A Postmodern Accounting Theory: An Institutional Approach 1787697940, 9781787697942

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A POSTMODERN ACCOUNTING THEORY

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A POSTMODERN ACCOUNTING THEORY: AN INSTITUTIONAL APPROACH BY ´ GAETAN BRETON Universit´e du Qu´ebec a` Montr´eal, Canada

United Kingdom – North America – Japan – India – Malaysia – China

Emerald Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2019 Copyright © 2019 Emerald Publishing Limited Reprints and permissions service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-78769-794-2 (Print) ISBN: 978-1-78769-793-5 (Online) ISBN: 978-1-78769-795-9 (Epub)

Table of Contents

Foreword

Chapter 1

xiii

Introduction

SECTION 1: THEORIES AND ACCOUNTING

1

5 7

Chapter 2

Theories and Schools of Thought

Chapter 3

The Traditional Vision of Accounting Theory

21

Chapter 4

Accounting in the Scientific Institution

43

Chapter 5

For a Definition of Accounting

65

Chapter 6

Accounting: the State and the Firm

97

SECTION 2: THEORIES OF ACCOUNTING

113

Chapter 7

Sociology of Accounting

115

Chapter 8

The Psychological Aspects of Accounting

133

Chapter 9

How Decisions are Made

153

Chapter 10 A Theory of Accounting

169

vi

Table of Contents

SECTION 3: “TESTING” THE THEORY

179

Chapter 11 Analyzing the Documents Accompanying Decisions

181

Chapter 12 Manipulating and Lying

201

Conclusion

215

References

219

Index

235

List of Figures

Chapter 3 Figure 3.1.

Schematization of Accounting Elements . . . . . . .

37

Presenting Accounting Information Through Faces The Linguistic Sign . . . . . . . . . . . . . . . . . . . . . . Characteristics of the Types of Languages . . . . . . Communication Scheme. . . . . . . . . . . . . . . . . . . Firm’s Networks . . . . . . . . . . . . . . . . . . . . . . . . The Network of Power Corporation of Canada Board’s Members . . . . . . . . . . . . . . . . . . . . . . .

69 70 72 77 88

Types of Legitimacy Related with the Sector . . . . Types of Legitimacy/Illegitimacy Related with the Public Sector . . . . . . . . . . . . . . . . . . . . . . . . . .

121

Simple Vision of the Conditioning Process . . . . . .

134

Chapter 10 Figure 10.1. Organization of the Society . . . . . . . . . . . . . . . .

174

Chapter 5 Figure 5.1. Figure 5.2. Figure 5.3. Figure 5.4. Figure 5.5. Figure 5.6. Chapter 7 Figure 7.1. Figure 7.2. Chapter 8 Figure 8.1.

Chapter 11 Figure 11.1. Figure 11.2. Figure 11.3. Figure 11.4. Figure 11.5.

Communication Scheme. . . . . . . . . . . . . . . . . . . Actantial Model . . . . . . . . . . . . . . . . . . . . . . . . Bremond’s Elementary Sequences . . . . . . . . . . . . Merck 2006, Cover of the Annual Report . . . . . . Image of a Satisfied Doctor After Having Changed the Life of One Patient . . . . . . . . . . . . . . . . . . .

89

122

185 188 191 194 198

viii

List of Figures

Chapter 12 Figure 12.1. Principles of Accounts Manipulation. . . . . . . . . . Figure 12.2. A Proposed Framework for Understanding the Practice of Accounts Manipulation . . . . . . . . . . .

202 203

List of Tables

Chapter 3 Table 3.1. Chapter 5 Table 5.1. Table 5.2.

Table 5.3.

Table 5.4. Chapter 6 Table 6.1. Table 6.2. Table 6.3. Table 6.4. Chapter 8 Table 8.1.

Table 8.2.

Profits Distributed in Dividends Previously to the Big Loss of 2008 . . . . . . . . . . . . . . . . . . . . . . . .

Linguistics of Accounting. . . . . . . . . . . . . . . . . . Grouping and Classification of the 296 Organizations Which Whom the Board Members Are Connected . . . . . . . . . . . . . . . . . . . . . . . . . The Nine Categories Grouped in Three Main Categories with a Comparison Between the Boards of 2007 and 2013 . . . . . . . . . . . . . . . . . . . . . . . Potential Resources Necessitated by Firms. . . . . .

Statement of the Qu´ebec’s Debt Since 1970 (millions $) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets of the Qu´ebec Government at March 31, 1997 by Competencies . . . . . . . . . . . . . . . . . . . . The Assets That Were Accounted for in 2005 . . . Accounting for the Deficits and the Debt Since the Accounting Reformation of 1997–1998 . . . . . . . .

Key Differences Between Small and Large Power Distance Societies. I: General Norm, Family, School, and Workplace . . . . . . . . . . . . . . . . . . . Key Differences Between Small and Large Power Distance Societies. II. Politics and Ideas . . . . . . .

38

73

90

90 91

107 108 109 110

45 146

x

List of Tables

Table 8.3. Chapter 11 Table 11.1. Table 11.2. Table 11.3. Table 11.4. Table 11.5.

Power Distance Index (PDI) Values for 50 Countries and 3 Regions . . . . . . . . . . . . . . . . . .

Arguments Found in an Annual Report . . . . . . . Initial State, Final State, and the Position at the End of the Year . . . . . . . . . . . . . . . . . . . . . . . . Application of the Semiotic Tools to the Story of Jamilla Colbert . . . . . . . . . . . . . . . . . . . . . . . . . Functions of Text Illustrations . . . . . . . . . . . . . . Application of the Semiotic Tools to the Story of Doctor Hess . . . . . . . . . . . . . . . . . . . . . . . . . . .

147

187 192 195 197 199

About the Author

Ga´etan Breton is author or co-author of over a dozen books, mostly essays, and over 30 academic articles. He graduated from the City University of London and is currently a Professor of Accounting at Universit´e du Qu´ebec a` Montr´eal. In the last 15 years he has concentrated his teaching at the graduate level and supervised many Masters and PhD students. He is also deeply invested in the life of his community, having served as treasurer and councilor for many not-for-profit organizations.

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Foreword

This book aims to break with tradition in many ways. Firstly, we want to submit the accounting activity to the standards established in the human sciences. Consequently, the standardization process will not be presented as a form of theorization and the books of standards will not be presented as accounting theories. Our attitude constitutes a major rupture with the traditional vision. This traditional vision based on an intense confusion leads to strange ways of presenting the research done since the 1960s. We want to discuss these research as products of the institution of accounting and as representing different aspects of the accounting theory. The body of research has some specific tendencies; for instance, the massive use of mathematics for two reasons: firstly, to establish a rupture with the traditional “research,” which was more practitioners’ discussions than “scientific” investigation, and secondly, to topple accounting research on the side of the “pure” sciences following the research in finance and economics. Economics occupies a particular place in the general picture of the academic disciplines. It is not really included among the human sciences and surely not among the natural sciences. Some people consider that it can be no science at all. Considering the crucial influence of economics on the development of accounting, we argue that the students in accounting have the right to be exposed to the discussion in its most actual state. To do so we adopt a postmodern position, which is in fact an attitude. The most important leitmotif we keep from this position is to doubt every dogma included in the traditional accounting theory handbooks. This doubt will lead to discussing the situations and the concepts leaving the students with the possibility of making their own choices. We want to enlighten their choices instead of indoctrinating it. Here comes the second position from our postmodern approach, which is to consider that there is no unique good answer to one question but many possible answers that are socially discriminated by whoever holds the power in the institutions. This book is addressed to accounting students at undergraduate and graduate levels. We refuse to imprison undergraduate students in a compulsive vision of learning, transforming them into machines only able to repeat infinite lists of details. Graham Stacey, head of research at Price Waterhouse London, told us once about the graduates in accounting: they are not educated, they are trained. At the end of their program they will be specialists of a profession in society but, in the actual state of the academic system, they may have never thought about their

xiv

Foreword

role in this society except for claiming their protected field of intervention; although for others they are furiously advocating the “free market.” In this spirit, the questions at the end of the chapters may be viewed more as discussion topics than questions with a specific answer. Obviously, they are related to the content of the chapters, but they may sometimes necessitate other readings to be answered properly, which means with an open state of mind. Although everyone studying accounting may be confronted with such questions or topics, graduate students may be more prone or able to provide more complete answers. Finally, as the students-readers will understand later, we take a constructivist point of view contrary to the implicit positivist one behind the classical accounting theory handbooks. We also start with the concept that any institution is a discursive object. Being discursive doesn’t imply that it does not exist for real, it is only another form of existence. These are the bases on which we build our accounting theory which is not made of standards and any pretentions about some supposed “laws” driving the markets.

Acknowledgments

We would like to thank particularly: Professor Richard J. Taffler, our thesis supervisor, who will recognize in this book many topics we have discussed. Wafa Ben Yedder, doctoral candidate, who helped format some versions of this text.

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Chapter 1

Introduction Postmodernism is firstly forced to apply its principles to itself. Then, as the theory of relativity cannot be absolutely relative, the main principle of postmodernism to relativize and doubt every statement can hardly produce a definition of itself that would be “definitive.” Therefore, this “school of thought” will have problems to express its identity which would be to form no school of thought. Seen like that, postmodernism seems to have caught the quintessence of the academic spirit. Deconstruction is the most important attitude in this current period, even without the task of reconstructing after: The postmodern condition of fragmentation and simulation makes coherence problematic. (Boje, 2001b, p. 5) Obviously, the idea and even the project of doubting everything are known at least since Descartes and Plato (Major, 2012). These authors had also a project of reconstructing the world after deconstruction. However, postmodernism can leave pieces on the floor of history as Picasso was leaving pieces of bodies disseminated in his paintings. The deconstructed text appears like the organization in the agency theory: a nexus of relations escaping to ordinary hierarchies and even to the basic rules of language; it is everywhere and nowhere at the same time and cannot anymore be physically localized and assigned to a specific source of power. This accounting theory handbook recognizes the discursive nature of accounting and therefore its ethereal character. This book aims to distinguish clearly the scientific and the standard-setting processes and apply the principles recognized in other social sciences as a basis to establish an accounting theory. In consequence we have to remember that the social activity comes before the theory and not the contrary. Then, we will discuss the possible basic constituents of the theory of accounting. Such constituents must be derived through considering accounting as an object of knowledge and then studying it in interaction with other objects. We will consider accounting as an institution, implying the presence of participants and objects. Some of these are accountants, shareholders, users of accounting numbers, passive receivers of accounting reports, governments, governmental agencies, and also reports, books (both textbooks and registers kept in A Postmodern Accounting Theory, 1–4 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78769-793-520181001

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A Postmodern Accounting Theory

organizations), annual reports, etc. These peoples and objects are evolving within the boundaries established by the surrounding society. Therefore, as any social object, accounting must firstly be studied from a sociological point of view. When accounting reports are requested, people in the organization may be tempted to use it as an instrument to produce some impressions. Therefore, there is a psychological effect of accounting reports on those preparing and receiving them. Moreover, these reports are said to be input in the decision-making process. But, there is never any explanation on how decisions are made and on the kind of accounting information able to support this process. In this book, we will consider both aspects. How accounting reports can modify the behavior of those preparing it or part of it, and the effects of the reports on those receiving it. This latter part includes a study of the state of the knowledge about the decisionmaking process. Then, we will study the communicational aspect of accounting reports. We will compare the methods available to study written productions and see what we can say of accounting reports as communication devices. In most accounting theory books, the usefulness of an accounting report is taken for granted and the informational quality of the reports is presented as a function of its length. That was also often the case in accounting research. The disclosure had been measured from the space occupied in the annual report, noticeably for social and environmental disclosure. The communicational aspect of accounting is a part of its psychological aspect considering how the financial statements are constructed to produce specific effects on the receivers. Traditional accounting theory handbooks have problems with the treatment of research. The reason is dual. Firstly, the obsession of trying to include the standard-setting activity in the accounting theory places them in an awkward situation toward research. The most recent books on accounting theory do not correct this problem; they add the researches along the standard-setting as if it was two aspects of the same process. As in any other discipline, the research is supposed to build a constantly evolving theory; which is greatly incompatible with including the standardization process and keeping the traditional financial statements as the canvas on which the accounting information is always conceived. Even Scott (2003) ignores what to do with accounting research. A book about accounting theory must inevitably draw on accounting research, much of which is contained in academic journals. There are two complementary ways that we can view the role of research. The first is to consider its effects on accounting practice. (…) The essence of this approach is that investors should be supplied with information to help them make good investment decisions (…). Yet, this increase in disclosure did not “just happen.” It (…) is based on fundamental research into the theory of investor decisionmaking and the theory of capital markets, which have guided the accountant in what information is useful (…).

Introduction

3

Independently of whether it affects current practice, however, there is a second important view of the role of research. This is to improve our understanding of the accounting environment (…). (Scott, 2003, pp. 6–7) Scott talks about the role of research, although placing research in a corner. The role of research in accounting theory is the same as in sociology or psychology – to elaborate theories explaining and predicting “reality.” Scott’s position constitutes an acceptation of all that had been called accounting theory in the past. Then he uses as an example the research on capital markets that had been derived from the basic conceptions of economics. Finally, he invokes researches about “conflicts” and proposes the discussions around the agency model to illustrate that. These are the two focal lines in Scott’s book, the adverse selection, which might be an effect of a poor provision of information and the moral hazard, which is reputed to come from an asymmetry of information. This vision gives accounting a crucial and traditional role as both the major problems identified are informational in nature. Accounting has remained surprisingly stable across times. A reading of the book by Pacioli (1494) shows that little has changed for centuries. The complexification of business financing and structuring had increased the length of the notes but had little fundamental effects on the structure of the financial statements. For instance, the fundamental assets of the new economy are still ignored in large part by the accounting reports in the name of the difficulty to measure it. In consequence, our book will be totally different from its predecessors although we are far from considering it as definitive. We will start by discussing the concepts of theory and school of thought. Previous books, symptomatically, take one of two options: they may take these notions for granted or propose many explanations while proposing no real conclusion. Here, we will clearly take some positions and go forward based on it. After having clarified these concepts we will analyze, although quite rapidly, the preceding accounting theory handbooks, mainly to determine the limits of their conception of a theory. In a postmodern spirit, we will also clarify and criticize their epistemological position. Then, after having established what is a theory and looking at the definitions provided by our predecessor, we will define the second term of our main title: accounting. Accounting is strangely seldom defined in accounting theory books. We will provide a definition that will allow us to go further in associating both terms: theory and accounting. Then, we will look at the main environment of accounting – the firm – and this will lead us to the real principal environment of the accounting activity and of the firm itself, the State and the Society. From that, we may be able to propose a first aspect of the accounting theory. This aspect will be sociological. Then, we will explore the psychological aspect including all the decisional aspects related to the use of accounting reports or accounting information. At this point, we may try to put together the pieces of what will be an accounting theory.

4

A Postmodern Accounting Theory

The following section inventories the methods to be used in analyzing accounting documents including an analysis of the manipulations and the distortions, voluntary or not, affecting the quality of the information. The behavior of the producers of this “information” and the attitudes of the “users” are part of the theory.

SECTION 1: THEORIES AND ACCOUNTING

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Chapter 2

Theories and Schools of Thought The accounting literature do not define clearly the concept of theory. For a long time accountants have considered that the book of standards constituted the theory of accounting. Then they have made distinctions between the standard itself and some principles that are reputed to be behind the choices of the standard-settlers: relevance, reliability, verifiability, etc. A theory is a systematic statement of the rules or principles which underlie or govern a set of phenomena. A theory may be viewed as a framework permitting the organization of ideas, the explanation of phenomena, and the prediction of future behaviour. Accounting theory is that branch of accounting which consists of the systematic statement of principles and methodology, as distinct from practice. Thus, the rule of conservatism belongs to the subject of accounting theory; the practice of providing for future losses from current doubtful receivables, being a question of practice, does not. (Most, 1982, p. 55) The first section is widely accepted outside the accounting domain. A theory explains and predicts is a sentence we can find in many books, for instance Gay and Diebl (1992). The next section does not flow from the first part. Conservatism is a choice, not a rule explaining or predicting. However, conservatism is an interesting phenomenon to be studied as an object by an accounting science. In the US, there had been a lot of discussion around the conceptual framework, which can be considered a good thing as long as we understand that it is not theoretical or even conceptual. In fact, the framework would be better called political. The Trueblood Committee made plenty of consultations about the objectives of the financial statements (Belkaoui, 1992). We can notice that the process of creating a Committee and sending it on the road to consult different groups or persons is more like a political approach than a scientific one. Their report concluded that: The basic objective of financial statements is to provide information on which to base economic decisions. (Belkaoui, 1992, p. 183) A Postmodern Accounting Theory, 7–19 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78769-793-520181002

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A Postmodern Accounting Theory

But, this is done without any real investigation or integration of any research on the decision-making process. They must also provide a list of the users. We have the habitual list ending by the government and the society. Nobody ever asked what might be the information needs of those groups. If we read the introduction of the International Financial Reporting Standards (IFRS), we will see that they settle the question saying that the economic aspect being the most important also for the society what satisfies the investors’ needs will be enough for the other users. Although all the needs for information of these users cannot be satisfied by financial statements, there are needs that are common to all users. As the investors are suppliers of risky capital to the entity, the provision of financial statements responding to their needs will satisfy equally to most needs of other users susceptible to be satisfied by financial statements. (IASB, 2006, p. 37) (Our translation) Therefore the decision has been taken. The information needs of other groups have to align with those of the investors as they are providing the risky capital and that is clearly the most important element. Nobody asked what the other groups were bringing. A reading of Hill and Jones (1992) may have changed their vision. There is not only money invested in a firm and, among money, there is not only direct money. The society has invested education, health of people (workers), and many public infrastructures (Sen, 2003) constituting indirect investment. The need of the government for information to assess the extent to which the firm has fulfilled its mandate cannot be subsidiaried to the information given to the shareholders. We see already that it will be a long fight between public versus private interests. The standards being done mostly by some private institution, although on the behalf of the public authority over professions, incorporate uniquely private investments in money and private needs of information. Governments have the power to require this information. Any social institution - and business is no exception - operates in society via a social contract, expressed or implied, whereby its survival and growth are based on: (1) the delivery of some socially desirable ends to society in general, and (2) the distribution of economic, social, political benefits to groups from which it derives its power. (Shocker & Sethi, 1973, p. 97) The firm is a social institution. This important role must be controlled, which is, a primordial function of accounting. If the institution is not fulfilling its mandate, it may be revoked. In a dynamic society, neither the sources of institutional power nor the needs for its services are permanent. Therefore an institution

Theories and Schools of Thought

9

must constantly meet the twin tests of legitimacy and relevance by demonstrating that society requires its services and that the groups benefiting from its rewards have society’s approval. (Shocker & Sethi, 1973, p. 97) Thus, accounting standard-setters can hardly consider as accessory the needs of groups of stakeholders. Their main reason may be that social choices are driven by the economic world dominated by the firms and the “businessmen” who are financing the electoral process and therefore controlling the politicians. Are accounting standards nothing more than political compromises in a complex arena of organized capital and labor, the government and the accounting profession? (Chua, 1986, p. 624) Science and Politics We have to make a first distinction between a scientific and a political process. A theory, even when issuing “laws” resulting from systematic observations, tries to explain and predict from the developed knowledge of the object, what will be its behavior. A standard is a choice made by people, therefore a political choice in its most fundamental meaning, trying to prescribe the behavior not to predict it. Obviously, when distorting the meanings of the concepts, one can pretend to predict a given behavior as it is prescribed, as we can predict that somebody will stop at the red light (maybe), not from an observation of the natural behavior of the subjects, but from the knowledge of the convention. In accounting, the confusion between those two processes is constant.

The question is why transform standards into theoretical statements? The social popularity of sciences (hard) and the will to present the accounting system as producing neutral value-free reports explain these attempts to classify accounting, through its use of numbers, among the scientific activities. Accounting information is particularly useful for legitimization activities because they appear to possess a neutral technical rationality. Numbers are often perceived as being more precise and “scientific” than qualitative evidence. (Chua, 1986, p. 617) Another direction to understand the phenomenon comes from an institutional analysis of accounting. Briefly, before the 1960s, accounting was a technical topic. It had not yet entered into the university. If we look at it 50 years after, we see that the accounting departments are often behind the rest of the business schools in terms of the diploma of the professors, for instance, and in term of the control exerted by the professional bodies. To completely enter into the university,

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A Postmodern Accounting Theory

accounting professors may increase their level of diploma to the university standards and increase their research financing, but they may also find a way to pretend that what they are teaching is a science and not a “mere” technic, as well as any other department around. University professors occupy a median position in the social system as owners of a capital, but only some of them are included in the dominating class, always as consultants. The professors of accounting are also in a median position in the academic world as they are not teaching hard sciences but are viewed as teaching something “more serious” than arts. In term of “capacities”, which position in the social space depend principally on the possession of cultural capital, a dominated specie of capital, university professors are situated mostly on the dominated side of the power field and are directly opposed on this to the directors of industry and commerce. But, as owners of an institutionalized form of cultural capital, providing them with a bureaucratic career and regular revenues, they are opposed to writers and artists, occupying a position temporally dominant in the field of cultural production, they are distinguishing themselves at different degrees following the faculties, from the tenants of the least institutionalized and the most heretics of this field (…). (Bourdieu, 1984, p. 55) (Our translation) Bourdieu concludes that university professors rank below businessmen of all kinds as they don’t have the prestige of money and the power going alongside. Normally, university professors would not have been businessmen if they had not taken the professorship. But, professors of accounting feel they have renounced a “successful” career in the world of business and finance. This success would be obviously measured in money. Therefore they feel devaluated. Moreover, because they do not have the same level of diploma than the rest of the institution, they feel despised (often they are) in the university even if they have sacrificed a wonderful, glorious, and lucrative career to be there. The transformation of their books of recipes into theory handbooks is a way to increase their statute in this ungrateful institution that is the university. However, as underlined by Bourdieu, there are in the university people that are more devaluated because of their discipline if not of their diplomas. In our societies, the distinction between political and scientific creates a problem: the sciences having reached such a level of recognition while the political process is totally despised. Therefore, everyone wants to identify himself with science rather than politics. But, by itself, a society cannot exist without a political process, which is a system for making collective choices and decisions. However, the political process is seen as one prone to be turned at the benefit of private interests, which is easily exemplified, but does not eliminate the necessity of a political structure whatever its form. As in other human sciences, the perceived weakness of accounting knowledge is compensated by some attempts to present it as a pure science. The first of these attempts is the most natural connection for accounting, i.e., economics.

Theories and Schools of Thought

11

Accounting will then assume the contradictions of the economic world theorizing together the existence of markets as well as their absence.

2.1 “Economics” as a Science This primacy given to the decision of the investors constitutes a new understanding of the traditional theory. If the market constitutes and unconscious principle of organization, decentralized and automatically regulated, the firm is, to the contrary, a voluntarist organization centralized and planned in an authoritative manner. (Gabri´e & Jacquier, 1994, p. 35) (Our translation) and In other words, to the limit, the firm as a social organization has no reason to exist in the neo-classical theory where it is reduced to an invisible entity that can be assimilated to an individual in its productive function. All is happening as if no elementary unit would be allowed to contain more than one individual, as if the prices constitute an efficient system of transmission of information and all transactions must be done on a market. This is the necessary condition for the realization of a general optimum. (Gabri´e & Jacquier, 1994, p. 35) (Our translation) In such a system, there can be no distinction between the owner and the workers, and as the information is total and the working contracts renegotiated all the time, there is no provision of information organized. The prices, under no control, are the only information useful for everybody in the system. Strangely, most accountants believe that this pure market organization is the one prevailing in our societies. In such an environment, the accounting theory would state that accounting is totally unnecessary and must disappear as nobody would spend a cent for it, understanding that the production comes from a constantly renewed contract between parties that are cooperating to increase the output (Alchian & Demsetz, 1972). The production system, in the classical theory, has no mention of authority and hierarchy as everything is made by contract; this notion will enter slowly in the system with the apparition of the firm to replace the continual contracting system (that has never existed in practice). Starting with the role of organizing the work for creating a “plus-value” that would be his remuneration, the entrepreneur becomes the master from his property rights. From a system where “the work can be said to hire the capital as well as the contrary” we fell into a system where all the power is conferred to the entrepreneur because he possesses the financial capital. The agency theory is a good illustration of this new understanding of the question based on the idea that the appointed managers have different interests than the owners (Hill & Jones, 1992) and that these interests are illegitimate by

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A Postmodern Accounting Theory

virtue of the private property “theory.” In this system of relationships, accounting becomes a guard dog servicing the owners. Despite that, we live on the fiction of a fair distribution of the power (Hunt & Hogler, 1990) in our societies through the democratic system. When the absolute right of the capital on the firm is admitted, there is no obstacle to the separation of the “entrepreneur” and of the control, which is the managerial firm. In such a firm the accounting function becomes very important for many reasons. Firstly, many owners are not in the firm and need the information that is provided by the financial accounting system. Secondly, even those being near the firm are not necessarily provided the frequent reports produced by the management accounting system. Therefore they also need some version of the financial accounting reports. Accounting is, like the firm, a market failure; a replacement of the market system that is said not to function efficiently. If Williamson (1964) explained the raise of the firm structure by the transaction costs with the automatization of most production plants and the apparition of communication systems able to connect directly the provider of services with the customers, the negotiation of every commercial act is made more possible than ever in the history. In such an environment, accounting has to also pretend to be highly technological. Therefore, as a university discipline, accounting will try to be associated with the disciplines generally recognized as scientific in the society. In this case, after economics, it will be the mathematics.

2.2 Some Considerations About Mathematics and Sciences Mathematics is a strong help in associating accounting and science. Popper (1991) pretends that the goal of the science is the truth. Mathematics is presented as the truth. The example we find very often is two and two are four. One of the most common jokes about accountants is the client asking how much two and two are while the accountant answering what do you want it to be? The science is the truth (what is a strong belief in our societies) and accounting can soften this truth. “The days when a company’s accounts were simply a record of its trading performance are long dead” (Griffiths, 1986, p. 2). Over the implicit reference to an “ˆage d’or” where things were what they are supposed to be, this statement consecrates a departure of the accounting from the world of precision and rigor, associated with sciences, to fall into the world of “propaganda” (Griffiths, 1986, p. 2). Consequently, we may think firstly a little about the “nature” of the science and the mathematics. This idea that numbers tell the truth is related with two aspects of the question. The first is about the religious vision we have of mathematics and science. We believe that science says the truth; but the “truth” is not a scientific category, it is a religious one. The truth is revealed forever and keeps its form through time. We can consider that if any science would have reached the truth, there would have been nothing to search for anymore in this field and it would have terminated there. If, despite their great progress, the sciences are still in movement, it is because the possibilities to find better solutions remain open.

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Popper (1991) even uses the term “truth” very often, revealing that his philosophical origins replaces it by the concept of verisimilitude. Therefore, he describes his assessment of theories in terms of “assessment of the state of the critical discussion concerning them.” Then, the science leaves the field of the truth and sterile dichotomies to become an always unfinished process tending toward the “truth,” looking more acceptable to us. Later in the same book, he produces another definition: I propose to say that the goal of science is to discover satisfactory explanations for all what is surprising us and seems to necessitate an explanation. (Popper, 1991, p. 297) (Our translation) But, “natural” sciences, in the societies, have gained such an aura and mathematics has gained so much prestige because, as a closed system, it produces always one and only one answer to a specific operation. Mathematics is not a science in the sense that there are no numbers in nature, although we can apply numbers to objects in nature. Mathematics constitute a kind of system of language elaborated by humans to help understanding the world. As long as we stay inside the system, everything works well. If we try to confront the system with the external world, the nice construction starts to collapse. Such confrontation is called statistics. One apple plus one apple are two apples. But try to give them to two children and you soon will be confronted with the limits of the mathematics because one is half the size of the other or one doesn’t have the same bright red color. As long as you work with virtual apples, mathematics functions perfectly well. We have then entered in a new aspect that is covered by ethnostatistics. Statistics, (…), are a scheme of rationality, a scheme that orders elements of reality. The goal of statistics is to classify elements into categories of similarity. Through statistics, researchers thus seek to uncover, or perhaps create, order from disorder. (…). Its goal is to minimize the risk in decision making by reforming or eliminating those elements that cannot be safely and easily categorized into similarities. (Carlon, Downs, & Wert-Gray, 2006, p. 477) This statistical representation system can become, under its exacerbated form, detached from its referent and then floating in hyperreality (Baudrillard, 1981) or falling into fetishism (Carlon et al., 2006). This primacy of statistical procedures over what it is trying to count appears noticeably when we are considering the measures of conformity used by the statistics, elimination of extreme values, etc. Therefore, if one considers the people behind the numbers, those who do not enter the mold are eliminated as they disturb the counting process. However, we may ask, after that, which society is described by those statistics: a society made conformed by profiling and eliminating the disturbing elements?

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Hyperreality Hyperreality is defined by Baudrillard (1981) as a detachment of the sign from the referent. For example, we may use the market value of a firm. We have often seen such value move up and down while no changes appearing in the actual life of the firm. But, every evening the news anchor will report the movements of the stock markets for the day. Therefore the representation, the stock price, has replaced the reality of the firm and become a substituted reality. In the same way, when the money is traded by itself, its relationship with the strength of the economy is obliterated and its value becomes independent.

The social vision of the science is reflected in the words we use to build classifications. For instance, we distinguish the pure sciences: this label implies that the others are impure. We also term these as natural. In fact, “natural” here is opposed to “human.” The human has transformed himself and is no more pure or natural. This opposition is to be read on the same lines than natural versus cultural. These distinctions are made along a spectrum expressing the level of precision which is often attributed to the use of mathematics. But, this distinction is also made along this constantly moving frontier between nature and culture. Our understanding of animal behavior changes. A century ago, the animal was pure instinct and the human owned the reason. But now, we know that animals have cultural habits and the distinction is becoming less clear. The human was on the bright side of the frontier and philosophy was at the top of the ranking. Now, it is the contrary. Natural sciences are “natural” because their object has not yet been “denatured” by human touch. In brief, humankind cannot see itself as a living form among living forms in a series of intricate ecosystems. Humankind still sees itself as the center of the universe and to express its position it calls the rest: environment. Consequently, the “impure,” “unnatural,” “soft” thus human sciences will be tempted to include mathematics to look like some “real,” “serious,” “apt to produce social recognition” sciences. The semiotics follows a similar path when transferring the notion from the linguistic to discourse analysis. The linguistic, since Saussure 1909 (Saussure, 1995), had been the leader of “human sciences” in terms of recognition and appearance of scientificity. For instance, biology is considered as a natural science. For one, the education system classifies it on this side of the dichotomy. Then, like other disciplines, biology has developed in many directions. Researchers are now studying the behavior of animals. The knowledge that had been developed on these questions is classified among the natural sciences, i.e., hard and serious knowledge. During this time, the study of human behavior is classified as a human science and considered less strong, less serious, and less scientific in the social representations. Why then classify differently psychology applied to human or animal? Animal is a very large category and scientifically, humans are animals. Therefore it is the strength of the old vision of the world where the human is the center that has

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influenced even the scientists when making their classifications. This vision is also present in the word environment. When we use the word environment, we place the human being at the center and the rest around him, to be used by him. Would it not be better to classify the human being as an element of some subecosystems that are part of a “total” ecosystem of which the frontiers are not known yet? This concept of social representation is the object of a series of studies forming a scientific field with its paradigms and theories.

2.3 The Social Representations Researchers in social representations have a tendency to oppose a systemic construction in the mind (van Bavel & Licata, 2002) to the world of experience (Habermas, 1973), corresponding to a dichotomy between science and common sense (Bangerter, 1995; van Bavel & Licata, 2002). This line of fracture will also be encountered in the debate between academics and practitioners. The sciences, considered inferior a century ago, are now at the top of the productions of the mind. The old opposition between the spiritual and the temporal is at work here. When the dominant people in the society were proud of not working and would never have been seen doing something useful, the “spirit” was ranked far over the industry. Religion sustained the same discourse. This precedence given to the spirit (religion) over the physical world has structured our ways of thinking for centuries. To give the precedence to the natural sciences means that we privilege the observation over the spiritual production per se. This discussion is at the very center of the Critique de la raison pure by Kant (1980). He sustains positions that would classify him among the socioconstructivists of his time. Effectively, experience itself is a mode of knowledge necessitating a comprehension which I must presupposed the rule in myself before the object are proposed to me, consequently a priori; and this rule is expressed in a priori, on which all the objects of the experience must necessarily be ruled and with which they must coordinate. Concerning the objects in their conception completely coming from the mind, and that in a necessary fashion, but without being able to be given in the experience (at least how the reason think it), the attempts to think it (as they must be thought) will exemplified excellently what we admit as a change of method in the way of thinking: it is that we know a priori of the things only what we put in it ourselves. (Kant, 1980, pp. 46–47) (Our translation) This statement is not far from what has been written by the Groupe m (1992). If our perception can isolate some redundant elements in the mass of sensorial information, it is obviously in function of practical objectives: these invariants are a guide for the action of the subject. The properties of the object thus become factors of decision.

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A Postmodern Accounting Theory In summary, we can repeat the phrase of Maurice Reuchlin, for who “the perceived object is a construction, an ensemble of information selected and structured in function of the previous experience, the needs, the intentions or the organism actively implied in a specific situation”. (Groupe m, 1992, p. 80) (Our translation)

Today, making money is everything and “thinking for thinking” is quite secondary. Therefore we live in a period of economic obsession, not of philosophical reflection. Our image of a genius is like in Good Will Hunting or the Figures of the Shadow; people able to fill boards with successions of mathematical formulae having absolutely no meaning for us, but able to change the lives of the people. However, Kant can be used quite more dangerously. He brought the distinction “analytic–synthetic” posing that analytic statements are true or false “simply in virtue of their meaning” (Godfrey-Smith, 2003, p. 25), i.e., a priori. Here is one crucial piece of work the logical positivists saw for it: they claimed that all of mathematics and logic is analytic. (GodfreySmith, 2003, p. 26) For the researchers in the social representations field, economics is characterized by a specific relationship between the corpus of “scientific” knowledge and the casual experience. In the natural sciences, the knowledge about reality is in harmony with the experience of the reality, fulfilling that way the Hegelian criteria of validity (Markova, 1982). This is not necessary the case in economy, where the knowledge of economy does not necessarily correspond to the experience of the economy. The expert economic knowledge seems more anchored in a mathematic representation of the economy, that can be validated or not by the economic experience. (Ormerod, 1994) (van Bavel & Licata, 2002, p. 83) (Our translation) Moreover, the introduction of a metaphorical discourse (McCloskey, 1985) increases the distance between the “economic science” and the experience. The economists continue to discuss their metaphors as if they were discussing reality, without being conscious of the fact that they are referring to representations of the reality instead of the reality itself. Their mathematical representation, behind their economic knowledge, shows how much the economic language is saturated by the metaphors. (McCloskey, 1985) (van Bavel & Licata, 2002, p. 84) (Our translation) This mathematical-oriented vision leads to a conception of the economy assimilated to a system. That is another example of the effect of the structuralism

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and the prestige of the mathematical system. This systemic conception implies the “capacity to act by itself” producing a “dynamic and mobile system having its own life.” As opposed to the “all for the reason,” we have now the “all for the observation.” However, common sense cannot be anymore the criteria of validation as van Bavel and Licata (2002) were proposing, as science has developed new means of investigation that our senses cannot duplicate. That would be the position of the Groupe m. Those days, empiricism was everywhere and “researchers” produced ideological texts believing it to be scientific. In this context, science must be understood as the direct expression, unbiased by the observer, of what exists in the “real” world. This unobtrusive observation seems unfortunately to be more and more guaranteed by the use of statistics, extracting the essential (recurrent) and eliminating the accidental. This way of thinking would allow to pick the essential rules of functioning, the “laws,” even in human sciences. Unfortunately, this is impossible. As Kant was saying, what we see is what we firstly put in. Commentators refer all the time to the “market laws.” One of these immutable laws is the offer and demand. This law contains an equilibrium price. In certainty it may be a correct description of the functioning of the system. But certainty doesn’t exist. Consequently, what economists continue to call the “law” of offer and demand is broken. The use of the word “laws” is not benign in the measure where the natural sciences apply it to basic and recurrent functioning observed in nature. A law, in natural sciences, is absolute and will always be exact. Using the expression “market laws” makes the market appear as natural, functioning out of human influence. This system opposes the “rationality” of nature with its immutable laws of functioning to the disorganization characteristic of human societies. This rationality, in the sense of Weber (1995), is a normal transformation of the social structures and also an instrument of domination (Marcuse, 1964).

2.4 The Businessman as the New Leading Social Figure The best aristocrat was ignorant (often illiterate) and unoccupied. With the coming of the bourgeoisie at the top of the social structure, working has become very important, and people who were not working were poor, despised precisely for that, or filthy rich and above any social conventions. Even the aristocrats started to become managers of their wealth, to increase it and stop the spoiling as the new conception of the society implied. The businessman became the hero of the new society based on the liberty for all and this liberty being based on the property rights as was the right to vote. The entrepreneur succeeds because he developed and proved some qualities in exerting the entrepreneurial power. In other words, the proof of the ability to manage is justified by the existence of the enterprise, by its performances. From a liberal point of view, the entrepreneurial force allows a selection of the best as those exerting the power are forcibly those being more successful which they have

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A Postmodern Accounting Theory proved through their results. Conversely, those who are governed are assured that the one that is governing them manifests some capacities and talents that they does not possess themselves and that the entrepreneur has given definitive proof by creating an enterprise and providing with some work or products. In that way, the justification of the power of directing of the entrepreneur is not contradictory with the modern liberty. It allows the introduction of a common order in the potential disorder from the indifference of the individual all free and equal. For the liberal man, the entrepreneur is then the reasonably acceptable master, and even, reasonably desirable. (Gomez & Korine, 2009, pp. 38–39) (Our translation)

This importance given to the entrepreneur and the businessman is to be observed in practice in the pressures made over the governments to conduct the common affairs from the examples given by the business world. Now the stateowned enterprises must do profits even if it has no meaning in their situation. Moreover, a candidate will be elected because, as a businessman, he knows how to conduct businesses and, by association, public affairs.

2.5 Summary At this point, we have a social understanding characterized by a belief that natural sciences are finding the truth while human sciences produce more or less mere opinions. It is also believed that the mathematics are totally truthful and brings scientificity where appearing, although a lot of people entertain a strong lack of confidence for statistics which are reputed to say anything they wanted. Accounting, for a casual observer, is made of numbers, so it is to be classified as mathematics. If accounting is mathematics because it uses numbers, sociology is literature because it uses words. But, this misunderstood usage of numbers provides a statute to accounting and can be transformed into an asset. There is a constant fight in the society to be well positioned in the popular imagery. These representations are evolving through time and can even be completely reversed over a certain period. Accounting is competing in this arena and uses its advantages at the best for the accounting institution, producing the components of its social statute which exists completely in the vision of the people. In this chapter, we made necessary distinctions about some main concepts used in epistemology of sciences. This establishing of the basis leads to an institutional analysis. We describe the positions of different groups in the scientific institutional system. This prominence is related with the precision and the supposed “truthiness” of the knowledge produced by the different categories of disciplines. Mathematics, only a convenient code, plays a crucial role in the acceptation of disciplines into the dominant group of the exact sciences. As a discipline, accounting fights to appear among the dominant group. Then we discussed the characteristics of the social representations leading to the actual dominant

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classification of the knowledge. Doing that, we find that the businessman is actually a dominant figure in the collective imaginary. As accounting is done mainly in enterprises and is made of numbers like mathematics, this association may be a royal way for social recognition.

Questions 1. Provide a definition of a theory. 2. Distinguish between a theory and a standard. 3. Is the definition of a theory, provided by Most, appropriate? Propose some arguments to support your answer. 4. Why the conceptual framework cannot be a theory? 5. How would you describe the presence of the political aspect in the accounting standard-setting process? 6. What is a social institution? 7. Which elements constitute the accounting institution? 8. Gabri´e and Jacquier argue about some fundamental contradictions between the market and the firm. Comment. 9. Comment the statement proposing that information able to satisfy the investors will automatically satisfy most other needs expressed by other stakeholders a. What is a stakeholder? b. Why the investor-shareholder would be considered the most important of them? c. Who is the principal of the entrepreneur considered in his role of agent? 10. Is the use of numbers enough to classify accounting as a mathematical discipline? 11. Are sciences telling the truth? 12. Kant proposed a distinction between analytical and synthetic statements. What did he mean? 13. Is mathematics a science as physics or chemistry? 14. Is economics a science? 15. What is an analysis following the institutional theory and why is it relevant in the case of “accounting”?

Themes to Be Developed Further How would you describe the position of accounting among all the other disciplines taught at the university today and consequently the position occupied by accounting professors?

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Chapter 3

The Traditional Vision of Accounting Theory In this chapter we will exemplify the definitions of the theory provided by the traditional accounting theory handbooks and confront them with the definitions given in the preceding chapter. Then, we will consider the usage of the concept of normative theory in accounting as it is the spearhead for the inclusion of standard-setting as a theory.

3.1 Wolk, Francis, and Tearney Wolk, Francis, and Tearney (1992), conscious of the meaning emanating from accounting research, propose a somewhat “between two chairs” definition. But, even though the phrase accounting theory has been used for many years, it has no standard definition. The term is used in this text in a very broad sense. It includes concepts, such as realisation and objectivity that have evolved in response to practical needs; models for valuation methods and other types of accounting alternatives, such as purchase and pooling; and hypothesis and theories based on a more formalized method of investigation and analysis of subject matter used in other academic disciplines such as philosophy, mathematics and statistics. (Wolk et al., 1992, p. 6) Firstly, we have the old notion of accounting theory full of ideas, needs, political decisions, etc. Secondly, the new way of seeing accounting theory emanating from the research is referred to. We have to remember here that the research revolution in accounting dated from the 1960s, with Beaver (1966), Brown and Ball (1967), Foster (1986), etc. This had been continued in the 1970s with Jensen and Meckling (1996) and Watts and Zimmerman (1986). Consequently, in 1992, the discussion is well advanced and had reached other levels. Wolk et al. accept, from the tip of the lips, to consider the new way of defining a theory if they can bring their old stock in it. In the 1990s, their vision is totally outdated. Moreover, they dare to say that accounting theory has no standard definition. It is to admit that they have no clear conception of their topic. Doing that, they are pretending that accounting theory is totally particular and can

A Postmodern Accounting Theory, 21–42 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78769-793-520181003

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escape to the specification of theories in general. This confusion is maintained through their citation of Larson (1969). First, there is a conceptual category of problems involving the isolation and precise definition of the properties that will be measured. Second, there is a separate category of methodological problems involving the determination of appropriate measurement procedures to be employed in assigning numbers to represent these properties. Evaluating the explanatory significance of the numbers which ensue for any measurement process depends on having resolved the problems of both categories… if the two types of problems are confused with each other and treated as being essentially one; it is likely that one or the other of the problem area will go generally unresolved. (Larson, 1969, in Wolk et al., 1992, p. 9) That would probably be relevant in a case of research. But there is no research in their vision of accounting, so the question of the measurement cannot be posed that way. Larson is talking about an observable phenomenon that is to be measured. However, profit is not an observable phenomenon outside of the measure. In this case the measure creates the object. Although putatively a measurement of wealth and profit, accounting practice is in fact a calculational activity and the results of those calculations have no empirical referents. (…) The most serious problem is that accounting practice numerals are meaningless in the logical positivist sense of not being either analytical or verifiable, in the pragmatist sense of not being decision-useful, and in the operationalist sense of not being operationally defined. (Lee, 2006, p. 444). Objectively nobody can say which object is measured, as the object, and the measures are perfectly confounded. Profit is the measure as well as the object measured.

The rest of their discussion of the measurement is pure wandering. For instance, objectivity is presented as the first quality of the measurement defined as: (…) the degree of consensus among measurers in situations where a given group of measurers having similar instruments and constraints measure the same attribute of a given object. (Wolk et al., 1992, p. 11)

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So, if you take people having studied in the same books, having received the same diploma, the same training, and the same conception of the world, and you ask them to measure the same “thing” with the same tape, they may arrive at the same result. However, this is not objectivity, this is conditioning. Then, a syllogism is not a theory; it is a way of reasoning logically. The premises of a syllogism are obtained through observation. The example they provide: a horse has four legs, is the result of observation; as well as for the second premise, John has two legs. A premise in this sense is not an assumption although it can be debatable. However, what is certain is that the categories: debit and credit, are neither premises nor assumptions; they are part of the jargon developed around the activity. Moreover, it would be better not to confound the hypotheses posed before the theory and those coming after to be tested in the deductive process. This latter group of hypotheses, in the best of case derived from the theories, forms the essence of accounting research. In summary, they try again to introduce their traditional categories into the scientific process and it does not work. Their chapter is devoted to show that the so-called “research” is not that clean of value judgment and finally that “normative” theories have nothing to envy to the “positive” ones. Their chosen example is the following so-called research question: Why has the accounting profession been cursed with a strong authoritative bias – resulting in the establishment of professional bodies such as FASB to rule on “generally accepted accounting techniques”? (Wolk et al., 1992, p. 33) He took this “example” in Christensen. We have never seen, and less accepted from a graduate student, a research question having this form. That is probably why they are forced to borrow their example instead of taking one they have encountered themselves. Taking a far-fetched, even made-up example to discredit the other side is a well-known argumentative technic. They add, to close the point, another argumentative technic, which is the authoritative reference (Ben Yedder & Breton, 2017). Sterling (1990) is also very forceful about the point that you cannot study discipline by studying the behaviour of those who practice the discipline. Hence, Sterling sees positive research being concerned with the sociology of accounting rather than with the mainstream focus on income determination and wealth measurement. (Wolk et al., 1992, p. 33) Therefore, we must not study society through the behavior of people in that society and psychology through the behavior of people individually. Doing that, these disciplines may pass away from the essential, which is, in accounting, income determination and wealth measurement [sic].

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A Detour Through Positivism The first thing that must be clearly stated in science is the relationship the researcher (the subject of the research) pretends to have with the studied object. This relationship can have three main aspects: (1) the subject can know the object without interference, the essential part of the research in accounting follows that principle, knowingly or not; (2) the subject is investing himself in the knowledge process, so the results are a point of view on the object; (3) “reality” is a construction. Obviously, this question has no three mere answers but a multitude of degrees on a spectrum where the three propositions occupy both ends and let’s say the center. These questions are treated by the philosophy of sciences. This is the position claimed by Comte (1998) presenting firstly positivism as a philosophy. This philosophy then is transformed into a political system. That is where Comte cannot escape from the temptation of the “normative” side resented by anyone having studied a question extensively. However, Comte (1798–1857) arrives in the period between the French Revolution and the real industrial revolution (he wrote his main texts between 1830 and 1842). He was very much influenced by the new science that will produce the machines so important in the industrial revolution. Therefore, he wanted to escape the theological discourse and find the “laws” governing the evolution of the societies. By naming these tendencies “laws,” he referred to the natural sciences and established a pretention to “bring” human sciences to the level of “objectivity” and precision of these sciences.

