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Accounting for Government and Society David J. Cooper, School of Business University of Alberta, Edmonton, Alberta, T6G 2RS, Canada. Email: [email protected] Wayne Morgan David Cooper is pleased to acknowledge the financial support of ICAEW’s charitable trusts and SSHRC. Thanks to Scott Loder for research assistance. 1 Accounting for Government and Society 1. Introduction Accounting is an activity that is pervasive in the modern world and has been the object of academic interest from a variety of disciplines for at least the last hundred years. Accounting is clearly technical, but it is much more than that since how and what we account for affects everyone in society; there is a ‘public interest’ at stake. The monopoly given to accountants to act as auditors in many countries and the legitimacy afforded by professional status means that the public interest should be paramount in discussions of accounting. This essay is intended to stimulate a discussion about such issues, with an emphasis on considering what might be the needs of society and governments for accounting oriented corporate reporting. Accounting has a major impact in the economy and society, and there is increasing recognition that the impacts of accounting are pervasive. Two areas that have risen in prominence in recent years are the role of accounting in macro economic management and in environmental issues and climate change. This then will be our focus, although there are many other areas where it is being recognized that accounting has an impact. Some of these are obvious and been well known for a long time. Well known impacts include the effects on the allocation of resources in society, and accounting (or at least corporate reporting) has been focused on those resources that are allocated in public by capital markets. Internal (management) accounting has similarly been concerned about capital allocation within the firm, and has helped organizations become more efficient, where efficiency is defined in terms of the needs of capital. Accounting has wider and more subtle effects. It impacts the distribution of resources, in terms of who benefits and looses in allocations across many types of markets. It is self evident that those who are not able to participate in markets, such as the poor, the young and the aged, are by- standers in this process. We also take it as self evident that not all aspects of social and economic life are managed through markets. What is perhaps less clear, but nonetheless highly significant, is that accounting impacts the culture of society, at least in terms of what is regarded as valuable or important in society. This cultural impact affects how we see (and act in) the world and what is recognized and accounted for. It offers a narrative about our world and organizations within it1. If we account for physical assets or financial liabilities, then these likely will be managed and be a focus of attention. If we account for product quality, employee safety, human capital or child labour, then these are 1 We will not here pursue the idea of accounting as narrative (Davison, 2011) but point out that what is particularly relevant to our essay is the notion that accounting narratives create specific visibilities and invisibilities (Hopwood, 2008) rather than a concern with readability or analysis of specific components of corporate reports (Clatworthy and Jones, 2003). 2 likely to be a focus of attention and be actively and thoughtfully managed. Conversely, if we choose not to provide accounts of corporate behaviour in relation to employee conditions or environmental performance, then we are choosing one of at least four possibilities. First, we choose to trust the actions of firms and their managers. Second we believe these aspects of corporate behaviour are unimportant and do not need to be accounted for. Third, our choice may be based on a belief that corporate behavior is controlled absolutely by complete and well functioning markets2. Finally, we may say that financial and corporate reporting is part of a wider informational environment and suggest that accounting has no particular expertise in specific domains and thereby defer to other information providers. Then the question arises about what types of accounts or narratives of corporate behaviour should (or need to) be managed by accountants, as opposed to other information providers, such as statisticians, economists and sociologists. While it can be argued that it is the job of the political process in society (what may loosely be described as government and society) to recognize these affects and to decide on what is to be accounted for and how (and who) is best to conduct the accounting, our position is that accountants have a responsibility to stimulate and inform that political process. Because some impacts are subtle or cultural, accountants (and others) need to make governments and society aware of them and to stimulate debate about the purposes of accounting. To ignore that process is in effect to accept that the current situation is ideal. So, we might start our discussion of the needs of government and society by considering recent debates about the nature and purposes of accounting both within accounting and in the political process. Despite several attempts over the years, there is no explicit and agreed view about the purposes of accounting or how we might identify and act on a public interest role. It would seem that accountants accept the basic structure of reporting and suggestions for change typically occur within the constraints of current legal practice. Yet, a faith in a harmony of interests between capital markets and societal wellbeing has always been fragile and disputed, but perhaps no more so since the global financial crisis of 2007-2008. It is well established in the academic literature that this harmony is problematic, whether we take a position from neo classical economic theory (Tinker, 1980; Cooper and Sherer, 1984), a concern with justice (Sen, 2009; Flower, 2010), or an empirical awareness that capital market health is inversely related to many indicators of societal well being (eg., Collison et al, 2012). Yet in their study of the Company Law Review that lead to the UK Companies Act of 2006, Collison et al 2 Perhaps this is the belief behind the courageous and ambitious initiative on “Information for better markets”. But political philosophers at least since Adam Smith have recognized that unless all human activity takes place in well functioning and complete markets (eg no monopolies, equal endowments of resources), there is no guarantee that social welfare will be maximised, or be just. Further, it is unclear whether or if all human activity could take place in markets. 3 (2011) suggest that there was very little discussion on the possible objectives of companies, that there was limited awareness by participants that there were varieties of capitalism (Dore et al, 1999; Hall and Soskice, 2001; Hall and Gingerich, 2009) and these varieties all seemed to be stable but resulted in quite different social outcomes (e.g. on societal inequality and health). While Walker (2010) has recognized that varieties of capitalism have profound (and varying) implications for international accounting regulation and harmonization, it seems that practical debates about the purposes of accounting and the roles of accounting in society3 are rare and rarely venture into such fundamentals. This essay, by examining the needs of users of accounting other than capital market participants, contributes to thinking about accounting policy and practice in different ways. It addresses the question about the purposes of accounting in relation to society generally, albeit in a rather limited way designed to raise issues and highlight relevant research, rather than to offer definitive remedies. We start by discussing some crucial issues in the title of our essay in an attempt to clarify some of the concepts that underlie our arguments. We then outline two general issues that should be addressed in considering who is accounting for, and specifically how accounting can meet the needs of government and society. Section three discusses the link between corporate reporting and macro- economic policy, as an example of the needs of government. Section four then considers what accounting for society may involve by outlining some issues in relation to corporate reporting, sustainability and social reporting generally. Our conclusion identifies some important omitted issues, the practicality of our proposals and the implications for governance of accounting policy making. 