more focused on Ruritania, I have no idea.’’ There were quite different risk exposures facing the two subsidiaries of ABC. The US subsidiary operates in a more litigious environment, was making a loss, and the US office responsible for the audit had changed in the previous year. It is thus unsurprising that the US audit partner followed Ruritania’s instructions more precisely than the Canadian. Another way the local feeds into the global audit is how the different national audit teams identified with ‘their’ own multinational. Both audit teams lamented that the world wide engagement partner had not visited them, and they speculated frequently about the progress of the audit in other jurisdictions around the world. When the two national audit teams from North Americans spent social time together (in the bar or at mealtimes), the main topics of conversation were comparative charge out rates (and salary levels of people at equivalent levels in the two offices), and the direction and future of AuditFirm. This is hardly surprising, but physical co-presence highlighted for these auditors their common anxieties, how little they knew about AuditFirm, but also how they shared a common, global fate, both in relation to the future of AuditFirm but also about their future involvement in the ABC audit. The global is inflected, or given meaning, by the specificities of the local. 7 This feeling of distance worked its way throughout AuditFirm. A partner in one of the offices, which did a significant amount of work for 7 Beck (2000) provides a vivid example of this process. Food from a specific region or nation––say Mexican food––is now available almost throughout the world, and there are some fairly universal expectations about the menu. But what Mexican food means in Mexico, may be quite different from its nature and meaning in London, Dallas, Amsterdam, Hong Kong, or Mexico City. Mexican food is both the same and quite different around the world. 13 the Canadian audit, commented that they ‘‘were not close enough’’ to influence the scope or budget of the work; they just accepted the instructions from the Canadian lead partner. Yet, for them too, the client was the local plant management of ABC, not the Canadian lead audit partner, to whom they reported. We suspect that local appropriation of inter-office instructions occurred at this level too. It is worth concluding this section by reemphasizing that these local decisions feed into the global statements, and that the global instructions constrain and enable the work done at the local level. This is what Giddens refers to as the dialectic of the global–local (1991) and when Beck argues that ‘‘the local must be understood as an aspect of the global’’ (2000, p. 48). Formal systems are an integral part of an audit, enabling the necessary centralization and standardization of audit work. While these technologies seek to provide coordination, standardization and control, our study also highlights the role of partner autonomy, local understandings of risk exposures and client relationships. The reappropriation by the local partner suggests that whilst abstract systems involve a disembedding of social and work practices across time and space, there is still significant attention to local work practices, legal traditions and knowledge both in how these systems are appropriated and how they come to be re-embedded in different local contexts. Specifically, the global engagement partner may use these systems quite differently from national lead engagement partners, who may use them quite differently from those at the branch level. For example, we noted that whilst national lead partners actively reappropriates these systems, the branch offices, which were not only ‘distant’ in space but also remote in the management of the audit, had lower levels of reappropriation. Furthermore, the ‘global–local’ dialectic suggests, that the use of these systems is always constrained and enabled by actions and events occurring at these multiple interconnected levels. Thus, there are often different forms of reappropriation occurring at different rates in each of the participant offices. Such differences feed into the complexity and challenge of managing across offices, particularly in terms of effective co-ordination. 14 M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 Audit methodology: REDESIGN In this section, we examine a quite different but equally important abstract system, REDESIGN. It was the most recent manifestation of the firm’s risk based audit methodology which was rolled out across their national offices worldwide and facilitated the coordinating of work for the accomplishment of the ABC audit (descriptions of such methodologies can be found in Bell et al. (1997), Winograd, Gerson, & Berlin (2000) and Eilifsen, Knechel, & Wallage (2001)). We explore REDESIGN as an integral mechanism for coordinating audit work across offices, and how this methodology affects trust within AuditFirm. REDESIGN was explicitly described in AuditFirm training materials as re-engineering the audit. This re-engineering has three key elements: a move to reduce documentation, reviewing audit work through interviews (both linked to efficiency gains and reduction of litigation risk), and a focus on developing a ‘business advisory mindset’ (which we understood to encourage cross selling and increased commercialization). These features can be usefully examined using Giddens’s structuration approach to see how the global–local dialectic is played out in the context of the audit firm. Abstract systems and new forms of trust Documentation mechanisms, trust, and coordination effects A major focus of REDESIGN is how audit documentation is re-conceived, which has consequences and implications for trust and legal exposure. REDESIGN replaces what is now seen as unnecessary and extensive documentation with a brief statement that merely states what work has been done, and how. Less documentation underscores how different forms of trust are differentially involved. The firm’s legal advice appears to be that the courts are not to be trusted with documents––that errors in documentation may be used by lawyers to allege negligent audit work, that ‘petty’ errors such as a failure to sign a page of the working papers, or missing pages may be ‘misinterpreted’ by courts as evidence of poor working practices. Further, the reduction in documentation involves a shift in the nature of the evidence collected and documented––less supporting evidence is kept in the form of client vouchers and details of work done, and more is documented about the processes carried out by the auditor. Conceptions of what is risky seem to shift from a concern with clients’ documents to ensuring audit processes are carried out. Documents themselves are seen as risky––capable of being used in courts against the auditor; partners indicated that the firm had obtained very careful legal advice on this issue. This push is reinforced by planned moves to a ‘paperless’ audit 8 and to get auditors to think about providing additional business services and advice. At training sessions and our de-briefing meetings with a number of junior auditors, some of them expressed discomfort in signing off without traditional forms of documentation, such as a bank reconciliation, being in the file. There was also confusion about what should be included in the file, and concerns that it would be hard for next year’s auditors to follow last year’s working papers without sufficient documentation. These concerns highlight the discomfort produced by auditors with the (lack of) interaction with other auditors (social integration), in this case those working on the audit in future years, who are absent in time and space. These interactions had previously been mediated by confirmatory documents, such as bank reconciliations and detailed notes that can help future auditors understand what had been done in previous years, which had formed a link between auditors from one year to the next. The fear was that previous years’ work would now be even more ‘distant’. Coordinating the audit over time was seen as requiring extensive documentation from one year to the next, especially when there was significant turnover of staff on the audit over time. The reduction of documentation requires new forms of trust relations based on abbreviated reports of the procedures used to sign off the audit components. Future auditors would no longer have the benefit of actual physical evidence of the 8 Such a drive was more recently highlighted in Arthur Andersen’s shredding of documents related to Enron. M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 work done in previous years. Interestingly, fears about the reduction in documentation and new documenting practices came mostly from junior auditors, who seem to like to fully document their work. Junior auditors are inexperienced and are anxious about the visibility of their performance the loss of a paper trail to guide and justify their work increases their anxiety and uncertainty. Review by interview and face-work trust REDESIGN seeks to significantly reduce the time spent on an audit by introducing a ‘review by interview’, which has implications for increased face work in the coordination of the worldwide audit (Boden & Molotch, 1994; Nohria & Eccles, 1992). Face-to-face reviews replace the traditional practice of writing review notes and subsequently clearing them with a supervisor (a similar process is described by Winograd et al. (2000)). A senior audit partner said that it is expected that REDESIGN will reduce the required hours on an audit by 20%. With the new approach, significant issues are reviewed and discussed between senior and junior auditors, as soon as possible after the work had been conducted. These changes involve an intensification of face work commitments, which require the development of new forms of trust relations between auditors and their managers in face-to-face interaction. Auditors are expected to be trustworthy in remembering what they did, and orally communicating that effectively. Senior auditors are to be trusted in eliciting the ‘truth’ from junior auditors. Partners and senior auditors now face the risk that the junior auditors have not actually done the work they say they have. It seems they will either have to trust or develop other ways of monitoring the work of juniors. Review by interview imposes risk on junior auditors and affects their sense of the audit being more challenging: while a satisfactory response can enhance their reputation, it also requires a immediate response, without the benefit of researching the appropriate answer. All the juniors we talked to stressed that audit work was nothing like what they expected when they entered the profession: it was less bureaucratic and more intellectually challenging. 15 There have been mixed reactions to this approach as became evident during an in-house workshop on REDESIGN. Managers and partners generally believe that junior staff like the increased interaction as it provides more opportunity for them to talk with partners. On the other hand, some of the junior staff have already coined the term ‘review by interrogation’, and are clearly not comfortable with the perceived ‘interrogation factor’ which accompanies this approach. Auditors now need to be prepared to justify their audit opinion on the spot, describing the steps they took in arriving at their opinion. 9 While some junior auditors on the ABC audit expressed enthusiasm to us for ‘review by interview’, they also indicated that other junior auditors in the office felt significant anxiety with the process. Apparently for ‘others’, face to face interviews implied greater scrutiny of their work, could expose areas of ignorance, and served to increase surveillance and control. The Canadian junior auditors of ABC reported to us, however, that review by interview was an opportunity for personal interaction with their seniors, a way of demonstrating their competence and getting to know the partner, and they believed this would increase the partner’s trust in them (Nohria & Eccles, 1992). The nature of our access did not provide us with the opportunity to observe more than one or two such interviews, so we cannot comment on the dynamics of the interactions, the co-ordination of bodily movements and the minute details of body language that Goffman and Giddens stress in their discussion of processes of social integration, and how they help reproduce social life. However, in the interactions we did observe, it was clear that the self-confidence of juniors (which seemed linked to their performance on professional examinations) significantly affected the style of interaction, and was influenced by the extent to which others trusted their competence as competent auditors. 9 In the ABC audit, we observed that the review often took place as soon as the work had been done. This no doubt depends on the extent and availability of the audit partner and/ or manager ‘in the field’. 16 M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 These activities together involve a significant increase in face work commitments, with new webs of face-to-face interaction being embedded in place. As Boden and Molotch (1994) argue, increased use of formalized systems and information technologies increases the compulsion for co-presence and proximity. They provide numerous examples of the importance of co presence, which ‘‘is thick in information’’ (Boden & Molotch, 1994, p. 259), and argue that ‘‘the proclivity for co presence is especially strong. . . [in] conditions considered sensitive, complex, or uncertain’’ (p. 270). These are characteristics of auditing, particularly when it involves multiple locations and personnel. Auditors seem to prefer physical documents and signatures (rather than copies and faxes)––a longstanding preference which has been supported by the courts––but also means that they strive to upgrade their modes of communication. Auditors who were out of town seemed to want to speak to people on the phone, rather than relying on email, even when matters weren’t urgent, and would often prefer reassurances on apparently minor matters from coworkers from both AuditFirm and ABC based on face to face interaction, rather than phone calls or written statements and notes. This compulsion for face to face inter-action and social integration could be a response to boredom, insecurity or loneliness, but these possibilities did not appear to be the dominant motivation for our observations. Yet, this compulsion becomes increasingly difficult to achieve as auditors are physically dispersed across offices and countries. Extending the philosophy behind ‘review by interview’, the worldwide engagement partner in Ruritania summed up his general attitude to face work: ‘‘My dream is to set up a meeting [of all those working on the ABC audit] at the same time as the controller’s meeting of ABC, bringing everybody together. . . I am in favour of bringing people together because whether the electronic system is providing, it is the eye-to-eye contact which is the most important. That is where you get immersion on top of the message itself. It is key.’’ Reflexivity and identity: redesigning audit and the shift to the auditor as business advisor Training sessions stressed that the purpose of REDESIGN is to get auditors to ‘refocus and rethink’ the operation and purpose of an audit. This refocusing has significant implications for the identity of auditors, their role, and the changing nature of their work. Furthermore, how REDESIGN is locally appropriated within different offices, and the increased focus on business advisory services, has implications for coordination and control of global audits. As one audit manager remarked: ‘‘(The idea is to) drive your commodity to be the most effective, efficient audit so that you can deliver for your clients, and free up your people (auditors) to deliver business advisory services that clients are looking for.’’ The REDESIGN methodology involves increased face work activities in client-auditor relationships, to facilitate the auditor trying to sell business advisory services. To the partners we talked to, this is a major promise of REDESIGN. Whilst business services have always been important, selling them had typically been seen as the responsibility of audit managers and partners. The new orientation is to involve audit staff at all levels in providing what are seen as more profitable activities for AuditFirm. A significant component of the training session on REDESIGN involved convincing junior auditors, some of whom had graduated from University less than a year previously, that they could contribute to the identification of potential problems with, and solutions to, the client’s business. Many of the junior auditors had mixed reactions to this challenge; it opened up the risk of seeming foolish and ignorant to the client but simultaneously left them feeling that they had something imaginative and innovative (albeit constrained by the range of services offered by AuditFirm) to offer. Young auditors were encouraged to think about and apply the knowledge gained in university courses such as marketing, finance, production, and organizational design. Such knowledge M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 would help them to identify problems in the client firm, and to suggest advice about solutions. Junior auditors were requested to keep a ‘learning journal’ of reflections on improvements that could be made to how they carry out their part of the audit. These improvements were then proposed to clients as potential business advisory services. In this way, the role and strategy of AuditFirm as an accounting firm that sought to extend its services had significant implications for the identity of the most junior auditor. To facilitate the increased delivery of these business services, REDESIGN also seeks to increase the length of the audit cycle. This is an example of the way in which firms can ‘stretch’ time, to use it more efficiently, in the pursuit of profit. Increasingly, the audit work is being spread over the year instead of being crammed into the short audit season following year end (when resources are particularly scarce). An important part of this approach is to allow more time for relationships to be developed between auditors and clients. Certainly there was an emphasis in getting to know the client and even the most junior auditor was expected to wander around and be friendly, not so much to check details of the audit work per se, but to ensure the client had a positive attitude about the audit team. It is believed that this can be best accomplished by having more frequent periodic discussions during less busy periods. A related part of this approach involves making a conscious effort for auditors, at all levels, to talk and develop relationships with client management outside of the accounting group, for example, with operations staff and senior managers. It was hoped that the all levels of client personnel would thereby come to trust the competence and goodwill of the auditor, thus making it easier to sell services and learn about the challenges facing the client. An audit manager described the change: ‘‘We talk to people in operations because we [need to] understand what has been going on in the company. Typically in the old days, auditors would stick there in the accounting department and that would be all they would talk to and they would have a very narrow 17 focus. So we definitely try to have a broad focus.’’ The inter-relationship between reflexivity in the audit and shifts in auditor identity was evident a couple of other ways. The first concerns the differential interpretations of REDESIGN’s focus on controls based audit. This was particularly noticeable in the way the US and Canadian offices audited their ABC client. At the audit sign off meetings, a number of Canadian auditors, including the audit manager, were obviously perplexed as to why the US team continued to rely solely on substantive testing. Clearly, this reliance will depend on a number of factors, such as differences in the nature of the client’s business, profitability etc. in different regions. However, what is surprising is not that different offices or countries would take a different attitude to the risks associated with their part of the job, but the way in which the Canadian auditors made sense of these differences (see Cooper et al., 1998, for a similar argument). The Canadian team spent a whole lunch time session commenting on how they were more advanced than the Americans in adopting new technologies and approaches, how this suggested that the Americans weren’t as modern, professional or well trained as they thought themselves to be, how the differences reflected the American auditors’ concern to maximize the time spent on the job to enhance their revenues, and so on. One auditor put it this way: ‘‘It amazed me, because I went down to the States and they don’t feel comfortable with control based auditing . . .. I think we get better audit reliance by looking at controls. . .. down in the States they have made a conscious decision that we give our best audit assurance by vouching stuff.’’ Here we see how cultural views of the identity of Americans (and, by implication, conceptions of Canadians as the ‘‘other’’) such as the quality of education, the emphasis on self interest and a more market based system of economic activity–– are played out in social processes. The views of the Canadian auditors about their American 18 M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 counterparts (the accuracy of these views is not relevant to the current analysis) are reinforced by their interactions and reproduce national stereotypes––e.g., that Americans are concerned to maximize revenues, that American auditors are not as well educated as Canadians. Other understandings, such as that Americans are more tolerant of risk and quick to adopt new methods and technologies, are disrupted and changed. At the same time, however, the Canadian auditors seemed to inadequately recognize or downplay the fact that the US subsidiary was much less profitable and that the US auditors were operating in a more litigious environment. These factors lend some credence as to their risk averseness and potentially help explain their decision to rely totally on substantive testing for this client. Nonetheless, these different approaches to audit testing highlight that the expectations and stereotypes about national culture of different auditors can reproduce (and change) social understandings, thereby affecting the ability to plan and coordinate across national boundaries. A second example of how the development of business advisory services and associated changes in auditor identity affected the global coordination of AuditFirm concerns the process of bidding on a major consulting project. The North American auditors saw a major opportunity to bid on the implementation of a large ERP system in ABC. Some of the Canadian and US auditors blamed the Ruritanians for not informing them of the client’s plans to implement the system, and hence alerting them to consulting opportunities. During the audit, the presence of another Big Four firm in the client was a constant reminder to the Canadians and US auditors that they were operating in a global context, and no amount of ‘good relations’ with the local ABC managers could ensure they could obtain the valuable additional consulting work they strived for. Ruritania was seen as remote, even as incompetent. Yet, when we visited Ruritania we learned that the audit committee of ABC would, in fact, not permit their auditors to do the sort of consulting work that the North Americans were struggling to propose on. Apparently, this was not communicated to the Canadian and US auditors. Governance and reg- ulatory practices in Ruritania affected North America, even when the North Americans did not recognize this. The lead partner in Ruritania explained: ‘‘I don’t want to be at the level of implementation which is a big billion dollar business SAP worldwide because I am on the verge of getting into some operational managerial decisions. So, [business advisory services] has been interpreted in a different way. . . we are providing business advisory services, but not to threaten the integrity of the audit.’’ We conclude this section by returning to the theme of re-appropriation, and the global–local dialectic. Coordination of work through instructions is combined with opportunities for local appropriation. The risk based and strategic approach to the audit was to be used on the ABC audit. However, the features and emphases of the methodology seemed to vary quite significantly. Some adaptations may seem quite cosmetic. For example, the Canadian version is named REDESIGN, eh!, the latter phrase being commonly ascribed as Canadian. Other changes seem more substantive. At an audit methodology training exercise we participated in, a strong distinction was made between what the National office apparently saw as the purposes of REDESIGN, eh! and how it is understood in the office where the training took place. That is, some aspects of the methodology, such as identifying business opportunities, were emphasized or embellished in the local office, while others, which reflect the official and National Office orientation, such as achieving further efficiencies in auditing procedures, were downplayed. The differential construction of REDESIGN suggests re-appropriation of this technology by partners at a number of different levels and offices. Discussion and conclusions Using the theoretical elements previously identified in Table 2, we summarize the key findings from our longitudinal field study. Our theoretical perspective and key illustrations from our study M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 are summarized in Table 3. These illustrations, taken as a whole, deepen our understanding of coordination processes in the multinational audit. We draw selectively on these findings in discussing implications for understanding globalization processes, the coordination of audit work, and the development of audit firms. In the remainder of this section, we highlight the benefits of using a structuration approach to understand globalization processes in coordinating audit work. We conclude by synthesizing and developing some implications of our analysis of 19 coordinating audit work in processes of globalization for auditors, auditing and audit firms. The benefits of a structuration approach to globalization A structuration approach to globalization, with its theoretical elements and main themes elaborated in Table 3, offers not only a sensitizing device to identify key observations of our study on coordinating work in the context of a global audit, but also enables us to appreciate the significance of Table 3 Key theoretical concepts and illustrations from the study Theoretical elements Main themes Illustrations from our study Local–global dialectic • The global reproduced in the local • REDESIGN and inter-office instructions (IOI) are globally designed systems that are appropriated locally • Auditors draw on local knowledge and client interaction in using these abstract systems • North American approach to REDESIGN affects Ruritanian interpretation of business advisory services • REDESIGN and IOI are standard methodologies and templates that enable coordination of work between all audit offices • REDESIGN created by experts in risk based auditing from a number of countries. This expertise is specialized and applied worldwide. • Review by interview involves a shift in trust from documentation to verbal statements by subordinates • Increased focus on consulting at institutional level raises anxiety among some auditors about their expertise in this area • Failure to propose on ERP implementation project forces Ruritanian auditors to question their interpretation of legitimate consulting work and results in communication problems in coordination of audit work • Auditors asked to keep a ‘learning journal’ of reflections on improvements that could be made to how they carry out their part of the audit • Materiality level decisions influenced by whom auditor sees as their client • Local appropriation of the global • Local appropriation feeds into and shapes the global Abstract systems as coordinating mechanisms • Abstract systems facilitate standardization across contexts and provide a key coordinating function • Coordination mechanisms understood as processes of disembedding • Importance of trust, understood as confidence Reflexivity and identity • Reflexivity in audit is interrelated with the ongoing construction and reflexivity of auditor identity • Local appropriation of abstract systems can both facilitate and undermine their use 20 M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 these observations for understanding globalization processes. For example, the management literature on globalization has tended to describe coordination mechanisms in terms of degree of formality; stressing that informal mechanisms are as important as formal systems (Martinez & Jarillo, 1989, Preston, 1986). This results in a dualistic analysis, which privileges the formal over the informal, or vice-versa. In contrast, our perspective has emphasized coordinating as a disembedding process that involves not just the stretching of abstract systems (as formal coordination mechanisms) across space but also their re-embedding into local contexts. In reproducing the global, auditors integrate the abstract systems in their local context, and in this appropriation of the global, they may be able to shape the global. Work involves social and system integration. The implication of the local appropriation of global systems by auditors, in multiple offices with multiple interests, is always indeterminate, though in many cases the fragility of this situation is masked by the eventual production of the audit as a seamless product. With these different appropriations of the same abstract system across different local contexts, there is always the potential for external contradictions between these crosscutting systems (Whittington, 1992), as auditors draw on different local knowledge and institutions in appropriating the abstract systems; in making them ‘work’ for them. These contradictions are particularly problematic for the engagement partner who coordinates the audit worldwide. The differential ability of local auditors to impact the global was brought home to us in discussions with AuditFirm engagement partner for the global ABC audit. He saw North American auditors as having legitimate resources and reputable institutions (in this case a long history of professional audit standards and education), and in consequence he was very open to their suggestions for modification to the audit and interaction with the worldwide client. In contrast, he viewed auditors in developing countries where ABC operated (such as China and Turkey) as needing instruction, guidance and supervision in the coordination process. They did not possess the legitimate resources (such as status, skills and reputation) and institutions to shape the global. Furthermore, our theoretical approach also highlights the importance of trust and identity in the process of coordinating work, which is an ongoing achievement in dynamic processes of globalization. Changes to new audit methodologies are associated with reflexivity in institutions, a felt need to constantly understand themselves better; and thereby, to improve. Such reflexivity requires new forms of trust, as these systems involve a new blend of systems and social integration associated with formal and informal coordinating mechanisms. Difficulties in developing trust, as required by these abstract systems, may lead to significant anxiety by auditors and impact the coordinating of work in multinational audits. While some of these issues are identified in studies of auditor socialization (Anderson-Gough, Grey, & Robson, 1998), our field study enabled us to identify how auditors’ concerns (for example about ‘serving the client’–– Anderson-Gough, Grey, & Robson, 1997––and conceptions of time––Anderson-Gough, Grey, & Robson, 2001) get played out by both junior and senior auditors. We found the auditors in our study worrying about their competence as business advisors–– how could they confidently and legitimately offer advice to client managers who were often older, and certainly more experienced in their firm and industry? For those who entered audit and accounting because they liked the apparent certainty of numbers, they recognized they had to be reflexive, and change; they had to re-skill. Those with social skills embraced this world of the client as customer, and saw their progress in AuditFirm dependent on their ability to get on with partners. But they also recognized (sometimes belatedly) that social skills are also social constructions, in that what ‘worked’ in some contexts may be ineffective in others. For auditors away from the ‘centre’ of the worldwide engagement team, they had to learn about the shifting limits to, and opportunities for, autonomy. Sometimes they were at the ‘end of the line’, picking up the crumbs of revenue and profit permitted by more central partners. Yet at other times, they could construct their own sense of what needs to be done, determining the scale and scope of the audit work. M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 Our study on globalizing processes in audit coordination, provides insights into general debates on globalization and its impact on the fragmentation and convergence of the modern world (Guillen, 2001). We found that manifestations of convergence in audit occur alongside evidence of increased fragmentation. All offices and teams involved in the ABC audit used interoffice instructions and AuditFirm’s Redesign methodology. Focusing on the formal properties of these systems would lead an observer to suggest global convergence in audit practice, and stress the strength and power of globalization. Examining how the systems were used, however, enabled us to identify the local appropriation of these systems, and how local practices and institutions simultaneously facilitate and undermine these systems. These local appropriations, such as knowledge of the client and their local involvements in local business organizations, sporting teams, charities, and so on, not only shape the global, but they also strengthen the auditors need to connect to the local. In such ways, the local is also reinforced––for example, auditors moving from one office to another need to integrate themselves into the local community if they are to effectively use global abstract systems. Focusing on use can thus reinforce understandings of globalization as fragmentation. Our conclusion is that globalization leads to both convergence and fragmentation; as Giddens (1990) highlights at a more abstract level, it is a ‘process of uneven development that fragments as it coordinates’ (175). A key focus, therefore, as highlighted in our study is to explore the specificities of these processes and thereby to understand what is converging and what is fragmenting in the coordinating of work in multinational audits. Issues of fragmentation and convergence also manifest themselves in the organization of the multinational audit firms, and the power of groups within them. As Bauman (1998) has observed in relation to globalization more generally, there are core and periphery actors, winners and losers in the globalization process. While Bauman focuses on winners and losers in both central and periphery nations and societies, his general point highlights a major issue for the management of 21 multinational accounting firms. In these vast networks of offices, there are core and periphery offices, with the core often reflecting their location in large metropolitan cities, such as London, New York and Tokyo, where most head offices of multinational corporations are located. These offices may be ‘core’ in multiple ways––size of office, profitability, and source of the leaders of the organization. Yet as our study shows, core and periphery may not be connected to the size, financial success or distance from major economic centres. Ruritania is a small player in AuditFirm as a whole. In our case, the Ruritanian office represents the centre, even to offices and partners who normally see themselves as part of the metropolitan core. However, it is interesting to note that the Ruritanian engagement partner, even in his position at the ‘centre’, clearly perceived and coordinated in a different manner with the ‘core’ and ‘periphery’ offices as distinguished by their perceived strength and development of their institutions. In a similar manner, many smaller offices of the Big Four, located away from the headquarters of multinational corporations, are highly profitable, and the source of many work innovations. While they contribute significantly to the overall firm, they often resent the status of the large, metropolitan offices, serving global clients. The concerns of smaller and peripheral offices, about smaller clients, not for profit organizations, and relations with the local education and business community, are often not reflected in the globalizing and distant agendas of the larger offices, who are more concerned about international trade rules, foreign direct investment, harmonizing and standardizing accounting and auditing standards, and managing large contacts. The costs of belonging to an global professional service firm are often a source of considerable resentment for peripheral offices––‘‘throw-up’’ is a term we’ve heard used to describe their contribution to corporate headquarters. Whether large professional service firms can sustain both sets of offices is an issue that worries many senior managers of such firms. In short, fragmentation and convergence also exists within these multinational firms. 22 M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 Implications for coordinating audit work Our study suggests two key globalizing tendencies associated with the reflexivity and change of audit, namely increased litigation surrounding audit work, and the commercialization of audit, which are linked to detailed work practices in the global coordination of the audit. Increased litigation of audits, particularly in the US, has led AuditFirm to increase the standardization of work through new documentation procedures and practices. How evidence about the audit is collected and documented is changing. REDESIGN involves keeping less, and different forms of, documentation, which has implications for professional values, norms, and work practices. These changes in documentation raised issues of trust by some auditors in being comfortable with last year’s audit work by absent others. Reductions in documentation were perceived to create challenges in coordinating the audit from year to year, and made the firm more dependent on the stability of audit teams over time. The emphasis of face work approaches in the review by interview procedure shifts the nature of trust relations in the coordination of audit work between superiors and subordinates. These changes in professional norms have implications for auditor identity such as new skills they need to develop and will likely impact the human resource policies and procedures (e.g. recruitment and promotion) of audit firms. Despite gender and racial diversity, we expect that there will be increasing reliance on homogeneous values, a global convergence that will emphasize consistency of behaviours and attitudes. The reliance on face work and interpersonal trust in procedures such as ‘review by interview’ may lead to a focus on developing ‘shared’ values, an emphasis on a standardized and predictable ‘‘organizational man’’ (Whyte, 1956). Global convergence would seem to be the outcome; though agency and predilections to local diversity should not be underestimated. There has been a considerable debate about the commercialization of the audit. Auditors have always been commercial––indeed, the claim to professional status and integrity can be seen as a commercially successful strategy in a different era. Commercialization as we saw it was more about the provision of a wide range of services whose common feature was not appeals to integrity or public service, but responding to clients’ needs. This conception of commercialization requires careful analysis of who is identified as the client, and how their needs are constructed. Hanlon explored the migration of Irish accountants to core countries, concluding that the purpose of such migrations and returns is to ensure that the leaders in peripheral offices develop ‘the same values, beliefs, experiences and so on as those at the economic heartland. . . a commitment to business’’ (1994, 181). While Dezalay (1997) and Willmott and Sikka (1997) point out some problems with Hanlon’s analysis and evidence, we wish to emphasize a different element of commercialization. The pressures to focus on increasing audit firm profits through emphasizing higher margin services often reinforces the differences of perspective between partners concerned with identifying the needs of clients, for example by developing new consulting services, and those who market those services in the context of local knowledge about the client (see also Dirsmith, Heian, & Covaleski, 1997). While the production of the new business advisory services, such as the implementation of ERP systems, is facilitated and controlled to a considerable extent at the global level, for example at the engagement partner, the marketing of these services typically takes place at the local level. This global production and local marketing of these services creates challenges in coordinating work in the ever changing world of consulting work. How, for example, are new consulting products to be communicated to the local, marketing partners? These commercial developments also create tensions at the institutional and individual level. For example, it is now commonplace to point out that the development of an entrepreneurial culture, with a focus on the client as the management of firm buying services, can create tensions within a professional organization. But these changes at the institutional level are bound up with shifts in auditor identity: how the accounting and auditing ‘professional’ shifts to being more sensitive to business, or how does commercialization change M. Barrett et al. / Accounting, Organizations and Society 30 (2005) 1–24 the nature of what it is to be an audit professional. Auditors may worry about not just what their job enables and permits (attest, risk based audit, business advice), but also just who is their client. In the ABC audit, we saw AuditFirm partners identifying a wide range of ‘stakeholders’ as ‘the client’: investors, local client managers of ABC, worldwide client managers of ABC, public works councils, as well as other auditors in AuditFirm. Our study of the ABC audit has placed the specifities of the case in terms of more general issues of the management and organization of AuditFirm, the identity of auditors, changes in the institution of audit, and how the global interacts with the local in making globalization ‘real’. So, while we can only comment on and discuss how AuditFirm has responded at the detailed work practice level, we believe our study sheds light on the globalizing tendencies at the institutional level. Thus, litigation as a globalizing tendency may lead firms and auditors to respond to changes in documentation practice (at AuditFirm it was less documentation). Similarly, commercialization may lead to firms diversifying in different ways (depending on their strategy), resulting in revised conceptions of what a good auditor is, and who is their client (for similar processes in law see Cooper, Brown, Greenwood, & Hinings, 1996). The precise working out of globalization suggests caution in attempting to predict and generalize not only across firms but also across time and space. In a post Enron and Arthur Andersen era, globalization may take new forms than those we have discussed in our AuditFirm case. Yet we can generalize about the structuration of globalization as processes constituting the global–local dialectic. In contrast to wide-ranging and abstracted predictions of what globalization entails, our study highlights that globalization works in the details. Acknowledgements The authors acknowledge the financial support of the Chartered Accountant’s Education Foundation of Alberta. David Cooper’s work is also supported by the Social Sciences and Humanities Research Council of Canada and the Certified 23 General Accountants of Alberta. 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Winograd, B. N., Gerson, J. S., & Berlin, B. L. (2000). Audit practices of PriceWaterhouseCoopers. Auditing, A Journal of Practice and Theory, 19(2), 175–182. 1045 Authors name Performance Measures and the Rationalization of Organizations Barbara Townley, David J. Cooper and Leslie Oakes Abstract Barbara Townley Edinburgh University, Scotland David J. Cooper University of Alberta, Canada Leslie Oakes University of New Mexico, USA This article focuses on rationalization, its dimensions, the possibilities of reasoned justification in the public sphere, and the technologies that would operationalize this. It does so through an analysis of the introduction of performance measurement in the Provincial Government of Alberta, Canada. We argue that performance measurement represents twin dimensions of rationalization: the pursuit of reason in human affairs, that is, the process of bringing to light the justifications by which actions and policies are pursued; and rationalization as the increasing dominance of a means–end instrumental rationality. The article illustrates how an initial enthusiasm by managers for the performance management initiatives was replaced with scepticism and cynicism. We show how the potential for reasoned justification was frustrated in practice, through a growing disparity between a discourse of reasoned justification and the practical operationalization of mechanisms of business planning and performance measurement. The search for reasoned justification and instrumental mastery are part of the same rationalization process, and these two contradictory, but inherently connected forces are an important explanation of the dynamics of managers’ responses to organizational change. Keywords: performance measurement, rationalization, reasoned justification, communicative action, instrumental rationality, New Public Management Introduction Organization Studies 24(7): 1045–1071 Copyright © 2003 SAGE Publications (London, Thousand Oaks, CA & New Delhi) Performance measurement is an increasingly pervasive aspect of organizational life, especially in the public sector. Explanations for its growing promotion and use vary, but two broad strands may be identified. Carter et al. (1992) argue that the introduction of performance measurement in the public sector reflects a dissatisfaction with pluralistic or interest group politics, and that its use is an attempt to replace the ‘rationality of politics’ with the ‘rationality of planning’. Performance measures are thus an example of the various reforms and techniques introduced in government (for example, programme budgeting, strategic planning, TQM and zero-based budgeting) to rationalize, through planning, government policy. They are an attempt to shift decision-making beyond political bargaining and the latest balance of forces between competing interest groups (Wildavsky 1975), a rationality of politics that often silences disenfranchised voices. www.sagepublications.com 0170-8406[200309]24:7;1045–1071;032525 1046 Organization Studies 24(7) The justification for these reforms is that of a better, more reasonable, better planned and more rational social order. It is a discourse that harkens back to the Enlightenment discourse of rationalization as the pursuit of reason in human affairs, and Kant’s dictum that ‘All actions affecting the rights of other human beings are wrong if their maxim is not compatible with their being made public’ (cited in Chambers 1996: 235). As MacIntyre (1988: 6) notes, ‘a central aspiration of the Enlightenment ... [was] to provide for debate in the public realm standards and methods of rational justification by which alternative courses of action in every sphere of life should be adjudicated just or unjust, rational or irrational’. Whereas the preceding emphasizes the role of performance measures as one element of achieving a reasoned justification for action, a second explanation emphasizes their use as the extension of a market economy and managerialism into the public sphere (Osborne and Gaebler 1993; Efficiency Unit 1988; Gore 1993). Principles of a market economy and managerialism have accompanied state restructuring in late 20th-century capitalism, in the face of growing welfare demands, globalization and the requirements of unfettered financial capital. Performance measures are one means of achieving a managerialist rationality that includes reducing the size of the public sector, cutting government expenditures, bringing free-market principles and disciplines into government, developing a more customer-oriented focus, and allowing public-sector managers to be more autonomous and entrepreneurial. Different versions of public-sector reforms emphasize some or all of these means, in varying mixes (Pollitt and Bouckaert 2000). These two themes reflect broader debates in philosophical enquiry and social theory. In philosophy, they reflect early Enlightenment debates from Kant’s ideal of a community of individuals who develop a politics that relies on reasoned argumentation rather than coercion; to Hobbes, where reasons of utility reduce to a calculus of power (Hindess 1996). In social theory, debate has focused on the nature of rationalization (Ray and Reed 1994; Hasselbladh and Kallinikos 2000), particularly as exemplified by the work of Weber and Habermas. Weber’s (1978) thesis that modern society is characterized by increasing rationalization represents one strand of this debate. Although Weber identified rationalization as a universal, historical process involving emancipation from tradition, he saw this potential as being undermined by an institutionalization of an instrumental or purposive, means– end rationality. The dominance of technique and calculation, organization and administration are identified as the institutionalized and dominant form of rationality in modern western society (Horkheimer 1994; Horkheimer and Adorno 1995; Bauman 1989; Ritzer 1996). While there are important insights from such analyses and associated criticisms of modern society, they have led to a one-sided critique of bureaucracy, and ignore the potential benefits of public management (Du Gay 2000). Habermas (1984, 1987, 1996) questions whether rationalization is solely the diffusion of an instrumental rationality or purposive-rational action (Alvesson and Deetz 2000). He argues that there has been a failure to develop and institutionalize different dimensions of reason (Burrell 1994). In the attempt Townley et al.: Rationalization of Organizations 1047 to rescue the claims of reason from the pessimism of Weber, Horkheimer and Adorno (Rehg 1996), Habermas puts forward his theory of communicative action: the process by which agents are coordinated through acts of reaching understanding, where ‘coming to an understanding is a process of mutually convincing one another ... on the basis of motivation by reasons aimed at achieving valid agreement’ (Habermas 1984: 392). Underlying this is communicative rationality, a rationality based on Kant’s dictum of relations of mutual recognition between rational beings — that the other should be treated as an end and not a means. ‘A communicatively achieved agreement has a rational basis ... an agreement rests on common convictions ... both [parties] ... base their decisions on potential grounds or reasons’ (Habermas 1984: 287). Habermas locates the potential for rationality in the implicit validity claims that are inherent in communication, namely, that something is comprehensible, true, right and sincere. (These claims prompt the following questions. What do you mean? Is what you say true? Are you entitled to say that? Do you really mean it?) Assent on these validity claims is not given once and for all, but is redeemed through continually renegotiated practical discourse. Rationalization (the pursuit of reason in public life) thus comprises two strands: reasoned justification or communicative action and a strategic, instrumental action. For socially justified and coordinated action, there is a need for both reasoned justification for action and the realization of that action, that is, methods to implement rational justifications. Such action requires the interplay between both reasoned justification and an instrumental rationality oriented to a practical mastery of the world and knowledge of the empirical conditions of action. Without this interplay, communicative rationality engages in continuous dialogue that fails to achieve practical engagement (Chambers 1995). Where instrumental rationalization dominates, an unreflective and uninformed action comes to dominate organization and public life. Purposiverational economic and administrative action may be complementary to reasoned justification, but it may also act as a counteracting tendency against it. The temporary resolution of this interaction is an empirical question. Performance measures have the potential to achieve agreement on action. Porter (1986) shows more generally that statistics offer an integrative role in organizations, a mechanism for coordinating action. For example, in government, the executive can allocate resources among competing ministries on the basis of numbers and statistical measures. The political technologies designed to operationalize performance measures, however, also involve a degree of purposive-rational action. Conversely, they also have the potential to dominate and corrupt any reasoned justification for action. As Rose (1991: 673–674) notes, ‘Numbers have an unmistakable power in modern culture ... [they] achieve a privileged status in political decisions, [yet] they simultaneously promise a “de-politicization” of politics ... by purporting to act as automatic technical mechanisms for making judgements, prioritizing problems and allocating scarce resources.’ We present these twin dimensions of rationalization as a means of analysing managers’ reactions to the demands placed on them in the provision and 1048 Organization Studies 24(7) delivery of public services. We do so because we believe that reason is the only morally justifiable basis for achieving socially justified and coordinated action. It is preferable to all other means, such as force, tradition and charisma. The extent and possibility of the socially justified and coordinated action of a public service can then be understood and assessed through an analysis of the interplay of these twin dimensions of rationalization. The introduction of performance measures in the Province of Alberta was initially promoted and embraced by many government managers as an attempt to introduce greater transparency into government. That is, the reception and support for the reforms was informed by the belief that there could be a rational justification for the programmes and policies of the Albertan government, and that business planning and performance measures would support a process of rational justification to both politicians and the general public. Government managers initially embraced the introduction of these measures as a potential for what we will refer to as reasoned justification. There was a view that performance measures were a more rational attempt at addressing the ‘public interest’, and an improvement on public servants acknowledging the temporary outcomes of bargaining when groups engage in strategic action to try and get their own way. It was a process that was accepted or presupposed as valid by participants. Our interest in exploring public-sector reforms was stimulated by a desire to explain the response of managers and civil servants interviewed in our study of the implementation of performance measurement in government. We were initially surprised at the degree of support the proposed changes received. Managers often worked extended hours struggling and debating the developments and how they should respond to them. We had expected strong resistance or opposition (Laughlin and Broadbent 1993), given that the reforms represented a radically new way of managing, challenging traditionally and professionally established methods. However, as we illustrate later, most interviewees were initially enthusiastic. We sought to answer the question of how we may explain this sense of hope and energy among the majority of managers we talked to. The article proceeds by briefly introducing the methods used in our longitudinal field study, including why we give prominence to managers’ reasons for their actions. The core of the article discusses the changing reactions of managers to the introduction and implementation of performance measurement systems, drawing out different dimensions of rationality immanent in these techniques. We analyse how the attributes of measurement systems privilege one dimension of rationality over another, leading to an imbalance in rationalization. The concluding section discusses some implications for a more balanced rationalization process. Method In making sense of managers’ responses to performance measures, we adopted the principle of charity (Lukes 1994), that is, that one should be maximally Townley et al.: Rationalization of Organizations 1049 charitable in assigning truth conditions to the language which is held to be true by those being interpreted. From this, the interpreter should impute an immanent rationality to all utterances and assume that they represent a reasonable expression. We adopt this approach for three reasons: ethical, methodological and political. To give reasons for belief and action is a function of moral autonomy and responsibility. Ethically, therefore, we should not dismiss an agent’s reason or explanation. We should regard them as sincere. To set aside the reasons given by the actors themselves violates their integrity. Treating seriously what people say and how they explain their world does not mean that their utterances are necessarily true. Methodologically, however, taking utterances seriously allows the researcher to grasp the reasons why these appear rational, that is, that the subject felt entitled to put them forward as true. ‘We can descriptively ascertain what the actor takes to be true in contradistinction to what is (in our opinion) true. The choice ... consists in either ignoring or taking seriously the truth claim that the actor connects with his opinions.... If we ignore them as validity claims, we treat opinions and aims as something subjective.... In this case we neutralize the claims to truth.’ (Habermas 1984: 117) A serious examination of reasons provides details of the cultural store of knowledge that legitimate and justify truth claims: treating managers’ claims seriously allows us to understand their enthusiasm for the reforms. Lastly, politically, we wish to give voice to actors in a social and organizational process. One significant feature of the standard explanations offered for management and administrative reforms, whether they emphasize greater rationality or managerialism, is that they neglect the reasons of ‘everyday’ civil servants (Tomkins and Groves 1983) for adopting or resisting such reforms. Such neglect results in an emphasis on the aspirations and motivations of senior managers, politicians or experts, leaving other actors mute. Either reasoned justification and the technologies to operationalize this are treated as self-evident, or changes are assumed to be a direct consequence of an instrumental manipulation. The latter renders ‘everyday’ managers and civil servants as mere bearers of structure, while also relying on the problematic model of power as control — A’s (the Alberta government) getting B (a particular unit of government) to do something B would not otherwise do (adopt business planning and performance indicators). Both interpretations deny agency and fail to account for both the attraction and success of these initiatives. In presenting the responses of those at various levels of government charged with the responsibility for introducing these changes, we examine the reasons why people may be actively involved in sustaining them. In addition, we stress the nuances in the process to appreciate the opportunities for dissent and resistance that such attention to particularities highlights. In adopting the principle of charity, we also argue that the actions of those introducing these measures cannot be dismissed merely as an overt legitimating justification that liberal democracies are obliged to engage in as part of democratic politics (Brunsson and Olsen 1993). Democracy depends on a 1050 Organization Studies 24(7) moral validity, that is, legitimacy must be rationally constructed through democratic debate, and citizens should be convinced by reasons, both of which contribute to citizens learning about the nature of democracy (March and Olsen 1983). It is inadequate to maintain that the introduction of institutional change can be maintained through instrumental or strategic manipulation, and that actors relate to each other only in strategic terms. Although we are not denying the force of threats of sanction and the possibilities of reward, reasons for obedience need to be legitimately justified in the eyes of those concerned, that is, they need to be achieved through reasoned justification. We present material drawn from an ongoing, longitudinal case study begun in 1994, on the introduction of business planning and performance measures as part of an exercise in ‘reinventing government’ by the Provincial Government of Alberta, Canada. This initiative was similar to experiences in other jurisdictions (Pollitt and Bouckaert 2000). Our case focuses on one division within the provincial government, the Cultural Facilities and Historical Resources (CFHR) Division, which is part of the Department of Community Development. At the time of the research, the department had responsibility for a number of policy areas, including individual rights protection, parks and recreation, the arts, seniors, and cultural facilities. The CFHR Division is responsible for the preservation, presentation and protection of Alberta’s natural, historical and cultural resources. This involves it in both cultural resources management (the preservation and protection of artefacts and archival records) and facility management (the presentation of educational programmes and exhibits at 18 provincially operated sites). Our study is based on 143 extended semi-structured interviews conducted between 1994 and 2000 with representatives of the Treasury and central agencies of government, the Department of Community Development, the Division of Cultural Facilities and Historical Resources, and the individual historical sites themselves (Oakes et al. 1998; Townley 2002a). At all levels two of us interviewed managers having responsibility for implementing business planning and performance measures and managing their development, implementation and monitoring. At division and site level we also interviewed curators, educators, researchers and representatives of the sites’ Friends organizations. Each interviewee was asked about the rationale, espoused and understood, for the introduction of business plans and performance measures. Interviewees were asked how they developed plans and measures, their responses to their introduction, any difficulties that had been encountered, and how work operations had changed as a result. These interviews were supplemented by examination of policy documents (including memos, business plans, planning documents and letters) and observation of meetings on performance measures and business plans. In addition, we participated in a Government Interchange Programme, a forum for senior civil servants to discuss the management of government. We recognize that analysing materials involves a complex interplay between theorizing and observing perceived patterns. This is necessarily a reflexive process (Oakes et al. 1998). We searched the interviews for references Townley et al.: Rationalization of Organizations 1051 to performance measures in order to identify how they were made sense of by the managers. We examined how managers understood the role of performance measures, how they were to be integrated into their everyday activities, and how they saw and understood these measures as helping them or not. A variety of specific references to performance measures coalesced around positive and critical references. Through an iterative process we identified two repeated themes: that of their providing a vehicle for communicating and debating about the nature and purpose of work and interacting with others (‘we have to do something about this’); and that of their distorting the understood role and purpose of the CFHR Division for ‘the sake of meeting the measures’. We then located these themes within the broader theoretical framework outlined above. Provincial Developments as Reasoned Justification? The rationale for the Albertan exercise was in response to a perceived lack of accountability in government activities. Several unsuccessful Albertan government investments in private-sector initiatives had proved costly to taxpayers (Radcliffe 1997), and had prompted a crisis in the perceived legitimacy of government operations (Lisac 1995). The new leader of the provincial ruling party successfully contested a 1993 election on the premise of a ‘New approach to Government’ (Dinning 1993). Driven by the promise to cut the provincial deficit and ‘reinvent government’, the provincial government cut funds for all programmes by about 20 percent over three years, and announced that all government departments were to develop three-year business plans and develop key performance measures. The changes introduced in Alberta were quite dramatic. In 1993–94, all government departments were required to produce three-year business plans outlining their objectives and goals, accompanied by a series of performance indictors and measures to allow an evaluation of their success. Accountability Reports were required of each ministry (and organizations within them) to include business plans, budgets, annual reports and financial statements. The underlying question prompting these initiatives was, ‘put very simply, did the programmes and services and dollars we spent achieve the results we wanted and make a positive difference to Albertans?’ (Government of Alberta 1995). As a preliminary to this process, the government initiated a number of consultation exercises held throughout the province. Through regional roundtables and forums, questionnaires, and individual and organizational submissions Albertans were invited to engage in a review of the goals and direction of government: ‘The people of Alberta are dissatisfied with the old ways of conducting public business, especially traditional decision-making processes that take a “closed door” approach — where leaders acting on their own make a decision with minimal consultation. Information is not shared with the public. When this happens, trust and credibility are lost, and once lost, are difficult to regain.’ (Government of Alberta 1993: 10) 1052 Organization Studies 24(7) Debate had to be ‘representative (with all interested and affected groups); open; transparent; and accountable’ (Government of Alberta 1993: 10). Table 1, modified from a government document that circulated at the beginning of the reforms, poses a series of questions that were designed to encourage debate. The questions are relatively open and offer the promise of dialogue. Questions such as ‘What approaches should we use to ensure our goals are met?’ and ‘What support do employees require to achieve these results?’ specify neither the content nor outcome of debate. Of course, using the vocabulary of ‘business’, ‘customer’, ‘mission’ and so on structures debates to some extent, and it is evident that the government was oriented to a particular set of categories that would operationalize these questions, an operationalization that would raise questions later on. However, we want to suggest that the rationale which accompanied the introduction of these initiatives, and the way they were framed as a set of questions, resonates with the belief that government activity should be based on reasoned justification. We are not arguing that these initiatives met the principles of full dialogue. It was not a process in which everyone was allowed to take part, question any assertion, and allowed to express attitudes, desires and needs. However, the initiatives can be seen as an attempt to address Albertan concerns about the legitimacy underlying the government’s use of public resources, and to examine and make explicit the grounds on which policies and programmes were based. There is an implicit assumption that activities are not to be guided by unreflective, normatively ascribed agreement, that there can be a degree of rationally motivated agreement among participants. The initiatives are an attempt to move to an effectively functioning public sphere, to achieve communicatively achieved agreement as to the purposes and goals of government. Table 1. Performance Measurement as the Potential for Reasoned Justification Category Description Core government business What business are we in as a government? Mission What is our Ministry's overall purpose? Who are our customers? Goals What must we achieve to carry out our mission? Outcomes What are our expected results? Strategies What are the approaches we should use to ensure our goals are met? Performance measures How well are we achieving our intended outcomes? Performance management What are our employees' expected results? What support do they require to achieve those results? How well are they achieving their intended results? Townley et al.: Rationalization of Organizations 1053 Meaningful Numbers As part of their initiatives, the Albertan government was heavily influenced by reinventing government initiatives from other jurisdictions (Osborne and Gaebler 1993; Douglas 1993). They had in mind an administrative system that they saw as necessary to operationalize these reforms. There is a tension between communicatively achieved understanding, with its burden to engage in discussion, and coordination by other means, such as hierarchical administration. Business plans with their subsets of, for example, objectives, goals and performance indicators and measures, can act as a linguistic shorthand, a useful instrumental mechanism for coordinating action that frees people from the burden of continuous engagement in communication. Before examining how the technologies introduced could reinforce an instrumental rationalization, we show how performance measures were viewed as facilitating reasoned justification and contributing to the communicative aspect of rationalization. Performance measures were an essential part of what the government saw as its obligation to communicate more effectively with Albertans: ‘What we need the performance management system to do is to tell everybody how the decisions made affect the outcomes of the ministry as we are being held accountable in the public domain’ (Treasury official 1994). Measuring Up, the annual report of performance measures, was described as the province’s annual accountability report to Albertans: ‘The report is a collection of core government measures indicating how well the province is doing in terms of achieving certain global goals such as increased life expectancy, sustained economic growth and keeping Albertans safe from the effects of crime. The measures convey to the public and stakeholders in a simple, clear and honest way, the impact government programmes are having and if we are delivering them in the most efficient and effective ways possible.’ (Alberta Treasury 1995: 5) A repeated theme was performance measures as an essential element in the provision of information for meaningful debate: ‘The performance measures business itself is just one [part] of a multi-pronged approach to accountability and transparency. To govern better. That is why we are doing this’ (Treasury official 1994). Performance measures were seen as providing more useful information than in the past, when the emphasis was on inputs and spending: ‘When we went to assess the performance of that organization, we would ask them questions like “Did you spend your money? ... What percentage of the money was expended? ... Were you over or were you under? If you had an authorized FTE [fulltime-equivalent staff] count of 75 at the beginning of the year, did you still have 75 FTEs working for you?” But no questions related to, at least at the macro-level of, “How many people came through the door? How much money did they spend? Were they happy about what they saw? Were we meeting their needs?” ’ (Departmental manager 1995) The communicative potential of performance measures can be identified in the following rationale for their importance in improving the CFHR Division: 1054 Organization Studies 24(7) ‘My approach is, if you can’t measure it, it is not worth doing. Right? So in other words, if you can’t drive some measure of your result, or why you are doing it, or why you have been effective ... Somewhere along the line, whether it is because we did not clean the exhibits properly, or maintain the exhibits properly, or we didn’t have enough staff on the ground when the buses went through, we dropped 3% points in satisfaction. And let’s recognize that and make our management decisions based on that. Maybe we can afford to drop 3% points because we saved enough money, made a significant expenditure saving that allowed us to do another project, and it was worthwhile.’ (Treasury official 1995) Although performance measures had the potential for reasoned justification and communicative action, it was also recognized that they could operate counter to this potential: ‘To be blunt you can go two ways. You can produce these measures and go through the exercise of putting them on paper and reporting them publicly and then you can hire a budget officer to come in and say, “OK how are we going to report these on an annual basis, and this is the number.” Or you can make them real and say, “Here, do them and use them in the management of your facility. Make them real for your staff — and try to find some connections to the work that you do within those measures. And if this measure isn’t any good throw it out and find another one. Ah, if you need more measures let’s find a way for you to communicate their results to the community, public that needs to know — the stakeholders and clients.”’ (Treasury official 1995) This tension between measures acting as the potential for justification and communicative action or reinforcing an instrumental rationalization was never really addressed in the formulation of these initiatives, as is demonstrated in the following interchange in an interview as to what constitutes a ‘meaningful number’: Q: So, a ‘three’ for example would allow people to say, ‘This is a three. Please can we have an explanation of what has gone on and why it is a three?’ A: Right. So there is accountability in the performance measure. This interaction demonstrates the potential for performance measures aiding reasoned justification. However, the interaction continued and showed how this potential did not materialize. Q: That is your understanding of how this should work? A: That is my understanding of how these things may work. Q: Should work? A: Well, hopefully should work. I am not saying that is everyone’s interpretation. Q: That was my next question. How widespread is that view, from your knowledge? ... Is that a general interpretation? A: To be honest with you, this type of discussion, in my memory never took place. (Treasury official 1994) In summary, managers were enthusiastic about the possibilities of developing meaningful numbers that could inform reasoned justification. They were not so naive as to assume this would inevitably occur, and seem not to have thought through the mechanisms by which this might be achieved. Townley et al.: Rationalization of Organizations 1055 Managers’ Responses Managers responded positively to the news that government would be managed differently. The value of closely examining the purpose of the organization and being accountable for outcomes was accepted. ‘We need to justify what’s done. We asked the basic question, what do we really do?’ (Division manager 1994). Indeed, there was some belief that measures would not only clarify purpose, but would also provide guidance in making decisions: ‘We need to move from efficiency and effectiveness numbers and measures. Do we affect knowledge bases, people’s awareness of their own history? What indicators do we use? Cultural impact? Educational patterns? Heritage appreciation? We want to be in a position of knowing how to make decisions. How do we allocate resources based on impact?’ (Division manager 1994). The use of performance measures was seen as beneficial for the way the division itself could be managed: ‘The setting of performance standards is a way of tracking. It’s partly a government initiative but it’s also a management initiative. Are we doing what we think we’re doing?’ (Division manager 1994). Managers identified the prospect of rationally motivated agreement among participants about the purposes of programmes: ‘Are the products and services correct? Is the process correct?’ (Division manager 1994). Managers of sites even began to contemplate ways in which they could measure and discuss things that were meaningful to them: ‘This is one area that I want to look at, so that we have more information in that area ... the knowledge change of a participant. I don’t know how one would measure that, but it is important to think that if we are in a historical business and we want to share or interpret the history in a meaningful way to the visitor, that there is some either greater appreciation of a point of history, or that there is an increase in knowledge of fact of history is being accomplished. Beside the strictly entertainment factor, there is nothing wrong with measuring the entertainment factor, that they went away with a smile on their face and a fun time and telling six others that it is a great place to visit. It is part of our agenda in terms of increasing gate visitation.’ (Site manager 1995) Responses by members of the CFHR Division were thus informed by a view of justifying their function and purpose through reason. Mechanisms they were obliged to adopt were interpreted as supporting a better way of enabling the sites to work more effectively. For example, although most sites were obliged to develop and use business plans, this was interpreted as a ‘logical’ thing to do. Indeed, there was a denial that this represented anything fundamentally new. In this respect, the belief in reasoned justification and a communicative ethos functioned as a restraint on procedural rationality: ‘Planning, gather the data and deciding where you are going to go. Tools of the jargon have changed but when I planned a vacation 20 years ago in a more casual way, that was basically the same process. You gathered data, you evaluated and you set some action steps. It hasn’t changed, everything around it has changed — we have more tools. We have different ways of looking at things. There’s certainly a much wider range of variables that we take into account.’ (Site manager 1996) 1056 Organization Studies 24(7) There were also instrumental interests in welcoming the changes for managing the museums and sites. A vision of managing the facilities as decentralized, empowered units, where the emphasis would be on outcomes and finance, was enthusiastically received in comparison with the traditional stereotype of bureaucratic control: ‘We now have a revenue generation focus ... we might have tracked these stats before and it was interesting information, but it didn’t really tell you anything. So what if your attendance was up. But now you have the added dollars to these numbers. Its very interesting.’ (Site manager 1995) Even here, however, the responses were not wholly instrumental. The changes were also seen as a better way to conduct government, with longer-term decision-making leading to better decisions: ‘This forces us to look beyond one year ... what we can do over a three year horizon’ (Site manager 1995). Thus, for managers there was a legitimacy in the government’s move to these initiatives, both in terms of reforming government practices and facilitating the effective operation of CFHR. These initiatives were accepted, even though they had their negative side because they represented a move from unthinking acceptance and custom. As one division manager explained: ‘Every single position in every department was to be examined and justified; what does this person do, was it worthwhile, do they justify their salary? There was a sense of the removal of safeguards traditionally there, a sense that anything could be done. They were reorganizing and eliminating areas. A new set of rules undermined other traditions.... There was a feeling nothing was sacred.... I’ve worked 20 years in government and have not seen anything like it before.’ (Division manager 1994) For managers, the claims to ‘truth’ (‘these things may work’) and ‘right’ (the moral legitimacy of government to introduce changes) validated the process of performance measurement. Pressures Toward Instrumental Rationalization Having argued that business plans and performance measures can function as the basis for reasoned justification, they can also operate in a manner that heavily circumscribes this. As we show below, techniques of calculation and the specialized knowledges inherent in planning and measurement systems can suppress moves to socially justified and coordinated action. In so doing, they inculcate an instrumental rationalization that depersonalizes social relationships and extends technically rational control over social processes (Brubaker 1984). Below, we distinguish between the political imperatives of senior agencies of government which sought to impose a particular model and standardize across departments, and technological imperatives that derive from the logic of the plans and measures themselves. We do this for ease of exposition, but recognize their interconnection and mutual constitution. These imperatives, although introduced for good reasons, worked to reinforce an instrumental rationalization. Townley et al.: Rationalization of Organizations 1057 Political Imperatives Since 1979, the Auditor General’s Annual Reports had regularly recommended that the provincial government design and implement a system for promoting effectiveness measurement (Gendron et al. 2001). When these recommendations were reinforced by a high-profile report (Alberta Financial Review Commission 1993), the government adopted business planning and performance measurement as central to its ‘new approach’ to government. The Auditor General’s Office proffered a simple, homeostatic model of control (Anthony 1966), what Mintzberg (1996) refers to as a performance-control model, to secure government objectives. The Auditor General’s recommendation for three-year business planning included: the setting of clear objectives and goals for government activity; designing strategies and allocating resources to achieve objectives and goals; measuring performance and results in terms of outputs achieved; the evaluation of the outcomes of action; and the allocation of costs to output. This was formalized in the 1995 Government Accountability Act, which required each ministry to report a summary of these elements annually. In addition to pressures from the Auditor General’s Office, there were also internal pressures for isomorphism between departments (DiMaggio and Powell 1983). Although the original intention had been that each department would design a system which would meet its own needs, the potential for variety and diverse systems and measures was undermined through a tendency for departments to copy other departments, or to seek out experts or authority figures who would provide standard packages and advice (DiMaggio and Powell 1983). Departments felt it would be quite risky to develop measurement systems and present measures to central and powerful agencies (for example, the legislature and its committees) that were different from the norm: ‘They say “Well, the ministries have to be responsible and they have to develop the information. It must meet the environmental context of your ministry and it must be meaningful for your ministry, and it must be something that your managers buy into.” And so we say, “Well, fine. We can look at all of this theoretical bullshit that is coming out of your highly paid management consultants and people that don’t know anything about public sector organizations, and I guess we will just make something up.” Then they say, “Why doesn’t your business plan look like Health? Yeah, we really like that one, so why didn’t you do it the same way?” And we said, “Because we are not the Department of Health, because you didn’t give us any guidance, because you didn’t tell us what format you wanted, because no one is taking any responsibility for doing a consolidated document,” and we start pulling our hair out and saying, “Because you buggers can’t make up your mind.”’(Department manager 1994) A corollary of standardization and homogenization was simplification. The Auditor General stated that ‘MLA’s [Members of the Legislative Assembly] ministers and managers need performance measures which are easily understood — simplicity, clarity and candour are the essence of good accountability’ (Auditor General 1993–94). While such features might facilitate reasoned justification, there is a danger of this slipping into an instrumental rationalization: 1058 Organization Studies 24(7) ‘What we are trying to do is focus the development of measures and indicators at the lowest level of the cost center since this is the most meaningful level for the delivery of goods and services and solutions to our customers. Then we cluster our measures and indicators around each one of these cost centers. So you can appreciate that if cost center 9 is the “women’s secretariat” and cost centre 1 is “accounts payable”, the measures and indicators for “accounts payable” are going to be significantly different from the measures and indicators for the “women’s secretariat”. And so the question for us becomes, “How do we then report this in a meaningful way so that it makes any sense when it gets up [higher]?” There is a considerable debate about whether you can roll up the measures and indicators ... and report anything meaningful to our political masters. And you can appreciate that since the Premier has asked for 5 or 6 primary measures or indicators, in a department that covers as many policy and issue areas as this department, it is virtually impossible for us to develop a single set of measures that speak meaningfully to anything. The Deputy [Minister] has a predisposition toward rolling things up. He likes analysis to sort of cascade up or cascade down, and so one of the initial tasks that he gave me was “reduce it to a single number.” If the department has an overall efficiency rating of 10, then if one part of the department has an overall efficiency rating of 2 and another part has an overall efficiency rating of 15, saying that we have a 10 is a meaningless number. [But], if he wants a single number, he indeed will get a single number.’ (Department manager 1995) Rather than inconsistent and local information, central government agencies were interested in simple standardized information that they could use to compare across units, and make resource allocations based on this information. The possibility of using the system as a means of centralized control and punishment was never far away: ‘We will scare them silly because we will be asking them to demonstrate that they are doing their jobs. And we will be looking at it in terms of these measures of effectiveness and efficiency and customer satisfaction. They will be held accountable ... and when they don’t start hitting them, then it affects the next cost center up and the next cost center up ... I mean it could turn into a real dog eat dog organization. I don’t know. It could become a very efficient organization.’ (Central department manager 1995) Technological Imperatives From an initial discourse that emphasized a potential for reasoned justification, debate and dialogue quickly collapsed into a standard template. The reasons for this lie partially in the logic of administrative systems themselves, the desire to create order out of organizational messiness through ‘rationalized packages’ (Hasselbladh and Kallinikos 2000). ‘The situation to be regulated, which is embedded in the context of a life-history and a concrete form of life, has to be subjected to violent abstraction ... so that it can be dealt with administratively’ (Habermas 1987: 363). This ‘violent abstraction’ operates through a variety of mechanisms. Notably, planning and performance measures rely on a specialized vocabulary, translating the variety of everyday experience into a standardized managerial language. For the purpose of comparison this language is then converted into quantified and apparently objectified measures. Centralized control relies on Townley et al.: Rationalization of Organizations 1059 the structuring of these into a hierarchical matrix that can relate the performance of the individual manager or unit to the whole organization (Townley 1995). These mechanisms constitute political technologies that render a realm governable (Foucault 1991). We elaborate these processes below. Specialized Vocabularies In a specialized vocabulary of business planning and performance measurement, actions and events are reconstituted as policy goals, outcomes, outputs, processes, and outcome measures. The development of a specialized organizational language is an important element of an instrumental rationalization. First, it provides the basis for creating administrative objects and establishing causal relationships. Specialized vocabularies of strategies, budgets and performance measures articulate and construct new organizational visibilities and objects to be acted upon (Hopwood 1987). Second, a specialized vocabulary is accompanied by specialist personnel who act as official ‘translators’. Rather than enabling reasoned justification, people’s everyday activities now become reconstructed and represented using this vocabulary (Oakes et al. 1998). Specialized ‘expert’ groups in departments and central government agencies develop new measures independently of the professional knowledge and experience of front-line managers and critique any measures proposed by them. ‘The specialized knowledge and skill that experts provide plays a pivotal role in framing decision-making agendas and the substantive outcomes that flow from them’ (Reed 1996: 574). The introduction of new mechanisms of formalization and abstraction creates power imbalances between those familiar with these terms and those who are not. These imbalances are never stable. Once knowledge is formalized and codified, it is subject to continual elaboration by new forms of expertise (Reed 1996). In the CFHR Division, concerns were raised over issues of communicative competence. The new vocabulary was in the main alien to the vocabulary of government. There was an obligation on those involved to absorb and apply this vocabulary quickly. As one division manager stated: ‘Government documents provide the lexicon for the new system. The initial statement mentioned mission, goal statements and vision statements. We picked up on the new language, vision, mission, strategies etc.’ (Division manager 1995). Although managers made use of this new vocabulary, it was not a lexicon that came easily. It also bore no resemblance to their lived experience: ‘All of this planning suggests that everything is set and then it happens ... is very nice in text books, but that’s BS when it comes to real life’ (Site manager 1995). The difficulty in remembering a new lexis and all its categories (goals, objectives, measures and so on) was expressed several times, often by those who had responsibility for devising a performance measurement system. It was a language that was alien to most site personnel: ‘Our team had real problems trying to grasp the concept of a benchmark. In fact most of the period that was allotted to us — I think it was only two hours — was spent arguing about what is a benchmark. And, even people like X [an ‘expert’] 1060 Organization Studies 24(7) had trouble trying to explain to us what a benchmark was’ (Site manager 1995). The criterion of comprehensibility for the validity of the reforms was soon undermined. Quantification The stress on performance measures, a critical component of the business planning process, reflected the importance attached to them by Osborne and Gaebler (1993). Politicians and senior civil servants offered recurring mantras: ‘What can’t be measured, can’t be managed,’ and ‘If you don’t measure results, how can you tell success from failure?’ The performance measures required under the Albertan performance measurement system were to be quantitative. Thus, ‘the use of subjective evaluation of performance should be avoided where possible to enhance the objectivity of results. ... [However,] using subjective rating systems for client satisfaction surveys on the direct delivery of services is acceptable’ (Alberta Treasury 1996: 9). Measures are more powerful than words as a mechanism of transcription due to their reproducibility, durability and communicability (Latour 1987; Hasselbladh and Kallinikos 2000). In Alberta, qualitative measures would only be used under sufferance. The dangers of focusing on easily quantified objects, leading to a preoccupation with them, and resulting in bizarre strategic consequences, has been amply demonstrated elsewhere (Wilensky 1967; Smith 1993; Chwastiak 2001). Outcome measures were chosen as the main reporting mechanism for ‘stakeholders’ and the public. As Osborne and Gaebler emphasize, a ‘perfectly executed process is a waste of time and money if it fails to achieve outcomes desired’ (quoted in Alberta Treasury 1996: 2). Input measures and output measures are no longer adequate because ‘they fail to indicate whether government programmes are achieving the desired results’ (Alberta Treasury 1995: 2). As the government’s objective ‘is not simply to measure results but to improve on them’, ministries were challenged to develop outcome measures ‘which demonstrate the result or impact of their activities’ (Alberta Treasury 1995: 11). The difficulties of measuring outcomes spawn a ‘mosaic of indicators’ (Jackson 1988: 11). In Alberta, in addition to the five official types of measures (core government measures, key ministry measures, management measures, societal indicators and watch list measures), there were also activity-based measures (level of demand for services), efficiency measures (for example, costs of performing the activity on a per unit basis), intermediate measures or short-term outcome measures, and outcome measures (for example, healthy Albertans and well-educated workforce), each with their own targets. While such a rich mosaic of measures can support reasoned justification and guide action, there is also a self-generating momentum of continual elaboration in the desire to represent organizational complexity. This can result in managers being trapped in a measurement panopticon. Original enthusiasm and pride in the division’s activities led to some overoptimistic assessments of the type of measures that could be set for the future, for example increasing visitation measures by 10 percent per year, or Townley et al.: Rationalization of Organizations 1061 growth in income generation by 5 percent annually. Some of the difficulties of this optimism and naivety became obvious over time. Revising these targets downward may be acceptable in a process of reasoned justification, but when used instrumentally they became a weapon to be used against the managers. In our case, managers manoeuvred to avoid any potential embarrassment: ‘There is the recognition of the danger of tying into measures. We’re now going for five year averages’ (Division manager 1995). There was an increasing concern that measures could come to dominate activities: ‘We have to be careful getting into the measurement game. [There is a danger] we put resources into monitoring rather than delivery. We know what gets measured directs the organization. Therefore we have to be sure that we measure the things we want to measure.’ (Division manager 1996) A specific concern was that some outcome measures, for example visitation, could seriously compromise the mandate of the division to provide ‘authentic’ history and not popular history, in terms of a Hollywood or Disney version of history: ‘I won’t measure excellence in terms of people through the door. If we give them what they want, we give them the US West’ (Division manager 1997). Similarly, since students did not pay and were thus not counted as visitors, measuring visitation by revenues also undermined the educational mandate of museums. Managers felt that such concerns represented a potential pathology of measures. Under these circumstances, measures became simply mechanisms of calculability: ‘The issue is that satisfying the reality of numbers overwhelms everything else. And what is more frustrating is that we only had limited control over the indicators chosen, for example, visitation. We were told to improve the indicators and measures without a concern with underlying reality.’ (Division manager 1997) Initial enthusiasm that the measures were a valid method of improving activities gave way to a growing disillusionment at both division and site level: ‘I cannot tell you what the measures are. They change all the time and I don’t bother to remember them’ (Site manager 1996). This disillusionment was exacerbated by continuing budget cuts which were experienced throughout government: ‘We can’t use performance measures. All we can do is measure the rate of decline’ (Site manager 1997). The irony of the latter, that measures might be used to engage in a debate about the need for investment of public resources, was, by this point, lost. In the context of reasoned justification, rates of decline could form the basis for decision and action. Now decline was simply an embarrassment, from which politicians needed to be protected. All these measures undermined both a comprehensible and practical legitimacy that reasoned justification might be based on. They also created a web of evaluation cues that threatened managers. The measures offer the possibility for reasoned justification if they are used to discuss trade-offs between measures and goals. However, hierarchical evaluation affects their use. Further, even if measures are seen to have limited empirical validity (for 1062 Organization Studies 24(7) example, they poorly reflect the activity or purpose they are intended to represent), managers feel pressured to manage to them (Hopwood 1973). Rose (1991) explores this general process of managing by numbers, pointing out that quantification stimulates a variety of debates about the adequacy, accuracy, abuse, morality and privacy of numbers. These valuable debates can inform reasoned justification, but too often numbers are deemed to speak for themselves and preclude debate. Structuring a Hierarchical Matrix Measures were consciously conceived as forming a tiered relationship with other measures. Their interrelationship provided the articulation of means– end relations that were seen as underlying all government activity. Core government measures were regarded as an aggregation of lower level measures; key ministry measures supported core government measures; management measures provided programme-specific information for higherlevel measures; and societal indicators gave an overview of Alberta society. The role of performance measures as they were articulated within a disciplinary matrix, promised control and easily identifiable causal relationships, an assumed linear progression along a causal chain from inputs to outcomes. Decompositional and reductionist, the whole is assumed to represent the sum of the parts. The performance management system provides the refinement of the techniques of calculation, a specialized knowledge, which proffers the calculability of events and the extension of technically rational control, inducing the belief that the phenomena of everyday life are calculable and, in principle, controllable (Townley 2002b). The final result is the creation of an articulated and integrated matrix or map that combines the disparate elements together. Figure 1 (derived from Alberta Treasury 1996) demonstrates administrative abstraction. Units of government are linked by a fixed system of reports and measures which themselves are hierarchically ordered, structuring the content of reports and plans at the adjacent level. Through this hierarchical structure, the action plans of all employees are required to link to measures of the state of Alberta. This rigid template is an administrative elaboration of the original template chosen to address the questions posed (see Table 1). Whereas Table 1 raises questions, Figure 1 provides a fixed administrative framework for how these questions may be addressed. Broader debates of overall purpose very quickly became focused on these given categories. The template came from Osborne and Gaebler (1993) — the ‘bible’ for change. For them, reinventing government required a clear matrix: the definition of the fundamental mission; the articulation of an organization’s basic goals; creating the vision; developing strategies to realize vision and goals; implementing a set of measurable goals and responsibilities; a timetable for realizing strategies; measurement and monitoring of progress; and evaluation of results and feedback. It is a matrix that attempts to capture everything within a disciplinary grid, to totalize and individualize, that is, identify the individual components of, and contributions to, each process (Foucault 1979, 1991). Specifying results is a process of rendering explicit means–ends relations. The possibility that 1063 Townley et al.: Rationalization of Organizations Figure 1: Performance Measurement as Instrumental Rationalization LEVEL MEASUREMENT MATRIX Government Societal Indicators, Core Government Measures ‘Measuring Up’ Ministry Departmental Performance Measures Accountability Reports, Annual Reports, Business Plans, Core Businesses, Departmental Goals Division Divisional Performance Measures Business Plan, Core Businesses and Desired Outcomes, Goals, Objectives and Targets Branch/Unit Branch Performance Measures Business Plan, Goals, Objectives, Targets Individual Performance Appraisal, Action Plans, Productivity Plus, Core Competencies the links between measures and outcomes, inputs and outputs, monetary expenditure and accomplishments, may not be explicit, is not considered: ‘Measures should be intuitively understandable and provide sufficient background information to enable the reader to see the relationship between what is being monitored and how it is assessed. If the reader is unable to see the linkage between the measure, outcome, and goal, the report does not constitute a valid accounting to the public.’ (Alberta Treasury 1995: 9) Developing a meaningful specification of means–ends relations has been challenged. McSweeney and Sherer (1990) point out that most public-sector organizations have not only conflicting and ambiguous goals, but that the technology to transform inputs into desired outputs is unclear. Specifying means–ends relations closes off dialogue about alternative models of how the organization works, for example non-linear models that stress complexity, recursion or synergy. One of the most widely used models of performance measurement, the Balanced Scorecard, is explicitly justified (Kaplan and Norton 2001) as a means to develop causal models (referred to as ‘strategy maps’) of the organization. Yet, when introduced as a hierarchical matrix, such maps are as likely to be used as legitimating ammunition and rationalization devices than as a means for decision-making and reasoned justification (Burchell et al. 1980). Again, discussion of means–ends relations may allow for reasoned justification, but if it is asserted that there is only one means– ends relation, then this closes dialogue and biases the process in favour of instrumental reasoning. 1064 Organization Studies 24(7) In CFHR, the initial promise had been that, once accepted, the three-year plans would provide some stability in which the managers could learn to be more entrepreneurial. That promise disappeared and managers were left feeling resentful. To them, the move to reasoned justification was now seen as insincere, as a form of manipulation. ‘People are pretty cynical. They see performance indicators as just one more thing they’ve got to do’ (Site manager 1997). In addition, the links between measurement, operations and actions were questioned: ‘Can we measure the back of operations stuff? Do we manage better with or without the measures? We still don’t know’ (Division manager 1997). Conclusion: A Continuing Dialectic? Mintzberg (1994) identifies several factors that may account for difficulties with performance measures: the failure to follow the correct process in introducing what are major changes to the way managers have been used to operating; underestimating the length of time it takes for major changes; and a lack of commitment of those involved, usually at senior management level. Organizational politics and the political environment of government are other factors that have been identified as undermining major changes. Certainly, some of these are reflected in our case. To concentrate solely on organizational factors, however, neglects the dialectic or interplay of the two dimensions of rationalization that are immanent within performance measures and indicators: their potential as the basis for reasoned justification and communicative action, and their role in the enhancement of an instrumental rationalization. As we have shown, both dimensions informed responses to the introduction of business planning and performance management systems. Introduced with the potential of enhancing reasoned justification, these technologies (accountability reports, business plans and performance measures) simultaneously worked toward a dominant instrumental rationalization. In Alberta, the reforms were initially concerned with cutting government expenditures, not through an unreflective general cut, but through a rational process involving business planning and performance measurement, where justification, accountability, transparency and entrepreneurial initiative were to be dominant. We observed how managers in Alberta initially saw the Albertan version of New Public Management as promising opportunities for wider public consultation, and multiple arenas for dialogue and deliberation around issues of values, goals, and mission. All too often, however, attention shifted to technical inquiry, for example specific technologies for measuring performance, strategic planning, revising incentive mechanisms, costing outcomes, and linking budgets to results. As the plans and measures were introduced and experienced, initial enthusiasm waned. Performance measures were introduced, ostensibly to allow a professionally controlled field to become more accountable and accessible to a broader public. Middle managers in CFHR increasingly saw these Townley et al.: Rationalization of Organizations 1065 mechanisms as denying their expertise, closing off debate and promoting an instrumental rationalization. The operationalization of reasoned justification was undermined by an instrumental rationalization. The increasing concerns of CFHR managers about business planning and performance management reflects the dialectic between rationalization as a process of reasoned justification (bringing to open and conscious reflection the criteria and grounds for action) and rationalization as the institutionalization of an instrumental reason. Their responses were informed by an acceptance of rationalization as an exercise in reasoned justification and an acknowledgement of the potential for measures to facilitate action. While recognizing the need to make planning and measures work, there was also a resistance to a dominance of a purposive or instrumental rationality. There was an underlying belief in the validity of the appeal to reasoned justification, but also an awareness of the dangers of an instrumental rationality being taken too far in its operationalization. Managers showed a willingness to accept the premises of change and engage in its objectives, but were wary about the methods for its execution. The two potentially conflicting, but inherently connected forces are part of the same rationalization process. They are also an important explanation of the dynamics of responses to organizational change. In our study, we have shown how the managers understood and embraced the process of ‘reinventing government’ as an attempt to engage in the potential for reasoned justification. However, the operationalization of reinventing government through business planning and performance measures involves dimensions of both an instrumental rationalization and communicative action. The relationship between the potential for reasoned justification and an instrumental rationalization sets the parameters within which the participants in our study understood the purpose and function of ‘reinventing government’. The agents involved draw on both dimensions to work out responses to articulating and acting, as they are involved in negotiating, in real time, answers to questions of ‘What should we do?’, or ‘How should we manage?’ The two dimensions of rationalization may be envisaged as maintaining the tensions that provide the basis for informed action. At times communicative rationalization may be complementary to purposive-rational, economic and administrative action, but it may also act as a counteracting tendency against it. This interdependence needs to be acknowledged, and the interrelationship traced more thoroughly in order to understand change and enable more effective public management. Having argued for a dialectic between the two dimensions of rationalization, however, we see a bias or tendency for one dimension to be privileged. Calls for greater accountability and more responsive and thoughtful government became operationalized as a mechanical and instrumental rationality of performance reports, outcome measures and performance incentive schemes. Our observations of how formal systems and templates for performance measurement were introduced in Alberta shows how an instrumental reasoning came to dominate reasoned justification and communicative action. There are 1066 Organization Studies 24(7) systemic logics, both of a political nature and immanent in the techniques themselves (Townley 2002b), that favour an instrumental domination. It can be otherwise, and that is the value of stressing the dialectical character of rationalization and change processes. In contrast to a mechanistic conception, performance measures have the potential to stimulate a debate about the ‘macro picture’. The demand for reasoned justification around the meaning, validity, effects and uses of performance measures can always erupt; this is the point about the inherent possibility of contradiction. The formalization and the promotion of the new expertise can be used by managers to construct new debates, questioning assumptions of the measures and enabling new meanings to be developed. The inherent contradictions in plans and measures suggest that there is always change. Although processes of change are connected to wider structures of power that mean that managers are not wholly autonomous agents, mangers have some freedom to interpret and act. This is reflected in their questioning of and resistance to specific mechanisms of formalization (Townley 2002a). For example, the response of increasing numbers of managers to a performance measurement system conceived in terms of instrumental mastery has been to experiment unofficially with new technologies that seem to offer the promise of reasoned justification. Attempts are being made to develop new measures, for example to assess the preservation mandate of the department. Such attempts reopen debates about the desirability and feasibility of quantification (Rose 1991). Important questions that arise from these observations concern the possibilities and conditions for reasoned justification in the public sphere, whether this is possible and how it might be operationalized. These questions have been addressed by work on socializing forms of accountability (Roberts 1996) and ‘deliberative democracy’ (for example, Chambers 1996; Habermas 1989; Forester 1993, 2000), which focuses on the public sphere as ‘an institutionalised arena of discursive interaction’ (Fraser 1992: 2). We conclude by highlighting some implications of this work. Roberts (1996), for example, argues for the importance of dialogue within organizations, in the attempt to combine the benefits of instrumental and communicative action. Dialogue facilitates interdependence, socializing forms of accountability, and communicative action to achieve objectives. It requires the recognition of mutual dependence, making assumptions explicit, regarding everyone as a colleague whose views must be attended to, and a willingness to confront hierarchical power and challenge the interests and assumptions of those in power. This allows for the informal, socializing side of organizations to be brought into the daylight of formal organizational practices, and for ‘the instrumental and the moral ... be[ing] brought back into relation’ (Roberts 1996: 59). In public-policy decision-making, managers in government organizations are experts who often deal with political and economic actors with multiple interests in order to achieve a public good (Forester 2000). They operate in the context of uncertainty about what the problems are and what will work, confused moralities, competing interests, and historical and deep-seated inequalities and resentments. Consequently, Forester (2000) argues that Townley et al.: Rationalization of Organizations 1067 reasoned justification or deliberative democracy should encourage three elements: ‘technical inquiry’ about available strategies and analytical methods of project and policy analysis; explicit value inquiry about obligations and responsibilities, and goals and values to be honoured or respected; and the recognition of the importance of social identities — the worries and fears, hopes and loyalties, commitments and self-images of participants. The conditions for dialogic conversation and deliberative democracy, however, can all too easily degenerate into pseudo-participation and managerial manipulation of organizational commitments and identities, thereby collapsing into instrumental rationality, as was illustrated in our case. Although governmental organizations, such as the CFHR, are not completely public spaces, they espouse values of openness, public consultation, internal dialogue and acting for the public good. These espoused values create the space for dialogue and communicative action. In our case, however, technical inquiry soon overshadowed deliberation about values and social identities. There was little recognition of inequalities; participation was carefully managed to marginalize many voices; and dialogue about interests, hopes and loyalties was frequently seen as illegitimate. These biases and exclusions were then reinforced by the specific technologies of performance measurement. Resistance arises, however, when there is a growing disarticulation between a discourse operating as communicative rationalization, but being operationalized through mechanisms that predominantly reflect dimensions of an instrumental rationalization. A weak link between managerial technologies, which can take on varying significance and use (for example, as instrumental mastery or reasoned justification), and the rationality that explains these mechanisms (for example, enhancing accountability, reasoned justification and communicative action) provides a continuing source of tension and conflict that sets the parameters of change. While the appeal to communicative rationality attempts to stabilize participants’ social construction of the changes that are taking place, the instrumental rationalization associated with the technologies of implementation destabilizes this. Such disarticulation has important consequences. When the coordination of action becomes unhinged from communicatively established consensus, participants are not required to be responsible for their actions. In other words, the control of behaviour passes from the authority of the conscience of associated individuals to the planning authority of societal organizations: ‘more and more complex networks that no-one has to comprehend or be responsible for’ (Habermas 1987: 184). ‘As the process of rationalization advances, the subsystems of purposive rational action become increasingly independent of ethically grounded motives of their members and thus make increasingly superfluous any internal behaviour controls related to moral practical rationality’ (Habermas 1984: 353). This represents our fundamental concern with the developments in Alberta: the substitution of technical for moral responsibility in the name of morality. But equally, we suggest, it could be otherwise. 