9 June 2005 - From 14h00 to 16h00

Transcription

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.
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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.
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
worldwide 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
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.
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
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 Manager
Audit Senior, Canada
Audit Junior, Canada
Computer Auditor––regional specialist (2)
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
AuditFirm Training Workshop
Canadian Audit Partner, Office 1
Canadian Audit Manager, Office 1
Canadian Audit Manager, Office 2
Observation of planning meeting of Canadian Audit Team
Canadian Engagement Partner and Head of Audit
Worldwide Engagement Partner, Ruritania
Worldwide Engagement Manager, Ruritania (2)
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
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
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
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
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.
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
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:
‘‘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
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.
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
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
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
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
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
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.
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
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
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. Earlier versions of
this paper were presented at the following conferences: ‘‘Information technology, work and globalization’’, June, 1997, ‘‘Accounting, space and time’’
September 1997, Canadian Academic Accounting
Association, May 1998, ‘‘Spacing and Timing
Conference’’, November 2001, and ‘‘Interdisciplinary Perspectives on Accounting, July 2003. It was
also presented at the following Universities: Minnesota, February 2001, Central Florida, March
2001, London School of Economics, November
2001, New Mexico, November 2001 and Cambridge, June 2002. We are extremely grateful for
comments at those events, the suggestions of the
anonymous reviewers, and those by Deidre Boden,
Wai Fong Chua, Yves Gendron, Bob Hinings,
Brian Pentland, Mike Power, Keith Robson, Steve
Salterio, Brian Shapiro and Kevin Taft. We also
thank the (anonymous) accounting firm and their
client, for their access and cooperation.
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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
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
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
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
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
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?
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
‘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.
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)
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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.
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
‘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
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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’]
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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
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
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
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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
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
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
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
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
Note
The authors gratefully acknowledge the financial support of the Canadian Social Sciences and
Humanities Research Council and the Certified General Accountants of Alberta. Our work
depends on the cooperation and tolerance of managers in Alberta Community Development,
which we truly value. Neither they, nor the department, are responsible for the opinions
presented here. We appreciate the helpful comments of the reviewers; participants at the
Management Control Conference (Reading, July 1998), the Interdisciplinary Perspectives on
Accounting Conference (Manchester, July 2000) and the CIMA Lecture at the LSE (November
2001); and Brian Shapiro, Casey Crowe, Mahmoud Ezzamel, Keith Robson, Brian Bloomfield,
Colin Brown and Wai-Fong Chua.
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Barbara Townley is Chair of Management and Organization at Edinburgh University
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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.
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EH8 9JY, Scotland.
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David J.
Cooper
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in the public sector and the management of professional firms. He received his PhD
from the University of Manchester.
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Canada.
Leslie Oakes
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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.
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.
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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.
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
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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
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).
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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
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
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.
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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
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.)
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).
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
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.
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
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-
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.
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
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
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
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
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
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
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.
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
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
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).
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
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.
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
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. Perhaps sociologists and hlstorians, as biological Individuals, concern themselves more
with the professions of life and death than with the
profession of loss and profit, but surely accounting is
today far more socially Important than medicine (1988,
p. 325).
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539
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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-
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.
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.
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
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
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
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 )
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
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
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
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
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
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
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
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
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