2. Conceptions of needs, society and government. The broad title of our essay immediately highlights that we need to clarify our terms and focus. We limit our attention to what firms should disclose about their activities that may be used by governments and others in society (“others” would include, but not be limited to, capital market participants). We do not have the space to consider what governments should account for to society or what might be the scope of government activity that should be accounted for. While important, this issue of government reporting is not our concern here, nor are several perhaps obvious uses of corporate reporting – for examine to determine income subject to tax, or more generally to regulate industries or assess the success of particular policies. Instead, we 3 Burchell et al (1980) point out that most (normative and prescriptive) discussions of the role and purposes of accounting are disconnected from careful studies of how accounting is actually used and practiced; our essay is normative and prescriptive but also builds upon studies about how accounting is used by these other users. Further, we suggest our normative exercise is nonetheless a contribution to thinking about (and perhaps even reforming) accounting policy and practice. 4 focus on some examples of corporate reporting that will respond to the needs of others in society, an approach that is centrally concerned with the purposes of accounting and how that might connect to the public interest and society. No doubt, part of the appeal for academics of focusing on capital markets is their significance in modern economies. The task of such research, however, has been facilitated by the development of well defined models of investor behavior and the widespread availability of large data bases. But capital markets are not ‘society’, and many other needs and concerns may be overlooked with a pursuit of this one aim. To put the matter bluntly, focusing on capital markets is a personal, political or value laden choice, as is a focus on other needs and concerns. We make no pretence that our position is not value laden. Indeed, in discussing how social sciences can best contribute to the management of society, Flyvbjerg (2001) suggests that the social sciences need to recognize the value laden nature of our disciplines. Our focus on accounting policy making4 to meet the needs of society starts from the position that we need to engage in a dialogue on such matters and that we cannot solely rely on experts to determine what is desirable. In considering the types of corporate reporting and disclosure that would respond to the needs of government and others in society we are faced with three questions. First, what is the model of government that we assume? The question matters because the accounting/corporate reporting needs of government may differ depending on how one views what “government” is. We can adopt, for example, a model of government as a democracy, with government an agency that balances a plurality of interests through periodic elections. This is a model that treats government as a unitary entity that aims to maximize social welfare, or tax revenues, or some other singular criterion (Jessop, 2002). The most useful corporate reporting would then be the corporate reporting that served this need. Alternatively, we can conceptualize government as a fragmented collection of disparate agencies and ministries that operates according to a diverse set of mechanisms and values (Miller, 1990; Rose and Miller, 1992). In this case, it may be less clear what the most useful overall corporate reporting would then be, because needs may shift or vary according to which agency or ministry was the focus. Other conceptions are also possible- for example as a guiding force which aims to maintain a particular form of economic and social relations, a concept that political scientists refer to as the state, and accounting therefore has perhaps a more passive or background role (we discuss this role later). Second, how are we to conceptualize society, for example as an entity characterized by conflict or consensus? Is it organized or disorganized? Who are the “others in society” and how and 4 That is, choices about what and how we account for specific activities, including debates about the conceptual frameworks and the boundaries of what is accounting and auditing. 5 what do they make decisions about? Does government represent the wishes and values of society? Third, and relatedly, how is information or other needs to be known and what mechanisms exist for their articulation? Needs may be easier to identify if society is organized and based on consensus, yet governments and societies rarely speak to accounting issues! Further, and importantly for this essay, whereas most conventional responses to such questions in accounting leads to a belief that accounting can respond (well or badly) to well articulated needs, we stress the importance in recognizing that accounting proposals may also help to shape possible needs and to make visible some needs, while occluding others (Hines, 1988; Burchell et al, 1980). Our purpose in raising these issues is not to assert our solution to a political debate. Rather, it is to point out that any claim to represent the needs of government or society, and indeed any accounting policy prescriptions, involve contentious assumptions and choices. This cannot be avoided and to believe that accounting unproblematically represents reality is to assume that there is a well defined and widely accepted definition of reality, or perhaps more accurately, that there is agreement about both what aspects of reality are to be represented and also that such representations can be depicted in only one way. Any claim to offer apolitical technical solutions similarly faces the problem that the technology is itself political, at least in the sense of being differentially available, understood and used. Technologies are inevitably imbued with the assumptions and values of the technology builder. Many accounting policy makers try to side step these untenable assumptions by claiming that the same accounting representation can be useful for many purposes and to instead argue over the best representation. The analogy is often to map making, arguing that what any user needs is an accurate and unbiased map (Solomons 1978; 1983). Yet as the history of maps indicates (e.g., Brotton, 2012), map- making is influenced by politics and patrons, and the belief systems and priorities of the cartographer. Maps are as much about money, empire and discovery as about space: “the idea of the world may be common to all societies, but different societies have very distinct ideas of the world and how it should be represented” (ibid). Likewise with accounting representations and narratives (Tinker, 1991): even without delving into a philosophical debate on the nature of reality, it seems clear that we can construct an infinite number of maps, stories or representations of organizational performance. Perhaps this partly explains why there have been many ‘conceptual frameworks’ proposed for financial reporting- each representing a different view about what is important to represent (Macve, 1997). Accounting rules and conceptual frameworks are inevitably the outcome of power, politics, national histories and traditions and the belief systems of the standard setters (Zeff, 1972, Cooper and Robson, 2006; Camfferman and Zeff, 2007; Bozem and Quack, 2009). 