Objectivity is highly supported in modern researches by the extensive use of statistics. We don’t know if Comte was the first to propose the standards of natural sciences for human sciences; however, before his times, natural sciences did not have the aura they would possess from this period. This aura emerged from the technical ameliorations the society was experiencing at the time. Before his period, all knowledge was religious, including philosophy. He assisted at the separation of sociology (whom he is often called the father), psychology, and a modern conception of literature as a fictive expression of the collective unconscious. Emanating from philosophy, these new fields, partitioned from the old ones, needed a rigor that he found in the discourse of the new natural sciences. He arrives at a moment in history where the societies were ready to change their focus from a totally idealistic system where people believe that everything was generated in the mind, what Kant called “pure reason,” to a system where things were there, waiting to be understood through empirical observations that was called “phenomenology.” Therefore, what is now known as the “scientific method” was ready to take the lead.

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Berger and Luckmann (2005) are not at the extreme of the spectrum saying: As the society exists at the same time as an objective and a subjective reality, any theoretical understanding of its nature must implies both aspects. As we said before, these aspects are both recognized in their own way, if we understand the society in term of continuous dialectic process made of three phases: the exteriorisation, the objectivation and the interiorisation. (Berger & Luckmann, 2005, p. 177) (Our translation) A researcher must state clearly which position he is taking and, to do so, he has to know the available positions. Unfortunately, in accounting at least, few people take the trouble to even know in which position they are as they profess a na¨ıve first-degree positivism. However, there are researches in accounting escaping to this pattern. We must remember here that almost each category of knowledge is discursive in essence, as the science is made of a raw material that is language. But, basically, any theory must start with a continuous observation of a section of the “real” world even if no researcher can escape the basic categories he has integrated as prime education, except if, in the rationalist tradition, he believes that everything starts in the mind and must be derived from it. But, what is the quality of this observation? It would be possible to make a history of sciences around the continuous perfecting of our means of observation. Scientists have invented instruments to help our limited senses to perceive the world outside. The telescope and the microscope are two well-known examples. However, acarians and faraway galaxies existed before we were able to see them. Also, we now understand that a dog can perceive ultrasounds, which we cannot do. It is not because we cannot perceive it that it does not exist. We can compensate our perceptive deficiencies by inventing instruments. We will end this section with a quote from the disturbing book of the Groupe m. We know that a person born blind, operated later, although perceiving the circle or the triangle, will not be able to distinguish between these two types of figure before some training. Then, there is a form only after a figure is declared alike other perceived forms. (Groupe m, 1992, p. 68) (Our translation) In summary, even if we postulate the objective existence of a world outside us, are we really equipped to know what it is like?

The Historical Cost In our view, the use of the historical cost reflects a highly condescending attitude from the accountants toward the users of accounting numbers. For a long period, nobody really challenged the historical cost. The argument

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was the objectivity and the verifiability, and almost everyone was happy with that. One of the most convincing arguments was the practical aspect of conservatism, consisting in the immediate recognition of all costs (potential losses), realized or reasonably expected alongside the recognition of the revenues or increase in values only when realized, i.e., cashed (Watts, 2003). This was done with the goal of not distributing money unearned, diminishing the capacity of production of the firm. Therefore, this argument says that investors are frivolous and that they will take back the money even if the firm needs it. The accountant is then saying that the investor is irresponsible and that he has to compensate by using conservatism. Doing that, the accountant is deciding on behalf of the investors what is to be done with the investor’s money. Moreover, everyone in the accounting world seems to find this condescending attitude completely normal having elevated it at the rank of principle, the going concern.

Opposing normative and positive theory (Ryan, Scapens, & Theobald, 1992) is opposing two elements that are not on the same level. When talking of normative theory, they refer to the “goal” of the theory which would be to frame the practice and tell people what they have to do. When talking of positive theory, they refer to the possibility of knowing an object for what it is without any interference from the observer. Both cannot compete as they are not in the same field. Wolk et al. presents the investors as totally mechanistic. They have a rate preestablished for the dividend and seem to stick to it against all odds: Assume that three accountants (…). Assume that users of accounting data believe that dividends of a year are equal to 75 percent of income determined by M1 for the previous year. Users also believe that dividends of a year are equal to 60 percent of income determined by M2 for the previous year. (Wolk et al., 1992, p. 25) Investors are presented as being quite rigid. Authors implicitly propose to manipulate the revenue to diminish the dividend. And then, came the 1970s with their high rates of inflation. The historical cost continues to prevail but started to obviously look misleading. The annual difference between historical cost and current cost is more or less equal to the inflation rate. When the inflation is negligible, the annual difference remains acceptable. When the rates of inflation neighbor 20%, the difference can be problematic. Many proposals came to replace it by several versions of the current cost accounting. After that, the levels of inflation came down and the question disappeared from the radar for awhile. It was back when the IFRS were proposed containing

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some provisions allowing the firms to choose to present the long-term assets at the current value. A new debate started. The arguments proposed were quite surprising. For instance, we had arguments of the type: the historical cost limits the fluctuations. The investors will be misled by the fluctuations on the market. Moreover, most people sustaining these arguments were tenants of the efficient market hypothesis pretending that the investors have all the information almost instantaneously. So, if investors have instantaneously all the information, how can accounting documents issued months later protect them against their alleged immaturity? Consequently, there is no logical argument for the historical cost and for dividing the profit into realized and unrealized parts as we never did that with the losses.

3.2 Kam Kam (1990) tries to integrate new accounting research with old standards setting conception of the theory. For the sake of simplicity, accounting theory can be divided into “low level” and “high level”. The former consist mainly of the very basic concepts, such as those found in Intermediate Accounting, and the pronouncements of authoritative bodies. The CPA exam usually focuses on low-level theory. High-level theory usually concerns procedures that are currently not used in practice, or a deeper analysis of present concepts and standards, or empirical research on certain relationships. I believe that both are important and I have attempted to synthesize the critical elements of the two levels of theory in this book. (Kam, 1990, p. vii) This view presents many important elements of the accountants’ understanding of the world.

3.2.1 The Spatial Representation of Accounting The first tendency that we see is a representation of the accounting domain as a vertical structure where standards occupy the center. The practitioners are on the ground (read the reality), and the ideas (concepts) are at the top, in the clouds. When you make standards from the practice, you have a bottom-up process. When you make standards from a conceptual framework, you have a top-down process. The generally accepted accounting principles (GAAP) standards were supposed to be inspired directly by practitioners’ usages. The expression is clear: GAAP means that the standard-setters observe the practice and propose as standards what is most commonly done. These proposals are then sent back as an exposure draft to these practitioners agreeing or disagreeing that the proposed standard is reflecting their best practice. Therefore, two comparable

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transactions can be treated totally differently because this system is making standards one case at a time. That was one of the strongest criticisms against the GAAP system followed by the multiplication of standards resulting from this approach. The conceptual framework approach to produce standards is supposed to be derived firstly from the general objectives of accounting (helping decisionmakers), specified with subobjectives and so on, to arrive at the standards level. This approach would eliminate exposure drafts. Exposure drafts were created to check with practitioners if the proposed standard were reflecting their best practice well. If standards are derived from a “conceptual” framework, there is no need to check with the practitioners. The spatial model of accounting also contains tacit aspects. The top section is seen as representing ideas, and as any accountant knows, ideas are in the clouds while practice is strongly grounded in the “reality” where the money is done. Therefore research is perceived as a top cloudy, “high-level” activity while discussing standards is perceived as incarnated in the “reality.” That is another social representation that is widely shared by the accountants. The distinction between GAAP and “framework” standards remains artificial. For instance, a set of financial statements had been derived with the GAAP system and despite the alleged changes, the same set of financial statements remains official after supposedly turning to the conceptual framework. Moreover, after these standards are supposedly defined through an ensemble of objectives and subobjectives, the standard-setters continue to prepare exposure drafts to ask practitioners if the proposed standards are reflecting the best practice well, and, the most infamous of all, the “conceptual framework” of the new international standards ends saying that no provision included in the framework has precedence on any standard enunciated thereafter. The present framework is not an international accounting standard, and in consequence it contains no normative provision on any question of evaluation or information to be provided. Nothing in the present framework is supplanting a specific international accounting standard. The IASC Council recognizes that, in a limited number of cases, there can be a conflict between this framework and an international accounting standard. In this case where there is a conflict the provisions of the international accounting standard prevail over those of the framework. (IASB, 2006, p. 35 CADRE) (Our translation) Therefore, we may believe that the set of financial statements is agreed by everyone on a basis of having nothing to do with a project of some sort but with some unspecified needs or ritual practice. Also, while practitioners complained that accounting research was “in the clouds,” not understandable and not useful,

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they were wrong because a lot of research had concluded that financial statements carried no information to the market because they arrive long after the information they are supposed to carry had been spread all over the marketplace, one way or another. The conclusion would be that accountants must stop to prepare financial statements and do something else. Obviously they prefer to say they did not understand. Auditing firms had developed models in the 1970s to scientifically sample transactions in the firms. When they realized that to have a valid sample able to produce a statistically valid inference leading to an opinion on the system would cost them a lot of money because of the sizes of these samples, they just came back to their good old methods. Today nobody talk about statistical sampling in auditing. But what is the value of the opinions so produced with a maximum of 36 tests, regardless of the number of transactions? Everybody is looking at the other side, simulating ignorance. However, this spatial conception of accounting is very well spread. The difference is that most research in accounting is not done by accountants and is done in such a way that it does not explain the accounting phenomenon. The problem is not that accounting research produces results that are not understandable, but that it produces results that are not serious, based on assumptions that are totally unbelievable like market efficiency. Then, both “worlds” ignore the other and all is going on. The books of accounting theory try to conciliate what is not reconcilable, avoiding providing definitions of what they are talking about and therefore presenting the accounting practice as evidence.

3.2.2 Accounting as Evidence Another common feature from the books of accounting theory, after their absence of some serious definition of a theory, is the absence of a real definition of what is accounting. For instance, Kam does not define accounting before page 33. This definition is quite short although interesting: Accounting is an art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof. (Kam, 1990, p. 33) This definition was taken from the Accounting Terminology Bulletin No. 1, published in 1953 by the American Institute of Certified Public Accountants (AICPA). It is a good definition showing the technical and linguistic characters of accounting. However, we may have some reservations about the interpretative part of it. But, if accounting is an art, how can we make the theory an art? Kam does not go in depth in the definition, replacing it by an historical development about double-entry accounting. For instance, counting is an activity coming from immemorial times. However, can we say that counting and accounting are the same things?

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We can propose that before double-entry accounting, we had mere lists, with numbers associated sometimes with no attempts to add the value of these counted things (Breton, 2016). However, we must remember that double-entry accounting, although really bright, is only a technical device even if it had transformed our vision of accounting over a long period. Kam illustrates this, confounding the theory with the conceptual framework consisting firstly, in the objectives of the financial information. Since the objective of accounting is to provide useful information for decision making, this implies a decision-theoretical approach to accounting. Such an approach is helpful as a design for testing the overall theory to ascertain whether it achieves its purposes. Primarily, the theory is to serve as a standard by which to judge accounting practices. In other words, it should be the “blueprint” for the construction of the many individual systems in practice. If the individual systems provide useful information, then the theory on which the systems are based can be considered effective or valid. (Kam, 1990, p. 49) Obviously, if we can agree with the first sentence that a theory of accounting must be, in part, a theory of the decision process, the rest is totally out of line, making science not an explanation and an understanding of the world, but a program to do things better. Also, he does nothing to establish this theory of the decision and never refers to one. We retrieve here the social representation of the natural sciences. The science is what makes the world better, inventing new things which are continuously increasing our comfort. This view is still very much popular today. In human sciences, there is no dramatic discovery producing a commotion in public. In fact, our vision of constant development is based on the idea that natural sciences will compensate the overuse of resources implied in this process by discovering, for instance, new sources of energy replacing those that have been spoiled, etc. If we were certain that science will not do this, we will stop the development at once. But, even if it was proven that this development goes faster than the compensating measures, many of us don’t want to see the “facts” and continue to stay in denial. Consequently, if accounting is supposed to help individuals and groups to take good decisions, the results are not very encouraging. Then, why accounting has remained structurally about the same than 50 years ago if the results are so disastrous. One answer may be that, considered in its social dimension, accounting is a failure and the accounting numbers provided to citizens are totally beside the point. The absence of definition is driven by the practical “nature” of accountants. This practical tendency was expressed in the vertical structure of the profession we described earlier. At the bottom of the structure was the practitioner, near the ground where the money is done, as we know that only practical people make money. Because he is practical, the accountant does not care too much about ideas existing in the clouds. Therefore the practitioner is fundamentally a na¨ıve positivist ignoring that he is because he cannot imagine another approach to the

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world. Kam will delay defining the “theory” to Chapter 16, keeping the essential for the end.

3.2.3 A “Natural” Positivist Kam starts by saluting natural sciences providing answers. So, for him, science is basically a way of solving problems. The simplest form of theory is a general or universal statement of a belief. A statement, such as “All lions eat meat”, qualifies as a theory. For simple theories, other terms are often used, such as hypothesis or proposition. The most elegant form of a theory is a deductive system of statements of decreasing generality. (Kam, 1992, pp. 485–486) The social use of the terms is confounded with their scientific meaning. A belief is not the first term of a syllogism and the syllogism is not the starting point of the theory except in the case of extreme rationalism pretending the world must be known a priori. Now, logic intervenes to develop theories after they have been elaborated through observation. Effectively, these logical manipulations will conduct to testable hypotheses. However, we need the theory before to test it. Chalmers (1987) says that “deduction only allows to derive enounces from other enounces.” The most distressing vision is expressed as follows: You will notice in the following figure that theory begins in the “unreal” world of abstraction, that is, in the human mind: but for it to be useful, theory must eventually relate to the “real” world, the world of experience. (Kam, 1992, p. 486) We are taken a few centuries back. The theories start in the mind is a totally rationalist position that nobody sustain anymore. Kant (1980), who was by many sides a rationalist himself, criticized the “pure reason” and introduces the importance of confronting the theories in elaboration with the experimental world. If some believe that the experiment necessitates a form of previous understanding of the phenomenon, others will radically go on the other side and propose a descriptive philosophy or phenomenology (Romano, 2010). Rationalism has a long history in the western conception of the world. This belief is very well described by Einstein (2009): The elementary belief of the philosophy in its genesis gives to the pure thinking the possibility to discover necessary knowledge. It was an illusion; everyone can easily understand that, if he forgets momentarily the ulterior advances of the philosophy and of the physical science. Why being surprised, when Platon gives to the

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A Postmodern Accounting Theory “Idea” a reality superior to those of the objects empirically experienced? Spinoza and Hegel are inspired by the same feeling and reason along fundamentally the same lines. We may almost ask ourselves the question: without this illusion, is it possible in the philosophical thinking to invent something big? (…). Facing this illusion, quite aristocratic, of the unlimited perceptive power of the mind, exists another illusion quite populist, the simplistic realism, following which the objects are the pure verisimilitude of our senses. This illusion occupies the quotidian activity of the human and the animals. Originally, sciences develop along this line, mostly the physical sciences. (Einstein, 2009, p. 57) (Our translation)

In our view, the a priori knowledge, described by Hume or Kant, is expressing their need for a kind of truth subliming the eras and cultures, truth that is so fundamental that it is superior to any human construction and is the same for all people in all countries and for all times. This is an essentialist position that is quite comforting, as opposed to an existentialist position that would carry more insecurity. Accountants are “natural” positivists, “simplistic,” following the classification of Einstein. They believe to have a direct access to “reality,” believing, to start with, that this reality exists without their intervention. Therefore they have an instinctive lack of confidence for all ideas as they are perceived as things happening in the head, consequently unreal. All the inductive sides of the theory are evicted to make equivalence between ideas and theories. Then, a theory emerges from the mind and must be later fitted to the “real” world. Kam opposes what would be a theory of the accounting measure to the positivist theory that he also called behaviorist. Doing that, he takes the side for a normative theory against a positive situating the accounting theory outside the world of epistemology and research. Then, Kam starts to propose a series of “theories” to explain the form of the accounts: the proprietary theory, the entity theory, the fund theory, the commander theory, the investor theory, and the enterprise theory. All these “theories” come from the social definition of the term which is a hypothesis to explain something observed, in our case the form of the accounts. He borrowed the idea (at least the proprietary theory and the entity theory) from Hendriksen (1970). The definition of theory sinks into confusion. A first configuration of the conception by accountants of a theory as truth emerges keeping them outside of the university spirit if not of its walls. These conceptions cannot be taken seriously by the rest of the academic community. That is probably why, around the world, accounting faculties or departments are generally considered as something different by the rest of the universities. Mike Gibbins was asking why accounting research is not quoted in other neighboring disciplines while their researches would be quoted in accounting. I would propose two reasons: firstly because accounting research is often

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conducted in such a way that it cannot be taken seriously, producing ideology more than research results. Secondly, the way accounting researchers quote researches from other disciplines is most of the times accompanied by a distortion of the meaning of these researches in their originating domain. Accounting researchers are often looking for a “little model” to apply immediately. They very rarely go to the originating discipline to see the characteristics of this model and how to manipulate it during the transportation. For instance, the “model” of Hofstede, which is a scientific catastrophe, had been taken at face value by researchers in management and accounting because it was containing numbers (rankings) that were easily entered into a statistical model. But, the basic value of these numbers are totally ignored and as accounting research functions as a jurisprudential system, if somebody else has published a research using this “model,” it is considered validated. Scientifically speaking, it was already sufficiently incriminating to use Hofstede’s model. But, by an intellectual summersault, Gray “transposed” the model to the accounting domain. He argued that the society is a system and that any social activity is a subsystem including accounting. Therefore, as all subsystems are said to be structured in the same manner than the enclosing system, accounting has the same categories as the main system. The model of Kohlberg, based on one heavy tendency from the philosophy believing that there is an intrinsic moral subliming every culture, every tradition, and every condition of living, also produced totally ideological results. But the model is associated with a scale and has a test that can be administered, despite the fundamental inappropriateness of the cases proposed to the subjects. Another problem arises from the simplistic point of view of the researchers. As an example, when Ponemon (1992) uses Rest’s test of the Kohlberg theory on auditors, he is not making research in auditing, but in psychology. But he ignores it. Others have applied the test on different categories of subjects and Ponemon is also applying the same test on another particular category. Therefore, his conclusions must be on the model of Kholberg and not on the auditors. Moreover, the “ethical problem” Ponemon pretends to investigate has been declared a problem only by himself. In substance, traditional “accounting theory” believes that there is a world outside existing by itself and that this world can be known through opening our senses and turning our mind off as ideas are opposed to “reality.” Traditional accounting theorists believe that a theory is a recipe to do something useful. They called that a normative theory and believe that accounting theory is included in standards books and that standards setting bodies are doing accounting research producing accounting theory. We may deplore that their vision is keeping accounting isolated in the university even among what is abusively called “management sciences.” If we would apply some tips of scientific observation to the traditional accounting theory books, we would observe a very strong tendency to assimilate accounting theory to a plea for convincing people of the utility of accounting. Therefore it may take its roots in a profound insecurity among accountants. This feeling was probably aggravated by the entry of accounting curricular in the

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universities where it is considered as mere technic, and the new research, although denied by the profession, saying that accounting numbers have little effect on the investors they are supposed to inform.

3.3 Repeated as a Mantra Most (1982) gives a good example of people repeating things they do not understand at all. This is obvious when a sentence becomes a negation of the preceding affirmation. A theory is a systematic statement of the rules or principles which underlie or govern a set of phenomena. A theory may be viewed as a framework permitting the organization of ideas, the explanation of phenomena, and the prediction of future behaviour. Accounting theory is that branch of accounting which consists of the systematic statement of principles and methodology, as distinct from practice. Thus the role of conservatism belongs to the subject of accounting theory. (Most, 1982, p. 55) If we can agree with the first sentence of the quotation and accept as a well spread way of thinking that a theory explains and predict; the second sentence, placing conservatism in the theory, is clearly a negation of what he said in the two previous sections. Moreover, if accounting theory is a branch of accounting, what is the trunk? Normally, the source of the knowledge, the theory is the root as it is treated by the part of the philosophy called epistemology. Again, conservatism is not an explanation of a phenomenon or a prediction of behavior, it is a political choice. Most also proposes a disputable conception of what an assumption or a hypothesis is. He gives as an example: “Investors use information in arriving at their investment decisions” (Most, 1982, p. 59). That is quite vague principally in the absence of a definition of what is information. But the hypothesis following the assumption is highly symptomatic of how hypotheses are derived in accounting research: “If a corporation which is expected to report a profit reports a loss instead, some holders of the corporation’s shares who would otherwise have continue to hold will sell” (Most, 1982, p. 59). This hypothesis comes from no quoted theory. It is the concretization of beliefs that may or may not have any foundation. Testing a theory supposes the presence of a theory. A theory is not something we believe or not, it is an ensemble of knowledge coming from the application of techniques of observation, the formulation of conclusions from these observations, and the logical transformation of these conclusions into testable hypotheses. “Research methodology can also be viewed narrowly as a set of strategies, domains and techniques employed in hypothesis testing” (Most, 1982, p. 60). But

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methodology covers also the construction of the theory not only the testing of hypotheses derived from it. We define a methodology as the ensemble of means or methods; thus as the strategy and tactics used to answer a question.

In fact, this is a way of telescoping the research work. In the natural sciences, where they “solve problems,” it is not that direct. There are “pure” sciences, “discovering” the principles and then “applied” sciences, solving particular problems from these principles. There exist a series of inductive methods that are used for observing and making theories to be tested later. But in accounting research, it is current to confound methodology with statistics. Many methodology courses in graduate accounting curricula are mere courses of statistics, which is quite reductionist. Methodology is a strategy, statistics are tactics. To synthetize the point, we can quote the definition of the accounting theory provided by Underdown and Taylor (1985). To their credit, they provide the definition at the very beginning of their book. Accounting theory has been defined as “a cohesive set of hypothetical conceptual and pragmatic principles forming a general frame of reference for a field of study” (American Accounting Association, 1966). Within this definition accounting theory may serve one or both of the two ends which all theories serve, namely to explain and to predict. Theories which explain may set out principles of what ought to be, in which case they are normative. Alternatively, theories may explain observed phenomena, and are term descriptive. Theories of both types may be found under the heading of accounting theory. (Underdown & Taylor, 1985, p. 2) This would stand as an excellent summary of the content of accounting theory handbooks. The only one having a different approach is Scott (2003).

3.4 Recent Developments The accounting theory books we just discussed have often been reedited. The last edition of Scott is the seventh one. Other books have also been published. They all discuss the standards abundantly although often including information about the academic research alongside. There is also a plethora of definitions of accounting theory on the web all turning around the conceptual framework. Accounting theory is a set of assumptions and methodologies used in the study and application of financial reporting principles. The study

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A Postmodern Accounting Theory of accounting theory involves a review of both the historical foundations of accounting practices, as well as the way in which accounting practices are changed and added to the regulatory framework that governs financial statements and financial reporting. (https://www.investopedia.com/terms/a/accountingtheory.asp#ixzz 5AxNXJnHt, accessed on March 28, 2018)

Any relationship with a real theory is totally avoided and this entry is only a synthesis of what they found on other sites like the FASB. This is a standard attitude toward theory, just ignoring it. However, we can find quite better. There is always a reason behind each and every action of a human being. A man does not anything without any sound reason. Regarding Finance, or financial matters, a man is always extra cautious and so, he never makes any financial transaction without any reason. As accounting deals with financial transactions, so every accounting work is also based on reasoning. Accounting Theories always try to explain with reason, the logic underlying a particular practice. Generally Accepted Accounting Principles cannot be changed completely as they are widely and universally accepted but they can be reformed and remodeled to suit the needs of any changed Society or Economy. Accounting Theories point out to the scientific ways of thinking for the solution of any real world accounting problem. (https://accountingtheory.weebly.com, accessed on March 28, 2018) Firstly, the way the author defines the behavior of people dealing in financial matters is already so tendentious, based on the primacy of a certain conception of the rationality. But the limits of his vision appear clearly when he declares the GAAP are universally accepted and so are not changeable at will. They can be modified slowly to suit the needs of the society. Although the ideas of explicate and predict are there, we see that the normative and prescriptive functions are the most important by far.

3.5 Assumptions, Principles, and the Like Briefly, they all use the right terms although not applied to the right objects and often not applied at all. We will review some of these elements to see how they function (Fig. 3.1).

3.5.1 Business Entity The idea of separating the business from the owner may look usual now, but it is relatively new in the history. The main problem is the absence of responsibility of

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Fig. 3.1.

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Schematization of Accounting Elements. Source: Unegbu (2014, p. 6).

the owners. A good example of that is provided by the 2008 crisis. For instance, the big losses of 2008 for both most involved US banks were turning around three billion dollars (Table 3.1). Therefore, what is the responsibility of these people having cashed the dividends? If you cash the profit and are not responsible for the losses, how will you justify this profit; in other words, where is the risk? For example, with the consolidation, accounting is in advance on the income tax laws still considering every legal entity separately allowing to swing the profits in subsidiaries positioned in countries with low rates of tax.

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A Postmodern Accounting Theory Table 3.1. Profits Distributed in Dividends Previously to the Big Loss of 2008.

Year

2007 2006 2005 2004 2003

Freddie Mac Net Profit

(in billions $) Fanny Mae Net Profit

(2.5) 3.1 1.9 2.4 4.6 12.0

(2.6) 3.5 5.8 4.8 – 14.1

3.5.2 Going Concern Normally, the accounting profession pretends to present a true and fair view of the financial situation of the organization. This would be done without any consideration for the consequences which are for the investors to evaluate. If we introduce an “assumption” (which is the word used by Unegbu but not exactly fitting the definition of an assumption) saying that the entity must continue in priority, we may have to bias the information to reach this goal. Moreover, we are taking the decision instead of the investors on the basis that our judgment is better because we have another hidden assumption (one fitting the definition this time) stating that investors are judging uniquely on the basis of the dividend or the return they receive at a given time. This “hijacking” of the decision process goes against all the discourses the profession is carrying on providing information for others to take decisions, not taking the decisions in their behalf. Our economic systems are based on the principle that if an organization is not efficient it must. If accountants place the going concern principle over the true and fair view, they are helping keeping potentially inefficient organizations in function, biasing all the economic equilibrium.

3.5.3 Stable Monetary Unit It must be practical to use a stable monetary unit. However, it is false. In years where the inflation is low, the error is not very important, depending on the kind of commerce we are talking about. In a food market, the error will be minimal, as there are few things kept for a long period. However, there is still an error consciously made in the name of a principle or of the easiness to apply. Every time we change the “values” of the assets to suit some assumptions or principles, we potentially bias the decision-making process and jeopardize this process by displacing the locus of decision.

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3.5.4 Accounting Periods and Matching This is not really a problem because we have to stop the process at some time. In that we follow the laws having fixed the fiscal year of the entities creating the necessity of having accounting reports at those dates. We have elaborated the matching principle which is quite logical. This matching principle is useful as long as the circuit of the good or the service enters within a year. When it does not enter within a year we have to develop standards to allow the recognition of uncashed profits, which is in contradiction with our principle of prudence claimed so loudly by the profession.

3.5.5 Historical Cost The historical cost may be practical for an accountant, but it is plainly ridiculous as a principle. The discrepancies, which may be small for one year, cumulate from year to year to arrive at numbers having no meaning at all. However, with those biased numbers, the accounting profession is again diverting some decision power over supposedly higher principles like the going concern. Therefore, we calculate returns on assets that are totally detached from the reality.

3.5.6 Money Measurement We have examples of statements that were not measured in monetary is but through other economic indicators. That was the case of the social balance sheet introduced in France in the 1970s. In accounting we have the tendency to believe that every data that are not monetarily measured fall into the qualitative category made of feelings and impressions. However, to say that 1 person in 10 on the board is a woman is far more precise and quantitative than the impressionist notion of profit produced by the accounting profession.

3.5.7 Objectivity The accountant is supposed to be constantly in search for some specific qualities or characteristics of the information he is preparing and issuing. One of these qualities is objectivity. Basically, it would mean that the report produced reflects exactly the object without any intervention of the preparer. In our views, this is clearly impossible mainly if we consider what we have just said about the presuppositions, assumptions, and other principle accountants have to consider and apply in their preparation of accounting reports. As defined in the traditional accounting theory handbook, objectivity is a kind of conditioning, as we discussed earlier. But objectivity can also, in the CICA Handbook, take the form of neutrality. Then, the objectivity is no more toward the objects but toward the groups involved in the process. We remember that the “international conceptual framework” says that what will satisfy the investor, provider of capital, is prone to satisfy all the other categories of stakeholders. It looks like neutrality having been cheaply reached.

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Finally, what we learn from this short analysis is that accounting principles, assumptions, qualities, and standards are often in contradiction. Moreover, these principles, when applied, deprive the investor of a part of his decision power to transfer it to the accountant. This is an “agency effect” that had not been studied.

3.6 Summary Scott discusses the “core” aspects of “accounting research.” For instance, he presents a chapter on market efficiency. Market efficiency is an informational hypothesis even if nobody ever bothers to propose a description of how the information is circulating among the agents in the “market.” They say that they know all or part of the information and that is supposed to be sufficient. Moreover, they add that every agent interprets correctly the information so that there is no possibility of making excess returns. We all know that it is not exact, so this hypothesis might be rejected. This inexactitude is at the basis of the explanation of why financial analysts exist. If there are people doing technical or fundamental analysis and selling it, it is because those people, who are the best informed on the market place, believe that this market is not efficient as their clients do too. Accounting researchers themselves do not believe in EMH as if it would apply, there would be no need to frame accounting practice and then the accounting profession will disappear. Therefore, as accounting research is a part of the accounting world, a researcher must ask the question: why such frivolous hypotheses can take such place in a self-pretending “science”?

Excess Returns If someone would be able to predict the future market price of a stock, he will be able to make excess returns. Technical analysts pretend they can predict the future value of a security by studying the historical evolution of prices. Doing that, they strongly reject the EMH. Fundamental analysts pretend that they can predict the future movements in the price of a security with all the information publicly available. Doing that, they reject the EMH.

However, Scott declares that “the most important concept of financial accounting theory” is information asymmetry. This asymmetry was historically proposed by the tenant of the agency “theory” based on the EMH, which looks a little contradictory and leads to two effects that are at the basis of Scott’s book: moral hazard and adverse selection. Adverse selection is a type of information asymmetry whereby one or more parties to a business transaction, or potential transaction, have an information advantage over other parties (…).

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Moral hazard is a type of information asymmetry whereby one or more parties to a business transaction, or potential transaction, can observe their actions in fulfillment of the transaction but other parties cannot. (Scott, 2003, p. 8) However, this vision of information asymmetry appears to be contradictory with the definition of the functioning of the market on which all these theories are based. Modern financial theory rests on two assumptions:

1. Securities markets are very competitive and efficient (that is, relevant information about the companies is quickly and universally distributed and absorbed); 2. These markets are dominated by rational, risk-averse investors, who seek to maximize satisfaction from returns on their investments. (Mullins, 1982, p. 115) Mullins considers that the breaches existing in the EMH are not having a material impact on the efficient market functioning, while Scott pretends that the asymmetry of information is the rule, making those markets inefficient per se. But Scott settles the matters by proposing more accounting information to decrease the inefficiency. Therefore he remains in an efficient market framework although he based his book on the inefficiency of this market, as for him, the inefficiency is not a refutation but only a minor dysfunctioning. An important assumption of the theory is that a market works well once explicit consideration is given to contracting and other costs of using the market. Thus, the theory fully subscribes to the efficient market hypothesis (…) and also to the validity of the capital asset pricing model. (Bromwich, 1992, p. 323) But, there are optimality and optimality. Most authors discussed a kind of absolute optimality in part because they are influenced by the economic modeling considering one period, one good, one piece of information, and the rest in perfect certainty. Jensen and Meckling tempered their definition of optimality following the circumstances. These relevant circumstances are related with the separation of the ownership and the management of the firms described quite long ago by Berle and Means (1933). Therefore, there is little science to be taken in traditional accounting theory handbooks. Science exists in an institutional environment. If accounting has to be a science it will have to conform first to the desiderata of the institution, mainly the university. Moreover, the descriptions of the sources of the accounting activity are a pack of contradictory measures prone to usurp the decision power of the investors and other stakeholders, when they are considered at all, and transfer it to the

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accounting profession, increasing its power of interpreting financial numbers in our societies.

Questions 1. What is positivism? Is it a method? 2. By which process do researchers believe that statistics generate objectivity? 3. How would you define objectivity? 4. “The firm is a planned economy under an authoritative control.” Comment. (When the firms reach sizes that are larger than many countries [calculated from the GIP vs the sales], the “free” enterprise is then organized into a totally authoritarian structure.) 5. The market for accounting a. Why the firm and the accounting statements can be said to be market failures? b. What to say about the existence of those markets followed so closely in the news? 6. What is hyperreality? How can it be applied to accounting? Provide an example that is not in the book. 7. What do you think of the statement: “accounting theory has no standard definition”? 8. What would it be to have a standard definition? 9. Do you agree with the idea that “you cannot study disciplines by studying the behaviors of those who practice the discipline”? 10. What are the possible epistemological positions in the philosophy of knowledge? 11. Following Einstein, what is a “simplistic” positivist? 12. What is the “raw material” of sciences?

Chapter 4

Accounting in the Scientific Institution Accounting, as expressed in the handbooks, has a long way to go to become a science. We may continue to discuss the question by reviewing some elements or understandings that seem to block the way toward an “accounting science.”

4.1 The Concept of Normative Theory The concept of normative theory is not reserved to the accounting domain. It exists in media analysis, ethics, and many other areas. A Normative Theory expresses a judgment about whether a situation is desirable or undesirable, and is based upon some moray or standard. The world would be a better place if the moon were made of green cheese, is a normative statement. (www.answers.com) or, Normative theory: any theory which seeks to establish the VALUES or norms which best fit the overall needs or requirements of society either societies in general or particular societies, and which would be morally justified. For those who see the aim of modern social science as descriptive and explanatory and not “prescriptive,” such a goal for social science or sociology is not acceptable. Hence in these circumstances, the term “normative theory” can be a pejorative term. (Collins Dictionary of Sociology) We definitely stand in the first group. We have nothing against appraising values; we are against calling it a theory or pretending that it is done on the basis of a theory. Assessing values is done through beliefs and faith and cannot be called scientific. It is a religious or a political–ethical matter. But everyone is trying to appear among the scientists those days. There is even a church calling itself by a name that includes the word “science.” A Postmodern Accounting Theory, 43–63 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78769-793-520181004

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A Postmodern Accounting Theory And today? Who still believes, those days, – except some growth child that we can encounter among the specialists – that the knowledge in astronomy, biology, physics or chemistry can teach us something on the meaning of the world or even help us to find any traces of this meaning, if it ever existed? If it exist some knowledge able to eradicate to the roots the belief in the existence of something looking like a “meaning” of the world, it is precisely those sciences. In definitive, how come the science would be able to “lead us to God”? Is it not the un-religious power? (Weber, 1963, pp. 95–96) (Our translation)

Asking the science to decide for us is to mix science and religion in its most general meaning as well as science and politics, which is only prone to create confusion. The confusion also increases in accounting by the import of the concept of normative theory. As described, after the securities acts the accounting literature became normative in the sense that it sought to prescribe the contents of accounting reports. For example, Chambers (1966) advocates current costs as the basis for the valuation of assets. Financial accounting texts also tend to adopt normative (i.e., prescriptive positions). By itself, theory, as we describe it, yields no prescriptions for accounting practice. It is concerned with explaining accounting practice. It is designed to explain and predict which firms will and which firms will not use a particular method of valuing assets, but it says nothing about which method a firm should use. (Watts & Zimmerman, 1986, p. 7) However, it was the only way to be able to call theory what had been written roughly before 1965. The idea comes from economics and entered the accounting domain through Watts and Zimmerman (1986). “Normative economics” comes from the School of Rochester (Milton Friedman) where also Watts and Zimmerman are. Friedman pretends that a theory must be judged not by the verisimilitude of its assumptions, but by its capacity to predict. The theory producing the best predictions should be prized, regardless of the lack of realism inherent in the underlying assumption. (Wallace, 1991, p. 39) But how can a theory based on frivolous assumptions produce the best predictions of reality? The answer is quite easy: by refusing to look at what is not conformed to the “theory.” This question becomes more important when we remember that the economists normally present their predictions as the “real reality.” Other economists have raised the same objections: But the economists hang to it (the notion of scientific progress) as to a floating tree, engendering one of the most curious conceptions antiscientific conceivable: the one of Friedman. Friedman refuses any

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debate on the realism of the hypotheses. Whatever the hypotheses, he said, as long as they are functioning more or less (…). We are appalled in front of such a praise of the anti-scientific spirit (…). (Maris, 2003, p. 44) (Our translation) Beyond their strange scientific aspect, the propositions of the positive theory, as understood in Rochester, seems not to produce the high-quality predictions that were expected. In summary, the empirical tests have demonstrated that the three hypotheses generated by the accounting positive theory have a low predicting power as well as a low explicative power. Then, on which basis Watts and Zimmerman continue to pretend that their story is credible? They continue to pretend that their story is credible based on the fact that the alternative model to explain accounting choices assume that the firms use the accounting methods prevalent in their industry. “Many accounting professors” assert that Watts and Zimmerman, “would be uncomfortable with the explanation wanting that managers choose their accounting procedures by imitating what the others are doing” (p. 140). They would then suggest that “the real question is the lack of alternative model having a better explicative power and not the weak explicative power of their theory.” (p. 140). (Mouck, 1992, p. 41) The three explanations proposed by Watts and Zimmerman for the choice of accounting procedures are the CEO motivations, the debt specifications, and the political costs. These hypotheses come from no theory. They proceed from general beliefs and vague interpretations of general economic propositions. Are normative theories producing predictions or prescriptions? A prescription can have beneficial or malefic effects, but as it changes the state of the world it cannot be a test of any model, i.e., a prediction. The accounting discipline, following economics, escapes to the logic that prevails in the rest of the world. So we can find that kind of assertion: “normative theories have a long history in accounting research” (Ryan, Scapens, & Theobald, 1992, p. 53). They give an example of “normative research in management accounting.” Nevertheless, the neoclassical economic framework with its profit maximizing objective forms an essential underpinning of management accounting’s conventional wisdom. (Ryan et al., 1992, p. 45) Firstly, the neoclassical economic theory never included the maximization of profit as a fundamental element. To the contrary, if the assumptions of the theories were to be realized, the markets would function in a perfectly competitive environment and the profit would be minimized not maximized.

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A Postmodern Accounting Theory In fact, neoclassical economic theory holds that profits are zero in perfectly competitive markets, a condition which that same theory sacralises. (Frederick, 1995, p. 52)

The confusion arises when people start to believe that the profit is the remuneration of the entrepreneur, which is not the case in the classical or even neoclassical theory. It is the remuneration of the capital owners who are no more entrepreneurs, which is a deviation as already described by Berle and Means (1933). The classical entrepreneur obtains this quality not by putting some money in a business but by organizing the work. If the investors do not even know where is and what is being done by the company he is putting his money in, he is not an entrepreneur and then we have a problem with the definition of profit. The salaries of the management are difficult to justify rationally in such a model of the firm as the owner-manager of the firm bring no productive contribution. (…). The introduction of the imperfect information has the effect of giving a creative role to the owner and the manager. Each of them can pretend to bring different types of knowledge that the ordinary employees do not bring. (Demsetz, 1998, pp. 44–45) (Our translation) What is brought by an investor who does not even know where the firm is situated and what exactly it is producing? However, it is not our purpose to discuss more deeply this question here; after having acknowledged the reversal of meaning leading to these contradictory beliefs, the system “sacralizes” the pure and perfect competition implying the absence of a profit which, on the other hand, becomes the main motor of the system. Whatever the content of the concept of normative theory in Friedman’s discourse, it had rapidly assimilated to the standards in the accounting domain. In the early stages of its development, accounting theory arose out of accounting practice. It was only later that accounting researchers began to develop theories which contained prescriptions for practitioners. (Ryan et al., 1992, p. 68) Those having brought the greater credit for this idea of normative theory did it through a negative process. When W&Z wanted to propose a positive theory, which was scientific, in the meaning this term can have in human sciences, they positioned it in opposition to what was done in the domain before, labeling it normative theory. Normative, no doubt; theory, that is more debatable. There is a social usage of the word theory. Every organized opinion on something is said to be a theory. Consequently, when we are discussing science, we have to be prudent about the different acceptions that we will encounter. The words have many meanings that we have to deal with when trying to provide definitions or separate acceptions. Weber (1963) makes a distinction between the “facts” and the opinions in a classroom. The question of what “ought to be” must, for him, stay

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outside of the classroom. He establishes a distinction between the knowledgeable and the political, defining the domain of the latter as the domain of opinion and prescription by opposition to the domain of reflection and description. But, to refrain imposing their personal convictions (Weber, 1963), we have to recognize them for what they are. Most of the times that is where the problem stands. A normative theory is a complete mix of both personal opinions and inductive approach (however, with an insufficient quantity of observations) that is usurping the prestige of the science by calling itself a theory. There are controversies among accounting academics regarding what an accounting theory is. Watts and Zimmerman (1986: 2) posit that accounting theory seeks to explain and predict accounting practice. Positivists like Watts and Zimmerman (hereinafter W&Z only) cite economics and natural science disciplines such as physics, chemistry, etc. in the defense of their method and call their method “the scientific method” (W&Z, 1986: 2), thus probably implying that there is only one method in science. This is highly disputed by accounting academics pursuing other strands of research (Christensen, 1983; Chua, 1986). Science is not a unified structure. There is not a unique scientific method. Science knows many methods (Feyerabend, 1993). Hence, even if one wishes to study accounting as a scientific discipline, there is more than the method advocated by W&Z (1986: 3). One major criticism of W&Z’s view of accounting theory is that it unnecessarily narrows the area of accounting research (Chua, 1986; Whittington, 1987). For our purpose, we adopt the following definition of accounting theory: “— the business of accounting theory is to examine beliefs and customs critically, to clarify and extend the best from experience and to direct attention to the genesis and outcome of accounting work” (Littleton, 1953: 132). This definition accommodates different strands of accounting research such as research in normative accounting and empirical accounting as well as research in interpretative accounting. (Kabir, 2017, pp. 1–2) This author provides a good example of the reigning confusion. Obviously, W&Z had little knowledge of the work of Comte, for instance, and used the expression “positive theory” in the habitual opposition to “normative theory.” However, positivism is not a method, it is a philosophical position the scientific has on the relationship he can entertain with the studied object. Obviously, specific methods will follow this basic position, but the position itself is not a method. Calling Feyerabend to its rescue is a cheap argumentative move. Feyerabend may easily agree to the existence of many methods in science; however, we would be surprised to hear him accepting the normative “approach” as a method. As a normative theory cannot be validated or falsified, we can suppose easily that for Feyerabend it would rapidly reach the cemetery of false sciences. The definition retained by Kabir is a repetition of all the confused ones reported in this book.

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Anyway, trying to settle the matter of defining what is theory or science and what is not, within the limits of accounting literature, is totally vain. The accounting science, if it ever exists, may follow the same rules as other sciences and not be conceived of conveniently picked elements while the rest is pushed in the shadow. Therefore, accounting theorists must start by stating what a theory is before applying it to the accounting domain; however, symptomatically, they very often use the syntagma “accounting theory” as if this theory was particular and unique in its conception. Why tenants of the normative standard-setting-based approach want so much to be scientific? Sciences have the prestige and that prestige in the academic institution is the privileged key for reaching essential resources (theory of resources dependency). Instead of changing their approach of accounting research, they try to change the perception the world has of their approach. That is typical of a legitimating process, completely based on discursive manipulations (Ben Yedder & Breton, 2017; Hasbani & Breton, 2013). Even the texts discussing methodologies reproduce the same discourse. Ryan et al. provide some support to this way of thinking by saying that at the beginning the theory emerged from the practice and that later the theories started to elaborate prescriptions for the practitioners. Others have proposed that accounting is an instrument to produce information for decision-making. In fact, this was included in the CICA Handbook (Canadian Institute of Chartered Accountants) introduction and many other texts oriented toward the practice. The idea is that in an economy the best decisions, most efficient, must be taken to avoid wasting resources that are in limited supply. Money is a very important and scarce resource. The accounting profession believe that increasing the quantity of information available will help to increase the quality of investment decisions and therefore of resources allocation.

4.1.1 The Confusion in the Terms Accounting standards, like any other standards, are political statements in the basic sense that they are decided by authorized people, forming a committee or any other assembly, from knowledge, experience, needs, or any other motivations. But, every time, these standards are the results of some decisions. A theory is the fruit of observations or supposedly comes from reason and cannot be made through decision. A standard changes the world in imposing a way of doing things. A theory describes the world through discovering how it is working. A standard comes before the action and a theory comes after we have an understanding of this action. A standard cannot be proposed as a theory, however, and that is a cause of part of the confusion in the domain. A “pure” theory can be “applied” and used to create a technology becoming a standardized way to do things. This is probably why some people see the theory as preceding the action. But these theories have been developed through observation firstly and then through a series of transformations made from logical reasoning, and then tested. Such a vision is greatly spread by TV shows and movies where the science is presented like a magic solution to be applied to save the day. However, in most

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cases, the scientist who is “saving the day” has been rejected from the “normalized” scientific community and will be called from despair, after the institutionalized science failed. Such images are interfering with the social representations of accounting as a science and with the importance and place of the standards as they are forming the conception people have of the science and all the intellectual disciplines. The importance given to standards can be traced in the early conception of “accounting theory” which was also characterized by discussions, for instance, about what have to be capitalized or passed into expenses taking into account criterion like if it is replacing something already existing or if it is bringing a new technology in the organization, etc. Then, we entered in a new era with Hendriksen (1970). He avoids defining what theory is by describing instead the ways for building theories: induction, deduction, sociology, etc., not realizing that a series (a paradigm) must be formed of mutually exclusive elements. Belkaoui (1992), described a theory as follows: The primary objective of accounting theory is to provide a basis for the prediction and explanation of accounting behavior and events. We assume, as an article of faith, that an accounting theory is possible. A theory is defined as “a set of interrelated constructs (concepts), definitions and propositions that present a systematic view of phenomena by specifying relations among variables with the purpose of explaining and predicting the phenomena.” (Belkaoui, 1992, p. 56) This definition looks very promising and is prone to suscitate the approbation of researchers in many domains. He took it partly through Kerlinger to which he adds the definition from Webster’s Dictionary: (…) The coherent set of hypothetical conceptual and pragmatic principles forming the general frame of reference for a field of inquiry (Webster dictionary, quoted in Belkaoui, 1992, p. 56) Both definitions are acceptable from a positivist point of view. However, Hendriksen adds that the “frame of reference” may be used to evaluate and guide the development of new practices. Belkaoui, making little use of the definitions he had advanced, follows in this line and starts talking about evaluating and developing. And then, probably to add to the confusion, in a paragraph, he describes accounting as a language but with no distinction and no definition of a language. The promising definitions taken from Kerlinger and Webster’s Dictionary, applied to a research field in the goal of explaining and predicting what is happening in a section of “reality,” are then forgotten. Belkaoui is saying here that knowledge implies explaining and predicting processes. However, immediately after, he passes directly to the definitions from Hendriksen abusively pretending they are derived directly from what precedes.