1068 Organization Studies 24(7) Note The authors gratefully acknowledge the financial support of the Canadian Social Sciences and Humanities Research Council and the Certified General Accountants of Alberta. 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Academy of Management Journal 45/1:163–179. Townley, Barbara 2002b ‘Managing with modernity’. Organization 9/4: 549–573. Weber, Max 1978 Economy and society. Berkeley, CA: University of California Press. Wildavsky, Aaron 1975 Budgeting: A comparative theory of budgetary processes. Boston: Little, Brown and Company. Wilensky, Harold 1967 Organizational intelligence: Knowledge and policy in government and industry. New York: Basic Books. Barbara Townley Barbara Townley is Chair of Management and Organization at Edinburgh University and Visiting Professor, University of Alberta. She has published widely, including two books and articles in ASQ, AMR, AMJ, JMS, OS and Organization. Her research uses the work of Foucault and critical social theory to examine HRM, performance measurement and public-sector management initiatives and their ethical implications. She received her PhD from the LSE. Address: Management School, Edinburgh University, 50 George Square, Edinburgh, EH8 9JY, Scotland. E-mail: [email protected] David J. Cooper David J. Cooper is Certified General Accountant Professor of Accounting and Director of the PhD Programme at the School of Business, University of Alberta. He is co-editor of Critical Perspectives on Accounting, and on the editorial board of six other journals. He has published eight books and more than 50 articles in journals such as ASQ, AOS, OS and CPA. His current research concerns management control in the public sector and the management of professional firms. He received his PhD from the University of Manchester. Address: School of Business, University of Alberta, Edmonton, Alberta, T6G 2R6, Canada. E-mail: [email protected] Leslie Oakes Leslie Oakes is an Associate Professor at the Anderson School of Management, University of New Mexico. She has published widely in ASQ, AOS, Accounting Review and the Journal of Accounting and Public Policy. Her research focuses on the social role of accounting, accounting for non-profit organizations, the history of accounting and interdisciplinary research on social policy. She received her PhD from the University of Wisconsin. Address: Anderson School of Management, University of New Mexico, Albuquerque, NM 87131, USA. E-mail: [email protected] Accounting Organizations and Society, Vol. 12, No. 3, pp. 273-291, 1987. Printed in Great Britain 0361-3682/87 $3.00+.00 Pergamon Journals Ltd. MODES OF REGULATION IN ADVANCED CAPITALISM: LOCATING ACCOUNTANCY IN FOUR COUNTRIES* A. G. PUXTY University o f Sheffield H U G H . C. W I L L M O T T University o f Aston and D A V I D J. C O O P E R a n d T O N Y L O W E University o f Manchester Institute o f Science a n d Technology Abstract The paper presents a framework for examining how accounting practices are regulated within advanced capitalist societies. Through the critical use of Streeck & Schmitter's (Private Interest Government and Public Policy, Sage, London, 1985) exploration of models of social order, regulation is theorised as an expression of the combination of the organising principles of Market, State and Community. The analytical framework is then applied to compare modes of accounting regulation in the Federal Republic of Germany, the United Kingdom, Sweden and the United States of America. The paper highlights the significance of contradictions within and between the organising principles of advanced capitalism and seeks to display the regulation of accounting as a medium and outcome of the articulation of these contradictions. The social context of accountancy, has not been g i v e n t h e e m p h a s i s w e b e l i e v e it w a r r a n t s . A c o n c e r n w i t h t h e s o c i a l c o n t e x t is i m p o r t a n t if accountants are to understand their position and r o l e s h i s o c i e t y a n d if t h e s i g n i f i c a n c e o f a c c o u n t a n c y is t o b e a s s e s s e d . A c c o u n t a n c y p r a c t i c e s may be significant in relation to their social and economic consequences which include not only the more obvious and direct effects on resource a l l o c a t i o n i n s o c i e t y (Zeff, 1 9 7 8 ) b u t a l s o t h e e x tensiveness and legitimacy of economic calculative discourses and practices, the reinforcement o f o r g a n i s a t i o n a l b o u n d a r i e s ( w h a t is t o c o u n t as i n t e r n a l a n d w h a t is n o t t o c o u n t b e c a u s e it is e x ternal to the enterprise) and the reproduction of the relations of production and distribution more generally. This paper focusses on the roles of account a n c y i n r e g u l a t i n g e c o n o m i c a n d s o c i a l activities in society and the manner in which the institutions of accountancy are themselves regulated. These aspects are intertwined. The study o f t h e r e g u l a t o r y i n s t i t u t i o n s o f a c c o u n t a n c y inv o l v e s a n e x a m i n a t i o n o f t h e i n t e r p o l a t i o n o f accounting technologies and ideologies in regulating the relations and practices of social repro- * We gratefully acknowledge the financial assistance of the Economic and Social Research Council, who are funding the project "Accounting Regulation as Corporatist Control" as part of their initiative on Corporatism and Accountability. This paper is a product of initial theorising on this project and an earlier version of this paper was presented at the Accounting and Culture Conference in Amsterdam, the EGOS Colloquium in Stockholm, and the Interdisciplinary Perspectives on Accounting Conference in Manchester. We appreciate the comments made by contributors at each of these Conferences, and notably Simon Archer, Sten Jonsson, Keith Robson, Tony Tinker and Grahame Thompson. Any errors or misunderstandings are our own responsibility. 273 274 A.G. PUXTYet aL duction. The mode of regulating accountancy is likely to affect the content and consequences of accounting policy and practices. Conversely, the form of accounting rules will have implications for the mode of their regulation. The paper analyses the roles of accountancy in regulating social and economic activities in society by developing a framework for understanding a variety of principles of regulation. 1 It then explores the scope and variation in modes of accounting regulation in a number of late capitalist societies (using the U.K., U.S.A., Sweden and West Germany as examples). It presents a relatively elaborate framework for understanding principles of regulation in order to contribute to a comparative analysis of accountancy in which different modes of its regulation are associated with the distinctive histories and institutional specificities of different nations. However, in highlighting different modes of regulation, a fundamental commonality amongst the four countries studied is also recoguised. All are advanced capitalist economies in which systematic and persistent patterns of inequalities in power and resources exist between (fractions of) capital and labour. To talk of advanced or organised capitalism is to acknowledge that the contradictions of capitalism are reflected and sustained not only through increasingly internationalised and monopolised markets but also through various forms of state and neo-corporatist modes of socio-economic regulation (Mandel, 1975; O'Connor, 1973; Offe, 1984; Streeck & Schmitter, 1985). More substantively, the paper provides a framework for exploring and evaluating contemporary challenges to the authority of the regulatory institutions of accountancy, a challenge which is perhaps most visible in the United States, but is also emerging in Western Europe. This challenge comes from at least two sources. Emerging from the political Left in the 1970s, there has been a critical appraisal of the monopolisation of the market for accounting services and challenges to the lack of accountability of professional bodies (Tinker, 1985). At the same time, the radical Right has re-asserted the value of unfettered market forces and thereby challenged the efficacy of professional self regulation (Benston, 1978-80). Concurrently, the relationship between the modern state, large multinational corporations and multi-national accountancy companies has brought into question the most appropriate mode of regulation of accountancy institutions and the roles of accountants in modern society. The paper is structured into four main sections. The first offers a framework, developed by Streeck & Schmitter (1985), for exploring the varying approaches to regulation in advanced capitalism and the roles of accounting therein. Three organising principles - - the market, the state and the community - - are identified as providing modes of regulation. In the second section we advance a critique of the limitations of the Streeck & Schmitter framework in which it is argued that their framework is deficient in maintaining a focus on the nation state, thereby ignoring the increasingly significant international and transnational institutions of regulation. Further, the framework is shown to be flawed by its somewhat ahistoric and asocial character. In consequence, it provides neither an explanation for the origins, reproduction or transformation of the modes of regulation, nor an indication of the role of human agency in such dynamic processes. Despite these failings, their framework is valuable in highlighting the contradictory nature of regulatory modes. More specifically, it provides considerable insight into the comparative analysis of accounting regulation which is offered in the third section of the paper. Finally we offer a commentary on the comparative analysis of accountancy regulation, showing h o w the organising principles of State, Community and Market apply to the regulation of accountancy institutions and h o w these principles exist in relation to one another. This paper is intended to contribute to the growing concern to locate and analyse accountancyin its social context (see for example, Scott, 1931; Lowe& Tinker, 1977;Burchell et aL, 1980, 1985; Benston, 1979/80;Tinker, 1984, 1985;Cooper & Sherer, 1984). MODES OF REGULATIONIN ADVANCEDCAPITALISM TOWARDS A CONCEPTUAL FRAMEWORK The institutions and processes of accounting r e g u l a t i o n in different n a t i o n - s t a t e s c a n n o t b e u n d e r s t o o d i n d e p e n d e n t l y o f t h e h i s t o r i c a l and politico-economic contexts of their emergence a n d d e v e l o p m e n t . F o r this reason, w e v i e w t h e p a r t i c u l a r i n s t i t u t i o n a l f o r m s a n d social p r o c e s ses o f r e g u l a t i o n as an o u t c o m e o f d i s t i n c t i v e constellations of material and ideological forces that a r e p r e s e n t w i t h i n different nations. To take t h e e x a m p l e o f t h e U.K., w e w o u l d h i g h l i g h t t h e h a r d i n e s s o f laissez-faire i d e o l o g y a n d t h e signific a n c e o f t h e City as a w o r l d financial c e n t r e . T h e c o n j u n c t u r e o f t h e s e a s s o c i a t e d e l e m e n t s has c r e a t e d c o n d i t i o n s f a v o u r a b l e for a c c o u n t a n t s to o c c u p y a k e y p o s i t i o n as "the w a t c h d o g s o f Financial Capital" ( A r m s t r o n g , f o r t h c o m i n g ) . H o w e v e r , w h i l e r e q u i r i n g sensitivity w i t h res p e c t to t h e e x i s t e n c e o f significant d i f f e r e n c e s b e t w e e n e c o n o m i e s a n d societies, it is also rel e v a n t to r e c o g u i s e t h e i r similarities. This cons i d e r a t i o n has a l r e a d y b e e n a l l u d e d to in charact e r i s i n g t h e m as " a d v a n c e d capitalist". This label is i n t e n d e d to signify a n u m b e r o f c o m m o n feat u r e s o f o u r f o u r nation-states. First, it i m p l i e s that t h e y are p a r t a n d p a r c e l o f a m o n o p o l i s t i c stage o f c a p i t a l i s m in w h i c h t h e p o l i t i c a l e c o n o m y o f nation-states is i n c r e a s i n g l y cond i t i o n e d b y t r a n s n a t i o n a l forces, p a r t i c u l a r l y multinational corporations and military and e c o n o m i c ' a l l i a n c e s (e.g. NATO, EEC). Second, t h e label i m p l i e s that, as c a p i t a l i s m "advances", i n s t i t u t i o n s o f t h e state h a v e t e n d e d to b e c o m e increasingly intertwined with the operation of m a r k e t forces. Third, it allows that, d e s p i t e t h e historical tendency towards rationalisation and d i s e n c h a n t m e n t , m o d e r n nation-states h a r b o u r a n d d e p e n d u p o n t h e e x i s t e n c e o f t h e values a n d ideals o f c o m m u n i t y . A l b e i t in d i s t o r t e d form, t h e s e values m a y still e x e r t a p o w e r f u l , if anac h r o n i s t i c , i n f l u e n c e in t h e r e g u l a t i o n o f everyd a y e c o n o m i c a n d p o l i t i c a l life. H o w e v e r , as 275 w i t h t h e o t h e r p r i n c i p l e s , this i n f l u e n c e will differ a c c o r d i n g to t h e c o n t r a s t i n g histories, cult u r e s a n d p a t h s o f d e v e l o p m e n t o f different nation states. 2 W e have s u g g e s t e d that an analysis o f a c c o u n t ing r e g u l a t i o n as a social a n d o r g a n i s a t i o n a l p h e n o m e n o n r e q u i r e s critical a p p r e c i a t i o n o f its c o n s t r u c t i o n w i t h i n a n e x u s o f " m a r k e t forces", "bureaucratic controls" and "communitarian ideals". In stressing t h e i m p o r t a n c e o f a p p r e c i a t ing t h e i m p o r t a n c e o f t h e n e x u s o r fusion o f t h e s e o r g a n i s i n g p r i n c i p l e s , w e s e e k to avoid f o r m s o f analysis in w h i c h t h e c o n t r a d i c t o r y p o l i c i e s and p r a c t i c e s e m a n a t i n g from b o t h capitalist e n t e r p r i s e s a n d state i n s t i t u t i o n s disapp e a r f r o m v i e w (Frankel, 1983, pp. 1 1 - 1 2 ) . To this end, w e d r a w initially u p o n t h e w o r k o f Streeck & Schmitter (1985) who have identified t h r e e ideal-typical p r i n c i p l e s o f c o o r d i n a t i o n a n d a l l o c a t i o n " d i s p e r s e d c o m p e t i t i o n " (Market), " h i e r a r c h i c a l c o n t r o l " ( S t a t e ) and "spont a n e o u s solidarity" ( C o m m u n i t y ) . Figure 1 illustrates t h e i r m o d e l . The differences between these principles can b e s t b e a p p r e c i a t e d b y c o m p a r i n g a n d contrasting t h e m in t e r m s o f t h e i r r e s p e c t i v e s o u r c e s o f m o t i v a t i o n a n d authority, o n t h e o n e hand, and s o u r c e s o f t e n s i o n a n d cleavage, o n t h e other. For example the operation of the principle of d i s p e r s e d c o m p e t i t i o n is s e e n to g e n e r a t e b o t h e c o n o m i c e n t r e p r e n e u r s w h o m a x i m i s e profits a n d c o n s u m e r s w h o are satisfied w i t h t h e material benefits d e r i v e d f r o m c o m p e t i t i o n . But tensions are u n d e r s t o o d to arise f r o m t h e basic conflict o f i n t e r e s t b e t w e e n sellers a n d b u y e r s o f p r o d u c t s as w e l l as factors o f p r o d u c t i o n . In contrast, t h e a u t h o r i t y o f h i e r a r c h i c a l c o n t r o l , as o p e r a t i o n a l i s e d b y c a r e e r civil servants for example, is v e s t e d in a g r e e d rules a n d p r o c e d u r e s b a c k e d u p b y t h e state's m o n o p o l y o f l e g i t i m a t e c o e r c i o n . This p r i n c i p l e o f c o o r d i n a t i o n a n d all o c a t i o n is c h a r a c t e r i s e d b y its successful p r o t e c t i o n o f a c t o r s f r o m e x t e r n a l t h r e a t s a n d its 2As Frankel ( 1983, p. 14) notes, "While it is perfectly reasonable to speak of the French state, or the Turkish state, or any such shorthand term which implies a set ofhistoricaUy specific social institutions and relations, it is quite another matter to involve concepts of 'the State' and 'the capitalist State' as if they were self-evident or empiricallyvisible and similar in all societies and over long periods of time". 276 A. G. P U X T Y e t al. Fig 1. Three principles of social order. 1. Guiding principle of coordination and allocation Market State Community Dispersed competition Hierarchical control Spontaneous solidarity Bureaucratic agencies Families 2. Predominant coilective Firms actor 3. Principal medium of exchange Contracts Authoritative regulation Compacts 4. Predominant resources Economic entrepreneurship, calculative rationality Legitimate control over means of coercion Respect, trust, inherited status 5. Principal motives of superordinate actors Profit Career advancement; bureaucratic stability Esteem offonowers 6. Principal motives of subordinate actors Material benefit Fear of punishment Belonging to group; desire to share in common values 7. Common motive ofall actors Maximisingadvantage Maximisingpredictability; minimising risk Satisfyingidentity 8. Principal line of cleavage SeUersvs buyers Rulers vs ruled Natives vs foreigners 9. Principal pay-offs External security; equitable and predictable treatment Mutual affection; collectiveidentity Material prosperity Adapted from Streeck & Schminer (1985). s e c u r i n g o f e q u i t a b l e and p r e d i c t a b l e t r e a t m e n t for all its citizens. T e n s i o n s arise, n o n e t h e l e s s , in r e l a t i o n to p r i v i l e g e s that rulers p r o v i d e for t h e m s e l v e s and o b l i g a t i o n s t h e y i m p o s e o n others. Finally, w i t h s p o n t a n e o u s solidarity, l e a d e r s are d e s c r i b e d as e n j o y i n g t h e e s t e e m o f followers w h o themselves benefit from a sense o f belonging. As m e m b e r s o f a c o m m u n i t y b o t h g r o u p s are able to "satisfy t h e i r m u t u a l n e e d s for a s h a r e d affective e x i s t e n c e and a d i s t i n c t i v e coll e c t i v e identity" ( S t r e e c k & Schmitter, 1985, p. 7), b u t t e n s i o n s are g e n e r a t e d by t h e a p p e a r a n c e o f o u t s i d e r s w h o fail to r e s p e c t t h e sanctity o f d o m i n a n t n o r m s and values. A l t h o u g h S t r e e c k & S c h m i t t e r stress t h e pres e n c e o f internal t e n s i o n and cleavage, t h e y also e m p h a s i s e that t h e m a i n threat to t h e persist e n c e and l e g i t i m a c y o f t h e s e organising principles is e x t e r n a l - - that is, it is p o s e d by t h e coe x i s t e n c e o f other, c o m p e t i n g p r i n c i p l e s o f order. For, as t h e y s e e it, u n d e r t h e c o n d i t i o n s o f " m o d e r n i t y " , e a c h o f t h e s e p r i n c i p l e s o f o r d e r is in c o m p e t i t i o n for " t h e allegiance o f specific groups, for t h e c o n t r o l o f s c a r c e r e s o u r c e s , for t h e i n c o r p o r a t i o n o f n e w issues, for t h e definition of rules regulating exchanges b e t w e e n them, and so forth" ( 1 9 8 5 , p. 9). A n d yet, paradoxically, e a c h o r d e r is also a c k n o w l e d g e d to f e e d off t h e fruits o f its " c o m p e t i t o r s " . Capitalist m a r k e t relations, for e x a m p l e , are reco g n i s e d to b e d e p e n d e n t u p o n t h e a u t h o r i t y o f t h e state for e n s u r i n g "the p o l i c i n g o f c o n t r a c t s " n o less than it is u p o n t h e p r e s e n c e o f "trust, def e r e n c e , e s t e e m and c o n s e n t r o o t e d in c o m m u n i t a r i a n p r a c t i c e s " (p. 9). Likewise, t h e state's a u t h o r i t y is s e e n to b e reliant u p o n "the socialised identification o f its s u b j e c t s w h o ass o c i a t e it w i t h a p a r t i c u l a r nation, e t h n i c group, r e l i g i o n o r ' c o m m u n i t y o f fate'" (p. 9).3 To s u m up, S t r e e c k & S c h m i t t e r a t t e n d to 3Our conceptual framework focusses on the social and organisational shaping of accounting practice by nation-state specific forces of regulation that have a degree of national specificity. But, equaUy it has been necessary for this framework to be sensitive to accounting practices as c o n d i t i o n a n d m e d i u m of these forces as weB as a product of them. Accounting itself plays a formative role in advancing, mediating and legitimising the principles and mechanisms that underpin and condition its own MODES OF REGULATION IN ADVANCEDCAPITALISM " m o d e r n i t y " as a c o m p o s i t e o r d e r in w h i c h a del i c a t e b a l a n c e is m a i n t a i n e d b e t w e e n t h r e e formally incompatible, yet substantively interdependent, guiding principles of coordination and allocation. 4 In our view, the value of Streeck & S c h m i t t e r ' s d i s c u s s i o n r e s i d e s in its s e n s i t i v i t y t o the complexity and multi-dimensionality of " m o d e r n i t y " a n d its p r o v i s i o n o f a d e t a i l e d f r a m e w o r k o f analysis. It r e c o g n i s e s h o w t h e institutions and practices of modernity are conditioned by the presence of ordering principles that are simultaneously interdependent and contradictory. However, we have reservations about the analytical commitment and points of departure of their framework. These reservations can be summarily stated by highlighting a number of absences within t h e i r d i s c u s s i o n o f h o w s o c i a l o r d e r is acc o m p l i s h e d . First, it l a c k s a n h i s t o r i c a l d i m e n sion. T h e r e is l i t t l e a p p r e c i a t i o n o f h o w t h e p r e sence and interpretation of the three organising 277 p r i n c i p l e s is h i s t o r i c a l l y s p e c i f i c . S e c o n d , t h e i r analysis t e n d s t o b e c o u c h e d in t e r m s o f t h e e x a m i n a t i o n o f s o c i a l o r d e r w i t h i n n a t i o n states. T h e r e is little s p a c e , o r signs o f i n v i t a t i o n , t o app r e c i a t e t h e l i m i t e d p o l i t i c a l a n d e c o n o m i c autonomy of states within a world system. Third, and most crucially, Streeck & Schmitter's framew o r k offers n o a t t e m p t t o d i s c e r n w h i c h c o n t r a d i c t i o n s w i t h i n " m o d e r n i t y " a r e central in g e n e r a t i n g c h a n g e b o t h g e n e r a l l y a n d also in t h e r e l a t i v e p r e s e n c e a n d i n f l u e n c e o f t h e t h r e e organising principles within contemporary social practices. Before advancing a critique of their p o s i t i o n , t h o u g h , w e e x p l o r e m o r e fully its c o n t r i b u t i o n t o s e n s i t i s i n g us t o t h e p r i n c i p l e s t h a t m a y i n f o r m a c c o u n t i n g as a s o c i a l p r a c t i c e . A c c o u n t i n g as a social p r a c t i c e O u r a r g u m e n t s o far is t h a t an a d e q u a t e s t u d y o f a c c o u n t a n c y r e g u l a t i o n m u s t a t t e n d t o its ins t i t u t i o n s a n d its p r a c t i c e s as e m e r g e n t w i t h i n , Market (d spersedcompett on) J "-.. State I (hierorchicnicontro[) // J~ccounting practices J 1 Community (spon~oneoussoldority) Fig. 2. Accounting and the intersection of ordering principles. practices. Double entry book-keeping, for example, is widely recognised as a critical technique for the establishment and universalisation of capitalist relations of production. More particularly, where states have supported and/or licenced the operation of professional bodies, these associations have selectively sought tile preservation of ideals of community (i.e. service to the public interest) as a means of vouchsafing their authority (Willmott, 1985b). In doing so, they may be seen to offer themselves and their clients a degree of protection from the "twin evils" of the anarchic irrationality of the market and the bureaucratic surveillance of the state. 4 Here it is relevant to note that Streeck & Schmitter go on to identify what they regard as a fourth principle, an inter- and intra-organisational consertation, which ".isattributed to the associative model of social order. As wili become clear, we accept that this fourth principle has assumed greater significance in modern capitalist societies, and is of relevance to our study in so far as accounting regulation is accomplished through inter- and intraorganisational concertation (e.g. the role of professional associations in the U.IC). However, we believe that the properties of the Associative model of social order are better understood as an outcome of the intersection of "Market", "State" and "Community" than as properties that can be analysed independently (see Winmott, 1985a). 278 A.G. PUXTYet al. and reproductive of, the intersections between ordering principles (see Fig. 2 ). We n o w explore the relevance of each of these principles, with reference to accounting in the U.K. Dispersed competition. Accountancy practice is regulated by market principles in a variety of ways. First, with respect to internal "management" accounting private firms are the major providers or generators of accounting information. Accounting practices pervade the modern organisation and take on increasing significance as they are used to control and improve, as well as monitor, employee and organisational performance. Indeed, the expansion of accounting practices into virtually every area of corporate life is promoted and supported as the pressures to maintain or improve the extraction of surplus value mount in the face of competition (Hopper et al., 1986). Second, within the U.I~, capital market pressures have stimulated the development of accounting disclosures. Indeed it has been suggested that company accounts, produced to facilitate the smooth operation of capital markets, would be, or have been. constructed and audited without the goad of regulation. (Watts, 1977; Benston, 1973). Hierarchical control The principle of hierarchical control is also significant in the formation and reproduction of accountancy practice. For example, of considerable importance is the passing of legislatior. (e.g. Company Acts, commercial codes, market regulations) that make the preparation and publication of company accounts a legal requirement. In this way, the state, or associated agencies, seeks to hold companies accountable for their activities and ensures that costly information is made available for both market and non-market actors - - something that the market mechanism could not be relied upon to provide. The principle of hierarchical control intervenes, therefore, to ensure that basic accounting practices are undertaken as a means of reducing the turbulence and uncertainties associated with the erratic discipline of the market. However, in the U.IC, the state does not exercise this control directly by passing detailed statutes. Instead, the legislation governing accounting practice merely indicates in very general terms the minimum requirements in respect, for example, of the preparation and auditing of company accounts. The detail of h o w accounts are to be drawn up is left to the "discretion" of the accountancy profession. It is the members of the profession, in consultation with advisors from a plurality of interest groups, who formally specify the precise content of the standards which determine h o w accounts are prepared. And it is members of the profession, not the state, who are responsible for verifying (i.e. auditing) the position presented in published accounts. Spontaneous solidarity. A recognition of the role of the profession brings us to a consideration of"community" in shaping accounting practice. Clearly, it would be a mistake to equate the organisation or the profession with the operation of the principle of spontaneous solidarity. For, in essence, the formal organisation of an occupation into professional associations in the U.K. was promoted, historically, by the unreliability of an unregulated, "free" market for accounting expertise (Willimott, 1986). In this market, sellers of accounting labour w h o possessed a measure of expertise and honesty were being brought into disrepute by those who possessed little save the ability to make a fast buck in an unregulated market in which many buyers were unable to assess the quality and reliability of the product. To justify their monopolistic efforts to restrict the supply of accounting labour the emergent, "industrial" professions drew heavily upon the ideals of c o m m u n i t y - - of gentlemanly conduct and public service. To attain and legitimise social closure, emphasis has been placed upon "good breeding", upon being wellconnected and upon the "personal" qualities associated with such characteristics as reliability, trustworthiness and fellowship. Even as training and qualifications have been introduced to provide impersonal validations of technical competence, the trappings of Establishment virtues have been retained, not least because these have an instrumental value in legitimising market MODESOF REGULATIONIN ADVANCEDCAPITALISM practices and, thereby, securing the market value of accounting labour (Macdonald, 1984). But equally, it is important to acknowledge that accounting activities may also be defended and reproduced by practitioners because they offer a valued source of personal satisfaction, collective identity and social esteem, and not solely because they are of instrumental, material value. The principles of dispersed competition, hierarchical control and spontaneous solidarity all play a role in the regulation of accountancy practice. Accountancy regulation is something that cannot be analysed by reference to only one or even two of these principles since it is clearly a mix of all three of them. Recent debates over inflation accounting in the U.I~ indicate the problematic and potentially volatile nature of this mix. The U.IC state may have p r o d u c e d a blueprint in the form of the Sandilands Report ( C m n d 6225, 1975) but the Accounting Standards Committee, having earlier tried to produce a blueprint themselves, were expected to implement the State blueprint. Market resistance has resulted in the withdrawal of a standard, with calls for either the State or the Stock Market to provide mandatory backing for any future standard ( C o o p e r e t al., forthcoming). The above observations beg the question of which of the principles is dominant in the conditioning of the institutions and practices that constitute accountancy regulation. If the carriers of these institutions and practices (e.g. accountants) are analysed in isolation from the economic and political contexts in which they are shaped, the answer might well be "spontaneous solidarity" or, at least, the selective borrowing and embellishment of communitarian principles by professional associations. If the activities of accountants are abstracted from the wider context, accountants alone appear to be responsible for determining the specific contents of accounting policy, standards and practice. It is only when the formation and development of the institutions and practices of accounting regulation are theorised as an o u t c o m e as well as a medium of advanced capitalist structures of economic and political relationships that it becomes evident that the very presence of an or- 279 ganised "profession" depends upon the presence of other organising principles. It is to a consideration of the significance of these principles that we n o w turn. BEYOND THE EQUILIBRIUM MODEL It has been suggested that Streeck & Schmitter's framework is analytically useful in disclosing the presence, absence, characteristics and inter-relations of the three principles of order. However, the potential value of Streeck & Schmitter's framework is constrained by its fragmented focus upon the constituent elements of the ideal-typical orders, to the neglect of the tot a l i t y that is constituted through their intersection. Absent from their discussion is any general theory of society that offers an analysis of the principle or principles that are more, or less, dom i n a n t in t h e constitution and reproduction of modernity. Even when disclosing the existence of cleavage and contradiction, their examination of models of order only emphasises the presence of checks and balances within and between principles. It offers little or no indication of the force of each principle either in relation to the others or, more importantly, in relation to their intersection. Of course, there is no easy or definitive answer to the question of which forces or principles are dominant or determinant in the constitution of accounting in modern society. As Tinker ( 1 9 8 4 ) stresses, in exploring the conjuncture between advanced capitalism and accounting regulation, it is also necessary to be sensitive to the ways in which structured social inequality and conflict is "mediated, modified and transformed" and that other conflicts are also present. Amongst these, Tinker numbers racial, sexual and psychological conflict. Of equal relevance to the present argument, perhaps, are the conflicts over professional identity (which may well include strong sexual and racial strains) that cannot be reduced to structural (class) conflict. Yet, while recognising the ( m u t e d ) presence of what we refer to as the Community principle of organisation, we c o n c u r with Tinker that there is a considerable 280 A.G. PUXTYe t aL danger in the analysis of regulation becoming preoccupied with the manifest tension and conflicts within and between interest groups. Analysis should not overlook the deeper, defining structural relations of advanced capitalism which both enable and constrain the expression and resolution of such conflicts. Or, as Tinker, in emphasising the importance of the historical context, puts it: it is important not to lose a sense of proportion by letting the "moderators" and "intervening factors" take on greater significancethan that which is being moderated structural conflict itself. - - But, equally, we believe that it is a mistake to stress the explanatory-power of "structural conflict" if the effect is to deny or neglect the critical role of agents in the reproduction of social systems. For although agents are positioned in a structure of class relations, they are still obliged to respond inventively to the manifestation of contradictions that are continuously "thrown up" by this structure. Although clearly conditioned by the location of their positions within the class structure, these responses are not programmed by this location. Indeed, what is crucial to realise is that there are ideological (as well as material) conditions for the reproduction of class relations and, more specifically, the positions/subjects within these relations (Coward & Ellis, 1977; Therborn, 1980; Pecheux, 1982). With the reservation that the continuation of advanced capitalism is conditioned by the ideological production of compliant subjects, we are persuaded that an appreciation of the structural contradictions endemic to advanced capitalist modes of production is an important key to understanding the fundamental dynamics of regulating accounting policy and practice. For example, the free operation of the Market principle of "dispersed competition" tends to frustrate its own reproduction since, by definition, each participant in a competitive market - - labour as well as capital - - has a vested interest in excluding, or wiping out, the competition - - by buying it up, by pricing it out and/or by erecting massive barriers to entry. Indeed the very operation of the market stimulates a cyclical crisis of overproduction during periods of "boom" which are then drastically terminated by "slump". During this cycle, there is a continuous crisis of underinvestment as demand falls and the competitive response of substituting capital for labour has the effect of reducing future opportunities for realising a surplus. Finally, by commodifying labour and by socialising and rationalising the process of production, there is a tendency for labour to b e c o m e homogenised, deskilled and generally "proletarianised". This process can lead to a situation where labour is more likely to discern a collective interest in withdrawing consent from, if not actively resisting, the oppressive demands of capital for relations of production and consumption whose primary concern is sustaining a political e c o n o m y of private appropriation. And yet, in each case, the flexibility and adaptability of the capitalist mode of production, the capacity for its contradictions to be contained and displaced but not removed, also needs to be recognised. For example, with the development of the market, a limited number of very large, often multinational competitors can b e c o m e sufficiently big to be unconcerned by the continuous emergence of numerous small firms that compete for very localised and specialist segments of their market. Frequently, it is these small firms that smooth the periods of "boom" and "slump" as their entrance is stimulated by a rise in demand (just as their exit is promoted by its fall), whereas the bigger firms draw upon their reserves to weather the storm. The existence of reserves also offers the latter the possibility of strategic restructuring through diversification, for example by investing in new technologies as a means of "outpacing" the tendency for the rate of profit to fall. Similarly, potential crises of over production and under-investment are averted or buffered by the realisation that demand can be created through the stimulation of mass needs. Thus, in advanced capitalist nation states at least, it is the affiuent worker with money to invest as well as spend, not the impoverished worker, w h o has b e c o m e the boon of capitalist development - - develop- MODES OF REGULATIONIN ADVANCEDCAPITALISM m e n t w h i c h , o f c o u r s e , r e q u i r e s c o n t i n u o u s exp a n s i o n i n t o n e w m a r k e t s in o r d e r to e n s u r e acc u m u l a t i o n . In this p r o c e s s , t h e division bet w e e n t h e "political" a n d " e c o n o m i c " s p h e r e s has e n c o u r a g e d t r a d e u n i o n i s t s a n d e m p l o y e r s alike to f o r m u l a t e a n d i n t e r p r e t e m p l o y e e dem a n d s in n a r r o w , e c o n o m i c terms. T h e basic, e x p l o i t a t i v e s t r u c t u r e o f capitalist s o c i e t y is t h e n largely t a k e n for g r a n t e d as t h e focus o f d e b a t e t u r n s u p o n n o t i o n s o f "fair wages" a n d "ability to pay" w i t h i n t h e cash nexus. Effectively e x c l u d e d f r o m t h e e c o n o m i c s p h e r e a r e issues, for e x a m ple, r e l a t i n g to t h e c o n t r o l and a c c o u n t a b i l i t y o f c a p i t a l in r e l a t i o n to t h o s e w h o p r o d u c e t h e w e a l t h (cf. H a w o r t h & Ramsie, 1985). In t h e c o n t e x t o f a d v a n c e d capitalism, h o w ever, it is insufficient to limit analysis to t h o s e c o n t r a d i c t i o n s w h i c h a r e essentially e c o n o m i c in nature. This is b e c a u s e d u r i n g t h e d e v e l o p m e n t o f t h e capitalist m o d e o f p r o d u c t i o n , t h e state has p l a y e d an i n c r e a s i n g l y i m p o r t a n t a n d q u a s i - a u t o n o m o u s r o l e in m e d i a t i n g a n d organising t h e c o n t r a d i c t o r y t e n d e n c i e s o f capitalism. For e x a m p l e , in its l i m i t e d r e s p o n siveness to t h e d e m a n d s o f l a b o u r a n d its conc e r n w i t h f o r m a l l y d e m o c r a t i c d e c i s i o n making, t h e state has b o t h facilitated a n d f r u s t r a t e d t h e o p e r a t i o n o f t h e M a r k e t p r i n c i p l e as t h e d o m i n ant m e a n s o f r e g u l a t i n g social a n d e c o n o m i c relations (Poulantzas, 1975; Offe, 1984). In r e c o g nising t h e i n f l u e n c e o f State p r i n c i p l e s in t h e regu l a t i o n o f capitalist d e v e l o p m e n t , i n c l u d i n g acc o u n t i n g , it is n e c e s s a r y to r e j e c t t h e c r u d e Marx i a n f o r m u l a t i o n o f t h e state as an i n s t r u m e n t o r " e x e c u t i v e c o m m i t t e e " o f a unified capitalist clans as w e l l as t h e i d e a that its p o w e r is always t i g h t l y c o u p l e d to class i n t e r e s t s (Lenin, 1971; Miliband, 1973). Instead, t h e state is s e e n to make often poorly coordinated and pragmatic r e s p o n s e s to t h e c o n s t r a i n i n g i n f l u e n c e a n d re- 281 sistance o f o r g a n i s e d l a b o u r as w e l l as t h e p o w e r e x e r t e d b y fractions o f capital. In this light, t h e state is t h e o r i s e d as a c o m p l e x a n d l o o s e l y c o u p l e d set o f i n s t i t u t i o n s that e n j o y a d e g r e e o f "relative a u t o n o m y " f r o m e c o n o m i c class interests. In r e s p o n d i n g to class p r e s s u r e s to pursue p o l i c i e s a n d d e v e l o p i n s t i t u t i o n s o f mediation (e.g. c o r p o r a t i s t forms o f e c o n o m i c regulation), r e g u l a t i o n t h r o u g h t h e state s e c u r e s and e x t e n d s its p o w e r base as it s i m u l t a n e o u s l y facilitates a c c u m u l a t i o n for capital and e m p l o y m e n t for labour. In large part, t h e d e v e l o p m e n t o f t h e app a r a t u s o f t h e state as a t h i r d f o r c e has arisen f r o m o r g a n i s e d l a b o u r ' s f o r m a l l y successful p u r suit o f t h e d e m a n d for p o l i t i c a l r e p r e s e n t a t i o n t h r o u g h u n i v e r s a l suffrage. A l t h o u g h this a c h i e v e m e n t has n o t r e s u l t e d in t h e transformat i o n o f t h e state, it has p r o d u c e d s u p p o r t for p o l i c i e s that m a y r u n c o u n t e r to t h e l i b e r a l princ i p l e s o f t h e Market. A m o n g s t s u c h p o l i c i e s are t h o s e that e x p a n d d e m a n d , p r o m o t e r e g i o n a l dev e l o p m e n t , s u b s i d i s e d e c l i n i n g industries, and e x c l u d e capital f r o m p a r t i c i p a t i o n in p o t e n t i a l l y p r o f i t a b l e m a r k e t s (e.g. b y n a t i o n a l i s a t i o n ) o r regulate the pricing of commodities, including labour. O f c o u r s e , m a n y o f t h e s e p o l i c i e s h a v e also b e e n i n d i r e c t l y a d v a n t a g e o u s to capital, especially when the cost of expanding demand, i m p r o v i n g c o m p e t i t i v e n e s s o r a t t r a c t i n g investm e n t has b e e n s o c i a l i s e d t h r o u g h s e l e c t i v e c h a n g e s in t a x a t i o n a n d p u b l i c e x p e n d i t u r e . H o w e v e r , universal suffrage ( a n d p r o p o r t i o n a l r e p r e s e n t a t i o n ) has also h a d t h e largely unint e n d e d c o n s e q u e n c e o f stabilising a n d legitimising t h e s t a t u s q u o o f w e l f a r e c a p i t a l i s m s i n c e p o l i t i c a l p a r t i e s are o b l i g e d to a p p e a l to t h e " m i d d l e g r o u n d " o f p o l i t i c a l o p i n i o n in o r d e r to s e c u r e a w o r k i n g majority. 5 Yet, in o r d e r to s e c u r e p o l i t i c a l l e g i t i m a c y 5 Although we have noted the (unintendedly) "functional" role of the state in preserving the status quo, we would wish to reassert our emphasis upon the presence and critical importance of contradictions within the capitalist mode of production that are displaced into, and not resolved by, the political sphere following interventions by the state (Offe, 1984). Late capitalism enters a political crisis as the shortfall between the demands of the electorate on the one hand, and the suppliers of goods and tax revenue, on the other, is widely perceived as its failure, and not attributed either to a lack of realism on the part of the electorate, to profligate state expenditure and/or to economic mismanagement by the party in power. Needless to say, the task of avoiding and discrediting such a perception is undertaken by the leaders and spokesmen of those parties and interest groups most committed to the "free enterprise", Market principles of capitalism. 282 A.G. PUXTYet aL t h r o u g h t h e b a l l o t b o x , t h e m a n a g e r s o f t h e state are u n d e r p r e s s u r e to i n t e r v e n e in t h e e c o n o m y at all levels to c o u n t e r t h e d e f i c i e n c i e s and irrationalities o f t h e o p e r a t i o n o f M a r k e t principles. And, in d o i n g so, t h e y c r e a t e an a r m y o f unp r o d u c t i v e b u r e a u c r a t s w h o s e allegiance is n e i t h e r d i r e c t l y to "capital" n o r "labour" b u t rather, to t h e s e c u r i t y (i.e. p r e s e r v a t i o n ) o f t h e m o d e r n state, to its e l e c t e d r e p r e s e n t a t i v e s and, n o t least, to themselves. M o r e o v e r , t h e m a n a g e r s o f t h e state (i.e. p o l i t i c i a n s and s e n i o r civil serv a n t s ) have c o m e to d e p e n d u p o n various agencies o f i n t e r e s t r e p r e s e n t a t i o n (e.g. p r o f e s s i o n a l a s s o c i a t i o n s ) to w h o m state p o w e r is "licensed", a n d o v e r w h o m c o n t r o l is e x e r c i s e d o n l y indirectly -- through the threat of withdrawal of the licence. T h e t e n d e n t i a l effect o f state m a n a g e r s ' p o s i t i o n i n g in r e l a t i o n to t h e d e m a n d s o f d i v e r s e capitals, o r g a n i s e d labour, t h e e l e c t o r a t e and its l i c e n s e e s is t o w a r d s t h e uneasy, restless r e p r o d u c t i o n o f t h e status quo.. COMPARATIVE ACCOUNTANCY REGULATION Theorising accountancy regulation It s h o u l d n o w b e c l e a r that o u r u n d e r s t a n d i n g o f the r e l a t i o n s h i p b e t w e e n "Market", "State" and " C o m m u n i t y " p r i n c i p l e s o f s o c i e t a l regulation is that t h e y are b o t h essential and p r o b l e m a t i c a l for the " o r d e r i n g " o f a d v a n c e d capitalism. In e x a m i n i n g a c c o u n t a n c y regulation, w e t h e o r i s e its i n s t i t u t i o n s a n d p r a c t i c e s as an outc o m e o f i n t e r a c t i o n s b e t w e e n p a r t i e s (e.g. div e r s e state managers, agents o f fractions o f capital and r e p r e s e n t a t i v e s o f o r g a n i s e d i n t e r e s t g r o u p s ) w h o are p o s i t i o n e d w i t h i n a s t r u c t u r e o f p o l i t i c o - e c o n o m i c r e l a t i o n s that is simultaneously u n i t e d a n d d i v i d e d b y i n t e r n a l c o n t r a d i c tions, t e n s i o n s and struggles. A c c o r d i n g l y , t h e a c t i o n s a n d a c c o u n t s o f t h e s e p a r t i e s will b e t h e o r i s e d as an e x p r e s s i o n o f t h e fusing o f t h e p r i n c i p l e s o f Market, State a n d C o m m u n i t y . In this light, t h e r e p r o d u c t i o n / r e f o r m o f t h e prevailing s t r u c t u r e o f p o l i t i c o - e c o n o m i c r e l a t i o n s is s e e n as an ( o f t e n u n i n t e n d e d ) c o n s e q u e n c e o f t h e s e p a r t i e s ' efforts to m o b i l i s e t h e i r s t o c k o f m a t e r i a l a n d i d e o l o g i c a l r e s o u r c e s ( i n c l u d i n g ins t i t u t i o n s ) to n e g o t i a t e p o l i c i e s a n d p r a c t i c e s o f r e g u l a t i o n that are p e r c e i v e d , w i t h i n t h e t e r m s o f t h e i r o w n frames o f r e f e r e n c e , to safeguard o r a d v a n c e t h e i r o w n individualistic c a r e e r interests as w e l l as t h e class i n t e r e s t s o f t h o s e o n w h o s e b e h a l f t h e y act. 6 Reflecting h i s t o r i c a l a n d c u l t u r a l differences b e t w e e n nation-states, variations in t h e c o m b i n a t i o n o f p r i n c i p l e s that r e g u l a t e i n s t i t u t i o n s a n d p r a c t i c e s o f r e g u l a t i o n are to b e e x p e c t e d . Facilit a t e d b y t h e in-built flexibility a n d a d a p t a b i l i t y o f the capitalist m o d e o f p r o d u c t i o n , t h e s t r u c t u r e s o f a d v a n c e d c a p i t a l i s m invite a n d a c c o m m o d a t e a n u m b e r o f nation-state specific strategies dealing w i t h e m e r g e n t p r o b l e m s (cf. Strinati, 1982). O n c e applied, a n d e m b o d i e d in m o d e s o f regulation, t h e s e strategies s h a p e a n d c o n s t r a i n t h e c o n d i t i o n s a n d d i r e c t i o n s o f future d e v e l o p ment. By r e t u r n i n g to o u r e a r l i e r d i s c u s s i o n a n d c r i t i q u e o f m o d e l s o f social o r d e r , w e can identify a n u m b e r o f t h e o r e t i c a l l y p o s s i b l e m o d e s o f r e g u l a t i o n ( s e e Fig. 3). M i r r o r i n g o u r a r g u m e n t that, in this c o n t e x t , t h e organising p r i n c i p l e s o f C o m m u n i t y are s u b o r d i n a t e d to t h o s e o f Market a n d State, t h e s e m o d e s are s e e n to r e l y m o s t h e a v i l y u p o n s o m e m i x o f t h e l a t t e r e l e m e n t s . So, at o n e e x t r e m e , t h e r e is t h e ideal-typical m o d e o f Liberalism w h e r e b y r e g u l a t i o n is p r o v i d e d exclusively b y t h e d i s c i p l i n e o f M a r k e t principles. That is to say, activity o c c u r s , a n d i n f o r m a t i o n is p r o v i d e d , o n l y if it is f o u n d to b e c o m m e r c i a l l y d e m a n d e d . At a n o t h e r e x t r e m e is t h e c o n c e p tual p o s s i b i l i t y o f Legalism, w h i c h relies u p o n t h e u n r e s e r v e d a p p l i c a t i o n o f State p r i n c i p l e s . In 6 When saying this, it is not assumed that these perceptions are "accurate", or that they are devoid of undesirable unintended consequences, or indeed that there is a well defined link between interests, actions and outcome (Foucault, 1977). On the contrary, there is every expectation that actions and accounts will be informed by unexamined and indelible prejudices, assumptions and rationalisations about the purpose and process of accountancy regulation. But, as researchers, our role is not to mirror and thereby legitimise these actions and accounts as the reality of regulation but, rather, to illuminate this "reality" from an intellectually coherent perspective. MODES OF REGULATION IN ADVANCEDCAPITALISM Market ~LiOeralism \ .. 