6 Unsurprisingly, therefore, none of the proposed rules or conceptual frameworks are more than temporary and unstable resolutions that become unworkable as conditions and times change (Macve, 1997). Compare the Corporate Report (Renshall, 1976) and its advocacy of a stakeholder approach, with frameworks oriented to employee rights and industrial democracy that were proposed for French accounting at the same time (Sudreau, 1976), and then with recent conceptual frameworks proposed by the Financial Accounting Standards Board and the International Accounting Standards Board (IASB/FASB, 2010) that seem to use a particular model of shareholder capitalism (Arnold, 2012). As Walker (2010) points out, one can believe in the virtues and values of capitalism, but this belief does not exhaust the possibility for different accountings based on different versions of capitalism, each of which may produce different outcomes for different sectors or groups in society5. Accounting policy makers might believe that what is good for the capital market will be good for society and meet the needs of government. But as stated earlier, what is good for one segment of society may not produce optimal social benefit (Cooper and Sherer, 1984 ). In this paper, we will examine several areas where there are possibilities (even though not much demand, at least among those who currently have a voice in corporate reporting) for an expanded view of corporate reporting for government and society. Even though we cannot define the precise nature of such possibilities, what we point out is that society and governments may benefit from a re-orientation of corporate reporting towards the needs of society, rather than to capital market participants that have received so much prior attention. Accounting narratives potentially offer multiple stories, and the issue then is which stories are to be told and re-told and which stories are neglected and diminish our understanding of accounting’s potential. Our preference is to encourage multiple stories (as well as multiple maps). Thus we consider narratives that examine the links between first, corporate financial reporting and macro-economic policy, and secondly, stories about social reporting, societal welfare and sustainability. 3. Corporate reporting and the macro economy In this section, we argue that corporate financial reporting meets the needs of governments in subtle or passive ways: governments do not need to read the financial statements of corporations and then make decisions based on the accounting information in those financial statements to meet their objectives; instead their objectives are met by the continued use of accounting by corporations and others in society. We use the term “the state” in this section to 5 As Young (2006) demonstrates even the conception of who is the appropriate user of financial reporting changes over time and most likely across jurisdictions. 7 distinguish our analysis from a focus on a particular legislative or executive or bureaucratic aspects of “government” and also to allow a broader analysis. The state is in a dual position: it is both a participant in the economy and it has responsibility for management of the economy, or at least faces criticism and perhaps even legitimacy crises when the economy does not perform well (Jessop 2002; Boyer 1990). The fundamental problem for the state is to enable growth i.e. capital accumulation while maintaining social harmony. Whatever its political philosophy, the state seeks to manage the economy, by using some mix of fiscal, monetary, and industrial policy. Thus, “getting out of the way” of corporations, the market or the voluntary sector still involves the state in choices about how best to organize economic and social life (and to set the rules for these aspects of life). Recent moves to involve other social actors in delivering state policy, such as social agencies, NGOs and community organizations may facilitate social harmony, but this depends on how such institutions are motivated and controlled by the state (Hardt and Negri 2001). Many of the state’s uses of accounting are decision oriented: accounting (corporate reporting) data is used to assist in analyzing many specific policies or programmes. We view these as “active” uses of accounting, and accounting allows the state visibility into particular aspects of the economy and society, such that state programmes or projects can be undertaken (Miller 1990) and evaluated. Accounting researchers have looked into how conventional financial reports can be used to evaluate a variety of policies, for example, in relation to privatizations, use of public private partnerships in financing infrastructure, industrial regulation and so on (). As noted, corporate reporting is also used as a basis for calculations of corporate and other forms of tax. Accounting also has a passive role, which is equally or perhaps more important to the state, in that accounting allows a form of regulation and social stability to occur. As Oguri (2005) argues, capital needs accounting operations which recognize and control its movement; the metamorphosis of capital into money and capital (in a firm for example) and back to money is “fixed and controlled by bookkeeping.” (ibid, 82). Modern states rely on capitalism; capitalism relies on accounting. This gives specificity to what we mean by “stability” – not only is it the smooth and crisis- free growth in corporate earnings (or GDP), but it is also stability of social and economic relations. Promoting stability Society (and markets) value stability. Several types of stability can be contemplated: stability of financial markets, stability of other markets, and more generally, stability of growth and stability of the social formation (i.e. stability of class relations), and more far reaching, stability of ways of life, or dominant cultures. We describe these in more detail below and offer a 8 perspective on how accounting, while providing information for better functioning of capital markets, at the same time may increase the potential for instabilities that disrupt other markets and social relations. Instability often is associated with crisis. Accounting information has been implicated in several crises: most recently, the 2008 global financial crisis. Accounting research is unclear on whether accounting promoted or exacerbated the global financial crisis, although Waymire and Basu’s survey (2011) of the historical evidence on crises generally suggests it may amplify them. The debate regarding whether accounting is pro-cyclical has been around for some time. For example, Baxter (1955) noted that in upturns, when prices are rising, revenues are higher while costs of sales are at lagged prices, so profit is incorrectly overstated; conversely in downturns, profits are incorrectly depressed; Baxter suggests that these tendencies reduce the stability of the economy. Haldane (2012, p.262) notes that fair value principles “appear to have played a role in both over-egging the financial upswing and elongating the financial downswing. They have tended to over-emphasize return in the boom and under-emphasize risk in the bust. That is not a prudent approach. Indeed, it is a pro-cyclical one.” Further research is necessary to resolve the extent to which accounting is pro-cyclical. We may speculate, for example, that even though fair value accounting may not be