Download Accounting for Government and Society

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.
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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
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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).
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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
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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.
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(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
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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.
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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
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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.
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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).
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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
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As Young (2006) demonstrates even the conception of who is the appropriate user of financial
reporting changes over time and most likely across jurisdictions.
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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
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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
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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.
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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.”
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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
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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.
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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).
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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. There may not be a final outcome, but a continued discussion about
accounting policy making and objectives, with experiments that themselves can be discussed
and reacted to.
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