283 Legalism/State Corporatism / Community Fig. 3. Strategies of regulation situated in relation to dominant models of social order. this case, behaviour is sanctioned only if it follows the letter of the law - - law that is enforced not by commercial failure, but by the state's m o n o p o l y of the means of coercion. Because neither Market nor State principles exist in a p u r e form actual m o d e s of regulation can only approximate to the ideal-types of Liberalism and Legalism. More useful for empirical analysis, then, is the notion that, within different nationstates, the regulation of accounting, for example, can be c o m p a r e d along the Liberalism-Legalism axis. Between these poles, different diluted combinations of Market and State principles, with remnants of Community principles, are to be exp e c t e d (discussed below). Clearly, an adequate analysis of accountancy regulation requires a grounded study of policy makers and their social context. In the absence of such studies, w e may make a preliminary assessment of the dominant, but ever shifting, combinations of m o d e of regulation in the four nation states, using evidence about their formal institutions of regulation. This will provide an indication of the utility of the framework adopted and a theoretically grounded appreciation of the different patterns which currently exist in late capitalist nation-states. Modes o f accounting regulation in f o u r nation-states An example of predominantly Legalist modes would appear to be the Federal Republic of Germany. Regulation there is predominantly the o u t c o m e of statute law, both the Aktiengesetz, 1965, and tax legislation. "The regulations of German tax law for the determination of taxable income are (almost) as important as regulations of commercial law" (Wysocki, 1983, p. 59). These laws, though created by lawyers and administrators in the Ministry of Justice, are also influenced by representations, and relevant bodies including Wirtschaftsprufer, accountants in industry, and accounting academics (Busse von Colbe, 1984) n o w concentrate on attempting to influence the process of developing n e w laws by lobbying. Additional regulatory institutions which indicate the significance of State princi~ pies in developing a Legalistic m o d e include the Commercial Code (Handelsgesetzbuch) of 1897 "finally amended 4 July 1980" (Wysocki, 1983, p. 58) anti decisions by the courts. As with all codified legal systems, the latter involves an interpretation by the judicature of the intention of statute and the commercial code; the principle of the p r e c e d e n t does not apply. These legalist influences have b e e n modified, however, by the introduction of other principles of regulation. Market principles may be evidenced in the charts of accounts of individual industries that tend to be followed by the firms in that industry. Combinations of Market and Communitarian principles seem to apply in two further elements. The "Grundsatze Ordnungsmassiger Buchfuhrung" (variously translated as "Generally Accepted Accounting Principles" and as "the 284 A.G. PUXTYet aL principles of proper book-keeping") influences a c c o u n t a n c y regulations. For, a c c o r d i n g to W y s o c k i ( 1 9 8 3 ) : "Even g i v e n t h e a b o v e legal r e g u l a t i o n s c o n c e r n i n g a c c o u n t i n g s t a n d a r d s in t h e F e d e r a l R e p u b l i c o f G e r m a n y t h e r e is conside r a b l e s c o p e for s o m e form o f a c c o u n t i n g stand a r d s for e x t e r n a l a c c o u n t i n g . This s c o p e , acc o r d i n g to t h e will o f t h e G e r m a n Legislature, is to b e filled b y t h e G r u n d s a t z e O r d n u n g s m a s siger B u c h f u h r u n g i.e. b y g e n e r a l l y a c c e p t e d acc o u n t i n g principles". Finally, W y s o c k i refers t o a n o t h e r b o d y n o t all u d e d to b y o t h e r authors: An organization which is quite active in the interpretation of GAAPis the "lnstitut der Wirschaftsprufer..." and its professional committee, the "Hauptfachauschuss"... the Hauptfachau$chuss has since the thirties published many pronouncements, comments and releases about accounting principles under German legal provisions. Although these pronouncements, comments and releases are formally private opinions, they are taken to be equivalent to GAAPin many cases. There are only a few of these pronouncements which have not been accepted by the public in Germany... (p. 62). A l t h o u g h o t h e r s o u r c e s suggest that t h e I n s t i t u t e d o e s n o t f o r m a l l y issue a c c o u n t a n c y regulations, this b o d y seems, to s o m e e x t e n t at least, to have a parallel a u t h o r i t y n o t t h r o u g h issuing specific r e g u l a t i o n s b u t b y a d j u d i c a t i n g o r advising o n fundamental principles. W h i l e W e s t G e r m a n y a p p e a r s to q u i t e c l o s e l y a p p r o x i m a t e legisalism, o t h e r n a t i o n states s e e m to a d o p t a c o m b i n a t i o n o f m o d e s . As a first app r o x i m a t i o n , t w o m i x e d m o d e s c a n b e identiffed. In t h e first o f these, r e g u l a t i o n is acc o m p l i s h e d t h r o u g h t h e d e v e l o p m e n t o f organisations that are f o r m e d to r e p r e s e n t a n d a d v a n c e t h e i n t e r e s t s o f t h e i r m e m b e r s . In r e l a t i o n to acc o u n t a n c y , t h e p r e s e n c e a n d i n f l u e n c e o f professional b o d i e s is t h e m o s t o b v i o u s e x a m p l e o f t h e s t r a t e g y o f Associationism. In this m o d e , t h e r e is some dependence upon principles of Community. H o w e v e r , s u c h p r i n c i p l e s are r o u t i n e l y subo r d i n a t e d to t h o s e o f t h e Market. M e m b e r s h i p is f o u n d e d p r i n c i p a l l y u p o n calculative r a t i o n a l i t y r a t h e r than a d e s i r e to share in c o m m o n values. The other "mixed" mode along the L i b e r a l i s m - L e g a l i s m axis i n v o l v e s a g r e a t e r reliance u p o n State p r i n c i p l e s o f " h i e r a r c h i c a l con- trol". H e r e t h e State d o e s n o t simplyl i c e n s e t h e e x i s t e n c e o f o r g a n i s e d i n t e r e s t g r o u p s b u t incorp o r a t e s t h e m into its o w n centralised, h i e r a r c h i cal s y s t e m o f regulation. In d o i n g so, t h e state s i m u l t a n e o u s l y r e c o g n i s e s its d e p e n d e n c e u p o n t h e s e associations a n d seeks to u s e t h e m as an ins t r u m e n t in t h e p u r s u i t and l e g i t i m a t i o n o f its policies. This m o d e o f regulation, w h i c h w e des c r i b e as C o r p o r a t i s m , has r e c e i v e d m o s t attention in r e l a t i o n to t h e m a c r o level w h e r e governm e n t s c o n d u c t tri-partite n e g o t i a t i o n s w i t h repr e s e n t a t i v e s o f industrial capital a n d l a b o u r (e.g. in t h e U.K. c o n t e x t , t h e C o n f e d e r a t i o n o f British I n d u s t r y a n d t h e T r a d e s U n i o n Congress). However, m o r e generally, C o r p o r a t i s m d e s c r i b e s any " a t t e m p t to assign to i n t e r e s t associations a dist i n c t r o l e b e t w e e n t h e State a n d 'civil s o c i e t y ' ( m a r k e t a n d c o m m u n i t y ) so as to p u t to p u b l i c p u r p o s e s the t y p e o f social o r d e r that associations c a n g e n e r a t e a n d e m b o d y " ( S t r e e c k & Schmitter, 1985, pp. 2 0 - 2 1 , e m p h a s i s a d d e d ) . Thus, a l t h o u g h t h e strategies o f A s s o c i a t i o n i s m a n d C o r p o r a t i s m c a n b e s e e n to s h a d e into e a c h other, t h e basic d i f f e r e n c e b e t w e e n t h e m lies in t h e e x t e n t to w h i c h t h e State "leans" o n i n t e r e s t g r o u p i n g s to a c h i e v e "public" (i.e. State), as cont r a s t e d w i t h "private" (i.e. M a r k e t ) p u r p o s e s . In t h e light o f this m o d e l , t h e U.I~Lis s e e n to b e p r i n c i p a l l y Associationist in organisation. U.K. p r o f e s s i o n a l b o d i e s have n o t b e e n set u p b y t h e State [although t h e State m a y h a v e b e e n influential in t h e i r d e v e l o p m e n t (Loft, 1986)] a n d t h e p r o f e s s i o n a l b o d i e s are nominally, at least, indep e n d e n t o f it ( W i l l m o t t , 1986). In this c o n t e x t , a c c o u n t i n g s t a n d a r d s are set b y a b o d y , t h e Acc o u n t i n g Standards C o m m i t t e e (ASC) w h o s e m e m b e r s h i p still o v e r w h e l m i n g l y consists o f r e p r e s e n t a t i v e s o f t h e six m a j o r p r o f e s s i o n a l b o d i e s a n d w h i c h is i n d e e d a s u b c o m m i t t e e o f t h e c o o r d i n a t i n g c o m m i t t e e (i.e. the Consultative C o m m i t t e e o f A c c o u n t i n g B o d i e s ) o f t h e s e six b o d i e s ( W i l l m o t t , 1985a). Its rulings d o n o t have t h e f o r c e o f l a w and are n o t i n f r e q u e n t l y ign o r e d b y r e p o r t i n g c o m p a n i e s . In p r i n c i p l e it has t h e p o w e r to d i s c i p l i n e m e m b e r s o f t h e acc o u n t i n g b o d i e s for failure to c o m p l y w i t h t h e s t a n d a r d s for financial statements. H o w e v e r , this p o w e r has n o t b e e n w i d e l y u s e d in t h e fifteen MODESOF REGULATIONIN ADVANCEDCAPITALISM years the system has existed. The standards produced by the ASC are supported, but not enforced, by the Stock Exchange and generally attract favourable c o m m e n t from the government. Members of the ASC are part-time (as with the ASB in Sweden, but in contrast to the FASB in the United States - - see below), and may tend to act as representatives of the institutions they represent (although that may not be the intention). To the extent that the rhetoric (that the ASC acts in the public interest through trust and respect) actually informs its practices, so it may be r e g a r d e d as embodying communitarian principles. However several analyses of the U.K. accounting profession (Johnson, 1980; Puxty, 1984; Cooper, 1984; Willmott, 1985b, 1986) and standard setting (Hope & Gray, 1982) suggest that the Market principle of dispersed competition through economic entrepreneurship and calculative rationality is predominant. However, the principles of liierarchical control are gradually becoming felt in the U.I~, largely through its membership of the European Community. This is most noticeable in changes to the law. The Companies Acts of 1949, 1967, 1976, 1980 and 1981, consolidated into one large Act, in 1985, were orientated to increased disclosure and the discretion of the accounting profession in defining "true and fair". Although embodied into the latest Acts, the undefined principle of true and fair is somewhat problematic in relation to both professional discretion and authoritative regulation. Within the U.K., the overt relationship of the state to the accountancy profession is one in which there is little in the formal structure (only recognition for audit purposes of members of certain bodies) but more considerable informal pressure (for instance the state is represented at the meetings of the ASC and the professional institutes keep in touch with their "sponsoring" Ministry, the Department of Trade and Industry). Further in the U.I~ system the courts and judiciary attempt to understand the letter of the law rather than the intention behind it. There is a system of precedence whereby previous legal decisions are to some extent binding for subsequent court decisions. 285 The relatively direct involvement of the Swedish state in the regulation of accountancy in that nation state leads us to suggest that Corporatism is the best description of h o w accountancy reg~ulation appears to operate there. The State has passed various pieces of legislation governing financial reporting, of which the most important are the Bookkeeping Act 1976, the Companies Act 1975 and the Municipal Tax Act 1926. The requirements are quite detailed. The courts, as in other countries with codified legal systems, interpret the law. Accountancy regulations appear to be particular to broad sectors of the e c o n o m y (there are separate regulations for the public sector, local government and private sectors, for example). For quoted companies, the Stock Exchange has issued guidelines on both the disclosure of information and the form of financial statements. The auditors in Sweden have attempted to emulate the influence of the accounting professions in Anglo-American practice and thereby to introduce Market and Communitarian principles of regulation. The Foreningen Aukterisade Revisover (hereafter FAR) has issued a number of recommendations (using special committees) on auditing, and a few on accounting. However, these are not binding and indeed government legislation set up the Accounting Standards. Board (hereafter ASB). This is a product of the Bookkeeping Act (SFS) of 1976 and reflected in part governmental feeling that the FAR was itself an interested party that was not unbiased in issuing accounting standards. The ASB consists of experts from various interested parties such as auditors, business, academia, small firms, tax authorities and unions. The 1976 Act required it to "further the development of good accounting practices in company books and their published reports" (SFS 1976, p. 377 quoted by Jonsson, forthcoming) intending that it "should with participation from different interested parties in industry . . . work for the improvement of published accounts" (p. 112). The statements of the ASB do not have the force of law "unless the content of the directive is covered by a court ruling or by administrative decisions" (Jonsson, forthcoming). 286 A.G. PUXTYet aL The Swedish state is also directly involved in the authorisation of candidate members of the accountancy profession. After obtaining the appropriate academic qualifications and practical experience, the candidate applies for registration with the Royal Board of Trade. Following this, he may (but need not) apply to join the professional body (FAR). The FAR is not a State body. The duality of the FAR and the ASB appears to make Sweden unique. It is of note that the FAR issues exposure drafts for c o m m e n t before deciding on a recommendation. The ASB does not, and its decisions have, until 1986, been unanimous. After an initial period in which the FAR was unhappy with the establishment of an alternative source of rules, the two boards have now, according to Jonsson, developed a coordinated way of working. However, the FAR is strongly represented on the ASB. The fourth country with which we are concerned, the U.S.A., cannot be typified quite so easily. As a federation of states, much of the hierarchical control takes place at individual state level. Corporate legislation is a matter for the individual states, as is the recognition of the qualified accountant. There is hence a relationship between the state and the profession in that each aspiring Certified Public Accountant (CPA) must obtain recognition from his or her state licensing authority before being allowed to practice. However the American Institute of Certiffed Public Accountants (AICPA) is a national body; and its examinations are c o m m o n to all states and recognised by them. Membership of the AICPA is not compulsory for those w h o wish to practice as CPAs. Accountancy regulation in the U.S.A. as it relates to the corporate reporting of larger companies, is governed principally by a state agency, the Securities and Exchange Commission. Financial statements in the U.S.A. are heavily influenced by the Federal Securities Acts of 1933 and 1934. These incorporated disclosure provisions for companies with assets over $1 m. The latter Act set up the Securities and Exchange Commission (SEC) which undertakes the detailed regulation of corporate disclosure and has considera- ble powers (which it uses). Whilst these arrangements appear to vest considerable authority in State and (capital) Market principles of regulation, the SEC has generally taken the view that detailed accounting regulation should be undertaken by a more "independent" body organised by the U.S. accounting profession. The latest of such bodies is the Financial Accounting Standards Board (FASB), set up in 1974. If the SEC does not like the regulations set by the FASB, however, it is willing to take action to change them. The U.S. Congress, in addition to its influence through the Securities Acts, is willing to overrule the SEC on accounting regulations w h e n it feels it is necessary. As a result, it can be the subject of (sometimes intense) lobbying by affected companies. The FASB is appointed by the Financial Accounting Foundation which itself is funded half by business firms and half by public accounting firms. The FASB consists of seven full-time members w h o are backed up by a large and extensive organization. Its members are n o t intended to be delegates of other bodies. They are specifically required to sever links with existing employers when appointed, which contrasts with Swedish and U.K. practice. The standards produced are mandatory on the companies concerned (as a result of SEC backing). In sum, there is a close relationship between the SEC and the FASB and the accounting profession has some influence both as a lobbying body and, as suppliers of expertise to the Financial Accounting Standards Board. U.S. accounting regulations thus contain elements of Legalism and Associationism, with the latter subordinated to the former. Above, we have identified the formal modes of accountancy regulation in the U.IC, U.S.A., Sweden and Germany. Whilst this may contribute to comparative accounting theory, it is clear that much remains to be done. The dynamic of accountancy regulation could be made more explicit by an historical analysis of advanced capitalism and accounting change. The apparent convergence of modes of accountancy regulation between the four nations states suggests that more attention needs to be paid to international and trans-national pressures. And greater MODESOF REGULATIONIN ADVANCEDCAPITALISM e m p h a s i s c o u l d b e p l a c e d o n the roles of acc o u n t a n c y rules ( w h i c h w o u l d i n c l u d e s t a n d a r d s e t t i n g a n d law m a k i n g ) i n r e g u l a t i n g a d v a n c e d capitalism i n o r d e r that the i n t e r a c t i o n b e t w e e n the r e g u l a t o r y rules a n d the r e g u l a t o r y b o d i e s c o u l d b e m o r e t h o r o u g h l y appreciated. Finally, w e have said little o f the effect of these differing m o d e s o f r e g u l a t i n g a c c o u n t a n c y . Leaving aside the p r o b l e m a t i c n a t u r e of c o n c e p t s such as effectiveness, d e m o c r a c y , utility a n d sophistication, w e c a n n o n e t h e l e s s share the r e c o g n i t i o n of Muis that different r e g u l a t i o n s a n d p r i n c i p l e s of r e g u l a t i o n are likely to have p r o f o u n d l y different material a n d ideological effects: We can broadly categorise countries into "sophisticated" (U.S., U.I~, Netherlands), "legalistic/formalistic" (Germany and France) and the so-called "primitives" (Switzerland, Japan, Italy)... I would like to point out.., that this classification says little or nothing about the socialeconomic utility of public accounting as such: a country may well be classified as "sophisticated", as an index of the thoroughness of its accounting and reporting doctrine, but in an economic sense far worse than the socalled "primitives".We should remember that no one has so far been able to prove a causal relationship between a well-developed public accounting system with an informal but effective communication system among the happy few wielding economic power, take, for example, Switzerland, France and, until recently, Belgium... I believe in it (i.e. the sophisticated model) not for the sake of rational (or rather quasi-rational) economic decision° making but rather because a sound framework of accounting enhances the decision-making process in our democratic society - - of which our economic financial fabric is no more, but also no less, than one of the cornerstones. Transparency in our financial reporting enhances the transparency of our society and thus democ. racy (Muis, 1984, p. 264). COMMENTARY It will b e clear from o u r c u r s o r y e x a m i n a t i o n of these four nation-states that a c c o u n t i n g is regulated differently w i t h i n G e r m a n y , the U.K., S w e d e n a n d the U.S.A. I n r e v i e w i n g these cases, a starting p o i n t is to e x a m i n e t h e i r r e s p e c t i v e features in t e r m s o f c o m m o n a l i t y and contrast. I n d o i n g so, it is w o r t h recalling o u r v i e w that the p r i n c i p l e s of Market, State a n d to a lesser e x t e n t C o m m u n i t y , in the form of"Associationism", are 287 p r e s e n t in all four countries. T h e p r e s e n c e a n d e x t e n s i v e n e s s o f these p r i n c i p l e s is h o w e v e r problematic. It is f u n d a m e n t a l to c o u n t r i e s w i t h codified legal systems that the legal c o d e s a t t e m p t to regulate all c o n d u c t . It is to b e e x p e c t e d therefore that Market p r i n c i p l e s will have a l i m i t e d influe n c e in a c c o u n t a n c y r e g u l a t i o n in c o u n t r i e s w i t h legal systems of this kind. G e r m a n y is the clearest e x a m p l e of the four c o n s i d e r e d here. At first sight, it w o u l d appear that the state is fundam e n t a l i n u n d e r s t a n d i n g the r e g u l a t i o n of acc o u n t a n c y information. However, as w i t h so m a n y systems, this is a m i n i m u m a n d the m a r k e t d o u b t l e s s o p e r a t e s to i n c r e a s e o r modify this m i n i m u m . O n e f u r t h e r feature of the G e r m a n system m u s t b e m e n t i o n e d , h o w e v e r ; the prep o n d e r a n c e of p o w e r i n h e r e n t in the banks w h i c h o w n a n d / o r c o n t r o l a substantial p o r t i o n of the e q u i t y of industry, have substantial repr e s e n t a t i o n o n the s u p e r v i s o r y b o a r d s (Aufsichstrate) of m a j o r industrial e n t e r p r i s e s a n d often have a substantial o w n e r s h i p i n t e r e s t i n firms o f auditors. G i v e n the r e s u l t i n g k n o w l e d g e of affairs b y the banks, t h e r e has b e e n a lack of interest in the F.R.G. (and, to a lesser e x t e n t , in S w e d e n ) in d i s c l o s u r e for i n v e s t m e n t p u r p o s e s (as o p p o s e d to disclosure for the n e e d s of creditors). This p o w e r r e l a t i o n s h i p has therefore had a m a r k e d i n f l u e n c e o n the m a r k e t for inform a t i o n in the F.R.G. T h e i n f l u e n c e of the capital m a r k e t has b e e n m o r e i m p o r t a n t to the U.K_ a n d U.S.A. t h o u g h e v e n here, t h e r e has b e e n considerable state i n v o l v e m e n t . Second, it c a n b e s e e n that i n each case t h e r e is s o m e p r o v i s i o n for the a c c o u n t a n c y profession to share w i t h the state in the c o n t r o l m e c h a n i s m o v e r financial reports. This m a y b e t h r o u g h r e p r e s e n t a t i o n s a n d a r g u m e n t o v e r the s u b s t a n c e o f statute law ( G e r m a n y ) , p r o m u l g a t ing its o w n standards a n d b e i n g p r e s e n t e d o n the g o v e r n m e n t ' s o w n standards b o a r d ( S w e d e n ) , a d m i n i s t e r i n g a standards b o a r d itself (U.K.) or partly f u n d i n g a n d partly h a v i n g its m e m b e r s staff the q u a s i - i n d e p e n d e n t ( o f the state, that is) standard-setting a u t h o r i t y (U.S.A.). Although the form of the i n s t i t u t i o n s varies b e t w e e n c o u n tries, the parties i n v o l v e d d o not; and t h o u g h the 288 A.G. PUXTYet aL overt structures vary, the extent to which different interests have influence over the actual regulations that take place cannot be deduced from the formal structures. Third, there is in all cases some state control over the entrance to the accountancy profession. This is weakest in the U.K.: in the other three countries the state must either register a candidate directly before s/he is permitted to practise as an accountant (Germany, Sweden and the U.S.A.) or there is a state-designed organization to supervise accountancy (as in the German K a m m e r ) . In the U.I~ the government sanction is indirect: the professional bodies admit candidates to membership on the same terms as the state registering bodies in other countries (with requirements to be satisfied concerning education, practical training and integrity) and it does so in the knowledge that State approval for the self-governance of the profession will continue only so long as they exercise the privilege in a way acceptable to the State. Fourth, the different forms of regulation present different potentials and problems. In each country there are likely variations in the roles of accounting and auditing in the accountability of third parties. These variations may reflect the histories and specific features of the State, Market and Community principles of regulation in individual nation-states. These variations may themselves reflect to whom, by what means and for what aspects of behaviour, accountability is present. Accounting and auditing appears to be more extensive as a regulator in the market orientated countries of the U.S. and U.K., yet the institutions of accountancy and auditing may themselves be less subject to pressures for accountability in these nation-states, pressures which may exist in countries more familiar with problems of the accountability of state bodies. These four matters however constitute only the statics of the structural and procedural commonalities and differences among the four countries. Located as they are in different spatial configurations within Fig. 3, the four countries inevitably face different dynamics as a result of the different ways the contradictions of the ad- vanced capitalist system are worked out. It is the recognition of this process which distinguishes the argument of this paper from the social order suppositions of Streeck & Schmitter. In essence, the argument ofStreeck & Schmitter is one of social order. That is to say, the three organlsing principles associated with Market, State and Community provide the means whereby society is integrated. The argument of this paper is that any such "integrated" order is illusory, and that the characteristics of advanced capitalist countries are essentially ones in which the contradictions of the system lead to continual ruptures and crises which are enacted and managed, often with unanticipated effects, through the (conditioned) medium of human agency. For example, a particular accountancy standard may have been particularly influenced by the community ideals of an accountancy profession. But the resulting draft standard may then b e c o m e unacceptable more generally. Under these conditions either market forces (in the shape of objections to the draft by industry, the securities industry, or some other b o d y ) may move to change the standard, or the government may step in to oblige some change. For this standard alone, therefore, the mix will have shifted to one with a greater preponderance of influence from Market or the State principles and only in the new form will the issue be "acceptable". This is not to claim that it will remain acceptable: social change may make the new mix likewise subject to challenge. Since contradiction is immanent to the system, no permanent location within the Market-State--Community configuration can finally resolve the tensions and processes that result from them. CONCLUSION It has been stressed that there will be no single matrix of Market, State and Community principles of organisation which will apply to all arenas of regulation. Rather, the extent to which each of these regulatory forms is prominent in its influence upon the arena under investigation (such as, for example, the treatment of research and MODESOF REGULATIONIN ADVANCEDCAPITALISM development in accounts, or the method of currency translation deemed appropriate)will vary from one issue to another. In this sense, the location of the nation-state in the conceptual space of Fig. 3 may be taken to be an arena within which such differences vary, rather than a specifiable point. For any such issue, each of the three organising principles are likely to be implicated in the definition and ( t e m p o r a r y ) resolution of the issue. Further, the saliency of each is likely to vary over the period of the issue's visibility. The dynamics within each such issue will revolve around the tensions resulting from the systemic contradictions as these are expressed and encountered by agents of the organising principles. For any such issue solutions will be suggested that favour and combine one or more of the regulatory modes: Legalism, Liberalism, Association and Corporatism. The exploration of such process, provides an illuminating insight into the way in which the three organising principles of advanced capitalism intersect, collide and shift. We are conscious that the framework elaborated in this paper is neither simple nor complete. Our c o n c e r n is to point out that the different modes of regulating accountancy in specific nation states (and indeed the differing means by which accountancy regulations may be implicated in the regulation of economies and societies) cannot be read off from a description of advanced capitalism, with its alleged characteristics, needs and interests. But, conversely, it would seem fallacious to ignore the location of accountancy regulations and regulatory institutions in their social context of advanced capitalism, with its tendencies to fissure and crisis. The actions of policy makers are based on their frame of reference, including their enactment of opportunities and constraints, and thereby reproduce their own social context; but policy makers are not autonomous in their actions. An adequate analysis of accountancy regulation can no more ignore the systemic contradictions of advanced capitalism than it can disregard the everyday practices of the agents w h o embody, confront and reproduce them. To conclude, the value of the Streeck & 289 Schmitter framework, elaborated and extended, is that it offers a concrete analysis of the specific principles of regulation that can be accommodated within advanced capitalism. Our c o n c e r n in this paper has been limited to developing and applying the framework for identifying differences in the organisation of accountancy regulations in a number of advanced capitalist nation states. We appreciate that a more complete account would identify the historical conditions that are associated with the changing nature of accountancy regulation and its specific features in each nation state. Such an account, we believe, would need to address both the structural location of policy makers as part of the process by which the contradictions of advanced capitalism are managed and displaced and the opportunities for those policy makers to enact their own frame of reference in the ways in which they deal with these contradictions. For this reason an adequate examination of the alternative modes of problem-dealing (for example, with respect to the regulation of accountancy) must attend to the following. First, it must explore h o w the status of the activities of policy-makers is a condition and consequence of contradictions and struggles within the political e c o n o m y of different nation-states. That is, accountancy regulation is recognised to be implicated in the contradictions of capitalist societies, as a means through which struggles are conducted. Clearly then, we do not share a vision of accountancy regulation as being the outcome of rational administration or being achieved through the interplay of great leaders visions that are commonplace in official histories of the accountancy profession. Second, we suggest that an adequate account of accountancy regulation should acknowledge the frames of reference within which policy makers identify and integrate the issues or puzzles which they face. The culture, history and experience of policy makers in different nation states means that they may take specific views of what is an acceptable, tolerable, sensible or even efficient response to the dilemmas and contradictions they face. And finally, it must be appreciated h o w these frames of reference fundamentally inform 290 A.G. PUXTY et aL the responses of policy makers. For example, to the extent to which Market principles of regulation have been perceived to offer an acceptable r e s o l u t i o n t o c o n t r a d i c t i o n s w i t h i n s p e c i f i c nat i o n s t a t e s , s o p o l i c y m a k e r s w i l l f o r m u l a t e responses to their problems in terms of these prin- c i p l e s . H o w e v e r , s i n c e , as w e h a v e a r g u e d , all principles of regulation have contradictions w i t h i n t h e m , it is u n l i k e l y t h a t a n y n a t i o n - s t a t e will display an entirely consistent set of institutions and practices of accountancy regulation at any point in time. BIBLIOGRAPHY Armstrong, P., The Rise of Accounting Controls in British Capitalist Enterprises, Accounting Organizations and Society (forthcoming). Benston, G., Required Disclosure and the Stock Markets: An Evaluation of the Securities and Exchange Act of 1934, American Economic Review (March 1973) pp. 132-155. 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Niemark, The Normative Origins of Positive Theories: Ideology and Accounting Thought, Accounting Organizations and SocieCy (1982) pp. 167-200. Tweedie, D. & Whittington, G., The Debate on Inflation Accounting (Cambridge: Cambridge University Press, 1984). Watts, R., Corporate Financial Statements: A Product of the Market and Political Processes, Australian Journal o f Management (April 1977) pp. 53-75. Westergaard, J., Inequality and Corporatism, in Hunt, A. (ed.), Class and Class Structure (London: Lawrence & Wishart, 1977). Willmott, H., Setting Accounting Standards in the UK: The Emergence of Private Accounting Bodies and their Role in the Regulation of Public Accounting Practice, in Streeck, W. & Schmitter, P. C. (eds) Private lnterest Government and Public Policy (London: Sage, 1985a). Willmott, H., Serving the Public Interest: A Critical Examination of a Professional Claim, unpublished paper, University of Aston ( 1985b ). Willmott, H., Organising the Profession: A Theoretical and Historical Examination of the Development of the Major Accountancy Bodies in the UK,Accounttng Organizations andSociety ( 1986 ) pp. 555-580. Wysocki, K. von, Research into the Processes of Accounting Standard Setting in the Federal Republic of Germany, in Bromwich, M., and Hopwood, A. G., (eds), Accounting Standard Setting in an International Context (London: Pitmans, 1983). Zeff, S., The Rise of Economic Consequences,Journal o f Accountancy (December 1978) pp. 56--63. 291 Accounting, 0rgani.zation.sand Socfery,Vol. 20, No. 6, pp. 507-546, 1995 Copyright0 1995 ElsevicrScience Ltd F’rintcdIn Great BritsIn.Au rightsreserved 0361~f&32/95 $9.50+0.00 03613682(94)00033-6 CHANGES IN THE CODE OF ETHICS OF THE U.S. ACCOUNTING PROFESSION, 1917 AND 1988: THE CONTINUAL QUEST FOR LEGITIMATION* ALISTAIR M. PRESTON University of New Mexico DAVID J. COOPER University of Alberta D. PAUL SCARBROUGH Bentley College and ROBERT C. CHILTON University of New Hampshire at Manchester While the accounting profession in the U.S. has claimed to be a moral or ethical body throughout the twentieth century, its moral schema and code of ethics have in fact undergone a number of changes. This paper argues that the codes of ethics (or professional conduct), and the discourses surrounding them, appeal to meta narratives of legitimation and that through this appeal the profession seeks to legitimize itself within the social realm. The paper explores two distinct periods: the tum of the century, during which time the first code was formulated, and the 1980s when the current code was constructed. We seek to demonstrate that the changes in the code and discourses are translations of both the political challenges to the legitimacy of accountants and a wider transformation in the culture of American society. Throughout the twentieth century, accountants ln the United States (U.S.) have sought to represent themselves as a profession. Accounting, like medicine and law, ,was to be regarded as an occupation more “heavily influenced by the service motive than entirely by the profit motive” (Higgins & Olson, 1972, p. 33). Higgins & Olson also suggested that accounting “involves judgment and the acceptance of responsibility to others.” It was claimed that the judgmental nature of accounting and its public service orientation meant that the foun- We would like to thank Matt Perkins for his help with the legal cases cited in this paper, Brenda Ramsey for her help in collecting materials, Pat Arnold, Wai Fong Chua, Anthony G. Hopwood and the anonymous reviewers of Accounting, Otgunfzutlom and Socfefy for their useful comments. David Cooper also acknowledges the financial support of the Social Sciences and Humanities Research Council, the Management Accounting Development Fund and the Winspear Faculty Fellowship, Universny of Alberta. l 508 A. M. PRESTON el al. dation of the profession would rest, not upon standardization and regulation, but rather upon a moral schema and code of ethics. Morality would serve as a guide to professional conduct. As Higgins & Olson (1972) note: The code (of ethics) is a main foundation document of the profession it is the ethical concepts that tie the body with spirit. Indeed, as suggested earlier, it is agreement on ethical concepts and adherence to them by an overwhelming majority of practitioners that transforms a vocation into a profession @. 33). It is this claim that morals and the code of ethics are the guiding principle of the accounting profession that is the focus of this paper. Many of the histories of accounting and examinations of accounting and auditing practices have repeated and taken for granted claims by accountants that they are professional. Accountants are conventionally seen as applying esoteric skills, knowledge and judgments to complex tasks in the pursuit of their own, and the public’s, interest (Zeff, 1972; Mason & Gibbens, 1991). Moreover, reforming accounting is often conceived of in terms of moving to a more professional and moral order (Briloff, 1990; Sikka & Mitchell, 1993). Typically, a functionalist model (Parsons, 1964; Casler, 1962) is offered as the reason and need for professions to adopt codes of ethics. One version of this model suggests that a code of ethics, written or otherwise, serves to ensure and protect the interests of the client in an where engagement professionals deliver expert services which cannot be easily measured or judged as to their quality. Such a position is normally accompanied by a claim for exclusive rights to practice. Under such conditions the public interest is said to be served both by the professional regulation of its members’ behavior and by protecting the public from unscrupulous and unqualified practitioners. ’ In examining the formation of codes of ethics and the continuing claims to moral status by the profession over the twentieth century, we wish to distance ourselves from the functionalist model of ethics and professionalism more generally. More useful to our purpose are the critical interpretations of the functionalist model (Johnson, 1972; Larson, 1977; Wilhnott, 1986). These authors argue that a code of ethics is one of a number of means employed by the profes sion to secure privileges for its members. Thus, beneath the overt public interest claims is a submerged private interest agenda (Osiel, 1984; Mitchell et al., 1993). Monopoly of practice, often sanctioned by the state through licensing procedures and reinforced by control of knowledge and skills, confers wealth and power upon the individual professional (Portwood & Fielding, 1981) and autonomy and self-regulation upon the professional body. In extending the monopoly argument, Abbott emphasizes the importance of inter-professional status and suggests that “ [plrofessional ethics . . . helps determine extra- and intra-professional status . . . these status aspects of professional ethics account for the universal claims of disinterested service, the positive correlations of ethicality with intra-professional status and of enforcement with visibility, the preponderance of intra-professional regulation, and the individualistic level of ethical injunctions.” (1983, p. 872). A common thread of this stream of literature which is important to our analysis, is the treatment .of accountants’ claims to be professional as historically and socially contingent, and therefore problematic (Loft, 1986; Willmott, 1986; Abbott, 1988; Robson & Cooper, 1990; Robson et aZ., forthcoming). Another stream of more critical research has pointed to the partisan nature of accounting and has examined the links between accountants and specific interests, notably capital (Tinker et al., 1982; Armstrong, 1987; Nei- ’ This functionalist view of professions is the one favored by the professions themselves and is often used in official histories and public relations. Edwards & Miranti (1983, Carey (1969-70) and Previts (1985) are good examples of this discourse. WiIlmott et al. (1993) explore how a professional accounting institute draws upon and reconfigures functionalist understandings of professionalism and Interests in discussions about changing its governance structures. U.S. ACCOUNTING PROFESSION CODE OF ETHICS mark, 1993) and the state (Tinker, 1984; Puxty et aZ., 1987; Miller, 1991; Chua & Poullaos, 1993). This paper seeks to augment these streams of critical research by offering an analysis of claims by accountants to be moral and professional which explicitly focuses on the historical and cultural context within which they were formed. We agree that ethical codes are an important articulation of accountants’ claims to professional status. However, to be effective, ethical codes must embody the cultural mores of the time. As Abbott (1983) notes, “ [E]thics codes are the most concrete cultural form in which professions acknowledge their societal obligations.” (Abbott, 1983, p. 856, emphasis added).* In order to illustrate this position, we examine two codes, from the 509 beginning and end of the twentieth century.3 Through these we show not only that what constitutes moral and professional behavior changes, but also how the codes draw on, and give shape to, the cultural context of the time. In short, we seek to locate the codes of ethics in their societal context, particularly the cultural character of the time (Lehman & Tinker, 1987). Although we do not hold to a precise or static definition of the terms morality and ethics (indeed we argue that these change in the U.S. over the twentieth century) we view these terms as teleological encompassing a framework which, however loosely, prescribes the qualities of a “good life” and incorporates a set of criteria or standards defining the kind of person one should strive to become.* 2 We are somewhat sympathetic to Merino’s complaint that ‘historians are often content simpiy to look at the ethical rules enacted [t]his kind of analysis underrates the efforts these accountants made to establish ethical standards and it ignores powerful informal rules within the profession” (1975, p. 216). Yet it is impractical to observe historical practice and, further, we are not here focusing on the ethics of accountants but at the codes as cuIturaI symbols and the use of such symbols in legitimating the activities of accountants. 3 This periodixation is somewhat problematic in two respects. First, it tends to suggest the intervening years were insignificant; this is certainiy not so. During the intervening period a great number of new rules were added to the code. Moreover, legitimation activities directed at managing relationships with regulatory agencies became critical to the profession. Second, the choice of periodization might suggest that the period beginning in the 1970s represents one of acute discontinuity or radical transformation in the code of ethics, or indeed U.S. society. Following Lehman & Tier (1987) we suggest that this period ushers in a new tone or emphasis, although the issues and changes were not unique to this particular period. while we may observe how particular issues, say that of independence, can be interpreted as having long been on the moral agenda of the profession, they (re-)emerge in a particular form and with particular modes for their resolution in the past two to three decades. In this respect we would argue that “real revolutions in sensibility can occur when latent and dominated ideas in one period become explicit and do minant in others” (Harvey, 1989, p. 44). 4 For a more precise operational definition of morality and ethics, one may draw upon the work of Foucauh (1985). Foucauh treats the term “moraIity” as an overarching concept which itself incorporates a number of elements. These are, the “moral code,” the “morality of behavior” and the ethical subject. A moral code refers to prescriptions or to a set of values and t-triesof action that an individual is obliged to follow on pain of sanction. These prescriptions may either be set forth in a coherent doctrine covering all possible aspects of an individual’s behavior or be expressed in a diffused manner providing for compromises and loopholes (Foucauk, 1985, p. 25). Foucauh provides guidance on how we might examin e the codes of ethics: “[a] history of ‘codes’ would analyze the diierent systems of rules and values that are operative in a given society or group, the agencies or mechanisms of constraint that enforce them, the forms they take in their multifariousness, their divergences and their contradictions” @. 29). Aforul@~ of behavior refers to the manner in which individuab “comply more or less fuIIy with a standard of conduct; the manner in which they obey or resist an interdiction or a prescription; the manner in which they respect or disregard a set of values” (Foucauh, 1985, p. 25). Thus, the question is whether individuals act in a moral manner. Foucauh’s concern with the ethical subject refers to the “manner In wbicb the individual is supposed to constitute himself as a moral subject of his own actions” (Rajchman, 1986, p. 172, emphasis added). It therefore refers to a process of self-transformation into an ethical being, “models proposed for setting up and developing relationships with the self, for self-reflection, self-knowledge, seIf-examina tion, for the decipherment of the self by oneself, for the transformations one seeks to accomplish with oneself as object” (Foucault, 1985, p. 29). 510 A. M. PRESTON et al. Legitimation, culture and narrattves A theme central to our analysis is that of legitimation. Typically, legitimacy and legitimation are conceived of ln terms of accountants’ continual quest to secure professional privileges (Richardson & Dowling, 1986; Richardson, 1987). Legitimacy is conceived as congruence between institutional actions and social values and legitimation as actions that institutions take either to signal value congruency or to change social values. We find these ideas useful in understanding accountants’ codes of ethics. The promulgation of professional codes of ethics is an activity intended to confer legitimacy upon the professional body. The success of legitimation activities rests upon the acceptance of the professions’ exclusive expertise by powerful institutional bodies (Iarson, 1977; Bernstein, 1985; Richardson, 1987) perhaps most importantly the state and its agencies (Willmott, 1986; Puxty et aZ., 1987). Relationships with federal and state agencies have been instrumentally important for the U.S. accounting profession (Previts & Merino, 1979). Moreover, it is clear that the content of the accountants’ codes of ethics and the discourses surrounding them not only have been shaped by, but also have been used in attempts to shape, the profession’s relationship with powerful institutions. However, following Freidland & Alford (1991) the institutional perspective needs to incorporate meanings as well as organizations. Friedland & Alford (199 1) note that “[T]o posit the exteriority of society in a non-deterministic manner non-functionalist, requires a . . . conception of society as an inter-institutional system. We conceive of institutions as both supra-organizational patterns of activity through which humans conduct their material life in time and space, and symbolic systems through which they categorize that activity and infuse it with meaning.” (Friedland & Alford, 1991, p. 232). Friedland & Alford criticize a purely political/economic interpretation of institutions arguing instead for the need to bring society and culture back into the analysis. Accordingly, we see the relationships between the accountants’ claims to legitimacy and powerful institutional forces as being mediated by the social and cultural character of the time. We pay particular attention to the role of ethical codes as symbolic systems used to legitimize accountants’ claims to professional status and privilege. In accordance with the above, another theme central to our analysis is that of culture. As Abbot notes, “[l]egitimating work connects professional diagnosis, treatment, and inference to central values in the larger cub ture, thereby establishing the cultural authority of professional work . . . Legitimation justifies both what professions do and how they do it.” (Abbott, 1988, p. 184, emphases added). Accordingly, we do not simply ascribe the changes in the accountants’ codes of ethics to the institutions that permeate accounting around the two time periods we examine, but we also interpret them in terms of the cultural shifts that took place between the two periods in the U.S. However, in order to attend to the changes in ethical codes in the twentieth century, societal context and cultural character has to be conceived of in more precise terms than, say, modernity or capitalism. We use culture in its anthropological sense to refer to a common understanding of shared values beliefs and norms of a people. These values, beliefs and norms inter alia may be seen as operating within a discursive domain or narrative field (Harraway, 1989). Lyotard (1986) defines narratives as a form of customary knowledge. They “allow the society in which they are told, on the one hand, to define its criteria of competence and, on the other, to evaluate according to those criteria what is performed or can be performed within it” (Lyotard, 1986, p. 20). An utterance, or performance, is judged to be “good” or legitimate because it conforms to the relevant criteria of justice, beauty, truth, and efficiency and so forth which are concurrently articulated within the culture. Narratives act as legitimating devices; indeed, Lyotard refers to them as “narratives of legitimation.” It is useful to see the accountant’s codes of ethics as appealing to, or incorporating elements of, these more U.S. ACCOUNTING PROFESSION CODE OF ETHICS programmatic and cultural narratives of legitimation in order to confer legitimacy upon themselves. In turn, the embodiment of these cultural narratives in the accountants’ code of ethics and in their discourses further legitimizes the narrative. We are particularly concerned to observe how the accountants’ code of ethics appeals to contemporary conceptualizations of morality and societal culture to legitimize the profession within the wider public domain5 We wish to note that the term culture does not imply agreement within the social body, but rather, note that it is within discursive domains or narrative fields that contestable notions of liberty, justice, morality and the public interest, as well as art, myths, legends, and caricatures of heroes and villains are placed in tension with one another. The importance of resistance is stressed by Friedland & Alford: “The meaning and relevance of symbols may be contested, even as they are shared. Individuals, groups and organizations struggle to change social relations . . As they do so, they produce new truths, new models by which to understand themselves and their societies, as well as new forms of behavior and material practices” (1991, p. 254). Our decision to choose two time periods enables us to compare and contrast two quite different codes of ethics within two quite different cultural contexts in the U.S. U.S. culture has undergone significant changes during this century. Susman (1984) describes a shift from a culture of character to a culture of personality; from a producer culture to a consumer culture. Simply put, one of the fundamental conflicts of twentieth-century America is between two cultures - an 511 older cuiture, often loosely labelled purhan-republican, producer-capitalist culture, and a newly emerging culture of abundance. If twentiethcentury politics rarely carries the burden of ideological conflict, there was nonetheless a significant and profound clash between different moral orders. The battle was between rival perceptions of the world, different visions of life @ xx). Within this cultural shift in the twentieth century, Abbott argues that there has been a corresponding “shift from legitimacy of character to legitimacy of technique” (1988, p. 190) although the extent of this shift varies between professions, depending on the use of science and social structures (notably in terms of regulation) for legitimation. This paper traces the links between general cultural perspectives, the challenges and organizations which accountants manage, and the ethical codes accountants produced in order to legitimate their activities in each of the two periods. We do so in order to illustrate both continuity and change. The iirst period covers the emergence of, and some early transformations in, the accountants’ code of ethics between 1905 and 1917. This was a particularly crucial period for both “the formation of the profession”6 and its code of ethics. This early period concentrated on “character”, notions of the practitioner’s correct “state of mind”, and actions “becoming” a profes sional. We suggest that the focus of accountants’ ethics in this period was on forming oneself as an ethical subject, and insisting on good character as the basis for legitimating the activities of accountants. U.S. culture in this period can be characterized as a complex current of moral, philosophical and political ideals 5 It is outside the scope of this paper to theorize about the precise nature of the interlinkages between the accountants’ code of ethics and the changes within which they operate. We do, however, reject the notion of a direct causal linkage between changes in culture and changes in the accounting profession’s code of ethics. We tind latour’s (1987) notion of translation useful to conceptualize how more general, societal or programmatic discourses come to permeate localized discourses on morality and the code of ethics within the accounting profession. Translation involves the mediation of these programmatic discourses through more specific intra-institutional and inter-professional opportunities and threats facing the profession in each of these two periods. As such, social values do not simply filter or trickle down to the profession, but are actively worked upon and reconstructed to legitimize, create and preserve the privileges of the profession. 6 This is, in fact, the title of the chapter in Previts & Merino (1979) which deals with the period 1897-1918. 512 A. M. PRESTON including pragmatism, idealism and Protestantism. These features interacted with the problems of accountants at the beginning of the century, notably about intra- and inter-occupational status, to produce their ethical claims. The second period is concerned with the 1970s and 1980s. We take as our focus the code of professional conduct which was introduced in 1988 and “look back” over the 1970s and 1980s to trace the threads of some of its features and to identify the issues that confronted accountants. In the “age of political accountancy . _ . [and] identity crisis” (Previts & Merino, 1979, p. 304) the code and discourses reveal the emergence and increasing use of legalistic and technical rhetoric and a growing concern with public relations. In this period there is more emphasis on ethical codes as sources of legitimacy for professional practice. The end of the postwar boom, the rise of neo-conservatisim, a greater emphasis upon a more extreme form of individualism and a firmly embedded consumer culture have all affected the moral culture of U.S. society, and indeed the very notion of morality itself. These changes in the wider social context and their manifestations in the issues facing accountants helps to explain the changes in the accountants’ code of ethics. One final comment before exploring the two time periods: we do not directly judge the relative morality of accountants in the two periods. This is not because we are rendered powerless to judge in the face of a relativist view of morality, but because we wish to focus on the politics of the present. Our purpose is to focus on the inter-relations between cultural values, social challenges to accountants and the ethical codes. A voluntarist shift in ethical codes is as unlikely to change the practices of accountants as are appeals to a universal, asocial conception of the attributes of a profession. Changing the accountability of accountants will require changes in the symbolic order as well as in our social organizations. To illustrate the magnitude of the changes in the two codes of ethics, in the following section we provide a brief et al. overview of them, highlighting both their continuities and their discontinuities. THE CODES OF ETHICS 1917 AND 1988 The codes of ethics of the profession at the turn of the century and the discourses surrounding them set the tone, the structure and, to a large extent, the content of the accountants’ moral schema and ethics for most of the first half of the twentieth century. The 1905 written code, which was part of the bylaws of the institute, contained only two rules. One prohibited members from allowing non-members to practice in the member’s name. The second prohibited the payment of referral fees. The language of these two rules was virtually identical to that of the “fundamental rules” in the English Charter of 1889 (Carey, 1965, p. 85) reflecting the role of English and Scottish Chartered Accountants (CAs) in the early years of accounting in the U.S. On the formation of the American Institute of Accountants in 1917, its Rules of Professional Conduct contained eight injunctions. The tirst rule concerned which firms and individuals could address themselves as “members of the American Institution of Accountants.” The second rule warned that willful misstatements of facts in any accounting work would result in the expulsion of the member from the Institute of Accountants. The third rule prohibited any person who was not a partner, or was not in a member’s employ from practicing in his name. The fourth rule concerned commissions and brokerages. Rule five prohibited members from engaging in any business incompatible or inconsistent with that of public accounting. Rule six insisted that members might only certify accounting work prepared under their supervision by members of their Iinn or staff. Rule seven insisted that the Secretary of the Institute be informed before any member lobbied to change or enact state or federal law. Finally, rule number eight prohibited encroachment on other members’ business. (See Appendix 1 for the full text of the code.) U.S. ACCOUNTING PROFESSION CODE OF ETHICS The rules are commandment-like in their expressions. They concern mainly prohibitions against very specific practices which might affect the standing and legitimacy of the institute. They were also apparently very concerned with excluding non-members from the practice of public accounting and with the regulation of inter-professional relations. It is notable that the codes between 1905 and 1917 were relatively sparse in terms of written rules, yet as we shall see in the next section they emerged during a time of intense debate about the nature of ethics in the profes sion. A large section of the 1907 American Association of Public Accountants (AAPA) year book was devoted to ethics. The papers presented in this year book by Sterrett, Cooper and Montgomery were reprinted in the Journal of Accountancy in the same year. In many respects these writings, although conflicting in a number of respects, set the tone for the 1917 code. Moral discourses during this period covered many issues which were subsequently formalized into the written code. For example, prohibitions against encroachment (codified in 1917) contingent fee arrangements (codified in 1919) advertising (codified in 1923) competitive bidding (codified in 1938), and independence (first dealt with in 1934, but the term “independence” was not used until 1964) were aII discussed at length in the 1907 debates. The focus, however, was not on written codes but on how accountants should conduct themselves, forming themselves as ethical subjects. Indeed, an understanding of accountants’ attitudes towards ethics must be sought as much in the way accountants spoke and wrote about ethics as in the codes themselves. It is in these discourses surrounding the code that we fmd an emphasis upon the correct character of the accountant and the appropriate state of mind he should adopt towards his fellow members, clients and the public. The rhetoric is replete with exhortations of duty, responsibility and loyalty and references to education, upbringing and to the ten commandments. We shaII explore 513 these discourses in more detail in the next section. The order of the eight rules of the 1917 code represented the sequence in which they were adopted. By 1941 there were 15 rules, again ordered in the same manner. However, the Code of Professional Conduct adopted on 12 January 1988 which emerged from a report by the Special Committee on Standards of Professional Conduct for Certified Public Accountants (referred to as the “Anderson Committee and Report” after its chairman) reflected a number of significant changes both in terms of the number of rules and in the form of the code itself. This code consisted of two sections: the “Principles” and the “Rules”. (See Appendix 2 and Shaub, 1988.) The Principles section contains six short articles covering such topics as the accountant’s responsibilities, the public interest, integrity, objectivity and independence, due care and the scope and nature of services. According to Marvin Strait, then vice president of the Institute’s board of directors, the “principles section is to be goal-oriented, positively stated and inspirational. Its intent is to encourage members to go beyond the minimum framework of the present rules in the spirit of professionalism” (Collins & McRae, 1987, p. 72). Whereas the first four articles cover themes similar to those debated early in the century, and found in an essay which was attached to the 1973 code, articles V and VI, covering due care and the scope and nature of services, were new to the code and, as we shaII see, their addition is significant. The Rules, which constitute the enforceable part of the code, rather than merely being listed are now categorized into five “series”. The series 100 rules are concerned with independence, series 200 rules deal with compliance with standards, series 300 rules cover the accountant’s relations with clients and Include confidentiality and contingency fees. There are no rules in the 400 series in the 1988 code. In the 1973 code the 400 series encroachment contained a rule covering which had been discontinued. The absence of 514 A. M. PRESTONet al. the series 400 rules reflects a consent decree between the Federal Trade Commission (FTC) and the AICPA in the late 1980s. The series 500 rules essentially relate to the regulation of internal relations in the profession. It is here that we find the greatest similarity to the 1917 code. Rule 501 prohibits acts discreditable to the profession. This rule had always been part of the profession’s bylaws and was integrated into the code in 1962. Rule 502 prohibits misleading or deceptive advertising. This is a dramatic departure from earlier codes. In the 1973 code all forms of advertising were banned.’ The change in the rule effectively enabled accountants to advertise their services. Rule 503 relates to commissions and rule 505 relates to the form of practice and permissible names. Listing these rules does not, however, reflect the degree of elaboration of the rules in the 1988 code. The AICPA also issues “interpretations” on the rules. For example, over 100 interpretations have been issued on the rules of independence. A number of themes which were featured in the discourses surrounding the code at the turn of the century persisted in the 1980s. For example, the code is still highly individualistic and oriented toward regulating the behavior of individual members. Loyalty is still a dominant theme; however, it is now expressed in terms of teamwork rather than referring to the members as brethren. The distinction between members and non-members is also evident, as is education and serving the public interest (Hall, 1988, p. 80). We nevertheless find far fewer references to the character of the accountant and, as far as we have been able to determine, absolutely no mention of the ten commandments, nor of duty and responsibility. Instead, we iind references to the image of the profession, the importance of public relations and/or reducing the expectations gap between what the profession claims to practice and what the public expects of the profession. While we draw attention to the changes ln the codes of ethics in the two periods, many elements of these early codes and discourses are still present in some form or another in the current code and discourses on morality. As Haber (1991) has pointed out, an important feature of U.S. professions is the smuggling of the premodern into the modern world, where the premodern in modern professions is the claim to character, honor, service and duty associated with an ascribed aristocracy. The residue of this claim remains to the present and points to the more enduring features of U.S. society, namely its capitalist and modernist nature. However, what may be assumed to be of lesser importance in one period may become dominant in another, and vice versa. 1907 TO 1917 In this section we examine in more detail the challenges facing the professionalization of accountants and the way in which the code of ethics in accountants’ appeals to the cultural narratives of the time served in part to legitimize their quest for and claims to professional status. Challenges to the professionalization of accountants While Previts & Merino (1979) argue that the period 1897-1918 witnessed the formation of the U.S. accounting profession, this “achievement” took place in difficult circumstances. These difficult times need to be examined, for they show why U.S. accountants felt a “need” to legitimate their activities during the formation process. We stress three challenges to accountants in this era: calls for accounting disclosures to play a more decisive role in the control of industry and financial trusts, public ’ The change in the rule on advertising was introduced in 1978 after an investigation by the Justice Department and a Supreme Court decision which stated that “professional organizations were not exempt from federal anti-trust laws and that prohibitions against advertising were contrary to anti-trust laws” (Lowe, 1987, p. 84). U.S. ACCOUNTING PROFESSION CODE OF ETHICS concerns about monopolization and exclusion in occupations, and rivalries among accountants and the conflicting claims of the various professional and state organizations. “Perhaps the most important development, in retrospect, for the emergence of the public accounting profession, was the rise of financial capitalism” (Previts & Merino, 1979, p. 129). One of the conclusions of the Industrial Commission (U.S. Congress, 1900-1902) was that “an independent accounting profession ought to be established if corporate abuses such as stockwatering and overcapitalization were to be curtailed effectively” (Previts & Merino, 1979, p. 133). The reform movement at the federal, state, and municipal levels of government also saw an important role for statistics and accounting in reducing corruption and enhancing efficiency. Disclosure of information was regarded as an effective way of controlling large organizations, which were seen to pose a threat to democracy (Merino & Neimark, 1982). However, the lack of indigenous and organized accountants with skills and independence that were generally recognized, led to the use of British accountants by U.S. business leaders (Miranti, 1988) and to calls for public sector regulation, perhaps through the U.S. Treasury Department (U.S. Congress, 1902, p. 649ff, cited in Previts & Merino, 1979). U.S. accountants saw considerable opportunity - in the control of business and financial trusts and in the reform of governments to expand and obtain work. Yet they needed to legitimize both their competence and their claims to be of good character in order to capture this work from potential competitors, such as bankers, actuaries, lawyers and statisticians (Abbott, 1988, p. 227). Groups of accountants did form themselves into a variety of organizations. Littleton (1942) estimates that 1,370 people were listed as accountants in the city directories of New York, Philadelphia and Chicago between 1850 and 1899. By the end of the century, many of them were organized in a variety of state societies and there were often competing groups within one state. New York had the largest 515 group of accountants and it has been the most carefully studied. From the 1890s there had been a considerable struggle between the anglophone American Association of Public Accountants (AAPA) and the “less distinguished . . . [and] more heterogeneous” (Miranti, 1988, p. 363) New York Institute of Accountants (NYIA). The former body wanted to follow the British model, including explicit codes of ethics. Miranti (1988) suggests that the AAPA was suspicious of the wave of non-Protestant immigrants to the U.S., believing them to lack the “character” necessary to be a moral accountant. The NYIA had a stronger belief in formal education, a notion of science as standardized practice, and confidence in its ability to transform people with diverse backgrounds (Miranti, 1988). into moral accountants Through the 1890s the AAPA and the NYIA fought over education proposals and state-mandated licensing requirements. Temporarily, in 1896, the two bodies reached a compromise which enabled them to obtain licensing legislation in New York and to use the designation, Certified Public Accountant. However, rivalry and competition remained intense, particularly since economic conditions were depressed. Previts & Merino (1979) trace the gradual merging of the two bodies and the creation of a national organization in 1905. It is at this point that the first ethical codes were created. While many accountants felt that professional conduct was best controlled through ethical subjects whose character, rather than rules, would provide legitimacy, a few senior figures, like John Cooper (1907) argued for detailed codes of ethics. Only two rules were produced, in part because of the cultural values of the time (see below), but also because outsiders saw rules as limiting competitive opportunities. The two bodies merged to create the American Association of Public Accountants in 1905, but “fundamental divisions as to goals and priorities remained unresolved. . . . The merger had treated but failed to heal bitter regional and ethnic divisions among practitioners” (Previts & Merino, 1979, pp. 143-144). The national association remained powerless either 516 A. M. PRESTON et al. to control the behavior of those who presented themselves to the public as accountants or the behavior of their own members. There was also concern about the erratic progress in obtaining CPA legislation in some states and when approaches were made for federal legislation concerning national recognition, the FTC responded in 1914 with the “threat” of govemment control. The FTC suggested recognition of “zone experts”, prescribed audit procedures and predetermined fee schedules (Previts & Merino, 1979, p. 146). Part of the problem was that the professional bodies could not ensure the competence or character of accountants. At the same time, federal and press criticism suggested that the CPA certificate offered little protection to the public and that established practitioners were creating a monopoly through a highly restrictive examination process. While established accountants received their designation by waiver, potential new entrants faced an examination with failure rates around 90%.’ To thwart threats of federal intervention and still criticism, the American Association of Public Accountants reorganized itself in 1916 into the American Institute of Accountants and abandoned attempts to achieve national recognition for the CPA. The ethical code was expanded, reflecting a desire to legitimate and control the behavior of accountants. Yet this was somewhat unsuccessful in that a new body, the American Society of Certified Public Accountants was established in 1921, heralding “The Great Schism” (Carey, 1969-70). During this time of the formation of the accounting profession in the U.S., it was difficult to rely simply on appeals to character to legitimate the claims of accountants. At the turn of the century a number of discourses, some complementary and some competing, served to create a highly charged and contested terrain within which the profession sought to establish and legitimize itself. The terrain included the emergence of pragmatism during the progressive era and the continued strength of both Protestantism and the Victorian emphasis on character and idealism. We suggest that these constitute the narratives of legitimation of this period. Claims of morality by the accountants are a mix of appeals to the general discourses of the time and attempts to establish formal codes of ethics. A code was an important prerequisite for the status of accountants in the context of the occupational rivalries and challenges outlined above. Having discussed the interest of accountants in being seen as professional, in the next section we examine the way the culture of the period is translated into specific ethical injunctions. The progressive era: 1900- 1915 The last part of the nineteenth century was a period of remarkable material development, industrial investment and urban growth in the U.S. During this time, the federal government practiced conservative liberalism. Although its laissez faire attitude towards business stimulated industrial growth, it also invited a number of excesses. Indeed, it was these excesses that incited the calls for an independent accounting profession which were so central to the formation of the profession. These excesses are vividly depicted in the magazines and literature at the turn of the century. Writers concerned about these excesses came to be and their works known as “muckrakers” appeared in numerous popular magazines (Curti, 1951, p. 621). Hofstadter described the last quarter of the nineteenth century as a period in which Americans’ “moral energies had lain relatively dormant” (1963, p. 1). Social Darwinism characterized the moral tenor of this period, and commentators like Spencer argued that individual and social development were best left to the competitive “struggle for existence” and the “survival of the fittest”. Such reasoning appealed to secularist conservatives and anti-reformists in the last few decades of the nineteenth century. U Previts & Merino (1979, p. 147) indicate that only 6 out of 111 candidates passed the Illinois examinations between1903 and 1908. In New York State in 1916, only 3 out of 156 passed. U.S. ACCOUNTING PROFESSION CODE OF ETHICS As a reaction against the commercial exploitation, political corruption and urban degradation of the latter part of the nineteenth century, the “progressives” embarked upon a major reform program. They made efforts to expose corruption, crime, waste, brutality and autocracy in a bid to solve the numerous social and economic problems: Tenements would be eliminated; the sweated labor of women and children would be forbidden; . extortionate tariffs and monopolistic practices would be regulated out of existence; social legislation would protect the working classes from the terrible hazards of industry; adulterated foods and falsely advertised drugs would be driven off the market; unfair competition by the great corporations would be subject to constant policing by government; the concentration of business control in the hands of a few powerful banking interests would be broken up; better credit would be provided for farmers and small businessmen (Hofstadter, 1963, pp. 5-6). The progressive era created a hopeful and reformist atmosphere, emphasizing social cooperation and public service. Pragmatism emerged as a powerful philosophy and argued for a pluralism of ideas, the application of science, and an acknowledgement of active human effort in the bettering of life. In many respects pragmatism was an attempt to “redeem spontaneity and indeterminacy from the oppressive causal network of Spencerian social evolution” (Hofstadter, 1944, p. 133). While William James postulated a philosophy of the creative individual, it was John Dewey, his successor, who developed a social theory of pragmatism. Dewey propounded a secular ethic. Social issues such as the problems of Individualism and socialism, business and its regulation, labor relations and the family featured prominently in his ethical writings (Dewey & Tufts, 1908). His ethics were radically different from the abstract homilies and religious influences of the past, emphasizing man’s ability to reform himself and society through the application of science. Discourses upon and concern for morality during this pern 517 iod provided the context within which the emerging accounting profession came to define itself as a moral body and establish the underlying principles of its ethical code. The connection between the accounting profession and the progressive movement has been drawn elsewhere, particularly by Previts & Merino (1979). Although not all accountants were progressives, the fledgling profession nevertheless subscribed to a number of progressive ideals namely: (1) a fundamental faith in democracy, a concern for morality and justice and a broad acceptance of the efficacy of education as a major tool in social amelioration; (2) an increased awareness of the social obligation of all segments of society and introduction of the ideals of accountability to the public of business and political leaders; and (3) an acceptance of pragmatism as the most relevant operative philosophy of the day (Previts % Merino, 1979, p. 137). In so doing the accounting profession sought to establish itself, legitimize its activities and have conferred upon it the status and privilege of a profession by subscribing to political and moral ideals of the day. The discourses surrounding the earliest code reflect some of the pragmatist principles, in particular the emphasis on public service and the efficacy of education. Yet, as we shall see, these principles could conflict with those of Protestantism and the concern with character. Both Sterrett (1907) and Montgomery (1907) writing during the difficult formative years of the AAPA, stressed that the principal aspect of the accountant’s behavior subject to moral judgment was his relations to the public. Montgomery (1905) notes that: “as he [the accountant] is measured by the community at large, so must he regulate his own relations (1) to the public, (2) to the professional brethren, and (3) to himself” (p. 29). In order to measure up to the expectations of the public, the accountant was above all to put service to the public and his brethren before himself and personal gain.’ 7 Combined, these relations to the public and brethren constitute what Foucault (1985) substance”. refers to as the “ethical 518 A. M. PRESTON et al. In constructing themselves as ethical subjects, accountants would be called upon to work on their relations with the public and fellow accountants. It is important to note that serving the public or protecting the public interest harks back to the Victorian notion of the “professional gentleman” (Castronovo, 1987) and to the older professions of the church, law and medicine. These “older professions” were seen as embodying the ideas and images to which the profession aspired. The emphasis on social obligations, social welfare and regulation during the progressive era reinforced the importance of public service and morality more generally as a contemporary ideal, an ideal to which the accounting profession appealed for its legitimacy. Education, which was initially the concern of the NYIA, was also given a high priority in the accountants’ quest for legitimacy in the newly formed AAPA. Indeed, the accounting profession was instrumental in setting up the first business schools in America (Previts & Merino, 1979). The most common definition of a profession during this period centered upon education. For example, Joplin (1914) described a profession as “[a]n occupation that properly involves a liberal education or its equivalent and mental rather than manual labor” (p. 187). However, education was meant to convey more than the acquisition of academic skills. Correct schooling implied a broad liberal arts education, which was closely linked to morality: The concept of liberal education incorporated the Aristotelian concept of “spiritual condition” and in its essence was ethical. Education imparted not only academic skills but imbued the young person with such values as righteousness, wisdom, and a sense of justice (Toplin, 1914, p. 149). The character of the individual was to be forged through a thoroughly moral education. In addition to legitimizing the profession, the notion of a morally educated professional was extremely important for the accountants’ moral schema. It permitted and legitimized the claim that ethics was a “state of mind” which was developed through proper upbringing and correct schooling. Moreover, this implied that it was not the profession’s responsibility to provide moral training, but merely to limit membership to those who had already received it and continued to practice it. As a consequence the unethical behaviour of an individual member was less the fault of the profession than of bad upbringing. This view persisted at least until the 1930s. For example, the editor of the Journal of Accounting, noted that: Every lawyer, every physician, every accountant and every man in every other professional field should be imbued with a spirit of righteousness and the ideals of a gentleman. The truth of the matter is, however, that all the professions have attracted men and women who, for lack of background or suitable environment or proper moral fiber, have been slow to grasp the true significance of professional life. It has been said repeatedly (and the remark, we believe, was originally made by an eminent member of the accounting profession) that ethics is a state of mind and he who has it not will never acquire it (Richardson, 1936, p. 313, emphasis added). While the emphasis in the early twentieth century seems to have been with the construction of the ethical accounting subject, this process of construction was not accountingcentric. Guidance on how accountants might transform themselves into moral subjects, were to be found outside the profession, in a Christian upbringing and liberal education. The state-of-mind argument was also used to limit and then justify the small number of written rules. Some argued that practitioners should be guided by their own consciences and that no ethical rules needed to be enacted (Main, 1923, p. 3). Others argued that certain rules were necessary to regulate the internal relations of members within the profession itself. Indeed, despite the claim that relations with the public were of primary concern, the two rules in 1905 and most of those added during the first quarter of the century were concerned with the internal regulation of the membership and not with relations with the public. As Abbott (1983) points out, this emphasis reflects a concern with intra-profes- U.S. ACCOUNTING PROFESSION CODE OF ETHICS sional status and the desire to control who might be an accountant and how members should act in relation to other members. In order to constitute himself as an ethical or moral subject, the accountant was expected to accept the duties and the responsibilities of membership of his profession. His morality reached completion ln the community of his fellows. The accountant was obliged to demonstrate loyalty and devotion to his professional brethren if he was to receive the public’s trust. As Sterrett (1907) noted: Under ordinary circumstances regard for the good name of his profession seals the lips of the professional man about matters concerning others in his own profession. It may be fairly stated a prime duty of every profes sional man towards his associates to look for the good that may be found in every man, to magnify all that is to be commended, and to avoid unnecessary references to those things which will tend, if known, to lower the public’s estimate of the profession at large (p. 118). During this period, therefore, the code could be simple. Proper upbringing, the correct state of mind and education would serve to protect the public and at the same time legitimize the profession. Although pragmatism was a secular philosophy, with its emphasis upon pluralism and human intervention (based on science) rather than intervention based on theology, the U.S. was nevertheless a profoundly Chris tian nation at the turn of the century. There were undoubted tensions between pragmatism and Christianity and these offer a space for non-determinist human action (Priedland & Alford, 1991) and changing ethical codes. We will now examine the nature of Christian ethics and its emphasis on character and the philosophy of idealism. Protestantism, character and idealism Protestantism entered the twentieth century with growing congregations and confidence that it was to be the Christian Century (Handy, 1971; Curti, 1951).i” This sentiment ._ was expressed 1894: 519 in a statement by Gladden in Every department of human life - the families, the schools, amusements, art, business, politics, industry, national politics, international relations - will be governed by the Christian law and controlled by Christian influences (Gladden, 1894, quoted from Handy, 1971, p. 161). Protestantism in the U.S. was highly individualistic. Individual freedom, self-advancement, and the need for a strong personal ethic were cornerstones of the faith (Smith et al., 1963). Yet, paralleling this strong individual emphasis was the requirement of benevolence. Personal freedom was to be used to improve the human situation. Similar to the incipient political reforms which began to shape the political philosophy at the turn of the century, benevolence, or the more communitarian side of Protestantism found its voice, particularly in the “social gospel” and “cooperative” movements within the liberal wing of Protestant faith. These movements, like the political reformists, sought to draw attention to the urban slum and the condition of labor, and argued for the necessity of a social rather than an individual ethic (Handy, 1971, p. 159). A secular version of Protestantism found expression in Victorian idealism, which as a moral philosophy enjoyed wide acceptance in Western Europe and America at the turn of the century (Olafson, 1973). As with mainstream Protestant theology, idealism sought to counter the challenges posed by the Englightenment and its espousal of science. “Idealism undertook to show that nature and mind are more intimately interrelated than the mechanistic natural sciences of the eighteenth century had appeared to allow” (Olafson, 1973, p. 4). Self-realization and human achievement became central to the idealist’s moral schema, revealing a highly Individualistic orientation. Yet, importance was also assigned to the formation of relationships of cooperation and ‘” Indeed, some of the firms which would emerge as dominant in the twentieth century, such as Price Waterhouse (Allen & McDermott, 1993) and Ernst & Whinney (Jones, 1981), had strong Christian traditions, often linked with the Quakers, 520 A. M. PRESTON common purpose among human beings. “The deepest ethical obligation of the individual is to this larger consciousness which he is to realize in himself and in his actions through his membership in some association with his fellows” (Olafson, 1973, p. 5). Self-realization required the transcending of linite individuality in the interest of larger and social forms of self-hood (Royce, 1908). The early ethical codes and moral discourses of the accounting profession are infused with many of the themes of Protestantism and idealism. Numerous references are made to Chris tianity and Christian ethics. For example, Sterrett (1907) commented on the scope and spirit of the code: Let USthen first of all divest ourselves of the thought that any code or system of professional ethics or accountancy can or in any manner should, supersede or modify those fundamental principles of right and wrong which, existing from the beginning of time, were formulated and given definite expression in the decalogue and developed through all the struggles of the centuries since @. 110). The reference to the decalogue (the ten commandments) and the appeal to those “fundamental principles of right and wrong” reveal the strong appeal to Christianity to provide the moral foundation for the profession. Accountants were invited to recognize their moral obligations because of divine law. The teleological framework of Christian morality (as a means of underpinning the accountants’ code of ethics) reinforced the notion that the profession itself was only responsible for augmenting moral training (notably through a form of apprenticeship) and that only a limited number of rules were necessary in the written code. The secular or social ethic of the day was also referenced. Sterrett (1907) drew a distinction between “abstract” principles of right and wrong, “which are of course immutable”, and et al. the more mundane “human standards” of practical daily conduct which were “by no means as fixed.” The public accountant was expected to adhere to the immutable laws and to the more mundane human standards. l1 The individualism of Protestantism and idealism was evident in the code and discourses surrounding it. Abbott (1983) notes that most codes of professional ethics do not “regulate aggregate professional performance or conduct - total provision or costs of service, total quality of results, and the like. . . . Professional ethics deal with individuals and individua1 behaviors” (p. 860). In the early codes and moral discourses of the accounting profession, the focus was upon the individual members’ behavior and, importantly, their character. The accountant’s character was required to possess certain virtues including “tact, caution, firmness, good temper, courage, integrity, discretion, industry, judgment, patience, clearheadedness, and reliability” (Dicksee, 1913). Character would, it was argued, enable the accountant not to subordinate his interest to those of his client and the public. Sterrett went as far as suggesting that an accountant should “advise his clients against employment of his professiona service [even if this] may deprive a practitioner of an immediate benefit” (1907, p. 112). Specific proscrip tions against advertising, direct solicitation and encroachment, which were discussed at length during these early discourses and which were subsequently codified, were all expressed in terms of the ideal character of the accountant. The concept and representation of character were particularly important to the accountants’ claims to legitimacy. Susman (1984) argues that the term character conveys a moral quality which had great significance during the nineteenth century and at the beginning of this century. He further notes that Orison Swett Marden’s manual, Character: The Greatest I1 Foucault would refer to this as the mode of subjection, “the way in which the individual establishes his relation to the rule and recognizes himself as obliged to put it into practice” (Foucault, 1985, p. 27). These we= both the (immutable) divine law and the (more transitory) contemporary social standards of behavior. U.S. ACCOUNTING PROFESSION CODE OF ETHICS Thing tn the World, exemplifies the value placed on character at the turn of the century. According to Susman, that manual emphasized the need to be a: true Christian gentleman, pure, upright, intelligent, strong and brave, possessing a Sense of duty, having benevolence, moral courage, personal integrity, and the “highest kinship of soul” devoting service to mankind, being attentive to the ‘highest and most harm* nious development of one’s powers” to achieve “a complete and consistent whole” (19&1, p. 279). Susman (1984) suggests that a culture of character aptly defines this period, although (as we shall see) this was already beginning to change during the first decade of the twentieth century. Character, which included such concepts as citizenship, duty, work, honor, reputation, morals, manners, integrity and manhood, “provided a method of presenting the self to society, offering a standard of conduct that assured inter-relationship between the ‘social and the moral”’ (Susman, 1984, p. 273). being of “good character”, and behaving in a way that demonstrated character was crucial to the legitimacy of the individual accountant and the accounting profession. Susman (1984) notes that character, as conceived of during this period, also “provided a method for both mastery and development of the self” -and it was argued that this “kind of self control was the way to fullest development of the moral significance of self” (p. 273). In effect, exhibiting the virtues of good character were critical in transforming oneself into an ethical subject. Once again the profession itself need not be fully responsible for the moral development of its membership, rather it need only admit and retain those persons exhibiting “proper” character. Significantly, Weber makes important connections between Protestantism, character and capitalism. Drawing on his tour of the U.S. in 1904, Weber suggests that: “[Protestant] conduct was a certain methodical, rational way of life which - given certain conditions - paved the way for the “spirit” of modern capitalism” (1970, p. 321). 521 Sayer clarifies the links between Protestantism and character, showing how that version of Christianity produces an unceasing quest for a believer to improve himself, to be a moral character: Protestantism expected of its adherents, not the recurring . cycle of sin, confession and absolution accepted by the older Catholicism, but a continual ethical “probation”; “the God of Calvinism demanded of bis believers not singIe good works, but a Iife of good works combined into a unfjied system” (Weber, 1974, p. 115). The godly were perpetually on trial. Morality is thereby abstracted from all particuhtristic contexts, becoming an ontological attribute of the subject it provides the basis upon which this new subjectivity is unified the ethical becomes a question of cbaracter, a core constituent of personal identity (1991, p. 121, emphasis in originaD. This persistent self-improvement and examination is the means by which an ethical subject is constantly being recreated. Sayer then indicates the link to capitalism: The [Protestant] sects bred a “formalistic, hard, correct character which was peculiar to the men of that heroic age of capitalism” (Weber, 1974, 166). “Hence indfvfdual motives and personal self-interests were also placed in the service of maintaining and propagating the ‘bourgeois’ Puritan ethic” (Weber, 1970, p. 321). “the Godless cannot trust each other across the road; they turn to us when they want to do business; piety is the surest road to wealth”, Weber quotes. The benefits of such an attitude to “sober bourgeois capitalism” are obvious enough (1991, pp. 122-123, emphasis in originaI). The achievement of accountants in the early part of the century was to draw on the culture of pragmatism and Protestantism in legitimating their practices and their pursuit of wealth. However, the culture of the times was somewhat contradictory, and these contradictions provided space for addressing, inter alia through the code of ethics, the challenges facing the profession. To sum up our analysis of the emergence of the 1917 code, the accountants’ code of ethics and the moral discourses surrounding it was told as a story of men of character, and thus of high moral integrity, who formed into an A. M. PRESTON et al. 522 association to serve the public interest. The discourses talked of the importance of education and self-mastery in the moral development of the individual and how this “state of mind” could be relied upon in the execution of the service. The accountant’s calling was governed not merely by written rules and regulation, but also by a belief in divine law and continuous examination by himself and his brethren. Although the individual accountant was responsible for his own moral conduct, he was portrayed as having a social ethic, aware of the human standards of the day and active in the pursuit of social improvement. His responsibility extended also to his brethren and calls for loyalty, devotion and, above all, preserving the good name of the profession. At the same time, accountants were facing considerable threats about their competence, their monopolization of practice and their fractious state. Codes emerged as the leaders worried about their ability to sustain Protestant values in the face of diverse immigration. 1970 TO 1988 In the previous section, we discussed how the code of ethics and the discourses surrounding it appealed variously to the progressive ideals of the pragmatists as well as Protestant and idealist values for its legitimacy as a moral, professional body. In this section, we examine content of and the discourses surrounding the 1988 code within the context of contemporary U.S. culture. While we follow Abbott’s general thesis that legitimation through character was replaced by the legitimacy of technique, we also suggest that important residues of the earlier period continue in the focus on personality in the present. We draw out three themes from the cultural milieu, namely those of liberal individualism, a calculative or technical rationalism and the consumer culture. The embodiment of these contemporary cultural themes into the code and discourse of ethics are interpreted once again through the challenges faced and the institutions relations formed by the profession during this period. Challenges to the accounting industry By the 1980s accounting had become a major industry, dominated at first by the “Big Eight” and then the “Big Six” multinational accounting firms (Stevens, 1992). The 1988 code was introduced during a prolonged period of turbulence in the accounting industry. On the one hand, accounting firms experienced massive growth in their revenues, mainly in their consulting practices. This growth relied on the access obtained by the firms through their audit work, an advantage not available to competitors in consulting services. Moreover, accountants traded on an image as independent and professional advisors. Yet this image was challenged, so that Olson, a former president of the AICPA, described the 1970s as the profession’s “years of trial” (Olson, 1982). During the 197Os, accountants faced two congressional investigations, one chaired by Senator Lee Metcalf and the other by Representative John Mos; experienced increased litigation; and suffered from mounting bad press about their failure to meet public expectations. The Metcalf Committee (U.S. Congress, 1976a) was disturbed by: the alarming lack of independence and lack of dedication to public protection shown by the large accounting firms which perform the key function of independently certifying the financial information reported by major corporations to the public (U.S. Congress, I976a, as quoted ln Olson, 1982, p. 43). The Moss Committee (U.S. Congress, 1976b) was dismayed at the lack of uniform accounting data within the energy sector and with the reliability of accounting information more generally. Repeating the concerns of the FTC in 1914, the committee noted that: As the energy problem became clearer to us, we discovered that we were unable to obtain reliable data concerning companies involved in the energy industry. As a result, I proposed a provision in the Energy U.S. ACCOUNTING PROFESSION CODE OF ETHICS Policy and Conservation Act caliing for certain uniform accounting procedures (U.S. Congress, 197613, as quoted in Olson, 1982, p. 39). The Moss Committee went on to note that the largest impetus to investigate the profession: came with the disclosure of the illegal and improper payments made by some of our nation’s largest and most prestigious corporations. Bribery, illegal political contributions, kickbacks, slush funds and secret bank accounts were matters that independent auditors either did not discover or did discover but chose not to publicly disclose (U.S. Congress, 1976b, as quoted in Olson, 1982, p. 39). The rash of litigation experienced in the 1970s brought the judiciary into the realm of the accountant on a far greater scale than before. A series of cases served to expand common law liability beyond what the accounting profession had thought warrantable. In addition, the federal securities law enacted in the early 1930s became subject to increasingly liberal interpretations by the courts over this perscope of auditor iod, including the malfeasance. The courts reinforced the federal laws which provided statutory prohibitions against fraud and material misstatements of financial information. As Abbott (1988) argues, accountants’ claims of legitimacy and competence are played out in the context of the activities of rival occupational groups, in this case the law. Much of this litigation surrounded backruptties which occurred despite audits, and led to cries of “where were the auditors?” (Olson, 1982, p. 40). Because of these and other events the profession suffered from a considerable amount of “bad press” during this period. For example, reports in the Wall Street Journal such as “A public interest law firm claims that the Big Right accounting firms constitute ‘the most unscrutinized and powerful professional force in this country”’ (7/26-28; 2, 1979) served to alert the public to the challenges facing the industry and individual accounting fit-tllS. In response, a special committee of the 523 AICPA chaired by Harry Mancher (AICPA, 1976) “recommended significant changes to the organizational structure of the AICPA including the formation of a section for practice units with continuing education requirequality reviews and new ethics ments, standards” (Liebtag, 1987). The Cohen Commission (AICPA, 1978) considered the scope of the auditor’s responsibility. In addition, in 1973, under mounting criticism of its standard-setting procedure, the Accounting Principles Board (APB) was replaced by the Financial Accounting Standards Board (FASB). The industry experienced a similar round of criticism and responses in the 1980s when congressional inquiries were conducted by Representative Jack Brooks, who was concerned with the quality of audits of govem1986) and ment units (U.S. Congress, Representative John Dingell, who was concerned with the “mounting list of collapses, corporate failures and abuses, alleged audit failures, and lawsuits linked with the names of prominent accounting firms” (Dingell, 1985, p. 53; U.S. Congress, 1986). The Anderson Committee was formed in 1983 to deal with the “expectation gap” and reported in 1986 (AICPA, 1986). The Treadway Commission (AICPA, 1987) investigated the role and responsibilities of auditors and the prevention and detection of fraudulent financial reporting. As the outgoing president of the AICPA, J. Michael Cook, commented in 1987, “[Mlany of the prominent issues of 10 years ago are being reconsidered today” (Liebtag, 1987, p. 56). The concerns of the congressional lnvestigations, law suits and press reports in both the 1970s and the 1980s centered around three principal issues, namely those of independence, accounting standards and the competence or quality of the audit function. From the perspective of the critics of the industry, the conflict of interest in the accountants’ attest relationships with clients and the public, and hence their independence as professionals, both in performing audits and setting standards, was exposed, examined, reported upon and judged to be biased towards the 524 A. M. PRESTON et al. client’s rather than the public’s interest. The ability of accountants to detect fraud, uncover illegal contributions and predict bankruptcy, and hence their competence as auditors was likewise exposed, examined, reported upon and judged to be lacking. Finally, the adequacy of financial reports, as a device to disclose and represent the financial performance and position of an organization, and hence the efficacy of accounting practice, was again exposed, examined, reported upon and judged to be inadequate. Major disputes surrounding merger accounting, accounting for income taxes, inflation accounting, the treatment of foreign currency translations and oil and gas accounting suggested that the industry neither received universal support from its constituencies nor possessed a consistent scientific base for credible claims to expertise. Throughout the 1970s and 1980s the accounting industry, including its professional bodies, accounting firms, and individual accountants was subject to surveillance and regulation. The industry, seeking to be regarded as a self-regulating profession, acted within a field of potential and actual judicial, congressional, press and public visibility. In contrast to the difficulties of establishing professional status and monopoly of practice at the turn of the century, the accounting profession was, in the 1970s and 198Os, concerned with an erosion of autonomy and privileges. With these new threats, appearance and legitimacy in the public realm became, if anything, even more important. However, as we shall shortly see, it was a significantly different public realm from that which existed at the turn of the century, a public realm that needed a different response for legitimacy to be conferred upon the profession. By 1988 the three issues of independence, adherence to technical standards and quality had become central to the accountants’ code of ethics and to the discourses surrounding it. In the following section, we attempt to link these issues to contemporary U.S. culture. In dealing with contemporary culture, one is faced with a more difficult task than defining the cultural character of the turn of the century. One doesn’t have the benefit of well developed (though somewhat contradictory) historical perspectives of the period. The difficulties are deeper than this, however. The culture of the U.S., like its population, is far more diverse than it was at the turn of the century. Contemporary culture does not lend itself to broad categories and unifying themes such as pragmatism, Protestantism and idealism. A common understanding, shared values and beliefs are less obvious. Indeed, contemporary culture may be more appropriately defined in terms of an absence of a common understanding, and the proliferation of values and beliefs. Moreover, culture is something that is actively worked upon, by what Ewen (1988) refers to as the culture industry. Vast resources are employed to shape public opinion and to offer a multiplicity of lifestyles (each requiring a huge array of consumer goods) to individuals able to afford them. Another difficulty resides in the fact that much of what we define as contemporary culture has discernable roots in transitions which took place quite early in this century (Susman, 1984). Contemporary culture in some senses might be seen as an intensification of the themes which emerged at the turn of the century or as a final breaking away from the more restrictive influences of Victorian idealism and Protestantism. However one might wish to conceptualize it, the influence of the past makes periodization of themes, central to the present, very difficult. Despite these difficulties, theories of contemporary U.S. culture tend to emphasize the primacy of the individual; the reliance on, and demand for, calculative rationality, particularly scientific and economic, as narratives of legitimation and the intensification of the culture of consump tion. Given these themes, the next section is laid out as follows. First, concentrating primarily on independence, we explore how this concern relates to the growing individualism of U.S. culture in the 1970s and 1980s. Second, we seek to connect concern for adherence to technical standards with a more general growth in rationality. Finally, we examine the U.S. ACCOUNTING PROFESSION CODE OF ETHICS issue of quality within the context sumer culture. of the con- Individualism Individualism is an enduring feature of U.S. culture. However, as we have demonstrated, at the turn of the century individualism was coun tered in part by an articulated social ethic. In contrast, by the 197Os, U.S. culture and political ideals had begun to place a much greater emphasis upon the individual. This was evidenced by the rise of neo-conservatism, a more extreme expression of liberal philosophy, and a shift in public sentiment away from the principle of state welfare and social entitlements. Choice was increasingly conceived as the exclusive predicate of individual actors as they sought to maximize their pleasures and minimize their pain in a value-neutral system which allowed an individual “to acquire the objects of his desire, rather than prescribing what kind of objects he ought to desire” (Smith, 1986, pp. 121-122). Gill (1987) notes that modern liberal philosophers such as Rawls (1971), Dworkin (1977) and Nozick (1974) emphasized that: the tights of the individual are primary, protecting one both against the claims of others and against the community as a whole. Moreover, rights are conceived as a set of publicly recognized entitlements that provide a framework within which individuals can choose for themselves among competing visions of the good @. 