prevalent (Gebhardt 2012, suggests less than 20% of assets are measured at fair value), it may be that relatively small portions of an economy’s assets in fair value may move an economy away from structural stability and towards financial fragility. Boyer (2007) notes that the impacts on financial fragility of an economy are more important as one moves from a single asset, to considering credit market impacts, and then spillover impacts to stock markets, real estate, credit and productive capital. It may be that economies’ stabilities are especially sensitive to their portion of economy that is in financial assets, and financial assets at fair value in particular. Our purpose here is to draw out implications for how accounting meets (or does not meet) the needs of the state, or wider social needs for stability. We recognize that accounting may be pro-cyclical, and that it matters whether fair value or historical cost is used. We further suggest that the financialization of accounting (where investor needs dominate) does matter and to judge the ‘value’ relevance of accounting information solely in terms of capital market reactions means that other users and needs are unmet or are viewed as less legitimate (Farjaudon and Morales, in press). Although many may see accounting debates (e.g. over fair values6) as technical, they reflect a much larger debate about the nature of the economy, the 6 As a simple example of the power of accounting, in this case its terminology, to make some things appear legitimate (and others less so), note how the term ‘fair’ values helps to legitimate market value by assuming that market transactions are ‘fair’, even if they involve monopolies, deceit in transactions, or where access by some people is limited, for example, for reasons of gender, race or lack of resources. 9 kinds of goods and services that will be produced, where jobs will occur, what resources are valued, and ultimately which geo-political areas will prevail. To see these larger implications, we adopt a political-economic and institutional perspective, following Arnold (2009; 2012). A political-economic and institutional perspective allows us to consider the impacts on stakeholders other than market participants, and therefore allows us to draw out how accounting may meet (or not meet) the needs of government or wider social needs. Of course, other participants are also impacted by the “economic” and by capital market performance. Indeed, these other users may be more acutely impacted, but in ways different from those effects (such as crime, stress, social instability and health) contemplated by viewing their role only as investors. We proceed first by discussing financialization, and then drawing out the implications of financialization. We then describe how accounting may be used to provide information to counter, or at least predict, the impacts of financialization. Financialization Krippner (2005; 2011) describes “financialization” as the growing importance of financial activities as a source of profits in the economy. Using about fifty years of U.S. data, Krippner shows that the share of corporate profits of the manufacturing and services sector has declined, while the share of finance, insurance and real estate (FIRE) sector has risen. FIRE’s share of employment and GDP has also risen over this time. This is not just a matter of the dominance of FIRE firms. Froud et al (2006) indicate how the financial activities (including treasury) of large corporations such as GlaxoSmithKline, Ford and General Electric, have increasingly come to dominate their traditional products and services. Gleadle and Cornelius (2008) show how accounting performance measurement systems (such as EVA) focus manager’s attention on likely capital market reactions to a wide range of choices. Krippner (2011) suggests that financialization was a result of policymakers’ ad hoc responses to who should bear the burden of fading prosperity in the U.S. in the late 1960s and 1970s. Among these responses were financial deregulation and changes in monetary policy. Deregulation allowed the substitution of “the market” for direct intervention by the state. As credit expanded, inflation resulted, setting the stage for financial sector profit increases, future asset price bubbles and instability. Summing up, Krippner (2011, p. 144, emphasis in original) notes that “under the policy regime that supported financialization, capital would no longer be scarce but available in abundant supply, with the result that incipient political conflicts over how to distribute limited resources between competing social priorities were effectively depoliticized.” 10 Following Krippner, financialization is a response to, or perhaps displacement of, politicaleconomic problems. Social choices are still made, of course; but these choices are not made in a political realm but in the boardrooms of corporations and financial institutions. There, concerns about inequality and social justice are likely to be less prominent than in institutions where there is some voice for all the population. As we explain later, accounting, in particular financial reporting that recognizes profits due to financial transactions, plays a role in this financialization, depoliticization and lack of concern with distributional issues. The story of financialization is not necessarily about conspiracies in smoke filled rooms (although Arnold 2012, indicates this can happen). As Krippner (2005) notes, the responses were often ad hoc; at the macro level we are discussing here there are myriad factors involved in determining a particular outcome. Several features of accounting can be enrolled to help manage the contradictions in the role of the state. Accounting provides, most generally, an apparently objective response – numbers, particularly “official” audited numbers, have validity. Accounting regulates the movements of capital (Oguri 2005), and promotes a social accountability for a rate of return to capital (Bryer 2005), via for example the calculation of return on capital. The state does not have to promote capital accumulation specifically; accounting provides the information system that carries with it the ability to calculate, manage, promote, and hold accountable economic activity in terms of whether it generates a return to capital. The actual technology of accounting, what counts as debits or credits, also matters – to illustrate, if accounting ignored profits from financial activities and instead only included profits from “productive” activities such as those where labour power had to be applied to transform commodities into other commodities, the profits from financial activities (as measured by accounting) would be zero; Krippner’s search for financialization of the economy as measured by corporate profits from financial activities would have not indicated financialization had occurred because it would be invisible in their financial reporting of corporations.7 We can now connect the debates about the specific items that appear in corporate reporting with respect to asset balances and income determination with macro-economic stability and informational (and other) needs of governments. We note that fair value accounting has been part of accounting for a long time, being expressed in “lower or cost or market” rule for inventories and marketable securities. In the 1990s fair value recognition and measurement expanded to debt and equity securities and derivatives. This move to fair value measurement is qualitatively different from past uses of fair value in terms of its implications for stability. Fair 7 It would be invisible just as many other “transactions” (externalities) are invisible to accounting. Matters are more complicated: the return to capital that accounting measures and enforces would be impacted, it is unclear what would signal capital to shift from industrial to financial activities, cash flows and income measurements would differ, and so on. These are beyond our point here, which is that accounting made financialization visible. 