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The same problems appear in Mathews and Perera (1991). In a chapter, they present a very well-documented epistemological discussion, including the concepts of inductivism, positivism, and even falsificationism. They describe the scientific process in a quite clear manner although their inductive process comes after the observation, their deductive process comes before the explanation and prediction, and that they are looking for universal laws. However, if reformatted, they propose a scheme that is a good start for discussion. Their description would be most generally acceptable and had already been proposed in accounting. However, the terms have to be described more deeply to be useful. For instance, what is observation? How can we make it—positively or subjectively—and how theories can be accepted through verification or rejected through falsification? The theories of knowledge are not infinite in quantity. One may believe that the object is revealing its nature without the intervention of the subject (the observer). This one is a positivist. The one who believes that the so-called “reality” is a construction of the mind is a constructivist. Any hybrid position in the middle had been sustained. However, Mathews and Perera, in the following chapter, when the time comes to apply those principles to the accounting activity, forget completely what they just established. There is a definite link between accounting theory and accounting practice, in the sense that accounting theory construction stems from the need to provide a rationale for what accountants do or expect to be doing. In other words, changes in the principles occur mainly as a result of the various attempts to provide solutions to emerging accounting problems and to formulate a theoretical framework for the discipline. (Belkaoui, quoted by Mathews & Perera, 1996, p. 52) Accounting theory becomes a normative system having a goal to guide the practice and give some sense to it. For us, it is obvious that there is a relationship between the theory and the practice. The theory is the result of a form of observation of the practice, but to understand the practice a posteriori, not to orientate it or give it a meaning. Therefore an accounting theory will have a section to describe why particular standards have been chosen, which were the forces behind those decisions, etc. A related major problem is its distortional reading of the Kuhnian notion of paradigm. The notion of paradigm had been used with the meaning of way of thinking. In some of the management literature it is a mere difference of opinion. But, a little bit of etymology and following the traces to the scientific discourse (Kuhn, 1983) show that this vision is too simplistic.

4.1.2 The Notion of Paradigm The word paradigm comes from the Greek para deigma meaning: for example. An example is something you can substitute to the object under consideration to help understand it. Therefore it is a vertical structure by opposition to a

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syntagma, which is a horizontal structure or a description of how things are combined. To say it otherwise, every element in the syntagma can be replaced by another element having the same function and therefore forming a paradigmatic structure. The black book can be the blue, the green, the yellow, etc. So we will have the paradigm of colors describing the ensemble of the possible elements that can be placed in the syntagma at this specific spot. A paradigm can be used to designate a scientific theory because this theory replaces the reality in doing the same function for the purpose of describing and understanding one phenomenon. This concept had been very lightly treated in the accounting literature. There is a scientific conception of the paradigm that can be derived from Kuhn (1983), and a social use of the word that have invaded the business world among others, and that can be described as a way of thinking or an opinion. Scientifically speaking, a paradigm is far from being an opinion, an expression of intersubjectivity. In brief, there is a “scientific” conception and a social representation of the paradigm. However, in Kuhn, the notion of paradigm describes a theory, but also all the scientific community and researches evolving around this theory (Bourdieu, 2001). The theory becomes a limitation as well as an explanation and a special effort has to be made to escape the “tyranny” of the established theory. Basically, the paradigm is the theory itself, not all of the institutional system established around it which is included by Kuhn. In accounting we must acknowledge that Belkaoui had done a very good effort to spread the confusion around the notion of paradigm. He presents six of his paradigms as competing in the accounting science: 1. 2. 3. 4. 5. 6.

Anthropological / inductive True income / deductive Decision usefulness / decision model Decision usefulness / aggregated market behavior Decision usefulness / decision-maker / individual user Information / economics (Belkaoui, 1992, p. 499)

Firstly, a paradigm is a model, not the way to produce it. If a model can be produced from an anthropological analysis, which we assume means through observation, it is not inductive in itself, but the result of the application of a form of inductive process. It is exactly the same with the deduction which is the process of testing the theories, not these theories themselves. A theory is not inductive or deductive, it is the result of a constant interaction between these two types of connections between the theoretical world and the “real” world. Secondly, if accounting consists of an ensemble of information destined to be used as input in a decisional process, accounting theory must be, among other sources, a theory of the decision. This decisional process was studied at the level of the market in general (all the studies on the effects on the market of the production of information) and at the individual level (that is often called behavioral

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accounting). However, there again, it is not the behavior of the market that is a paradigm, but the theory describing the behavior of the agents in the market. Belkaoui pretends to borrow his definition of a paradigm from Ritzer. It includes the following components: 1. an example, defined as a piece of work presented as the model of what is done in the paradigm; 2. an image of the object; 3. theories, methods, and instruments. If we admit, following some readers of Kuhn that the term paradigm can be extended to cover the academico-scientific institutional environment (Bourdieu, 2001), we would be able to admit the proposed definition. But we don’t, as the institutional context, although very important, remains quite different from the theory itself. Therefore, such a definition is highly fitted in the domain of the natural sciences, having a common conception of their domain, some subsidiary theories, and some common methodology. Belkaoui tries to apply this definition to the paradigms he had identified in the accounting domain. That is where the problem appears clearly. He describes the elements of the anthropological/ inductive paradigm as follows: The first type of theory deals with all attempts to explain and justify existing accounting practices – the historical-cost approach to asset valuation, conventional cost-allocation techniques, bookkeeping techniques, and so on. The second kind of theory deals with attempts to explain management’s role in the determining of techniques and include the income-smoothing hypothesis and the beginning of a positive theory of accounting. (Belkaoui, 1992, p. 501) A positive theory proceeds from the position the subject (researcher) thinks he can sustain in regard to the object under study; it has little to do with the content of a particular object. Also, the justification of the practices cannot be a function of the theory. Moreover, the supposed theory of earnings smoothing, that had not been yet enunciated (Breton & Chenail, 1997), cannot be presented on the same level that the positive accounting theory which, although thin and open to criticism, really exists. The inscription of the scientific process into a social context by Kuhn (1983) precised by Bourdieu (1984, 2001) focuses on the discursive aspects of the process. This vision led some epistemologist to pretend that sciences (even the natural ones) are mere discourses. But, it is a question of rhetoric, textual strategy, writing, staging, semiotic, but of a new form connected at the same time on the nature of things and on the social context without reducing it to one or the other. (Latour, 1991, p. 12) (Our translation)

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Thus, we may find statements of that kind: To close a technological “controversy” one need not solve the problems in the common sense of that word. The key point is whether the relevant social groups see the problem as being solved. (Pinch & Bijker, 2012, p. 37) In this spirit, even in pure science, the discursive strategies take the pole position in front of the “real” findings. This tendency has some correspondence in the management world. When Boje (1995, 2001a) describes the firm as a discursive object, he is underlining that everything around is as much a discursive effect (Groupe m) than an objective reality. We cannot ignore, however, that even Latour is forced to refer to the “nature of things” as opposed to social interactions so to the simultaneous presence, in the mind, of positivism and constructivism. Plainly stated, the object is there, independently of the humans; but what we know about it remains entirely discursive. Mathews and Perera (1996) adopt a na¨ıve Kuhnian version of the paradigm, without returning to any basic definition. We mean that any theory can be described as a paradigm, but not every paradigm is a theory. Their figure presenting the “Kuhnian progression” (p. 43) is also very simplistic. In the real scientific world, we do not pass from a dominant theory to another one as cleanly as what their figure implies. In natural sciences it is not that clear, but in human sciences, which is the case of any science of accounting, competing theories can “compete” for a long period. We believe that Bourdieu (1984, 2001) presents a better image of the tensions present in the academic institution. When Mathews and Perera (1996) take the work of Wells (1976) they totally denature the text of Kuhn. Kuhn (1983) was talking about scientific theories, whereas Wells is trying to force the traditional vision of the “accounting theory” into the mold from Kuhn. It is impossible to have a scientific revolution in the accounting theory world of Wells because there is no science at all in any attempt to normalize accounting. Wells take the phases proposed by Kuhn, which are an interesting description of how a “scientific” school is formed, and tries to apply that to accounting. The symbolic generalisations include accepted notions such as double entry, concepts of income, ratios and classifications. Shared commitments include the realisation and matching principles, going concern and the basis of asset valuation. Shared values include conservatism, consistency, materiality and other similar positions. Exemplars include textbooks and expositions in current use. (Mathews & Perera, 1996, p. 45) This citation shows well the confusion reigning in this domain. All the elements they enter into the categories of Kuhn have no scientific dimension, therefore they do not belong to the scientific world. These exercises in metaphorization can be extremely dangerous.

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The problem stands in their reading of Kuhn (1983). In Kuhn, the paradigm is the theory, but this theory is the center of an institutional movement that had been described noticeably by Bourdieu. A theory is an object of language and the institutions are equally so (Philips, Lawrence, & Hardy, 2004). This institution, or school of thought, includes people, academic journals, grants and research funding bodies, and research procedures and positions. However, the institutional grouping around a theory is not the paradigm per se. It is the reflection of the material conditions into which the paradigm is competing for supremacy in its domain. Authors like Wells are displacing the meaning of a paradigm by spreading it to the academic school of thought and its instrument to gain and conserve hegemony over its specific field. A paradigm is an object of language being the “other” of an object in the “real world” but also being an object in the “real world” itself, as discourses are real and do really exist. Then, in their scientific acceptions, paradigms are not concurrent advices on the world, they are concurrent models. These models have not been established through intersubjectivity, but have to satisfy basic criteria to be considered so. Science is an institution, having many different stratifications depending on the domain and places where people encounter other poeple: universities, laboratories, congresses, conferences, journals, etc. What Bourdieu, in a way, and Kuhn are describing is the organization that, in our society, takes the responsibility to separate what is knowledge conformed to the procedures accepted and what is not. Some observers will find this institutionalization hegemonic and prone to kill any imagination appearing outside the official school’s precepts. Feyerabend (1979) raised such questions about the system of recognition of the knowledge.

4.1.3 Other Sources of “Normative” Theories There is a belief that “the choice of accounting method has distributional consequences” (Mozes, 1992). This statement may look surprising. How can the way to tell the story have tangible effects? For instance, let us consider the concept of profit. The accounting profit belongs to shareholders when everybody else had been compensated. Therefore, it carries the idea that anybody else had received a fair compensation, which is based on the idea of free contracting which, in turn, depends on the circulation of complete information and the existence of other fair price mechanisms. Consequently, those implicit conditions never exist, and the distributional consequences are not conformed to the societal model supposedly sustaining economic activity. In many European countries they had an income statement (value-added oriented) that was far more informative and “neutral” than the model proposed by the IFRS. Standards are research objects, in the sense that they are social products that can be investigated on the basis of the influence presiding at their choices and the consequences they have on the distribution of the wealth in the society. Practitioners mostly ignore the world of research and the distributional consequences of their decisions.

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4.2 Research Versus Practice There is a recurring topic in accounting theory or accounting “reflexive” documents: the nonusefulness of the accounting research for practitioners. The objective of the research appears to be one of conforming rigidly to apparently scientific standards of design, methodology, and presentation rather than satisfying the criterion of practical usefulness. (Lee, 2006, p. 439) Where is this “criterion of practical usefulness” coming from? Lee is influenced by the old idea that accounting research must be driven by the practice which is a very bad way to make it enter into the university. A late arrived discipline must construct its legitimacy in the institution to have equal rights to recognition and therefore to resources. Accounting had been despised long enough in the universities for accounting academic to know that. This vision also comes from the confusion between accounting theory and standard-settings and also between pure and applied research. Another root of the question lies in the fact that governments and official bodies created to finance research in human sciences are not very generous with researchers in accounting. Therefore, accounting academics look at the professional institutions, like big accounting firms, to finance the research. In Canada, two of the three official accounting bodies (before they were united) historically had a representative on the board of the Canadian Academic Accounting Association. As the leaders of the accounting firms have little formation in accounting research, they will ask for the benefit for them of financing research. The question is legitimate although beside the point. There are, at last, some delicate elements in the discussion. If we look at the research over 50 years, there are many indications at the effect that the financial statements and the annual report are not read and if so, are not understood by the users, ordinary or institutional (Lee & Tweedie, 1977, 1981). Therefore, instead of playing ostrich, the profession may have to work on an alternative presentation format and, maybe, some alternative calculation system. The only thing they produced over this time was the self-designated conceptual framework that had no precedence on the standards and therefore that brought no significant changes in a set of financial statements remaining exactly the basic same even if thicker. Surely the way the research is reported can look esoteric for practitioners (Richardson, 1996). But the research reports are written to fit in academic journals having a goal to position themselves within the ensemble of all academic journals, for the authors to be recognized in the academic institution before the professional one. The two widely commented criteria for academic recognition are the research grants and the publications in recognized journals. So, to come back to Latour, they have to write research reports showing the signs of a certain conception of the scientificity to be accepted in these journals and have new or renewed research grants. We recently heard a researcher in medicine complaining about the negative effect of publishing in large quantities over the quality of the

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reported results that were not sufficiently tested. So, it seems to be a tendency in the academic institution at large. But, the lambda doctor in medicine may not understand every research protocol reported in The New England Journal of Medicine or The Lancet but he won’t say those researches are useless to him. The attitude of the profession refusing to touch the very basis of the financial reporting is also playing a big role in that misunderstanding. However, historically, the academics took the blame bluntly because they needed the money from the practitioners. A relevant question would be why the practitioners and the society in general would be interested in accounting research. The answer we propose is in two parts, the first one is the resources expended in the information process, and the second is about the difference between “pure” and “applied” research.

4.2.1 Saving Scarce Resources We know a certain amount of things about the usefulness of accounting reports. On the one hand we hear that accounting is providing information for decisionmaking and that these decisions are about investing or not. Then, we open a book about “investment theory” and there is no mention of accounting information (Haugen, 1986). Moreover, the products to be exchanged have greatly evolved through time: securities, government bonds, corporate fixed income securities, corporate stocks, options and warrants, forward and future contracts, the shares of investment companies and mutual funds, etc. (Haugen, 1986). The situation has not become simpler since this list was done. If we look at the work trying to find a correlation between earnings per share and the market price of the stock of a firm, we see that the results are not very conclusive (Gordon, 1994). The study of Gordon was reproduced in 1994 but originated in 1959. After that, we had a series of study looking at the effect of accounting information on the stock market. In this series, the results pointed in the direction of no effect at the moment of the official publication of the financial statements, but to some effect at the preliminary announcements date. However, it is difficult to establish which information is really impacting at this date as a preliminary announcement is quite a simple document containing little information outside of the profit figure and some references to important contracts implying that a two page set of financial statements may be sufficient (or a face; Smith & Taffler, 1992). Another line of research had taken the question from another angle. They look at what was important in the financial analyst reports leading them to one of the standardized recommendations: buy, hold, and sell. They concluded that information on the management was the most important (Breton & Taffler, 2001; Rogers & Grant, 1997). Therefore, accounting numbers ranked behind management discussion and analysis, footnotes, and the president’s letter (Rogers & Grant, 1997). These results may be triangulated with the results of Lee and Tweedie (1977, 1981) finding that the president’s letter was perceived by the users as the easiest part to understand in the annual report and was consequently the most thoroughly read. Therefore, to reach their audience, analysts may use arguments found in this part of the report. At this

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point, there is little information on the relationship between the content of the report and the recommendation. Breton and Taffler (2001), related systematically both aspects and they also found that other information was more important than the profit or the accounting numbers in general to reach a recommendation. Despite these research results, we continue to spend a lot of money to put together financial statements and other accounting reports as if they would be used for decision-making. Somebody might be in denial somewhere. Moreover, we spend a lot of money to have this information audited and, still more, to have standards along which the reports must be aligned while researches conclude that the audited report has no effect.

4.2.2 The Difference Between Pure and Applied Research We often see, in practice, a distinction made between pure and applied research. Normally, pure research looks for the general principles (in natural sciences it will be called “laws”) that explain a related series of phenomenon. So, there is pure physics and even pure chemistry, etc. Applied science then takes the results developed in “pure” science and applies it to developing concrete instruments that will help in our day-to-day life. For instance, the NASA makes a lot of research that can be qualified “pure” research although doing both. Often, things we have in our houses today had been developed from researches conducted at NASA. Like for any other discipline, research in accounting is of both categories. There had been a lot of researches on the importance of accounting numbers in general in the decision process. The methods used might have been inappropriate, the research questions often coming from nowhere, and the use of assumptions so unrealistic that the results meant nothing. But this was “pure” research. When we have research looking at the use of a specific item of information to reach a specific decision, we have applied research. After nearly 60 years of “scientific” research in accounting, the practitioners continue to say that there is no research interesting their practice. But, accounting research cannot really discuss the accounting standards mostly if it is to back the status quo (Lee, 2006), as the members of the standards-setting committees have done for decades. Researchers can discuss accounting standards as social objects. They may ask why a strange concept as the historical cost is in use, who is fighting to keep it, and who tries to eliminate it, etc. Therefore, this question of opposing research to practice is generally posed with the already made idea that the gap is the fault of the researchers. However, the bad faith from the world of practitioners and mainly their associations are, in our view, the main problem if there is any.

4.3 Arguments for Constructivism We believe that it is now impossible to pretend to know the object by itself. Firstly, the history of sciences shows the development of instruments that have

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changed our vision of the world. Let us take the microscope; it shows us a series of life forms we were ignoring the existence before. In the same way, the telescope has shown us parts of the universe whose existence we never would have guessed before. We know that our optical nerve is attached in our eyes in a place where we see nothing. So, strictly speaking, we have two black points in front of us. Our brain is reconstructing the image, filling the black spots with something coherent with the rest taken from our visual experience which is largely made of what has been told to us. An image is intelligible because there is a certain form of order allowing detecting the similitudes and differences: The order is a property of the culture, not the nature. (…) The imposition of the order happens with the perception, and results from the specificities of the brain being unable to assimilate such diversity without simplifying it. The order is then a discretization of the disorder, establishing thresholds dealing synchronically with tons of differences in doing like if everything was uniform between the thresholds. (…). (…) An image can be ordered for a viewer (in possession of a model) and not for another (not having the model). It is the reader that makes the reading. (Groupe m, 1992, p. 41) (Our translation) There too, our capacities to treat information impose choices in the data to be treated. The first particularity of the visual medium, which will not go without effect on the communication by this channel, is its puissance: it allows carrying 107 bits/second, 7 times more than the ear. This enormous quantity must be considerably simplified and reduced before reaching what we called the conscience, which admits only between 8 and 25 bits / seconds. (Francke, 1977) (Groupe m, 1992, p. 61) (Our translation) We must admit that there are many things outside that we cannot perceive, like the ultrasounds, and other things that we perceive wrongly. The best example is the movies. All the images in a movie are still. But because they pass at a predetermined speed in function of a physical phenomenon called the retinal persistence, we perceive moving images. If only one image is inserted in the series, our conscience has no perception of it, but it has some effect on us because our eyes see it although the information is not processed in the same way as the rest of the film. This is the phenomenon of the subliminal images suggesting things to our subconscious. With all the new instruments and knowledge that are developed, it is becoming more and more difficult to be a complete positivist for a serious epistemologist. If the positivism consists in believing that what we see is what is really there, the constructivism is a little bit more complicated. In substance, it says that our

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knowledge is a construction and then they are not that different. However, we have to be careful with the concept of socio-constructivism. If we accept that our reality is mainly a consensus, it cannot be separated into pieces. It will be impossible to isolate a socially constructed object and others that are not. For instance: They conclude that the language the CEO uses in the CEO letter is often multi-coloured, seductive, appeasing, and socially constructed. (Jon¨all & Rimmel, 2010, p. 310). This sentence has no meaning and a CEO letter is not more socially constructed than another text. That is the problem with people manipulating comprehensive concepts such as small tools, an unfortunate practice widely spread in accounting. The socially constructed world is all socially constructed and this since its beginning if such thing exists. Therefore, there is no “objective facts” as would say Mouck (2004) in a desperate attempt to reach some never existing “solid” ground. Even Baudrillard seems to have fallen in this trap when he said: “… signs are exchanged against each other rather than against the real” (Carlon, Downs, & Wert-Gray, 2006, p. 478). Saying that, he is supposing a previous objective existence for the reality: an “age d’or” of the “real” reality. We have to add that he is using the categories of Saussure in his categorization of the sign and the reality represented. But, if Saussure was able to develop his theory of the sign without having to precise the statute of this reality, Baudrillard cannot as he is proposing that the detachment of the sign is a characteristic of our historical period. Therefore, for him, there must have been a period where the sign was related to the referent. In brief, we live in a social world, mainly made of words and existing through a series of consensus. A social world is an ephemeral attribute of a flow of symbolic interaction among active people competent in the conventions of certain cultural milieu. The major mode of symbolic interaction for modern people is discursive. (Harr´e, 2002, p. 23) In our view (and we are starting to doubt it), the world “outside” is and is not tangible, sometimes perceived as it is and often reconstructed for we can only perceive it through our deficient senses. Our perceptions are physically limited, culturally constructed, and influenced by a series of psychological factors. With these deficiencies we try to apply our perceptions to make decisions, in the best of situations.

4.4 Decision-Making Accounting is reputed to be done as a basis for decision-making. The primary objective of accounting is to provide information that helps decision-makers make better decisions. (Bouwman, 1985, p. 61)

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Old accounting theory books discuss the question of decision-making. Moreover, they may admit that accounting would be determined by the ways through which information is treated to reach these decisions. A key element in understanding accounting is to understand the process whereby data is converted into information by the user. (Most, 1982, p. 63) That is a far more general question than what is done with accounting reports. Trying to determine, by the movements on the market, if a piece of information, artificially isolated, has an effect on the choices of investors lying on assumptions that cannot be sustained seriously, like the EMH,1 cannot lead to useful results. The question remains open to determine on which information creditors and investors ground their choices when assessing firms for they are the two categories described by the FASB as primary user groups (Most, 1982, p. 195). That is where the paved road ends and the speculations start. On the one hand, we have a dividend model, illustrated by Gordon, saying that the value for stockholders is based on the expected future dividends that may be a function of future earnings. It cannot be a scientific theory, as nobody knows future dividends, it remains purely speculative. If so, accounting finds its utility in deriving earnings (Most, 1982). But the future remains of the domain of crystal globe readers more than accountants that are fixed on the past except if we believe that the future is an exact projection of the past, in its inferential meaning. For instance, the relationship between earnings and dividends can be discussed harshly as many firms, believing in the model, are ready to do a lot to keep their dividend level even during years of losses. On the other hand, we have the Modigliani–Miller model saying that the dividend policy is irrelevant (Most, 1982). The value of the firm becomes the actual value of future net cash flows, which constitutes a return to the crystal globe. Sauvy, a lucid economist, would say, from memory, prediction is difficult, mostly when it is about the future. When we look at Foster (1986), we see that the predictive ability of analysts (who are the most performing and sophisticated users) declines very sharply and rapidly through time. Despite what we have just said, all the models we have in accounting and finance about the future behavior of firms on the market are based on stability (the best estimate of future earnings is actual earnings, i.e., a random walk (Malkiel, 1985), therefore any change in the accruals can be considered as a manipulation or a slow and steady progression (the best estimate of future earnings is based on the actual earnings plus a steady rate of growth). DeAngelo (1986) measures discretionary accruals as total accruals. While the first constitutes an acceptation of the impossibility of predicting the future while doing it still, the second one presents a future that would be conformed to a maximal reduction of the risk that can also be called uncertainty. Jones (1991) accepts an evolution of

1

Efficient Market Hypothesis.

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normal accruals following the evolution of assets. Both systems of inferences do not reflect what we know about the world outside. Finally, by quoting what he calls a series of approaches to making accounting theories, Most gives credit to all these “approaches” as prone to produce some kind of theory. Therefore, it is a salad from which no real conclusions emerge. But, when seeing that the next chapter is entitled: “The search for generally accepted accounting principles” (Most, 1982, p. 83) one understands that no step forward had been done. Some accounting theory handbooks present a decision approach. In this spirit, Scott (2003) based his books on two elements: the adverse selection and the moral hazard. Despite all the reservations we may have toward the agency theory and the concept of moral hazard, we may admit that the central question is providing information for the principal to make decisions. Scott reframes all the old vision of accounting theory by almost eliminating all this discourse about norms and standards and treating it at the end, through a discussion about the “theories of regulation” that are not presented clearly as they have a tendency to become “regulation as a theory.” Scott also affirms the central question of decision usefulness. However, he says that accounting “is information” (p. 6), which is debatable in a book posing a distinction between information and data. If accounting is really a jargon, it is a way to carry information, similarly as English or French, but it is not the information itself. But even Scott cannot escape from the rule: It turns out that the most useful measure of net income to inform investors, that is, to control adverse selection, need not be the same as the best measure to motivate manager performance, that is, to control moral hazard. (Scott, 2003, p. 8) We already know that the profit had no tangible existence, but it is the first time we see an admission that it can depend on the goal you have, outside of the texts on earnings management. In a way, we are back to the starting point. But theory wants to understand and then predict from this understanding. However, this presentation is in direct line with the conception of the society wanting that the economy is supposed to generate the most efficient use of resources, which will be reached in eliminating adverse selection, and to protect the property rights, which is the goal of eliminating what they called the “moral hazard.”2 But, doing that, accounting will not qualify to be called neutral or objective. If accounting is carrying information, it has to deliver it with the smallest possible bias, which is the problem of all historical costs. Surprisingly, many supporters of the efficient market hypothesis, so believing that the information is 2

In fact, talking about moral hazard to describe the managers pursuing their own interest is saying that the property rights give the owner the moral right to do anything he wants to increase the market value of his property and that those owning no properties have to work for this owner forgetting their own interests, reaching this conclusion based on the idea that following one’s own interest is an intrinsic part of human nature [sic].

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spread far before the accounting reports are published, support the historical cost to impede shareholders asking for more dividends on money that is not yet cashed. But, they are supposed to already know all these numbers that historical cost accounting tries to hide. Accountants have adopted a decision usefulness approach to financial reporting as a reaction to the impossibility of preparing theoretically correct financial statements. However, the decision usefulness approach leads to the problem of identifying the users of financial statements and selecting the information they need to make good decisions. Accountants have decided that investors are a major constituency of users and have turned to various theories in economic and finance – in particular to theories of decision and investment – to understand statement information investors need. (Scott, 2003, p. 53) We see that Scott, finally, is not that far from his predecessors. What is he meaning by “theoretically correct”? If the decision usefulness is a consolation price, what is his book about? A science of accounting, a theory, will try to understand what the structure of the controlling group is having made the focus to fall on decision-making. However, if we look more closely, this tendency is not that new. Then, he is brought to discuss rationality, which is already included in his adverse selection argument. This is coming directly from the definition of rationality borrowed from the classical economic theory passing through the finance “theory” that is always in the background of this kind of argument. However, scientifically speaking, it is very difficult to find any foundation for the concept of rationality as used in economics and finance. Finally, he finishes with the portfolio theory. This “theory” is also a negation of the classical liberal economic theory. It is quite a huge market failure. The theory had difficulties to explain the existence of the firm, when the compensation of the entrepreneur was the marginal wealth created by his organization of the work. But when, in surplus, people are compensated without having any action in the firm, the model is totally distorted as, at the basis, bringing money is equivalent to bringing labor force. With the portfolio theory, all the rights are given to the one bringing the money. Scott, as many others, is developing contradictory arguments without mentioning their incompatibility. We believe that this confusion is easily developed in the absence of a definition of accounting. Because we cannot be happy with the old “accounting is an art and a science.”

4.5 Summary All this discussion shows the terminological and conceptual confusions reigning in the institutional space occupied by the accounting theory. The conclusion of this chapter then will be institutional. Accounting exists mainly in the business world, which has specific practices and exigencies. This subworld also has its rituals. So, accountants have to present a certain image of competency and knowledge to be included in this social sphere. These “professionals” have won some points in this

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quest. In some countries the accounting profession is recognized among the liberal professions (medicine, law). This is quite surprising considering that the recognized “accounting profession” is not really such by preparing the accounting report but by auditing these reports (therefore it must be termed the auditing profession). In the academic institution, accounting is a newcomer. Closely monitored by the professional bodies, the accounting departments have been filled by practitioners. These departments have not yet fully reached academic standards in terms of the qualification of the professors and, consequently, the research fundings and publications. Then, professors of accounting have, as a group, a low statute in these organizations.

Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

12.

What is the relationship between accounting theory and accounting practice? What is a normative theory? Can it exist? What is a paradigm? What is the difference between prediction and prescription and what are their statutes in a theoretical context? Is the maximization of profit a basic element of the liberal economic theory? Science is mainly a discourse. Comment. Which differences do you make between a positive and a normative theory? What do we know about the effects of accounting numbers on investors’ decision-making process? What are the goals of the sciences? Contrast the na¨ıve positivism and the socio-constructivism. Is the maximization of profit a goal of the entrepreneur in the liberal economic theory? a. What is supposed to be the compensation of the entrepreneur in this theory? b. Can we measure the profit? A paradigm is a model and a theory is also a model. Explain.

Themes to Be Developed Further 1. A society (state) must be governed differently than an enterprise. Comment. 2. What would be the consequences of your positioning as a positivist or a constructivist on your researches in the accounting field? 3. Practitioners refuse to take stock of the results produced by the accounting research. Comment.

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Chapter 5

For a Definition of Accounting Any object we may know does not deserve a particular theory. There is no theory for a table, or there are so many theories amalgamated together to arrive at this applied result that there is no one appearing as THE theory of this object. Most objects are the application of theories elaborated long before they appear or even after. For instance, an electronic device cannot be constructed without the existence of many theories behind while a table can be done without most of it. What kind of an object is accounting? At first we may say intuitively that it is not a physical object although some of its manifestations are tangible. Accounting is intangible but the books containing the numbers of a particular entity are tangible. The first move will be to look at what the literature proposes as definitions for accounting.

5.1 The Definitions From the Literature Belkaoui (1992) starts by quoting the AICPA (American Institute of Certified Public Accountants): Accounting is the art of recording, classifying and summarising in a significant manner and in term of money, transactions and events which are in part at least, of a financial character, and interpreting the results thereof. (AICPA, 1953, quoted by Belkaoui, 1992, p. 22) The first tasks of accounting are recording, classifying, and summarizing. This means to keep the register of an entity and produce accounting reports covering specific periods. We can probably all agree that it is the basis of the accounting activity. But, a bookkeeper can do that, except maybe for the summarizing. But, is it an art? If the manner we do anything defines an art, then it is an art, but everything is, and it says nothing particular to differentiate accounting except classifying it among the activities rather than physical objects. Any activity necessitating creativity is an art. So, writing the consequences of a series of research findings is also an art. Then it says that the accounting discourse implies basically some calculation and consequently must be constructed around numbers representing monetary A Postmodern Accounting Theory, 65–96 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78769-793-520181005

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quantities. Up to this point the definition is very descriptive and widely acceptable. But the question of the interpretation is more complicated and debatable. Firstly, is this interpretation coming before the summarized numbers or after? For instance, when we valorize the tangible assets at their historical costs, we interpret the numbers before producing them, meaning that the user, who is the decisionmaker, will never have the alternative number in front of him to make his decision. This is most disturbing when we realize that financial accounting is primarily done for people outside the firm having no other access to information. Then accounting is usurping the power to decide instead of informing the decision. In the 1960s, the AICPA proposed a revised definition: The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information. (AICPA, 1966, quoted by Belkaoui, 1992, p. 22) Firstly we see that the accent on the bookkeeping aspect of the “profession” is replaced by more “professional” responsibilities. Firstly, the accountant must identify, implying that it is not immediately given. Secondly he must measure, implying a series of choices. Finally, he must communicate the information to the users. So, we have passed from a world where accounting was mostly clearly defined and was a straightforward transcription of the “reality” to arrive in a world where things are not always so easy to access and that some expert translators are needed to format the “reality” into usable information. The sociology of the profession would say that such a change provides a huge power to the accountant by placing his activity under the veil of the specialization and that the new aspects of choosing and interpreting place him among the professionals. Added to the use of numbers, it becomes useless to try to understand it for a profane. That is the basis of a profession (Breton, 2016; Breton & Caron, 2008). At this point, accounting is sufficiently complex to enter into universities and develop exams to prove that it is a difficult profession to enter and that the professional bodies place great importance in the qualification of the new accepted professionals. Then Belkaoui reproduces the old question of whether accounting is an art or a science. He settles the matter rapidly by quoting Mautz, stating that accounting is a science. Accounting deal with enterprises, which are certainly social groups; it is concerned with transactions and other economic events which have social consequences and influence social relationships; it produces knowledge that is useful and meaningful to human beings engaged in activities having social implications; it is primarily mental in nature. On the basis of the guidelines available, accounting is a social science. (Mautz, 1963, quoted by Belkaoui, 1992, p. 23) It is interesting to see the social aspect of accounting described that way in 1963. However, the problem with this definition is that accounting produces no

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knowledge following the definition any science has of it. The information produced by accounting numbers may be useful (although widely contested) for decision-making but it has not the scientific qualities described by epistemologists. Therefore, accounting is not a science. But it is a social activity that can be the OBJECT of one or many sciences. Most accounting theory books do not define accounting at all. Kam does it in the same way as Belkaoui, by quoting the AICPA. He also adds the definition brought by the APB (Accounting Principle Board), which adds some dimensions to those we already reproduced here: Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions… (APB, 1970, quoted by Kam, 1990, p. 34) First, the APB does not enter in the discussion about the art and the science. Accounting is defined by its purpose, which is to provide information for decisions. Since this statement (Statement no.4), most writers agree with this definition. The following question would be which information is to be provided? In this line of reasoning Kam adds that “the boundaries are fuzzy” and moreover “the inexactness of our definition of accounting, however, is an indication of the primitive state of accounting theoretical development today.” Many authors, notably Scott (2003), instead of providing a definition, will start with some historical considerations on the development of accounting. At this point, it seems evident that accounting is a form of language. However, there are many forms of language and we have to precise the limits of the definition when applied to accounting. From here, the following statement stands as our definition of accounting. It is a language. The interpretative aspect that is now very fashionable is dependent on the institutional dimension of the profession, not on the activity per se. Accounting produces summaries of events (purchases, sells, etc.) happening in an organization (enterprise, not-for-profit organization, governments) in a coded form allowing the people who know the code to be informed and use this information.

5.2 Accounting as a Language Barthes (1964) makes a distinction between langue and langage. The language includes both aspects of langue and parole as used in linguistics since Saussure. The langue is the institutional aspect, the code, which an individual cannot alone create or modify. The parole, which we may translate by the discourse, is the way individuals use the langue, thereafter the code. We can characterize an individual by his peculiar usage of the code. This articulation between the code and the discourse is at the basis of linguistics since Saussure. The code is unique and

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remains abstract; it is actualized in a multitude of discourses. Each discourse is part of an idiolect, which is the particular usage one individual does of the code. The activity known as accounting is a language. At the time where it was seen as a sin to work, for very rich persons, they hired stewards (managers) to take care of their sources of revenues. Other mandates exist that will necessitate reports made in another fashion with other instruments. Many mandates are composites and will imply many categories of reports. The money entrusted to fiduciaries is supposed to serve some specific purposes, and the report must mainly convey the state of the activities and the objectives it was expected to fulfill. However, these precisions remained contextual. Some other forms, as we will see, might have been developed. The sociology or the history of accounting may include the social influence having led to its elaboration. This will be a part of the theory, but not related with the content of accounting, only to the existence of this particular activity in a given society at a precise period. The activity exists because there is a need to distance the relationship between the owner and the manager (Breton, 2016). But, the content of the activity cannot be derived from this information.

5.2.1 Carrying Knowledge Accounting is not knowledge in the same way history, physics, or anthropology are. It is carrying knowledge as history or physics are carried through French or English or any other language. As a language, accounting can carry information and knowledge about a lot of things, but it is not knowledge by itself. Any natural language is used by different disciplines to carry knowledge, mostly since knowledge is made of words and sentences; it is a form of the science, not its content. The role of accounting is to narrate “events” having happened, under a conventional form allowing those participating to this convention, speaker of the language, to be informed of these “events.” Accounting is relating, not explaining or describing by itself. If accounting produces a description, it is resulting from a specific use of the language like in a natural language. Accounting does not give any knowledge of the world. It merely carries the knowledge like any other language. Accounting tells “events” like purchases, sales, etc., but provides no knowledge of the reasons, the circumstances, or the consequences of these events. Therefore accounting, in its technical aspect, cannot be a science. It would be possible, without this technic, to produce financial reports into a narrative form. It would probably be less synthetic but more widely intelligible by people speaking only natural languages. There have been experiences in adding both aspects with the “cartoons graphics” (Moriarity, 1979). This technic allows expressing, in one only visage, grossly drawn, the financial situation of the entity considered. As esoteric as it may look, it seems to work (Smith & Taffler, 1984). Therefore accounting may not be the only instrument prone to “account” for transactions but the only one possible choice among others. The model of Moriarity is based on the same principles than the model of Altman to detect risky firms. They calculate a limited number of ratios that are

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reputed to contain the essential information necessary for decision-making. The form and the size of the visage are determined by this series of ratios: the mouth by the ratios related with the profit, the eyes by the debt, the nose by the liquidities, and the ears by the financial leverage (ICCA, 1992). Software have been develop to draw the visages from the ratios. Smith and Taffler (1984) proposed some sets of financial statements, ratios, and faces to different categories of subjects to compare their effects on the decision. Their results suggest that faces allow taking decisions at least as good as the next best method and this, in a quite shorter period of time. Thus, why would we not finally take accounting information at “face value”? (Fig. 5.1) Numbers presented in a set of financial statements appear to be one possible choice (among others) to present this information.

Raos Sales/net worth

Sector 19x6 6,84 15,93

19x5 5,75

19x4 4,14

19x3 4,25

19x2 4,17

19x1 4,18

Sales/stocks Sales/working capital Short term assets/short term debt Net profit/sales Net profit/net worth Net profit/working capital Total debt/Net worth Short term debt/net worth Stocks/working capital Short term debt/stocks Long term debt/working capital Fixed assets/net worth CICA, 1992, p.228.

5,4 8,57 1,80 1,86 13,37 17,26 145,2 98,8 166,0 77,0 35,7 26,1

4,1 4,49 1,60 0,01 2,61 2,04 288,2 214,1 109,2 153,1 53,4 31,3

3,4 3,97 1,55 2,29 11,35 10,89 233,2 190,2 115,2 158,5 36,5 27,5

4,6 3,87 1,75 2,55 10,86 9,90 187,9 146,7 84,0 159,2 36,1 23,8

4,8 1,63 1,57 3,14 13,10 15,19 167,4 152,0 100,0 176,2 12,4 20,3

5,5 4,64 1,71 3,44 14,38 15,98 143,1 126,2 84,9 165,1 13,5 19,0

Fig. 5.1:

4,3 10,07 1,23 (0,07) (1,06) (0,67) 876,0 678,4 232,9 184,1 123,7 92,2

Presenting Accounting Information Through Faces. Source: CICA (1992, p. 228).

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REPRESENTATION Sign Signiϐier

Signiϐied

Concepts

Reality

Referent

Fig. 5.2:

The Linguistic Sign.

Studying how to speak a foreign language is not a science, but the linguistics of this language is a science. This linguistics will cover many aspects. Studying accounting as a social activity is as scientific as studying any other social activity and therefore is as scientific as any other human science. Therefore we can think about doing the linguistics of the accounting language. For instance, it is generally accepted that the categories – assets, liabilities, debit or credit – were perfectly arbitrary and that there is no motivated relationship between the sign and the object that is referred to. It is known, since Saussure (1995), as one of the main characteristics of a language, called in French, l’arbitraire du signe (Fig. 5.2). If we separate arbitrarily the level of concepts from the level called “reality,” where the referents are, the linguistic sign is entirely situated on the conceptual side and the represented objects on the reality side. Obviously these “objectives” referents3 may also be feelings or even ideas to be expressed through being represented by signs. The sign itself is made of two faces, the signifier and the signified. The signifier is the physical support, a series of sounds or letters or even movements being the physical aspect of the sign. The signified is the mental image of what we want to represent. It is not the object in its specificity, only a kind of generic mental representation of it. This signified is relatively independent of the referent. To support this statement, we may consider the independence of the words relatively to the object. The words designating an object can be multiple and changed through time. Currently, we see the signified changing referent by a series of sliding of meaning.

5.2.2 Natural and Accounting Languages Belkaoui (1989) presented accounting as a language. However, he fell immediately in the metaphor (It is like a language). A referent is any part of the “world” that is represented by a sign

3

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71

It is customary to call accounting a language or, more precisely, the language of business, as it is an important means of communicating information about a business concern. (Belkaoui, 1989, p. 262) This sentence is metaphoric. Accounting can be described as a language. If it can be described that way not metaphorically, maybe it is because there are many kinds of languages and that the observer does not have to twist the facts to make it fit the definition. Therefore, if accounting is, in full right, a language, it expresses far more than some business concern. This language is not really one in the sense of a natural language. We learn from the sociology of professions that professionals have developed specific languages called jargons, which are parasites of natural languages in the measure where they use the signs taken from natural languages assigning them more restricted definitions. Ignoring Saussure as well as Dubar and Tripier (1998) and interpreting wrongly the works of Chomsky (1969, 1971), Belkaoui uses metaphorical references to force the insertion of accounting into the category of language: a) The symbols of lexical characteristics of a language are the “meaningful” units or words identifiable in any language. These symbols are linguistic objects used to identify particular concepts. These symbolic representations do exist in accounting. Numbers and words, debits and credits, may be viewed as symbols generally accepted and unique to the accounting discipline (McDonald, 1972). b) The grammatical rules of a language refer to the syntactical arrangements existing in any given language. Such rules also exist in accounting. They constitute the general set of procedures used for the creation and dissemination of accounting data. They formalize the structure of accounting in the same way as grammar formalizes the inherent structure of natural language (Jain, 1973). Given the existence of both symbols and rules as major components, accounting may be defined a priori as a language and researched as the basis of the theories and methods used in the study of language. (Belkaoui, 1989, p. 282) (Our emphasis) The problem is that debit and credit exists already in natural languages. In the natural languages, these words have a larger meaning. Belkaoui found the quotes, that have no particular linguistic authority in fact, and then, based on it, he decides that the linguistics findings can be applied directly to the accounting discourse which “may be viewed as” a language. Then, to discuss the basis, he did not refer to Saussure but to the Sapir–Whorf hypothesis. From this incursion in anthropology, he concludes that the sociolinguistics is relevant here. But the Sapir–Whorf hypothesis is not about the sociolinguistics as developed by Labov (1976),

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describing the use of language in relation with the social position and the social ambitions of the speaker. Sapir–Whorf were discussing the formation of the language and its embedding in the culture and the society from which it emerges as all the thinking is framed and organized by the language (Schaff, 1969). Starting from an acceptable definition, Belkaoui derives in trying to characterize the belonging to different accounting associations by the hypothetical use of different levels of language. There is nothing in the theory allowing such a statement. Belkaoui (1980) will even pursue his own experiment in order to try the methods presented by Haried a few years before. Haried used a method derived from Osgood, Suci, and Tannenbaum (1957) to ask his subjects to evaluate the degree of similarity of a series of accounting-related concepts: entity assumption, going concern assumption, stable monetary unit assumption, etc. The answers to that were expected to differ from subjects coming from three totally different groups: accounting professors, accounting students, and chartered accountants. This is not a research in sociolinguistics; this is no research at all. Over the fact that the accounting language must not be confounded with a natural language, nobody having accounting as a mother tongue (hopefully), accounting is a second-degree language parasite of a natural one. Computer languages are third-level languages. We can make a typology of the languages in the following sections (Fig. 5.3). The meaning is constituted by the denotations plus the connotations. The denotation is the nexus of the meaning. It can be exemplified by the main definitions of a word found in a dictionary. The sign TABLE denotes a plane surface elevated over the floor; it also means a list like in the multiplication tables or the tables of the law. The connotations, for their part, are potentially infinite in quantity. They represent the personal experience of the subject regarding an object. When we remember what Proust made from a small cake (a madeleine) we can understand that the connotations are potentially infinite. These connotations are the richness of the language, if we like, but they also bring imprecision. Therefore, a semi-technical language, which the sociology of

TYPES Languages

• • •

Natural Semi-technical Technical

Fig. 5.3:

CHARACTERISTICS Connotations

• Numerous • Limited • None

EXAMPLES Examples • English • French • Accounting • Psychology • Cobol • Modula

Characteristics of the Types of Languages.

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the professions often called a jargon (Dubar & Tripier, 1998), will try to eliminate these connotations. The words used by the speakers of a semi-technical language will take a common meaning, eliminating partially the connotations. In accounting the word PROFIT will design many things, but it can’t design the fact of growing for a person or take advantage of the credulity of someone, meaning that it can take in natural languages. In a technical language, no real denotation and moreover no connotation are tolerated and no approximation can be accepted. When the computer was writing C: ., if you did not write the right word, it was finished. No approximation was able to replace the proper word. The signs having no real meaning are totally empty of any affect, i.e., any connotation. Accounting is to be classified among the semi-technical languages or the professional jargons. Parasite of a natural language (or of many in fact), this language limits the quantity of connotations without eliminating it completely. Consequently, it will remain a nontechnical usage of this language that may be qualified of social as for the language of psychology, while it is impossible to conceive a social usage of Modula or COBOL or any such languages.

5.2.3 The Linguistic of the Accounting Language If accounting is a language, it is potentially the object of a linguistic. Linguistics is taking the language as an object and considering it under an ensemble point of view. A science of accounting will be a linguistic made from different points of view such as sociolinguistics, psycholinguistics, etc. (Table 5.1). Among the linguistic studies, we can make a first distinction between internal and external ones. By internal, we mean the study of the language as a system,

Table 5.1: Linguistics of Accounting. Aspects

Technical

Psychology

Sociology Politics

Content

The structures of the language will be studied, i.e., how the elements appear and disappear. Briefly, the focus would be on the standards as expression of the structures of the language at a given time. Accounting has an effect on behavior. The process of making budgets is a good example. We will analyze, for instance, the effect of accounting on behaviors (behavioral) and on the decision-making process (cognitive). Accounting is developed in particular social contexts. It is a social stake that different groups try to appropriate. It is an extension of the preceding. We would analyze the way political leaders use accounting, what we have termed the ideological usage (Breton, 2016).