33). Smith (1986) suggests that this form of liberalism, which continues into the present, has been informed by a number of other sources, most notably neoclassical economics. Individualism was not only featured in liberal philoso phy and legal theory but became, over this century, a defining characteristic of U.S. culture. The twentieth century has been described as a period of “untrammelled individualism” (Bell, 1976) and this found expression in the self-referential art of artists and architects who, along with entrepreneurs like Bruce Barton and Henry Ford and sportsmen such as Babe Ruth, came to be viewed as 525 heroic figures and in turn intensified the cult of the individual (Harvey, 1989; Susman, 1984). The thread of individualism is also a feature of the psychological novels of the twentieth century. As Susman (1984) notes, this literary genre emerged early in the century and “was increasingly interested in probing personality and less in studying moral or social achievement _ . .” (p. 276). The theme of the individual also found expression as “psychological man” (Rieff, 1966) within psychoanalysis and psychiatry. Susman (1984) summarizes the emphasis on the individual by describing the twentieth century as a culture of abundance in which one’s personality rather than one’s character became the expression of self. Within the culture of the individual, the moral question of “what sort of person one is to become? ” is not addressed. Yet as MacIntyre (1984) notes, this is an “inescapable question in that an answer to it is given in practice in each human life” (p. 118, emphasis as in the original). Such a question requires a teleological framework which is an anathema in a world of rights-based individualism. The modern sensibility “no longer finds it credible to attempt to find oneself within a prior, given, moral order, or to ‘construct’ oneself in terms of some great transcendental ought” (Rajchman, 1986). What is significant is that without a teleological framework, the whole project of morality becomes an interminable and ultimately an unintelligible process. Morality becomes “merely a matter of opinion, that is, no morality at all” (Gutmann, 1985). As Dworkin (1977) notes, within the doctrine of modem liberalism the questions of What is the good life for man? and What sort of person am I to become? are systematically unsettlable within the social realm; they are subject to individual agreement or disagreement. “[T]he most striking feature of contemporary moral utterance is that so much of it is used to express disagreements: and the most striking feature of the debates in which these disagreements are expressed is in their interminable character” (MacIntyre, 1984, p. 6). In such a culture, in the place of moral guidance we find rules. Increasingly, 526 A. M. PRESTON et al. discourses within the public realm become legalistic. One’s behavior becomes defensible by following or abiding by rules rather than appeals to an established moral order. In short, rules increasingly replace moral obligations as a means of legitimation. It is within this public sensibility that we interpret the many changes we may observe in the accountants’ code and in the discourses surrounding it. The 1988 code is notable for the increasing specificity of rules. This is particularly true of the series 100 rules on independence. We shall use the rule of independence as an example of how the code begins to reflect the contemporary stance on rules rather than moral guidance. As Williams (1992) points out, the concept of independence in accounting has shifted from its being conceived as an integral part of the character of a professional to being regarded as an economic commodity. Thus, for years the profession had resisted codifying a rule on independence. Even the introduction of the SEC rule on independence in 1933 did not move the profession to act. Independence, they argued, was a “state of mind” intrinsic to the character of the professional and not easily subject to formal definition. In consequence, the introduction of the term “independence” in the code in 1964 was significant. It signaled that the “state of mind” argument, and with it, the portrayal of the professional accountant as a man of character, although still prevalent in the rhetoric of accountants, had lost considerable legitimacy in the public realm. The rule on independence, with its continuing attempt at a precise definition (there are currently over 100 published Interpretations of this rule), accords well with the contemporary culture of modern liberalism, with its relimoral ance upon rules rather than discernment. Merely claiming independence, or any other professional virtue, as part of a “state of mind” consummate with an accountant’s commitment to “serve the public interest” and to “put service before profit” is not credible within a public sensibility which makes a virtue of the pursuit of individual gain. In contemporary U.S. culture, a claim of independence needs to be supported by a rule specifying its nature and scope. In doing so the notion of independence is rendered transparent, even if only apparently so. Like other rules of the code, the rule of independence and its interpretations are expressed to be legally interpretable so that the extent of an accountant’s compliance or noncompliance is determinable. For example, Rule 101-A-(b) states that: independence would be impaired if during the period of professional engagement or at any time of expressing an opinion the member was a trustee if that trust had or was committed to acquire any direct or material indirect financial interest in the enterprise (as quoted from the Journal ofAccounting, September 1987, p. 115). The apparent precision of this and other interpretations suggests that the accountants are clearly more concerned with regulation than with inspirational guidance. It may be argued, therefore, that the virtue of the accountant is not expressed in terms of character, but rather by the extent to which he or she abides by the rules; legitimacy of technique is stressed more than legitimacy of character (Abbott, 1988). Given this representation, one might assume that the enforcement of the rules becomes an issue. However, in general, scant attention is paid to enforcement; apparently a big part of legitimation is just having the rules. At certain times enforcement emerged as an issue. However, it was normally the luck of enforcement that was the issue. For example, in 1971 Marshall S. Armstrong, president of the AICPA, commented: In my view, there is an absence of spirited enforcement of the Code of Professional Ethics throughout the profession as a whole. If such a condition were allowed to continue, the result could be a gradual loss of the prIvIlege of self discipline without our realizing it (quoted from Loeb, 1972). The statement by Armstrong reveals a recurring concern that if the profession did not U.S. ACCOUNTING PROFESSION CODE OF ETHICS discipline its members, then others, presumably state and federal agencies, would. Dingell (1985) reiterated this threat: Rules without enforcement tend to work very poorly, and I don’t care whether you are talking about raising children or dealing with major U.S. corporations Rules without adequate enforcement seem to breed a rather healthy degree of contempt and, I suspect, rightly so (Dingell, 1985, pp. 53). Returning to the rules themselves, by adopting legalistic rules the profession did not entirely surrender its moral elements, but these were relegated to the principles section. Whereas the principles are what the professional accountant must aspire to, it is the rules that he or she must obey. The principles are correspondingly less precise and have been subject to less careful interpretation. For example, Article IV on “Objectivity and Independence” states: “A member in public practice should be independent in fact and appearance when providing auditing and other attest services” and that “independence precludes relationships that may appear to impair a member’s objectivity in rendering attestation service” (AICPA, 1988b, pp. 5-6). Although expressed in an aspirational manner, it is left to the rules to specify how one is to achieve the state of independence and what relationships are permissible. The number of interpretations surrounding these rules, however, suggests that precise specificity is never fully achieved. In short, we see a separation emerging between enforceable regulations and moral aphorisms, and within this, the language shifts between legal precision and ethical homily. Legitimacy resides in demonstrable adherence to the rules, although, as we shall see, the principles preserve the profession’s claim to being an ethical body, which is still useful under certain conditions. As such, we see what Haber (1991) refers to as the smuggling of the premodem into the modem world; ethics reside in an uneasy juxtaposition with the legal. The increasingly legalistic nature of the code is more than terminological. With increased 527 litigation, accountants’ actions are being judged against very specific criteria. For example, the scope of the rule on independence focuses on prohibiting auditors from any financial investment and from holding any positions in client companies. Defining independence in a more precise legal manner serves to contain discussion about its scope and content, thereby possibly preventing a more restrictive definition being imposed from without. Except for the rather general reference to “conllicts of interest” in rule 102, the AICPA has succeeded in differentiating the discourses on the scope of CPA services from discourses on independence. Reference to scope of service occurs only in the principles section, and accordingly the rules ignore or avoid by omission the potential conilicts of interest inherent in a single firm’s providing management advisory, tax, and auditing services to the same client. Yet these conflicts of interest are precisely what critics of accountants stress. Raiser (1987) provides a very good example of some members’ concerns over this potentially more restrictive dimension of independence and their desire to limit debate. He notes that: Serious misgivings have been raised about the scope of services proposal in the report [on new standards]. The section’s wording may be too broad, say some observers, and that in its vagueness a Pandora’s box of unreasonable demands and uninformed suppositions about auditor independence may be opened. Moreover, other observers argue, scope of services is just one part of independence. Why single out this one aspect, they note, which raises a shadow issue that needn’t even be raised? After all, there is abso lutely no evidence that scope of services has impaired independence or caused an audit failure (1987, p. 110). Thus, a more precise legal expression serves not only to legitimize the auditors’ claim to independence in the culture of modem liberalism, but also serves (for the moment at least) to define and therefore restrict its impact upon the members’ activities. One may argue that the role of rules may be to preserve dis- 528 A. M. PRESTON er al. cretion and at the same time keep the public happy.” While rules are a source of legitimation in contemporary society, they seem to conflict with another pillar of liberal capitalism, the free market system, particularly as interpreted within the anti-regulatory atmosphere of the 1980s. This places the accounting profession in a particularly difficult position. In the theory of free market enterprise, it is believed that market forces provide a “level playing field” upon which individuals may maximize their utility. Although some minimal rules may be deemed necessary in order to keep the game fair (Heclo, 1986) or to limit the excesses of human desire (Smith, 1986), regulation is typically viewed as a form of interference, a restriction on competition. In this respect, the existence of institutional rules indicates a breakdown or the deliberate restriction of free market principles. Similar concerns were expressed in the earlier period we examined (Frevits & Merino, 1979) but, in contrast, the 1988 code firmly resolves the issue in terms of rules rather than reliance on character. George D. Anderson, the chairman of the committee which produced the 1988 code, noted that the idea that rules undermined the operation of free market principles was increasingly applied to the accounting profession during the 1970s and 1980s. He asks rhetorically: Does it really serve the public interest to ban advertis ing, solicitation and competitive bidding? Do such bans really affect the quality of work of a professional? Or are these artificial restraints not needed, and do they in fact harm the public interest?. The courts have stated that the restraints placed upon themselves relating to solicitation, competitive bidding and advertising are not needed to ensure the performance of quality work and can constitute a restraint of free trade (quoted in Liebtag, 1987, p. 62). These imposed amendments to the code refer to the Supreme Court ruling and the Federal Trade Commission consent decree which were intended to promote competition within the accounting profession, and thereby create a more efficient market for accounting services. It was argued that such steps would, under the principles of a free market system, protect the interests of the public. Arguments which suggested that advertising, encroachment, and direct solicitation were unseemly and inconsistent with the professional image, and which served to legitimize the profession at the turn of the century, had the complete reverse effect IL The increasing emphasis placed upon precisely defined rules raises the question of whether the code and discourses surrounding it may be defined as moral. Foucault makes it quite clear that morality cannot be reduced to rules. He states that: A moral action tends towards its own accomplishment: but it also aims beyond the latter, to the establishing of a moral conduct that commits an individual, not only to other actions always in conformity with values and rules, but to a certain mode of being, a mode of being characteristic of the ethical subject. In short, for an action to be “moral” it must not be reducible to an act or series of acts conforming to a rule, a law or a value (1985, p. 28). Rules required no moral discernment or appeals to an “ethical state of mind’, nor do rules require commitment to a certain form of being. In this respect, the telos (or the image of the ideal accountant), or indeed the personal attributes or “virtues” belonging to an accountant, except for abiding by the rules, are no longer relevant, and indeed are rarely mentioned. Rather, rules require only conformity. The moral question of “How should I, as an accountant act in this particular situation I am situated in.1” (Francis, 1991) becomes a legalistic rather than moral one. The ends to which one’s actions lead are no longer pertinent or even relevant, What is important is merely that the rules are followed. As MacIntyre (1984) notes, “[Q]uaRties of character then generally come to be prized only because they will lead us to follow the right set of rules” (p. 119). Moreover, the mode of subjection, or the reason why the accountant is incited or invited to behave in a particular manner (Foucauh, 1985), resides primarily in the threat of government regulation if the accountants “fail to clean up their act” (Dingell, 1985). In short, the profession’s emphasis upon rules and enforcement represents a regulatory rather than moral discourse and this serves to challenge the claim it has to being an ethical body. The increase in rules and precision stand in stark contrast to the early debates on the codes of ethics, where despite some contrary positions, rules were deliberately limited to emphasize the moral inherent in the accountant’s character. U.S. ACCOUNTING PROFESSION CODE OF ETHICS in the 1970s and 1980s in that they brought into question the profession’s legitimacy to act as a virtual monopoly and regulate itself. By the late 198Os, Rule 302 of the code, pro hibiting contingency fees, was also under threat from the Federal Trade Commission. The profession’s response to this threat is interesting in that it evoked a line of argument which was moral in tone and which harked back to an earlier time: It’s a basic rule of professional ethics and personal integ rity that when you audit a client company’s books you must maintain complete independence. You can’t have it both ways. If the FTC wants us to have fee income based on the benefits we can obtain for our clients, then we cannot be expected to fulfil our responsibilities as the public’s watchdog (Liebtag, 1987, p. 36). Thus, facing a changing public sensibility in which rules were more legitimate than claims to an ethical state of mind and yet, at the same time, suggesting the operation of monopolistic practices and self-interest, the accountants’ search for legitimacy becomes very complex, precarious, and subject to multiple rhetorics.13 Claims to self-regulation were not credible without precisely defmed and enforceable rules, and yet these very rules contradicted the principles of free market enterprise. The apparent need for rules to regulate behavior within the virtual monopolistic structure of the AICPA raised another specter for the profession, namely whether it is, or should be, able to regulate its own members. The Congressional enquiries of both the 1970s and the 1980s were specifically concerned with the issue of self-regulation. For example, Senator Metcalf was surprised at: the extraordinary manner in which the SEC has insisted upon delegating its public authority and the tesponsibilities on accounting matters to private groups with obvious self-interest in the resolution of such matters (U.S. Congress, 1976a. as quoted in Olson, 1982, p. 43). By 1987 the profession felt the “most visible challenge to the U.S. is direct government reg.- 529 ulation, a threat that has hung over the head of the accounting profession for sometime” (Kaiser, 1987, p. 108). The threat was explicit in the Dingell inquiry: I find it very curious, for example, that one day a corporation gets a clean bill of health and within one or two days thereafter it collapses amidst charges of fraud - and fraud that was going on for eight or nine years. One must ask, “Arc the rules deficient or arc the qualifications of the auditor or accountant adequate? Are the qualifications that are imposed on the profession sufficient? Are the statutes involved here with the federal government or the states sufficient? Is the self-policing of the accounting profession sufficient?” (DingelI, 1985, p. 53). Once again, we see the profession walking a very thin line. The increasing specificity of the code of conduct and the growing number of accounting standards (see next section) suggests that the members of the profession needed regulations to govern their behavior, given the privileges they enjoyed. Yet it is not clear that the public or Congress fully accepted the idea that the profession was the most appropriate body to enact and enforce the regulations. In short, the more explicit the rules, the more vulnerable they, and the accountants, became to external assessment (Abbott, 1988). To sum up: while the increased specificity of rules is more intelligible as a means in contemporary American culture that appeals to a professional state of mind, it nevertheless carries with it two important contradictions. The rules both draw attention to the profession’s restraints of free market practices and/or suggest that the profession needs regulating, and for some, that the regulation should come from outside the profession itself. As a consequence of this contradiction, the legitimacy and representation of the profession to important institutions and the public at large remains precarious and fraught with problems. Rationality Late twentieth-century U.S. culture is characterized not only by the elevation of the indivi- ” This complexity makes it very difficult to periodize contemporary discourse surrounding the code of ethics. 530 A. M. PRESTON er al. dual and an emphasis on free market economics, but also by the growth in forms of calculative rationality. Once again, calculative techniques predate the contemporary period. It is the intensification of these techniques in the latter part of the twentieth century that we recognize. In this respect, our concern here is not with the emergence of rationality but rather with its appropriation as a legitimating voice. Legitimacy in the late twentieth century is increasingly subject to the litmus tests of science which demanded “facts” which can be objectively determined, verified and proven through inquiry. Lyotard (1986) argues that the rise of rationality was at the expense of narrative or customary forms of legitimation. In the face of scientific discourse, customary knowledges were increasingly cast as “folk-words” (Maskell, 1985). “Judged by the yardstick of science, the majority of them prove to be fables” (Lyotard, 1986, p. xxiii). They belong to: a different mentality: savage, primitive, underdeveloped, backward, alienated, composed of opinions, cus toms, authority, prejudice, ignorance, ideology. Narratives are fables, myths, legends, fit only for women and children (Lyotard, 1986, p. 27). The growing web of standards and standardsetting bodies, as well as the 200 series rules on adherence to standards, may be interpreted as a response, by the accounting profession, to the rationality of the twentieth century. The Rules in the 1988 code required adherence to accounting principles generally accepted (GAAP), which include Statements of Financial Accounting Standards (SFAS), Opinions of the Accounting Principles Board (APB), and Accounting Research Bulletins (ARB). In addition, the accountant as auditor must adhere to generally accepted auditing standards (GAAS), which outline the conduct of an audit, and the more technical Statements on Auditing Standards @AS), as well as those promulgated by the Governmental Accounting Standards Board (GASB). If we combine these with the various interpretations and technical bulletins relating to the above standards and the various SEC releases, we observe a growing web of specific technical requirements pertaining to the preparation of financial reports and the conduct of audits. In short, despite continuing claims for the need for “professional judgment” and the continuing rejection of the notion of uniform rules for accounting practice, the profession, in keeping with the rationalistic culture of the day, began to reflect an increasingly technical or even scientific orientation. The use of statistical sampling and structured audits, as well as the positivist and empirical nature of much accounting research, may all be seen as part of an increasing preoccupation with and use of the legitimizing notions of objectivity, technique and verifiability. The climax of this concern is in many respects the conceptual framework of the six Statements of the Financial Accounting Concepts (SFAC) promulgated in the 1970s and 1980s. Within these documents, we observe a preoccupation with “representational faithfulness” to what is seen to be an objective reality. The accountant’s responsibility, and the stated intent of the standards adopted by FASB, are to represent the “facts” of transactions, measured against the degree to which they faithfully represent economic reality. Within these discourses, expertise and technical competence in the application of standards become the defining characteristic of professionalism. The appeal to techniques of rationality was not only evidenced by the promulgation of standards; the profession also was concerned to prove that they were being adhered to. The 1988 code was accompanied by what was referred to as “a practice-monitoring program.” The program made participation in a peer-evaluated “quality review” compulsory for CPA firms in public practice. It was argued that: [AIR firms need to have quality reviews of their audit and accounting practices because of the public interest in that work, because substandard performance is a problem that firms of all sizes have to guard against U.S. ACCOUNTING PROFESSION CODE OF ETHICS and because independent reviews of audit and accounting practice have been shown to be effective in helping firms identify and correct substandard practices (Huff & Kelley, 1989, p. 34). Larson (1987) notes that substandard work by auditors was a real problem to the profession: “Studies by state boards and state societies indicate that 30-40% of all audits are substandard. This finding parallels a General Accounting Office study, which found 34% of them were substandard” @. 118). To correct this problem, the profession introduced the quality review in order to demonstrate that members would take concrete steps to establish competency and to “improve quality of practice through greater adherence to standards” (Collins & McRae, 1987, p. 72). We see, therefore, the emergence of an increasingly technical language to represent the work of accountants. This language, like the legal language of compliance discussed above, constitutes the moral. The accountant becomes more of a technical expert in 1988, rather than the professional gentleman of the turn of the century. In this context, the legitimacy of the accountant is increasingly based upon demonstrable competence and technical standards rather than personal characteristics and professional judgment. The accountants increasingly appeal to a technical rationality, and thus the traditional story of the moral accountant, who places the public interest above profit, is correspondingly marginalized. It is important to note that, just as U.S. accountants have not entirely surrendered their claim to moral status, they have not abandoned their contention that accounting cannot be reduced to a uniform set of rules and standards. However, the increasing number of standards and the discourses surrounding them point to a greater reliance on the rational application of technique and less reliance on the moral dimensions of professional judgment. Within such rationalist discourse we find little mention of the nature of the accountants’ moral obligations, the reasons for these obligations, or the manner in which accountants 531 should strive to meet them. However, we must be careful not to overstate the case, for, as we have previously argued, important continuities and residues remain from the earlier era. The legitimacy of professional character is not completely eclipsed by that of technique. There are inevitable tensions between these two forms of legitimation. Appeals to moral character in the application of professional judgment sit somewhat uneasily with claims to adherence to technical standards and rules in the pursuit of individual economic wellbeing. Image and public relations In this section, we examine how the accounting industry draws on a third cultural value, the separation of reality and image, in an attempt to remedy its tarnished image and augment its legitimacy and standing in the contemporary culture. Twentieth-century U.S. culture is interrelated with the rise of consumerism. We draw on the importance of representation, image and style, to help explain the features of the code which concentrated on quality of service. Our concern here is not with theorizing the emergence and growth of the consumer culture but rather with its expression in the 1970s and 1980s. In particular, we are concerned with what Ewen (1988) refers to as the vast representational apparatus which grew up as part of the consumer culture to promote not only mass produced and styled goods, but also services, corporations, politicians, and, we argue, the accounting industry. This representational apparatus includes corporate identity consultants, political campaign consultants and personal image consultants, whose activities and services have become powerful cultural intermediaries concerned with creating an “imagistic corridor” between the product, service, person, institution, idea or message being sold and the consumer. Ewen (1988) contends that the focus of the production of culture has settled upon surface images in which the separation of form and substance and the transformation of reality into images (Jameson, 1984) has become a 532 A. M. PRESTON et al. defming characteristic of the contemporary U.S. Ewen (1988) paints a disturbing and negative picture of U.S. culture, increasingly “constructed out of images, attitudes, acquisitions and style . . . [culture resting] on the flimsy, if seductive foundation of appearance” (p. 62). Jameson (1984) depicts this as a “depthless culture” celebrating surfaces and the consumption of images. In short, contemporary culture “encourages a comprehension of the world that focuses on easily manipulated surfaces, while other meanings vanish to all but the critical eye. ” Most notably, “as the evanescent becomes increasingly real, reality becomes increasingly evanescent” (Ewe& 1988, p. 262). Concomitant with the transformation from a producer to a consumer culture, we observe that the construction and representation of self shifted from a concern with the “character” to the “personality” of the individual. Whereas the culture of character emphasized how to strengthen it through citizenship, duty, work, morals, loyalty and manhood, the culture of personality was concerned with how to build it into one which was “fascinating, stunning, attractive, magnetic, glowing, masterful, creative, dominant or forceful” (Susman, 1984, p. 277). The ideal of self-sacrifice under the puritan-republican, producer-capitalist culture yields to that of self-realization under the culture of abundance. The newer version of personality stresses self-fuhillment, selfexpression, self-gratification and, importantly, consumption. We draw a parallel between the accountants’ code of conduct and the discourses surrounding it, and the late twentieth-century consumer culture. We argue that the accounting industry, particularly during the 1980s has drawn upon the vast representational apparatus in U.S. society to try to solve what has been openly referred to as its “image problem.” By the mid-1980s the various problems con- fronting the profession, which as we have seen included the threat of government regulation, increasing numbers of law suits and a more general loss of public confidence, came to be defined (by the SEC commissioner amongst others) as an “image problem” (see Collins, 1986). The representation of this “problem” took a number of forms. The most common expression was that of the “expectation gap” (Guy & Sullivan, 1988) but other expressions included “credibility gap” (Collins, 1986), “crisis in communication” (Mednick, 1986X “perception gap” (Mednick, 1986) and the “erosion of public confidence” (Olson, 1982). Each of these phrases conveys a sense that the root of the accountants’ problems were thought to be, or were presented to be, more illusory than real. They were a matter of expectation or perception and the solution lay in “narrowing the gap” through shaping “the public perception of reasonable expectations” (Liebtag, 1987, p. 52) or by means which would “enhance public perception” (Kaiser, 1987, p. 108). In short, during the 1980s the profession appeared to be acutely concerned with the difference between its “self-image” and “public image ’’ . The discourse surrounding the code of ethics and, as we shall see, the code itself became part of an intensive “public relations” effort by the profession to restyle its image or correct its image problem and thereby re-establish its legitimacy. The stylistic themes of the profession’s “new” image were those of excellence and quality of service. The themes of excellence and quality were both in vogue in the commercial sector.14 Excellence was evidence by the title of the Anderson report which was called “Restructuring Professional Standards to Achieve Professional Excellence in a Changing Environment” (AICPA, 1986, emphasis added) and the title of the Annual Report of AICPA for 1987/88 was “The Measure of Excellence” (AICPA, 1988a, emphasis added). The theme of quality was also discernible in the ‘* The theme of excellence was being popularized by Peters & Waterman’s In Search of Ercelknce (1982) and the theme of quality was presented as a means of achieving a competitive advantage, typically over the Japanese, in both the service and manufacturing industries (Crosby, 1979). U.S. ACCOUNTING PROFESSION CODE OF ETHICS Restructuring Plan, as the Anderson report came to be known. What is relevant to this particular analysis is that the plan included the proposals for the new (1988) code of ethics, or Code of Professional Conduct as it was renamed in 1988. The plan to restructure included a mandatory “practice monitoring program” for members in public practice, significantly referred to as the Quality Review. The creation of a quality review process was the centerpiece in the bid to create a demonstrable quality of service. The quality review would “help individual practices maintain and improve quality and thus improve the quality of the entire profession” (Larson, 1987, p. 120). The primary focus of the quality review was claimed to be educational and remedial, rather than disciplinary; its intent was “improve quality through greater adherence to standards” (Collins & McRae, 1987, p. 72).15 The promotion that the quality review program received during the eighties attests to its importance as a public relations (PR) device. More explicit references to PR are found in the literature of this period. Kaiser (1987) stressed the need “for the profession to solve its perceived problems and recapture public confidence” (p. 108, emphasis added). One route to recapturing this confidence was to launch a major public relations campaign. In an article entitled “Boosting the Profession with Effective PR”, Corbett (1986) noted that recently a group of internationally known senior independent public relations professionals met at the American Institute of CPAs New York Headquarters and advised that: CPAs need to promote themselves more aggressively. They should shed all negativism and structure public 533 relations programs that emphasize positive attributes, such as professional competence for which they are already recognized (Corbett, 1986, p. 76). Aggressive promotion in the late 1980s took place at both the level of the profession and at the level of the individual firm. The code of ethics, particularly at the level of the AICPA, was part of this “package”. Improving public relations was more than rhetorical. The 1987-1988 Annual Report of the AICPA lists its promotional activities under the heading of “Communicating Credibility”. These activities included a year-long centennial campaign which “raised the CPA’s visibility”, a full-scale educational program on the “Plan to Restructure”, a major advertising campaign which underscored “the Institute’s commitment to quality” and a series of advertisements with the tag line “The Measure of Excellence.” In addition, it was noted that the “AICPA scored a solid media hit by working with the U.S. Office of Consumer Affairs and Better Business Bureau to develop a brochure on home equity loans.” Finally, the annual report notes that “to gain even more media attention for the profession” the Institute conducted its lirst poll of members on a broad range of business and economic issues (all quotes from AICPA, 1988a, p. 10). The centennial year also saw the issuance of a CPA stamp by the U.S. Postal Service and a letter of congratulation from President Reagan, both of which were prominently displayed in the centennial issue of the Journal of Accountancy. Finally, the AICPA also entered a float into the annual Rose Bowl parade which won a prize ” It is interesting to note that quality review was also presented to the membership as a cost-saving, efficiency-producing device. For example: Normally, no concrete dollar value can be afhxed to excellence: no exact calculation of time and energy can measure it. “Excellence is the intangible reward of tangible efforts.” These [the Anderson’s report] proposals are the exception to this maxim, however, since the rewards will also be tangible think about the dividends - the rewards - these investments will pay they will mean more efficient operations and more effective services. These cannot help but translate into greater demand for our services and increased bottom line income (Iarson, 1987, p. 118). The appeal to individual self-interest and economic rationality is inescapable in the above quotes. 534 A. M. PRESTON et al. and “enhanced our image” (Kaiser, 1987, p. 112). The language of the annual report is quite clearly derived from the image industry. “Raising visibility”, “tag line”, “a solid media hit”, and “media attention” are part of the language of advertisers and public relations consultants. The institute not only sought to enhance public opinion, but also was interested in measuring it. To this end AICPA “retained Louis Harris and Associates, New York, to conduct a public opinion poll focusing on CPA qualifications and services and the regulation of the profession” (Journal of Accounting, 1986, pp. 16-34). The issue of ethics and morality was featured strongly in the poll and among the 12 key professional groups included, “CPAs emerged at the top or close to it” (journal of Accounting, 1986, pp. 16-34). The results of the poll often appear in contemporary discourses on the profession and, to this day, serve to sup port the claim that, by and large, CPAs held the public’s confidence (Kaiser, 1987). The language of advertisers and public relations consultants reappears in the discourse surrounding the use of public relations by individual CPAs and firms. Corbett (1986) suggests that: As a CPA you’re an important conduit of information about the profession to the public ‘Ihe message you convey and how well you promote yourself and the profession can affect public attitudes. Each CPA should accept responsibilityfor educating the business community, the news media and others about the CPAs’ high standards of competence, professionalism and integrity@. 76). The public relations tools suggested to the individual CPA or firm, included mass media advertising, covering both services and image which can “catapult an organization or issue into the public consciousness quickly and cost effectively” (Pincus & Pincus, 1986, p. 129); social communication, including client newsletters and media relations, holding public seminars, employee participation in commuand the charitable programs; nity or sponsorship of community events (Pincus & Pincus, 1986; Corbett, 1986). It is striking that, for some, the public relations exercises at both the firm and AICPA level were concerned with image rather than substance. Charles Kaiser, who was a member of the Anderson report implementation committee, suggested: Satisfaction doesn’t equal reality minus expectation. Rather, satisfaction is based on the relationship between perception and expectation. That is, if you “perceive” you got more than you expected, whether or not you actually did, you’ll be satisfied. Perception is, more often than not, one’s reality (Kaiser, 1987, pp. 109-110). Charles C. Cox, an SEC Commissioner, noted that accountants were “beginning to realize that in 1986 it will be at least as important to Zook effective as to be effective” (Collins, 1986, p. 59, emphasis added). Again this comment reinforces the point that form and appearance in some senses were more important than substance and action. The array of promotional devices available to both the AICPA and individual CPAs and firms, by and large concentrated upon the surface image of the profession and its practices. From the above quotations, and by virtue of the very techniques themselves, it is clear that the public relations and advertising campaigns were quite explicitly intended to shape public perception and narrow the expectations gap; an attempt to shore up the accountant’s unsure footing in the late 1980s. The public relations consultants specifically advised the and profession to “shed all negativism” “emphasize positive attributes,” and the membership was encouraged to keep dissent “within our own ranks” (Liebtag, 1987, p. 58). Ewen, citing Marcuse (1964), suggests that such an appeal to the surfaces and the avoidance of substance is involved in the “the closing of the universe of discourse” and acts as a “discouragement of thought” (p. 262). Moral discourse is not merely replaced by, but becomes part of, the depthlessness of stylized imagery. U.S. ACCOUNTING PROFESSION CODE OF ETHICS CONCLUSIONS accountants In contrast to the way attempted to legitimize themselves at the turn of the century, we see in 1988 a story of the professional accountant as one who follows the rules of the code; as a technically competent expert in his or her understanding and application of the escalating number of standards; and as committed to projecting the image of quality and excellence. Although in the background we may discern the remnants of an older, more overtly moral discourse, that particular story is increasingly mute. Instead, the rules of the code resonate with a regulatory or legalistic rhetoric and contain a specificity which seeks both to more precisely delineate the extent of the accountants’ obligations and to act as a benchmark from which malfeasance may be judged. Resting upon the principles of rationality, the proliferation of standards points to, and seeks legitimacy within, an objectivist or realist epistemology in which accounting practice is premised upon a claim that it mirrors economic reality or truth. The standards and the rules in the code give accounting the appearance of being both more concrete and more closely regulated. However, the regulation comes not from disciplinary proceedings but from quality reviews where the performance of accountants and firms are examined by their peers and suggestions are given for improvement. Finally, with the profession’s recourse to the representational apparatus of the consumer culture, we find that the code of ethics and the discourse surrounding it, once central to the spirit of the profession, are recast as part of a public relations campaign. In this narrative we observe an overt attempt to fashion public perception. Here the profession is attempting to recast itself as a modern institution and shed the increasingly anachronistic image of a brethren and of accountants as professional gentlemen. According to J. Michael Cook (Chairman of the AICPA 1987/1988) the profession needed “to move away from being a club-like organization” to “one that would stand up for a demonstrable 535 quality of practice” (Collins, 1986, p. 75, emphasis added). Quality of practice and excellence became modern euphemisms for professional competence and indeed for the professional l&n/herself. The code, the quality reviews and the new educational requirements became the themes around which the public relations and advertising campaigns were formed. The legal, technical, and imagistic rhetoric speaks to a different audience, whose sensibllities have been shaped by and in turn shape a culture emphasizing individualism, rationality and the production and consumption of stylized images. As with contemporary culture more generally, the narrative of legitimation of the industry has become a curious pastiche of language and imagery which may point to a crisis of representation. Instead of the somewhat more cohesive narrative of the turn of the century, we tind what Lyotard (1986) refers to as a plurality of language games in which the profession, the individual accountant, accounting and audit practice are cast in a series of guises. The moral narrative is uncomfortably juxtaposed both against the legal, the technical and the imagistic, each time raising questions about whether the profession will be able to sustain its claim to being a moral body. Prohibitions against underbidding, advertising, direct solicitation and encroachment are no longer part of the accountants’ written code of professional conduct. Reports with titles like “The Accounting Wars” (Stevens, 1989) and “The CPA Jungle” (Wall StreetJournal, 24/7/91) suggest that such practices are becoming increasingly popular in at least the big six firms. Seemingly, because the rules have been removed from the code they have been divested of their moral imperative. The scope of the accountant’s morality now appears to be defined by and limited to the rules and their increasingly precise interpretation. To the extent that “state of mind” is referred to, this is likely to focus on the morality of individual self-interest and businesslike behavior. At the turn of the century underbidding, 536 A. M. PRESTON et al. advertising, direct solicitation and encroachment were also not part of the written code and yet they were nevertheless laden with moral connotations. At the turn of the century, rules at best regulated minor points of professional conduct. It was the accountants’ “state of mind”, at least at the discursive level, which was said to provide moral guidance; the accountant was constituted as an ethical subject through his Protestantism and idealism. Drawing this distinction is not intended to suggest that we believe that accountants were more moral at the turn of the century, or that the code and the discourse surrounding it formed a complete and internally consistent moral schema. Rather, the intention is to note that the code, the discourses surrounding it, and thus the very conceptualization of what constitutes morality within the accounting profession have undergone a number of profound changes. The overtly moral discourse at the turn of the century, in which we observe reflections upon the ten commandments, right and wrong, the virtues of courage, loyalty, integrity, duty, responsibility and the professional state of mind, stands in somewhat stark contrast to current concerns over what rules members ought to follow, what standards ought to be set and adhered to, and what solid media hits, advertising campaigns and public relations tools ought to be deployed to shape public perceptions. As U.S. culture changed from a producer to a consumer culture and from a Protestant-idealist to a rational sensibility, so to did the accountants’ appeals to it for legitimacy. In drawing a relationship between accountants’ morality, the specific challenges facing the profession, and the wider culture we do not subscribe to a deterministic, cause/effect model. Rather, we suggest, using an imagery from Giddens (1990), that social and cultural discourse spiral in and out of the profession and the accountant’s life, reconstructing professional concepts of morality and perceptions of threats and, in turn, the universe from which they emerged. The transformations in the code of ethics and the discourse surrounding it, therefore, are not merely a reflection or opportunist response to the wider changes in U.S. culture. As a profession of some size and visibility, changes in the way it seeks to legitimize itself become, in part, constitutive of, or reproduce and reinforce, the wider society. It is perhaps not surprising, then, that the sociologist Andrew Abbott ends his book with a statement which places accounting at the center of social and cultural life: The jurisdiction of money requires the kind of attention long received by health. 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Tinker, T., Theories of the State and the State of Accounting: Economic Reductionism and Political Vohmtarism in Accounting Regulation, Journal of Accounting and Public Policy (1984) pp. 55-77. Tinker, T., Merino, B. & Neimark, M., The Normative Or&ins of Positive Theories: Ideology and Accounting Thought, Accounting, Organizations and Society (1982) pp. 167-20. U.S. Congress, Senate, The Accounting Establishment: A Stuff Study, Prepared by the Subcommittee on Reports, Accounting and Management of tbe Committee on Governmentul Operutions, 94th Congress, 2nd sess. (Washington, DC: Government Printing Ofice, 197&a). U.S. Congress, Subcommittee on Oversigbt and Investigation of tbe House of Representative: Committee on Interstate and Foreign Commerce Federal Regulation and Regulatory Reform (Washington, DC: Government Ptinting Office, 1976b). U.S. Congress, Commlrtee on Government Operations: Substandard CPA Audits of Federal Ffnanciul Assistunce Funds: The Public Accounting Profession ts Failing tbe Tax Payers (Washington, DC: Government Printing Office, 1986). Weber, M., From Max Webs Essays in Sociology, in Gerth, H. & MiIls, C. W. (eds) (London: Routledge, 1970). Weber, M., l%e Protestant Ethic and tbe Spirit of Capftulism (London: Allen and Unwin, 1974). Wiis, P., Prediction and Control in Accounting “Science”, Criticul Perspectives on Accounting (1992). Wilhnott, H., Organizing the Profession: A Theoretical and Historical Examination of the Major Accountancy Bodies in the U.K., Accounting, Oqanizutions and Society (1986) pp. 555-580. Willmott, H., Cooper, D. J. & Puxty, A. G., Maintaining Self-Regulation: MakIng “Interests” Coincide in 539 A. M. PRESTON et al. 540 Discourses on the Governance (1993) pp. 68-93. Z&, S., Forging Accounting of the ICAEW, Accounting, Auditing and AccountabfIfty Journal Princzples in Five Countries: A History and Analysis of Trends (Cham- paign, IL: Stipes Publishing, 1972). APPENDIX 1 American Institute of Accountants Rules of Professional Conduct Prepared by the Committee on Professional Ethics and approved by the Council April 9, 1917. (1) A firm or partnership, aU the individual members of which arc members of the Institute, may describe itself as “Members of the American Institute of Accountants”, but a firm or partnership, aU the members of which are not members of the Institute, or an individual practising under a style denoting a partnership when in fact there be no partner or partners, or a corporation, or an individual or individuals practising under a style denoting a corporate organization, shaU not describe themselves as “Members of the American Institute of Accountants.” (2) The preparation and certification of exhibits, statements, schedules, or other forms of accountancy work, contahring an essential misstatement of fact, or omission therefrom of such a fact as would amount to an essential misstatement shall be, ipso facto, cause for expulsion, or for such other discipline as the Council may determine, upon proper presentation of proof that such misstatement was either wilful or was the result of such gross negligence as to be inexcusable. (3) No member shall allow any person to practice in his name as a public accountant who is not a member of this Institute, or in partnership with him or in his employ on a salary. (4) No member shaU directly or indhectly allow or agree to allow a commission or brokerage, or other participation by the laity in the fees or profits of his professional work, nor shall he accept directly or indirectly from the laity any such commission, brokerage or other participation for professional or commercial business turned over to others as an incident of his services to clients. (5) No member shall engage in any business or occupation conjointly with that of a public accountant, which in the opinion of the Executive Committee or of the Council is incompatible or inconsistent therewith. (6) No member shall certify to any accounts, exhibits, statements, schedules or other forms of accountancy work which have not been verified entirely under the supervision of himself, a member of his iirm, one of his staff, a member of this Institute or of a similar association of good standii in foreign countries which has been approved by the Council. (7) No member shall take part in any effort to secure the enactment, alteration, or amendment of any state or federal law, or any regulation of any governmental or civic body, affecting the practice of the profession without giving immediate notice thereof to the Secretary of the Institute, who in turn shall at once advise the Executive Committee or the Council. (8) No member shall directly or indirectly solicit the clients nor encroach upon the business of another member, but it is the right of any member to give proper service and advice to those asking such service or advice. APPENDIX II: CODE OF PROFESSIONAL CONDUCT (AS ADOPTED 12 JANUARY 1988) Composition, Applicability, and Compliance The Code of Professional Conduct of the American Institute of Certified Public Accountants consists of two sections - (1) the Principles and (2) the Rules. The Principles provide the framework for the Rules, which govern the performance of professional services by members. The Council of the American Institute of Certified Public Accountants is authorized to designate bodies to promulgate technical standards under the Rules, and the bylaws require adherence to those Rules and standards. The Code of Professional Conduct was adopted by the membership to provide guidance and rules to all members those in public practice, in industry, in government, and in education - in the performance of their professional responsibilities. Compliance with the Code of Professional Conduct, as with aU standards in an open society, depends primarily on U.S. ACCOUNTING PROFESSION CODE OF ETHICS 541 members’ understandii and voluntary actions, secondarily on reinforcement by peers and public opinion, and ultimately on disciplinary proceedings, when necessary, against members who fail to comply with the Rules. Section 1 - Frinciples Preamble Membership in the American Institute of Certitied Public Accountants is voluntary. Ry accepting membership, a certified public accountant assumes an obligation of self-discipline above and beyond the requirements of laws and regulations. These Principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants express the profession’s recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct. The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage. Artlcle 1 Responsibilities In carrying out their responsibilities as professionaLs, members should exevxise sensitive professional and moral judgments in aN tbeir activities. As professionals, certified public accountants perform an essential role in society. Consistent with that role, members of the American Institute of CertiRed Public Accountants have responsibilities to all those who use their professional services. Members also have a continuing responsibility to cooperate with each other to improve the art of accounting, maintain the public’s confidence, and carry out the profession’s special responsibilities for self-governance. The collective efforts of all members are required to maintain and enhance the traditions of the profession. Article II The Public Interest Members should accept tbe obligation to act in a way that will serve tbe public interest, honor the public trust, and demonstrate commitment to professionalism A distinguishing mark of a profession is acceptance of its responsibility to the public. The accounting profession’s public consists of clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of certified public accountants to maintain the order functioning of commerce. This reliance imposes a public interest responsibility on certified public accountants. The public interest is defined as the collective well-being of the community of people and institutions the profession serves. In discharging their professional responsibilities, members may encounter conflicting pressures from among each of those groups. In resolving these conflicts, members should act with integrity, guided by the precept that when members fuhill their responsibility to the public, clients’ and employers’ interests arc best served. Those who rely on certiiied public accountants expect them to discharge their responsibilities with integrity, objectivity, due professional care, and a genuine interest in serving the public. They are expected to provide quality services, enter into fee arrangements, and offer a range of services - all in a manner that demonstrates a level of professionalism consistent with these Principles of the Code of Professional Conduct. AR who accept membership in the American Institute of Certified Public Accountants commit themselves to honor the public trust. In return for the faith that the public reposes in them, members should seek continually to demonstrate their dedication to professional excellence. Article III To maintain and broaden public confidence, members sboukipe~own allprofessional responsibilities with tbe highest sense of tntegrlty. Integrity is an element of character fundamental to professional recognition. It is the quality from which the public trust derives and the benchmark against which a member must ultimately test all decisions. Integrity requites a member to be, among other things, honest and candid within the constraints of client coniidenti- A. M. PRESTON et al. ality. Service and the public trust should not be subordinated to personal gain and advantage. Integrity can accommodate the inadvertent error and the honest difference of opinion; it cannot accommodate deceit or subordination of principle. Integrity is measured in terms of what is right and just. In the absence of speciIic rules, standards, or guidance, or in the face of conflicting opinions, a member should test decisions and deeds by asking: “Am I doing what a person of integrity would do? Have I retained my integrity? ” Integrity requires a member to observe both the form and the spirit of technical and ethical standards; circumvention of those standards constitutes subordination of judgment. Integrity also requires a member to observe the principles of objectivity and independence and of due care. Article Iv Objectivity and Independence A member should maintain objectfufty and be free of conjlfcts of interest in dfscbargfngprofessfonal responsibilities.A member in publicpractice should be independent in fact and appearance whenprovfdfng auditing and other attestation services. Objectivity is a state of mind, a quality that lends value to a member’s services. It is a distlngulshlng feature of the profession. The principle of objectivity imposes the obllgatlon to be impartial, intellectually honest, and free of conflicts of interest. Independence precludes relationships that may appear to impair a member’s objectivity in rendering attestation services. Members often serve multiple interests in many different capacities and must demonstrate their objectivity in varying circumstances. Members in public practice render attest, tax, and management advisory services. Other members prepare financial statements in the employment of others, perform internal auditing services, and serve in financial and management capacities in industry, education, and government. They also educate and train those who aspire to admission into the profession. Regardless of service or capacity, members should protect the integrity of their work, maintain objectivity, and avoid any subordination of their judgment. For a member in public practice, the maintenance of objectivity and independence requires a continuing assessment of client relationships and public responsibility. Such a member who provides auditing and other attestation services should be independent in fact and appearance. In providing all other services, a member should maintain objectivity and avoid conflicts of interest. Although members not in public practice cannot maintain the appearance of independence, they nevertheless have the responsibility to maintain objectivity in rendering professional services. Members employed by others to prepare financial statements or to perform auditing, tax, or consulting services are charged with the same responsibility for objectivity as members in public practice and must be scrupulous in their application of generally accepted accounting principles and candid in all their dealings with members in public practice. Article V Due Care A member should observe tbe profession’s tecbnfcal and ethical standards, strtve continually to improve competence and tbe quality of services, and d&barge professional responsibility to the best of tbe member’s abflflity. The quest for excellence is the essence of due care. Due care requires a member to discharge professional responsibilities with competence and diligence. It imposes the obligation to perform professional services to the best of a member’s ability with concern for the best interest of those for whom the services are performed and consistent with the profession’s responsibility to the public. Competence is derived from a synthesis of education and experience. It begins with a mastery of the common body of knowledge required for designation as a certified public accountant. The maintenance of competence requires a commitment to learning and professional improvement that must continue throughout a member’s professional life. It is a member’s individual responsibility. In all engagements and in all responsibilities, each member should undertake to achieve a level of competence that will assure that the quality of the member’s services meets the high level of pmfessionalism required by these Principles. Competence represents the attainment and maintenance of a level of understanding and knowledge that enables a member to render services with facility and acumen. It also establishes the limitations of a member’s capabilities by dictating that consultation or referral may be required when a professional engagement exceeds the personal competence of a member or a member’s fum. Each member is responsible for assessing his or her own competence - of evaluating whether education, experience, and judgment ate adequate for the responsibility to be assumed. U.S. ACCOUNTING PROFESSION CODE OF ETHICS 543 Members should be diligent in discharging responsibilities to clients, employers, and the public. Diligence imposes the responsibility to render services promptly and carefully, to be thorough, and to observe applicable technical and ethical standards. Due care requires a member to plan and supervise adequately any professional activity for which he or she is responsible. Article VI Scope and Nature of Services A member inpublicpractice should observe the Principh of the Code of Professional Conduct in determining the scope and nature of services to be provided. The public interest aspect of certified public accountants’ services requires that such services be consistent with acceptable professional behavior for certified public accountants. Integrity requires that service and the public trust not be subordinated to personal gain and advantage. Objectivity and independence require that members be free from conflicts of Interest in discharging professional responsibilities. Due care requires that services be provided with competence and diligence. Each of these principles should be considered by members in determinin g whether or not to provide specific services in individual circumstances. In some instances, they may represent an overall constraint on the nonaudit services that might be offeted to a speciiic client. No hard-and-fast rules can be developed to help members reach these judgments, but they must be satisned that they are meeting the spirit of the Principles in thls regard. In order to accomplish this, members should l l l Practice in firms that have in place internal qualitycontrol procedures to ensure that services are competently delivered and adequately supervised. Determine, in their individual judgments, whether the scope and nature of other services provided to an audit client would create a con&t of interest in the performance of the audit function for that client. Assess, in their individual judgments, whether an activity is consistent with their role as professionals (for example, Is such activity a reasonable extension or variation of existing services offered by the member or others in the profession?). Section II - Rules Applicability The bylaws of the American Institute of Certified Public Accountants require that members adhere to the Rules of the Code of Professional Conduct. Members must he prepared to justify departures from these Rules. DefillitlOllS [Adoption of tbe revised Code of Professional Conduct will require modification of some of tbe definitions oftused in tbe Printiples and Rules. T&e Professional Ethics Executive Committee has this project under way. Until new dejnftions are adopted, tbe definitions of terms as they appeared prior to adoption of the new Rules on 12 Januay, 1988, are presented for reference.] Client. The person(s) or entity which retains a member or his iirm, engaged in the practice of public accounting, for the performance of professional services. Council. The Council of the American Institute of Certified Public Accountants. Enterprise. Any person(s) or entity, whether organized for profit or not, for which a CPA provides services. Financial statements. Statements and footnotes related thereto that purport to show financial position which relates to a point in time or changes in Bnancial position related to a period of time, and statements which use a cash or other incomplete basis of accounting. Balance sheets, statements of income, statements of retained earnings, statements of changes in Bnanclal position, and statements of changes in owners’ equity are financial statements. Incidental financial data included in management advisory services reports to support recommendations to a client and tax returns and supporting schedules do not, for this purpose, constitute Enancial statements; and the statement, affidavit, or signature of preparers required on tax returns neither constitutes an opinion on financial statements nor requires a disclaimer of such opinion. 