11 value accounting is now applied to more types of transactions, and to more entities. The emergence of derivatives has uncoupled financialization from any constraint to the real (i.e. underlying) economy (Macintosh et al 2000). As well, fair value accounting is being applied when economies have likely peaked in financialization (we return to the implications of the “peak” below). When accounting incorporates more and more fair values into measurement, and the society this accounting is embedded undergoes financialization, the risk of problems due to instability, including pro-cyclicality, volatility and financial crisis, increase. While accounting facilitates and encourages financialization, financialization itself carries with it other risks. This is the core of the debate about fair value accounting: issues of exacerbating cycles, volatility, and financial crises. Therefore, while accounting is helping describe, accounting for, resolve and displace problems of the state at one level, these narratives may be contributing to undesirable consequences at another level. What is needed, perhaps, is a more macro-level of accounting that may further assist the state in promoting stability and regulating economic cycles. For this, we turn our discussion to national accounting8. National accounting National accounting is currently ubiquitous: terms such as GDP, GNP, national income, national debt, are familiar9. While the state may not be interested in the corporate reporting of a particular company, for purposes of the state’s role in managing the economy it is important that corporate reporting include data which aggregates into national accounting data. Audited financial information has more credibility and tends to create consistency more than information that is not audited. It is also more efficient if firms produce and disclose one rather than multiple sets of information. Of course, we should recognize that states give themselves the power to require specific information from firms in order to develop national statistics and the information they require to manage the economy and society more generally. The United Nations publishes standards for national accounts, called the System of National Accounts (SNA). A SNA methodology document (United Nations 2000) describes differences in business accounting and national accounting. The SNA balance sheet requires revaluation of financial assets and liabilities at market prices, the valuation of intangible assets and many nonproduced assets. Corporate accounting data aggregates, with adjustment, into national 8 We use the terms “national accounting” or macro-level accounting interchangeable throughout to refer to accounting at the level of a nation or economy 9 This was not always the case: Suzuki (2003a, 2003b) traces the development of national accounting in Britain to efforts to manage the War economy. Suzuki explains the efforts involved in bringing into being the notion of the macro-economy and what constitutes it, such as expenditure, income and output. These early efforts led eventually to standardization of national accounts by the United Nations under the System of National Accounts (SNA). 12 accounts. This national accounts information can then be used by the state for purposes such as macro- economic planning, industrial policy and so on. As Suzuki (2003b: 501) notes, “these indices are often treated almost as the objectives of economic management and even as reality, rather than a means to analyze and manage economic reality.” The problem of measures becoming the object of policy, rather than the underlying concern, has been well recognized in accounting for a long time (Hopwood, 1992). More recently, it has been suggested that the measures and the models that they are linked to, actually construct the concerns (Mackenzie, 2008). So, while it is well recognized that national income statements exclude unpaid labour (in the home or in subsistence farming), many natural assets (clean air and water for example), and externalities such as pollution (Waring 1988; 1999), it is important to recognize that such exclusions are likely to lead to distortions in public policy. These exclusions increase inequalities and lead to changes in the distribution of benefits and costs in society. Thus other indicators, such as the Genuine Progress Indicators or Integrated Reporting, which recognize various capitals (including natural capital) and incorporate measures of inequality and social justice have been proposed, and there are experiments with public policy using such indicators. These will be further discussed later in the paper. However, we wish to go further; is corporate accounting data, aggregated into national accounts and further analyzed in economic models that use national accounts data, useful to the state for analyzing and managing the economy? Returning to our discussion of financialization, and the objective of stability, perhaps such data could be useful for predicting (and thereby help manage or avoid) economic crises. Unfortunately, this is currently not the case. Bezemer (2010) notes that current macroeconomic models (including those used by the OECD) did not see the 2008 crisis coming and suggests that a different approach to macroeconomic modeling, which incorporates financial flows, is better at predicting financial crises. Specifically, “the economy’s credit flows shift progressively away from the real economy and increasingly into financial asset markets, with every growing financial asset returns and individual net worth figures, and a growing debt service burden on the real economy… While these features of the bubble absorb most of the public’s, the regulator’s and the financial community’s attention, they cannot change the ancient reality that the economy’s debt-carrying capacity poses an immovable limitation to debt-driven growth. Calculations of this limit proved reliable predictors of the crisis.” (Bezemer 2010: 684). Conventional equilibrium models based more on neo-classical theory exclude wealth, debt and flow-of-funds. Bezemer notes that equilibrium models are able to predict various macro13 economic factors, such as labour force participation and unit costs, and also that some of the models are undergoing revision to incorporate stock-flow concepts. We have not analyzed whether or how the United Nations’ SNA may be modified to improve economic models, or whether for example new economic indicators are necessary,10 but we suggest that new economic indicators could use corporate and other accounting data for their measurement to assess debt carrying capacity and national flow of funds. Such indicators, using corporate accounting data, would help first governments see financialization coming and, second, help market participants, governments and others respond appropriately to it. Krippner has shown that it is possible, using time-series aggregate accounting data on corporate profits, to discern financialization, although it may require several years of data. However, to be able to use this data to help market participants, governments and others respond appropriately to it would require adjustment to the macro-economic models used by states to manage the economy, as Bezemer (2010) suggests. Summary This section has travelled from the debits and credits in corporate reporting to the models that are used to govern national economies. We do not suggest that it is simply the debits and credits that are all that matter to either corporate reporting or financial stability; as Arnold (2012) argues, the configuration of institutions and governance arrangements – the financial architecture, the domain