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and by external we mean the application of the method of other human sciences and even natural sciences to the language as an object. The technical (internal) level will include the phonology, studying the production of sounds; the morphology, studying the structuration of the words; the syntax, studying the grammatical construction of the sentence; and the semantic, studying the meaning of the words and sentences (Dortier, 2001). Then external discipline intervenes through history, sociology, psychology, and even neurology (Dortier, 2001). Accounting speaks of natural languages with more restrictions. Adapted to the category of language (semi-technical), all the categories of internal studies can apply maybe except phonology because it will not differ from those of the natural languages parasite. The external discipline will also apply, except maybe the neurolinguistics. But what do we mean by linguistics? F. de Saussure wants to make a science out of linguistics. For that, he tries to give to it the attributes of a science, i.e., an object, a method, and theoretical and analytical concepts. The object of the linguistic, argues Saussure, is the language (code), defined in opposition to the parole (speech). The language is “at the same time a social product of the faculty of language and an ensemble of necessary conventions”. It is then a social institution, a shared code, a system of signs common to the ensemble of the members of a community. The parole is the use of this system by the speaking subjects, the individual realisation of the code. It is “an individual act of will and intelligence.” (Krieg, 2001 p. 22) (Our translation) As a semi-technical language accounting will not have any specific phonology or even syntax. Based on a restriction of the connotations, for the concepts to be clear among the professional, the distinction will be mainly at the semantic level. If we take the word profit, we can compare the definitions in specialized and general dictionaries. In a specialized dictionary we find: Profit noun (a) money gained from a sale which is more than the money spent; clear profit 5 profit after all expenses have been paid: we made $6,000 clear profit on the deal; excess profit 5 profit which is higher than what is thought to be normal; excess profits tax 5 tax on excess profits; gross profit or gross trading profit 5 profit calculated as sales income less the cost of the goods sold (i.e., without deducting any other expenses); healthy profit 5 quite a large profit; manufacturing profit 5 difference between the cost of buying a product from another supplier and the cost to the company of manufacturing it itself; net profit or net trading profit 5 results where income from sales is larger than all expenditures; net profit before tax 5 profit of a company after expenses have been deducted but before tax has been calculated; operating profit 5 result where sales from normal business activity are higher than

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the costs; paper profit 5 profit on an asset which has increased in price but has not been sold; he is showing a paper profit of £25,000 on his investment; trading profit 5 result where the company’s receipts are higher than its expenditure; profit margin 5 percentage difference between sales income and cost of sales; pretax profit margin 5 the pretax profit shown as percentage of turnover in a profit and loss account (…). (Collin & Joliffe, 1992, p. 169) In an old Webster dictionary, the definition is far more general: Prof-it (…) n. often attrib (ME. Fr. MF. Fr. L profectus advance, profit, fr profectus, pp. of proficere) 1: a valuable return: gain 2: the excess of returns over expenditure in a transaction or series of transactions; specif: the excess of the selling price of goods over their cost 3: net income usu. For a given period of time 4: the ratio of profit for a given year to the amount of capital invested or to the value of sales 5: the compensation accruing to entrepreneurs for the assumption of risk in business enterprise as distinguished from wages or rent – (…). Profit vi 1: to be of service or advantage: avail 2: to derive benefit: gain ; vt: to be of service to: benefit. (Webster, 1965, p. 680) We have reproduced only half the entry for the word profit in the specialized dictionary while we have the complete entry for the general dictionary. The first definition is quite complete. One can go from the top of the income statement to the bottom, passing by all the intermediary managing subtotals with the instructions to calculate it. The different terms for the same numbers are all explained, i.e., gross profits and operating profit or operating margin, etc. It is interesting to see that the basic meaning of profit can be assimilated to progress (Dauzat, 1938). Therefore, the profit is the change in the wealth of some entity over a period. The accounting jargon has kept the meaning. In the general dictionary, the definition is far more synthetic. There is a reference to the economic theory (compensation for risk) that is not in the accounting dictionary, keeping itself within the boundaries of the different profit calculations under the numbers or ratio forms. Then, the general dictionary makes another entry for profit, meaning something that is advantageous. This definition is again excessively general. We see that the specialized dictionary is producing a definition that is far more limited to one basic meaning with all the variations. The general dictionary tries to generally cover all the possible areas where the word can be used. This is exactly the inverse process. We can do the same thing with assets or any other accounting lexical form and the results will be comparable. Therefore we can say that we found the semantic particularities we were looking for. The accounting language, as any professional jargon, reduces the number of connotations

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associated with words and precises the remaining definition to increase the consensus between members of the profession and consequently the cohesion in the group. Incidentally, this last effect would be in accordance with the Sapir– Whorf hypothesis. There are some syntactic aspects to be considered. We have already said that the annual report is a genre (Breton, 2009). Inside the annual report, participating to create specific features making this form recognizable at first sight, we have the financial statements. The elements in the financial statements have a specific order. Firstly, we must say that with the proliferation of the notes to the financial statements, most of the statements themselves are constituted of narratives therefore responding to the syntactic rules of the natural language. However, a balance sheet contains the assets on the left and their owners on the right. This is the result of an arbitrary choice responding to no fundamental necessity. Things may have been presented in a different order without altering the informational content. One of the specificities of accounting documents is their strong internal coherence. An income statement is based on a calculation system going from top to bottom. This system includes intermediary subtotals that are supposed to be important in the decision process. Therefore, the numbers are not presented in random order but have to follow rules that are syntactic, not only by analogy. Finally, as we have said, the accounting jargon has a specific semantic that is more restrictive than the semantic of the natural language from which it is borrowing its symbols. Thus accounting is a form of language having all the necessary characteristics to be considered so regarding its category. It is an organized discourse over the limits of the sentence retained by Saussure. Accounting appears as a social object. This language reflects the distinction between the code and discourse that was proposed by Saussure (1995). It makes a fundamental distinction between the language as a code and the infinite numbers of discourses that can be produced with a limited code. Saussure would say that the linguistic limits its study to the sentence. After this, for him, there are only other sentences responding to the same set of rules. However, following Barthes (1966), we can say that there are other sets of rules for the discourse and that we may build another linguistic of a higher level to account for the discursive structural elements. This is also true for the accounting language. This new linguistic will take the form of a semiotic. In a natural language, the “rules” are not standards fixed by an academy, but consensus of the users having been formed through time, and in constant evolution, to reach the goal of any language: communication. So one can reject totally the rules, but he will not be understood at all. Communication is the goal of any language; other possible uses are totally marginal. In linguistics, this communication dimension is often taken for granted. But we may ask the question: how far can one speaker go from the rules and continue to be considered to speak the language, i.e., understood? On a similar line we can ask how much a person can differ from the society in which she is living without being completely rejected.

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Accounting is supposed to exist to communicate information about the financial situation of organizations. Therefore, normally, the design of the accounts would be a function of the needs of the decision-makers. This is true for every professional jargon whose function is to facilitate the communication between the members of the group while, to a degree, keeping outsiders away. Natural languages can support far more receivers and destinations than only the mere communication of the content of a message. These uses are described by Jacobson (1963) following the fundamental scheme of Shannon and Weaver (1949) augmented (Fig. 5.4): • Emotive: (Source oriented) When the source expresses its feelings toward an object (for example, a comment on a movie). • Conative: (Receivers oriented) When the communication is devoted to teach something to the receiver or to have a direct effect on him (for example, an order). • Referential: (Context oriented) When the communication is totally devoted to the transmission of information (for example, a scientific paper). • Poetic: (Message oriented) When the form is more important than the content (for example, some form of poetry). • Phatic: (Contact oriented) It is the part of the communication destined to maintain the contact (for example, the “hum” in the telephone, to indicate that you are still there). • Metalinguistic: (Code oriented) When providing precisions about the communication (for example, explaining the meaning of a technical term). In natural languages the communication process can support a series of goals. In a semi-technical context, the jargon cannot be as diversified. In principle, the goal is to deliver a message, intended by the source to the receiver to help him making decisions (in such a case doing nothing is a decision, in the recommendations proposed by sell-side analysts, hold has, by far, the highest frequency). Therefore, when the communication is specifically oriented, its characteristics must come from its goal, i.e., support the decision-making. However, we have to admit that no description of the process of decisionmaking had ever been proposed as a basis for making standards in accounting.

Code Source

Message

Receiver

Contact Context

Fig. 5.4:

Communication Scheme.

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Even the famous conceptual framework, although starting not far from it, does not consider the decision-making process seriously. For instance, the first user recognized by the framework is the investor. This investor is said to need information about the future and not the past. Therefore, going down in the model, the quality that will have precedence over the precision will be the relevance. However, the country having generated this “framework,” the US, has never departed from historical cost, showing that this framework had never been used to make standards in practice. Thus, it will be possible to conclude that financial accounting is not really used for decision-making but continues to exist and to absorb resources for other unspecified reasons. When talking of financial accounting, we are implying a decision to be taken on an investment “market.” The presence or absence of the conditions for a market to exist is never discussed. These markets are posed as facts and become practical excuses to explain social decisions as following the “laws” of the market. These days, the profit is the most socially known and used accounting concept (Breton, 2016; Breton & Caron, 2008). Everyone refers to profit to judge activities that have nothing to do with making profit. Few people understand how the profit is calculated and fewer understand its role in the general economy. In fact, accounting is placing the focal point on specific elements rending the ones left in the shadow looking unimportant. What is accounted for can shape organizational participants’ views of what is important, with the categories of dominant economic discourse and organizational functioning that are implicit within the accounting framework helping to create a particular conception of organizational reality. (Burchell, Chubb, Hopwood, Hughes, & Nahapiet, 1980, p. 5) Profit is now at the basis of the conception of the organization in general, being applied far over the boundaries of the private enterprise. Other accounting concepts, although taking a lesser social importance, at least statistically, continue to function without any real knowledge of what they are. There are two aspects to this question: the first is related with the professionalization of the accounting activity, and the second is the key role played by accounting concepts in our societies. In consequence we will determine the part of the markets and of the professionalization in the definition of what is accounting.

5.3 The Mirage of the Market To discuss the notion of profit, we have to refer to the context, i.e., the market. So, before discussing the notion of profit, let’s discuss the notion of market. If competitive equilibrium is defined as a situation in which prices are such that all arbitrage profits are eliminated, is it possible that a competitive economy always be in equilibrium? Clearly not, for then

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those who arbitrage make no (private) return from their (privately) costly activity. Hence the assumptions that all markets, including that for information, are always in equilibrium and always perfectly arbitraged are inconsistent when arbitrage is costly. (Grossman & Stiglitz, 1980, p. 393) and more: Thus, we could argue as soon as the assumptions of the conventional perfect capital markets model are modified to allow even a slight amount of information imperfection and a slight cost of information, the traditional theory becomes untenable. (Grossman & Stiglitz, 1980, p. 404) When we are talking about a market, we refer automatically to Adam Smith and the invisible hand. This approach proceeds from a magic vision of a market. There are conditions for a market to be a market and for an exchange to be done at “market” value. But all that is forgotten, and the word market is used all over the place without any knowledge of its implication. Moreover, nonmarket transactions are justified by referring to the “laws” of the market. The expression itself fits in the configuration described earlier as it refers to unavoidable scientific laws being the results of recurring observations of natural phenomenon. But there is no such thing in human sciences as natural laws. Others believe that such markets, if it had ever existed, would have been a danger for the society: Our thesis is that the idea of a self-adjusting market was pure utopia. Such an institution cannot exist on a long-term basis without annihilating the human and natural substance of the society, without destroying the Human being and transforming its environment into a desert. (Polanyi, 1983, p. 22) (Our translation) Then people will consider the price paid for a day of working to somebody starving, as conformed to the “laws” of the market and therefore legitimate. We have even heard, in our countries, that it was difficult to stop companies like Nike employing children because the revenue of these children was often sustaining the whole family. But if the child sustains the whole family, it is because nobody else works, so why not hire this somebody else in the family instead of the child? Probably because they will have to pay an adult more than a child. They call that market. This is not conformed to the theory. If one party at the transaction has no choice, it cannot be qualified as contract made in a competitive market. And if “markets” are not competitive, they don’t exist anymore in their classical economic definition. And they (economists) have taken plenty of time to recognize that it was easy for the firms having reached a certain size to impede the markets to be really competitive. (Akerlof & Schiller, 2016, p. 29) (Our translation)

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In the liberal market, neither individual buyers nor sellers have control over the prices. This kind of market is called purely competitive (Due, 1956). That is the desired kind of market as it is the form proposed and protected by our governments. Western societies generally have laws to protect the economy against monopoly and cartels, providing control over prices. The governments also have agencies to discuss the demands of companies for mergers and acquisitions in sectors where the competition is not assured. The government will also fix prices in sectors where the competition will cost more than its absence or take the activity in charge. However, we assist at a concentration in many sectors of the economy. The number of large companies decreases in almost every industry while the existing ones increase their size. Therefore, many authors such as Akerlof and Schiller or journalists like Palast (2006) have found fundamental flaws in the supposed market system. These flaws are not only small and passing incoherencies, they are long-lasting and much expanded deficiencies. This absence of control over price implies: It is essential that the various sellers and buyers act independently of one another if the market is to be purely competitive. If firms agree upon policies, the effect on competition is the same as that of numbers of sellers or buyers. (Due, 1956, p. 51) And, to complete the picture, the profit is also an indication that the firms can have power over the prices. Therefore, Watts and Zimmerman (1986) propose the size hypothesis: Ceteris paribus, the larger the firm, the more likely the manager is to choose accounting procedures that defer reported earnings from current to future periods. (Watts & Zimmerman, 1986, p. 235) However now, the world of firms has succeeded in spreading the belief that the more profit there is in the society, the better the economy is going (Breton & Caron, 2008). But, seen like that, this is no more a market economy despite the number of repetitions we can have every day.

5.4 Profit Against Market Firstly, the profit is a market failure. Those days, the social representation of the profit is that it constitutes the remuneration of the entrepreneur justified by the risk he is taking. Mythically, in a perfect market as described by Adam Smith, one cannot make profit as the competition forces the sellers to sell always at lower prices. (Wallenstein, 2000, in Breton & Caron, 2008, p. 76) In a real market as we have just described above, there is no profit because the competition is perfect. So, contrary to what our politicians are saying lately, profit

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is not an indication of the well-being of the economy but an indication of the absence of market, which can be disturbing in a supposed market economy (Frederick, 1995). The social representations are totally inversed from what Frederick and Wallenstein are saying. This reversal of meaning tends to favour the absence of real market and consequently the making of profits. Watts and Zimmerman (1986) based their third hypothesis on the fact that the profit is a signal for an absence of competition, and this becomes a signal for the government to intervene in the sector on the basis of the absence of market and the possibility that prices can be controlled. Then, they supposed that the firm would try to delay the recognition of some profit, not to awake the authorities. However, what we see in “reality” is that firms (together) instead of hiding profits change their social representation. All of that system had been destroyed (Polanyi, 1983) if it ever existed as described. These idealistic interpretations of the texts of Smith, Rousseau, and many others create an historical vision that can be quite biased. We cannot today follow in this direction. The habit of seeing, in the last ten thousand years as in the organization of the first societies a simple prelude of the real history of our civilization, which would start in 1776, with the issuing of The Wealth of Nations, is obsolete, not to say more. (Polanyi, 1983, p. 73) (Our translation) However, this biased vision is very useful to create the impression that we live in a market economy and that we can’t do anything to change it because the “laws” of the market as those in the natural sciences are given and immutable. Pretending to be in accordance with these “laws,” the firm system can affirm notions that are totally contrary to the basic principles of their very existence. The emergence of a relatively small number of large financial institutions… does not necessarily imply that they are able to maintain uncompetitive prices and thus realize higher profits. One explanation is the “efficient structure hypothesis.” This theory argues that high levels of concentration arise naturally over time, because the firm with the most efficient structure will dominate the market… Thus, in the case of financial services consumers would benefit from an industry dominated by a few large institutions, because they would actually provide the lowest cost product and ˆ e, services. (Canadian Bankers Association, 1997, in Breton & Cot´ 2006, p. 229) This statement is clearly against all the theoretical systems on which our economic life is believed to be built. Moreover, the Canadian banks have maintained themselves at the top of the profitable enterprises for decades now showing the faultlessness of this assertion. There are constantly five banks among the six most profitable enterprises in Canada, the sixth being an oil and gas company.

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Focussing on the profit as socially highly desirable, instead of an indication of the failure of the system, produces a distortion of this system although it is rending the third hypothesis of Watts and Zimmerman completely obsolete without having to manipulate profits to keep it low. For instance, we will sell a state-owned enterprise (SOE) because it is not making profit. But, immediately after it is sold, the tariffs would increase sharply creating a profit. There is no reason why citizens will sell for a cheap price a public asset that is profitable for them through the tariffs, to a private firm making profit by doubling those tariffs while diminishing drastically the maintenance of the infrastructures, and firing employees who will fall on the public assistance so increasing again the expenses of the citizens. As impossible as it may seem, that is exactly what happened with the water system in the UK. Moreover, the quality of the water has decreased and lawsuits for poisoning had been filled against many of the firms so created. But, now they make profits. The profit is purely a technical result totally dependent on the way we calculate the rest of the numbers. However, it has acquired a statute by itself as the result of a phenomenon called “psychological set” and the accounting world functionally, the profit has no tangible reality. In the same way, the accounting institution has transformed the social understanding of the concept of capital. Moreover, new definitions had emerged needing to be accounted for although the accounting system is very slow in incorporating new concepts. This reluctance to go at the pace of reality had been observed in the case of the Californian new economy practices as opposed to the traditional Eastern manufacturing ones. In fact, the schizophrenic relationship between the reality of the business and the account provided by the accounting profession implies that accounting remains unchanged while the practices are evolving in the shadow. At this point, we have just rapidly been able to catch a glimpse of the real business world under the accounting façade. The notion of profit, which would, socially speaking, find its roots in a maximization of the social welfare, is contaminated by the property rights: When these consensual goals of “utility-maximization” are examined, they invariably are the goals of the providers of capital. Although accountants and auditors sometimes suggest that they act in the ‘public interest’, it is generally accepted that both managerial and external financial reports are intended to protect the rights of investors and creditors (The Corporate Report, 1075; AICPA, 1973). In addition, internal control and contracting procedures have as their expressed aim the prevention of managerial and workers “excesses” and the safeguarding of the rights of “residual claimants” (Fama and Jensen, 1982). Influenced by traditional micro-economics, mainstream accounting thought is based on the notion of the prior claims of the “owners” and further implies that the satisfaction of these claims provides the means to satisfy all other claims. (Chua, 1986, p. 611)

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This is exactly the structure of our financial statements and also of what proposes the “conceptual framework” of the IFRS pretending that the needs of the investors are the most important, and if these information needs would be satisfied, everybody else would have enough information for its limited interests.

5.5 Capital and Capitals Obviously, in accounting it is traditional to consider the capital as an accumulation of money. Smith (1991) applies the term capital to the part of what an individual possesses that is not destined to be consumed in the day-to-day life, but destined to produce revenues. For Smith, the capital, money invested, is transformed into assets. The fixed capital is transformed into fixed assets like machines and shops, while the circulating capital is transformed into stocks destined to be sold as fast as possible.

5.5.1 The Intangibles At the time of Smith, there was a symbiosis between the entrepreneur and his enterprise. Now, some distinctions had been introduced between both as the firm is reputed to be independent of the “entrepreneur.” The accounts normally reflect the property of the assets on the right side of the balance sheet. This property is classified following the risk assumed by the provider of the funds. Therefore we have the short-term debts that are normally fully guaranteed, then the long-term debt in order of the guarantees, and then the section called capital presenting the investment of the shareholders opening a right to receive a part in the distribution of the residual when all the debtholders have been satisfied. This old classification had been greatly shaken by some new financial products created at the frontier between what were two clearly distinguished categories: the unguaranteed debt and the privileged shares. Many other more complicated and difficult-tounderstand financial products underline the resistance of the accounting model to follow the business practices. In substance, claims expressed on the liability side of the balance sheet are property rights. Why distinguish debt from capital, mostly considering that shareholders, for a large majority, are no longer involved in the functioning of the firm? They are buyers of a specific category of financing products.

In our understanding of the accounts, there is a correspondence between the recognition of an asset and the recognition of its financing. This financing implies, for every category, a remuneration that is fixed. However, some observers have started to pretend that these financial statements were not representative and that the firm was using other assets not included in the balance sheet. This discussion had been termed the “relevance lost”; as the quantity of these “forgotten assets” is reputed to diminish the relevance of the financial statements.

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These forgotten assets are mostly intangibles (Lev, 2001). For Lev, there are three main areas where intangibles can be developed: discovery, organizational practices, and the human resources. Lev uses the terms intangibles, knowledge assets, and intellectual capital interchangeably (Lev, 2001, p. 5). In the world of accounting, as we just described it, calling asset and capital the same thing can be a problem and, moreover, it is bringing us back to the time of Smith. Amir, Lev, and Sougiannis (2003) made a test to see if the information about intangibles reached the investors by other ways, as would advocate the tenants of the EMH. They found the trace of some new information but not a systematic replacement. Consequently, we have a problem of communication inside and outside accounting reports. During this discussion based on the concept of intangible assets, abusively called capital, others were discussing different versions of the capital.

5.5.2 The Social Capital Leana and Van Buren (1999) defined the social capital as follows: Social capital is broadly defined as an asset that inheres in social relations and networks. (Leana & Van Buren, 1999, p. 538) This definition will have to be completed if it has to become the basis of the entry of a new asset in the financial statement. We propose two ways of doing it. Firstly, we look at a general description of the phenomenon with no relationship with accounting. Secondly, we consider the question of the networks. 5.5.2.1 Bourdieu and the social capital Bourdieu (1979) has very little to do with accounting. He is referring to a simple definition of capital which can be synthesized by what is producing benefits. These benefits can be grouped into a label that will be the recognition. Recognition can happen because the subject is “distinguished” as being different from the mass. This distinction can operate because the subject knows how to act in the groups having the power in the society, mostly because it is his “habitus.” This knowledge and the networks going alongside are called the social capital. This social capital is more difficult to obtain than by reading the one hundred books one have to have read if you believe the Selection of the Reader’s Digest. These recipes to look like a member of some select groups are not efficient. Birth is the main factor for a person knowing those things for immemorial times, and it is impossible to trace the source of this knowledge. It comes with the person as second nature. Moli`ere said “Les gens de qualit´e savent tout, sans avoir jamais rien appris.” People of quality (aristocrats) know everything, without having learnt anything. In turn, the social capital can be subdivided into more discrete forms. These forms will include that cultural capital, describing a way of being, a way of feeling welcomed, and at your place in situations where other people will hesitate to go: at the concert or at the opera or on a select golf course, for instance. We have to

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say that this is in constant evolution, and if these cenacles are now more open to the commons, other cenacles have developed or some more exclusive versions of the already existing ones. There is also a symbolic capital. Language is made of symbols. While the use of the system is spread over all the population, its mastering is becoming less and less common. Therefore, the capacity to master the language, many languages, and other symbolic codes is an asset. Bourdieu will add other forms of capital. Finally, he is saying that every “sphere” of life is made not only of the substance of the content but of an institutional system that is specifying the place of everyone and what you have to do and to know to occupy one situation or another. Basically, all these competencies can really be considered as capital in the measure where they are producing revenue. This revenue is brought by better jobs, more clients for your professional practice, more connections, etc. The fact of having lived all your life in a certain social group can really be an asset. Bourdieu and Passeron (1970) discuss the reproduction of the social structure through the education system. They bring evidence that the upper class is reproducing its structure by through the scholar system. Very few are able to escape to the determination of their scholar cursus by their original social group. This reproduction is made naturally as the scholar system is not neutral but reproduces the culture of the dominant group in the society. Children coming from this group feel naturally at home in this cultural environment, while those coming from other groups have to make a cultural adjustment that can be difficult, sometimes impossible. If you have been raised among books, you won’t be disturbed by a system teaching with books. But if you have been raised learning manual competencies and apprehending the world through physical contacts, you may firstly have a huge reconversion to make, and secondly you may feel that your approach of the world is devaluated. Then, you start school with a huge retard, which will continue and most of the times increase as you will go further in the process. The inheritors receive from them a “cultural capital”, ensemble of knowledge and information that has become quasi natural for them and that are handicapping in their studies those who don’t have these because they were born in disadvantaged groups. (Cibois, 1992, p. 788) (Our translation) The consequence is that those having the power conserve it and those having the money (mainly the same) keep it. In terms of transcript into an institutional form, those having the right to use collective resources to fulfill the mandate received through the social contract seem to be able to transmit it, not by a divine filiation, but through the scholar system that is reputed to distinguish on the basis of the quality and to recognize the best at the end of the process. In our societies, economic capital, cultural capital and symbolic capital can be grouped under the same concept of capital in the measure where, in the one hand, they are created through investments and from

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In our society, the system sustains all forms of capital. By fiscal advantages, the revenue from financial capital is less taxed than the working revenue. The revenue from the social capital takes often the form of revenue from financial capital, so, here again, some fiscal advantages apply. The social capital is fundamentally symbolic: The symbolic capital is an ensemble of distinctive properties existing in and by the perception of agents provided with the adequate perceptive categories, categories that are acquired noticeably through the experience of the structure of the distribution of this capital inside the social space or a particular social microcosm as the scientific one. (Bourdieu, 2001, p. 110) (Our translation) Then the scientific capital is defined as: The scientific capital is an ensemble of properties that are the product of acts of knowledge and of recognition accomplished by the agents engaged in the scientific field and doted, consequently, of the specific perceptive categories allowing them to make relevant differences (…). (Bourdieu, 2001, p. 110) (Our translation) Bourdieu adds the political capital that is not exactly what the politicians or the journalists mean when using this term but rather a form of legitimacy: The political capital is also a symbolic capital of knowledge and of recognition or of reputation, but it is obtained from everyone in the logic of the plebiscite. (Bourdieu, 2001, p. 113) (Our translation) These capitals can be transferred from one generation to the other, like the money. The Prime Minister of Canada is the heir of a fortune, surely, but also of a family tradition that help him to reach this level. The scientific and social capitals follow the same line. Irene Joliot Curie received a Nobel Prize with her husband. We all know that her father had one and her mother had two. There was a tradition functioning at two levels. Firstly, she believed it was possible. Secondly, others, including the Nobel Prize Committee, were not surprised to see her name there. Moreover, she had been raised in a scientific community and she married one member of it. These considerations have no effect on the merit of these people, but acknowledge the possibility that other researchers of equally scientific merit had fewer chances to receive the Nobel Prize.

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This vision of the social, political, or scientific capital can be described as the recognition of the belonging of a person to a group. Said otherwise, it is the belonging to a network.

5.5.3 The Networks The networking for a board of directors is necessary to obtain the resources needed by the organization (Pfeffer & Salancik, 2003). But, there is more than that. The relative permanence of these links creates an asset that might be accounted for in the balance sheet. There are four main advantages provided from this networking (Hillman, Cannella, & Paetzold, 2000): a) provision of specific resources, such as expertise and advice from individuals with experience in a variety of strategic areas; b) channels for communicating information between external organizations and the firm; c) aids in obtaining commitments and support from important elements outside the firm; and d) legitimacy. (Hillman et al., 2000, p. 239). The linkage with the environment will also increase the proportion of outsiders on the board. These outsiders, over their own network, will also bring their personal experience to the organization. They can be classified into four categories in function of what they bring: insiders, business experts, support specialists, and community influencers. This enumeration describes what they do within the firm. But this is possible because of their position in some networks. Therefore there is a way of living including activities and places where these people meet insuring the “cohesion among corporate elites” (Burris, 2005). This way of networking is almost natural. “Is social capital anything else than an ensemble of networks of relationships” (Caill´e. 2006). This kind of network is organized in a firm to have access to the resources needed to fulfill its mandate. According to the resource dependence theory, the board of directors is a way for companies to connect with their environment and acquire the resources needed. Some authors argue that this acquisition of resources depends, for a large part, on the directors’ social networks (Breton & Pesqueux, 2006; Dicko & Breton, 2013a, 2013b). Far from being some remains of the paleo-industrial era, these dense networks, both interpersonal and inter-organizational, constitute the very basis of modern industries like the high technology of the Silicon Valley or the fashion industry with Benetton. (Putnam, 2006, p. 36) (Our translation) A firm is always embedded in a series of networks as shown in the Fig. 5.5.

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Fig. 5.5:

Firm’s Networks.

All these groups, within the firm, and the firm by itself, have developed different networks that can be mobilized to provide help and resources to the organization (Granovetter, 2008). The connections can be made for many reasons that are all useful to the firm at the center of this network. Being at the center is obviously only a matter of point of view. In such a network there is no “natural” or obvious center. • Being a director in a firm (Fracassi, 2009; Maman, 2000). • High responsibility in public administration (Maman, 2000), or sharing directorships in one or many firms. • High responsibility in a political organization (Fracassi, 2009; Maman, 2000). • Number of board memberships, with leadership positions or not (Lester & Cannella, 2006; Nicholson, Alexander, & Kiel, 2004). • Schools and universities attended (Fracassi, 2009; Hwang & Kim, 2009; Kim, 2005). • Affiliations with social clubs and associations (Fracassi, 2009). • Participation in political committees or commissions (Fracassi & Tate, 2010). • Participation in economic lobbies (Dicko & Breton, 2013b).

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These subcategories can be grouped into three main types: economic connections, people within or closely connected with firms; political connections, people within the government, agencies, or in any public administration at any level; and social connections, people from the same school, same social clubs, sport clubs or professional association, or on the board of the same charities. The next figure shows the network of the members of the board of the largest Canadian company. The board in question has 13 members. This figure shows how the networks of a firm can be complex. The different colors represent different categories of connections. The largest category is constituted by the business ties more deeply described in panel B. The specialization of each member of the board, except the founding family, with a specific group of connections exemplifies the concept that board members bring specific resources to the firm. Moreover, a deeper analysis will show that certain members of the board have in particular a certain category of connections. One is well connected with the political world in the US, at the highest level. Another is well connected with the academic and the institutional world in Canada (Fig. 5.6; Table 5.2).

Fig. 5.6:

The Network of Power Corporation of Canada Board’s Members. Source: Breton and Dicko (2015).

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A Postmodern Accounting Theory Table 5.2: Grouping and Classification of the Organizations Which Whom the Board Members Are Connected. Sectors

Numbers

Industrials Investment, assets management, trading Energy Banking Others Total

24 42 7 20 47 140

Source: Breton and Dicko (2015).

It is possible to relate these business connection categories to the different areas of implication of the firm showing the reasons for the nominations of these specific directors instead of others having different profiles. The categories can be grouped into the three broad classes determined earlier. It is interesting to note that although the raw numbers changed between 2007 and 2013, the proportions remain about the same. We can deduct that PCC, having kept the same structure, needs the same mix of resources from its environment (Table 5.3). Breton and Dicko (2015) summarize the different resources a firm can seek. Such classification can also be simplified with three categories: economic, social, and political as the table from PCC is showing. The firm is imbricated in a series of strong networks. These networks, following the theory of resource dependency, open access to resources that are absolutely necessary for the firm to pursue its mandate. Therefore these networks are producing revenues, which is the definition of an asset. If they are assets for the firm, they must be accounted for in the balance sheet as they must be subject to economic decisions. The question of why they are not considered

Table 5.3: The Nine Categories Grouped in Three Main Categories With a Comparison Between the Boards of 2007 and 2013. Categories of Connections

2007

(%)

2013

(%)

Economic Social Political

92 43 35 170

54 25 21 100

175 69 51 296

59 23 18 100

Source: Breton and Dicko (2015).

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Table 5.4: Potential Resources Necessitated by Firms. Resources

Description

All kinds of financial support or financial cooperation Human Employees, expertise, counselling Commercial Clients, suppliers, partners Political Block the unwelcome ruling and promote those that are protecting the firm Technical Information about new technologies Social Common resources, legitimacy Financial

Potential Sources

Financial institutions, capital market, other firms Professional corporations, universities Markets, other firms Deputies, representatives, parties members, ex-ministers, civil servants, lobbies Markets, other firms, universities Public opinion, media, communities

Source: Adapted from Dicko and Breton (2013b, p. 48).

would be studied by the sociology of accounting while the eternally invoked reason of the difficulty to put a value number on it looks no more convincing (Table 5.4). Such study is part of the sociology of accounting and is really only the beginning. One reason for that would be the development of the instrument. The models of Borgatti, Everett, and Johnson (2013) and of De Nooy, Mrvar, and Batajelj (2011) are not perfectly fitted for that kind of analysis yet. Nevertheless, the results show strong support for the resource dependency theory and illustrate well the networks of the member of the board from which we can deduce the reasons of their appointment. Other researchers have studied different aspects of this question. For instance, the effect for a firm of having political connections had been scrutinized (Goldman, Rocholl, & So, 2009). They propose interesting findings: The first main result of the article is that a portfolio of S&P 500 companies classified as having a Republican board significantly outperforms a portfolio of S&P 500 companies classified as having a Democratic board in the post-election period. (…). The second main result is that a company experiences a positive and statistically significant abnormal stock return following the announcement of a board nomination of a politically connected individual. (…). In addition, the positive announcement effect holds true for both Republican and Democratic connected directors. (Goldman et al., 2009, p. 2333)

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However, these research are still at their beginning. But, these connections are not all working that simply. The daughter of a former Prime Minister of Canada was married to the son of the founder and chairman of the largest and most influential company in Canada (PCC). In the logic of these papers that would have been an asset for the company. However, we cannot be certain if the asset was for the prime minister to account for. In fact, authors like Meyer and Rowan (1977) have a tendency to present the organization as living in perfect efficiency on another planet and being forced to conform to social norms, to abandon some of these efficient procedures, and also accept to be a “victim” of intrusive governments. But the networks show a different situation where it can be the contrary with a ruling group (small world) influencing the governments (Knoke, 1993). “Researchers” like Shleifer and Vishny (1994) take their assumptions from the newspapers. (…) public enterprises are highly inefficient, and their inefficiency is the result of political pressures from the politicians who control them. Examples abound. Most public enterprises are encouraged by politicians seeking votes to employ too many people. (Shleifer & Vishny, 1994, p. 995) Research trying to honestly find evidence of this comparative inefficiency are not really conclusive. It is easy to say that European airlines, taken altogether, have more employees than American ones. However, these measures need contextual information before to be taken at face value. For instance, in Canada we had two big train enterprises, one public and one private. The private one was reputed to be more efficient, which may be true because the Canadian Pacific Railway (CPR) had only to look at its profitability. The Canadian National Railway (CNR) had to fulfill the public mandate of connecting the remote areas. Therefore this company was keeping stations in remote areas providing service to small amounts of people, but being necessary to sustain the occupancy of the territory. This is not an electoral manoeuver, but a political necessity in a large country where 90% of the population is agglomerated along the southern border. After the government privatized the CNR, they had to compensate the private company to continue to do this work, but they lose the revenue from the paying lines to finance it. So, for the citizen, it was a net loss and a gain for the subscribers as the value of the stock gained more than 25% in the first 4 hours of trading. The introduction shares had been attributed to privilege clients months before the openings. Leaving the ideology for a minute and looking at how the electoral system is working, we see that this pretention that politicians force the SOE to hire unneeded people to gain their votes is inefficient and not really operating. In the province of Quebec, the civil servants were a very poor and unorganized group before 1960. When the State took a modern turn, the civil servants groups were reorganized, correctly paid, and attracted capable candidates. Since then, after 1980, like in many countries, the governments started to use the private sector for

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the most interesting tasks, and some of the best civil servants left the boat of the State. Now, following a study by the Bureau de la Statistique, (a governmental service) every category of public workers is paid less than their private counterparts. So, if we leave the ideological discourses, we see that in the province of Qu´ebec at least (but it is the same in Canada as a whole), the period where the remuneration of the employees of the public sector was better than those from the private sector had been very limited and made necessary by the catching up and the modernization of those states. However, “researchers” like Shleifer and Vishny implicitly pretend that an organization must not be judged by the proportion of its specific objectives that had been reached, but only and uniquely by the profit made inside this organization without considering the costs it may engender around. Moreover, they pretend that this measure may be the basis for public decisions. Today, it is quite more efficient for a politician to find a subscriber for his campaign having a production plant and wage negotiations. Then the government will intervene and giving some money to this subscriber will save apparently hundreds if not thousands of jobs. That is efficient and keeps the wealth in the “family.” Covaleski, Dirsmith, and Samuel (2003) studied the case of electricity in California. Organizations actively participate in constructing meaning around such strategic transactions as selling and acquiring electricity generating facilities, and this construction process itself generates ideology of rationality, which legitimate and reinforce particular organizing and structures for governing economic activities. (Covaleski et al., 2003, p. 438) Some near the ground accounts of this Californian catastrophe are more eloquent. In 1999, my parents send me their bill from San Diego. In spite of the 20% drop promised by the law, the first year of complete deregulation, the bill had increased by 379% from the preceding year. (…). In what will stand as the highest price to buy an election, Southern California Edison, Pacific Gas and Electric (PG&E) and their allied spend 53 million dollars to organized the failure of professor Coyle proposal of pacing the deregulation. (…). Politicians were publicly surprised when they discovered in 2002 a memo from Enron describing the technics used to manipulate the market – they wear Hollywood like names as: Get Shorty, The Death Star, or Rebound. Nevertheless, each one of these tricks that the electricity gang used in California had been rehearse in UK before. (…).

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A Postmodern Accounting Theory There had been, (…), discussions to block the deregulation, but the political impulse was on move, despite the fact that we know that it was leading to disaster. (Palast, 2006, pp. 76–78).

We can see that we are no more, in this domain, at giving a job to the brotherin-law in a small municipality. Now, the real image of the relationship between governments, politicians, and enterprises is made of very large transactions at an international level. The Panama or Paradise Papers provide good examples of the international dimension of the appropriation of public money by elected people and big enterprises conjunctly. So the connections for the politicians are now international and built with very rich and powerful people. The question of the optimal proportion of outsiders on a board has also been studied. Like for the other aspect, studying the presence of external members presents some methodological problems, the main being to make the difference. Many companies have started to identify the directors as insiders and outsiders. To go further with our example, PCC presented the founder as an external after he mostly retired and transferred his shares to his sons. In our view, this is an abusive classification. To date, these research, although deductive, are based on very little theory. This discussion is relevant for accounting theory in more than one way. Firstly, we may have to some day account for these systems of networking as the firms, in function of their activities, depend on it. Therefore it asks the question raised since long now of the relevance lost. These networks are precious although intangible and used to earn revenues. Every element used to earn revenues is an asset. Therefore, to date, the accounting world was opposed to the taking into account of these kinds of assets, alleging the difficulty to place a number beside it. However, if we go along the balance sheet, both sides, we see that the items being assessed with a number that is not an estimate are reduced all the time. These things exist, and they have an importance in the sociology of accounting and also on the decision-making and the information provided to this end. Accounting communication is questioned by the changing of vision of the formation of the board of directors and by a new understanding of the necessity for a firm to communicate. This communication opens the access to resources belonging or controlled by other firms in the system but also to the collective resources necessary to allow the firm to fulfill its mandate as a social institution (Breton, 2016). There may be a third channel of influence. From what precedes, it flows that the composition of the board has an effect on the performance of the firm (O’Connell & Cramer, 2010). This performance is casually measured through the profit, which is an accounting construct. We also have some evidence about the board composition and the confidence investors can have toward the issued accounting numbers (Anderson & Frankle, 1980; Chaney, Faccio, & Parsley, 2011) because, noticeably, of the monitoring of the financial information published by the firm (Vafeas, 2000). Then, once again, the discussion about the board, in the spirit of the resource dependence theory, is relevant to accounting theory.

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5.6 The Knowledge In the new economy, where objects will be sent through the computer and generated through a three-dimensional “printer,” the knowledge becomes very important. This knowledge can take two basic forms. It can be written in books containing the procedures and recipes to do on a continuous basis what others have elaborated or it can be in the mind of some employees (Grant, 1996) of the firm. At this point, if the knowledge is in the mind of the people, it must be difficult to determine a value to account for it. This arrival of people in the balance sheet may also raise some questions about the distribution of the revenues generated by these assets. Modern firms may have little tangible assets. At this point the return on assets ratio, or asset turnover, may be totally useless until what is really generating the revenue for these firms is taken into account in the financial statements. But this resource is “subject to uniquely complex problems of appropriability” (Grant, 1996, p. 111). In our view, it is obvious that accounting will have to seriously consider the changing form of the assets in firms and take it into consideration. Equally obvious is the fact that the assignment of values to these assets will be difficult. However, in a system believing that the market price of the shares is a correct assessment of the value, we have both ends of the problem, the actual accounting value and the market price. Between both values we would normally find the entangled value of all the assets that are not actually taken into consideration in the financial statements. All that is remaining to do will be to assign these values to particular assets. We may add that these financial statements will have to be at current value (Egginton, 1990).

5.7 Summary Accounting is evolving slowly while the enterprises are going quite faster. Some accounting students are still learning in books, pretending that accounting is an art and a science. Accounting is a language of a specific category called a jargon. These languages are parasites of natural languages and are created by professional or scientific communities to limit the quantity of correlations existing in natural languages and therefore increase the level of precision of their communication. Confusion can still exist like with the terms capital and assets. Now, based on the idea of the loss of relevance of the financial statements, some observers propose to account for what they have termed social and intellectual capital. Although in line with the original denominations, for the accounting world, these elements would be assets, as they serve to generate revenues. The question of the capital connected with these newly considered assets has not been discussed yet. But, as this capital entry will name the owners of the assets in question, it will have to determine the level of compensation for investing it specifically in a firm. Other examples of these new assets are other intangibles, the networks, the knowledge, etc. Their recognition opens a field for rethinking our practices. But,

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we have to remember that, in the 1960s and 1970s, there had been a series of discussions and proposals around the notion of social balance sheet and that these proposals had been wiped out by two new conceptions of the social responsibility of the firm: for a short period it had been the use of energy and since then it is the environmental action of the organization that is taking all the place.

Questions 1. Accounting is an art and a science. Comment. 2. Do you know alternative ways to the financial statements for presenting accounting information? 3. Through some standards for presenting financial information accountants are usurping the power in organizations. Comment. 4. Accounting is a language. Comment. 5. What is meant by the expression “l’arbitraire du signe”? 6. What are the components of a sign? Explain. 7. In which aspect the signified is different from the referent? 8. What are the different categories of languages and where can we situate the accounting language? 9. What are the functions of a jargon in a professional community? 10. Contrast denotation and connotation. 11. List the different aspects that can take the linguistic of accounting, with their field of application. 12. What is generally meant by professionalization? 13. Which are the conditions that must be realized to have a market? 14. What is the third hypothesis of Watts and Zimmerman? 15. Are we really living in a market economy? 16. Is there a distinction between capital and asset? 17. Which are the theories explaining the networking of a firm’s board members? Provide some key elements of the context for each theory.

Topics for Further Reflections 1. Imagine some CEO asks you to account for a new asset that is a highly recognized competency of a hockey player. How would you do it? a. How will you valuate (assign a number) the asset? b. What will be the counterpart on the right side of the balance sheet? 2. The reality of the profit. Discuss the effect of the “reality” of the profit on an accounting system that has made tremendous efforts not to produce any other relevant numbers, i.e., “intermediary managing subtotals.” 3. The SOEs are inefficient; they generate losses all the time. One problem is they are overstaffed for political reasons. Comment.

Chapter 6

Accounting: The State and the Firm In the business and administrative literature there is a tendency to consider that the individual precede the society. Also, this piece of common wisdom is not even convincing when we start to ask where this individual was coming from. However, in this current period, people will assume that the private property precedes the collective (social) one, which appears to be quite the contrary, when referring to the anthropologists. Therefore they believe that social responsibility comes after private responsibility. For an individual it may be a correct way of seeing things, but from a social point of view it is not necessarily so. In a society, one of the most important questions would be how to distribute property rights to generate the highest level of production with the lowest level of consumption of resources. Is public or private ownership more likely to promote social welfare? This ancient and central question in economics has generated a fair amount of conventional wisdom on the benefits and costs of public production of goods and services. (Laffont & Tirole, 1993, p. 637) The problem is to find the best incentive to reach the best level of production while limiting the spoiling of resources. It is casually taken for granted that private property will constitute the best incentive for limiting spoiling. If we consider that the society is at the basis of every distribution of rights and of the systems protecting those rights belonging to the society but lend to the individual, we have to find a system to measure the advantages and costs of this system not once and for all, but continuously, and not for the individual, but for the society. If we take the question along the lines of the agency point of view, we have the principals and the agents. The principals are those investing money in the firm, which does not exactly conform to the liberal economic theory. These investors have received the right to use the resources mobilized for their enterprise among the resources belonging to the society. Therefore, they become agents in turn and like the managers, they would have to produce reports to the principal. It is normally considered that they are discharged of this obligation with providing the reports asked by the different governmental institutions or agencies. However, although they produce an income tax statement, there is no report A Postmodern Accounting Theory, 97–112 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78769-793-520181006

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showing which value they have produced and which resources they have consumed to do so. That is the report the society would need to assess the performance of the particular way chosen for the distribution of the property rights. Moreover, the income tax statements often start with the accounting profit before making some modifications. So, they accept that the value created is the portion going to the shareholders. Therefore, the amount of income tax to be paid is dependent on the financial structure of the firm. The cause of this situation is found in the fact that the income tax, originally, was based on the individual revenue including all sources. Maybe this approach had been efficient at some time, but as the structures of the firms become progressively more complicated, it would be a good idea for the governments to modify the principles behind their tax systems.

6.1 The Real Social Responsibility At the very basis of the system lays the belief that the value of the production will be distributed in such a way that everyone will receive his righteous part. However, the facts have demonstrated quite a different reality and the need for governments to intervene. This intervention covers, among other areas, the organization of markets that are not arising spontaneously in the real world. The creed recognizes that management serves at the discretion of society and derives its legitimacy from being a useful social function (…). (Buchholz, 1992, p. 20) Given the fact that the society cannot be governed by the invisible hand, it is casually accepted that governments are needed to do that. Thus, governments are there to compensate for the deficiencies of the market system. It means that it is counterproductive to ask the firms to have direct social implications when the liberal state is supposed to be the coordinator of these activities. For instance, in the Province of Qu´ebec, we have a Ministry of Cultural Affairs. This Ministry employs specialists able to coordinate the support to different groups from different backgrounds. However, in Qu´ebec we also have SOEs4 such as HydroQu´ebec, the largest in the area; the Soci´et´e des alcools du Qu´ebec, a national liquor board; and Loto-Queb´ec, the big national lottery. These three SOEs finance probably more than half the cultural activities in the Province. Therefore, the government leaves to nonspecialists, the board of directors of these SOEs, the job to decide what will be privileged as cultural expression while keeping specialists in its ministry. If we ask the private firms to participate directly, we will have a spoiling of resources, and some aspect of each activity, the cultural life or the support to sick children, will be forgotten because there will be no coordination, which is the job of the state. To compensate, the organizations are now having financing activities around an official well-known spokesperson. This 4

State-Owned Enterprise.

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person, having little idea of what the organization is really doing, is charged to speak for it because s(he) is well known in the society. For instance, Celine Dion has a niece having an incurable sickness. People will be aware of the financing activity of the organization related with the research of a cure for this sickness. The organization will receive millions in free publicity because all the media do not care for the sickness but they follow Celine Dion’s every move. Therefore this organization, for a while, will receive a lot of money while other organizations around will die for lack of funding. By making the government do its job of coordination, we will increase, in theory, the efficiency of the system. If each firm has to develop a program to fulfill its social responsibility, the structuring costs will be huge at the aggregated level of the society. There had been a lot of fuzz around the statement of Milton Friedman that we take here from Klonosky (1992): The most well-known proponent of claims that corporation has few if any explicitly social responsibilities is the economist Milton Friedman. Friedman’s position is captured in his pronouncement that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” (Friedman, 1983) (Klonosky, 1992) Firstly, we may underline the fact that the quotation is complete, normally they stop at profit. We may agree with Friedman’s complete statement. The problem is that there are less and less competitive markets. Therefore the rule cannot apply. If the markets would be what they are supposed to be, we agree that the social mandate of the firm would be to fight to make profit, which will be rendered impossible by the pure competitiveness of the markets. Then, for the rest, the government will be there to equilibrate what the invisible hand has missed. However, the economic model organizing our societies has no referent in “reality.”