544 A. M. PRESTON et al Ffrnz. A proprietorship, partnership, or professional corporation or association engaged in the practice of public accounting, including individual partners or shareholders thereof. Insrfrute. The American Institute of Certihed Public Accountants. Interpretations of rules of conduct. Pronouncements issued by the division of professional ethics to provide guidelines concerning the scope and application of rules of conduct. Member. A member, Accountants. associate member, or international associate of the American Institute of Certilied Public Pradfce ofpublic accountfng. Holding out to be a CPA or public accountant and at the same time performing for a client one or more types of services rendered by public accountants. The term shall not be Limitedby a more restrictive definition which might be found in the accountancy law under which a member practices. Professional seruices. One or more types of services performed in the practice of public accounting. Rules Rule101 Independence A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council. Interpretation of Rule 101 Interpretation 101-l. Independence shall be considered to be impaired lf, for example, a member had any of the following transactions, interests, or relationships: A. During the period of a professional engagement or at the time of expressing an opinion, a member or a member’s firm 1. Had or was committed to acquire any direct or material indirect financial interest in the enterprise. 2. Was a trustee of any trust or executor or administrator of any estate if such trust or estate had or was committed to acquire any direct or material indirect financial interest in the enterprise. 3. Had any joint, closely held business investment with the enterprise or with any officer, director, or principal stockholders thereof that was material in relation to the member’s net worth or to the net worth of the member’s firm. 4. Had any loan to or from the enterprise or any officer, director, or principal stockholder of the enterprise. This proscription does not apply to the following loans from a financial institution when made under normal lending procedures, terms, and requirements: a. loans obtained by a member or a member’s fipu that are not material in relation to the net worth of such borrower. b. Home mortgages. c. Other secured loans, except loans guaranteed by a member’s firm which are otherwise unsecured. B. During the period covered by the financial statements, during the period of the professional engagement, or at the time of expressing an opinion, a member or a member’s firm 1. Was connected with the enterprise as a promoter, underwriter or voting trustee, as a director or officer, or in any capacity equivalent to that of a member of management or of an employee. 2. Was a trustee for any pension or profit-sharing trust of the enterprise. The above examples are not intended to be all-inclusive. Rule102IntegrityandObjectivity In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of contlicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others. U.S. ACCOUNTING PROFESSION CODE OF ETHICS 545 Rule 201 General Standards A member shall comply with the following standards and with any interpretations thereof by bodies designated by council. A. Professional Competence. Undertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence. B. Due Professtonal Cam Exercise due professional care in the performance of professional services. C. Planning and Supervisfon. Adequately plan and supervise the performance of professional services. D. Sufficrent Relevant Data. Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed. Rule 202 Compliance With Standards A member who performs auditing, review, compilation, management advisory, tax, or other professional services shall comply with standards promulgated by bodies designated by Council. Rule 203 Accounting Principles A member shall not (1) express an opinion or state affirmatively that the financial statements or other financial data of any entity are presented in conformity with generally accepted accounting principles or (2) state that he or she is not aware of any material modifications that should be made to such statements or data in order for them to be in conformity with generally accepted accounting principles, if such statements or data contain any departure from an accounting principle promulgated by bodies designated by Council to establish such principles that has a material effect on the statements or data taken as a whole. If, however, the statements or data contain such a departure and the member can demonstrate that due to unusual circumstances the financial statements or data would otherwise have been misleading, the member can comply with the rule by describing the departure, its approximate effects, if practicable, and the reasons why compliance with the principle would result in a misleading statement. Rule 301 ConIidential Client Information A member in public practice shall not disclose any confidential client information without the specific consent of the client. This rule shall not be construed (1) to relieve a member of his or her professional obligations under rules 202 and 203, (2) to affect in any way the member’s obligation to comply with a validly issued and enforceable subpoena or summons, (3) to prohibit review of a member’s professional practice under AICPA or state CPA society authorization, or (4) to preclude a member from initiating a complaint with or responding to any inquiry made by a recognized investigative or disciplinary body. Members of a recognized investigative or disciplinary body and professional practice reviewers shall not use to their own advantage or disclose any member’s confidential client information that comes to their attention in carrying out their official responsibilities. However, this prohibition shall not restrict the exchange of information with a recognized investigative or disciplinary body or affect, in any way, compliance with a validly issued and enforceable subpoena or summons, Rule 302 Contingent Fees Professional services shall not be offered or rendered under an arrangement whereby no fee will be charged unless a specified Ending or result is attained, or where the fee is otherwise contingent upon the finding or results of such services. However, a member’s fees may vary depending, for example, on the complexity of services rendered. Fees are not regarded as being contingent if fixed by courts or other public authorities, or, in tax matters, if determined based on the results of judicial proceedings or the Endings of governmental agencies. Rule 401 [There are currently no rules in the 400 series.] Rule 501 Acts Discreditable A member shall not commit an act discreditable to the profession. 546 A. M. PRESTON et al. Rule 502 Advertising and Other Forms of Solicitation A member in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive. Solicitation by the use of coercion, over-reaching, or harassing conduct is prohibited. Rule 503 Commissions The acceptance by a member in public practice of a payment for the referral of products or services of others to a client is prohibited. Such action is considered to create a conflict of interest that results in a loss of objectivity and independence. A member shall not make a payment to obtain a client. This rule shall not prohibit payments for the purchase of an accounting practice or retirement payments to individuals formerly engaged in the practice of public accounting or payments to heirs or estates. Rule 504 [There is currently no rule 504.1 Rule 505 Form of Practice and Name A member may practice public accounting only in the form of a proprietorship, a partnership, or a professional corporation whose characteristics conform to resolutions ot Council. A member shall not practice public accounting under a fmn name that is misleading. Names of one or more past partners or shareholders may be included in the tirm name of a successor partnership or corporation. Also, a partner or shareholder surviving the death or withdrawal of all other partners or shareholders may continue to practice under such name which includes the name of past partners or shareholders for up to two years after becoming a sole practitioner. A tirm may not designate itself as “Members of the American Institute of Certifted Public Accountants” unless all of its partners or shareholders are members of the Institute. Accounting Organizations and Society, Vol 9, No 3/4, pp 207-232, 1984 Printed m Great Britain THE VALUE OF CORPORATE ARGUMENTS FOR A POLITICAL 0361-3682/84 $3 00+ OO (~) 1984 Pergamon Press Ltd ACCOUNTING REPORTS: ECONOMY OF ACCOUNTING* D A V I D J. C O O P E R University of E a s t Anglia and M I C H A E L J. SHERER University o f Manchester Abstract Extstmg research on the chotce of accounting methods for corporate reports emphastzes prtvate interests In particular, shareholders' mterestS predominate m studtes of the effects of accountmg information on mdtvtdual users Attempts at assessing the soctai value of accounting reports, usmg the approach of marginal economtcs to reformation or the analysts of economic consequences also exhtbtt, m their execuuon, a pronounced shareholder orientation Thts paper suggests that an alternattvc approach, the Pohtmal Economy of Accountmg, may be fa'mtful This approach seeks to understand and evaluate the functions of accounting w,thm the context of the economtc, social and pohttcal environment m which it operates Research w,tfun thts framework ts tdentdied as hawng normattve, descrtpttve and crmcal qualities, and the paper concludes with some dlustrattons of potential research areas T h e m a j o r o b j e c t i v e o f t h i s p a p e r is t o o u t l i n e a n alternative framework for relevant accounting r e s e a r c h . T h e i n t e n t i o n is t o r e i n f o r c e r e c e n t c a l l s ( B u r c h e l l et al., 1 9 8 0 ; T i n k e r , 1 9 8 0 ) t o understand how accounting systems operate in their social, political and economic context in order that "better" accounting systems might eventually be designed. In order to set our arguments for a poliucal economy of accounting in c o n t e x t , t h e first t w o s e c t i o n s o f t h i s p a p e r r e v i e w m a n y o f t h e c u r r e n t a p p r o a c h e s t o assessing the value of corporate reports Whilst this review might be thought to duphcate others (eg. Gonedes & Dopuch, 1974; Foster 1980a, Leftwich, 1980, Beaver, 1981), the synthesis o f f e r e d i n t h i s p a p e r is q u i t e d i f f e r e n t It is designed to highlight the emphasis by most accounting research on individuals (especially shareholders) and a concern with market equilibrium and the associated passive acceptance of the existmg social and political context o f c o r p o r a t e r e p o r t i n g . I m p l i c i t i n o u r r e v i e w is a notion of social welfare that focuses on society as a n a g g r e g a t e ( r a t h e r t h a n a n a g g r e g a t i o n o f i n d i v i d u a l s ) , a n e m p h a s i s o n d i s t r i b u t i v e as w e l l as e x c h a n g e ( a l l o c a t i v e ) d i m e n s i o n s o f w e a l t h and power and a concern with socially necessary rather than market determined production. This view of social welfare leads to the conclusion that the study of the institutional context of *Prevtous verstons of tfus paper were presented at the London School of Economics, the Umversmes of Bwmmgham, Sheffield and Southampton and at a meetmg of the Northern Accounting Group The paper has benefited from the helpful, ffoften crmcal, comments of Mtke Bromwtch, Anthony Hopwood, Michael Mumli~rd, Marllyn Nlemark, Jtm Ohlson, Ted O'Leary, Tony Tmker and colleagues at the Umversmes of East Angha, Manchester and Sheffield The remamlng errors and the vtews expressed are the responstblhty of the authors 207 208 DAVIDJ COOPER and MICHAELJ SHERER a c c o u n t i n g is a l e g i t i m a t e and n e c e s s a r y area o f s t u d y for a c c o u n t i n g r e s e a r c h T h e d o m i n a n t c o n c e r n w i t h s h a r e h o l d e r i n t e r e s t has l i m i t e d the development of research about how a c c o u n t i n g s y s t e m s o p e r a t e a n d for d e s i g n i n g c o r p o r a t e a c c o u n t i n g r e p o r t s w h i c h m a y l e a d to a f u n d a m e n t a l i m p r o v e m e n t in social w e l f a r e 1 It is i m p o r t a n t at t h e o u t s e t to highlight a crucml t e n s i o n in this p a p e r w h i c h arises o u t o f o u r c o n c e r n to c r e a t e a c c o u n t i n g s that are v a l u a b l e m s o c i e t y O u r position, that t h e o b j e c t i v e s o f a n d for a c c o u n t i n g are f u n d a m e n t a l l y c o n t e s t e d , arises o u t o f t h e r e c o g n i t i o n that any a c c o u n t i n g c o n t a i n s a r e p r e s e n t a t i o n o f a specific social and political c o n t e x t . Not o n l y is a c c o u n t i n g p o l i c y essentially p o l i t i c a l in that it d e r i v e s f r o m the p o l i t i c a l s t r u g g l e m s o c i e t y as a w h o l e b u t also t h e o u t c o m e s o f a c c o u n t i n g p o h c y are essentially political in that t h e y o p e r a t e for the b e n e f i t o f s o m e g r o u p s in s o c i e t y a n d to t h e d e t r i m e n t o f o t h e r s H o w e v e r , it d o e s n o t f o l l o w I and this is h o w t h e t e n s i o n in t h e p a p e r manifests i t s e l f - that an i m p r o v e m e n t in a c c o u n t i n g p o l i c y can necessarily be achieved within the accounting d o m a i n Rather, t h e r e as the i m p l i c a t i o n that t h e p o h t i c a l l y d e t e r m i n e d n a t u r e o f t h e value o f a c c o u n t i n g p r e v e n t s any such r e s o l u t i o n wathm a c c o u n t i n g itself Socml w e l f a r e as likely to b e i m p r o v e d if a c c o u n t i n g p r a c t i c e s are r e c o g m s e d as b e i n g c o n s i s t e n t l y partial, that t h e s t r a t e g i c o u t c o m e s of accounting practices consistently (if not m v a r m b l y ) favour specific anterests in socaety and d i s a d v a n t a g e o t h e r s T h e r e f o r e , w e are arguing that t h e r e a l r e a d y exists an established, if implicit, c o n c e p t u a l f r a m e w o r k for a c c o u n t i n g practace. This p a p e r offers an analysis o f t h e value o f c o r p o r a t e a c c o u n t i n g r e p o r t s w h i c h r e c o g n i s e s b o t h t h e tactical d i s c o n t i n u i t i e s and varlataons in a c c o u n t i n g policies, i n c l u d i n g t h e p o s s i b i l i t y that actual p o l i c y o u t c o m e s m a y b e an i m p e r f e c t m a t c h w i t h t h e u n d e r l y i n g intentions a n d m o t i v a t i o n s a n d the s t r a t e g i c c o n s e n - sus and p a t t e r n s o f o u t c o m e s that m o r e o r less c o n s i s t e n t l y s u p p o r t financial and s h a r e h o l d e r Interests in s o c i e t y In o r d e r to a c h i e v e an i m p r o v e m e n t in a c c o u n t i n g p r a c t i c e s ( t o m a k e t h e m m o r e a c c o u n t a b l e to s o c i e t y m a d e m o c r a tac w a y ) at is i m p o r t a n t to cast asade the ideologacal mask w h i c h h i d e s t h e r e a l i t y o f a c c o u n t i n g r e s e a r c h , to adentify h o w a c c o u n t i n g r e s e a r c h justifies c u r r e n t political a r r a n g e m e n t s a n d patterns o f a d v a n t a g e a n d disadvantage, a n d h o w a c c o u n t i n g r e s e a r c h samllarly amplies that s u c h a r r a n g e m e n t s a n d p a t t e r n s are ammutable, effic i e n t a n d e v e n effective That as t h e p u r p o s e o f this p a p e r T h e first s e c t i o n o f this p a p e r r e v i e w s m a n y o f the studies w h i c h mm to assess the usefulness o f c o r p o r a t e a c c o u n t i n g r e p o r t s for users T h e s e studies, b e c a u s e t h e y have amphcataons m e r e l y for t h e p r i v a t e value o f informataon, p r o v i d e little g u i d a n c e for t h e d e s i g n of, and c h o i c e betw e e n , alternatave a c c o u n t i n g r e p o r t s that are i n t e n d e d to c o n t r a b u t e t o w a r d s social w e l f a r e In the n e x t s e c t i o n s o m e r e c e n t d e v e l o p m e n t s whach p u r p o r t to a d d r e s s the q u e s t i o n o f t h e social, as against the p r i v a t e value o f c o r p o rate a c c o u n t i n g r e p o r t s are d i s c u s s e d T h e s e a t t e m p t s , too, p r o v i d e an i n c o m p l e t e analysis o f t h e social value o f a c c o u n t i n g i n f o r m a t i o n T h e i r d e f i c i e n c y hes in t h e i r focus o n issues o f effic i e n c y ( r a t h e r than e f f e c t i v e n e s s ) and t h e i r e m p h a s i s o n a small set o f users and t h e p r o d u c ers o f a c c o u n t i n g r e p o r t s An a l t e r n a t i v e f r a m e w o r k for analysing t h e role o f a c c o u n t i n g anformation, d e s i g n a t e d as a p o h t i c a l e c o n o m y o f a c c o u n t i n g , is p r e s e n t e d thereafter A pohtical economy of accounting e m p h a s i z e s t h e infrastructure, t h e f u n d a m e n t a l relations b e t w e e n class an s o c i e t y It r e c o g n i z e s t h e institutional e n v i r o n m e n t w h i c h s u p p o r t s t h e e x i s t i n g s y s t e m o f c o r p o r a t e r e p o r t i n g and s u b j e c t s to critical s c r u t i n y t h o s e assues ( s u c h as t h e a s s u m e d a m p o r t a n c e o f s h a r e h o l d e r s and s e c u r i t i e s m a r k e t s ) that are f r e q u e n t l y taken for Tlus paper adopts a conventional viewpoint m that at focusses on corporate reports A full discussion of the value ofaccountmg w o u l d revolve discussion of mtm (e g h o u s e h o l d ) and macro (e g national) accountmgs (Gambhng, 19"74) and why a c c o u n t m g research assumes the tmmutabthty (and deslrabthtv) of legahstlc definitions of corporations (Burchell et a l . 1982) THE VALUE O F C O R P O R A T E A C C O U N T I N G REPORTS granted in current accounting research. Finally this alternative paradigm of political e c o n o m y of accounting is applied to three examples of potential research. PRIVATE VALUE APPROACHES There is a long tradition of accounting theory being concerned with the interests of the users of accounts (Sterling, 1972). This theoretical concern with users has influenced practice in the form of conceptual frameworks offered by professional bodies (AICPA, 1973; FASB, 1978b; Stamp, 1980; Macve, 1981). In this section we review the user orientation in order to highhght two features, the emphasis on shareholders and the partial equilibrium approach adopted. Emphasis on users in a partial equilibrium context may indicate necessary conditions for the prwate value of information. It does not provide a sufficient basis for prescriptions about socially desirable accounting policy and reports. Corporate reports a n d individual shareholders Accounting theory has long been concerned with the mterests of individual private shareholders. Whilst many theories have concentrated on aiding shareholders in decisions concerning their income, wealth and even utility 2 (Edwards & Bell, 1961; Chambers, 1966; Sterhng, 1970; Beaver & Demski, 1974), much of the empirical research has been limited to studies of shareholder usage and understanding of accounting reports. Shareholders usage and understanding has been assessed in two ways; firstly, by the application of techniques to measure readability, and hence understanding, of accounting reports (e.g. Smith & Smith, 1970; Still, 1972; Haried, 1972, 1973; Adelberg, 1979); secondly, 209 by shareholders', or their representatives', responses to questionnaires about their use, and hence understanding, of financial reports (e.g. Epstein, 1975; Lee & Tweedie, 1977, 1981; Chang & Most, 1979; Advisory Committee on Corporate Disclosure, 1977). In addition to certain technical difficulties and inconsistencies mherent in the types of empirical tests used, 3 both approaches suffer from problems of interpretation. There is an absence of references to any theories of h o w investors do or should use accounting information. Possible theories might include the bounded rationality model (Clarkson, 1962), or the portfolio model (Ball & Brown, 1969) Without such a theory against which to evaluate the empirical findings, it is impossible to determine whether "poor" usage or understanding is a material factor affectmg individuals' actions. Other problems of interpretation include the focussing on parts rather than the full contents of the accounting reports (Gonedes, 1978) and the level of self insight required of respondents (Nisbett & Wilson, 1977) A second limitation of this type of empirical research concerns the benefits which are expected to accrue from a concentration on the interests of the individual shareholder. The prescriptions derived from this research include calls for accounting reports to be simplified, accounting policy makers to concentrate on the needs of naive investors, and the need for education of individual shareholders in accounting and financial matters (e.g Tweedie, 1981). A potential consequence of these prescriptions would be to redistribute wealth from one group of "knowledgeable" shareholders to another group of "naive" shareholders (Findlay, 1977). Indeed, it is an implicit value judgement of this type of research that such a redistribution ts a 2 T h i s e m p h a s i s m c l u d e s s h a r e h o l d e r d e c l s t o n s t o a l l o c a t e w h a t a r e d e s c r i b e d as " t h e t r " r e s o u r c e s b e t w e e n firms ( s o - c a l l e d " f i n a n c i a l a c c o u n t m g " ) a n d t o a l l o c a t e r e s o u r c e s w t t h m a firm c o n s t s t e n t w t t h t h e m a x t m l z a t t o n o f s h a r e h o l d e r u t i h t y ( s o called "management accountmg") For e x a m p l e , C o o p e r et al ( 1 9 7 7 ) a n d B r t s t o n ( 1 9 7 7 ) q u e s t i o n t h e v a l u e o f t h e Lee & T w e e d i e s t u d i e s ( 1 9 7 7 ) m p a r t m r e l a t i o n t o t h e v a h d t t y o f t h e i r r e s e a r c h m s t r u m e n t s a n d tn p a r t in r e l a t t o n t o t h e t r r e s u l t s T h e s a m e dtfficulttes r e l a t e t o t h e t r l a t e r r e s e a r c h ( L e e & T w e e d i e , 1981 ) 210 DAVIDJ COOPER and MICHAELJ SHERER beneficial c o n s e q u e n c e in itself. In effect, s h a r e h o l d e r s are d e p i c t e d as i n d i v i d u a l s o p e r a t ing w i t h i n an e n v i r o n m e n t a l v a c u u m a n d this allows the design of corporate accounting r e p o r t s to b e c o n s i d e r e d as if it w e r e o n l y o f private i n t e r e s t But t h e o m i s s i o n o f any c o n s i d e r a tion for t h e i m m e d i a t e e n v i r o n m e n t , t h e capital market, in w h i c h t h e s h a r e h o l d e r class o p e r a t e s , i g n o r e s w i d e r effects w h i c h m a y e n s u e from s u c h p r e s c r i p t i o n s R e s e a r c h into s h a r e h o l d e r usage and u n d e r s t a n d i n g c a n n o t b y itself assess whether the above re-distributiuon would lead to a m o r e a p p r o p r i a t e a l l o c a t i o n o f r e s o u r c e s w i t h i n t h e capital m a r k e t , let a l o n e to a h i g h e r level o f w e l f a r e for all m e m b e r s o f t h e e c o n o m y As B u t t e r w o r t h et al. a r g u e ( 1981, pp. 58--62), understanding individual responses may be of i n t e r e s t in c o n t r i b u t i n g to a g e n e r a l u n d e r s t a n d ing o f a c c o u n t i n g ( e l a b o r a t i n g users and t h e i r settings); b u t It is u n l i k e l y that individual b e h a v i o u r translates to a g g r e g a t e m a r k e t responses (Schelhng, 1978) Corporate reports a n d aggregate shareholder behaviour R e s e a r c h i n d i c a t i n g capital m a r k e t "effic i e n c y " ( o r o t h e r w i s e ) w i t h r e s p e c t to published financial i n f o r m a t i o n m i g h t b e t h o u g h t to h o l d p r o m i s e for u n d e r s t a n d i n g and d e s i g n i n g a c c o u n t i n g systems. By e x p h c i t l y taking a c c o u n t o f t h e effects o f t h e a g g r e g a t e b e h a v i o u r o f investors in a m a r k e t e n v i r o n m e n t , s t u d i e s o f t h e i m p a c t o f a c c o u n t i n g i n f o r m a t i o n o n s t o c k market p r i c e s m i g h t p r o v i d e insights into sharehold e r use o f a c c o u n t i n g r e p o r t s and the c h o i c e between alternative reporting methods. F o s t e r ( 1 9 8 0 ) suggests that a l t e r n a t i v e a c c o u n t i n g r e p o r t s m a y affect t h e cash flows o f i n d i v i d u a l firms, t h e c o v a r i a n c e o f cash flows o f i n d i v i d u a l firms w i t h t h e market, t h e risk-return c h a r a c t e r i s t i c o f t h e e n t i r e capital m a r k e t a n d the i n f o r m a t i o n set u s e d b y m a r k e t t r a d e r s O n l y t h e first t w o effects s e e m to have b e e n systematically i n v e s t i g a t e d Studies in t h e U S (Ball & Brown, 1 9 6 9 ) and in t h e U K (Firth, 1 9 7 7 ) indic a t e that t h e r e ~s s o m e i n f o r m a t i o n c o n t e n t in a c c o u n t i n g e a r n i n g s r e p o r t s b u t this i n f o r m a t i o n is n o t "t~mely" s i n c e t h e m a r k e t p r i c e c h a n g e s precede publication of the accounting reports Reviews o f t h e e m p i r i c a l l i t e r a t u r e ( F o s t e r , 1 9 7 8 ) also suggests that t h e s t o c k m a r k e t can "see t h r o u g h " and adjust for c h a n g e s in a c c o u n t ing p o l i c y w h i c h d o n o t affect t h e e c o n o m i c position o f t h e r e p o r t i n g firm. T h u s t h e w e a l t h o f evidence from many of the empirical studies of the relationship between published accounting i n f o r m a t i o n and s t o c k m a r k e t p r i c e s s e e m s to i n d i c a t e that t h e p r i v a t e s h a r e h o l d e r c a n n o t m a k e c o n s i s t e n t a b n o r m a l gains f r o m using such information H o w e v e r t h e r e are a n u m b e r o f r e a s o n s w h y accounting policy makers should be wary of using m a r k e t r e s p o n s e s to assess t h e p r i v a t e and p a r t i c u l a r l y t h e social value o f t h e r e p o r t s chosen Firstly t h e r e are c o n s i d e r a b l e p r o b l e m s in d e f i n i n g and h e n c e assessing t h e efficiency o f r e f o r m a t i o n m a r k e t s (Fama, 1976; Beaver, 1981 ). A s e c o n d difficulty w i t h t h e efficient market l i t e r a t u r e o c c u r s b e c a u s e m o s t e x i s t i n g tests are, in fact, joint tests o f t h e capital asset p r i c i n g m o d e l and t h e efficiency of t h e i n f o r m a t i o n market I n t e r p r e t a t i o n of t h e results o f tests is a c c o r d i n g l y a m b i g u o u s (Ball, 1978, Foster, 1979). Many o f the a b o v e difficulties m i g h t b e r e m o v e d b y careful t h e o r e t i c a l w o r k a b o u t t h e m e a n i n g o f efficiency (Beaver, 1981), e x p l i c i t m o d e l l i n g o f s h a r e h o l d e r r e a c t i o n to p o t e n t i a l gains ( O h l s o n , 1979, Patell, 1 9 7 9 ) and m o r e sophisticated econometric work (e g deahng w i t h b e t a stationarity, t h e n o r m a l i t y of s e c u r i t y r e t u r n s and m e a s u r e s o f t h e m a r k e t p o r t f o l i o ) P e r h a p s o f m o r e i m p o r t a n c e in r e l a t i o n to t h e value o f a c c o u n t i n g r e p o r t s is that this l i t e r a t u r e is c o n c e r n e d w i t h t h e efficiency o f t h e m a r k e t for i n f o r m a t i o n r a t h e r than t h e efficiency o f t h e m a r k e t for t h e s e c u r i t i e s t h e m s e l v e s It m a y well b e that t h e e m p i r i c a l results i n d i c a t e t h e p r i v a t e value ( o r o t h e r w i s e ) o f i n f o r m a t i o n ( O h l s o n , 1979, Patell, 1 9 7 9 ) But o n l y m t h e m o s t u n h k e l y o f c i r c u m s t a n c e s is it p o s s i b l e that capital m a r k e t r e a c t i o n s also i n d i c a t e the social value o f i n f o r m a t i o n o r have i m p l i c a t i o n s a b o u t the desirability of alternative accounting measures o r d i s c l o s u r e s W o r k h n k l n g capital m a r k e t reactions and the value o f i n f o r m a t i o n ( e g Beaver & Dukes, 1972a, Ohlson, 1 9 8 0 ) m a y e v e n t u a l l y THE VALUEOF CORPORATEACCOUNTINGREPORTS p r o v i d e g u i d a n c e to a c c o u n t i n g policy makers. U n d e r p r e s e n t institutional a r r a n g e m e n t s ( i n particular, those that give rise to the free rider effect, reformation a s y m m e t r y a n d market i n c o m p l e t e n e s s ) it is h o w e v e r logically invalid to suggest that capital market efficiency tests can be used to assess the desirability of alternative a c c o u n t i n g m e a s u r e s or disclosures (Beaver and Demski, 1974; G o n e d e s and Dopuch, 1 9 7 4 ) The desirability of alternative a c c o u n t m g m e a s u r e m e n t systems c a n o n l y b e assessed ffthe o b j e c t i v e s of the a c c o u n t i n g f u n c u o n w i t h i n society are m a d e explicit ( R o n e n , 1979). And, if such o b j e c t i v e s are c o n c e r n e d with the effic i e n c y of r e s o u r c e allocation and the distributions of wealth w i t h i n the e c o n o m y as a w h o l e rather than o n e particular market, t h e n capital m a r k e t research is of l i m i t e d value. Focusing o n informational efficiency in the capital market may c o n t r i b u t e t o w a r d s an efficient allocation of capital r e s o u r c e s from the p e r s p e c t i v e of the s h a r e h o l d e r class, b u t the resulting e q u i l i b r i u m may n o t b e efficient for o t h e r m e m b e r s of the economy 4 C o n s i d e r a t i o n also n e e d s to b e given to the i m p o r t a n t b u t f r e q u e n t l y n e g l e c t e d q u e s t i o n of efficiency intra a n d i n t e r all the m e c h a n i s m s for allocating capital in the e c o n o m y . Capital is allocated b y several markets, i n c l u d i n g the p r o p e r t y a n d l a b o u r markets (for h u m a n capital) as well as b y a n u m b e r of p u b l i c l y o w n e d i n s t i t u t i o n s a n d p l a n n i n g authorities such as nationalized a n d r e g u l a t e d c o m p a n i e s , a n d n a t i o n a l and local governments. Within this wider set of allocation m e c h a n i s m s , the c h o i c e of an a c c o u n t i n g meas u r e m e n t system b e c o m e s m u c h m o r e c o m p l e x 211 T h e s e m e c h a n i s m s are directly affected by the a c c o u n t i n g i n f o r m a t i o n p r o d u c e d b y listed corp o r a t i o n s Many allocators of capital r e s o u r c e s o t h e r than the stock market also have an i n t e r e s t in the c h o i c e of a c c o u n t i n g m e a s u r e s and disclosures. Although in the future it m a y be s h o w n that w h a t is "good" for the stock market is also "good" for these o t h e r allocators of capital and h e n c e the e c o n o m y as a whole, it is a q u e s t i o n that is rarely addressed in the literature. CORPORATE REPORTS AND OTHER USERS T h e r e have b e e n a n u m b e r of attempts to assess the use of p u b h s h e d a c c o u n t i n g r e p o r t s by e x t e r n a l users o t h e r than shareholders, i n c l u d i n g e m p l o y e e s (e.g. C o o p e r & Essex, 1977; Foley & Maunders, 1977, Carlsson et al., 1978), l e n d e r s (e.g Libby, 1979), tax authorities ( e g Mace, 1977a; Lawson, 1980), g o v e r n m e n t ( e g . E n t h o v e n , 1973; Gambling, 1 9 7 4 ) a n d researchers (e.g. G o n e d e s & Dopuch, 1 9 7 9 ) Even if h o m o g e n e i t y w i t h i n the user groups is assumed, ~ conflicting objectives b e t w e e n these user groups may result in different p r e f e r e n c e s for the c o n t e n t and form of a c c o u n t i n g reports. T h e s e conflicting o b j e c t i v e s a n d h e n c e prefere n c e s may b e satisfied b y p u b l i s h i n g different a c c o u n t i n g r e p o r t s d i r e c t e d t o w a r d s each specified g r o u p (Revsine, 1973; ASSC, 1975), although the cost to the e c o n o m y in terms of r e s o u r c e s used w o u l d b e greater t h a n t f o n l y o n e set of a c c o u n t s w e r e published. The alternative a p p r o a c h is to design general p u r p o s e accounting reports (Iilri , 1975; Mace 1 9 7 7 b ) w h i c h a t t e m p t to satisfy the p r e f e r e n c e s of all user 4 It is of course the case that a substantial body of recent research has been concerned with the redistribution effects of accounting and investment decisions between different parties holdmg clmmson the firm Jensen & Meckhng( 1976), Myers (1977) and Kalay(1982), for example, have shown how the capital structure of the firm can alter the distribution of funds between bond and stockholders However, such work sn'nplyprovides further support for our argument that capital market research ts concerned with redistribution effects only on a very restricted level, bond and stockholders, particularly ff they hold a portfolio of assets, frequently belong to the same class Capital market research demonstrates very little concern for other groups m society, notably workers, consumers etc There ts little reason to assume the validity of this assumption Even the shareholder class who have a relatively well developed market in which they can trade according to their preferences, may have imperfectly resolved conflicts concernmg information (e g Hakansson, 1981 ) 212 DAVIDJ COOPERandMICHAELJ SHERER groups. T h e difficulty w i t h this a p p r o a c h is that any i n t e r - u s e r conflict o v e r p r e f e r e n c e s m u s t b e dealt w i t h b y a d e c i s i o n to c h o o s e o n e m e t h o d of a c c o u n t i n g o v e r another, i.e social choice. However, as has b e e n d e m o n s t r a t e d b y A r r o w ( 1 9 5 1 ) for the g e n e r a l case a n d b y Demski ( 1 9 7 3 ) for the case of financial reporting, it IS logically i m p o s s i b l e to make social c h o i c e s that are rational, reflect individual p r e f e r e n c e s and are n o t dictatorial. 6 In o t h e r words, the recogmtion, p e r se, of m u l t i p l e e x t e r n a l users for a c c o u n t i n g r e p o r t s is insufficient for assessing the overall e c o n o m y - w i d e value of a c c o u n t i n g reports. It fails b e c a u s e the a p p r o a c h lacks a t h e o r y a b o u t h o w these users s h o u l d or do i n t e r a c t w i t h each o t h e r in the social a n d pohtical e n v i r o n m e n t . Such a t h e o r y w o u l d n e e d to articulate differing interests in society, their i n t e r a c t i o n s and m e a n s of resolution. Corporate reports in a contracting c o n t e x t O n e of the m o r e r e c e n t d e v e l o p m e n t s m theories of c o r p o r a t e r e p o r t i n g has b e e n a shift from an emphasis o n the use of a c c o u n t i n g m p r e d i c t i n g variables "of interest" to a c o n c e r n w i t h the use of a c c o u n t i n g in c o n t r a c t u a l relationships b e t w e e n c o r p o r a t e stakeholders As this d e v e l o p m e n t is well s u m m a r i s e d m Butt e r w o r t h e t a l ( 1981 ), o n l y the m a i n issues will be discussed m thts p a p e r F o l l o w i n g Coase ( 1 9 3 7 ) a n d Alchlan & D e m s e t z ( 1 9 7 2 ) , c o r p o r a t i o n s have b e e n view e d as a set of rater-related c o n t r a c t s b e t w e e n p a r t i c i p a n t s In this v i e w a significant role for a c c o u n t i n g r e p o r t s a n d i n f o r m a t i o n is as a m o n i t o r i n g d e v i c e to r e c o r d the b e h a v l o u r of c o n t r a c t i n g parties involved. T h e r e are several critical issues for the value of c o r p o r a t e r e p o r t s Firstly w h a t are the d e s i r e d a t t r i b u t e s of such a m o n i t o r i n g system ( e g Ijiri, 1975, 1981)7 G i v e n the c o m p l e x way the c o n t r a c t u a l system adapts to " i m p e r f e c t i o n s " in the m o n i t o r i n g syst e m a n d the difficulty of identifying an o p t i m a l system, a t t e n t i o n has b e e n placed o n adaptive processes in the c o n t r a c t u a l relationship (Watts, 1977; Leftwlch, 1980, Milne & W e b e r , 1 9 8 1 ) It w o u l d appear, h o w e v e r , that this a t t e n t i o n has b e e n s t r o n g e r in asserting the e x i s t e n c e of processes w h i c h result in perfect a d a p t a t i o n rather than in d e m o n s t r a t i n g h o w they operate. Finally a t t e n t i o n has b e e n focused o n the b e h a v i o u r of the parties m the r e l a t i o n s h i p and the design of the r e w a r d systems to share the risks and r e t u r n s d e r i v e d from the i n t e r a c t i o n ( H o l m s t r o m , 1979, Harris and Raviv, 1 9 7 8 ) Applications of the c o n t r a c t i n g a p p r o a c h with its emphasis o n a g e n c y relationships, have b e e n u s e d to p r o v i d e e x p l a n a t i o n s for the developm e n t of GAAP ( B u t t e r w o r t h et al., 1981 ) and the a u d i t i n g f u n c t i o n as m e c h a n i s m s for m c r e a s m g the a m o u n t of disclosure a b o v e that w h i c h managers m i g h t privately wish to p r o d u c e (Watts, 1977, Ng, 1 9 7 8 ) Similarly, the c o n t i n u e d exist e n c e of i n s t i t u t i o n s such as the FASB in the U S a n d the ASC in the U K., a n d the r e g u l a t i o n of a c c o u n t i n g by g o v e r n m e n t has b e e n e x p l a i n e d in t e r m s of p u b h c g o o d characteristic of a c c o u n t i n g r e p o r t s and h e n c e the social value w h i c h the p r o d u c t i o n of a c c o u n t i n g r e p o r t s can c o n f e r o n the e c o n o m y as a w h o l e ( B e n s t o n , 1976, Findlay, 1977, Foster 1 9 8 0 b ) The identiffed deficiencies of these e x p l a n a t i o n s ( e g Leftwich, 1 9 8 0 ) do n o t d e t r a c t from the insight d e r i v e d from the a p p r o a c h Nevertheless, t h e r e s e e m to b e at least two p r o b l e m s with th~s approach. Firstly it t e n d s to elevate markets to the status of an i m m u t a b l e a n d ideal b e n c h m a r k That is, markets are treated as the standard b y w h i c h o t h e r institutional a r r a n g e m e n t s are to be l u d g e d (Demsetz, 6There are limited cases where rational collective choices can be made about information (Cushing, 1977, Hakansson, 1977, Bromwlch, 1980) There is considerable potential in identifying and evaluating alternative institutional arrangements for makmg social choices (Abdel--Khahk, 1971, Beaver & Demski, 1974, Mueller, 1979) Moreover, not all economists accept the proposition that interpersonal comparisons should not be made For example, Sen (1970) argues tor makmg interpersonal comparisons by imagining oneself in the place of another and Goodln (1975), based on the ethical postulate that everyone has an equal capacity for happmess, argues that interpersonal utility comparisons simply require asking men hox~ far along towards their "bhss points" (l e when the capacity for happiness is fully reahsed), a change m the distribution ot goods would take them and comparing their response~ THEVALUEOF CORPORATEACCOUNTINGREPORTS 1969). Market failures such as information asymmetry and non-excludability may be recognised but by assuming the perfect adaptability and omniscience of market participants, other institutional possibilities are dismissed (Leftwich, 1980). There is no recognition of the social, contrived nature of markets (White, 1981 ) or of their historical specificity (Routh, 1975). Consequently this approach almost invariably reinforces the existing market system or recommends reduction in intervention in market operations so that the market can operate according to its logic. In short, the emphasis on market efficiency which is inherent in this approach relies on the belief (derived from marginal welfare economics), that market efficiency is a necessary condition for social welfare improvements. The problem with this belief, which is considered further in the next section, is that it is based on extremely dubious assumptions (Graft, 1957) and an untenable instrumentalist philosophical position (Tinker et al., 1982). The second problem with the contracting approach is c o m m o n to all the approaches discussed in this section A concern with "users" of corporate accounts (for decision making involving prediction or for stewardship) may be able to address issues of private value but does not seem able to deal with the social value of these reports. By focusing on one subset of participants in society - - active market agents - - it ignores issues of social welfare which mcorporate the well being of all members of society. It has been recognised that the welfare of producer of accounting reports (Cyert & Ijiri, 1974) and corporate managers (Watts & Zimmerman, 1978) may be affected by corporate reports. It has also been recognised that accounting reports may themselves influence firms' financing and operating decisions (Prakash & Rappaport, 1977; Heald, 1980, Butterworth et al., 1981 ) Yet all these developments cannot avoid the problem of partial equilibrium approaches to valuing accounting reports, namely their failure to model the total interaction between these reports and all mdividuals and classes in society. 213 SOCIAL VALUE APPROACHES It is perhaps not surprising, given the claim of accountants to be professional (Sterling, 1974), the increasing concern about the value for money of accounting reports in society (Briston & Perks, 1977), and the public concern about the accounting profession (U.S. Senate, 1976, Davidson, 1979), that increasing attention has been placed on the social value of corporate reports. In this section we review the general equilibrium approach to the economics of information and the analysis of economic consequences. Both approaches attempt to understand and explain the production and use of accounting reports from an economy-wide perspective and hence directly address the broader issue of the social value of accounting information. General e q u i l i b r i u m a n a l y s i s General equilibrium economic analysis (GEEA) typically involves the analysis of information in a market context. It aims to identify conditions which result in economic efficiency in the allocation of resources through time between all market participants. In particular, GEEA of information seeks to identify the role of information in these allocations. Ohlson & Buckman ( 1981 ) synthesise much of the literature on the welfare implications of public information within the framework of marginal economics. Whereas Hirschleifer ( 1 9 7 1 ) suggested that public information was socially useless, Ohlson & Buckman ( 1981 ) demonstrate h o w this information will affect the sharing of risks in an e c o n o m y and so has welfare implications. The nature of these imphcations is not well specified, however, as they depend on market arrangements and the set of available resources to be traded The failure to produce specific welfare implications is also evident in the analysis of the production of private information. Htrshleifer ( 1 9 7 1 ) and Demski ( 1 9 7 4 ) have argued that there are incentives for one individual to privately produce information (thereby consuming recources) in order to make gains at the expense of another w h o does not have this information. 214 DAVIDJ COOPER and MICHAELJ SHERER D e m s k i & F e l t h a m ( 1 9 7 6 ) also s u g g e s t t h a t it m a y b e w o r t h w h i l e for an i n d i v i d u a l t o p a y t o s u p p r e s s i n f o r m a t i o n if o t h e r i n d i v i d u a l s m a y act o n this i n f o r m a t i o n in an u n f a v o u r a b l e w a y In s h o r t , t h e n , t h e w e l f a r e i m p l i c a t i o n s o f GEEA are unclear but depend on (exogenously d e t e r m i n e d ) m a r k e t s , a l t e r n a t i v e s a n d initial resource endowments For instance, Hakansson ( 1 9 8 1 ) s h o w s h o w g r o u p s t h a t differ in initial endowments (eg. wealth) will take different positions on accounting disclosures Further, t h e u s e o f GEEA to e x p l a i n t h e f u n c t i o n o f a c c o u n t i n g in s o c i e t y a n d to p r o v i d e c r i t e r i a for e v a l u a t i n g a l t e r n a t i v e a c c o u n t i n g s y s t e m s , is l i m i t e d b y its h i g h l e v e l o f g e n e r a h t y a n d abstract i o n W t t h o u t d e t a i l e d s p e c i f i c a t i o n of, for e x a m ple, u t i l i t y f u n c t i o n s , c o s t s t r u c t u r e s o f i n f o r m a t i o n a n d p r o d u c t i o n t e c h n o l o g i e s , it is n o t possib l e to i d e n t i f y w h i c h f o r m s o f a c c o u n t m g o r m s t l t u t i o n are e f f i c i e n t F u r t h e r , O h l s o n & Buckman (1980) indicate the senstttvity of the c o n c l u s i o n s o f t h e analysis to c h a n g e s in t h e attrtbutes of the model of the economy. For instance, they suggest that the conclusions derived from a simple (analytically tractable) m o d e l m a y n o t a p p l y for m o r e c o m p l e x m o d e l s ( w h i c h i n c l u d e s s u c h " c o m p l e x i t i e s " as t h r e e time periods, heterogeneous expectations and endogeneous information production). T w o f u r t h e r h m i t a t i o n s o f GEEA r e l a t e to t h e u s e o f m a r g i n a l i s t ( n e o - c l a s s i c a l ) e c o n o m i c s as t h e t h e o r e t i c a l basts o f t h e analysts T h e first g e n eral l i m i t a t i o n r e l a t e s t o t h e e x c l u s i o n o f effectiveness considerations The unwillingness of m a r g i n a h s t e c o n o m i c s to e n q u i r e m t o t h e fact o r s that s h a p e p r e f e r e n c e s a n d m o t i v a t e m a r k e t d e m a n d s ( a n d t h e c o r o l l a r y o f failing to c o n s i d e r demands which are not supported by resources o r a r e n o t e x p r e s s e d in a m a r k e t ) m e a n s that GEEA fails t o d i s t i n g u i s h b e t w e e n e f f i c i e n c y , t h e r e l a t i o n s h i p b e t w e e n r e s o u r c e s u s e d a n d outputs achieved, and effectiveness, the relations h i p b e t w e e n t h e o u t p u t s a c h i e v e d a n d t h e satisf a c t i o n o f s o c i e t y ' s n e e d s a n d e x p e c t a t i o n s (Pfeffer & Salancik, 1 9 7 8 ) 7 W h i l s t r e c e n t r e v i e w s demonstrate the theoretical disarray of much of t h e social s c i e n c e l i t e r a t u r e w h i c h a d d r e s s e s issues o f e f f e c t i v e n e s s ( p a r t i c u l a r l y t h a t r e l a t i n g to o r g a n i z a t i o n s - - cf. K a n t e r a n d B r m k e r h o f f , 1981, G o o d m a n & P e n n i n g s , 1 9 7 7 ) tt is n o n e t h e l e s s e v i d e n t t h a t p o h t i c a l issues c a n n o t b e d i v o r c e d f r o m e c o n o m i c analysis in r e l a t i o n to social c h o i c e s T h e f u n d a m e n t a l issues revolve around power and whose mterests pred o m i n a t e in s o c i e t y In o r d e r t o a d d r e s s q u e s t i o n s o f e f f e c t i v e n e s s m r e l a t i o n to a c c o u n t i n g r e p o r t s , it is n e c e s s a r y to m a k e e x p l i c i t a social w e l f a r e f u n c t i o n w h i c h e n a b l e s trade-offs to b e m a d e b e t w e e n i n d i v i d u a l s a n d classes o f m d l v t d u a l s m s o c i e t y T h i s ts n o t to say that it is t h e r e s p o n s t b i l i t y o f an a c c o u n t i n g r e s e a r c h e r ( o r a c c o u n t a n t ) to p r o d u c e a s o c i a l w e l f a r e function, s u c h f u n c t t o n s s h o u l d b e a r t i c u l a t e d in t h e p o l i t i c a l a r e n a H o w e v e r , it is t h e c a s e that an analysis by an a c c o u n t i n g r e s e a r c h e r ( o r a c c o u n t a n t ) that fails to i n c o r p o r a t e t h a t a r e n a has little c r e d i b i l i t y w h e n d i s c u s s i n g v a l u e s a n d 'better" choices. Because GEEA emphasizes the slgnLficance o f m d i v i d u a l s a n d a v o i d s m a k i n g m t e r - p e r s o n a l c o m p a r i s o n s o f utility, tt ts n o t an a p p r o p r i a t e m e t h o d o f analysts for f a c i l i t a t i n g the choice between alternative accounting measurement systems which have differmg distribut i o n effects in t e r m s o f w e a l t h a n d / o r w e l f a r e b e t w e e n classes in t h e e c o n o m y The second hmttation of marginal economic t h e o r y for g u i d a n c e a b o u t d e s t g n i n g a c c o u n t i n g s y s t e m s r e l a t e s to w h a t m t g h t b e t e r m e d its " Of course, efficiency is itself a problematic concept Its use by economists is ambiguous ( Hall and Wmsten, 1959 ), the concept is socially constructed (influencing and being influenced by ideological preferences) and it is given different emphases m different historical situations (e g Haber, 1964, Seale, 1971 ) Hence, its measurement is an overtly value laden political activity - - it ts not a technical task Since any measure of efficiency requires a method of valuing inputs and outputs, and given that any valuation system is value laden (Tinker et a l , 1982), the measurement of efficiency inevitably depends upon the prevalhng power and interests tn society, vlz how "things" (men women, land, capital, air, water, freedom, democracy etc } are valued Moreover, although it can be ufferred that effectiveness is a h~gher level order than efficient} effectiveness/cffic~enc~ will always need to be traded off against equality if, as we argue, interpersonal comparisons are made (Goodm, 19"5 ) THEVALUEOF CORPORATEACCOUNTINGREPORTS micro foundations Marginal economics implies that individual preferences for accounting information should be treated as exogenous wants although it has been suggested that such preferences may be influenced by learning through action (Sterling, 1972, March, 1978; Einhorn & Hogarth, 1981). Similarly, accounting researchers might also question the normative and descriptive validity of the notion of rational choice assumed by marginal economic theory. That is to say, individuals may not only be unable to behave consistently (Tversky and Kahneman, 1974) but they may also wish not to do so (Slovic & Tversky, 1974). Thus, some of the seemmgly innocuous assumptions about rational choice that form the basis of much of the public choice literature (including Arrow's Impossibility theorem) may indeed be contested These observauons notwithstanding, it seems probable that developments in GEEA, as they incorporate more "realistic" models of the economy, will not only produce more robust analytical welfare implications relating to the efficiency of resource allocation in a capitalist e c o n o m y but also will provide some insight into the roles of both pubhcly and prwately produced information in this process However, such implications and insights will be dependent on the essentially value laden conceptualisation of the variables analysed Differing views of such variables as eft]clency, effectiveness and information would lead to a range of general economic equilibrium analyses, each offering differing implications and interpretations. There are alternative approaches to the value of corporate accounting reports which offer a better basis for informed debate and discourse than the currently dommant one of a single analytical view derived from marginal economics and a particular conceptualisation of the variables Economic consequences analysis Economic consequences analysis (ECA) has recently emerged as an alternative approach for understanding and valuing the role of accounting reports in a broader societal context In contrast to the largely abstract approach of GEEA, 215 the ECA literature tends to be empirical and seems to have the potential for assessing a wider range of effects of changes in the accounting measurement system and hence for understanding the social role of corporate accounting reports (FASB, 1978a) Any changes to the status quo can, it is suggested, be assessed in terms of the "impact of accounting reports on the decision making behaviour of business, government, unions, investors and creditors" (Zeff, 1978, p.56). It seems unfortunate, however, that the "rise of economic consequences" (Zeff, 1978) seems to have been motivated, at least in the United States, by a desire by large corporations to counter attempts to change the existing reporting systems and levels of disclosure To date, it would seem that accounting researchers have generally reiterated the complaints of investors and businessmen about the consequences of changes in required accounting practice (AAA, 1978). As the 1980 Supplement to the Journal of Accounting Research illustrates, studies using ECA have almost invariably evaluated the consequences of accounting reports solely in terms of the behaviour and interest of the shareholder and/or corporate manager class (Selto & Neumann, 1981 ). Many of the empirical studies have attempted to assess the stock market reaction to changes in the content of published accounting information For example, Gril~n ( 1 9 7 8 ) suggested that the market reaction to SFAS 8 (Translation of Foreign Currency Transactions) was a consequence of the additional currency hedging which management was likely to undertake to minimize the fluctuations in corporate earnings. Similarly, the possibility that management of "full-cost" oil and gas corporattons would reduce exploration activity as a consequence of a switch to "successful efforts" accounting under SFAS 19 may have explained the market reaction to such corporations (Lev, 1979). But as Foster (1980a) has observed, the inconsistency of the results m the numerous tests of the market reaction to SFAS 19 is indicative of a general failure in such tests to specify a theory of expected effects (and thence identify necessary control variables). Vigeland ( 1 9 7 7 ) 216 DAVIDJ COOPERand MICHAELJ SHERER f o u n d that the stock market did n o t react to SFAS 2 This result may b e i n t e r p r e t e d as i n d i c a t i n g that investors' e x p e c t a t i o n s a b o u t managem e n t s ' R&D d e c i s i o n s w e r e unaffected b y a c c o u n t i n g standards. T w o disclosure requirem e n t s e n a c t e d by the SEC have also b e e n evaluated in t e r m s of stock market impact: line of b u s i n e s s ( s e g m e n t e d ) disclosure ( H o r w i t z & Kolodny, 1977; Collins & Dent, 1979), and r e p l a c e m e n t cost disclosures ( B e a v e r et al, 1980, Ro, 1980). Similarly, Morris ( 1 9 7 5 ) f o u n d that the U K. stock m a r k e t f o u n d little n e w inform a t i o n in early inflation adjusted c o r p o r a t e reports. All these studies have relied o n the effic i e n t markets p a r a d i g m in o r d e r to m e a s u r e any i m p a c t of a c c o u n t i n g c h a n g e s o n market p r i c e Even allowing for the criticisms, discussed previously in the first s e c t i o n of the paper, w h i c h this p a r a d i g m has r e c e n t l y e n c o u n t e r e d a n d for the possibility that s u c h studies can b e i n t e r p r e t e d as n e g a t i n g the efficient m a r k e t h y p o t h e s i s itself (Lev, 1979, p 501 ), the c o n c e n t r a t i o n o n stock m a r k e t r e a c t i o n hardly fulfills the e x p e c t a t i o n s established for the ECA a p p r o a c h by May & Sund c m ( 1 9 7 6 ) w h o had e m p h a s i s e d the import a n c e of o b t a i n i n g e v i d e n c e of the total e c o n o m y - w i d e i m p a c t of c h a n g e s in p u b l i s h e d a c c o u n t i n g information. T h e r e have also b e e n a few studies, w i t h i n the ECA framework, w h i c h have directly investigated the i m p a c t of c h a n g e s in a c c o u n t