of political economy or perhaps geo-politics – are also important. Given a background context described by Biondi and Suzuki (2007) as “making the world’s capital markets more efficient, and for this end, accounting is globally standardized based on the fair value,” we wish to synthesize our discussion and focus on stability, financialization and use of accounting data by the state into a more overarching concern. An economy can be conceived as a series of layers: an elementary layer that is mostly a selfsufficient layer of material life; above this, the market economy, where a degree of automatic coordination usually links supply, demand and prices; and finally the “zone of the anti-market, where the great predators roam and the law of the jungle operates. This – today as in the past, before and after the industrial revolution – is the real home of capitalism.” (emphasis in Arrighi 2010: 11, quoting Braudel 1982). Our discussion in this section has focused primarily on the middle layer of markets, and somewhat on the layer above, insofar as the state promotes stability. The stability sought by the state in product and factor markets, and in stability of social relations, could be seen as allowing the top layer of the anti-market to more easily penetrate into the underlying layers, much like a tick may be more satisfied if its host is lying rather than rapidly jumping around. 10 Such as a measure of an economy’s financialization, or much more practically, how many quarters are left in the current boom or until the next crisis. 14 Arrighi traces out a series of shifts in global power, from the Genoese, to the Dutch, then British, and then to the U.S, and recently from U.S. to China. He further argues that a signal of shifts in global power is financialization. In each case, commodity trading eventually shifted to financial trading i.e. the financialization observed by Kripper (which we suggested was permitted, encouraged and made visible by corporate reporting). However, while these shifts permitted further financial expansion and increased profits, the shift to finance also signaled the end of these as centers of power. Therefore, to the extent Arrighi is correct, corporate reporting, from which the degree of financialization of an economy can be derived, is important to states to identify, predict and prepare for these shifts. From the perspective of specific market participants, such as investors, employees, suppliers and customers, and for the states who are concerned about their wellbeing, accounting data may assist the state in being alert to such geo-political shifts in power, and the consequential market impacts, including product and factor markets, as well as financial markets. 4. Corporate social reporting and accounting for sustainability11. Issues of sustainability- economic, environmental and social- have been discussed for a very long time, although there is little doubt that concerns about climate change, degradation of natural resources and pollution has alerted more and more people to the need for governments and corporations, as well as themselves, to explicitly consider them in their decision making and action. Some claim an instrumental motive for this attention (“it’s good for business”), while others emphasize a moral imperative (“our responsibilities to nature and future generations”). There is an enormous literature, and much practical action, addressing such issues. Of course, choices are inevitably made about such issues. For some, the values of sustainability, avoiding harm to the environment or a desire to see corporations fully accountable for the effects of their behaviour impel a concern with ensuring that decisions are made that incorporate such values. Others may view their values in more instrumental terms, for example as a management activity designed to mitigate risks associated with the demands of diverse stakeholders, or as an opportunity to develop new products, markets and services (such as green energy, organic foodstuffs or base of the pyramid products). While these are conscious strategies and choices, it is important to recognize that inattention to such concerns also reflects a choice and the value of carrying on business as usual. To focus only on the financial reporting of an organization or to consider only financial dimensions of decisions sends 11 We use the terms sustainability, corporate social reporting and environmental accounting in a loose and undifferentiated manner. The issues we discuss in the section apply to various accounting approaches concerned to provide an account to and for society. 15 a message (perhaps unintentionally, or for reasons of apparent impracticality12) that accounting for social, environmental and other effects are not as important as a financial orientation. Further, in keeping with our focus in the previous section on accounting and macro- economic policy, social accounting and sustainability can be viewed not so much in terms of responding to the needs of decision makers and stakeholders for more complete information about an organization, but can also reflect the values behind many concerns for sustainability and stability for society (or even the planet) as a whole. Corporate level reporting can feed into decisions about managing and improving societal well being. Accountants and accounting is increasingly being recognized as actors that impact these issues, although it is salutary to recognize that there is a long history of (often failed) proposals and debates about corporate social reporting (CSR), accounting for externalities and sustainability accounting. There have been suggestions for societal accounting (Gambling 1974), analyses of proposals for value added statements (Burchell et al 1985) and discussions and case studies on social and environmental accounting (e.g. Hopwood et al 2010 ). There have been many experiments with various forms of social accounting, across the world, often focused on measuring the impact on various environmental indicators. Many accounting and consulting firms have developed sustainability services to help their clients represent their societal activities and impacts (O’Dwyer 2011). But as Malsch (in press) demonstrates, these representations are not very diverse, instead typically reflecting a particular, neo- liberal, set of values13. There is much to admire in the aspirations for such extensions and proposals, not least that organizations should be encouraged to internalize some of the externalities caused by their activities (such as water and air quality, carbon emissions, employee wellbeing, and product safety) thereby ensuring that such costs (and benefits) are recognized and incorporated into the market prices of products and services, enabling better functioning of markets. More recently, there have been initiatives relating to full costing (eg., Bebbington et al 2001; Antheaume 2007) to help inform internal decision making about the effects of proposed investments and activities. There continues to be extensive activity around social and sustainability reporting (e.g., Gray et al 1997; Milne and Gray 2007) to inform external parties about corporate performance and thereby, it is hoped, to address issues of corporate accountability and their stewardship of all types of society’s resources (financial, natural and human). 12 What is, or is not, practical depends at least in part, on available technology and expertise. Investments in technologies or expertise to identify and perhaps measure can shift the domain of the practical. Further, as numerous accounting studies have shown (e.g. Miller and O’Leary 1990; Power 1997), discourses about activities are also important in determining practicality. This is an important point that we return to in the conclusion. 