6.1.1 Disclosure or Action A lot of research under the headline of social and environmental responsibility has been conducted about what had been termed “social disclosure.” Social disclosure involves the communication and reporting of information concerning a firm’s community involvement, human resources, environmental impact, and product/service contributions. (Anderson & Frankle, 1980, p. 467) The problem is that the “social” is implicitly defined as what the “winners,” those who are creating value in the economic “sphere,” have to do for the losers, waiting for their “charity.” This comes from the deviant conception of the

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economy as being autonomous out of the society. The problem is not the “social,” but the malfunction of the market which most economists refuse to face, mainly the monetarists. The quote coming from 1980 shows well the basis of the confusion. Anderson and Frankle’s paper was about the effect of the “social disclosure” on the markets. Therefore, they were building their vision on an efficient market on the one hand, as this market integrates rapidly new information, but on an inefficient market on the other hand as important information were not provided yet. The papers in accounting journals about social and environmental disclosure settle a “problem” of dysfunction of the market in a setting of efficient market without saying anything about that. In Bowman and Haire (1976), the firm is presented as opposed to the society and as being clearly made of the shareholders and investors. The impact on the society is conceptualized through the concept of externalities, which although keeping the “market” at the center of the discussion evacuates very important aspects of the question. This being said, we have to balance the score by referring to Tipgos (1977) or Ramanathan (1976), presenting far better theoretical descriptions of the social responsibility of the firm. Moreover, disclosure can be a misleading concept as there is no guarantee that the quantity of disclosure indicates a better assumption of social responsibility, mostly in the absence of a correct definition of social responsibility. Some researchers have considered both aspects, performance and disclosure, separately (Rockness, 1995). However, Rockness remained in the limit of the disclosure to assess some perceptions of the performance. In summary, we would need some other source of information about the social performance of the firm to triangulate with its discourse. For the time being, we do not have systematically such independent and well-informed sources.

6.1.2 The Problem of the Externalities In the classical economic theory, externalities are defined as an activity or a good for which there is no market. There is another form of externality. Normally the products are sold at a price that is supposed to reflect their full cost. Such “fair” prices allow distinguishing between efficient and inefficient enterprises and highvalue and low-value products. But, with our system, many firms are able to externalize costs. For instance, the mines in Canada had been authorized to place their waste in specific areas. The accumulation of such waste has, after a while, contaminated many underground water reserves. In most cases, the mines are close and their owners live outside the country and are not reachable. So, the government is forced to undertake the task of repairing the damages with the citizens’ money. Therefore, somewhere, the consumable products that have been made from these metals did not include the cost of cleaning the spoiled environment and therefore have been sold at an unfair price which do not represent their real cost. Some products, which were not belonging to the optimal mix of product a society can generate have probably been made and sold because they were not fully priced. That is an externalization of the cost that unbalances the functioning of the economic system. If we look around, we see many occasions

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where the government is taking the costs on behalf of the corporations. For instance, if the lack of security and health protection generate industrial diseases, the government assumes generally most if not all the cost for the consequences. We believe that the market objectives are far from being reached with governments subsiding firms on the one side and assuming their rightful expenses on the other side. Without a fair pricing system the economic construction collapses. The idea that a production system can produce as much goods as possible with as less spoiling of resources as possible is based on the full pricing allowing the elimination of very expensive objects that are not really essential. However, this condition is not enough. The usefulness of a production in an economy is not measured by the needs but by the desire that is termed the demand and that must be solvent to have an effect (Meda, 1999). But the pricing system had been biased since long, if it had ever been fair. In consequence of this, our economies will satisfy solvent desires while others have nothing to eat but no money to orientate the production in this direction. For instance, more and more agricultural productions are replaced by corn because it enters into the production of ethanol where its value is far higher. This switch entails an increase of the prices of foods and more stress for those having problems to buy the minimum. But, as the success of the economy is measured by the production only through exchanges, we are collectively reputed to be richer if we make ethanol rather than food for people having little means to buy it. It is a pure Ricardian calculation. The utilitarian proposes a kind of measure of the “Gross National Happiness.” Obviously, Mill (2010) writes in a context very much tinted by religion functioning along the lines described by Weber as the spirit of Protestantism. Mill argues that the only goal in life is happiness. Therefore the measure of behavior is the measure of total happiness. This is, in a way, what the neoliberal economy is pretending to do. However, it assumes no differences in the capacity to pay. Therefore, provided that the prices are correctly settled, the solvent demand can regulate what will be the offer and everyone will be happy. However, it is another case of if: If all agents were equal and if markets were information efficient and if this led to allocative efficiency and if this led, in turn, to economic growth and if this ensured maximum welfare and if maximum welfare is the aim of the society then accounting is morally, economically and socially justifiable and may lay claim to an intellectual framework. (Gray, Owen, & Adams, 1996, p. 17) If all those assumptions on our economic system are false, we can wonder what accounting is measuring.

6.2 Ethics and Goodwill In our view, the social contract on which accounting is supposed to provide information relevant for social decisions is clear enough. Obviously, under the

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pressures, the states are not doing their controlling job on behalf of the societies. The citizens are bombed every day with accusations from the business world saying that firms are not given the liberty to fulfill their part of the contract, except when a crisis arrives and they declare that the government may have exercised stronger control over the economy. When supporters of CSR (Corporate Social Reporting) go on the ethical side, they change the line of the delegation of power and ask corporate citizens to be good and caring toward their contemporaries and, now, toward the future generations. To whom is the corporation responsible? I submit that we haven’t answered this question because it is not the right question to ask. Instead we should be asking “How can and do corporations contribute to constructing ’the good society.’ (Wood, 1991, p. 66) If we don’t ask the question of to whom the corporation is responsible, we change totally the line of analysis. We pass from a legal system of accountability, where the state has the legal power to change the way goods are produced, to a system based on the good faith of entrepreneurs, their sense of ethics, and their charitable spirit. For our part, we feel safer in the first system. It is not a question of good or bad social behavior; it is a question of respecting their contract. In accordance with the old liberal system, the remuneration of the entrepreneur is the marginal value produced by his organizing of the production in the firm. At this point, if the entrepreneur needed money, he would borrow it himself and use it in the business. Since these businesses had become moral persons, with more rights than the physical ones, “investors” put their money directly in the firm following the portfolio “theory,” which is totally contradictory to the idea of the entrepreneur creating an activity and risking his money. Therefore, the original system had been modified without any consultation and the markets, discussed by Smith, are no more important. The only market we discuss anymore is the capital market, which did not exist in a world where the entrepreneur is involved in the production process and responsible for the money he uses. In this system, the entrepreneur was supporting a certain level of risk as for the workers who had the risk of losing their job and having to find a new one, which was not always an easy task. With the portfolio system, investors put their money in production they do not know and make their money move at the first sign of decline in the profit, which is no more the marginal value generated from the organizing of the production. In such conditions the basic contract had been broken since a long time. In France, before the adoption of the US system through the international standards, there was, in the accounting reports, important traces of the social contract through the concept of value added. Such statements made it theoretically possible to discuss which value was created and who received it. In the British-inspired accounting system, all rely on the profit figure. This profit figure says nothing about the capability of the firm to produce value; it says which portion of this value belongs to the shareholders. However, this part is primarily dependent on the financing structure, which has little to do with the

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production of value. In fact, two enterprises doing exactly the same thing with equivalent assets and equal efficiency may show a totally different profit in function of their financing structure. Therefore, focusing on the profit figure rends totally unusable the financial statements for social purposes and even, to an extent, for private purposes. The profit figure reflects more the financing structure of a firm than its capacity to produce and distribute wealth, which is the first clause of its social contract.

For a while, it was casual to mention that, to follow the actual standards, the environmental eventualities had to be disclosed. Now, we don’t hear about that anymore. It has probably collapsed in the “impossible to assess” file that is always open to receive embarrassing items. Have you ever seen a set of financial statements with an eventual debt created by a “creative” understanding of some tax law provisions? Accountants have no business discussing the compliances to law; however, they have business assessing the financial effect of a breach in the compliance. But this is standards and professional matters. In theoretical terms, there is nothing to say except to observe how accounting is used in a context of taking a new market and putting a professional hegemony in place. The profession that will be the only one to receive the authorization by the state to sign an environmental report will control the field for a long time. The stakes are high, mostly at a time where the conventional audit is discussed fiercely and may have a problem to sustain the hegemony of some accounting professional associations.

6.3 Public Decisions Accounting influences public decisions through some key concepts and the calculation of the related values (Breton, 2016). The economic calculations provided by enterprise level accounting systems have come to be used not only as a basis for government taxation but also as a means for enabling the more general economic management policies of the state to grow in significance and impact (…). Accounting data are now used in the derivation and implementation of policies for economic stabilization, price and wage control, the regulation of particular industrial and commercial sectors and the planning of national economic resources in condition of war and peace and prosperity and depression. (Burchell, Chubb, & Hopwood, Hughes, & Nahapiet, 1980, pp. 5–6) Burchell et al. refer to decisions taken by governments on behalf of the citizens without really having them interfering in the process. Sometimes the decisions are

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taken almost directly in the public space. One of the most obvious citizens’ decisions, discussed during the last decades, had been privatization. The accounting concepts invoked in the discussion will be inserted in an ideological discourse. The literature on privatization has identified many motives for privatization. Among these are (1) improving the financial performance of the SOE, (2) raising finances for government spending, (3) widening ownership through capital markets, (4) promoting competition, (5) improving service delivery, (6) reducing the influence of public sector unions, (7) responding to pressures by external agencies such as the International Bank of Reconstruction and Development and the World Bank, and (8) replacing central planning with a market economy. (De Castro, 1996, p. 373) The presence of an ideological discourse appears clearly in the fact that most large privatizations have failed to produce the alleged effects although the same reasons continue to be presented as sufficient justification for privatization. The Homo economicus rejects as irrelevant any experience that is not conforming to his discourse (Maris, 2003). The realized privatizations, when studied ˆ e, in detail, do not show such a great deal of improvement (Bozec, Breton, & Cot´ 2002; Martin & Parker, 1995). On the basis of the two performance indicators and for the eleven firms examined in this study, it is difficult to sustain unequivocally the hypothesis that private ownership is preferable to nationalization on efficiency grounds. (Martin & Parker, 1995, p. 235) Martin and Parker use accounting measures to assess the increase in efficiency. These measures are mostly irrelevant and using better measures will only increase their results. A better measure will be to compare what it costs for the citizen receiving the service before the privatization and what it costs after privatization. Our understanding of situations is altered by already made ideas (Stone, 1989). Stone was discussing what is now known as storytelling, an important activity in the organization and extensively in the society in general allowing displacing the focus of a social discussion. In previous work, I defined storytelling organization as “collective storytelling system in which the performance of stories is a key part of members “sense-making” and a means to allow them to supplement individual memories with institutional memory” (Boje, 1991a, p. 106). Gephart, in a study of leader succession, conceptualized the storytelling organization as “constructed in the above succession stories as a tool or program for making sense of events” (1991, p. 37). In sum, the storytelling organization as seen in Tamara is a wandering linguistic framework in which stories are the medium of

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interpretative exchange. Storytelling organizations exist to tell their collective stories, to live out their collective stories, to be in constant struggle over getting the stories of insiders and outsiders straight. (Jones, 1991; Wilkins & Thompson, 1991) (Boje, 1995, p. 998) This construction is multileveled. At the top, we have an englobing ideology (Boudon, 1986) or the “grand narrative,” being basically the general story from which all the specific ones are derived which everyone believes and everyone else knows. It may look like a private enterprise is the best system to produce wealth in the society. The accounting world has its own derived stories. For instance, we see a movement toward believing that the concept of profit is the ultimate measure of the social relevance of an organization. The concept of profit has eliminated its competitors which were, at first sight, more prone to produce a better feedback of the value created in the society which is the very center of the social contract presiding at the creation of the private firm as a social institution. If in the 1960s and 1970s the societies have discussed the possibility of mixed economy allowing the state to control a certain quantity of sectors and enterprises, in the 1980s, this tendency has disappeared. The given proof for this disappearance had been the fall of the Berlin Wall presented as the failure of the communist system presented as the model of all attempts for collectivization. The firm has started to ask the state to render accounts of what they were doing with money that was presented as diverted from the private sector. The profit has become almost the only acceptable goal a firm can have, indifferent of the fact that it is a SOE or a private enterprise. All other goals are dismissed as inefficient. After that, the table is set to produce two series of stories: the first focusing on the bad performance of public firms and the second on the efficiency of private firms, and this in total hyperreality. It will be a waste of time to discuss accounting as a replication of the financial situation of the firm, even a true and fair view. Firstly, there is no place to find the financial situation of the firm, it is a matter of assessment and interpretation and these things differ from one individual to another. Then, the way accounting has chosen to calculate its numbers implies too many disputable choices to be a faithful representation of anything. Therefore, accounting is floating in hyperreality like many systems of representation existing in our societies except that there were never any referents in the reality for the accounting concepts. Consequently we have to accept the idea expressed by Boje that “accounting is storytelling” (Boje, 2001a, p. 1).

6.4 Public Measures and Citizen’s Decisions We can observe the basic bias in governmental accounting. If accounting is a matter of right, national accounts will have to express what the agent, the government, has done with the assets placed in his hands by the principal, citizens, altogether. In practice, this is not at all what we receive. The government produces statements about how much it costs to manage the assets, but nothing to what happened to these assets. The first example of that is in the calculation of the GDP.

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6.4.1 Calculating the GDP For some time now, questions have been raised about the value of the GDP as a measure of wealth (Meda, 1999) while we realize that the absence of a balance sheet in the government’s accounts is producing distortions in the interpretation we can make of the public accounts (Stiglitz, 2014). The GDP adds the destruction over the construction instead of deducting it. For instance, Today, the tropical forests covers only about 2% of the surface of the planet, but contain 70% of all animal and vegetal species. In forty years (1950-1990), the global surface covered by virgin forests has diminished by 350 million of hectares: 18% of the African forest, 30% of the Oceanian and Asian forests, 18% of the Latin-American and Caribbean forests had been destroyed. (Ziegler, 2002, p. 143) (Our translation) This destruction of the Amazonian forest, for instance, put at risk the capacity of the whole planet to regenerate air. This is quite an eventuality. Where are the many species that have disappeared since 50 years accounted for? What is accounted for is the cement they put on the beaches to build huge hotels. Imagine that, for a certain year, we deduce the forest lost from the building made of wood, etc. For some years the GNP would be negative because the destruction will pass the construction. Governments might find a way to account for that. This is the central point in their fiduciary role. Considering that the GNP is an aggregated measure made of all the economic activity for the period, a correct calculation of the wealth produced by the nation must deduct all the consumption done to reach this point. It would be something like an aggregated statement of the value added and deducted. The mandate given to the firm is to produce as much wealth as possible at the least possible cost in resource based on the idea that the demand, driven by the financial resources available, is infinite. With its actual system of accounting, the government has no means to control that, despite it being the central element of the social contract.

6.4.2 Calculating the Government’s Accounts Correctly Albeit their being totally beside the point, the states’ accounts are often manipulated. Those days, for instance, they were reorganized to make the debt appear more dangerous and terrifying for the uninformed citizen. 6.4.2.1 Understanding the tradition One of the main objections professional accountants have opposed to every level of government accounting practices was the question of the depreciation of assets. Many of them have tied the bad state in which public assets were kept with the absence of depreciation.

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Normally, contrary to what we hear every day, a public administration is not organized and managed like a family budget. The citizen benefitting and paying for the use of some assets at a time has no interest in subsiding the following group who will use the same set of infrastructures. In fact, if the parents are happy to accumulate value for their children, there is no logic for a public administration to accumulate the money before building an infrastructure. This will make the paying citizens not be the users of the infrastructure built from their taxes. Therefore, public administration will generally borrow the money to build any long-term asset. This borrowing was historically synchronized with the useful life of the asset. For instance, a municipal administration wanting to build a sports center having a useful life of 60 years will borrow the money for 60 years. If the capital of the debt is accounted through the current expenses, it is working exactly like a straight line depreciation going over 60 years, which was the expected life of the assets. Therefore there was depreciation although under a specific form that was not used in the enterprises. If the public assets have deteriorated lately, it is not because they are not depreciated in the books; it is a society phenomenon that is to be analyzed in parallel with the decrease of the size of the state and the continual pressures on the state’s budget. Moreover, how can we have depreciation in governments’ accounts when these governments do not have a balance sheet and a serious following on the assets they control? 6.4.2.2 Governmental manipulation of accounts If we take the case of the Province of Qu´ebec as an example of manipulated accounts (Table 6.1):

Table 6.1: Statement of Qu´ebec’s Debt Since 1970 (millions $). Year

1974–1975 1975–1976 1976–1977 1977–1978 1978–1979 1989–1990 1990–1991 1991–1992 1992–1993 1993–1994 1994–1995

Direct Debt

Future Retirement Benefit

Total

% of PIB

4,030 4,955 6,035 7,111 8,328 27,699 29,637 33,106 39,231 45,160 52,468

67 179 354 620 915 14,320 16,227 18,143 19,668 20,483 21,997

4,097 5,134 6,389 7,731 9,240 42,019 45,864 51,249 58,899 65,643 74,465

11.2 12.4 13.2 14.6 15.7 28.3 29.9 33.0 37.2 40.4 43.7

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Table 6.1: (Continued) Year

1995–1996 1996–1997 1997–1998 1998–1999 1999–2000 2000–2001 2001–2002 2002–2003 2003–2004 2004–2005

Direct Debt

Future Retirement Benefit

Total

% of PIB

52,886 52,625 57,294 60,685 61,209 63,630 67,112 70,176 77,933 83,479

23,624 25,461 40,438 40,428 39,337 39,111 38,060 38,426 38,281 36,286

78,510 78,086 97,732 101,113 100,546 102,741 105,172 108,602 116,214 119,765

43.1 43.3 51.9 51.5 47.8 45.8 45.8 44.7 45.3 43.7

Source: Adapted from Finances Qu´ebec (2006, Section 3, p. 30).

Trying to follow the evolution of the debt, we see that numbers are jumping in specific years. These jumps are due to the reorganization of the data. For instance, in 1998, the provision made for future retirement benefits increased by about 70%. These pensions are those of the employees of the state, civil servants of all kinds. These corrections have become the rule, and numbers are played with to produce the most dramatic effect (Table 6.2).

Table 6.2: Assets of the Qu´ebec Government at March 31, 1997 by Competencies. Field of Intervention

Administration Education and culture Industry, commerce, agriculture, and forest Communication infrastructures Touristic infrastructures, sports, and leisure Justice Health and social services Others Tangible assets Computer system development Total Source: Adapted from Ministry of Finances (1997, pp. 3–5).

(000 $)

94,072 21,930 189,850 14,540,315 238,873 343 262 71,558 216,118 118,981 15,492,302

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Stiglitz noted that states had no balance sheet. However, there is a calculation of the value of the tangible assets that is done to make an assessment of the net debt by the negative (Always be defiant toward the negative systems of calculation).

Table 6.3: The Assets That Were Accounted for in 2005. (000 $CDN)

Lands Buildings Ameliorations Complex networks Computer development Total

417,000 2,396,000 95,000 889,000 896,000 11,818,000

Source: Adapted from Finance Qu´ebec (2005).

Therefore, in 2005, the government pretended to have 11,818 million in tangible assets (Table 6.3). But, in 1997, before the accounting changed, the government declared 15,492 million in assets. In the reform made in 1998, they butchered 9,472 million in assets to reach a total of 6,016 million (15,492,302– 9,476,30256,016,000). This is quite an adjustment mostly when we consider, for instance, that the House of Parliament is accounted at 52,465,000 $, which is a fraction of what it will cost to rebuild it. But, we can suppose that it is the historical cost. The assets, related to education or health, indicate clearly that the schools and the hospitals, belonging to the state, were not included in these calculations. The official discourse wants the net debt to be made of the accumulation of deficits from current expenses. So they say that they spend more than they earn in terms of public services. However, there are some problems with this assertion. For instance, the net debt has increased by 4,643 million dollars (87,224–82,581) during the period covered by Table 6.4 while the cumulated results (revenues (2,15711261711,377) of less expenses (928172813581664)) show a surplus of 989 million dollars. So the debt had increased quite drastically while the revenues were over the expenses. Thus, the net debt cannot be said to be attributable to the excess of current expenses only, and the difference is huge as the operating surplus must be added to the borrowings (98914,64355,672) to reflect the available cash flow. If one would add all the deficits made by the Government of Qu´ebec since the beginning, he will fall short of the net debt by quite a huge amount. In the logic of these accounts, the tangible assets are subtracted from the total debt to reach the net debt. Therefore, the less that is subtracted, the larger and more frightening the net debt will appear. The next quote reports on other factors than operations having an effect on the cumulated deficits. The government consolidates the results made by the SOE.

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Table 6.4: Accounting for the Deficits and the Debt Since the Accounting Reformation of 1997–1998. Year

04–05 03–04 02–03 01–02 00–01 99–00 98–99 97–98

Revenues Expenses

57,297 54,950 52,676 50,503 51,214 47,577 46,889 42,307

57,961 55,308 53,404 51,431 49,837 47,570 43,763 44,464

(Deficit) or Surplus

Total Debt

Net Debt

(664) (358) (728) (928) 1,377 7 126 2,157

119,765 116,214 114,578 107,486 104,860 101,281 102,106 98,535

99,042 97,025 95,601 92,772 88,208 89,162 88,810 88,597

Tangible Cumulated Assets Deficits

11,818 10,735 9,716 8,234 7,166 6,693 6,233 6,016

87,224 86,290 85,885 84,538 81,042 82,469 82,577 82,581

Source: Adapted from Finances Qu´ebec (2005, p. 38).

Some of these enterprises have declared changes in their depreciation methods to pass to the straight line supposedly for harmonizing with the International Financial Reporting Standards (IFRS). Firstly, a government does not have to conform to any exterior pronouncement. Secondly, the principle enounced clearly in the International Financial Reporting Standard Handbook for depreciation is based on the principle that depreciation must follow as close as possible the usage of the asset. This was exactly the principle our standards had before. And the IFRS gives the example of the straight line depreciation only as an illustration. Government enterprises: ($3758 M) for adopting the straight-line method for tangible fixed assets to replace a method not recognized by International Financial Reporting Standards (IFRS); $9 M for various items. Departments and bodies: ($1234 M) for harmonizing the accounting policies of organizations in the health and social services and education networks with those of the Government to make it easier to incorporate these organizations into the Government’s consolidated financial statements using the line-byline consolidation method; $431 M for adopting a component-based approach for capitalizing and amortizing the cost of road infrastructure fixed assets; ($683 M) for contaminated land remediation obligations recorded as environmental liabilities; ($1 129 M) for changing the valuation basis for calculating interest on the pension plans; and $165 M for changing the method used to record personal income tax collected by the federal ´ government on behalf of Qu´ebec. (Finances et Economie Qu´ebec, 2013, p. 63)

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During 2009–2010, they added to the deficit 6,651 million dollars for adopting the straight line depreciation method in the SOEs (3,749) and the ministries (2,450) plus small adjustments. The amortization method used must reflect the rhythm with which the entity expects to consummate the economic advantages related to the asset. Different amortization methods can be used to divide in a systematic way the amortizable amount of an asset over its useful life. These methods include the strait line, the reducing balance at a constant rate method and the method based on the units produced. The straight line method produces a constant expense on the useful life of the asset if the residual value of the asset remains unchanged. The reducing balance method leads to a decreasing expense over the useful life of the asset. The method based on the produced units gives an expense that is related on the actual use or the budgeted production. The entity chooses the method that reflects, the most closely, the usage of the future economic advantages expected from this asset. (IASB, 2006, p. 965) The text seems clear for us: an entity chooses the method that is the most appropriate to reflect its situation. Therefore, the straight line depreciation is only one method among others. So when they pretend that the straight line method is the most appropriate, these companies say that they have wrongly applied other methods for years as their method was not the closest to the usage of the asset. Any other method than the straight line has a chance of producing higher expenses at the beginning and lower amortization expenses toward the end of the useful life of the asset. So, if you change for the straight line method in the middle of the process, you increase your amortization expense for the following years. For an SOE that has to make its tariffs approved in function of its expenses, such a move can be a useful tool to obtain the permission to increase its tariffs.

6.5 Summary Nobody discusses public accounts in the public space. They discuss the budget and what the government intended to do, but never the results. Over 6 years, we have more than 10 billion dollars for accounting adjustments that had a negative effect on the cumulated deficits based mostly on an opportunistic interpretation of the IFRS. To close this, we must add that the auditor declared that the financial statements were presenting a true and fair view of the financial situation of the state, which is as believable as the accounts of Enron. Governments are manipulating their accounts as well as private firms, and this in the goal of having their principal, the citizens, continue to vote for them, as well as mask some expenses that would not have the approbation of the population if their very nature would be disclosed like the “special projects” of all these secret agencies flourishing around our governments.

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Questions 1. What is the function of the private property system? 2. What is the function of the income tax system in a society and to what extend is it constituting a market failure? Comment. 3. What do you think of the well-known statement made by Milton Friedman and quoted in the chapter? 4. Taxing profit, do you think it is the best basis for taxation? 5. Discuss the role of governments in regard to charitable, cultural, and sportive activities relative to taxation. 6. Can you identify different forms of externalities? Provide some examples. 7. Can you comment the positions of Weber, Mill, or Ricardo about the topics we are discussing here? 8. Investors require 15% returns on their investment! Comment this statement with the content of this chapter and the classical neoliberal economic theory. 9. What are you learning through the profit figure? Which information the profit is providing to you: one, as an investor; two, as a citizen? 10. This 15% of question 8: Is it correct to account for it after the net profit? 11. Do you believe that privatizations are good social decisions? Provide examples where the alleged goals of privatization programs had been realized. 12. Do you believe that accounting is telling stories, and why? 13. Do you believe that the profit is an adequate measure for the performance of an SOE? 14. Can you know how the national assets had been managed through the actual accounts produced by states? 15. What have you learned during your studies about a state’s accounts? 16. Do you believe to be able to provide advices on a state’s accounts? If not, who will do that?

Topics for Further Reflections Our economic system is based on the idea that a private enterprise is better than an SOE because of the incentives coming from the private property system. How is accounting, through the concept of profit, reinforcing this idea rather than demonstrating it?

SECTION 2: THEORIES OF ACCOUNTING

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Chapter 7

Sociology of Accounting A theory of accounting can be elaborated from many points of view. In this section, we will draw the general scheme of different approaches for a theory of accounting. Therefore, as accounting is a sociological phenomenon, we will look at the parameters of the sociology of accounting. We also have discussed briefly the effect accounting can have on the behavior of people. Consequently, we will look at the possibilities of the psychology of accounting. As accounting is also a means of communicating, we will analyze the communicational role of accounting and consider the goal of this communication that is said to be an individual decision-making process. Consequently, we will look at the theories of the decision and the concept of rationality that goes alongside. From a scientific point of view, we not only can but also have to elaborate the sociology of accounting. We have many examples of particular sociologies: of the organization (Bernoux, 1985; Lafaye, 2005), of the enterprise (Bernoux, 1999; Sainsaulieu, 1997), of the professions (Champy, 2012; Dubar and Tripier, 1998), and of economic sociology (Granovetter, 2008). The sociology of accounting is to be placed among the sociologies of technics, a part of the general sociology. This technic is not associated with a science, although it can become the object of a science. The language is itself a technic for communicating; and although the most popular by far, language is one among other communication devices.

7.1 Accounting for the Social Contract Since Hobbes (2000) and up to a degree as his position on the origins of power in a state remain ambiguous, and Rousseau (1964), for who the origins of power are clearly situated within the citizens as a group, it is current to believe that the cement maintaining our societies together takes the form of a social contract. For Hobbes, publishing his Leviathan in 1651, a century before Rousseau, the state is an artificial animal created by the human being. This notion of “moral person” applied to an organization is quite original for the time and may announce the vision of the enterprises we have today. But, he is not totally convinced by the effect of democracy and saw the republic as a Leviathan. Moreover, he writes A Postmodern Accounting Theory, 115–131 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78769-793-520181007

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during a period of religious and civil turmoil in England. The Presbyterians were fighting the Episcopalians and England was the first modern European country to have executed its king in 1649, more than 100 years before France. This monster of a republic was frightening many who believed that without the central power of the monarchy, everything will be disembodied by private interests (Baillargeon, 2017). The answer proposed a century after, by Rousseau, is the social contract. The economic solution, proposed by Smith also a century after Hobbes, is the laissez faire, where everything will fall in place by itself: a catastrophic idea whose effects we are still enduring today. Any social institution – and business is no exception – operates in society via a social contract, expressed or implicit, whereby its survival and growth are based on: 1- the delivery of some socially desirable ends to society in general and, 2- the distribution of economic, social, or political benefits to groups from which it derives its power. The notion of the social contract provides a sound basis for widening the field of accounting. (Shocker & Sethi, 1973) The clauses of the contract are not established in what would have been the initial moment, the signature time. Its clauses are disseminated through the texts of the laws but also the unwritten habits that are delimiting what the society finds acceptable or not. Thus the agreement at the very basis of the society operates similarly to the language or the culture. It is impossible to retrieve the initial moment of the language, the moment where the great attributions of the signs to the referents were crystallized. Every one of us takes the language on the road and we leave it on the road again, without having really modified it in a sensible manner. In the same manner, the society is constituted by an ensemble of habits and practices that we take as such when we arrive and that we leave having influenced it very marginally if at all (Breton, 1982). The social contract is managed by the state. It evolves following the beliefs and the interests of those who can impose beliefs. It contains not only principles and procedures but also a kind of program coming from those beliefs. This program implies some level of education for the people, of social security, and of all a series of actions tracing the limits of state intervention. This program also implies the existence of institutions like schools, universities, courts, and so on, which are charged to conduct, in the field, the great missions of the state. The power of the state necessitates keeping a form of legitimacy at the basis of the exercise of a kind of domination allowing finding obedience from groups of individuals and citizens (Weber, 1995). Legitimacy takes many forms and is in constant evolution. At the time of the monarchy of divine right, the power of God was a sufficient justification for the prince to be the prince. Obviously, this divine right power have known many changes. Let’s quote, for instance, the quite drastic limitation of the power of the

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monarch who was forced to sign the Great Charter. Consequently, legitimacy was a somewhat floating concept, taking many forms following the periods. Weber has already proposed some forms of legitimacy describing the recognition of the ones exerting the power. But, we can also consider that the citizen accepted in a society is considered legitimate. This legitimacy can be seen by the social recognition it produces (Rosanvallon, 2008); the discussion about the arrival of immigrants is an example of this aspect of the legitimacy. The social recognition is the result of conformity to norms and standards (Rosanvallon, 2008). However, the increase of the populations in the urban environment and the multiplication of the communication means creating a certain social uniformity, allowing the fragmentation in subgroups, generated some kind of explosion of the old vision of the legitimacy. A legitimate democratic state is the one to whom we recognize the right to give orders following the method that had been elaborated to do so. However, a great lack of confidence is appearing more clearly every day; at each opinion pool, the politicians are at the bottom of the ladder of confidence, and the plethora of scandals that follow one after the other do nothing to restore this confidence. The population believes, in our democratic regimes, that “we are not democratically governed” and “(…) the citizen, after the electoral moment has passed, is not very much sovereign.” (Rosanvallon, 2015, p. 9) (Our translation). The state is sliding from a position theoretically on the side of the citizen toward a situation of accentuated distrust and a democracy that is quietly eliminating its instruments: political parties, programs, active implication of the citizens, to arrive at a politic-spectacle being gradually transferred in the medias, where the citizen has become a spectator and a consumer of politicians, packaged like products by big firms of public relations (Breton, 2000). The institutions created or annexed by the state to fill its mandates also become distrusted. The absolute doubt being installed toward these institutions and under the pressure of different groups, they are asked to make profits. Among these institutions, the firm still resists quite well mostly because nobody sees the firm as a public institution, at least the private one.

7.1.1 The Firm as a Social Institution The responsibility to organize the survival system for the population is devoted to the state, who has to put into place the means of production and the means to reproduce the means of production. This subensemble of social relationships is called the economy. However, this vision is not well spread in the governmental and accounting discourses. The habitual conception is that the social starts where the economic stops (Wood, 1991). It is well-accepted that major development decisions impact on both the economy and the social and natural environment, yet, in practice, the pursuit of economic development and growth often sees social and environmental impacts of economic processes ignored and discounted. (Boyce, 2000, p. 27)

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In some official documents, we have seen this figure made of three circles with a small overlapping: the social, the economy, and the environment. In the intersection is the “social economy.” They govern with such a vision although they are totally unable to explain which part of the economy is not in the society and which parts of the society and the economy are not in the environment. Such simplistic schemes explain nothing. The economy is entirely social, and all that is completely included in the environment. So there is no part of the economic world that is outside of the social sphere, mostly if we consider that the economy is basically a question of exchange. But, the economy had been appropriated by the private sphere, changing the locus of control. One of the most important principles of production and of overall productivity is the division of labor (Durkheim, 2007). The division of labor has for consequence to force the members of a society to constantly exchange in organized structures like markets. The necessity to organize these exchanges did not really appear at the time of the monarchy where the productivity of the 95% of the population was always sufficient to allow the eccentricities of the 5% relying on it. The 95% was merely surviving or was dying without the governing group taking much attention to it. Then appears the people. It is understandable, considering the state of education at the time, to wonder if it was possible to organize the survival with the people as the ultimate source of power. We said that the division of labor previously described by Smith (1991) is one of the main principles organizing this system. The second principle is the autoregulated market. While they feared that the disorder inherent to the “popular classes” impede the survival, Smith came to say that if each one works for himself in his specialty and interest, the ensemble will function all alone at the end. The invisible hand will do the job to coordinate the efforts and avoid the spoiling of resources. To reach this point, the property rights must be attributed in a society. In our societies, the system of private property has been judged the most prone to produce the maximal level of motivation while spoiling the least resources. These fundamental “decisions” are more or less included in our constitutions that can be considered as the basic documents forming our social contracts (Laffont & Tirole, 1993). In our model the cost of public ownership is a suboptimal investment by the firm’s managers in those assets that can be redeployed to serve social goals pursued by the public owners. (…) The cost of private ownership in our model is that the firm’s managers must respond to two masters, the regulators and the shareholders. (Laffont & Tirole, 1993, p. 637) We may complete our precedent statement and say that most of our developed societies choose some form of hybrid systems admitting the participation of the state, mostly in the sectors where the investments were too huge or where installing competition would cost more than its absence. But, we are then into systems where the ensemble of the markets is still, in

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principle, controlled by the invisible hand. Pure competition implies the autonomy of the agents that are contracting all the time. Obviously, such a functioning is highly impossible in the “real world.” Thus, the firm appeared to deal with this impossibility (Coase, 1937), put in a very abridged way. This providential firm, coming to reduce the transaction costs and consequently the frictions in the market system, is a paper creature, a virtual being, a moral person. Following the reasoning, the system was supposed to be autoregulated through the multiples and uncoordinated actions of the self-interest-oriented agents. This system is far too heavy and based on the existence of a level of circulation of information that cannot exist in practice. Then appeared somewhat spontaneously a new institution: the enterprise. Created to manage the transaction costs, the efficiency of the cooperation, the firm is a fiction, meaning that there is nothing we can point and say: this is General Motors (GM), for instance. GM owned manufacturing plants, offices, selling facilities, and thousands of other assets, but none of it can be said to be GM. In the classical theory, the firm is treated like an agent in the market, but nothing is said on the internal functioning of this “black box” (Hart, 1995), which can be very huge. The firm as a form of organization is filling the essential of the economic space, making it an institution used to fulfill, at the level of the society, some of the essential mandates of the state. As any other social institution, it receives, by a sort of spatial and fundamental metonymy, the particularities of the state. These attributes are necessary to function. Among those attributes, the firm will receive access to the collective resources to fulfill its mandate, which implies a part of the legitimacy belonging firstly to the state.

7.1.2 The Legitimacy of the Firm For Pfeffer and Salancik (2003) the situation of interdependence, fundamental in the life of enterprises, necessitates the transfer of some degree of legitimacy. In those days, every firm needed to operate a certain degree of recognition by the state. In its simpler expression, this recognition will take the form of a permit that can be delivered at the lowest degrees of the hierarchy. But, as soon as we talk about companies, we imply the existence of a birth certificate that was called a charter. It constitutes an official recognition of the existence of the firm, a birth certificate. For instance, an organization proposing as an intervention field the subcontracting of assassination would not receive a charter. It is then an initial granting of legitimacy to an organization that the public is still ignoring and may continue to ignore. A firm manufacturing screws and nuts will be recognized straightaway of public interest (Suchman, 1995) and nobody will question its activity. The governmental institutions charged with the surveillance of the firm will suffice, by default. However, even a firm of this sort can have legitimacy problems. Imagine the citizens learning that this firm is manufacturing their screws and nuts in India, with young children working on the production line. Then, there may be a problem of legitimacy, not related to the activity, but to the way to do it.

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We will encounter three kinds of legitimacy problems. The first one will be related to the basic activity. This one will be settled by the state accepting or not to give a charter and to accept the activity. Then, this accepted activity can become socially contested, as it is still the case for the tobacco industry. This kind of contestation can last for decades. It is not Pall Mall or Imperial Tobacco that is contested, but making tobacco products. Therefore, when the activity is contested, the problem is related to all the firms and it is a sectorial problem. While this problem is socially debated, a firm can lose its reputation because hiring children in a foreign country or the sector can have a problem of process legitimacy because the entire sector is adding addictive substances to the product to keep their consumers. It is important to discriminate between reputation and legitimacy. Legitimacy appears then as a conversation between an industry and the society (Hasbani & Breton, 2013). To this conversation are sometimes invited the governments and their regulating bodies, depending on the urgency of the situation. In the case of the Deepwater Horizon, many groups intervened, on both sides, to impute responsibilities and to reject them. The general public followed the debate through the media (Deegan, Rankin, & Tobin, 2002; Hasbani & Breton, 2013). The media played the role of transmitters essential for the conversation to continue. Often, for long periods, we hear nothing about any problem because nothing noticeable is happening. When the media are multiplying the references to a particular industry, then something is happening. The media become thus the barometers of the degree of legitimacy that the industries have at a given time (Deegan et al., 2002). With the Deepwater Horizon the situation becomes a problem of legitimacy because there was already a general belief that the oil and gas companies were ready to do anything to make money. No serious contestation of their activity was argued. However some defiance toward the process they follow to make money had been expressed. BP had not really lost its reputation as, two years after, and after the “legal sanctions,” the profit was back to normal. A firm manufacturing a simple product sold to other firms to enter into the fabrication of another more complex product may stay mostly ignored for the rest of its life. But, it is possible that something happened to change this state. Therefore, when the state is issuing official documents giving an official birth to this “moral person” that is a company there is a form of fundamental legitimacy that is conferred on behalf of the citizens but in absence of their knowledge. That is the beginning of the conversation that can start by a long silence which can last to the end of the firm; the initial legitimacy already there suffices for confirming the entering of the new firm in a group already legitimate. The definition we start with was proposed by Suchman (1995) stating that it is the activity that is recognized of public interest. Any industrial or commercial activity is not defining a firm but always an entire sector. Therefore, a legitimacy crisis touches entire industries, not specific companies. When specific companies are touched, normally it is their reputation they are losing. The so-called “general public” provides more than legitimacy to firms; it also provides their reputation, their “image de marque,” etc. (Fig. 7.1).

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Legitimacy from the citizens Fundamental recognition that a irm enter in a sector socially acceptable

Original

Given by the State (on behalf of the society) at the beginning of the organization under the form of charters, licenses or permits, etc.

Components of the social dialogue between sectors and society

Activity

Recognition by the member of the society that the activity of a sector is of general interest. (Pfeffer and Salancik, 2003; Suchman, 1995, Parsons, 1960)

Process

Recognition by the member of the society that the way a sector conducts its activity is acceptable. Moral legitimacy for Suchman (1995).

Legal (systemic)

The liberal theory had been included in the laws. We now have laws against monopolies or cartels. Even if people are not aware of the details of the laws, they may perceive huge proits as a result of taking some liberties with the system (Watts and Zimmerman, 1986).

Agency aspect of the legitimacy

Agency

The agent must conserve its legitimacy in front of the shareholders if he wants to continue to exercise the delegated power. (Fourth form of moral legitimacy for Suchman, 1995)

Fig. 7.1: Types of Legitimacy Related with the Sector. Source: Adapted from Hasbani and Breton (2013). It is possible to produce an equivalent figure for the public sector (Fig. 7.2). The SOEs also need to be legitimated, although this is the object of a continuous fight between the private and the public sectors. The ideology at the basis of this continuous fight is generally incorporated by the citizens as the private sectors possess most of the state ideological apparel, which is not anymore the education system, but the medias. In the private sector, the tobacco industry is the most publicly contested activity. The fight lasted for more than half a century now and is not yet settled.

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Legitimacy from the citizens Fundamental recognition that a irm is in an ineficient and costly sector

Original illegitimacy

By creating an SOE, the State confers some legitimacy. However, the society is not following in this direction. In our liberal economic system a SOE is a breach.

Components of the social dialogue between sectors and society

Activity legitimacy

Recognition by the member of the society that the activity of a sector is of general interest. (Pfeffer and Salancik, 2003; Suchman, 1995). Except for marginal goals.

Process legitimacy

Recognition by the member of the society that the way a sector conducts its activity is ineficient and costly by deinition. Moral illegitimacy derived from Suchman (1995).

Legal legitimacy

The liberal theory says that private property is the best motivation of our system. Public property, by cutting this source of motivation, is an incentive for pickings of any kind.

Agency aspect of the legitimacy

Agency legitimacy

Fig. 7.2:

The agent (managers of the SOE) are seen as looser refusing the competition and hiding from the market in SOE’s. (Fourth form of moral illegitimacy from Suchman, 1995)

Types of Legitimacy/Illegitimacy Related with the Public Sector.

Many other activities are also contested on the basis of their environmental effect. Conversely, an activity can become legitimate while it was not in its past: the example of growing marijuana plants illustrates this idea. But a sector can also be attacked over other questions. The pharmaceutical sector has been challenged not on his activity but on its greed. The rates of profit realized at the cost of sick persons and their lawsuit against the Government of South Africa, for instance, made people believe that the entire industry was ready

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to do anything to increase profits while the largest of them were already figuring among the most profitable firms in the world. It is their way of conducting their activity that would be contested here. If only one firm of the sector does something, it will be imputed to its reputation. But if all the firms of the sector are considered as using the same antisocial process, then it is a matter of legitimacy. In the case of BP, it had been a small legitimacy crisis because there was a constant underlying doubt about the discourse on the prices sustained by the sector suspected of doing anything to increase profits. A legitimacy crisis can develop from a problem of reputation originating in only one firm. The liberal economic principles had been incorporated into laws in many countries in the world. We have laws against cartels or monopolies. When some evidence of collusion is brought over the public place, people understand they have paid too much and start to increase their level of defiance toward this sector. For us, the stakeholders are not conferring legitimacy. Legitimacy comes from the “general public,” not as the general public but as citizens, from some sets of information that have nothing to do with the discourse of a deceived customer. This customer will say: I will never again buy this kind of car; he will not say we must stop making cars. But some people are starting to attack the legitimacy of making cars using fuel. This relatively new social conversation is now pushing many institutions to install electric devices for reloading electric cars. We may foresee that within 10 years most public buildings will have that kind of facility in their parking. Reputation can be dependent of the stakeholders because one organization may present many faces: one for the customers, one for the employees, one for the investors, etc. The so-called “stakeholder theory” (Donaldson, 1999) is replacing citizens as an ensemble by a series of different pressure groups possibly made of the same persons but with each time a different goal. Legitimacy is about how a sector respects its social contract; reputation is about how a specific organization respects a series of contracts with a series of groups or persons often called stakeholders. While reputation is an “attitude construct” (Schwaiger, 2004) although containing some varied cognitive proportion, it doesn’t have the political dimension legitimacy possesses. Finally, we have the legitimacy of the managers, mainly the CEO, for the shareholders. Obviously it is not all the shareholders, but those having a sort of control. The members of the board are also part of this process. So, a manager has to control the legitimacy of the firm for the general public and also his legitimacy in front of the shareholders and the board as any form of power has to be legitimated. Legitimacy is fluctuating like stock prices. It would probably be possible to follow it on a market if it would be possible to openly sell it. When the level of legitimacy becomes too low, firms take action to restore it. There are firms specialized in managing crises and a certain amount of literature about that (Coombs, 1999). Industries having the greatest political exposure will be more often scrutinized (Watts & Zimmerman, 1986). In the classical liberal economic theory, the profit is not supposed to exist as we are in a situation of perfectly competitive

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markets, with no barriers at the entry. Then, a high profit is a signal that the system is not functioning and will normally be followed by a drop of the legitimacy of this industry. For the profit, we may observe that the business world has succeeded in changing its meaning and that the signal of malfunction of the economic institutions had been transformed into a signal of health (Breton & Caron, 2008). The conversation becomes a diatribe in critical moments. The industry must then take the means to calm the tone, even to silence those who enflamed the discourse against the sector. The means to do that have been very rarely studied in the field. The theoretical proposals leave little space to tangible actions but prefer discourses. A typical proposed set of tactics would be, in this order: Gray, Owen, and Adams (1996). • • • •

educate and inform its relevant publics; seek to change the perceptions of the relevant publics; seek to manipulate the perceptions; seek to change external expectations of its performance.

There is no proposal implying to change something tangible in the firm. It is all about the perceptions.

7.1.3 The Discursive Defenses The conversational, then purely discursive character of the legitimacy places us in the necessity to enter into discourse analysis. Industries are unable to do without legitimacy as it is the key to open the coffers of the state and still better, its granaries. So, we have to analyze interventions to follow the patch of legitimacy decreases and identify the methods used by the industry to repair the holes made to it. The bad perception of the pharmaceuticals, underlined above, is accompanied by a fear that will not allow, in a foreseeable future, to question the activity of making medicines. Pharmaceutical companies, as a sectorial line of discursive defense, will say that they need profits to continue to do research. Many industries know similar experiences. They receive criticisms on their ways of conducting business without questioning their basic activity. Gas exploration is one of these sectors. The activities of these sectors are perceived as being essential, therefore they can take some liberties in the pursuit of profit, for instance, without being really in danger. That is where accounting intervenes. Legitimacy appears as an intangible asset; this is an accounting problem because it is one of these assets that are reputed to decrease, by their absence, the relevance of the financial statements. If we would account for the legitimacy, we will have to give a value to it and then to account for its fluctuations, and normally not just the diminution in the value. Maybe the time has come to change our set of financial statements and to have some statements that are not measured in monetary units or not entirely. At this point, it may

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be interesting to consider the Bilan social (social balance sheet) that has been legalized in France in the 1970s. This “balance sheet” was providing useful information on the firm through economic indicators instead of monetary valued items.

7.1.4 Accounting, Measurement, and Social Decisions Privatization has taken an important political space since about 30 years now. Privatization attempts to reduce the size or role of government by transferring production and delivery of public goods and services into private hands. (Fernandez & Fabricant, 2000, p. 133) Privatization was supposed to bring efficiency in the privatized organizations, which had not been the case in most circumstances (Cuervo & Villalonga, 2000). Accounting has imposed itself as a measure of the social performance of the firm. Key concepts from accounting are used to evaluate the measure in which the firm has reached its specific objectives and mandates, therefore its part of the social contract. To the industries with a noncontested activity, it will be the unrestrained pursuit of the profit that will be more frequently reproached while the SOE will be accused of not doing profits. That is the framework of our sociological study of accounting. Accounting is a technic used in our societies to tell the financial story of an entity. Then, its owners will pretend to use it to measure performance. For the state, the story in question would be supposed to tell the government if the firm has reached its goal and fulfill its mandate. Outside the Anglo-Saxon world, a state can have other mandates than increasing the wealth of some shareholders. These mandates are often fulfilled in part through SOEs. The expenses made by the SOEs for a state’s mandates are totally legitimate, but must be accounted for in the correct column if we want to judge the main activity of the organization. Accounting concepts cannot be used everywhere in the society. The privatization movement that had been observed in the 1980s and 1990s had, in its background, the transformation of the SOEs on the model of the private firm even if their goals are not the same. The first step was to declare the goals of the SOE illegitimate and substitute the profit as the only possible goal of an enterprise. The tenants of the privatization used accounting in a series of biased measurements arriving every time at the expected result. Boardman and Vining (1989) tried to prove, based on a nonexisting theory and using the profit as a measure, that private firms were performing better than public ones. They concluded that it was true although their results were inconclusive. This ˆ e, 2002; inconclusiveness has been observed by others (Bozec, Breton, & Cot´ Dharwadkar, George, & Brandes, 2000; Frydman, Gray, Hessel, & Rapaczynski, 1997) but has not stopped Boycko, Shleifer, and Vishny (1994) from building on nonexistent results showing that if the results are not in line with the ideology, the latter must prevail.