i n g r e p o r t s o n c o r p o r a t e m a n a g e m e n t decisions. Dukes et a l ( 1 9 8 0 ) a n d H o r w i t z & H o l o d n y ( 1 9 8 0 ) investigated the i m p a c t of SFAS 2 o n corp o r a t e R&D e x p e n d i t u r e s The i n c o n s i s t e n t results of these studies may b e d u e to differmg samples b u t e v e n w h e n a r e d u c t i o n m R&D e x p e n d i t u r e o c c u r e d , these studies are u n a b l e to d e t e c t w h e t h e r t h e r e was a c h a n g e in the n a t u r e and d i s t r i b u t i o n of R&D t h r o u g h o u t the e c o n o m y In short, the focus is o n firm-level effects and n o t e c o n o m y - w i d e effects. Similarly, W i l n e r ' s e x p e r i m e n t s ( 1 9 8 2 ) , albeit in a laboratory, s u p p o r t e d earlier surveys w h i c h suggested that SFAS 8 affected managers' e x c h a n g e risk d e c i s i o n s And Biddle ( 1 9 8 0 ) f o u n d that the LIFO-FIFO c h o i c e affected the size of inventories held by c o r p o r a t i o n s T h e theoretical justification for the effects identified in these studies t e n d s to b e based o n s o m e v e r s i o n of a g e n c y t h e o r y ( J e n s e n & Meckling, 1976; Watts, 1977). This t h e o r y suggests that c o r p o r a t e managers will have an i n c e n t i v e , based e i t h e r o n d i r e c t c h a n g e s in e x p e c t e d c o r p o r a t e cash flows ( e g. cost of capital, tax, i n f o r m a t i o n processing, political or p r o d u c t i o n costs) or o n c h a n g e s to the managers' o w n c o m p e n s a t i o n systems, to adjust their b e h a v i o u r as a result of c h a n g e s in accounting methods The r e l e v a n c e of these studies to an assessm e n t of the social value of a c c o u n t i n g reports can be q u e s t i o n e d o n a n u m b e r of grounds. Firstly, t h e r e has b e e n very little m o d e l l i n g of the p r o c e s s b y w h i c h m a n a g e r s r e s p o n d to a c c o u n t i n g c h a n g e s s The outputs, managerial attitudes and actions, are o b s e r v e d in association wtth the inputs, the c h a n g e in a c c o u n t i n g reports, b u t n o e v i d e n c e is p r e s e n t e d c o n c e r n ing the way m a n a g e r s actually arrive at their attitudes or actions Thus, the w h o l e issue of w h y m a n a g e r s act, or have the attitudes they do, is s u b s u m e d by the rationality a s s u m p t i o n s in a g e n c y t h e o r y 9 Alternative e x p l a n a t i o n s such as the n a t u r e of the i n f o r m a t i o n itself(Kelly-Newton, 1 9 8 0 ) or the role of c o r p o r a t e p e r s o n a l i t y (Sorter & Becker, 1 9 6 4 ) are n o t explicitly consid e r e d Secondly, these studies have b e e n u n a b l e to distinguish b e t w e e n o p e r a t i n g d e c i s i o n s b r o u g h t a b o u t by n e w a c c o u n t i n g standards and o p e r a t i n g decisions w h i c h w o u l d still have b e e n Btddle (1980) has made a recent attempt to model this process but although he found cash flow incentives have considerable power tn explammg voluntary LIFO-FIFOchoices, he also found other umdenttfied factors were important 9 We may challenge the descrtptwe and normative vahdtty of the notion of raUonahty mherent m agency theory Social psychologists have indicated the descriptive hmltatlons of the axioms which form the bas~sof the economic theory of choice We also doubt the deslrabnty of destgmng accounting reports predicated on a model of individual economic serf interest These issues aside, the agency theory hterature seems to view rattonahty inconsistently It assumes that individual managers and the stock market have incentives not to interpret accountmg numbers at their face value but that "bureaucra~Aes"such THE VALUEOF CORPORATEACCOUNTINGREPORTS taking b e c a u s e of c h a n g e s in o t h e r factors (Ball, 1980). More fundamentally, studies a d o p t i n g the ECA a p p r o a c h have focused their a t t e n t i o n o n a very l i m i t e d subset of the total e c o n o m y , namely, the i m p a c t o n the s h a r e h o l d e r or manager class. T h e effects of a c c o u n t i n g reports directly o n o t h e r users, e.g g o v e r n m e n t s and u n i o n s , a n d i n d i r e c t l y o n "non-users", e.g. consumers, e m p l o y e e s and taxpayers, have b e e n i g n o r e d T h e basis of such a d e c i s i o n can, at best b e that any s u c h effects are either s e c o n d a r y and/or lacking in e c o n o m i c significance Thus, these studies have m a d e an implicit value statem e n t that the n e e d s of the s h a r e h o l d e r a n d manager class are of p r i m a r y i m p o r t a n c e and that c o n c e n t r a t i o n o n those n e e d s is sufficient for an u n d e r s t a n d i n g of the role of a c c o u n t i n g r e p o r t s in society. Unless the insignificance of the effects o n o t h e r users a n d "non-users" is d e m o n s t r a t e d rather t h a n m e r e l y assumed, the c o n c l u s i o n from this research c a n n o t b e generalised for the e c o n o m y as a w h o l e and these studies are insuffio e n t for m a k i n g a c c o u n t i n g p r e s c r i p t i o n s i n t e n d e d to i m p r o v e overall social welfare. In addition, ECA research has b e e n at the level of the single e n t e r p r i s e so that the possibility of s u b s t i t u t i o n effects (e.g. the r e - d i s t r i b u t i o n of research e x p e n d i t u r e from o n e set of enterprises to a n o t h e r ) has b e e n ignored. Macroe c o n o m i c , social a n d political c o n s e q u e n c e s of c o r p o r a t e r e p o r t s are h i n t e d at rather than investigated T h e emphasis o n the legalistic definitions of single c o r p o r a t i o n s (as c o m p a r e d , for example, w i t h p r o d u c t i o n units or regional e n t e r p r i s e s ) m e a n s that b o t h m i c r o and m a c r o effects of a c c o u n t t n g policies c a n n o t b e identified w i t h any clarity. Despite its promise, ECA has at p r e s e n t a d o p t e d a partial e q u i l i b r i u m o r t e n t a t i o n to the c o n s e q u e n c e s of c o r p o r a t e accounting reports 217 Finally, it s h o u l d b e n o t e d that m a n y of these empirical studies u n d e r the ECA a p p r o a c h have b e e n f u n d e d b y the SEC a n d the FASB. The a c c e p t a n c e of a partial e q u i l i b r i u m o r i e n t a t i o n b y these i n s t i t u t i o n s m a y suggest either that they have failed to o p e r a t e in the interest of society as a whole, by w h o m they are financially supported, or that they too hold the belief that society's interests are identical to those of the s h a r e h o l d e r and m a n a g e r class. If research into the social value of a c c o u n t i n g r e p o r t s is to be taken seriously, t h e n w e n e e d to c o n s i d e r n o t only alternative m e t h o d o l o g i c a l frameworks b u t also alternative i n s t i t u t i o n s for s u p p o r t i n g those frameworks. These are the m a i n issues w e discuss in the n e x t s e c t i o n A POLITICAL ECONOMY APPROACH In the p r e v i o u s two s e c t i o n s w e have critically r e v i e w e d the prevailing a p p r o a c h e s a d o p t e d m the literature for evaluating the form a n d cont e n t of alternative c o r p o r a t e a c c o u n t i n g reports. O u r criticisms have b e e n d i r e c t e d t o w a r d s the partial e q u i l i b r i u m analysis of these a p p r o a c h e s and the bias w h i c h they e x h i b i t in favour of the s h a r e h o l d e r a n d m a n a g e r classes in society. The r e m a i n d e r of the p a p e r c o n t a i n s o u r a r g u m e n t s for an alternative a p p r o a c h w h i c h explicitly attempts to c o u n t e r - b a l a n c e this bias. In this way w e h o p e to e n c o u r a g e research w h i c h looks at the a c c o u n t i n g f u n c t i o n s w i t h i n the b r o a d e r structural and i n s t i t u t i o n a l e n v i r o n m e n t tn w h i c h it operates. To distinguish this a p p r o a c h from those above, w e shall d e s c r i b e it as a Political E c o n o m y of A c c o u n t i n g (PEA) (Tinker, 1980). T h e s t u d y of a c c o u n t i n g w o u l d b e n e f i t from an a p p r o a c h that emphasizes institutional features and influences, a trans-disciplinary m o d e as the government or trade unions do not In other words, agency theory seems to suggest that mdtvtdual managers and the stock market can see behind the arbttrary conventions of accountmg measurement but other potenttal users are fooled by them However, managers are not always qutck to see the consequences of changes m accountmg standards, as when U K. corporate managers did not immedtately appreciate that the proposal of the lnflatton Accounting Commtttee(1975) for current cost accounting would not produce any tmmedtate tax benefits which was a major reason for thetr imtial support for the proposals (Brennan, 1979) Similarly,governments can adjust conventtonal accounts to produce both replacement cost and funds flow data for nattonal mcome accounts (Maurtce, 1968) 218 DAVIDJ COOPERand MICHAELJ SHERER of investigation a n d the s t u d y of processes moving t o w a r d s d y n a m i c equilibria Although t h e r e m a y b e m a n y different variants of political e c o n o m y (Frey, 1978), m o s t emphasize the inter-relationship between political and e c o n o m i c forces in society In relation to an assessment of the value of c o r p o r a t e a c c o u n t i n g reports, a PEA suggests that any such value is likely to b e c o n t e s t e d as it is shaped in ( a n d s h a p e s ) b o t h the political and e c o n o m i c arenas Features o f a political e c o n o m y approach T h e PEA w e are e m p h a s i z i n g is c h a r a c t e r i z e d b y t h r e e features. The s t u d y of a c c o u n t i n g s h o u l d r e c o g n i z e p o w e r a n d conflict m society, and c o n s e q u e n t l y s h o u l d focus o n the effects of a c c o u n t i n g r e p o r t s o n the d i s t r i b u t i o n of i n c o m e , w e a l t h a n d p o w e r in society t0 Lowe & T i n k e r ( 1 9 7 7 ) argue that m o s t a c c o u n t i n g research is based o n a pluralist c o n c e p t i o n of society This v i e w assumes that p o w e r is w i d e l y diffused a n d that society ts c o m p o s e d of individuals w h o s e p r e f e r e n c e s are to p r e d o m i n a t e in social c h o i c e s a n d w i t h n o individual able to c o n s i s t e n t l y i n f l u e n c e that society ( o r the a c c o u n t i n g f u n c t i o n t h e r e i n ) As Lowe & T i n k e r ( 1 9 7 7 ) indicate, such a pluralist v i e w s e e m s to i g n o r e a substantial v o l u m e of e v i d e n c e that presents alternative views of society O n e alternative v i e w suggests that the mass of p e o p l e in society are c o n t r o l l e d by a well d e f i n e d elite (e.g Stanworth & Giddens, 1 9 7 4 ) A s e c o n d alternative view is that there ts a c o n t i n u i n g conflict in society b e t w e e n essentially antagonistic classes ( e g Mihband, 1969; Westegaard & Resler, 1975) By b r i n g i n g p o w e r to the forefront o f a c c o u n t m g analysts, w e suggest that these alternative views of society be taken seriously by a c c o u n t ing researchers Instead of a s s u m i n g a basic harm o n y of interests in society w h i c h p e r m i t s an u n p r o b l c m a t i c view of the social value of a c c o u n t i n g reports, a political e c o n o m y of a c c o u n t i n g w o u l d treat value as essentially contested, w i t h a c c o u n t i n g r e p o r t s o p e r a t i n g in specific interests ( e g. of elites or classes). T h e w a y these r e p o r t s m i g h t o p e r a t e i n c l u d e mystific a t i o n and l e g i t i m a t i o n ( B u r c h e l l et al., 1 9 8 0 ) Hoogvelt & T i n k l e r ( 1 9 7 8 ) a n d T i n k e r ( 1 9 8 0 ) illustrate these t e n d e n c i e s T h e y illustrate h o w the d i s t r i b u t i o n of i n c o m e for a specific enterprise (a m u l t i n a t i o n a l ) may b e d e t e r m i n e d by the d i s t r i b u t i o n of p o w e r a m o n g s t its participants rather than by any e c o n o m i c i m p e r a t i v e T h e i r w o r k also implies that the classifications used in c o r p o r a t e a c c o u n t i n g r e p o r t s focus a t t e n t i o n away from an a c c o u n t of the beneficteries from the e n t e r p r i s e More generally, T i n k e r et aL ( 1 9 8 2 ) i n d i c a t e h o w a c c o u n t m g theories t h e m s e l v e s are a p r o d u c e of the socIety m w h i c h they o p e r a t e a n d c a n n o t be regarded, e x c e p t in the m o s t trivial sense, as neutral; they serve specific interests A s e c o n d feature of the PEA w h i c h w e wish to e m p h a s i s e is the specific historical and institutional e n v i r o n m e n t of the society in w h i c h it operates Most a c c o u n t i n g research treats the e c o n o m y as ff it w e r e m a d e u p of p r i c e taking u n i t s with c o n s t a n t r e t u r n s to scale, instantaneously m o v i n g from o n e e q u i h b r i u m to a n o t h e r e q u i l i b r i u m o n the Paretian frontier T h e r e is little r e c o g n i t i o n that the e c o n o m y is d o m i n a t e d by large corporations, often o p e r a t i n g in ohgopolistlc or m o n o p o l i s t i c markets (Prats, 1976, H a n n a h & Kay, 1 9 7 7 ) D i s e q u i l i b r i u m is a standard feature of the e c o n o m y (Kornai, 1971 ) And the state, far from b e i n g the passive repository of social welfare, is actively i n v o l v e d in managing the e c o n o m y T h e role of the state ts i n d e e d c e n t r a l to an u n d e r s t a n d i n g of a c c o u n t ing policy, for the latter is strongly i n t e r r e l a t e d w i t h at least o n e o b v i o u s e l e m e n t of state activity, n a m e l y taxation With the increasingly appar e n t "fiscal crisis" w h e r e g o v e r n m e n t s c a n n o t fund their level of spending, the contradictory. p o s i t i o n of the state in acting o n behalf of large ~oThe concept of power ts of course, contested We are referring tn the abthty of a group to mtlucnce the allocation ot resources and indeed the definition of what constitutes a resource and an appropriate allocation Thls vlew of power ts related rather more to Lukes' thlrd dlmenslon of power ( Lukes, 1974 ) and to the artl(.ulatl()nof interests m soclet~ (Benton, 1981 ) It has httle relationship with the individualistic, one-dimensional views of power (Wrong. 19"79)wh~(.h influence much accounting research (e g Brown, 198 l, Newman, 1981, Hope & Gray, 1982) THE VALUEOF CORPORATE ACCOUNTINGREPORTS firms and c o m m e r c i a l i n t e r e s t s w h i l s t at t h e s a m e t i m e a t t e m p t i n g to p r e s e r v e social harm o n y and its o w n l e g i t i m a c y has b e c o m e i n c r e a s i n g l y a p p a r e n t ( O ' C o n n o r , 1973, Block, 1981). Several a c c o u n t i n g r e s e a r c h e r s (e.g. Zeff, 1972; M e r i n o & Neimark, 1 9 8 2 ) have r e c o g n i z e d t h e significance o f an h i s t o r i c a l focus in o r d e r to u n d e r s t a n d t h e c h a n g i n g roles o f a c c o u n t i n g p r a c t i c e a n d b y i m p l i c a t i o n t h e hist o r i c a l specificity o f an a s s e s s m e n t o f t h e social value o f t h e s e roles. Similarly, t h e r e has b e e n a gradual r e c o g n i t i o n o f t h e significance o f gove r n m e n t a n d t h e state in t h e d e t e r m i n a t i o n o f a c c o u n t i n g r e p o r t s and p o l i c i e s (e.g. Sterling, 1974; Shakleton, 1977). This r e c o g n i t i o n , h o w ever, has g o n e little f u r t h e r than a t t e m p t s to m a i n t a i n p r i v a t e c o n t r o l o f a c c o u n t i n g in t h e face o f w h a t is s e e n as i n t e r f e r e n c e b y an o t h e r wise neutral government Notable exceptions are the analyses b y H o p w o o d et al. ( 1 9 7 9 ) and Burchell et al. ( 1 9 8 1 ) w h i c h suggest that t h e state - - t h r o u g h its i n v o l v e m e n t in t h e administr a t i o n o f war, t h e m a n a g e m e n t o f national e c o n o m i c p l a n n i n g and c o n c e r n s for g r e a t e r a c c o u n t a b i l i t y ( o f t e n in t h e c o n t e x t o f e x t e n sions to e c o n o m i c d e m o c r a c y ) - - has b e e n actively i n v o l v e d in t h e d e v e l o p m e n t o f accounting practices T h e t h i r d e l e m e n t o f a PEA o f a c c o u n t i n g involves the a d o p t i o n o f a m o r e e m a n c i p a t e d v i e w o f h u m a n m o t i v a t i o n and the r o l e o f a c c o u n t i n g in society, that is, a v i e w that acknowledges the potential of people (and a c c o u n t i n g ) to c h a n g e a n d reflect differing i n t e r e s t s a n d c o n c e r n s . It has b e e n a t e n e t o f c o n v e n t i o n a l e c o n o m i c s a n d a c c o u n t i n g that the factors that s h a p e h u m a n p r e f e r e n c e s and m o t i v a t i o n s c a n n o t b e i n v e s t i g a t e d Cons e q u e n t l y it has n o t s e e m e d p o s s i b l e ( o r desirab l e ) to d i s t i n g u i s h the c a u s e a n d n a t u r e o f " g e n u i n e " n e e d s a n d t h o s e w h i c h result from d e m o n s t r a t i o n , o s t e n t a t i o n , a d v e r t i s i n g and o t h e r l e a r n t factors (Hollis & Nell, 1 9 7 5 ) To t h e e x t e n t that p e o p l e are c o n c e r n e d solely w i t h e c o n o m i c self interest, this self-interest m a y b e s e e n as a c o n s e q u e n c e o f t h e w a y s o c i e t y is o r g a m z e d r a t h e r than an u n a l t e r a b l e characteris- 219 tic o f p e o p l e ( M a r c u s e , 1 9 6 4 ) A c o n c e r n for a more emancipated view of human motivation w o u l d r e c o g n i s e t h e possibility, for e x a m p l e , that a c c o u n t i n g p r a c t i c e s m a y c o n t r i b u t e to alien a t i o n at w o r k a n d to t h e p u r s u i t o f p r i v a t e i n t e r e s t ( C h e r n s , 1978). For instance, i g n o r i n g externalities (social costs) when "accounting" for c o r p o r a t e activities m a y e n c o u r a g e selfi n t e r e s t at t h e e x p e n s e o f social interests. C o n t r a r y to an e m a n c i p a t e d c o n c e p t i o n o f t h e r o l e o f a c c o u n t i n g in society, a c c o u n t i n g practice is f r e q u e n t l y v i e w e d as a passive f u n c t i o n ( e g Peasnell, 1 9 7 8 ) w h i c h r e s p o n d s to, r a t h e r than changes, t h e e n v i r o n m e n t in w h i c h it o p e r ates. In t h e s a m e w a y as t h e m e d i c a l p r o f e s s i o n m a y have a l e g i t i m a t e c o n c e r n w i t h housing, social c o n d i t i o n s a n d p u b l i c h e a l t h ( e g t h e quality o f s e w e r a g e and w a t e r s u p p l i e s ) in o r d e r to c a r r y o u t a r o l e o f say, i m p r o v i n g t h e h e a l t h o f t h e c o m m u n i t y , so t h e a c c o u n t i n g p r o f e s s i o n m a y have l e g i t i m a t e c o n c e r n s in r e l a t i o n to its immediate environment (eg. the commercial a n d financial s e c t o r s o f t h e e c o n o m y ) A t t e m p t s to r e s o l v e t e c h n i c a l Issues w i t h o u t c o n s i d e r a tion o f this e n v i r o n m e n t m a y result in an i m p e r fect and i n c o m p l e t e r e s o l u t i o n d u e to t h e a c c e p t a n c e o f c u r r e n t i n s t i t u t i o n s and practices. O n e o f t h e s t r e n g t h s o f t h e C o r p o r a t e R e p o r t s (ASSC, 1 9 7 5 ) was that it saw t h e n e e d to c h a n g e legal definitions o f a c c o u n t a b i l i t y if a c c o u n t i n g r e p o r t s are to have value in i m p r o v i n g s t e w a r d s h i p and t h e r e b y social welfare Imperatives o f a political e c o n o m y approach T h e c h a r a c t e r i s t i c s o f a PEA a p p r o a c h m a y b e e n c a p s u l a t e d in t h r e e i m p e r a t i v e s : b e n o r m a tive, b e d e s c r i p t i v e and b e critical. T h e s e i m p e r a t i v e s are i n t e n d e d to b e m o r e radical than t h e usual e x h o r t a t i o n s o f this kind. I n c o r p o r a t ing all t h r e e i m p e r a t i v e s m a y b e a n e c e s s a r y ( t h o u g h n o t sufficient) c o n d i t i o n for "valuable" a c c o u n t i n g research. Be explicitly n o r m a t i v e A c c o u n t i n g researchers should be explicit about the normative e l e m e n t s o f any f r a m e w o r k a d o p t e d b y t h e m All r e s e a r c h is n o r m a t i v e in t h e s e n s e that it contains the r e s e a r c h e r ' s value j u d g e m e n t s a b o u t how society should be organized (Robinson, 220 DAVIDJ COOPER and MICHAELJ SHERER 1964; Mattesich, 1 9 7 8 ) H o w e v e r , v e r y few a c c o u n t i n g r e s e a r c h e r s m a k e t h e i r value judgements explicit For e x a m p l e , T i n k e r ( 1 9 7 7 ) d r a w s a t t e n t i o n to a critical issue that is f r e q u e n t l y i g n o r e d in t h e a l l e g e d l y n e u t r a l c o n c e r n w i t h p r e d i c t i v e ability any c h o i c e o f " o b j e c t s o f p r e d i c t i o n " reflects t h e r e s e a r c h e r ' s values a b o u t t h e i m p o r t a n c e and d e s i r a b i l i t y of p r e d i c t i n g cash flows, syst e m a t i c risk, e a r n i n g s e t c Similarly, w e h a v e d r a w n a t t e n t i o n to t h e i m p l i c i t value judgem e n t s i n h e r e n t in partial e q u i l i b r i u m analyses o f t h e value o f a c c o u n t i n g r e p o r t s C o n c e r n for t h e p r i v a t e investor, for capital m a r k e t agents, o r for c o r p o r a t e m a n a g e m e n t is in effect a n o r m a t i v e s t a t e m e n t that t h e i n t e r e s t o f t h e s e p a r t i c u l a r p a r t i e s s h o u l d p r e d o m i n a t e in t h e c h o i c e o f an a c c o u n t i n g s y s t e m Yet t h e r e l a t i o n s h i p betw e e n t h e s e i n t e r e s t s and o t h e r i n t e r e s t s in socie t y is r a r e l y a r t i c u l a t e d , let a l o n e justified. In c o n t r a s t to o u r p o s i t i o n , W a t t s & Z i m m e r m a n ( 1 9 7 9 ) h a v e a r g u e d that n o r m a t i v e t h e o r i e s are i n a p p r o p r i a t e in scientific r e s e a r c h b e c a u s e t h e y are m e r e l y a c l o a k for f u r t h e r i n g self-interest Even i g n o r i n g the logical a n d philosophical problems of their argument (see Chalmers, 1978, C h r i s t e n s o n , 1981, Lowe et al., forthcoming) their espousal of the positivist a g e n c y t h e o r y m e a n s that t h e y have t h e m s e l v e s t a k e n a n o r m a t i v e p o s i t i o n H o w e v e r , t h e i r norm a t i v e stance, that t h e w e l f a r e o f t h e sharehold e r class ( t h e p r i n c i p a l s ) is p a r a m o u n t , is n o t explicitly exposed or evaluated T h e suggcsUon that a c c o u n t i n g r e s e a r c h e r s should be explicit about the normative elements o f t h e i r r e s e a r c h is i n t e n d e d to facifitate c o h e r e n c e in a c c o u n t i n g r e s e a r c h and to e n c o u r a g e r e s e a r c h e r s to identify the p u r p o s e s o f t h e i r activities. O u r s u g g e s t i o n for m a k i n g s u c h values explicit would serve two broad purposes Firstly, it w o u l d aid t h e i d e n t i f i c a t i o n and evaluation o f i n d i w d u a l p i e c e s o f r e s e a r c h w i t h i n t h e context of a particular paradigm (Kuhn, 1970) o r r e s e a r c h p r o g r a m m e (Lakatos, 1 9 7 0 ) Thus, r e s e a r c h c o u l d b e classified into o n e o f t h e existing p a r a d i g m s , for e x a m p l e ECA, and assessed b y r e f e r e n c e to t h e u n r e f u t e d t h e o r i e s o f that paradigm Secondly, e x p l i c i t s t a t e m e n t s a b o u t t h e value j u d g e m e n t s o f t h e r e s e a r c h e r s w o u l d facilitate an e v a l u a t i o n o f t h e a l t e r n a t i v e p a r a d i g m s themselves. Lakatos ( 1 9 7 8 ) p r o v i d e s a set o f c r i t e r i a for d i s t i n g u i s h i n g b e t w e e n d e g e n e r a t e a n d p r o g ressive scientific r e s e a r c h p r o g r a m s A l t h o u g h s u c h d i s t i n c t i o n s vary o v e r time, it s h o u l d b e r e c o g n i s e d that p u b l i c l y s u p p o r t e d institutions, s u c h as the SSRC in the U.K and t h e FASB in t h e U.S., m a k e c h o i c e s b e t w e e n t h e o r i e s e a c h and ever}" t i m e t h e y a l l o c a t e funds for p a r t i c u l a r projects However choice between theories does not necessarily imply choice between research p r o g r a m m e s . An essential c l e m e n t o f t h e argum e n t in this p a p e r is that o n e p r o g r a m m e has b e e n d o m i n a n t . By e n c o u r a g i n g a variety o f research programmes with explicit normative e l e m e n t s , p u b l i c a l l y f u n d e d i n s t i t u t i o n s and o t h e r s s u c h as c o n s u m e r associations, t r a d e u n i o n s and e n v i r o n m e n t a l g r o u p s m a y r e c o g nise t h e uses a n d l i m i t a t i o n s o f p a r t i c u l a r "accountings" Further, c h o i c e o f a c c o u n t i n g p o h c i e s will b e r e c o g n l s e d as a social o n e w h i c h is t h e l e g i t i m a t e c o n c e r n o f all g r o u p s in s o c i e t y D e b a t e a b o u t t h e value o f a c c o u n t i n g c a n t h e n b e r e c o g n i s e d as b e i n g in t h e p o l i t i c a l arena r a t h e r than t h e p r i v a t e c o n c e r n o f a c c o u n t a n t s a n d the financial s e c t o r o f t h e e c o n o m y (U S. Senate, 1976). Be descriptive Recently, t h e r e have b e e n n u m e r o u s calls for ' p o s i t i v e ' r e s e a r c h in accounting (eg Watts & Zimmerman, 1978) To t h e e x t e n t that t h e s e a r g u e for a value-free a p p r o a c h to a c c o u n t i n g r e s e a r c h , w c have indic a t e d a b o v e t h e i m p o s s i b i l i t y as w e l l as undesirability o f this a p p r o a c h to r e s e a r c h To t h e e x t e n t that t h e y a r g u e for i n c r e a s e d d e s c r i p t i o n o f ' a c c o u n t i n g in action', that is t h e effects o f a c c o u n t ing o n s o c i e t y ( a n d vice v e r s a ) a n d for i n c r e a s e d understanding of the relationships between accounting, the accounting profession and the institutions in society, t h e n w e are in s y m p a t h y with them A b o v e it w a s a r g u e d that m u c h o f a c c o u n t i n g r e s e a r c h w h i c h utihses r i g o r o u s marginal e c o n o m i c analysis to m a k e s t a t e m e n t s a b o u t t h e n a t u r e and value o f a c c o u n t i n g is unable, d u e to THEVALUEOF CORPORATEACCOUNTINGREPORTS 221 the lack of descriptive validity, to provide an pared with Larson's ( 1 9 7 7 ) analysis of the rise of adequate basis for understanding or designing professionalism (in general) Rather than accounting systems Accounting is essentially describing what a profession wishes (or prepractical, it is executed by and it influences the tends) to be, Larson aims to elucidate what a probehaviour of individuals and classes inside and fession is through a description of the changing outside organizations To understand the prac- institutional structure that supports (to greater tice of accounting, or accounting in action, we or lesser degrees) the functions of a profession. suggest more attention be given to descriptive Be critical. T h e final exhortation concerns the studies in accounting research. Such studies would attempt to describe and interpret the attitude of the researcher, him or herself. In behavlour of accounting and accountants in the order to develop and evaluate alternative context of the institutions, social and political paradigms and methodologies, the researcher structures and cultural values of the society in needs to exhibit critical awareness, not only of the extant research but also of the relationship which they are historically located The descriptive imperative is not intended to between the supply of accounting research and suggest that descripttons of accounting (or the demand for it by various interests, including accounting descriptions themselves) are value the profession, managers and the funding institutions (Watts & Zimmerman, 1979). This need free or objective The interrelationship between facts and interpretations has been acknow- for a critical attitude has already been illustrated ledged even by spokesmen of the accounting m the discussion of the descriptive imperative. The criterion of critical awareness goes profession (Carmichael, 1979). Similarly, all beyond conventional notions of researcher descriptions are "structured by the conceputal indepenence; it requires that the researcher framework that is applied as well as by the techconsiders the kinds of accounting which may be nical instruments used in their production" (Irworthwhile outside the context of the existing vine, e t a l , 1979, p 5) It is important to go beyond description based environment as well as the process which led to on "commonsense" views of the world and and may lead from that context (Habermas, 1978). For example Bryer et aL ( 1 9 8 1 ) show actors' own definitions of their realities Whilst study of these views may yield much of interest that British Steel's plans, whilst they can be about the taken for granted view of the world analysed in terms of unrealistic expectations and (e g. Tomkins & Groves, 1983), there is a ten- dubious accounting practices, can only be dency for such studies to ratlonalise the ideol- understood in the context of the organisation ogy of the status quo. That is, the conceptual and history of the industry lteslf. The terms of framework implicit in commonsense views IS compensation to the former owners when the frequently little more than rationalisation for the industry was nationalised were such that masestablished view. This argument is illustrated by sive interest payments, unrelated to, and unsupKuhn ( 1 9 7 0 ) in his analysis of changes in scien- portable by, the assets acquired, resulted in the tific theories. Likewise a political e c o n o m y of desperate plans undertaken Similarly, Tinker et accounting needs to be based on descriptions of al. ( 1 9 8 2 ) argue that concepts of value are accounting practice based on alternative socially determined and that alternative conceptheories of soctety and accounting's role therin. tions of value are required which do not uncritiFor example the recent analysis by Jones ( 1981 ) cally accept that market exchanges are an of the relationship between the British accoun- adequate indicator of social value In developing tancy profession and the e c o n o m y uncritically counter-information ( e g Ridgers, 1979) and utilises the arguments and theories of the social accounting (e g. Epstein et al., 1976; Lesaccountancy profession itself to explain changes sem, 1977) critical accounting research would in the profession's organisation and structure. suggest the need to go beyond current Such commonsense descriptions can be com- economic arrangements (e.g. markets) and 222 DAVIDJ COOPERand M1CHAELJ SHERER d o m i n a n t theories (e.g. m a r g i n a l i s m ) Such research m i g h t d e v e l o p alternative c o n c e p t i o n s of value i n c l u d i n g those based o n socially necessary p r o d u c t i o n , that ts v a l u i n g p r o d u c t s according to their ability to satisfy the n e e d s of the comm u n i t y as articulated t h r o u g h d e m o c r a t i c rather than m a r k e t processes As a r e l a u v e l y i m m a t u r e subject, it is p e r h a p s n o t s u r p r i s i n g that a c c o u n t i n g research has n o t b e e n as reflective as s o m e of the o t h e r social scie n c e s ( e g. the c r i t i q u e of c o n v e n t i o n a l orgamsation t h e o r y f o u n d in Burrell & Morgan, 1979). A critical a p p r o a c h to a c c o u n t i n g , however, starts from the p r e m i s e that p r o b l e m s in a c c o u n t m g are p o t e n t i a l l y reflections of p r o b l e m s in and of society and a c c o r d i n g l y that the latter should b e critically analysed T h u s if a m a j o r p r o b l e m in a c c o u n t i n g is identified, say as its o v e r w h e l m i n g o r i e n t a t i o n to investors, t h e n a c r m c a l perspective w o u l d suggest that thxs p r o b l e m is a reflection of society's o r i e n t a t i o n and to c h a n g e a c c o u n t i n g p r a c t i c e r e q u i r e s b o t h social awareness ( e g. identification of alternative " a c c o u n t s " and the roles of a c c o u n t i n g in s o c i e t y ) and ultimately social change. W h e t h e r critical t h e o r y can m p r a c t i c e b e applied to a c c o u n t i n g research (for r e c e n t a t t e m p t s see Puxty et al, 1980 and Chua et aL, 1981 ) d e p e n d s o n w h e t h e r researchers can free t h e m s e l v e s from the attitudes and o r i e n t a t i o n s w h i c h result from their social and e d u c a t i o n a l t r a i n i n g and w h i c h are r e i n f o r c e d by the beliefs of the a c c o u n t i n g profession and the b u s i n e s s c o m m u n i t y For this sociahzation process has p r o d u c e d a c c o u n t i n g researchers w h o may e x h i b i t s u b c o n s c i o u s bias in the d e f i n i t i o n of the p r o b l e m set of a c c o u n t i n g and the c h o i c e of theories to analyze a n d solve these p r o b l e m s The c r i t e r i o n of critical a w a r e n e s s revolves reco g n i z i n g the c o n t e s t e d n a t u r e of the p r o b l e m set and theories a n d demystifying the ideological c h a r a c t e r of those theories The e x h o r t a t i o n to b e critical, then, goes b e y o n d the c o n c e r n s for i n d e p e n d e n c e in the face of i n c r e a s i n g professional pressures for "relevant and useful" a c c o u n t i n g research It also goes b e y o n d c o n c e r n s to critically assess the claims by c o r p o r a t e m a n a g e r s that c h a n g e s m a c c o u n t i n g r e p o r t s will have u n d e s i r a b l e cons e q u e n c e s o n the c o r p o r a t e sector and the public interest It involves a r e c o g n i t i o n of the contested n a t u r e of the a c c o u n t i n g p r o b l e m a t i c and i n d e e d the c o n c e p t of w h a t is or is n o t in the p u b l i c interest SUGGESTIONS FOR RESEARCH WITHIN A PEA FRAMEWORK A Political E c o n o m y of A c c o u n t i n g (PEA) is thus a normative, descriptive and critical a p p r o a c h to a c c o u n t i n g research. It p r o v i d e s a broader, m o r e hohstlc, f r a m e w o r k for analyzing and u n d e r s t a n d i n g the value of a c c o u n t i n g reports w i t h i n the e c o n o m y as a w h o l e A PEA a p p r o a c h a t t e m p t s to explicate and i n t e r p r e t the role of a c c o u n t i n g r e p o r t s in the d i s t r i b u t i o n of i n c o m e , w e a l t h and p o w e r in society In so doing, a PEA a p p r o a c h m o d e l s the institutional s t r u c t u r e of society that helps fashion this role a n d p r o v i d e s a f r a m e w o r k for e x a m i n i n g n o v e l sets of institutions, a c c o u n t i n g s and a c c o u n t i n g r e p o r t s This s e c t i o n suggests a n u m b e r of p o t e n t i a l research studies w h i c h c o u l d be u n d e r t a k e n w i t h i n a PEA a p p r o a c h At this stage in the d e v e l o p m e n t of a PEA approach, it w o u l d b e arrogant to d e l i n e a t e these studies as a coher e n t p r o g r a m m e of research, rather they should b e c o n s i d e r e d as skeletal illustrations of the type of research w f u c h may e v e n t u a l l y i n d u c e such a programme Accounting a n d social welfare A c c o u n t i n g research increasingly argues that all a c c o u n t i n g policy decisions, i n c l u d i n g the c h o i c e of the a p p r o p r i a t e a c c o u n t i n g measurem e n t system, m u s t be m a d e by r e f e r e n c e to the c o n t r i b u t i o n each alternative makes to overall social welfare ( B e a v e r & Demskl, 1974) A malor issue is t h e n seen as r e v o l v i n g a r o u n d the definition and m e a s u r e m e n t of social welfare Whilst the social role of a c c o u n t i n g has b e e n recognised for s o m e time (e.g. Scott, 1931 ) w e have already argued in this p a p e r that it is the pluralist v e r s i o n of social welfare w h i c h d o m i n a t e s a c c o u n t i n g research However, this p e r s p e c t i v e THE VALUEOF CORPORATEACCOUNTINGREPORTS p r e c l u d e s a n u m b e r o f p o t e n t i a l l y useful r e s e a r c h areas w h i c h d o n o t treat p r e f e r e n c e s as e x o g e n o u s variables For e x a m p l e , r e s e a r c h w h i c h a t t e m p t s to m v e s t i g a t e h o w a c c o u n t i n g r e p o r t s affect and m o d i f y p r e f e r e n c e s o r h o w p o w e r is u s e d to p r e v e n t a c c o u n t i n g alternatives f r o m b e i n g d i s c u s s e d by p o l i c y makers, m i g h t r e q u i r e a l t e r n a t t v e c o n c e p t u a l i s a t i o n s o f social welfare, based, for e x a m p l e , o n e c o n o m i c and social classes, o r o n c h a r a c t e r i s t i c s o f s o c i e t y as a w h o l e r a t h e r than o n an a g g r e g a t i o n o f individual welfare. Such c o n c e p t u a l i s a t i o n s m i g h t suggest that all n o t i o n s o f social w e l f a r e are essentially cont e s t e d and political In that s e n s e a c c o u n t i n g r e s e a r c h e r s m a y have to d e c i d e in a m o r e e x p l i c t t w a y w h i c h interests t h e y i n t e n d to s e r v e T h e p o s i t i o n a r g u e d in this p a p e r ts that accounting (and accountmg research) currently serves v e r y n a r r o w interests 1 e t h o s e r e l a t e d to t h e s h a r e h o l d e r and financial class An alternative c o n c e p t u a l l s a t i o n o f social w e l f a r e m i g h t take an a g g r e g a t e v i e w o f society, focussing o n social i n d i c a t o r s o f w e l f a r e e g levels o f and c h a n g e s in national i n c o m e , adult hteracy, dist r i b u t t o n o f wealth, m o r t a h t y statistics e t c ~j Wtth a c o n c e p t u a l i s a t i o n o f a g g r e g a t e soctal welfare, the value o f c o r p o r a t e r e p o r t s m t g h t lie in t h e i r c o n t r i b u t i o n to t h e c o n s t r u c t i o n of aggregate e c o n o m y statistics and to nattonal p l a n n i n g In addition, t h e w a y social w e l f a r e is m e a s u r e d interacts with the researcher's conceptualizatton o f social welfare. A c c o u n t i n g r e s e a r c h e r s s h o u d r e c o g n i z e , for e x a m p l e , that m c h o o s i n g m o n e y values to m e a s u r e t h e social costs and benefits o f a l t e r n a t i v e a c c o u n t i n g systems, they are a c c e p t i n g that t h e m a x i m i z a t i o n o f w e a l t h is an a p p r o p r i a t e p r o x y for social w e l f a r e T h e r e is mcreasing doubt about the wisdom of such a c h o i c e , partly d u e to t h e e x c l u s i o n o f "free g o o d s " in such a calculus ( e g S c h u m a c h e r , 1 9 7 4 ) H o w e v e r , r e s e a r c h c o u l d be u n d e r t a k e n 223 to assess t h e v a l u e o f a l t e r n a t i v e a c c o u n t i n g syst e m s in t e r m s o f o t h e r p a r a m e t e r s s u c h as e m p l o y m e n t , h e a l t h or self-esteem, e a c h of w h i c h m a y b e e q u a l l y a p p r o p r i a t e c a n d i d a t e s for social w e l f a r e proxies. An e x a m p l e o f this kind o f social a c c o u n t i n g is t h e study by R o w t h o r n & W a r d ( 1 9 7 9 ) o f t h e effects o n a n u m b e r o f m a c r o variables o f t h e c l o s u r e o f a steel plant in t h e U.K. Such e x e r c i s e s utilizing a m u l t i p l i c i t y o f m e a s u r e s o f soctal welfare, suggest that a c c o u n t m g r e s e a r c h e r s m a y n e e d to w o r k c l o s e l y w i t h o t h e r soctal scientists, i n c l u d i n g sociologists, p s y c h o l o g i s t s and e c o n o m i s t s . Note, h o w e v e r , w e are n o t a d v o c a t i n g c o n v e n t i o n a l social a c c o u n t i n g or c o s t b e n e f i t analysis w h e r e i n c o m m e n s u r a t e d i m e n s i o n s are c o m p r e s s e d m t o t h e single d i m e n s i o n o f m o n e y and v a l u e d in relation to m a r k e t p r i c e s Accounting as ideology In situations w h e r e t h e r e ~s a conflict a b o u t t h e o b j e c t i v e s o f social activity, B u r c h e l l et al. ( 1 9 8 0 ) suggest that a c c o u n t i n g i n f o r m a t i o n has an t d e o l o g i c a l f u n c t i o n in that it is u s e d to l e g i t i m i z e p a r t i c u l a r activities o r r a t i o n a h z e past b e h a v i o u r R e s e a r c h into this i d e o l o g i c a l r o l e may take t h e f o r m o f investigating w h i c h interests in t h e e c o n o m y are b o l s t e r e d and w h i c h interests are u n d e r m i n e d by the a c c o u n t lng m e a s u r e m e n t system c u r r e n t l y used in corporate reports O n e e x a m p l e o f this t y p e o f r e s e a r c h w o u l d b e an e x a m m a t t o n o f the r o l e o f a c o n c e p t u a l f r a m e w o r k in t h e a c c o u n t i n g p o l i c y m a k i n g process ( B u r c h e l l et al., 1 9 8 2 ) Rule making b o d t e s m a y m o r e easily justify t h e i r a c t i o n s if t h e y can b e said to be t h e o u t c o m e of "rational" p r o c e d u r e s and analysts (Pfeffer & Salancik, 1974; M e y e r & Rowan+ 1 9 7 7 ) W h e t h e r t h e search for o b j e c t i v e s and scientific bases for d e c t s i o n making by the SEC, FASB and ASC reflects a similar use o f ritualistic c e r e m o n i e s to l e g i t i m i z e t h e i r ~ The suggested use of societal mdlcators should not be t',tken to imply that such mdtcators are unambtguous or value free Many of the concerns expressed about effictency and effectiveness (see footnote 7) also apply here The issue ofwhat is, and what is not, included m social and economtc statlsttcs ts a well known problem m social and economtc research Stmtlarly, the categories used to classify data, for example m the stattsttcs on money supply, cause of death and dlstnbutton of wealth, all presuppnse a parttcular theory of the economy or society These tssues have been recogmsed for a long-ttme, recent dtscusstons can be found in Hmdess ( 1973)+ Irvme et al. (1979) and Tomhnson, ( 1981 ) 224 DAVIDJ COOPER and MICHAELJ SHERER activies and c o n c e a l c o n t e s t e d a n d i n c o n s i s t e n t choices would, therefore, be a worthwhile piece o f r e s e a r c h w i t h i n a PEA f r a m e w o r k ( D o p u c h & Sunder, 1980; Boland, 1 9 8 2 ) A n o t h e r a r e a o f r e s e a r c h from this i d e o l o g i c a l perspective would be a consideration of how a c c o u n t i n g r e p o r t s are u s e d in situations o f e c o n o m i c a n d p o l i t i c a l conflict. "Many o f the r e p o r t s b y C o u n t e r I n f o r m a t i o n Services can b e s e e n as a t t e m p t s to p r o v i d e i n f o r m a t i o n r e s o u r c e s for w o r k e r s e n g a g e d in specific struggles, a n d to e x p o s e t h e n a t u r e o f t h e social and e c o n o m i c s y s t e m w h i c h is t h e c a u s e and c o n t e n t o f t h e s e struggles" (Ridgers, 1979, p . 3 2 6 ) Within the context of collective bargaining S h e r e r et aL ( 1 9 8 1 ) suggest that m a n a g e r s are m o r e likely to d i s c l o s e a c c o u n t i n g i n f o r m a t i o n to u n i o n s w h e n it p r o v i d e s e v i d e n c e o f t h e i r inability to p a y h i g h e r w a g e s In contrast, w h e n t h e c o n v e n t i o n a l a c c o u n t i n g n u m b e r s d o n o t pres e n t a f a v o u r a b l e p o s i t i o n from m a n a g e m e n t ' s p e r s p e c t i v e , i e t h e c o m p a n y a p p e a r s to have t h e ability to p a y h i g h e r wages, m a n a g e r s e i t h e r refuse to d i s c l o s e a c c o u n t i n g i n f o r m a t i o n o r emphasize the limitations of existing accounting conventions S o l o m o n s ( 1 9 7 8 ) has a r g u e d that to b e useful a c c o u n t i n g s h o u l d b e as o b j e c t i v e as cartography. H o w e v e r , it is u n l i k e l y that any m e t h o d o f a c c o u n t i n g can b e n e u t r a l w i t h r e g a r d to its effects o n b e h a v l o u r and h e n c e o n t h e distribution o f i n c o m e and w e a l t h in t h e e c o n o m y T h e r e f o r e , t h e m a n d a t e d use o f o n e a c c o u n t i n g m e a s u r e m e n t s y s t e m i n e v i t a b l y h e l p s to sustain t h e p o w e r o f o n e set of i n t e r e s t s o v e r o t h e r s in s o c i e t y R e s e a r c h s t u d i e s o f a c c o u n t i n g as ideology would illuminate our understanding of the r e l a t i o n s h i p s b e t w e e n a c c o u n t i n g and t h e dist r i b u t i o n o f r e s o u r c e s a n d p o w e r in s o c i e t y and might suggest types of accounting systems w h i c h w o u l d b e a p p r o p r i a t e if t h e s t r u c t u r e o f s o c i e t y was c h a n g e d . Identification of accounting problems T h e a c c o u n t i n g p r o f e s s i o n and r e s e a r c h e r s f r e q u e n t l y justify t h e i r c h o i c e o f t h e a c c o u n t i n g p r o b l e m to b c i n v e s t i g a t e d b y r e f e r e n c e to t h e public interest However, the meaning of the phrase "the public interest" and the influences o n t h e c h o i c e o f a c c o u n t i n g p r o b l e m s are themselves areas w o r t h y o f r e s e a r c h G o u l d n e r ( 1 9 7 0 ) argues that t h e social s c i e n c e s have t e n d e d to b e g r e a t l y i n f l u e n c e d b y t h e d e m a n d s o f t h e i r clients in d e f i n i n g r e l e v a n t r e s e a r c h J o h n s o n ( 1 9 7 2 ) has s u g g e s t e d that t h e c l i e n t s o f a c c o u n t i n g are t h e industrial and c o m m e r c i a l c o r p o r a t i o n s a n d that t h e a c c o u n t i n g p r o f e s s i o n itself o p e r a t e s u n d e r c o r p o r a t e p a t r o n a g e Several studies also suggest that t h e r e is a c o m m o n ality o f i n t e r e s t b e t w e e n investors, m u l t i n a t i o n a l c o r p o r a t i o n s and large m u l t i n a t i o n a l a u d i t firms ( e . g R o c k n e s s & Nicolai, 1977, U S Senate, 1976, H u s s e i n & Ketz, 1 9 8 0 ) A c o r o l l a r y o f this c o m m o n a l i t y is that a c c o u n t i n g p o l i c y d o e s n o t r e p r e s e n t t h e i n t e r e s t s o f o t h e r classes o r g r o u p s in s o c i e t y For e x a m p l e Lowe etal ( 1981 ) a r g u e that a c c o u n t i n g p o l i c i e s t e n d to s e r v e t h e i n t e r e s t o f t h e financial s e c t o r as o p p o s e d to t h e industrial s e c t o r in t h e U I~ A c c o u n t i n g ( a n d e s p e c i a l l y capital m a r k e t ) r e s e a r c h m a y t h e n b e s e e n to b e c o n t r i b u t i n g to t h e de-industrialisation o f t h e U I~ e c o n o m y (Singh, 1 9 7 7 ) Such r e s e a r c h focuses o n facilitating t h e i n t e r n a t i o n a l m o b i l i t y o f capital funds to t h e m o s t " p r o f i t a b l e " a l t e r n a t i v e s r a t h e r than t h e m a i n t e n a n c e and d e v e l o p m e n t o f o p e r a t i n g units A PEA a p p r o a c h - - b y e m p h a s i s i n g t h e institutional f e a t u r e s o f s o c i e t y and a d o p t i n g a conflict m o d e l o f s o c i e t y - - p r o v i d e s a f r a m e w o r k for s t u d i e s w h i c h a t t e m p t to u n c o v e r t h e i n f l u e n c e that n a r r o w s e c t i o n a l i n t e r e s t s have in d e f i n i n g a c c o u n t i n g p r o b l e m s and i n d e e d t h e c h o i c e o f feasible w a y s o f r e s o l v i n g t h e s e p r o b l e m s . Thus t h e p r o b l e m s in a c c o u n t i n g for m u l t i n a t i o n a l c o m p a n i e s are c o n v e n t i o n a l l y i n t e r p r e t a t e d in t e r m s o f t h e p r o b l e m s for t h e m u l t i n a t i o n a l s - in relation, for e x a m p l e , to c u r r e n c y t r a n s l a t i o n The problems of multinational companies might however be seen from the perspective of host countries. From a host country perspective, p r o b l e m s inviting s o l u t i o n s in w h i c h a c c o u n t i n g m a y have a part to p l a y i n c l u d e transfer p r i c i n g rules, p r i c i n g o f t e c h n o l o g y a n d c o n t r o l o f remitt a n c e s to h o m e c o u n t r i e s Instead, it has b e e n s u g g e s t e d b y R u e s c h h o f f ( 1 9 7 6 ) that t h e largest benefits from t h e i n t e r n a t i o n a l s t a n d a r d i z a t i o n THE VALUEOF CORPORATEACCOUNTINGREPORTS of accounting practice accrue to multinational c o r p o r a t i o n s and auditing firms. Similarly, the large research effort into inflation accounting in the U.K. in the late 1960s and early 1970s may have b e e n influenced by factors others than the rate of inflation in the e c o n o m y Thompson ( 1 9 7 8 ) and Burchell et al. ( 1 9 8 0 ) suggest that there had b e e n a significant shift in the distribution of income away from profits and dividends to wages and h e n c e the pressure for an inflation accounting standard may be associated with a desire to re-distribute wealth "back" towards shareholder interests. Research into the process of identifying accounting p r o b l e m s might also consider h o w financial sponsorship encourages types of accounting research. With the increased funding by professional firms since the late 1970s (e g. Peat, Marwick, Mitchell & Co, 1976) accounting research has appeared to shift almost exclusively towards the interests of large auditing firms - e.g auditor's judgements (e.g. Felix & Kinney, 1982) statistical sampling ( e g Duke et al., 1982) and the management of audit workers (e.g. Jiambalvo, 1982; Wolf, 1981). Accounting researchers seem by and large, to have b e e n o v e r w h e l m e d by these firms' identification of accounting p r o b l e m s State agencies such as the SEC and the SSRC (in the U K.) and accounting organizations such as the FASB and the ASC together provide a significant p r o p o r t t o n of the total funds available for accounting research These bodies not only r e s p o n d to requests for funds, they also initiate research into p r o b l e m s which they believe are important and underresearched. Therefore, the extent to which these funding organizations are themselves indep e n d e n t of the chents of accounting and indeed their understanding of the nature of the public interest deserve the attention of accounting researchers. SUMMARY AND CONCLUSIONS Our c o n c e r n in thts paper has been to present a view of accounting research, particularly that related to views of the social value of accounting 225 reports, which offers some alternative to the current paradigm. The view e x p r e s s e d here is that accounting research should reflect upon the soctal, political and e c o n o m i c c o n t e x t in which accounting operates. Failure to consider this c o n t e x t has led to an emphasis on designing accounting reports that are in the interests of shareholders, and not necessarily in the interests of other groups in society The emphasis on shareholders' interests is to be found in the studies c o n c e r n e d with the usefulness of c o r p o r a t e accounting reports for the decistons of individual investors and in the partlal equilibrium studies of the value of accounting information within an efficient stock market Moreover, the general equilibrium approaches using o r t h o d o x e c o n o m i c analysis are quickly r e d u c e d to a shareholder orientation by assuming the existence of perfect markets and by ignoring the effects of accounting reports on the distribution of income and wealth in the e c o n o m y Finally, the interests of shareholders or their agents, c o r p o r a t e management, also predominate in the studies of the e c o n o m i c consequences of accounting reports, despite the recognition at the conceptual level of this approach that other groups in society do exist We suggest an alternative approach, the d e v e l o p m e n t of a political e c o n o m y of accounting, which explicitly considers the relationships b e t w e e n accounting and the instttutional structure of the economy. The attributes for relevant accounting research withm this approach may be summarized by the following exhortations to researchers be e x p l i c i t l y n o r m a t i v e - - make your value judgements explicit; b e d e s c r i p t i v e - - describe and interpret the practtce of accounting, accounting in action; and be c r i t i c a l recognize the c o n t e s t e d nature of the accounting p r o b l e m a t i c and particularly the c o n c e p t of the public interst We have also sketched three suggestions for the kind of research which might be undertaken within a political e c o n o m y of accounting, the role and form of accounting within alternative definitions of social welfare; the use of accounting reports as ideological instruments, and the interests and institutions which influence the identification of - - 226 DAVIDJ COOPER and MICHAELJ SHERER accounting problems and hence the type of a c c o u n t i n g r e s e a r c h w h i c h is u n d e r t a k e n W e are not suggesting that such research will be easy. G i v e n t h e d o m i n a n c e a n d i n t o l e r a n c e o f the current approach to research in corporate reporting, obtaining funding and journal space f o r m o r e r a d i c a l r e s e a r c h is l i k e l y t o b e d i f f i c u l t W e h a v e a l s o i n d i c a t e d t h a t r e s e a r c h is n e c e s s a r y at a c o n c e p t u a l l e v e l a n d a t a n e m p i r i c a l level The problems of the latter (mcludmg those relating to the difficulties of using social and economic statistics which are produced on the basis of one particular conceptuahsatton of society) will hopefully not discourage researchers to investigate the kind of issues outlined, but mstead will represent a challenge to those researchers concerned to produce "better" accounts and a more accountable accounting It f o l l o w s t h a t a l t h o u g h w e a c c e p t t h a t it is desirable (within a democratic soctety) to encourage a variety of scientific research progr a m m e s i n a c c o u n t m g r e s e a r c h , it is a n i m p o r tant theme of this paper that many markets are n o t n e u t r a l in t h e i r a c t i v i t t e s o r i n t h e t r e f f e c t s T h e r e f o r e , it m a y b e i n s u f f i c i e n t t o r e l y o n t h e market for accounting research to foster r e s e a r c h w h i c h is s t g n i f i c a n t l y d i f f e r e n t i n a p p r o a c h f r o m t h e e x t s t i n g p a r a d i g m R a t h e r , in order to develop a pohtical economy of accounting, n o r m a t i v e , d e s c r i p t i v e a n d c r t t i c a l r e s e a r c h needs to be actively promoted and nurtured BIBLIOGRAPHY Abdel-Khahk, RA User Preference Ordermg Value A Model, The Accountmg Revtew (July 1971 ) pp 475-71 Accounting Standards Steering Committee, The Corporate Report (ICAEW, 1975) Adelberg, A H, A Methodology for Measuring the Understandabthty of Financial Report Measures,Journal o f Accounting Research (Autumn 1979) pp 565--592 Advisory Commtttee on Corporate Dtsclosure, Report o f the Advisory Committee on Corporate Dtsclosure to the Securtttes and Exchange Commtttee, Us Congress Committee Prmt 95--29 (US Government Printing Office, 1977) Alchtan, AA & Demsetz, H, Production, Informatton Costs and Economic Orgamzatton, Amertcan EconomwRevzew (December 1972) pp 777-795 Amertcan Accounting Assoclatton, Report o f the Commtttee on the Social Consequences o f Accounting lnformatton (AAA, 1978 ) American Institute of Cermqed Pubhc Accountants, Oblect~ves Committee, Objectwes of Fmanctal Statements (American Institute of Certified Pubhc Accountants, 1973 ) Arrow, K., Soctal Chotce and Indtvtdual Values (New York John Wiley, 1951 ) Ball, R, Anomahes m Relat~onshtps Between Securities' Yields and Yteld Surrogates,Journal o f Fmanctal Economtcs (June-September 1978) pp 103-126 Ball, R, Discussion of Accounting for Research and Development Costs The Impact on Research and Development Expenditures, Supplement to Journal o f Accounting Research (1980) pp 27-37 Ball, R & Brown, P, Portfoho Theory and Accountm~ Journal o f Accounting Research (Autumn 1969 ) pp 300-323 Beaver, W ,FmanctalReportmg An AccountmgRevolutlon ( Englewood Chffs, NJ Prentice--Hall, 1981 ) Beaver, W & Demskl, J, The Nature of Financial Accounting Objectives A Summary and Synthesis, Studtes on Fmancml Accounting Objectives , Supplement to Journal o f Accountmg Research (1974) pp 170-187 Beaver, W & Dukes, R, Interpenod Tax Allocanons, Earnmgs, Expectations and the Behawour of Securtty Prices, The Accountmg Review (JanuatT 1979) pp 38-46 Beaver, W H, Christie, A A &Grtffin, P A, The Informatmn Content of SEC Accounting Sertes Release No 190,Journal o f Accountmg and Economtcs (August 1980) pp 127-157 Benston, G, Pubhc (U S ) Compared to Private (U K. ) Regulatmns of Corporation Fmancml Disclosure, The AccounttngRevtew (July 1976) pp 48~--498 Benton, T, "Objective" Interests and the Sociology of Power. 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