13 This would seem to reinforce Mouck’s (1995) concern that environmental accounting is all too often dominated by the ideas of modern finance theories and tends to marginalize perspectives informed by other ideas. 16 Many of these initiatives are genuine responses by accountants, statisticians, economists and others to shift corporate and societal debate and activity. These occur within a value that believes that unless firm actions are described, or perhaps measured, then they will not be seen as important or actively managed. A concern with a measurement focus may, however, also be seen as commodifying nature and humanity (Hines 1991; but see Power 1992). Further, there is always a possibility that such activities and initiatives are window dressing, ‘greenwashing’ or exercises in reputation management and a search for legitimacy to different constituencies. Indeed, Power (2007) suggests that most initiatives in firms are seen as pragmatic risk management responses rather than any moral commitment to a different ethos. US corporations seem to be much less interested in such initiatives than those in many other countries (Simnet et al 2009). Many researchers also seem pre-occupied with the use of such reports only in terms of their impact in capital markets. Research evidence is ambiguous about whether the capital market values corporate social reports (Clarkson et al, 2011). Even more disconcerting, there is evidence that sustainability reporting and disclosures is unrelated to corporate social performance (Gray 2006; 2010).14 Due to these characteristics, Scherer and Palazzo (2007) argue that “[c]ompanies sometimes position themselves as sustainable and drown the readers of their CSR reports in technical data but do no more than comply with basic environmental laws. As Laufer (2003: 257) has warned, ‘without external, third party verification and monitoring,’ it is impossible to differentiate between genuine efforts and CSR rhetoric.” (ibid: 1114) Due to these possibilities, much like corporate reporting to meet the needs of capital markets is standardized into accounting rules, social and sustainability reporting also could be more standardized and subject to stringent legal and regulatory requirements, rather than left to the decisions of corporations (Cooper et al 2005 ; Spence 2009; Spence et al. 2010). However, an alternative approach is to encourage alternative reporting, with third party monitoring and verification, along the line of the ‘social audits’ in the UK of the 1970s that offered independent assessments of corporate performance. These reports covered a wide range of organizations (e.g. Tube investment, the Alkali inspectorate, Cable and Wireless), and offered a rich, but acknowledged as incomplete, picture (quantitative or qualitative) of their activities. As Unerman and Bennett (2004) suggest, the power of the internet is that it allows multiple views to be communicated, although we are not here suggesting that such a website should be controlled by the organization itself. These reports were inevitably impacted by the values of the assessor: “[t]he value of an independent view will of course depend on the identity 14 Recent research on US firms continues to offer inconsistent results (e.g., Cho et al, 2012 and Mahoney et al, in press). 17 and motives of those who present it and, in particular, on the basis of their view in fact. Given these possible limitations, an independent view may never be a definitive one, though it will be almost bound to improve on the accounts that the average company will prepare on and by itself” (Medawar, 1976: 394). We will elaborate later the advantages of multiple views of corporate social reporting, and how they connect to our view of democratic deliberation. Important recent manifestations of a more conventional, rule or prescriptive based, approach can be seen in recent proposals from professional and corporate groups. These include the Global Reporting Initiative (GRI 2011), the Prince of Wales’s Accounting for Sustainability project (Fries et al 2010) and the various proposals for ‘narrative’ extensions to corporate reporting, where this typically includes environmental and other social disclosures (e.g. International Integrated Reporting Council 2012). These developments seem to derive from a widespread drive for multiple measures of corporate performance (e.g. Eccles and Krzus 2010) and the desire to offer an enriched understanding of the context and meaning of corporate reports through narrative disclosures. For example, Lev and colleagues (starting with Amir and Lev 1996) argued that traditional financial reports of firms need to be augmented by more ‘value relevant’ (to investors) information for firms in the new economy. Relatedly, Mouritsen was involved in a major initiative to incorporate intellectual and human capital in the reporting of firms (e.g. Mouritsen et al 2001). While these developments in narrative and integrated reporting are serious attempts to account for the multiple ways that corporations impact society, they suffer from leaving a false impression that they can cover, in a more or less objective and standardized way, all aspects of organizational activity. We believe that this search for one, comprehensive, report either leads to acute information overload or a false sense of objectivity. 5. Discussion and Conclusions. We have explained why accounting involves choices and that the values of the decision maker will impact those choices. Nowhere is that more clear than when considering the forms of accounting that would respond to the needs of governments and society. In exploring this theme, we have addressed two areas of accounting where governments and society may have a particular interest. It is worth noting that these suggest that corporate accounting need not be focused on the value of information from the perspective of the firm or an individual, but can instead be viewed in terms of macro- economic, national and social purposes, for example the quest for stability, sustainability, and population well being. 18 There are other uses of accounting by governments and others in our society that we have not discussed. First, consider accounting and industrial policy. We may live in an age of globalization, but as many commentators have pointed out, this does not mean the demise of the nation state, or national strategies relating to security, innovation, control of resources and so on. In many cases, governments typically can obtain information they require from the various parties in order to make decisions about what they consider to be the public interest. Part of the issue for us is how others should also be able to enter into informed debate about such matters. Other elements of industrial policy concern national control of what are seen as key resources, such as oil, gas, water, minerals, forests and so on, and national industrial policies in relation to research and innovation and the education and training of citizens. The implications of such industrial policies for corporate reporting are worth further consideration, but it seems likely that the demand would be for more segmental information than even the proposal in IFRS 8, reported along national lines, in areas such as tax paid, investments, employment, R & D expenditures and so on. A second omitted area relates to other areas that the “others” in society might be interested, beyond their role as capital market participants, such as happiness, human rights and social justice. Here a shift in the focus of accounting might be called for as input to such indicators. To briefly elaborate, there is a renewed interest in issues of happiness and social well being as better indicators of social performance than traditional economic indicators such as GNP (e.g. Helliwell et al, 2012, Stiglitz et al, 2009). Similarly there are concerns about inequality, social justice and human rights (Wilkinson and