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Bozec and Laurin (2000) compare a SOE in its privatization process and a private firm. The ideology is clearly leading their paper: To remedy to the economic performances of the public sector enterprises judged insufficient, the governments frequently proceed to the privatization of these firms. Effectively, since about 20 years, we see, around the world, some huge privatizations. Canada had not escaped this tendency. Therefore, large state-owned enterprises, as Petro-Canada, Air Canada or more recently the Canadian National appear among this group. In the economic literature, the theory of property rights argues that the public sector enterprises are systematically less efficient and less profitable than their counterpart of the private sector. The argument relay essentially on the presence of the capital market, more particularly the stock exchange market as mechanisms to ensure a rigorous control allowing the firms of the private sector to optimizing the efficiency and the profitability of their operations. (Bozec & Laurin, 2000, p. 266) (Our translation) Firstly, they propose a medicine for a sickness they declared themselves backed by some supposedly general movement of privatization around the planet. However, if we look at this movement, we see that outside the Anglo-Saxon countries, the privatizations had been driven by the IMF (International Monetary Fund) and the World Bank, so forced by the Anglo-Saxon countries in the name of private companies following and taking charge of the new privatized activities. Secondly, the economic literature, outside of the agency theory that is taking almost the entire place in accounting research but that is far from having this importance in economics or strategy for instance, is far from concluding what the paper is reporting. Anyway, the main argument of the property rights is not the market, but the incentives. Moreover, the argument of the markets is interesting. There were two railways in Canada. Therefore, in privatizing the CN, the Canadian government created a duopoly, not a competitive market. That will be the situation for most of the SOEs. In the UK, they had 10 public authorities to manage the provision of drinkable water and the disposal of used waters by geographical area. When they privatized, they created 10 regional monopolies; so much for the control by the market. In such a situation, the prices of water increased tremendously, and the profit of the companies followed. However, contrary to the supposed theories, the quality of the water was questioned in many places. The number of lawsuits rocketed during the post privatization period, some of these going as far as accusing the companies of poisoning people (Lobina & Hall, 2001). There are important reasons why the governments decide to take the property of a firm. The northern part of Canada is mostly empty. This situation can have negative effects on the Canadian sovereignty on the northern parts of the country. Therefore, the Canadian government elaborates politics to keep the northern

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areas alive and to provide some services to the population living there (Bozec & Breton, 2003). The public railway firm will have to provide services in the northern areas, keeping stations to manipulate low quantities of merchandises and low traffic of passengers. Therefore, the productivity will be lower than in the private firm. However, you cannot stop this service without considering the occupancy of the territory and the cost to displace the people living there. Another reason will be the expected failure of a large firm and the expected unemployment of a large quantity of people. In the Province of Qu´ebec, the government took control of a ski resort to save the enterprise from bankruptcy, i.e., saving jobs. The government also added in the books of the new SOE a certain amount of adjacent pieces of land. Some years later, the tenants of the privatization started to publicly argue that the government has no business in ski resorts, which can be found defendable. They privatized the resort for a low price including the land added to it. Finally, Canadian governments own firms in sectors where the investment was too large to be undertaken by private firms or in sectors which were natural monopolies and the difficulties of ruling were enormous; this is the example of the electricity sector in Qu´ebec. All these events show that the use of accounting concepts may be misleading. In the case of SOEs, owned by the citizens although managed by the governments, the tariff is a more relevant measure of the performance than the profit. The provision of water is a natural monopoly, and to make it on a “market” under the control of the state, which is an oxymoron, has few chances of producing any good. For instance, in London, after the privatization, the health authority expressed some concern about the return of infectious sickness having disappeared for decades. These examples are showing clearly that accounting concepts and reports have some very important effects on the society.

7.2 The Sociology of Accounting The society will designate, for the time being, the ensemble of the citizens living in a defined geographical area. A society is a cluster, or system, of institutionalized modes of conduct. To speak of ‘institutionalized’ forms of social conduct is to refer to modes of belief and behaviour that occur and recur – or, as the terminology of modern social theory would have it, are socially reproduced – across long spans of time and space. (Giddens, 1982, p. 8) The institution representing this society is principally the state and its specific components (government, parliament, etc.). Among other tasks, the state must organize the protection of the citizens (Rosanvallon, 1992). Later, the state will take the responsibility of the “Providence State” (Rosanvallon, 1992). The ensemble of means mobilized to these ends is generally the object of the economy. The economy is an abstracted notion incarnated, in our societies, by the firm as an

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institution. These firms, in turn, possess a series of attributes among which we find accounting as a communication technic. Accounting exists under many appearances. Normally, financial accounting is separated from management accounting, and accounting in the organizations is separated from the national accounting. Management accounting is mostly used to take decisions internal to the organization. Consequently, this form of accounting is not framed by any law or official ruling. Financial accounting is supposed to inform in priority the investors that are farthest from the firm and less prone to obtain other information. To encourage this world of investors, which is the goal of the market system and is perfectly in line with the discourse of Smith (1991), financial accounting is described by laws and rulings. However, the establishment of the standards is often subcontracted to professional bodies, which automatically places the large firms in a position to control the standardsetting process. That was also the conclusions of Watts and Zimmerman (1986) when they were promoting studies on the interventions of some categories of firms in regard to specific standards. Conducted following rules, such studies belong to the sociology of accounting. The sociology of accounting will have many entries. Firstly, we will consider accounting as a social phenomenon. As such we have to be aware of the inherent constructivism that accompanies social facts. We cannot approach society, or ‘social facts’, as we do objects or events in the natural world, because societies only exist in so far as they are created and re-created in our own actions as human beings. In social theory, we cannot threat human activities as though they were determined by causes in the same way as natural events are. We have to grasp what I would call the double involvement of individuals and institutions: we create society at the same time as we are created by it. (Giddens, 1982, p. 11) This vision of a social phenomenon is reinforced by the control of the state. Such an approach would ask questions about the apparition of accounting, about who controls it, and how the fundamental orientations with the ways to organize and structure this activity are decided. As accounting, through the announcements of profits and losses, influences the decisions of the citizens, we may study the channels through which the accounting images are formed in the society and such sociology may ask how come in many countries this mere technic has been elevated to the rank of profession. We have an example of this in the study of Christensen (2004). He examined how the management of an Australian university uses accounting concepts, in absence of numbers, to justify their decision to terminate a service they were offering. We assist to that kind of usage of accounting concepts and numbers every day. It is like if the public system including the government would have to make profit. Therefore, all the sustaining of people in need is limited, and the poorest and more needy people are sent to the charities that are funded to fulfilling this unavoidable function. Then, the governments can sustain the economy

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and the firms that are supposedly making it. Thus, instead of compensating for the deficiencies of the “market” economy, which is the function of the liberal state, our governments are giving billions to firms to do what they are supposed to do without the financial support of the state: create wealth. Doing that, the state is increasing the market imperfections. In Qu´ebec, it was said, a few years ago, that something like 400 million dollars would replace the higher education on its rails. It was far too expensive for our governments that gave a couple of billions to one company just after that. Nobody seriously asked what the financial performance of this “investment” was. Looking at the pace with which occidental governments “invest” money in the economy, sustaining the large firms, it is clear that the system of private firms is no more able to create wealth. Therefore, what are they doing? We cannot say anything in biology, in physics, in mycology, on the raising of silk worms or the painting of the quattrocento. We can say everything in economic. (Maris, 1999, p. 47) (Our translation) Accounting is, like always, at the end of the peloton. It continues to account historical values and forget a series of externalized expenses. It continues to help anyone having the means to pay, to cheat income tax, and to pump as much resources as possible from the governments to sustain an economic development that brings more wealth into fewer hands. While we may wish to believe that accounting is no more than a (complex) set of (socially neutral) techniques and skills and that economics is a “science” abstracted from ethics, values, human emotions, exploitation, quality of life and the state of the physical environment, such beliefs are untenable at best and destructive, dishonest and immoral at worst. (Gray et al., 1996, p. 15) Accounting is far from being this socially neutral, observing discipline. Accounts, those of the states or of the private organizations, are biased and oriented toward specific ends. Throughout conventional accounting theory, teaching and practice there appears to be a widespread acceptance that (for example) the purpose of financial accounting is to inform the self-interested decision maker in order that they maximise their personal wealth and (explicitly or implicitly) thereby ensure the efficiency of the capital markets. (AAA, 1977; Beaver, 1981; Benston, 1982a, 1984; Dyckman et al., 1975; McMonnies, 1988; Solomons, 1989). Why such a highly talented and privileged group of accountants should exert so much effort in order to ensure that the richest and apparently most powerful group in society become still richer and more powerful is rarely explored. (Gray et al., 1996, p. 17)

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Therefore, we may wonder what would be the “real” theory of accounting; the one that can explain accounting behaviors looking so unreasonable but sustained by the academics and the practitioners. Over the calculation of profit, organizations live on unsaid elements that are obliterated in the financial statements. In fact, there are two parallel discourses. The first is the official one and the second comes from different activist groups that have been on the field and seen the consequences of the actions of these enterprises. The government, for one, is clearly focusing on the first discourse.

7.3 Summary Accounting is the method used to measure the extent of the fulfillment of the social contract by the firm. 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. (Cooper & Morgan, 2013, p. 418) As such, the concept of profit is widespread in the social discourse and in the activity consisting in assessing the results of the SOEs and the governments. The profit is then the measure of the legitimacy of the social institutions although wrongly conceived and used. This diversion of the concept is possible because accounting is a social technique used by many groups and individuals in the society and an object of appropriation by factions or groups for their personal uses. Such usages include support to privatization projects, eliminating SOEs, closing social programs, etc. Consequently, the accounting concepts and activity will take different significations following the periods in history. It is the job of the accounting history and of the sociology of accounting to follow these changes in a diachronic perspective for the history and to describe the situation at a given time, in a synchronic perspective for the sociology.

Questions 1. What do you think of the attribution of the statute of “moral person” to a company? 2. a. What is a social contract? b. Who are the parties of this contract? c. Who manages the contract? 3. What is the relationship between legitimacy and power? 4. Enumerate the different forms of legitimacy of an organization and describe it shortly. 5. What relationship do you see between accounting and the social contract? Discuss. 6. Describe the social meanings of the concept of profit?

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7. What would be the best way for measuring social performance? 8. What are the objectives of the privatization programs? 9. Privatization is the best solution for SOEs that are making low or no profit. Comment. 10. Compare the tariff with the profit as a measure of performance in the public sector. 11. Is it in line with the liberal economic system’s specifications for a state to subsidy the companies? What would be the role of the state in such a system? 12. Answer the question (in green) asked by Gray et al. (p. 183) 13. How can you describe the role of the accounting history? 14. What is the difference between history and sociology?

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Chapter 8

The Psychological Aspects of Accounting There had been a series of studies implying the psychological aspect of accounting. These studies have been more assimilated to the management aspect of accounting research.

8.1 Psychology and Control The conception of the market, prevailing in financial accounting, presents agents in the market as superhumans having no psychological problems or even biases. They are considered perfectly rational. But, inside the firm, it is admitted that people can have psychological motivations to do certain things. There are a few psychological concepts which reached the financial accounting domain despite all the “ifs” of the efficient market hypothesis (EMH) and the difficulties CAPM (Capital Asset Pricing Model) had to convince everyone. The CAPM contained also a great amount of assumptions lacking convincing power. • Investors are risk-averse individuals trying to maximize their wealth. • Investors have homogeneous expectations about the returns of comparable stocks. • There exists a risk-free asset implying that investors can loan or borrow at this risk-free rate. • The quantity of assets is fixed; every asset has a market and is divisible at infinite. • There is no imperfection in the market as taxes or ruling or restrictions on some types of transactions. • Markets are without frictions, and information is free and accessible for everyone all the time. Obviously, if you make enough unrealistic assumptions you may be able to reach any wanted conclusions, as noted Herbert Simon:

A Postmodern Accounting Theory, 133–151 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78769-793-520181008

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A Postmodern Accounting Theory I know no science (except the economy) having the pretention to talk of phenomenon from the real world, and make discourses so flagrantly in contradiction with the facts. (Simon, quoted by Gabri´e & Jacquier, 1994, p. 13) (Our translation)

But over this scotomization, financial accounting has encountered some other notion inspired by the psychology. The most important is an alternate explanation for the behavior of the agents in the market. If it is not efficiency, it may be the functional fixation (Foster, 1986). The functional fixation is a lack of understanding of the information that is circulating in the system. In psychology it had been labeled: psychological set. It can be defined as follows: Practice in solving problems one way tends to “set” us to solve a new problem in the same way, provided the new problem situation contains stimuli similar to those in the practiced problems. (Morgan, 1961, p. 273) Then, in accounting, the definition has been imported. (…) a preparatory readiness to make a particular response to a given stimulus. Thus, based on this (…) and on accounting studies cited earlier, it appears reasonable to assume that some form of persistence of a set in the reaction of decision makers to data will occur in those instances when the decision makers are aware that there has been a change in the process generating the data. (Chang & Birnberg, 1977) Briefly, in the absence of the perfect knowledge implied by the EMH, agents in the market have a tendency, well known in psychology, to take something that was present the last time they succeeded and apply it even if the circumstances are not exactly the same. This attitude is near a conditioning, where the stimulus provokes always and automatically the same answer (Fig. 8.1). This Pavlovian vision is quite simplistic although a lot of research in accounting is based on it. For instance, what is called behavioral accounting is often as simplistic: if you find the stimuli, you will have the answer automatically.

CONDITIONING STIMULUS Accounting information

Fig. 8.1:

RESPONSE Investment decision

Simple Vision of the Conditioning Process.

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At least, we may suppose that there is a cognitive process intervening between both ends and that a given stimulus does not always provoke the same straight answer, or it will be too easy to make people buy anything. But, maybe it is. Or maybe other considerations are entering into account. To the contrary to what is teaching every rational economic theory, our decisions are not the result of a compensated means of the quantitative benefits multiplied by quantitative probabilities. (Keynes, quoted by Akerlof & Shiller, 2013, p. 13) Nevertheless, that is the way things are often presented.

8.1.1 In Management Accounting Management accounting produces reports, like budgets, prepared by people at many different levels in the organization. Each activity, department, or service will prepare a budget for the year to come to be aggregated at a higher level. People doing that have interests, but they also have their opinion about how the superior level proceeds to the aggregation. Then, if the lower level believes the upper management is indifferent to their problems and is always cutting without analyzing, they will take sufficient buffers (budgetary slacks) to conserve their margin of maneuver despite the cuts in the budget. Knowing that, the upper management may double the cuts. Therefore the demand for and the preparation of reports is prone to create or encourage some deviant behaviors. But, the top management may know that they can produce or reinforce desirable behaviors and prevent undesirable ones (Nitterhouse, 1989).

8.1.2 The Control of People When we talk of control, we realize that it goes far beyond the simple control of costs we discuss casually. In fact, control is a fascination that has increased with the industrial revolution and the development of means. However, it is not new for the colleges or the armies to exercise a strong control over activities. It is interesting to visit a museum of automatons. They are examples of the obsession of reproducing mechanically the movements and then having a machinelike human doing only the desired movement. The human body enters into a machine of power that is scrutinizing, disembodying and recomposing it. A “political anatomy”, which is as well a “mechanic of power”, is in the process of emerging; it is defining how one can have some power over others’ bodies, not only for having them doing what is desired, but for them to operate following the guidelines, with the techniques, the rapidity and the effectiveness that are determined. (Foucault, 1975, p. 162) (Our translation)

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This power has to be absolute to better control every movement and transform it into something productive. The gesture is decomposed in its elements; the position of the body, the members, the articulations are defined; to each move are assigned a direction, amplitude, a length; their order of succession is prescribed. The time is penetrating the body, and with it all the meticulous control of the power. (Foucault, 1975, p. 178) (Our translation) This increasing possibility of controlling the movements will produce Taylorism and Fordism. The human being is then used, between two machines, to do a task that the machine cannot do at that time. As the speed of the machine is constant, the human in between must also be constant and deprived of any personal will and preferably feelings. The potential negative effect of such a working organization had been illustrated by Charlie Chaplin in The Modern Times. The cinema is not the only art to have represented different forms of control in the business world. Zola, in Au Bonheur des Dames, has shown how the disorganized system of old small commerce had been replaced by the large department stores, like Le Bon March´e or later the Galeries Lafayette, in Paris. The employees are controlled in every aspect of their lives, including the personal one, and the information is circulating all the time very efficiently. Finally, he describes how, in the retailing commerce, desire has replaced need. Other sources have also discussed this question. Hoskin and Macve (1988) discussed the organization of the armories in the US. They propose that this organization had been imported from the military schools, pretention they backed by the presence of the same person at the direction of both organizations. Controlling the cost had been made necessary by the opening of the consumption to masses, which is totally in line with the ideas developed by Zola. Before that, there were a few buyers able and willing to spend a lot of money. Therefore the products were few and quite fancy. To increase the production and diminish the prices, the manufacturers had been forced to simplify the products and tighten the costs. By chance (or not) at this moment in the history the means to pass from individual artisanal production to serial mass production was developing quite faster than in the preceding centuries. A compensation system proportional to the units produced depends on an accurate accounting of the moves of everyone. Therefore, management accounting is everywhere in the life of the workers as a main determinant of their revenues.

8.2 Accounting as Communication Among the psychological aspects of accounting, we have the communication function. We communicate to produce an effect. Therefore, communications can be studied in function of the effect they are meant to produce compared with the effect they effectively produce. One phenomenon has taken importance in communication: storytelling.

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8.2.1 Storytelling Now “human interest” has replaced the enunciation of “pure facts”: Storytelling is used in unexpected sectors, wrote in 2006 the American sociologist Francesca Polletta, (…): managers are expected to tell stories to motivate the workers and the doctors are formed at listening at the stories of their patients. Reporters have switched to the narrative journalism and the psychologists to the narrative therapy. Each year, thousands of people adhere to the National Storytelling Network or participate to the about two hundreds festivals of storytelling organised in United-States. (Salmon, 2007, p. 8) (Our translation) Storytelling has invaded every aspect of our life. Politics has become storytelling when they present images of the personal life of the candidates. Obviously all that has nothing to do with the reasons of their presence on the television. Even in publicity, storytelling has become very important. Often, the stories of the people using the product takes so much space that at the end of the message you are not sure which product they were talking about. It would be useless to spend lines to discuss the invasion of storytelling in the scenarized reality shows. In a world of storytelling where they say all the time that “you have to have a dream if you want to have a dream come true,” the conception of “reality” softens seriously. (…) our quotidian idea, conventional, of the reality is an illusion that we spend an important part of our life to back up, even at the considerable risk to bias the facts toward our own definition of the reality instead of adopting the reverse process. Of all illusions, the most perilous consist in thinking that there is existing only one reality. In fact what exist are only different versions of it, which can be sometimes contradictory and that are all effects of the communication, and not reflecting objective and eternal truths. (Watzlawick, 1976, p. 7) (Our translation) Such lack of confidence in the objective existence of “reality,” expressed by many specialists in human sciences, is backed by the research about our perceptive abilities.

8.2.2 The “Quality” of Information There had been a number of discussions lately about the quality of information. The information is manipulated. However, many tenants of the efficiency of the market pretend that accounting information may lack quality. Therefore, at the moment where the IFRS (International Financial Reporting Standard) is to be enforced in most countries, some researchers would like to find if those new standards leave less room to manipulation. In a paper published in 2008, Barth, Landsman, and Lang ask whether firms using IAS produce accounting information of higher quality. Firstly, we have to

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acknowledge that there is no theory behind such a hypothesis coming from anywhere. Secondly, the problem is how to measure these differences in the quality. We all remember that the works of Jones (1991) and Dechow, Sloan, and Sweeney (1995) although applying the best models to companies that had already been prosecuted by the SEC were able to detect only around 30% of these manipulating firms. We have no indication of the accuracy of the method proposed by Burgstaler and Dichev (1997). Barth et al. (2008) use a measure of the variance in net income compared with the variance in cash flows, etc. This measurement can be classified in the same category as the measurement tested by Dechow et al. (1995) and have poor detecting results (Dechow & Skinner, 2000) although being difficult to determine as we don’t know who is manipulating or not. To this measure they add: We also interpret earnings that reflect losses on a more timely basis as being of higher quality. Our metric for timely loss recognition is the frequency of large negative net income. We interpret a higher frequency as evidence of more timely loss recognition. Finally, we interpret accounting amounts that are more value relevant as being of higher quality. Our metric for value relevance are the explanatory powers of net income and equity book value for prices, and stock return for earnings. (Barth et al., 2008, p. 469) The problem is the logic of this study. It is quite impossible to measure the quality of the standards as we would need to have at least a sample of clearly cheating firms to see if we can detect the manipulation as did, even imperfectly, Dechow et al. (1995). Barth et al. (2008) decided that the market value is the correct value and therefore the benchmark needed to assess the quality of accounting numbers. But if the markets are efficient and reach the “real” price before the accounting numbers are produced, the consequence is that there is no need for accounting numbers and so their quality or absence of quality are totally irrelevant. For the question of the quality of accounting numbers to be relevant we have to, at least, consider the market as a constantly adjusting system tending toward the “real” price but never really reaching it. Then, it’s goodbye benchmark and welcome relativism. However, a discourse on the quality of the information is developing, although this quality is difficult to assess. A real assessment would imply the existence of a real situation that we would be able to know outside of the financial statements. But, the financial statements are creating the world as well as expressing it (Watzlawick, 1976). Consequently, there is no place outside where the “real thing” can be observed. This discourse on the quality remains totally abstract and is probably there only to boost the sales of IFRS. Baudrillard (1981), when proposing the concept of hyperreality, in pretending that the representations, linguistic or of other nature, have been detached from the referents and are floating freely in the mental universe representing only themselves, is backing this idea that the “world of signs” has become the central element

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of our universe. If we take the example of the stock prices, they are supposed to be the expression of the future cash flows generated by the firms. This relation is fundamental in our system and is backed in the imaginative world by the EMH. The EMH is informational and therefore entirely based on discourses. We have the speculative bubbles phenomenon participating from this hyperreality. But we have also the fact that the news, every day, present the evolution of the market prices as the direct expression of the reality of the world of firms whatever its degree of separation. Consequently, the firm has no tangible existence in the dayto-day life, but is replaced by the supremacy of the representations that are now auto-referencing, evacuating by this process the “reality” itself. Those days, our economic humor was conditioned by a discourse on the stock market that we had transformed into a living entity with its “´etats d’ame” (frightened, unconfident, etc.). The observations made in our quotidian life have no chance of interfering with this discourse. We live in at least two parallel universes; the first one is made of our quotidian life, the second is made of the discourse on our life having taken such an importance that its detachment from the reality of our quotidian life places this latter under suspicion. Consequently, the enterprise is twice discursive. Its reality is entirely made of a discursive consensus, even if this consensus is written, i.e., transformed into a fixed discourse. This applies to every institution as they are made of discursive consensus. We argue that language is fundamental to institutionalization: institutionalization occurs as actors interact and come to accept shared definitions of reality, and it is through linguistic processes that definitions of reality are constituted. (Philips, Lawrence, & Hardy, 2004, p. 635) A consensus can be described as a shared definition of something. The United Nations may possess buildings and committees, but it may sell all its assets and it will continue to exist as long as people agree on this existence. This is not the same case for Elvis. We may all agree that he is living; he is dead and will remain as such. So Elvis is not an institution or an organization, the firm is one. A social institution is (among other things) an apparatus of verbal interaction, or an ‘order of discourse’. (…) In this perspective, we may regard an institution as a sort of ‘speech community’, with its own particular repertoire of speech events, describable in terms of the sorts of ‘components’ which ethnographic work on speaking has differentiated (…). Each institution has its own set of speech events, its own differentiated settings and scenes, its cast of participants, and its own norms for their combination – (…). It is, I suggest, necessary to see the institution as simultaneously facilitating and constraining the social action (here, specifically verbal interaction) of its members: it provides them with a frame for action, without which they could not act, but it thereby constrains them to act within the frame. (Fairclough, 2010, pp. 40–41)

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The motivations behind our actions are in a large proportion discursive. Some may be considered not being such. But, accumulating money can be considered tangible even if it is only a symbol, i.e., taking its value from a discursive consensus. (…) by looking at organizations as phenomena in and of language. Rather than consider organizations as some “thing” that exists independent of language and that is only described and reported on in language, the contributors to this issue start from the point of view that organizations can be understood as collaborative and contending discourses. (Boje, Oswick, & Ford, 2004, p. 571) After a while, these institutions are taken for granted and gain the form of legitimacy that is based on habits (Weber, 1995). In such a discursive environment, the current wisdom makes us expect manipulations. Even without it, is the discourse immediately accessible? Does it contain a double or a triple meaning? Maybe it’s “real” meaning is to be found in an intertextuality that most participants may not master to a sufficient degree? The discourse is suspect and with the importance given to the discourse comes the defiance and the interest for the methods to separate the true from the false. We have a good example with the television series Lie to me. This series was based on the work of Ekman and benefited from the assistance of the researcher himself. This method (Ekman, 2010) constitutes an approach similar to the lie detector, pretending to proceed to a triangulation between the discourse and the physical reactions of the subject read by a machine or observed by the specialist. But in the case of written material, is the triangulation difficult? Some researchers have tried to find some method for it. Hubbell, Chory-Assad, and Melved (2005) studied the deception in the organizations. They refer to the information manipulation theory (IMT). This theory from McCornack (1992) uses the four maxims applied to the conversation by Grice (1989). This theory is only one example of the kind of analysis that can be done on financial discourses. The best results will probably appear at the confluent of the many different approaches. 8.2.2.1 From Grice to McCornack One aspect of the originality of the theory of McCornack is that it applies on written discourse. However, he takes his sources in the work of Grice which is about conversation. The borrowed categories are as follows: Echoing Kant, I call these categories Quantity, Quality, Relation and Manner. The category Quantity relates to the quantity of information to be provided, and under it fall the following maxims: 1. Make your contribution as informative as is required (for the current purpose of the exchange). 2. Do not make your contribution more informative than is required. (Grice, 1989, p. 26)

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Here, quantity, quality, relation, and manner are broad categories illustrated by counsels about how to put it in practice. The first category refers finally to the concision not to hide key elements but to avoid losing the essential among the irrelevant details. The second category is the quality: Under the category of quality fall a supermaxim – “try to make your contribution one that is true” and two more specific maxims: 1. Do not say what you believe to be false. 2. Do not say that for which you lack adequate evidence. (Grice, 1989, p. 27) It is obvious that the assessment of the sufficiency of the proof can vary greatly from one person to another. Obviously the goal of Grice is to make the conversation a kind of presentation that may stick to the plain truth as much as possible. This is quite far from the art of the conversation and will produce quite dull dinners. The relation category refers to the relevance of the intervention and the manner is about delivery. Under the category of relation I place a single maxim, “be relevant”. (…). Finally, under the category of manner, which I understand as relating not (like the previous categories) to what is said but, rather to how what is said is to be said, I include the supermaxim – “Be perspicuous” – and various maxims as: 1. 2. 3. 4.

Avoid obscurity of expression, Avoid ambiguity, Be brief (avoid unnecessary prolixity), Be orderly. (Grice, 1989, p. 27)

Grice considers a conversation as an activity based on cooperation. For him, everyone must participate in rending the conversation efficient and agreeable. However, for him, it is clearly efficiency that is most important. Grice pretends to having borrowed his categories from Kant. However, in Kant (1970), it is not some categories of the conversation, but fundamental logical characteristics of knowledge. We must acknowledge that Kant also proposes esthetical qualities. A piece of knowledge is perfect 1) following the quantity, if it is universal, 2) following the quality, if it is distinct; 3) following the relation, if it is true and finally 4) following the modality, if it is ascertain.

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We easily see that the categories of Grice are not an exact superposition of the categories from Kant. The goal of a conversation is rarely entirely confounded with the distinction between what knowledge is and is not, at least in the logical, philosophical sense used by Kant. If we reread the phrase from Grice, he said he had taken the names of the categories from Kant, not their content. However, this is prone to create confusion. Therefore, we have a distortion of the concepts between Kant and Grice, passing from the categories of knowledge to the categories of conversation, and then, another distortion between Grice and McCornack passing from an oral conversation to a written exchange. When borrowing concepts of other disciplines, something we cannot exclude mostly in accounting, we have to follow the travel of these concepts from their origins to the accounting domain. We have some famous examples of problems created by the pleasure of finding a ready-to-search little model to be imported in accounting research. A first example would be the works of Haried. He found the works of Osgood, Suci, and Tannenbaum (1957) from psychology. Osgood was trying to describe the basic axes of the human mind while it is interacting with the world. Osgood used a series of concepts (father, mother, home, etc.) and asked the subjects to rate them on a Likert scale. Then, he statistically analyzed his results and found three fundamental axes along which the thinking was working. In our views, his findings are so general that they have little interest, but that is not the point. Haried (1972, 1973) decided that what was true for the mind was also true for a part of it. So the process applied to thinking in general was possibly applicable to accounting thinking. Consequently, Haried assumes the existence of an “accounting thinking” in the mind that is a subsection of the “general thinking,” which is totally abusive. From this, he replicates the study of Osgood using accounting concepts (debit, credit, etc.). He found two fundamental axes from a sophisticated statistical model and never really commented his results. If there are three fundamental basic axes in thinking, there cannot be only two in the so-called accounting thinking, mostly if you based the existence of this accounting thinking on a subsystemic belonging. Is Haried saying that accountants are lacking one fundamental axis? Is it possible? Haried never asked the question; he was published because most research in accounting focused on the mathematical model used and do not care to discuss if their questions, hypotheses, or results have any possibility to enter into knowledge as defined by the logic of Kant or anyone else. Another example would be in management research regarding the work of Hofstede. Hofstede never studied culture, declared Baskerville (2003). This

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statement would not have been contested by Hofstede himself. The little story of the Hofstede model is that he never conducted a study. They asked him to analyze a ready-made inquiry made by IBM in a specific department of their offices in 50 countries (Baskerville, 2003). Hofstede pretended to have borrowed his categories from Levinson and Inkeles. These categories are the relation to authority, the conception of the self, and the manner to face the conflicts. He pretends to have extracted the categories from responses and that these categories fit the model of Levinson and Inkeles. But, Hofstede did not establish the question and the format of the answers. Twenty years later I was given the opportunity of studying a large body of survey data about the values of people in over 50 countries around the world. These people worked in the local subsidiaries of one large multinational corporation – IBM. (Hofstede, 1994, p. 13) and These empirical results covered amazingly well the areas predicted by Inkeles and Levinson 20 years before. (Hofstede, 1994, p. 14) If we wonder how it is possible to extract some scientific results from a study that was not designed scientifically, the answer is one of these intellectual somersaults we are familiar with in accounting research: Problems which are basic to all human societies should turn up in different studies regardless of the approaches followed. (Hofstede, 1994, p. 14) Then the answer to our question is: the method has no importance; the results will always emerge independently of the method used from the assumption that it is about the same everywhere, probably based on another level of assumptions on the alleged uniformity of human nature. Then, he is reversing the methodological objections a little further. He pretends that as the respondents are all coming from the sales department in all the countries investigated by IBM, and that the firm is the same everywhere, the differences come from national culture. That is quite a strong assumption based on no previous work by all those having studied organizational culture in the past. Then, as he had defined culture as the “collective programming of the mind,” he defined the “organizational culture” as the collective programming of the mind distinguishing the members of an organization from another (Hofstede, 1994). This is a dangerous step. If we observe around us, we see that, over the specific firm’s culture, there is a cultural model of the enterprise around the world. Up to recently, no representative of a firm will have discussed a contract with any other top manager in the world without wearing a suit and a tie. Therefore, if you look at pictures, this is the standard way of appearing in public for a top manager except in the cases where they are visiting some production sites. Therefore, over the national cultures, there is a business culture everywhere in the

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world as there is an academic culture. If we consider a large enough foreign enterprise in another country, the production line will be filled by locals. Therefore at this level the cultural practices would be in line with the cultural practices of the country. As we go up in the hierarchy, we will find more people from the originating country of the firm or having worked in the head office in the originating country and the organizational “culture” will have then a kind of mixed appearance. So, again, pretending to characterize a culture by studying only one department of a huge multinational corporation is totally abusive. However, many researchers seem to have believed it (Adler, 2002; Sainsaulieu, 1997). Hofstede’s first category was the distance to power. He established this concept and the measure of it from three questions. 1. How frequently, in your experience, does the following problem occur: employees being afraid to express disagreement with their managers? 2. Subordinates’ perception of their boss’s actual decisionmaking style. 3. Subordinates’ preference for their boss’s decision-making style (Hofstede, 1994, p. 25) These three very general questions will not describe the boss of the department, for instance; it is said to describe the way people in the country are distant to power. No other factors like the economic situation or the family situation of the people will intervene (Table 8.1). From these three little highly auto-correlated questions, he derived the complete series of statements allowing him to classify countries on this variable. This is a good example of making the data speak if not speaking instead of the data. Then, these questions lead us to a series of statements that will describe both poles of the continuum on which the country will be classified (Table 8.2). Is it possible to have somebody exert power without any form of legitimacy? From our understanding of Weber, we would answer no. We will not really discuss this in more length. Let us simply say that these statements lead to the scores and these scores are presented in Table 8.3. The reader may try to fit these scores with any theoretical text or with his own experience. Just imagine the kind of money that is necessary for becoming the president of the United States of America. Is it creating a distance to power? Not that much for Hofstede. Thus, the US follows the left side of the table with the descriptive statement. Therefore, the “use of power should be legitimate and is subject to criteria of good and evil.” This can be the object of endless discussions. The point here is to say that such classification would necessitate quite more distinctions and arguments and that Hofstede’s work seems too broad to be serious. If we take the example of South Africa, can we say that the distance to power is the same if you are black or white? Therefore, South Africa looks as much democratic as the US. Maybe it is true, after all; or maybe the sales department of IBM in South Africa contains only white people. Hofstede himself probably had no answer for this question. It is the same for all these classifications.

Table 8.1: Key Differences Between Small and Large Power Distance Societies. I: General Norm, Family, School, and Workplace.

Inequalities among people should be minimized There should be, and there is to some extent, interdependence between less and more powerful people

Inequalities among people are both expected and desired Less powerful people should be dependent on the more powerful; in practice, less powerful people are polarized between dependence and counterdependence Parents teach children obedience Children treat parents with respect Teachers are expected to take all initiatives in class Teachers are gurus who transfer personal wisdom Students treat teachers with respect Both more and less educated persons show almost equal authoritarian values Hierarchy in organizations reflects the existential inequality between higher-ups and lower-downs Centralization is popular Wide salary range between top and bottom of the organization Subordinates expect to be told what to do The ideal boss is a benevolent autocrat or good father Privileges and status symbols for managers are both expected and popular

Parents treat children as equals Children treat parents as equals Teachers expect initiatives from students in class Teachers are experts who transfer impersonal truths Students treat teachers as equals More educated persons hold less authoritarian values than less educated persons Hierarchy in organizations means an inequality of roles, established for convenience Decentralization is popular Narrow salary range between top and bottom of the organization Subordinates expect to be consulted The ideal boss is a resourceful democrat Privileges and status symbols are frowned upon Source: Hofstede (1994, p. 37).

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Small Power Distance

Large Power Distance

The use of power should be legitimate and is subject to criteria of good and evil Skills, wealth, power, and status need not go together The middle class is large All should have equal rights Powerful people try to look less powerful than they are Power is based on formal position, expertise, and ability to give rewards The way to change a political system is by changing the rules (evolution) The use of violence in domestic politics is rare Pluralist governments based on outcome of majority votes Political spectrum shows strong center and weak right and left wings Small income differentials in society, further reduced by the tax system Prevailing religions and philosophical systems stress equality Prevailing political ideologies stress and practice powersharing Native management theories focus on the role of employees

Might prevails over right: whoever holds the power is right and good Skills, wealth, power, and status should go together The middle class is small The powerful have privileges Powerful people try to look as impressive as possible Power is based on family or friends, charisma, and ability to use force The way to change a political system is by changing the people at the top (revolution) Domestic political conflicts frequently lead to violence Autocratic or oligarchic governments based on cooptation Political spectrum, if allowed to be manifested, shows weak center and strong wings Large income differentials in society, further increased by the tax system Prevailing religions and philosophical systems stress hierarchy and stratification Prevailing political ideologies stress and practice power struggle Native management theories focus on the role of managers

Source: Hofstede (1994, p. 43).

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Table 8.2: Key Differences Between Small and Large Power Distance Societies. II. Politics and Ideas.

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Table 8.3: Power Distance Index (PDI) Values for 50 Countries and 3 Regions. Score Rank

Country or Region

PDI Score

Score Rank

Country or Region

1 2/3 2/3 4 5/6 5/6 7 8/9 8/9 10/11 10/11 12 13 14 15/16 15/16 17 18/19 18/19 20 21/23 21/23

Malaysia Guatemala Panama Philippines Mexico Venezuela Arab countries Ecuador Indonesia India West Africa Yugoslavia Singapore Brazil France Hong Kong Colombia Salvador Turkey Belgium East Africa Peru

104 95 95 94 81 81 80 78 78 77 77 76 74 69 68 68 67 66 66 65 64 64

27/28 29/30 29/30 31 32 33 34 35/36 35/36 37 38 39 40 41 42/44 42/44 42/44 45 46 47/48 47/48 49

21/23 24/25 24/25 26 27/28

Thailand Chile Portugal Uruguay Greece

64 63 63 61 60

50 51 52 53

South Korea Iran Taiwan Spain Pakistan Japan Italy Argentina South Africa Jamaica USA Canada Netherlands Australia Costa Rica Germany FR Great Britain Switzerland Finland Norway Sweden Ireland (Republic of) New Zealand Denmark Israel Austria

PDI Score

60 58 58 57 55 54 50 49 49 45 40 39 38 36 35 35 35 34 33 31 31 28 22 18 13 11

Source: Hofstede (1994, p. 26).

From this very questionable “model” Gray decided to make an adaptation for accounting. His basic idea, exactly like for Haried and Osgood, is that society is a system. This system is made up of subsystems that are structured on the same model, i.e., having the same values. Therefore it would be possible to find in the accounting subsystem the same values as in the global society.

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Consequently the categories of Hofstede are transferred in the Gray model. However, as his subsystem is not much the same, he has to modify it a little. The categories are as follows. • Individualism vs state control – “(…) a preference for the exercise of professional judgment and the maintenance of professional self-regulation as opposed to compliance with prescriptive legal requirements and statutory control.” • Uniformity vs flexibility – “(…) a preference for the enforcement of uniform accounting practices between companies and the consistent use of such practices over time as opposed to flexibility in accordance with the perceived circumstances of individual companies.” • Conservatism vs optimism – “(…) a preference for a cautious approach to measurement so as to cope with the uncertainty of future events as opposed to a more optimistic, laissez-faire, risk-taking approach.” • Secret vs transparency – “(…) a preference for confidentiality and the restriction of disclosure of information about the business only to those who are closely involved with its management and financing as opposed to a more transparent, open, and publicly accountable approach.” Obviously, the relationship with the original categories is quite thin. Moreover, the observer can ask himself what is included in the accounting subsystem. It is clear that it is the Anglo-Saxon accounting system and conceptions that are described by Gray. Therefore, the accounting values of the rest of the world do not deserve any consideration. This is so ethno-centrist; and they try to say it might be knowledge. The lightness with which some accounting researchers take the relationship between the theory and the hypotheses being tested is sometimes amazing. Enterprise environmental performance has become of concern in securities market. Given this, the present paper investigates two complementary hypotheses: (1) Valuation of the firm is affected by its pollution record, thus implying existence of latent environmental liabilities (H1) and (2) A valuation premium is attached to firms with a satisfactory pollution record due to the effect of “ethical” investment decisions (H2). (Cormier & Magnan, 1996, p. 25) They have decided, true or false that is not important for them, that environmental performance, supposing it can be defined clearly and measured, has an effect on the market value of the firms. Some studies, also using hypothesis testing methods although those hypotheses were coming from no theory, have done that kind of “study” before, so they feel free to do it. Their hypotheses are derived from

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this perception of the market that is far from being consensual in the literature. For instance, papers on the effect of environmental catastrophe are not pointing in this direction, and a casual observation of the financial statements of BP after the Deepwater Horizon catastrophe don’t point in this direction either. Labelle and Thibault (1998) report that companies have a tendency to decrease their profits after an environmental catastrophe in order to minimize the sanctions. Another example of the weakness of the underlying theory is provided by Morck, Shleifer, and Vishny (1988). They say: Theoretical arguments alone cannot unambiguously predict the relationship between management ownership and market valuation of the firm’s assets. (…). Since theory provides relatively little guidance as to what this relationship should be, our paper is as much descriptive data analysis as formal hypothesis testing. (Morck et al., 1988, p. 294) Descriptive data come from the same family as explanatory work. In our view, if there is no theory and someone wants to study the area, he must use methods to build such a theory, rather than testing hypotheses coming from nowhere.

8.3 Why Produce Information? Over the rendition of accounts, that is supposed to be the first goal of a financial statement, we can ask what are the goals pursued by their preparation? The firm is characterized by a strategic approach. This approach is the first reason to develop a global strategy in the firm. This strategy will be declined in each function of the firm, like the budget. In fact, the budget is the numbered version of the strategy. Among those sub-strategies, we will find a financing strategy having the goal to obtain as much financing as needed at the lowest possible cost of “capital.” To reach this goal, the stocks of the company will have to look as performing as possible with the lowest possible level of risk attached to it. In fact, they have to realize the impossible, which is to detangle the notion of risk from the notion of returns and to make them go in a different direction. Therefore, it would be very na¨ıve to believe that the adequacy with “facts” is the priority of the preparers of financial statements. There is no reason why it would be otherwise, except if the activity is closely framed and that punishments are high when the rules are not followed. That is why all those rules have been established through time. However, the punishments remain quite low. And much more important is the bias involved in administration of criminal justice under laws which apply exclusively to business and the professions and which therefore involve only the upper socioeconomic class. Persons who violate laws regarding restraint of trade, advertising, pure food and drugs, and similar business practices are not arrested by uniformed policemen, are not tried in criminal courts, and are not committed to prisons (…). (Sutherland, 1983, p. 6)

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Such bias brings no moderation to the kind of crime that is so leniently considered. Mostly, the fact that they are not really fought has a negative effect on the conception of the crime in the society that we may have. Is it, in regard to every human science, possible to sustain that accounting reports cannot lie? However, we still have papers, rejected in some journals on the basis of that kind of arguments even if they accept papers on earnings management as long as you not call them account manipulations; as management is noble while manipulation is bad. Lying is not acceptable while managing the facts is. Then, in front of such evidence, if we take a user perspective, the question is: can we detect lying in the financial reports? There have been many attempts to detect lies in the spoken and even in the written discourse: lie detector, neurolinguistic programming, and Ekman’s system are examples of such attempts on the spoken discourse. Hobson, Mayew, and Venkatachalam (2012) look at the “nonverbal vocal cues” to detect deceptive statements in speech. For the spoken language, the lie detector infers the truthfulness of statements through physical reactions registered by a machine. Ekman (2010) used a similar approach, associating observable reactions with telling the truth. Social psychology uses emotional markers to identify deceptive messages (Hobson et al., 2012). In a written context, it is more complicated, mostly since the written material is no more handwritten. Grice (1989) proposed a new characterization of the communication process, based on cooperation. However, this principle of cooperation does not exclude deception and misleading statements (Klinkenberg, 1996). Transposing Grice’s “maxims,” McCornack (1992) proposes a method to discriminate between truthful and false written statements. These manipulations can be classified as impression management. Following Solomon, Solomon, Joseph, and Norton (2013) inspired by Goffman, we will define impression management as choosing to show your best profile to avoid embarrassment (Scheff, 2006). Therefore it can be considered a lie by omission. Researchers focusing on the forms of lies consider purposeful omission as a kind of lie (Ekman, 2010; McCornack, 1992; Sutherland, 1983). There is another method used by the police on written statements. They will use a series of cues like the pronoun (if somebody says I or we), the tense of the verbs (past or present), the connectors used, etc. (McClish, 2001).

8.4 Summary To conclude this chapter, we may say that every discourse is open to conscious or unconscious manipulation. If we refer to Goffman (1973), we see that everyone is generally attempting to present their best side in social intercourse. Almost every woman uses cosmetics before going out. This can be viewed as a form of lying. However, it can also be seen as a way to embellish the environment. Over the moral considerations, we may admit that there is always a form of staging behind what we see and what we hear. This normal way of doing things can be used to mislead people purposely. In a “business” defining itself as having the goal to provide information for decision-making, we cannot ignore the knowledge already developed in human sciences on the manipulation of information.

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Questions 1. Why did the psychological effects of accounting reports appear more clearly in the context of management accounting? 2. The persons working in the firm carry the image of the firm. Comment this enouncement taking into consideration the limits of the controlling function in and around the firm. 3. Do you think that the “reality” is real? How do you reach your conclusion? 4. What is behavioral psychology? Contrast it with other kinds of psychological approaches: psychoanalysis, conditioning, cognitivism, etc. 5. If accounting is developed for communicating purposes, it may be studied with the tools developed by the communication researchers. Comment. 6. What are the three forms of the EMH? 7. If the markets are not efficient, can you propose from the literature some alternative explanations for the behavior of the agents in the market? 8. What is storytelling? Provide some examples from your day-to-day life. 9. The quality of financial information is supposed to be related to the standards used to produce it. Is it logical with all we know in sociology and psychology? 10. What is the importance of language in our conception of the world? 11. Do you believe that accounting reports say the truth? Also, where can be found the true financial situation of the firm?

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Chapter 9

How Decisions Are Made Basically, a decision is simply a choice: A decision is a judgment. It is a choice between alternatives. It is rarely a choice between right and wrong. It is often a choice between two courses of action, neither of which is probably more nearly right than other. (Drucker, quoted in Haas Edersheim, 2007, p. 209) Historically, there had been four approaches to the process of decision-making and Drucker presents the fourth one. However, there can be alternative classifications. The first approach is from the economic theory and assumes that individuals, who are perfectly rational and have perfect knowledge of all the possibilities offered, are always taking the most efficient decision in function of their utility curve where the ultimate goal is to reach an equilibrium which is attained when no more consumption of one desirable good can be obtained without removing a unit of another desirable good. Samuelson (1972) proposes a definition of economics based on the notion of decision: Economics researches how men and the society decide (…) to affect rare productive resources to the production, through time, of varied goods and services (…). (Samuelson, 1972, p. 22) (Our translation) Such a definition can look strange when confronted with the sacrosanct “laws of the market” applied by the invisible hand and unescapable. Economics is based on the idea that resources are rare, therefore their allocation is crucial and is the object of a decision. However, this decision is never taken forever because the demand is infinite and the offer is finite. Both meet automatically where the price curve of the offer meets the one of the demand. At this level, there is no decision taken by the agents. So, when all is going as it is supposed to go, we are all in the invisible “hand of the market.” Therefore, the domain of the political economy covers the situation where the hand is not working well. McConnell, Pope, and Julien (1983) say that economics is constituted by a first phase of observation followed by the application of the consequences to derive principles which will be used as input in the political decision-making process. A Postmodern Accounting Theory, 153–167 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78769-793-520181009

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However, we do not find this vision in the discourse of Milton Friedman when saying that a theory is to be assessed by the quality of its results over its adequacy to reality. In substance, decisions are the basis of the study of economics, therefore it is normal that a certain model of how to make decisions has emerged from this discipline, even if we cannot say that it encompasses accurately the facts observed in the “world” around. Smith, for instance, started to write An Inquiry into the Nature and Causes of the Wealth of Nations in 1767. He had met with Voltaire, d’Alembert, and many others. His vision of the homo oeconomicus places the people at the summit of the social pyramid while creating a “natural” regulating system taking away all the power of the people. Smith is then proposing a vision reconciling the new principles of the people’s sovereignty with the eviction of the resulting frightening Leviathan qualifying the state representing this untamed and unpredictable people (Hobbes, 2000). Consequently, the program of the homo oeconomicus can only be encompassing all other projects as it can predict from a basic duality (demand and offer) all the possible issues (Pesqueux, 2002). The second approach comes directly from the mathematics (Bayes) and pretends that the best decision is “rational” when it proceeds from a correct assessment of the probability of all the possible issues of the situation. For Cadet and Chasseigne (2009) there are only two conceptions of the decision-making process: the first, coming from economy, contains all approaches based on mathematics and probabilities. The second proceeds from psychology and analyses cognitive bias. This second approach, from psychology, is in opposition to the preceding one. However, it is also based on an imprecise definition of the rationality as, for instance, it uses the expression “heuristic biases”; and to detect a bias one must know the unbiased situation. Then, we can find, in some texts on the leadership and scientific management, another version of the decision coming from another point of view. This approach includes historical, psychological, and sociological influences over the decisions that are taken. These approaches are mainly related through the concept of rationality. However, the concept remains vague and highly ideological.

9.1 What Is Rationality? Rationality, in economics, can be described by the consumption of one more unit of goods. Because the utility curve cannot take into consideration other objectives than the consumption of units, the economic definition of rationality remains limited. Agency “theory,” deriving directly from economic beliefs, cannot explain the behavior of Mother Theresa, for instance. Therefore, from a falsificationist point of view, the so-called agency theory must be rejected or, at least, seriously amended. If somebody is very religious and wants to go to heaven after his death, he may do things not following the economic logic based on the property rights theory and the maximization of the utility curve principle. The economic rationality is

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based on a very selfish vision of the human being. If some desires like “being a better person to enter in heaven instead of inferno” can theoretically be included in the calculation of the utility curve, following the economic logic, it may be impossible to find the substitution value. However, a restricted version of the curve is still impossible to calculate, what then to think of an open and extensive one? Pesqueux (2002) summarizes this impossibility: In his speech behind the Nobel Academy, Herbert A. Simon repeated the characteristics of the “classical” decision making model: exhaustive knowledge of the options, of their consequences, preferences present and future, possibility to compare all these. With such characteristics, the result of the decision is predictable but the exigencies of this “classical” model are too strong. (Pesqueux, 2002, p. 109) (Our translation) In substance, it is not difficult to be rational in certainty. But, we still see people do “irrational” things although they may know the probable adverse consequences. In the same spirit, it may look irrational to play everything you have and more at the casino or to use all the money one can find to buy alcohol or drugs. However, when an addiction replaces every other thing, in regard of the strength of these addictions, the behavior described becomes totally rational. Therefore there are as many definitions of a rational behavior as there are people. We can say that any predictable behavior may be rational. The behaviors we have described are totally predictable in function of the goal of the subject. Are these goals rational per se? That is another question depending on ideological factors. Religious beliefs are considered irrational by some people, while others will believe they are perfectly rational. Therefore, the concept of rationality is too ideological to be useful in this context. The behaviors cannot be “judged” from such criteria. Incidentally, we do not want to judge any behavior, reason, or justification. The concept of rationality is highly judgmental in economics, but also in psychology. In the Bayesian theory, the correct behavior is not derived from a preconception of what is right or wrong, but is described from a conception of a gain or a loss totally disconnected from the situation of the people, therefore normative. One problem we encounter is well known; it is the total ignorance of the human sciences by the writers in accounting, and the hegemony of the economic theory in finance. For instance, in a book titled Psychologie de la decision (Psychology of decision-making), Lainey (2015) says The economists are the first to be interested by the rational decision-making in the organisations (p. 29, our translation). It is a rapid somersault over the basis of the economic theory. An organization is a market failure, and all the theories of the firm (transaction costs, organization of the work, agency, etc.) are trying to justify this long-term contracting system over the market system where the contracting is permanent, therefore always made for the short term. Thus, theoretically, in a straight economic point of view, the firm is not rational. But, as any observer from the street, Lainey probably believes that the firm is the first and normal form of economic life.

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The second example of the casual beliefs taking step over the theory is the definition of the utility curve. Lainey presents utility as the pleasure or the satisfaction (p. 29) somebody can take in the consequences of his choices. He adds, as utility is quantifiable, it can be optimized (p. 29). This is the essence of the problem. The traditional dilemmas between butter and cannons can be easy to quantify although we can estimate that the way the problem is framed cannot lead to a solution applicable to the real world. But how can we measure the desire to cheat on the conjunct and the desire to go to heaven after death? We would probably have to multiply the desire to go to heaven by the probability the subject perceived of the existence of heaven and the force of the desire to cheat on his (her) partner in life while keeping the family going. In fact, the utility curve has never entered into these areas where we are struggling every day of our lives. Moreover, when the maximum of the curve is reached, any combination is a Pareto optimum. Therefore we can have only cannon or only butter and it will still be Pareto optimal (Maris, 1999) although difficult to swallow. What is an optimal result? This univocal way of seeing human behavior is so trivial that it can’t be used. Normally, a human being is entangled in the middle of a series of cognitive dissonances coming from the passions, the education, the long-term versus short-term perspectives that are difficult to resolve in a simple unidirectional answer. If a way of taking rational decisions exists, it must be described by the psychology, starting by providing a “rational” definition of rationality. Lainey concludes in saying that, rational decision making lies on postulates enunciated by the economists … (p. 30). By saying that, he is proposing that the delirious definition of the rationality provided by the economists is the basis of how to consider rationality in the decision process per se. The connection between the theoretical perfect rationality and the day-to-day life is better described by the concept of bounded rationality. The hypothesis of market efficiency pretends that information is spread automatically, but never considers the channels used to do that. In the efficient market hypothesis (EMH) it is magic. Information circulates everywhere at once because it is included in the price and someone does not have to know the information to act accordingly, which is considered equivalent to having the information. Economic sociology considers the channels through which the information is disseminated. Then we leave the world of magic to enter into our day-to-day world. Let us say that the existence of marketing is a strong signal that the managers do not believe in EMH; moreover, the money expensed for televised publicity during the Super Bowl shows eloquently the strength of their rejection of the EMH. The channels recognized in the literature are the personal networks; the labels; the cicerones who are the critics and commentators; the classifications and rankings made by institutions, associations, magazines, etc.; and the confluences that are supposed to adjust the products and the customers. Obviously, these communications are not the information following the definition given by information economics. The INFORMATION, one and unique, is replaced by a series of partial and oriented data destined to make the consumer choose one product instead of

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another. Consequently, often the decision escapes to the “rationality,” reaching the goal of the marketing, to play on a series of sensible chords. This is one of the big problems our students have. In their finance course, they learn that the investor is perfectly rational when buying shares. Then they go to their marketing course in the next room to learn that we can sell anything to anybody because the choice is made from a series of emotional factors. Therefore, even in the world of management, there is no consensus about the definition of rationality. Following Simon, there are two main approaches to the concept of rationality. A person not familiar with the history of the actual research in economy and in cognitive psychology may think that there are close relationship between these two areas – like a constant double way flow between theoretical concepts and empirical results. Mister Coats, (…) describes a series of ancient tries, generally unsuccessful, to apply the results of the psychology to the economic theory. Now, there is still very little communication between these two fields. In the USA, at least, there seems not to have, for the students preparing a doctorate in economics, any course asking them to master the psychological literature on the rationality; as well as, for the student in psychology, there is no course forcing them to learn the economic theories of the rationality. (…). This reciprocal state of ignorance becomes understandable when we realize that the research in economics and in psychology has for objective to answer to very different series of interrogations and that each of these fields adopted a conception of the rationality more or less appropriate to its own research problems. (Simon, 1992, p.) (Our translation) Substantial rationality is the one proposed by the economists, while the procedural rationality emanates from the world of psychology. Despite his kindness toward the economists, Simon remarks their propensity to ignore the world in which they are elaborating their theories. Then, the hypotheses of utility or of profit maximization on the one hand, and the hypothesis of substantive rationality on the other hand, have preserved economics from all dependency toward the psychology. As long as these hypotheses were not questioned, there was no reason for an economist to become familiar with the psychological literature concerning the human processes of cognition and choice. There was absolutely no place where the results of the research in psychology would have been applied to the process of economic analysis. The inadequacy of psychology to economy was total. (Simon, 1992, p.) (Our translation) Substantive rationality is a matter of reaching a goal within the given conditions or constraints. Therefore, rational behavior depends, for a large part, on the

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conditions prevailing in the environment. The classical economic analysis assumes that the economic actor is rational following the definition of what Simon called the substantive rationality. Therefore, as Simon said before, there was no need to question further the dimensions of this rationality, and the “homo oeconomicus” was ready to be born. However, the “homo oeconomicus” is such a limited fiction that he is incapable to represent the current behavior of a human being. The procedural rationality reflects some thinking preceding the action. There is no limitation to the motives able to sustain the choices, while the possibilities of the “homo oeconomicus” are very much limited. However, such diversity is difficult to mathematically model, which is probably why the economists tend to avoid it. We have to remember that most economic modelization is still functioning with a very limited number of goods, traders, trading periods, and little information; all that in certainty, most of the time. If the experimental demonstrations, revealing the incapability of human being to follow the rules of the substantive rationality in a situation of choice with an uncertain issue, have caused some surprise to the economists (…), it caused no surprise for the experimental psychologists familiar with the human capacity for processing information. (Simon, 1992) (Our translation) Therefore, if we follow Simon, we will conclude that the problem is uniquely the conception of the rationality in economics. However, as we will see later, the reference to heuristic biases raises questions about the definition of the rationality used in psychology also. Simon, with his reference to Cournot, leads us to the game theory. More than a century ago, Cournot identified a problem that became the permanent and ineradicable scandal of the economic theory. He observed that where a market is feed by only a few producers, the notion of profit maximization is not well defined. The substantively rational choice for each actor depends on the choices made by the other actors; nobody can choose without emitting some assumptions on the choices of others. (Simon, 1992) (Our translation) Choosing while considering what others might have done is the essence of the game theory. The concept of rationality is at the center of the first three tendencies we have described, while the fourth one uses completely different parameters to discuss the question of decision-making.

9.2 The Contradictions of the Agency Theory In this context, the agency theory looks like the confrontation of two opposed rationalities derived from a divergent curve of preferences. In such a vision, the protagonists, the principal and the agent, are totally rational. Moreover, the

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principal is less able to impose his rationality to the agent as he is out of the firm. He is not a real entrepreneur, only an entrepreneur by delegation. Therefore, to promote the ideology of the supremacy of the property right over any other, the tenants of the agency theory will create the concept of “moral hazard” to fustigate any rational behavior on the part of the agent, behavior that is supposed to be endemic to human nature. Therefore the agent is supposed to fight against his human nature to help the principal to satisfy his. Such a line of reasoning is proposed as rational. Based on the “fact” that anyone is looking for himself (which is the very basis of the system as described by Adam Smith), they will generate different processes to align the curves and to monitor the actions of the agents. “One of the fundamental tenets of economics is that individuals act in their own personal selfinterest to maximize their utility” (Zimmerman, 1995, p. 146). Therefore, the common good may emerge from the actions of everyone looking for his own good, except for all employees because the property rights “theory” impose to them to forget their own preferences to adopt the preferences of the providers of capital who were supposed, in the classical liberal theory, to earn their compensation from organizing the production, not just “lending” money. But, with the supremacy of the property comes the rights for the investors to not being an entrepreneur anymore. This moves the place occupied by the power, the locus of decision, in the hand of the specialists of finance (Pesqueux, 2002). The presence of the owner-entrepreneur to organize the production implied his knowledge of the production process. But, with the departing of the investorentrepreneur from the premises of the firm, the question of the technical knowledge becomes of first importance. The agency theory crystallizes the changes in the conception of the economic model and of the firm having a huge impact on the conception of accounting. The decision model changes with the conception of rationality. From the vision that the best way of maximizing a utility curve is to take matters into one’s own hands, comes a vision that it is better to delegate to specialists. These specialists are less and less specialized in the production but in finance. The direction of firms, over the last 100 years, has been transferred from engineers to MBAs. The consequence is that instead of returning the profit to the investors or investing in the production, they play with the profits on the stock market backed by the going concern obsession of accountants. As a consequence of the entrepreneur becoming an investor and leaving the firm, we see a tendency, at least in accounting, to separate the financial accounting, i.e., accounting for the external stakeholders, from the management accounting, i.e., accounting for the internal users. The decisions they have to take are then viewed as totally different. The external user decides to buy, hold, or sell, while the manager uses accounting reports to monitor the production system. Internal accounting systems are used for two purposes: to provide some of the knowledge planning and decision making and to help motivate and monitor people in organizations. (Zimmerman, 1995, p. 3)

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The separation between the interior and the exterior is then reinforced by the agency theory. The vision of the organization as a “nexus of contract” is not far from the definition of Simon (1992) seeing an organization as a complex nexus of communication within a group of individuals, except that the agency approach gives priority to the interests of the owners. For Simon, there are organizational objectives which cannot be confounded, as in the agency, with the owners’ objectives. However, some actions must be taken to provoke the adhesion of the employees of all levels to the organizational objectives. Unfortunately, it seems that the current in which the agency theory stands did the contrary to extract value: Firms have cut costs, eliminated waste, focused, outsourced, downsized, let go, and generally pared themselves to the bone. (…). Value has been extracted, but at what price? (Goshal et al., 1999, p. 10) To do so, the deciding actors in the firm played the game of each for himself. Explicit or implicit past contracts with both employees and suppliers were broken. Employee loyalty and commitment have been shattered. So has management confidence in its ability to create instead of cut: witness the vogue of high-growth companies like Reuters handing back cash to shareholders via share buybacks and special dividends instead of investing it to pursue emerging opportunities. (Goshal et al., 1999, p. 10) Since the arrival of the concept of bounded rationality along the agency theory, the coherence has still diminished. The “theory” is based on the market efficiency hypothesis and now it includes asymmetry of information, which is hardly reconcilable.

9.3 The Game Theory From the beginning the game theory appears as a Gemini of the economic theory. It works well with only rational decision-makers, by the number of two preferably, in a context with one piece of information, one simple choice that cannot be discussed, and one period. Game theory is designed to address situations in which the outcomes of a person’s decision depend not just on how they choose among several options, but also on the choice made by the people with whom they interact. (Easley & Kleinberg, 2010, p. 139) Theoretically there may be many players moving in very complex environments. However, all the examples given are always quite simple. The best known

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example is the prisoner’s dilemma. But many other simple examples had been proposed through time. Discussing the behavior of people through mathematics generally implies some simplification of this behavior. When the simplification process goes too far, the model does not apply to a real situation. That is why the economic model remained blocked for so long. Easley and Kleinberg (2010) present some of these assumptions: First, we assume that everything that a player cares about is summarized in the player’s payoffs. (…). We also assume that each player knows everything about the structure of the game. To begin with, this assumption means that each player knows his or her own list of possible strategies. It seems reasonable in many settings to assume that each player also knows who the other player is (in a two-player game), the strategies available to this other player, and what his or her payoff will be for any choice of strategies. (…). Finally, we suppose that each individual chooses a strategy to maximize her own payoff, given her beliefs about the strategy used by the other player. This model of individual behaviour, which is usually called rationality, actually combines two ideas. The first idea is that each player wants to maximize her own payoff. (…). The second idea is that each player actually succeeds in selecting the optimal strategy. (Easley & Kleinberg, 2010, pp. 144–145) We see that this thickness of the assumptions make the model disincarnated. Easley and Kleinberg add, after having quoted other examples including the prisoner’s dilemma, that “While no model this simple can precisely capture complex scenario in the real world (…)” (p. 145). Moreover, the degree of expertise of the participants seems to have an effect on their acting in accordance with the theory. Classical laboratory experiments shows that novice subjects do not adopt optimal strategies in the games with equilibrium in mixed strategies while case studies show that professional athletes (…) find the equilibrium strategy. (…). Obviously, the majority of the game with constant payoffs (real) is found in an intermediary context between these two polarized cases; but we know little about these “intermediary” situations. (Eber, 2013, p. 27) (Our translation) When the situation becomes slightly more complicated, the predictability of the behaviors decreases sharply. Even if the players can exhibit more sophisticated behavior, integrating anticipations on the degree of rationality of the other player,

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this cannot be included in the definition of equilibrium. In this model, discussed by every author, the rationality is absolute, conventional, and the possibilities are known by everyone a priori. We can say that the definition is simple and limitative, i.e., normative. If the two players reach the best individual outcome, it is far from being certain that they reach an optimum for the society, defined by the pareto optimality or the social optimality (Easley and Kleinberg). Obviously, these players have to be rational (Eber, 2013). Foucault preceded us in this reservation: I take for dangerous the word itself of rationalisation. When some people try to rationalize something, the essential problem is not to try to know if they conform or not to the principles of the rationality, but to discover to which type of rationality they are referring. (Foucault, 2004, p. 667) (Our translation) So, we have here another normative model. At least, Maslow was allowing people to have a certain evolution. In the economic game theory model, the payoffs remain at the level of the basic needs and motivations. It would be difficult to include self-actualization in a table of payoffs from a game theory case. Once again, in the business school where we have studied, there were courses on Maslow’s pyramid and other courses based on the economical definition of rationality. The problem is that they don’t teach those pieces of knowledge as instruments to understand the world but as tools to be put in a toolbox. When, as president of your enterprise, you will have to discuss human resources remuneration, you will take Maslow’s stuff out of the box and when discussing the CEO’s compensation, you will align the utility curves. But nobody is supposed to connect both and to ask which view has the best chance to represent human behavior. If Maslow would allow us the possibility of being at more than one level at a time, his pyramid would be far in advance on the vision of rationality. Obviously, in human sciences the notion of the norm is important: a psychological norm establishing the space of the normality and the space of the deviance, a sociological norm establishing the space of the socially acceptable and unacceptable and a discursive norm, helping to make the difference between the previous categories (Foucault, 2004). This capacity to generate norms and rules creates the image of a “decent” human being and allows, by opposition, the determination of the frontiers of sickness.

9.4 The Theory of Bayes This theory is like an older version of the game theory, the principle being that the decision-maker always tries to maximize his payoffs. But, this theory does not integrate the interaction between the decision-makers and the prediction of the behavior of others. From this point of view, the game theory appears as a development of the Bayesian theory by adding the interaction between “numerous” decision-makers.

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9.4.1 Nobody Earns the Expected Result A simple example of the computation of the probabilities is provided by Habib (2013). For a lottery with a number of options equal to n, the expected value is as follows: E(x) 5x1p1 1 x2p2 1 (…) 1 xnpn. Let’s imagine that somebody proposed you to turn a wheel of fortune where you have 50% chances to win 100$ and 50% chances to lose 50$, the mathematic expected result of this operation is calculated as follows: .50 3 100 1 .50 3 (250) 1 25. (Habib, 2013, p. 18) (Our translation) This is expressing very well the problem. Nobody wins $25 in this operation; one wins $100 or loses $50. If you are Bill Gates, you just don’t care. But if you are on welfare and the last $50 you have is to buy food for your children, will you risk it for the great advantage of having another $50 that you surely need very much but that is not essential for your survival? That is where the situation changes the behavior and that you go back to the bottom of Maslow’s pyramid. To understand what conduct each person to take a specific decision, Bernouilli introduces the concept of the subjective value of money (meaning personal to each individual) replacing the concept of nominal value of the money. Effectively, the pleasure of winning 1000V will not be the same for somebody with very modest revenues and somebody with very high revenues (Bernoulli, 1954; Mellers, 2000). Individualism really assesses the pleasure or the psychological satisfaction of the gain instead of the gain itself: he called this concept the utility. The utility is calculated by establishing a ratio between the gain and the fortune already possessed (Cadet and Chasseigne, 2009). A person who would make choices on the basis of the expected utility as defined by Bernouilli, will considered uniquely the fortune that will be his(hers) after the choice (Loewenstein, Rick & Cohen, 2008) and not the choice by itself. (Habib, 2013, p. 19) (Our translation) And this is only considering the gain. When a loss is in perspective, the problem is more difficult. Then the scale of the utilities is not constant. Honestly, the probability is that Bill Gates will not spend 10 seconds to play the game we discussed above because the gain is irrelevant and he may evaluate his time higher than this opportunity.

9.4.2 Simplistic Games in Situation of Limited Information It is possible to simulate markets in a classroom. The result will be that we will reach equilibrium. The settings will include two goods, one piece of information and a limited number of trading sessions; fine, but it proves nothing. But real life contains a multitude of ways, with a multitude of information pieces and a multitude of

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motivations admitted or not and a multitude of degrees of knowledge about the situation. That is why the game theory cannot be, for the time being, a model for the decision-making process. These “normative” theories are not based on observations but on how people might behave if there would be rational encounter problems when confronted with the real world. They do not look “grounded” enough. Allais has some doubts about these “theories” in the real world. He proposes some different examples: Enounce 1: Do you prefer situation A or situation B? Situation A: Receive 100 million in total certainty. Situation B: 10% probability to receive 500 million, 89% probability to receive 100 million, and 1% probability to receive nothing. Enounce 1’: Do you prefer situation C or situation D? Situation C: 11% probability to receive 100 million and 89% probability to receive nothing. Situation D: 10% probability to receive 500 million and 90% probability to receive nothing. Following the axiom of substitution and the axiom of independence, the subjects’ choices must be coherent: if in the enounce 1, the situation A is the most popular, in the enounce 19, it is the situation C that must be most popular. But the results obtain by Allais (1952) are not conformed to this description. (Habib, 2013, p. 23) (Our translation) We may propose, as an explanation, that for the ordinary citizen, although in old francs, the difference 500 million will do over 100 million is not that important in regard of securing the first 100 million. But, to discuss that with some relevance we would have to know what the purchasing power of 100 million of francs was at the time (Allais, 1952), what was the situation of ordinary people at the time in terms of retirement, for instance, and who were the subjects Allais observed. So, we cannot judge the situation with a mere computation of probability. If the expected gain was the only criteria of choice, no lottery would sell any ticket and the casinos will not exist. However, they both exist and continue to prosper very well. Therefore there are other variables that do not disappear in the e term of the equation, for instance, the price to enter into the game which can be illustrated by the negative in saying that in a casino most people play with the slot machines where the entry cost is quite low. Although the situations offered by Kahneman and Tversky (1979) do not reproduce the situations presented by Allais, they lead the researchers to the same conclusions as they reflect similar behaviors.

9.4.3 Historical Period and References Bernouilli (1954) and Cadet and Chasseigne (2009) said that the point of reference to assess an opportunity was the fortune already gathered by the subject. Kahneman and Tversky (1979) change this point of reference in their model.

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It is supposed to be more natural to consider the financial results as gains and losses instead of states of overall wealth (Kahneman & Tversky, 1984). We are not certain it is that “natural.” If we go back in history only half a century, or a little more, we see that the balance sheet was the most important of the financial statements. The statement of the results was considered less important in his transitory function. People would refer to their balance sheet as reflecting their overall success and showing their position in the society. Historically, it is impossible to really have an income statement, in its actual meaning, before the generalization of double-entry accounting. But, lists of assets have existed since immemorial times. Therefore, the accent was on the balance sheet and not as a list of means to produce revenues, but as a list of what a family possess expressing their rank in society. We also have to remember that the nobles were not working till the end of the nineteenth century, neglecting the revenue they would be able to produce by themselves from their assets. The importance of the revenue to attribute a value to an organization is relatively recent in the history and is by no means “natural.” In fact, the economic definition of profit was more “natural” when the owners were integrated in the calculation, meaning that the expenses for the standing of the family were taken into consideration. Some artificial distinctions between the owner and the enterprise had changed the way of considering the calculation of the benefit. The scientific discussion about the exact form of the utility curve will continue probably for decades ahead. At this point, we would just underline how such research tries to find the origins of risk aversion in the physical characteristics of humans and, maybe after, they may expand it to animals. Before evaluating the consequences of these findings on the form of accounting information to provide, let’s look at the bias that has been identified and at the meaning of the use of the word “bias.”

9.4.4 Biased or Unbiased, That Is the Question? If we say that there is a bias, it is because we have a benchmark that is the unbiased way to do the thing or to conceive it. To answer this question was supposing an important epistemological change instituting the decisional behaviour as the principal studied object instead of the corpus of formal rules. (Cadet & Chasseigne, 2009, p. 71) (Our translation) This escaping from the prison of the logical modeling (from illogical premises) will not last long. These researchers, having escaped from the normative theories, are falling back into the trap of implicitly saying what is normal and what is biased. 9.4.4.1 The framing The way the situation is presented seems to have an influence on the decision. It seems that people have a preference for certain gains and an aversion for certain

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losses. So when the situation is reversed and the certain gain is presented on the other side as a certain loss, the choice is modified and the aversion for the risk is also altered. The behavioural results are congruent with the results obtained by Tversky and Kahneman (1981), the participants being very strongly affected by the framing of the decision. In case of a loss, the participants will show a strong tendency to taking risk, while in case of a gain they will prefer the sure option. These behavioural results are supported by neurofunctional results, this tendency to be influenced by the framing being tied to the activation of the amygdale bilateral. This cerebral zone, known to be strongly implicated in emotional treatment (Trepel et al., 2005), is significantly more activated when participants choose the risky option in the case of a loss and the sure option in the case of a gain. (Habib, 2013, p. 37) (Our translation) Therefore, this effect is “physical,” which normally means “natural,” not “cultural.” However, the zone of the brain that is stimulated is strongly related to the results of experience, individual or collective. 9.4.4.2 The double process theory This theory postulates the existence of two ways of processing information. The first type is a very intuitive, very fast process of a lot of information without having to monopolize the working memory of the subject. It is considered an autonomous system (Habib, 2013). The second type is highly dependent on the cognitive capabilities of the subject. It is quite slow and demands more space of working memory and more resources.

9.5 Conclusion In conclusion, we have little human considerations in that normative model. Therefore the situation of people in their day-to-day life is not taken into consideration and the model brings us very little guidance in the formulation of a theory of accounting. What is the translation of the parameters of this model in the accounting language? There seems to be very few implications. The choice to be done after looking at accounting numbers are still in uncertainty, mainly because the financial statements are not talking about the future possible gains but about the past ones assuming the future to be a linear continuation of the past. After the discussions on the “conceptual framework” the relevance had been placed ahead of the desired characteristics supposedly because investors were interested not in what their money had produced, but in what it will produce in the future. We have to acknowledge that this was not very new basically, what was new was the form of the inference. If we look a little more deeply, we may find different forms of the line indicating the behavior of the future. Then, a

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reasonably accurate estimate of this line will necessitate more, or at least new, information. We know very little about how decisions are taken at least from the so-called theories of decision. In the circumstances we know equally little about the use of information in such a process when it is not perfectly simple and following unrealistic assumptions. Therefore, we have no guidance to make a theory of accounting as an instrument for decision-making.

Questions 1. What are the assumptions behind the “rational choice” approach? 2. The British political system is like the British economic system, giving some power to the “Commons” but under the control of the “Lords.” Comment referring to Hobbes, Smith, Rousseau and others. 3. Following Pesqueux, the classical model of decision is based on certainty as their first characteristic. Which consequence do you see for the validity of the model? 4. Provide some definitions of rationality. 5. What does the concept of bounded rationality bring to our understanding of economic choices? 6. Can the agency theory be called rational? 7. What do we learn from the game theory? 8. What is the main critic we can address to the Bayes calculation system? 9. Can we base a new accounting theory on the available decision theories? Why? 10. If it works like Smith was pretending, we have little decision to take, we only have to follow the flow and the “invisible hand” will equilibrate the entire system. Comment.

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Chapter 10

A Theory of Accounting It would be a little meager to say that as accounting is supposed to provide information for decision-making then theories of decision are theories of accounting. For that, we would need at least a theory of decision more explicit than what we have yet. Firstly, we have to define which accounting needs a theory. To start, we have to separate the different levels. At the first level, as we said earlier, accounting is a language implying that it is a social object, like any other language. As such, it can be the object of a science. However, no accounting activity needs a specific science to continue to fulfill its social function.

10.1 Decision and Information The types of decision to be informed by accounting numbers have been described in many handbooks. The CICA (Canadian Institute of Chartered Accountants), undertaking the elaboration of standards for Canada, stated the goal of the profession as providing information to increase the efficiency in the allocation of resources. Those who tried to establish a conceptual framework made a hierarchy of the decisions to be informed in priority. Formulating the objectives of accounting depends on resolving the conflict of interests that exist in the information market. More specifically, financial statements result from the interaction of three groups: firms, users, and the accounting profession. Firms comprise the main party engaged in the accounting process. By their operational, financial, and extraordinary (that is, nonoperational) activities, they justify the production of financial statements. Their existence and behaviour produce financial results that are partly measurable by the accounting process. Firms are also the preparers of accounting information. Users comprise the second group. The production of accounting information is influenced by their interests and needs. Although it A Postmodern Accounting Theory, 169–177 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78769-793-520181010

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Belkaoui raises many questions. Firstly, who is the firm and why the interests of the firm would be different of those of the shareholders? Another problem is that the traditional vision separates radically the problem and the decision. But now, problem framing is recognized as an important part in reaching a decision. Although, in the CICA Handbook, for instance, accounting is supposed to be neutral in its presentation of the information, others believe it is not the case and still others, among who we may figure, believe that it is impossible because there is no objective reality or even facts. Cooper and Morgan (2013) are in the second group presenting accounting as changing unduly the world it is supposed to present “fairly.” The classical vision is supported by the agency theory having transformed the firm into a kind of market within which many different groups are contracting. This view underlines the differences in the interests of each group involved around the firm (because there is no way to say “in the firm” anymore). 1. The shareholders There are actual shareholders having an interest in increasing the market value of their shares, to sell it at a higher price, without changing the risk and return parameter. There are also potential shareholders having an interest to decrease the market value to not pay too much for their shares and therefore increase their returns for a given investment. There are also the preferred shareholders wanting to secure their payments. 2. The managers A lot had been said about the interest of the managers that seem to be contradicted by the empirical results. An example of that is the disciplining of the managers through the markets. We have now multiple examples of managers leaving bankrupted firms with huge golden parachutes and finding new positions within a few weeks. Also we may assume that working for their own interests cannot be considered as narrowly as in the economic theory and that other factors, like the hubris, will intervene in their decisionmaking process. In such a system where the shareholders may even ignore what the firm is doing, the manager has the possibility to entrench himself and play the game to his taste. Depending on his interests of the moment, he may want to present high or low results.

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3. The employees The employees may want to influence results in the right direction to have bonuses or if they are negotiating some collective agreement to show a healthy situation implying salary increases or simply to keep their jobs if the firm is in danger. 4. Financial analysts They are only an extension of the shareholders. But they are taking their information from the management. So, there is in conflict of interest between these two groups. As the newspapers, when the firm will issue its preliminary announcement, will compare the profit expected by the stockbroking firms with the one presented by the firm and that every difference will be imputed to the ineptitude of the analysts, they are better to forecast the manipulated profit rather than the “real one” (Breton & Taffler, 1995). Moreover, if they correct the profit figure to eliminate manipulation, they will fall further from the announced one and will look more out in the newspapers not taking into consideration the reasons behind the forecasted numbers. Therefore the firm will not be happy and the investor relying on analysts’ advices will lose confidence. In substance, they are better to forecast the manipulated profit as disclosed in advance by the management team and everybody will be happy if not richer for some. 5. The government Normally, over the taxes, the government has the job to first make the society function and to ensure that, among others, the economic activity is conducted by the right institutions. In other words, the government has to verify if the firm, as a social institution, is fulfilling its social contract. Unfortunately, States rarely do that and the switch, in European countries, from the old financial statements to the normalized international standards is not helping them in doing their job.

These groups desire different accounting numbers to sustain the decision that is already made because it logically derives from the needs of each group. This late vision opposes two kinds of pragmatisms, the latter implying that accounting numbers serve more as justifications after the facts than informing decisions ex ante. In the traditional framework, the investment decision came first. Therefore we may believe that the first decision to be informed by accounting is investment. The consequence is that we may apply what we know about the theory of decisionmaking to this particular case. This application had not been really done because every text on this question applies the rationality of the economic man and therefore biases the results. A standard as the “going concern” is interfering with the free decision-making process. If the numbers are made in order to support the investment in the firm in question, the free will is biased and the accountant takes the decision partly at the place of the investor. There is no reason why the “neutral” accountant will have an opinion about the desirability of the going concern of the firm.

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To be perfectly rational, as described by the economic theory, an individual has to know clearly what he wants, and he preferably may want a supplementary unit of consumption reachable through an increase of the money he has at his disposal. He also must be perfectly informed already of all the possibilities existing on a perfect market. Obviously, we know nobody qualifying to be this person. If we start with the idea that information is not perfect and moreover that it can be institutionally biased, like with accounting principles, the decision process appears even more biased. To bring back the categories of the agency theory, the first interrogation might be: who is the principal of the firm? We are not sure that it is the shareholders as they are no more the entrepreneurs although they are the persons having to take investment decisions even if they have councilors for that. The shareholders are now entrepreneurs and often investors by delegation. Therefore, they do not take decisions within the firm, except for some controlling shareholders. They are reputed to take decisions on the place where their money is invested, but with the tendentious information (there is no other) provided by their brokers becoming undertakers for the firm’s shares nothing is less sure. If we keep the principle that financial accounting information is destined to those being far from other internal sources of information, the target of the information is outside the firm and this targeted outside investor, having possibly never seen the name of the firm, may not know what its activity is. The first locus of power in our occidental societies is constituted by the people. That has been accepted since a long time (Rousseau, 1964). This power of the citizens (we the people…), altogether, is delegated to the state (which is normally organized with a kind of legislative plus executive and judicial powers). Normally, if we were to start a democratic country today, we will want to produce as much wealth as needed using as few resources as possible. To do that, we will have to determine the best way to allocate the property rights that, at the very beginning, are all in the hand of the state. This allocation is supposed to be the one producing the best incentives to lead the ensemble of the people to fulfill the best of the goals we enunciated above. Our societies have decided, although there had been no identifiable starting point, that the private property provides the best motivation system. Fig. 10.1 shows the different layers of delegation of power we have in our societies. Each delegation implies a rendition of accounts. The form of these accounts will be derived from the resources over which some power had been delegated and the goal that were assigned to the agent by the principal. The bottom is constituted by the same group as the top except that at the top they take decisions and at the bottom they receive the services organized and provided through this structure. Going along the structure is a cascade of economic decisions to be taken that firstly come from citizens and governments before coming, in detail, from businessmen.

10.1.1 The Citizen Decision The first level of delegation of power is made by the citizens forming the society. The group called citizen has some characteristics that are not to be confounded with those of the groups called customers, although constituted by the same

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individuals. Cooper and Morgan (2013) argue that accounting numbers participate to the financialization of the economy and, as this process is eliminating the scarcity of the capital as a resource, the democratic control that is reputed to exist over the attribution of the resources, through the role of the state, is eliminated. However, as we have seen clearly with Freddie Mac and Fannie Mae,5 the withdrawal of the allocating decision from the democratic sphere does not eliminate the citizens from taking charge of the results if it goes wrong. However, we cannot say that accounting favored the financialization. To the contrary, it fought inch by inch to avoid the recognition of unrealized profits and of the present value of assets biasing the ratios and presumably the decisions taken from it. Whatever will be the results of this financialization or any other such tendency in the society, accounting is not leading the way; it is only following far behind. The magic of using the same capital twice by selling titles made of already accepted mortgages has not been concocted in an accounting laboratory. As an agent, the government is supposed to rend accounts to its principal, the society. But the form that had been developed for these accounts is quite strange. All the resources of the society had been entrusted to the government; therefore the report must be on the use of all these resources. These resources are mainly tied to a territory and a group of persons called a nation. That is the basis of the two indicators we have: the GNP and the GIP. As noted by Stiglitz (2014), the state has no balance sheet. Thus, we have no account of the assets of the nations and of their use. We do not have any accounts for the assets owned by the government itself, directly or indirectly. From this statement we can understand that the citizens do not receive the information they need to reach any decision. The GIP and GNP are so general that it will be very difficult to know what exactly is producing this aggregated result.

10.1.2 The Governmental Decision In Fig. 10.1, the state is the first entitled to receive reports from the firms in order to take decisions. These decisions are about the system of private property and private enterprise. The questions must lay on the ability of this system to produce as much wealth with as few resources as possible. Then there must be questions about the disseminating of this wealth. There is where the income tax enters into action. The system of the firm having shown its inability to disseminate the created wealth, the state must compensate by taking the money where it is and distributing it where it is needed. Obviously it is the locus of the biggest continuing fight in our society. The producers of wealth try to keep as much as possible while the role of the government is to take care of all the citizens who collectively are the owners of the resources used by the firms in their process of creating wealth. At this point, we have to ask what is really meant by the expression “creating wealth”? The creation of wealth can be translated by what governments called the value added. A piece of raw material enters a shop at a

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Freddie Mac and Fannie Mae are acronyms for two banks where the 2008 crisis started.

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The citizens, altogether Are represented by The State Is represented by Executive power (Government) Acting through The state institutions Agencies - Ministries - Departments - Firms - Schools - Hospitals - etc.

Shareholders Stakeholders The citizens as forming the society

Fig. 10.1:

Organization of the Society.

certain price. Then it will be transformed by the labor or the machines and sold at a higher price than the one paid for the raw material. What is creating the value and to whom it belongs are questions that we will not settle here as there is quite a lot of literature on the question. For one, Marx (1985) would say that if it is created by the labor, the value must be to the workers after the factors had been remunerated. Ricardo (1992) will say otherwise although recognizing that it is the quantity of labor that determines the price of a good. Consequently, the question is around the appropriation of the value. While Marx continues to conceive the value created by the work as the remuneration of the work, Ricardo (1992) treats the work as any other merchandise on a market and fixes the price at the intersection of the demand and the offer. Therefore the price fluctuates and the rest of the value added constituting the profit will fluctuate in function of the market price of the labor and other raw components. Unfortunately, Ricardo is unable to conceive the capital under the same structure. One may believe that these questions are far from the accounting theory. But, to the contrary, all the discussions around the recognition of assets that are, in part, in the head of the workers (like in the computer business) raise the question of the other side of the balance sheet; who will figure as the owner of these assets and what will be the way to compensate this investment, which is in great part a social investment (i.e., education, health).

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In accounting terms, the question is what the society has invested in the firm and what kind of report will it need to assess the performance of this investment. The investment is constituted as follows. 1. The level of health in a society To be productive a society needs a high general level of health (Sen, 2003). Therefore, with a good health system the society may be able to prosper. But, the work should not produce sickness. If the activities of a company produce a sickness that is discovered many years after being contracted, it is the entire society who will pay to cure the sick ones. Therefore the cost of taking care of these persons is externalized from the firm which will be able to sell a product at a price that is not representing the full cost. This full cost would have possibly limited the selling of such a product. Therefore, many units would be made in excess of their normal capacity and will constitute a spoiling of resources. 2. The level of education in a society It is mostly impossible to work in our societies without a basic mastering of reading and counting. It is so much part of us that we don’t realize that we are using such abilities all the time. Even the illiterate have developed a way to “read” the signs appearing everywhere now. We must say that the development of pictograms, as an effect of the cultural diversification of our societies, help greatly the illiterate to function and remain unnoticed. However, for a society to develop and create, it must have a good level of education (Sen, 2003). This education must be conceived independently of the needs of the firms but in accordance with the advancing of the society in general.

10.1.3 The Investor’s Decision There had been some studies about the way an investment decision is taken. However, in hyperreality where the neoliberal economy functions, the investor is supposed to be the entrepreneur. But since many years now, this is no more the case and the investor is replaced as an entrepreneur by some “specialists” supposed to take his interests as their own for a “just” compensation. However, as one example of malfunction, the compensations of these managers have reached levels never thought of before. The investor’s decision is firstly made in function of a portfolio which is supposed to equilibrate the risk. That is essentially what is taught in the business schools. However, if we take the example of France, there are about 1,000 firms registered with the Paris Stock Exchange while the database “Diane” registered more than 1,000,000 firms. We may temper our conclusions so easily drawn from observation limited to listed companies. In the rest of the French business world (1,000,000–1,000), the control block is generally over 50% of the shares rending easier the decision process.

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The noncontrolling shareholder’s decisions can be summarized as buy, hold, or sell. These recommendations are not equally distributed. On a UK sample, Breton and Taffler (2001) found a very small proportion of “sell.” By far, the larger number of recommendations was “hold,” which is a two-sided recommendation, if you have some stock hold means keep it, while if you have no hold means don’t buy any. As Rogers and Grant (1997) and Breton and Taffler (2001) conclude, accounting information is not the most important when reaching a recommendation. The quality of the management and the strategy proposed come first. The decision of a noncontrolling shareholder of a listed company is not to change things in the firm but to leave if the direction taken by the management is not to his taste. That leaves a large open space to the management. In the unlisted firm, the controlling shareholder may cumulate firstly the role of manager, or he may be in position to intervene directly. It is not the same function at all. The accounting system wants to inform both types of decision. In the first situation there are many other sources of information, even for the minority shareholder. In the second type of decision, the minority shareholder may be totally left in the dark by the controlling shareholders and the management. In this case, the minority shareholder will at least receive the annual financial statements.

10.2 What Would Be a Theory of Accounting? A complete theory of accounting will be multiple entries. As we have said before, it will take a sociological dimension by taking the question of the rendition of accounts at its roots. Therefore it will have to theorize the relationships between the different persons or groups demanding or receiving accounts. This part will belong to the sociology per se. The principal rendition of accounts in a society occurs between the government and the citizen. Then, the government delegates some parts of its mandate to several institutions. These delegations are associated with the use of resources that are developed by the state for the general well-being of the society like health and education, or some specific resources under the authority of the state that can come from the territory, like natural resources. A theory of accounting following the forms accounting has taken lately will have to be included in a theory of accounting that is more general, including different forms of accounts that may be elaborated even without any recourse to the accounting language we know. For instance, we may refer to the social balance sheet that had been implemented in the 1970s in France. The means were economic indicators, like the proportion of women in the top management, the proportion of minorities in the whole working force, etc. These balance sheets constituted a form of rendition of accounts without using the accounting mechanic. Therefore, classical accounting appears as one possible form for the rendition of accounts, and the theory of accounting is firstly a theory of the political bodies in a society and of their relations implying a delegation. As we said earlier, a theory of accounting also implies to analyze the behavior of people

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invested in a delegation relationship. Psychological aspects will influence the form of this relationship. The best part may belong to the psychology. Finally, the economic theory must be reconceptualized to fit the “reality.” The portfolio theory changed the situation and must be taken into consideration in the economic theorization process. At this point, however, we may see that the theory of accounting will be centered on the communicative function.

Questions 1. Which levels can we distinguish in the study of accounting? 2. What is the goal of the accounting profession for the CICA? Explain the ties between this goal and the theory of economy from which it is derived. 3. Accounting is a market failure. Explain. 4. Accounting goes against the EMH. Explain. 5. Who are the users of accounting reports? 6. Can we say: the shareholders, as if they were forming a homogeneous group? 7. The decisions taken by investors depend for a small part (if any) on the results of individual firms. Comment. 8. Which difference do you see between a citizen and a consumer? 9. Do you believe the citizens to be well informed by the public accounts for taking their decisions? 10. How do you see, in practice, that the financial statements we have reflect more the conception of Ricardo than the one of Marx about the property of the value added? 11. List some of the investment of the society in the firm.

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SECTION 3: “TESTING” THE THEORY

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Chapter 11

Analyzing the Documents Accompanying Decisions Accounting data in financial statements are published in a larger document called the Annual Report. This report is constituted by an ensemble of texts or discourses of which the financial statements constitute only a section. These annual reports are all constructed around the same structure. As a support for communication, we can use communication analytical instruments to deconstruct the annual report. There are many possible approaches to text analysis that can be used in accounting and on the annual report where the financial statements have a role to play in the whole dynamic of the text. We will present the content analysis, readability analysis, semiotic analysis, and the rhetoric of Aristotle and then discuss the apparent and the hidden programs included in a text.

11.1 Content Analysis For Krippendorf (1980), content analysis is a simplification allowing adding statistical treatment to previous forms of text analysis in the purpose of making inferences. The method had been widely used in accounting studies. Jones and Shoemaker (1994) reported on a series of studies doing content analysis of annual reports and other financial documents. The list is now much longer.

11.1.1 Classical Content Analysis Content analysis consists essentially in counting the occurrences of lexical forms or the co-occurrences of those forms. It is based on the assumption that frequency is an important indicator, which had been reasonably demonstrated through time. However, to extract some “meaning” from these frequencies, we have to, for example, firstly organize the lexical forms into meaningful structures called ˆ e, 2006; Breton & Taffler, 2001; Smith & Taffler, 2000). themes (Breton & Cot´ Other related methods had been developed as the model of Botosan (1997), for instance. As in classical content analysis, she defines categories to be traced later in her corpus. We may also include, among the extensions of content analysis, the

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works of Sydserff and Weetman (2002) counting the frequencies of passive form sentences, building the DICTION score. One important limitation of the method consists in focusing uniquely on words, although assembled into themes. The effects produced by specific arrangements of words, by intertextual references, or other significant elements that are not included totally in one word or the recurrent association of two of them, are mostly ignored by such research strategies.

11.1.2 The Accounting Content of Websites It is current now to limit the number of a printed annual report assuming that interested parties will find it on the website. However, is it possible to analyze the content of a website like the content of a document? If you look for an annual report on a website, you will rapidly discover that one specific characteristic of a website is that it is made of a series of layers. Therefore, what is easily available at first sight is not equivalent to what must be looked for in the depths of the site. In terms of financial disclosure, what is easily available on a website would be the information for investors. These information will contain the share prices evolution and other stock exchange information and maybe a few accounting numbers like in a preliminary announcement. If you want the annual report with the complete set of financial statement, you will have to go in a subsubsection to find it. It must be at the fourth or fifth level while the information for investors will be at the first or second level. Therefore, investors and even actual shareholders will satisfy themselves with this easily (short) assimilated information avoiding going further for a more complete report. Researchers in marketing have some advanced on accountants in analyzing websites. Perry and Bodkin (2000) analyzed the websites of the 100 largest Fortune 500 companies. They were looking for the advertising use of the website and they found a series of elements filling this function of pushing the annual report at the bottom of the sites. Analyzing the elements of content on a simple plan is not reserved to accountants. For instance, Ellinger, Lynch, Andzulis, and Smith (2003), analyzing the elements, produced a list of frequencies that placed every item on the same plan, as did Botosan (1997). Some more appropriate methods have yet to be developed to take into consideration the specificities of the website as a new system for communicating information or hiding it.