Pickett, 2009) and how the failure of accounting to consider such issues can lead to an unbalanced focus by governments and others in society, for example a neglect of gender, disability and poverty, or a strong emphasis on surplus and deficit (Flower, 2010). Recall the three problems we mentioned in section 2. We have taken as our starting point the idea that ‘needs’ for accounting can be identified and somehow are prior to demands for information. This seems to be the assumption of most accounting policy makers and indeed much of the accounting literature where models of putative decision makers and users dominate (Young, 2006). Yet there has been a growing recognition that accounting practices and discourses can help to construct the needs (Burchell et al, 1980) and reality (Hines, 1988) of decision makers. Indeed, it could be argued that such models ‘make’ those entities, in the sense that it is through such models that we construct specific images of those entities (Mackenzie, 2008). How are needs to be identified and assessed? While it is often assumed either that governments express the needs of society or that a group of technical experts can determine those needs, perhaps there is a need for a fundamental reconsideration of those assumptions. 19 We have skirted around the problem of defining government and society, instead assuming we can identify potential needs of governments and society. This is a classic issue in management, information and accounting research (Boland, 1979; March, 1987): how to develop information systems that support either a decision maker or a model of how the decision maker should decide. Our discussion has been instead based on an unspecified model of those entities, and whether economic or some other rationality guides their decisions. We have not fully discussed how they balance needs of stability and growth with sustainability (in a broad sense, including both humanity and the planet thriving) and the extent to which these may be competing objectives. Further, while we have made some reference to accounting institutions, our discussion has been deliberately general and has not attended to specific government and societal institutions, or what may be referred to as the force of history. Even within the various approaches to capitalism, several factors impact the development and form of a country’s corporate reporting. Some countries emphasize central planning or taxation, with defined statutory prescriptions for accounting, while others allow greater freedom of accounting methods so corporations may communicate relevant information (Thorell and Whittington 1994, Catchpowle et al 2004). We also recognize that accounting does not exist as a monopoly provider of corporate information and that states and societies may take a number of forms and have differential ability to create and use alternative information sources. Such issues need to be considered further. One important institutional feature of financial reporting is that it is often associated with auditing, and audited corporate reports are often seen to add value to various users. Our discussion of Social Audits and the value of independent narratives of corporate reporting opened the possibility that auditing can be carried out by many groups, not just audit professionals. We suggest that some form of auditing is crucial because it adds legitimacy and credibility to reports. Audited narratives may have more legitimacy and acceptance, perhaps even as representing ‘truth’. While there are many providers of information about corporations, a crucial issue is that those provided by accountants and subject to audit appear to have more credibility and legitimacy than information provided by others. However, this faith has been somewhat disturbed by recent research that suggests that the sorts of audits provided currently by audit professionals may not be as valuable as might be desired (Jamal and Sunder, 2011). Further, studies of what might be referred to as folk auditing (see Jeacle and Carter, 2011) may be as valuable as those provided by professional auditors and evaluators. Thus it might be appropriate to encourage multiple narratives with multiple auditors, rather than a monopoly supplier of narratives (in the form of standard setters) or a monopoly supplier of audits (in the form of professional accountants and auditos). 20 We conclude by speculating about how corporate reporting may be reconfigured to better meet these needs, beyond specific suggestions we have already mentioned? How may changes come about? One approach is to use existing institutions and approaches. This would suggest minor changes in corporate reporting, with legal/regulatory requirements for information for capital market participants, and voluntary reporting for other participants. Or, notwithstanding their current capital market orientation, changes in corporate reporting may arise in the accounting policy/standards arena. This would give centrality to accounting standard setters, or governments (e.g. through changes in the law), or some combination of both. Whether such a change would come about by the eventual merging of the objectives of stability and growth with sustainability by mandate by states and others, or as a consequence of the structural, geopolitical, shifts that Arrighi describes, or simply due to recognition that they are fundamentally interrelated, is unclear. Accounting policy makers tend to assume that changes in disclosure or measurement rules, or indeed the purposes and focus of financial reporting, will come from the accounting profession and standard setters, and that any involvement of others is somehow illegitimate or political (whereas their own involvement is somehow outside politics). The problem is that such an approach may lack legitimacy, fail to consider the needs of many members of society, and in that, and in the exclusion of others, is itself political. There is an alternative way forward. Several commentators (eg Flyvbjerg, 2001; Mouffe 2005) suggest what might be seen as a less elitist approach to changes in various forms of regulation15. The idea of a more processual approach, involving rational, public deliberation and communication has also been suggested for the accounting domain. Building on debates about deliberative democracy, conditions for rational communication and an awareness of the dangers of relying solely on experts in determining public policy, a deliberative process has been proposed, where participants can become informed about the issues and engage in dialogue about how to make progress in dealing with issues concerning the accounting needs of governments and society (Fishkin 2011). A version of such a process has been suggested by Brown and Dillard, among others (Brown 2009; Brown and Dillard in press) under the label agonistic pluralism. As they describe it, “[I]n contrast to consensually oriented approaches …., the desired outcome is not necessarily resolution of ideological differences but to imagine, develop, and support democratic processes wherein these differences can be recognized and engaged.” (Brown and Dillard in press: 1). We would like to think of our current essay as an example of this process; we have made several c comments that could be an input into such a process. Such debate should be respectful and loosely relate to what Habermas refers to as an ‘ideal speech situation’, but it will inevitably involve people with different power, experience and expertise. We look forward to engaging in debate about these comments, and others that 15 The approach has been attempted in policy formulation and justification in health care, urban planning, education priorities, political constitutions, criminal sentencing and many other domains (Kahane et al, 2010). 21 might be raised. 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