11.2 Readability Analysis If accounting is supposed to provide information for decision-making, it must be accessible to the users. Based on this principle, researchers have decided to use some measuring system to evaluate the easiness with which the financial statements can be read. Obviously, we are again in a case of transportation without care of concepts from one universe to another. It is difficult to assess if the message received is the one intended to be sent.

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To satisfy his communication responsibilities and to ensure that the message intended is, in fact, the message received, the writer relies on feedback. (Adelberg, 1983, p. 163) In an educational context, we spend our time testing (obtaining feedbacks) if students have received what we wanted them to learn in a course or during a certain period. However, if they study from a textbook, to some extent, it can be tested at the source. Measures have been developed to evaluate the level, in terms of age and grade, of scholarly textbooks. What we have here is not a readability known by feedback but an a priori readability determined in the absence of readers. What the accounting profession lacks, and what this paper intends to provide, is a pragmatic tool that will allow writers to evaluate the comprehensibility of accounting messages before dissemination to readers. (Adelberg, 1983, p. 163) It looks like a miracle solution to make any communication more easily understood, but, are we really talking about understanding?

11.2.1 Readability, Understandability, and Comprehensibility Many writers did not ask the question of the potential difference between readability and understandability. They treat the question as if it was the same thing, implying that if the text is easy to read it will be easy to understand. However, other researchers make a difference between the concepts. Smith and Taffler (1992) compare some indexes of readability with a test devoted directly to the understandability: the CLOZE test. This test consists in eliminating one word on every five in this case, and asks the subjects to replace the missing words. They conclude that in a specialized context, the CLOZE is a better measure of understanding. They also found that their best performing group, the accounting practitioners, had an average level of understanding that was far from being impressive (just above 50%). However, we still have difficulties imagining what would be the definition of readability without referring to understandability, as without this latter, readability means nothing except the possibility for the eyes to run over the paper. Nevertheless, we see that the CLOZE is based on the content (cutting one piece of content every five), while the indexes are more focused on the form (length of the words, etc.).

11.2.2 The Construction of the Indexes Lewis, Parker, Pound, and Sutcliffe (1986) provide a good description of some of the indexes. These indexes are, among others, the Dale–Chall, the Flesch, the Fog, the Kwolek, the Fry, and the LIX. If you ever ask yourself how the dictionary included in your word processor dared to tell you that your sentence was too long, that a word was too long, or that your text was “wordy,” it is because such measures of readability are included in your text processor.

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If we take the scale for the LIX, a score of 20–25 means very easy, 30–35 easy, 40–45 medium, 50–55 difficult, and over 60 very difficult. The LIX scores, as reported by Courtis (1995), for the Chairman’s statement were around 58 and for the footnotes over 60. The few researches we have using these indexes classified accounting narratives among very difficult, or scientific, or any other categories meaning very difficult. Consequently, if these measures have some relevance, we may wonder why accounting reports can continue to remain the same while carrying so little understandable information for decision-making and through which process the accounting profession can continue to pretend the contrary.

11.3 Semiotic Analysis Meaning is not univocal, and not situated on a unique dimension. Consequently, there is not one but a multitude of meanings participating to the overall significance. Some approaches are more prone to enclose this explosion of meaning. However, it is obvious that the discourse itself (as an ensemble of sentences) is organized and that, through this organization, it appears as the message of another language, superior to the language of the linguist. (Barthes, 1966, p. 3) (Our translation) Saussure’s linguistics fixed its limits to the sentence. By opposition, the semiotics project proposes a “linguistic” of the discourse recognizing the specificities of the text over the limits of the sentence and the presence of isolated words. Presented this way, it includes all the analytical methods referred previously. A communication will have more or less opacity following the context in which it is produced. However, even a scientific communication will have a degree of formal opacity even if, in this category, the form is supposed to be transparent on the content. Moreover, a scientific communication is also a literary “genre” using conventional forms and structures. Thus, an analysis of communication must take into consideration its format and context. Every communication is an amalgamation of many of the functions described by Jacobson (1963), depending on the circumstances. An ensemble of these factors equally influences each of the elements forming the basic model of the communication (Fig. 11.1). Despite all the good intentions, something will be lost and added between what the source wanted to say and what the receiver will understand. In summary, the communication will always be imperfect and it is possible to learn how to take advantage of these imperfections. Consequently, knowledge of the communication process would allow to play on what will be understood by the receiver. It is not for nothing if the annual report of the large firms are conceived and realized by specialists in public relations. To illustrate these ideas, which may look esoteric to many accounting specialists, we will apply a modern version of the Rhetoric of Aristotle to the annual report.

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SOURCE

CHANNEL

MESSAGE

Mental universe Cultural universe Level of language Perception of the self Perception of the receiver

Fig. 11.1:

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RECEIVER

Mental universe Type (verbal or written) Noise

Complexity Coding

Cultural universe Level of language Perception of the self Perception of the source

Communication Scheme. Source: Breton (2009).

11.3.1 Aristotle’s Rhetoric There are four fundamental categories in Aristotle’s Rhetoric: the euresis, the taxis, the lexis, and the hypocrisis. This rhetoric flows from the organization of the democracy in the political environment. So, as democracy is based on the choice of the majority of an ensemble of people, the first goal of the discourse is to convince. 1. The euresis consists in choosing the arguments. 2. The taxis is the syntax of these arguments. These arguments must be placed in an order apt to produce the desired effect. 3. The lexis consists in choosing the figures of speech destined to embellish the discourse but also to create dramatic or any other kind of effects in order to provoke the adhesion of the auditor: effects of aesthetic, authority, reality, etc. 4. The hypocrisis refers mainly to the delivery. It is the staging of the intervention. These four phases are parts of a strategy to convince. This is always done in a moment of crisis in the general sense this word had in the classical theater. There is a situation demanding that other people may be convinced of something. 11.3.1.1 Euresis First, we have the list of arguments. These arguments will covers many topics and take many forms. The subjects covered depend on the domain of the discussion. However, the form depends on the strategies, which are quite stable across the possible topics.

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Following our analysis of Perelman and Olbrechts-Tyteca (1971), Breton (2006), and Breton and Gauthier (2000), we may have some broad categories: the framing arguments, the authoritative arguments, the community arguments, and the analogical arguments. All these categories present many forms of actualization in the discourse. Therefore, in an annual report, we may have arguments about the profit and the state of the market. This argument may be associated with a community argument: as we all know, the economy had been this or that this year. If the receiver is not aware of the alleged economic difficulties, he may feel guilty of ignorance and consequently accept the argument. That is a well-known form of manipulation of the perceptions based on an authoritative argument. A rhetorical study will begin with the establishment of the list of arguments. These arguments will imply some people having a role in the process: the president of the board, the members of the board, the CEO, the employees, etc. It will also be possible to study the actantial structure (Greimas, 1973). The arguments are about transfers and transformations. The firm’s representative wants to transfer always more value to shareholders and, to do so, he will transform the firm into a more profitable one, but entertain a surface discourse pretending the goal of the company is to ameliorate the life of people. The report we analyzed was, as usual, separated into two main sections (Breton, 2009). These sections are totally different in term of characters, spaces, and even for the paper used. We have analyzed the first part (the narratives, 19 pages). Independently of the structure of the report we have considered the arguments in this section. After presenting the highlights and a 10-year summary, we can find a map showing the retail facilities of the firm, then begin the narratives sections with the president and the chairman of the board reports. After that, we find a review of operations covering the rest of the 19 pages. The complete list of the arguments is quite limited as they are repeated in each section with sometimes a few details added (Table 11.1). The argumentation is quite simple and can be schematized through the tools developed in our model.

11.3.2 Transformation A text may contain many transformations. They generally can be ordered. The transformation operates between an initial and a final situation (EveraertDesmedt, 2000). The difference between the situations is the transfer of something, an alteration of the situation. In our chairman’s report, the object transferred is the value for shareholders. From a positive but modest initial situation the shareholders are assured of a bright future, which means steady streams of revenues. It is then the financial situation of the shareholders that is transformed through the new value created by the management team. To better understand the relationships between those people we can study the actantial structure.

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Table 11.1: Arguments Found in an Annual Report. These arguments are as follows: 1. we are the best (number one), 2. record results, 3. the current year shows improvement in: the sales, the profits, the debt/ equity ratio and the coverage of interests, 4. next year will be still better, 5. the administration is solid, its strategy is well founded, 6. there had been an important investment program implying acquisitions during the last three or four years, 7. some difficult adjusting years had followed, 8. all is settled now, 9. the expansion had weakened the historical basis of the firm in the eastern part of the country, 10. the economic conditions are difficult, 11. the difficulties are now behind, the proof being that the indicators are good, 12. the future shines. Source: Breton (2009).

11.3.2.1 The actantial structure An “actant” is not an actor; it is an archetype, a function, a category of actors. If the list of actors may have no limit in terms of number or diversity, they can be grouped into a limited number of categories, for instance, as follows: Actor: Superman Actant: hero Action: save the world There is an infinity of actors entering into an actantial class playing the same role, performing comparable actions. In the same way, an actor can change its actantial role during the process. The actor is totally integrated in the semantic level of the text, while the actant is a syntactical category expressing the organization of the narrative at the structural level (Fig. 11.2). As elements of an actantial structure, the actants possess some principal attributes: the competency and the performance. This competency is expressed in terms of will, power, and knowledge. The competency appears through the performance. However, a part of this competency can remain virtual. The acquisition of the competency is very important and normally precedes the main performance. In our annual report we have many actors playing some fundamental role.

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Axis of transfer Destinator

Object

Receiver

Axis of desire Adjuvant

Subject

Opponent

Axis of power

Fig. 11.2:

• • • • • • •

Actantial Model. Source: Hasbani and Breton (2013).

Chairman of the Board President Company (management team) Shareholder Directors (altogether) Market Narrator

• Adjuvant (has the knowledge) • the hero • the receiver • opponent • adjuvant (not clearly identified)

The narrator is not specifically mentioned in the text. For the chairman’s report, it must be the chairman. However, the tone is much the same in the chairman’s and the president’s report, making it difficult to perceive two narrators. For the review of operations, the reader cannot exactly identify a narrator. Moreover, as there is a specifically identified section entitled management discussion and analysis, who is narrating the review of operations? The shareholders are the receiver: “your company.” The discourse is about the company explaining how it had improved during the last period. The market is presented as an opposing force having to be tamed and used to our profit. The role of the chairman is to draw a general picture of the activities of the firm, interpreting for the hero the situation and its probable issue. Consequently, his text is articulated in three periods: the past, the present, and the future. The other sources are giving details of the general vision provided by the chairman. These details can be ignored by the reader if he decides to be content with what the chairman said to him as it was mostly the case in the research done by Lee and Tweedie (1977, 1981). In our case, it can happen easily as the chairman’s report is preceded by numbers showing a very positive situation and a map showing an interesting geographical spread for the firm.

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The governance is assessed following the description of the situation. The strategies are said to be fruitful despite a period of uncertainty following the massive investment program initiated a few years ago. Briefly, the management has won. This management team is the perfect adjuvant bringing knowledge and wisdom to allow an increase of the shareholders’ value.

11.4 The Functions These functions appear often in a similar order, although some variations can happen. For instance, the hero marries the princess at the end. If, this event appears placed at the beginning, the union will not be consummated before the end as a series of events will delay it, these events constituting the essential of the story. Or, as we often see in movies, the story will start with the end, the marriage, and then restart at the beginning with the story leading to this end. This changes nothing on the basic diegesis of the story and to the principles behind the analysis. Propp (1965) repertoires a series of stereotyped activities. The popular stories constituted a fertile soil for this, due to their initiatory dimension (Bettelheim, 1976). One may be surprised to find that those stereotypes are widely spread in the fiction we see on television or in the movies. The functions can be equivalent to what Fiol (1989) termed programs.

11.4.1 Example of Functional Analysis A traditional analysis will look for recurrent situations. Here we have a few examples:

THE NARRATIVE SECTIONS:

THE FINANCIAL STATEMENTS:

1. 2. 3. 4. 5.

make a summary of the situation predict the future present the situation in detail show the numbers authenticate the numbers (audit report) 6. invite the shareholders to the annual general meeting (AGM)

As the functions are always there, we see that predicting the future is one of the most important functions in the annual report. This prediction is based on a comforting interpretation of the past. The annual report practices some historic revisionism. These functions operate always into a temporal structure inherent to the comparison between an initial and a final situation. The analytical categories proposed by Genette (1966) are prone to take care of their temporal dimension.

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11.4.2 The Temporal Structure One interest of Genette (1966) resides in the temporal analysis. Any story contains a central part delimited in time, the diegese. But often, the stories are not told in a chronological sequence. These temporal manipulations are there to generate some narrative effects: explanations, justifications, anticipations, etc. Anticipations justify the present in showing its results in the future while flashbacks are used to provide the sources of an actual situation or the background of a character, for instance. Genette is also interested by the narrator: who is telling the story and when? The story can be told in advance (very rare), during the events happening, or after. The narrator can be omniscient, knowing the motives and secrets of everyone, or he can be relatively ignorant, telling only what his position in the story allows him to know or any other median position. In the studied annual report, time plays an important role. The report opens on a five-year summary. The chairman’s report is clearly structured around the notion of time and of the qualifications associated with the periods. The reference to the past as a benchmark (an initial situation) is always present. Results are better, the sales increased, while better profits and wider expansion are in view. The narrator travels constantly between the past and present to produce an impression of security to the reader. We have a narrator of the “guiding” category, although it is the chairman, the president, or anybody else. He is very knowledgeable. He can explain what happened in the firm broadly or in detail. Consequently, he creates an effect of confidence and security. We can see the interest of this type of analysis of annual reports. At a macro level, we will notice an underlying ideology of growth, implied in studies about income smoothing, for instance, driving this temporal structure. This underlying ideology of continuous growth (Piketty, 2013) can be traced in the political discourse and economical comments. This increasing process can be associated with the vision of the ever growing GIP as the expression of progress, a highly desirable thing in our societies. Bremond (1966) applies Propp’s analysis to a wider corpus of narrative texts. He connects the functions proposed by Propp into chains that he called elementary sequences (Fig. 11.3). These elementary sequences are then combined into more complex sequences that can be made of two or more elementary sequences. The possibilities are multiple. For Bremond, all these chains of actions are part of a process of amelioration or degradation. Annual reports repeat always the same structure. The fundamental functions are implicit in the text, relating to the idea of keeping the firm alive and generating value for the shareholders. Concepts like amelioration and degradation seem totally appropriate in the circumstances. Degradation will be less often the central process of the report as many observers think that the report generally presents an optimistic view of the situation. On the other hand, amelioration is very often at the heart of the report. As we previously said, most of the time, the future is presented as brighter while the present is already better than the past. However, one program often hides another one (Hasbani & Breton, 2013). Even in the

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Actualization (action to reach the goal)

191

Goal reached (success)

Goal missed (failure)

Virtual (goal) Absence of actualization (Inertia, barriers to action)

Fig. 11.3:

Bremond’s Elementary Sequences. Source: Breton (2009).

folktales there are always two levels. For instance, the princess is transferred as the object of desire. But the princess brings with her the power in the realm as I can’t remember this princess having a brother ready to take the throne.

11.5 The Apparent and the Hidden Programs The apparent program is given in the actantial structure as proposed by Greimas (1973). The traditional distribution will propose the prince as the subject and receiver of the object that is the princess. However, the story always starts with a political crisis resolved by a wedding that is the cause of the “they lived happy and had many children.” Psychoanalytically, the crisis can be interpreted as the apparition of the sexual desire for the adolescent that will lead to the discovery of the “object” that will satisfy this desire (Bettelheim, 1976). It is difficult to deny that folkloric stories reproduce this structure ad infinitum. There is a third level more immediately interesting for us. The princess, although a most appreciated gift, comes with the keys of the realm and the power to govern it. The capacity to govern is tested through the task the hero has to perform before reaching the princess. To govern means mainly to protect and the task is generally to eliminate a dangerous peril for the realm. So behind these magic stories of princes and princesses, there are stories of richness and power and dangers and protection that may impact at other levels. Therefore, the program is not univocal and has several layers. The fundamental message is the basis of what is called the American Dream, implying that anybody can reach the highest position if he has the intrinsic qualities leading to it. In their annual reports, pharmaceutical firms have all the goals of providing the best medicine for the lowest possible prices to save as much people as they can. However, in economically difficult years, their constant underlying program, create value for shareholders, has to resurface. Table 11.2 provides an example of analysis of the stated program of Pfizer over 20 years (only the last 10 ones are illustrated).

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Table 11.2: Initial State, Final State and the Position at the End of the Year. Years

Initial Situation

Final Situation

1998 Pfizer is in a very good situation

Success

1999

Success

2000

2001

2002

2003

2004

2005

2006 2007

Pfizer is in a better situation than ever. The success cannot be complete, however, without always helping people more Pfizer is finally world Pfizer is not satisfied being number one number one; the hero wants to help people Pfizer is world More people have access number one to Pfizer medicines. The hero helps humanity more than any other firm in the sector Pfizer is world The hero is ready for his number one new mission and is admired more than ever People from poor Amelioration of the countries don’t have access to medicines for access to medication people from developing countries. However, there is still much to do No universal access to The goal is approaching. health care More people have access to health care Lack of communication Following the open between the firm and the dialogue recently stakeholders enforced, the incomprehension has become to be part of the pass Adverse changes in the Pfizer adapted itself pharmaceutical industry successfully, but the situation is not over yet Pfizer experiences a period Pfizer creates more of rapid changes proprietary value Pfizer is criticized again Pfizer fulfills its mandate

Success/Failure

Source: Hasbani and Breton (2013).

Success in progress

Success

Success in progress

Success in progress Success in progress

Success in progress Success in progress Success in progress

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The deep structure is always there, but appears clearly in the years where the financial results are more uncertain. In the good years, the surface structure comes back and the philanthropic discourse takes the entire space. The analyzed annual report tells a story entering perfectly in the categories of traditional stories or of their modern transpositions. Doing that, the report mobilizes the instinctive capacity of the reader to recognize these structures and understand their functioning. The victory of the firm will leave the reader in the same state of satisfaction as the victory of the hero and make him ready to invest.

11.6 The Figures of Speech (the Lexis) To separate the lexis from the preceding phases remains artificial. A discourse is not a set of blocks that it would be possible to take at random and to decorate in a subsequent phase. In the discourse, all that is going alongside and the decoration is an integrative part of the very construction of the discourse. Our study of the lexis will follow the Rh´etorique g´en´erale of the Groupe m (1972). Some figures influence mainly the form while others have their main effect on the content. For instance, a figure altering the form would abbreviate a word, like writing “perks,” instead of perquisites. We will focus here on the figures altering the content. In a semi-technical language, like accounting, the form is supposed to be transparent on the content implying that the figures must be limited. The Groupe m proposes a series of figures of content. These figures modify the basic discourse to make it more interesting, more captivating, more convincing, in substance. In the chairman’s report, we find a “personalization.” The company is presented with human attributes. This report remains, however, relatively short. In the chairman’s report, covering 82 lines, we find a chronological effect and a series of hyperbole: earnings of almost $100 million, the highest in our history; this highly positive growth rate; uniquely positioned corporate brands; our management team has never been stronger; nor has it ever work better; etc. The chairman’s report is highly oriented toward the positive side, evoking the negative possibilities only to eliminate their effect and show how the company is strong. Figures of speech based on exaggeration and superlative will be very current in a report mainly in the president letter.

11.7 Hypocrisis The hypocrisis is the delivery or the staging. For an annual report, it would include an analysis of the images, of the proportions between the text and the images, of the differences in characters and paper between the narrative sections and the financial statements, etc. A complete analysis of all these elements would take a complete book. It is the same situation for the Internet sites. When we see lists of items like in the analysis proposed by Botosan (1997), we must realize that it is falling short of the goal which would be to account for the specificity of the medium. An analysis must

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specify at which level the information is and how easy it is to pick up. Then, it must specify also which information is easier to find and is proposed at the place of the other one.

11.8 Analyzing the Images This section is an illustration of what we can do with pictures through a semiotic analysis. Since the article of Barthes (1964), which was far from being conclusive, the approaches have been improved. Our study is done on annual reports of pharmaceutical firms. The next figure shows the cover of the 2006 Annual report of Merck (Fig. 11.4; Table 11.3).

Fig. 11.4:

Merck 2006, Cover of the Annual Report. Source: Hasbani and Breton (2016).

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Table 11.3: Application of the Semiotic Tools to the Story of Jamilla Colbert. Actantial Structure Destinator Merck Adjuvant Merck Her doctor Functional structure Initial situation “I felt so alone,” Jamilla recalls. “The doctors had no idea what more they could do for me.”

Object Health Hero Jamilla Colbert

Transformation Zolinza has definitely improved her life.

Receiver Jamilla Colbert and other patients Opponent CUTANEOUS TCELL LYMPHOMA Final situation “I have been blessed. There is hope out there.”

Source: Hasbani and Breton (2016).

Five pictures imply five stories. The fourth story will be described this way: For much of her adult life, Jamilla Colbert suffered from the disfiguring effects of cutaneous t-cell lymphoma. Most people have never heard of cutaneous T-cell lymphoma (CTCL). But for those who have this form of cancer, which affects the skin, every day is a challenge: pain and discomfort, stares from unthinking strangers, frustration that nothing provides real relief. It’s been 25 years since Jamilla Colbert noticed the first signs of CTCL – itchy skin, followed by growths on every part of her body that wouldn’t go away. Over the years, Jamilla’s search for relief led to one disappointment after another. From topical ointments and chemotherapy to full body radiation and surgical removal of tumors, nothing proved completely satisfactory. Although she got relief from some of these treatments, over time she still experienced symptoms of her CTCL. “I felt so alone,” Jamilla recalls. “The doctors had no idea what more they could do for me.” Then, two years ago, her doctor learned about a Merck clinical trial for the treatment of CTCL and immediately thought of Jamilla. She enrolled and had very positive results from treatment with the drug, called Zolinza. And while not all patients respond as favorably as Jamilla has, Zolinza has definitely improved her life. As Jamilla will tell you, “I have been blessed. There is hope out there.” (Hasbani & Breton, 2016, p. 7) We have the typical structure of a story with a negative situation at the beginning, then a transformation (amelioration, Bremond, 1966), helped by the

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adjuvant, leading to a much more satisfactory situation at the end. This happy ending is also the defeat of the opponent, the sickness and the resulting miserable life. Such a story is legitimizing the pharmaceutical sector in many ways. Firstly, by eliminating the sickness, the pharmaceutical industry appears to fulfill its social contract and to redeem its right to use public resources. Secondly, the industry is sending back to the society important resources that were not performing because of the illness. Therefore, the pharmaceuticals are rending back what they took. The sick person is the main agent of the recovery. Merck is just helping and bringing health to the people, as it is its mission. The picture has to be taken in a series. The five pictures show happy people. On the cover of the report, every one illustrates a story of somebody happy after having received effective treatment from the company. So, the firm is making people happy by giving them access to a healthier life. From the second picture, the eyes have to travel not only from top to bottom but also from right to left to follow the people. This is used to slow the eyes and make the brain register a more pregnant impression created by these images in series. Dark images are separated by brighter ones. The fourth image, those of Jamilla Colbert, is a bright one. The first things we see are the dolphins looking playful. Then immediately comes Jamilla looking happy. The simple existence of this picture is a statement by itself because her sickness was altering her appearance and provoking reactions, “stares from unthinking strangers.” Now, there is nothing to stare at and she can appear in full light on the cover page. A publicity picture is constructed in such a way that the eye will focus on the surfaces where the key information is placed (Joly, 2009). For P´eninou (1970), there are four principal configurations in the construction of publicity pictures. The focalized construction places the product where all the lines are converging. The axial construction places the product at the center of the picture. The construction in depth integrates the product into a scene although it is placed at the first level. Finally the sequential construction places the product at the end of the path the eyes are following. Normally, in our societies where we read from left to right the look will follow a kind of Z form, starting at the left top to scan the top then following a diagonal from the top right to the bottom left and then going to the bottom right (P´eninou, 1970). We must also consider the light because it will play a role in directing the attention. The fact that we have a high angle or a low angle shot also influences our perception of the image. Those findings had been applied (Stones, 2013). Following Levie and Lentz (1982), illustrations have four fundamental functions (Table 11.4). In marketing, all these functions lead to the formation of a positive attitude toward what the firm is selling. In the images we present here, the affective function is quite prominent, provoking emotional response. The term “affective” refers to empathetic, meaningful design that intents to evoke affect. Carliner (2000) added the term “affective” to a framework for information design, referring to it as “designing the communication product for its optimum emotional impact.”(…). The

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Table 11.4: Functions of Text Illustrations. Attentional

Affective Cognitive

Compensatory

1. attracting attention to the material 2. directing attention within the material 3. enhancing enjoyment 4. affecting emotions and attitudes 5. facilitating learning text content via a.improving comprehension b.improving retention 6. providing additional information 7. accommodating poor readers

Source: Hasbani and Breton (2013).

terms then relate strongly to products that are either bought or selected/used over key competitors, with positive affection playing a role in that selection criteria or continued use. (Stones, 2013, p. 87) These effects will be felt through a certain way of “reading” the pictures. In our case, the image is clearly made to be read following the “Z” pattern (Fig. 11.5). The first thing in the spot is the face of the researcher. We can describe his jocundial smile as expressing his satisfaction. Then we go down and see, from the smock he is wearing, that he is a scientific. If we do not understand at first glance, it is written on it. And, finally, we go toward the computer that we recognize mainly by the keyboard. The legend is: “It’s wonderful to make a difference in someone’s life.” The picture is also slightly low angle giving the superior place to Doctor Hess, the great researcher. We are at the bottom of the picture and, at the top, the Doctor is looking up, inside himself in fact, for new great ideas that we are too low to conceive but that will have wonderful effects on our lives (Table 11.5). Here again, it is about having fulfilled the mandate given to the industry to help people recovering health and spreading this goodwill as widely as possible. To end this subsection about semiotics, we may discuss a little bit of what is semiotic and what it is not. It is known, the linguistic limits itself to the sentence: it is the last unit she believe to have the right to work on; if, effectively, the sentence being an order and not a series, cannot be reduced at the sum of the words composing it, and constitute consequently an

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Fig. 11.5: Image of a Satisfied Doctor after Having Changed the Life of One Patient. Source: Hasbani and Breton (2016).

original unit, an enounce, to the contrary, is nothing more than the succession of the sentences that make it. “The sentence, says Martinet, is the smallest segment perfectly and fully representing the discourse.” The linguistic cannot give to itself a superior object than the sentence, because, over the sentence there are only other sentences: after having described the flower, the botanist has no business describing the bouquet. (Barthes, 1966, p. 3) (Our translation) Barthes expresses here the famous dichotomy proposed by Saussure between the code and the speech. Limited to the sentence, the Saussurian linguistic study, exclusively the code and the characteristics of the code are totally included in the study of the sentence. For Barthes, the linguistic is the code less the speech. Having taken this epistemological position, the linguistic pretends that the understanding of the speech, the discourse, is reducible to the understanding of its code. Then, the message of Barthes is that the discourse is not reducible to the code and must be studied by itself.

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Table 11.5: Application of the Semiotic Tools to the Story of Doctor Hess. Actantial Structure Destinator J&J Adjuvant Doctor Hess J&J Functional structure Initial situation Many have an uneven waist, asymmetrical shoulders, or a large hump. Some are in such great pain that they’re barely able to walk.

Object Health Hero Doctor Hess

Receiver Unidentified patients Opponent Scoliosis and other spinal deformities

Transformation “The vision we have is to use Harmonic technology as the cornerstone of a growing energy franchise that will offer multiple benefits to surgeons and patients in any procedure.”

Final situation “It makes a difference in the care I can provide for my patients.”

Source: Hasbani and Breton (2016).

However, it is obvious that the speech itself (as an ensemble of sentences) is organised and that through this organization it appears as the message of another language, superior to the language of the linguists: the speech has its units, its rules, its “grammar”: over the sentence and although made uniquely of sentences, the speech must be the object of another linguistic. (Barthes, 1966, p. 3) (Our translation) Barthes is using the linguistic metaphor to describe the new science, but he is not really projecting the categories of the structural linguistic on the speech. Others, coming from different horizons can have different ways of classifying things. Schaff (1969), coming from the anthropology and the philosophy of language, presents the language as a way of understanding our environment. From this, we can imply that a language is not only a code that we share with others, it is a way to cut pieces in the substance of the content. But, as Fiol said, the semiotic has the project to encompass every symbolic activity. The signs used in these activities don’t share all the same characteristics. The linguistic sign is separated from the referent while the iconic sign cannot be separated from its referent in the same way as this referent is already in the sign.

11.9 Summary All this leads us to the conclusion that if there is something to be kept in the agency “theory” is the opposition between those giving the mandates and those

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acting as agents. This is true between the shareholders (taken altogether) and the managers; but it is also true between the firm and the society. In this context, we have many levels of asymmetry of information and everyone is trying to take advantage of it. The firms, i.e., the managers and key people on the board, may have good reasons for agreeing to expense huge amounts to create and disseminate those annual reports that nobody reads. So, if they can learn how to make effective reports, the other side may learn how to decode it. What we are proposing here is an extension of the works on the numbers: earnings management, income smoothing, big bath accounting, etc., to the rest of the report.

Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Explain rapidly what is the “content analysis” method? What would be the differences between analyzing a text and an Internet site? Discuss some of the limitations of the content analysis method. Define the “readability analysis” method. Discuss the differences, if any, between readability and understandability. What are the main ideas behind the indexes used in readability analysis? Define the “semiotic analysis” method. How the characteristics of every element of the basic communication scheme may impact on the results of the communication process? What are the main categories of Aristotle’s rhetoric? What is an actantial structure and what is the difference between an actor and an actant? What is a “function” in a text? How can such analysis lead us to the conclusion that annual reports are storytelling? How are images built?

Chapter 12

Manipulating and Lying Many studies have focused on accounting manipulations (Stolowy & Breton, 2004), although the word manipulation raised some contestation. If we remember the phases of a crisis described by Coombs (1999), the accounting profession, despite the scandals having shaken it during the last decades forming a crisis, is at the second stage and never, to our knowledge, went over denial.

12.1 Accounting Manipulations The different techniques for manipulating accounts are well known. In the literature, they have received various names: earnings management, income smoothing, big bath accounting, in the UK window-dressing, creative accounting or, in the US accounting shenanigans. If we start from the principle that the agents do not see markets as efficient, manipulating information becomes a privileged way to operate a transfer of wealth between categories of agents in the market or stakeholders in the firm. These transfers come from the usage of management’s discretion to make accounting choices or to design transactions. These transfers will operate between the firm and the society, political costs, funds providers, cost of capital, or managers’ compensation plans. In the first two cases, the firm is the beneficiary from the transfer, while managers benefit in the third one (Fig. 12.1). The possibility of such transfers flows from the basic asymmetry of information between managers and the other categories of stakeholders. The literature proposes two bases for judging the performance of a firm. These bases will become the target of accounts manipulation: the earnings per share and the debt equity ratios (Breton & Taffler, 1995). Earnings per share can be modified by adding or removing certain revenues or expenses (modification of the net income), or by presenting an item before or after the profit number used to calculate the earnings per share ratio (classificatory manipulation). Stolowy and Breton (2004) propose a general framework for understanding account manipulations (Fig. 12.2). A Postmodern Accounting Theory, 201–213 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78769-793-520181012

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Fig. 12.1:

Principles of Accounts Manipulation. Source: Stolowy and Breton (2004).

Science and Politics We have to first make a distinction between a scientific process and a political process. A theory, even when proposing “laws” resulting from systematic observations, tries to explain and predict from the acquired knowledge of the object what its behaviour will be. A standard is a choice made by people; therefore a political choice in its most fundamental meaning tries to prescribe the behaviour and not predict it. Obviously, when distorting the meanings of the concepts, one can pretend to predict a given behaviour as it is prescribed, as we can predict that somebody will stop at the red light (maybe) not from an observation of the natural behaviour of the subjects, but from the knowledge of the convention. In accounting, the confusion between those two processes always persists. Accounts manipulation remains in the limits of the law or the standards. Outside these limits we have fraud. Here, we are discussing far-fetched and abusive interpretations of the laws and the standards. “Fabricating false invoices to boost sales figures is fraud, while interpreting consignment sales as ordinary sales is an error” (Stolowy & Breton, 2004, p. 11). However, the frontier between interpretation of the standards and fraud is not so easy to trace. Furthermore, the intents of the preparer of the report must be taken into consideration. So, if the distortion is significant and purposely done, it is a manipulation even if remaining in the limits of the standards.

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Fig. 12.2: A Proposed Framework for Understanding the Practice of Accounts Manipulation. Source: Stolowy and Breton (2004).

(…) deliberate deception in financial reporting is a form of fraud. In other words, the distortion of accounting numbers is a cynical exercise by corporate management to mislead shareholders, other stakeholders and protectors. (Lee, 2006, p. 423)

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For Lee, it is clearly purposeful and the effect of a system where self-interest has taken priority over public interest that is supposed to be the goal of the standards-setting process and of the professions. Lee wonders also that this possibility to “fool their auditor so persistently” remains at the turn of the millennium. This question, quite relevant, opens a debate on the role and the practices of auditors. Auditors are not looking for the highest level of truthiness but for the lowest level of risk. Lee (2006) reminds us that the constant increase in the quality of the disclosure had been the results of governmental actions. But every new regulation raises a movement to find a way to pass around it. For him, auditors had been too busy to enlarge the power of their corporations to take their responsibilities seriously. Therefore the corporations engage in techniques of “image management” not far from “earnings management.”

12.1.1 Earnings Management To better understand earnings management, we have to consider its objectives. Firstly, the firm will try to avoid being spotted as exerting a market influence (Watts & Zimmerman, 1986). Then the firm will try to delay environmental regulation and minimize its income tax or other possibilities involving a relationship with public authorities of many kinds. The second objective is also to the benefit of the actual shareholders. If the cost of the new investments in the firm is kept as low as possible, the share of the profit going to the actual shareholders is as much increased.6 Under this objective we will have all the financing and refinancing possibilities. This category of objective is the only one implying maximizing the accounting numbers. Normally the compensation contract defines a zone where the compensation is maximal (Healy, 1985; Lee, 2006). The manipulation will keep accounting numbers in this space. However, this was true with bonuses. As compensations are sliding toward share options, the image had been altered. For instance, a CEO can receive hundred thousand dollars, even millions, of special compensation in options although the accounting result may be negative. In fact the direct tie between accounting numbers and compensation has loosened through time and, in consequence, the model of Healy had become largely even if not completely obsolete.

12.1.2 Income Smoothing There are different kinds of smoothing recognized in the literature. However, some of them are more important in practice. Many tests of the smoothing (Eckel, 1981; Imhoff, 1977, 1981) are based on the idea that the variability of the results numbers must increase as we go down the results statement. If the net profit has a lower variance than the sales figure, it must be the result of a All this depending on the “legal” organization of the categories of shares.

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smoothing of some kind. That is one of the methods that had been proposed to test this hypothesis. Some other researches have considered that the target for the profit of the year is the one of the preceding year. Consequently, any change is an attempt at smoothing. Many more sophisticated methods have been derived from this one. The papers on smoothing have almost disappeared since 2000. This specific concern had been replaced by others in the field of account manipulations. The effect of the replacement of national standards by IFRS (International Financial Reporting Standards), and the quality of the numbers produced with these new standards have been at the center of the research since 2000. For instance, the question of the compared easiness to manipulate accounts with the old and the new standards had taken a large place.

12.1.3 Big Bath Accounting There had been a few studies on this particular kind of manipulation. The intuition comes from Healy (1985) when he says that if the results were too low under the lower limit of the bonus area, the reaction would be to lower it more by taking a series of expenses that had been delayed in provisions in the balance sheet. Such an operation will allow cleaning the provision accounts for subsequent use in better years. The intuition had proved conformed to the experience even in another situation. Pourciau (1993) found evidence that a new CEO will clean the accounts by creating a big loss in the first year that will be attributed to his predecessor. In a more general experience point of view, almost every time a new government is elected, the new person responsible for the finance declares that his predecessor has hidden many expenses and that the result of their first year will be lower than what had been promised during the campaign. Another variation is when a large negative event happened. For instance, Bombardier made a huge write-off after September 11 to clean a lot of old unfinished projects and unsold material. They said, and the analysts after them, that it was the effect of September 11. Therefore, we have three situations apt to encourage a big bath accounting situation for a firm: already low results, change of CEO, or a particularly negative event in the environment. We also have the case of changing control for the governments.

12.1.4 Creative Accounting Research on creative accounting are differentiated from those made in the US by their proximity to the practice. Many books had been published in the UK: Griffiths (1986, 1995), Jameson (1988), and the famous one of Terry Smith, Accounting for growth (1992), subtitled the book they tried to ban. These books are not the results of any academic research, but they tell well-documented stories about specific firms having “cooked their books.” In the academic field we have Tweedie and Whittington (1990), who examined some of the schemes denounced mainly by Smith. Breton and Taffler (1995) tested the reactions of financial

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analysts facing manipulated accounts. They found no reaction at all, what they expected and explained by the structure of relationship between investors, firms, financial analysts, and financial journalists.

12.2 The Efficiency of Manipulation Since the agency theory, the belief in accounting research is that managers are the bad guys trying to operate transfers of wealth from the shareholders to their own accounts.

12.2.1 Gains and Losses From Accounts Manipulation Firstly, we have to separate actual shareholders from potential shareholders. If the returns look better and/or the risk looks lower, the rate of return asked by new shareholders will be less. Therefore they will pay more for the share presenting a given level of return. Who will benefit from that? Not only the firm but also the actual shareholder, seeing the market value of the shares increasing. Therefore, managers and actual shareholders will benefit from manipulating accounts. The categories of players asking for manipulations are far more important than just the managers in their opposition to shareholders. Many stakeholders are touched, from the employees to the whole society. Manipulating accounts is then a social question (Breton, 2016; Lee, 2006).

12.2.2 Particular Studies The interest of some categories of participants having a word on the establishment of the financial statements to bias accounts has been studied. The CEO had been the target of such investigation as the agency theory points at managers as being the bad guys in the manipulation game. However, the preceding tables show that many others are benefitting, at least on the short term from this activity. Dechow and Sloan (1991) analyze the CEO in his last year of office to detect manipulations of the R&D expenditure in order to increase the benefits. The rationale for such behavior being: A detailed analysis of the incentive compensation plans in place at Merck & Co indicates a well-defined link between CEO incentive compensation and accounting-earnings performance. Furthermore, because executive retirement benefits are based on the compensation received in executives’ final years, departing CEOs face even greater incentives to increase their earnings-related incentive compensation in these years. (Dechow & Sloan, 1991, pp. 87–88) Pourciau (1993) had some positive results when analyzing accounting results and nonroutine executive changes. However, the ensemble remains inconclusive. Others (DeAngelo, DeAngelo, & Skinner, 1994) discussed the possibility of a relationship between the financial performance of the firm and the level of manipulation made through accounting choices. They found very weak although

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significant results. The numbers of possible factors possibly explicating the results temper the strength of the conclusions. Beneish (1997) compares the behavior of two samples of firms. The first one is constituted of firms openly recognized as GAAP violators and the second is constituted by companies having large accruals, which is recognized as a characteristic of the GAAP violators, although these had not been pursued or exposed as such. He found that financial statements can provide useful information if correctly analyzed, and that market participants underutilize the financial statements information which can also be concluded in a way from the works of professor Briloff.

12.3 Far-fetched Interpretation or Lies We have made a distinction between accounts manipulations and fraud. A fraud consists in doing something that is clearly against the law. Fraud in general is “an act of deception carried out for the purpose of unfair, undeserved, and/or unlawful gain, esp. financial gain” (Humphreys, Moffitt, Burns, Burgoon, & Felix, 2011, p. 585) Usually, the accounting literature recognizes three factors that are fraud predictors in an organization: opportunity, incentive/pressure, and attitude/ rationalization (Murphy, 2012). Managers “cooking the books” are buying time: (a) time before the problem appears clearly to anyone and (b) time to redress the situation, as like gamblers they always believe the situation will be straightened if enough time would be allowed, which constitutes a motivation. That is where the rationalization enters into consideration. In the first case, by delaying the public knowledge of the bad news, they smooth the shock assumed by the shareholders. In the second case, they avoid the iceberg and save the shareholders. It might be possible or only an expression of a huge managerial hubris (Wiltermuth & Flynn, 2013), which would be in line with the rationalization. There are some research about the fact that the auditor’s report will not include a provision for a well in sight bankruptcy. They do that because they don’t want the “rats to leave the boat” too fast jeopardizing any chance of recovery, if there is any. Obviously, if the markets are efficient, all that has absolutely no importance as the relevant information has been already included in the price since long. One thing is certain, there is no positive (in the sense of coming from positivism) way of seeing the situation as opposed to a manipulative one. In the absence of any benchmark, it becomes very difficult to discriminate between honest and dishonest presentations. Therefore curtains are there as much to make windows prettier as to hide what is inside. That is the main internal contradiction in the concept of window dressing. Lee (2006) would say, based on intention, that any manipulation is a fraud at the end of the day even if it is not considered such by the law. Therefore, shareholders will increase control over managers to limit account manipulations (Garcia-Osma & Guillamon-Saorin, 2011). That is the message of the agency theory. Unfortunately, as there is no “real profit,” it is difficult to evaluate the importance of the deviation included in the presented profit and

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consequently the trust we can invest in the financial reported numbers. Moreover, as we said earlier, shareholders can also benefit from manipulation. In the example of the restatements, the difference is difficult to make. In the US, for instance, the Securities and Exchange Commission (SEC) has issued rules to frame the information following such a decision. The companies doing restatements declared it was an error, a bad interpretation of the standards, or somebody involved in fraud within the firm. Sometimes it sounds unbelievable, but it is difficult to formerly contradict such declaration. We all know how practical it can be to restate the financial statements. In a given year you forget to include an expense; so the profit is higher. Three years after, the question of this expense is raised. Then, you send it back in history with no effect on the financial statements, except for the opening balance of the capital section. Companies do that all the time with or without a restatement. If you take a 10-year profit table in an annual report compared with the original financial statements for these 10 years, you will often see quite huge differences with no explanations. Therefore, it may be interesting to see if we can detect lies in financial statements, particularly in Form 8-K that must be filled in case of a restatement.

12.3.1 Detecting Lies The degree of truthfulness of a discourse has long been among the main focus of the philosophy of language. Logic has developed many formulas to assess the reliability of sentences (Kant, 1970) although remaining quite abstract. Lying is traditionally defined as, “(…) say something that you believe to be false with the intent to deceive about what you say” (Fallis, 2011). Lying in general does not always have this voluntary deceptive aspect. One can lie to somebody because what he asks for is not of his businesses. We think of utterly truthful persons as a hazard, and for lying, we all lie all the time. That there is a gulf between what we think we ought to do and what we do in fact is hardly a novel observation; the world is a wicked place. (Mothersill, 1996, p. 913) But lying is the oil that allows the social intercourse to continue; it is the result of the continual fight between the self and the society. In other words, we cannot appear in society without looking for a certain degree of consensus implying hiding a part of what we feel essential to reach such a “temporary consensus” (Goffman, 1973). For him, we all wear a mask all the time. The self that is presented to others is a construction: In this meaning and as long as it represent the idea that we are making of ourselves – the role that we try to assume – this mask is our real self, the self that we would like to be. In the long term, the idea we have of our role becomes an integrative part of our personality. We are born as individuals, we assume roles and we become persons. (Park, quoted by Goffman, 1973, p. 27)

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Therefore, from the fact that we accept that most women we encounter would wear makeup, which is generally considered an amelioration of the person before any presentation in public, we must admit that often lying is a quotidian and normal activity and must be discussed without any false reference to morals. Nobody will go for a job interview without wearing convenient clothes, having his/her hair well placed, and trying to look at his/her best. There are research trying to determine if people looking good have better opportunities in life. Their results suggest they have. Other researchers have studied lying in a business context. Referring to the job interview discussed above, it seems that 40%–70% exaggerate on their resumes (Williams, Hernandez, Petrovsky, & Page, 2008). There is, however, a difference between arriving at the best presentation of the self and lying to others in order to take advantage of them. This is also a part of the definition of lying. Methods to evaluate the truthfulness of enounces had been developed for the spoken language. The lie detector is inferring the truthfulness of enounces through the physical reactions of the enunciator registered by a machine. Ekman (2010) used a similar approach associating observable reactions with telling the truth. Social psychology uses emotional markers to identify deceptive messages (Hobson, Mayew, & Venkatachalam, 2012). A variety of methods are available to assist professionals with the task of deception detection, but few are relevant to text-based communications so prevalent today. Additionally, these approaches, such as Computerized Voice Stress Analysis, Scientific Content Analysis (SCAN), Content-Based Criteria Analysis (CBCA) (…). (Fuller, Biros, & Wilson, 2009, p. 695) Deception has been studied by researchers from the various fields of social sciences (Buller & Burgoon, 1996; McCornack, 1992), psychology (Masip, Garrido, & Herrero, 2004), philosophy (Chisholm & Feehan, 1977; Mahon, 2007), and even semiotic (Klinkenberg, 1996). Sutherland (1983), among white-collar crimes, lists a series of lies happening within organizations: They include misrepresentation in the form of stock market manipulations, fraud in sale of securities, enormous inflation of capital, inadequate and misleading financial reports, and other manipulations. (Sutherland, 1983, p. 153) Deception is quite likely to occur in the context of restatements, supposedly resulting from errors or lack of information. The multiplication of these restatements, during the first decade of the 2000s, casts a doubt about their purely random source. The study analyzes the information provided in Form 8-K and the press release (8K_PR) by applying the information manipulation theory (IMT) (McCornack, 1992, 2008). To investigate whether publicly held companies

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manipulate restatement information released in 8K_PRs, through the quantity, the quality, the manner, and the timing of information, we propose an index based on SEC guidelines and previous literature on disclosure. Our model may help investors and regulators to discriminate manipulative disclosure and to improve the guidelines for disclosing information related to restatements in 8K_PRs.

12.3.2 Restatements: Form 8-K A firm has a duty to make corrections if the statements are “discovered to have been false and misleading from the outset, and knows or should know that some persons are continuing to rely on all or any material portion of the statements” (SEC, 1979). Before 2004, a company could announce restatements in different ways (Palmrose, Richardson, & Scholz, 2004; Scholz, 2008). At that time, there was no regulation. In August 2004, the SEC required companies to announce the restatement in the Form 8-K under Item 4.02 within four business days of discovering that previously issued financial statements should not be relied upon. By regulating restatement announcement (RA), the SEC emphasizes the importance of transparency and timeliness (Jorgenson, 2004). Precisely, it stresses the importance of “balanc[ing] investors’ needs for timely access to information about the companies (…) about which they are making investment decisions with the time needed by companies to prepare accurate and complete information” (SEC, 2004, quoted by Jorgenson, 2004, p. 2). Despite the SEC regulation, there is no requirement to report the restatement’s impact (Dorsey & Whitney, 2004). The information provided in 8K_PRs about accounting problems varies widely (ACIFR, 2008; Palmrose et al., 2004). A company may indicate that the restatement is possible but the impact on earnings is uncertain, or that the restatement is necessary and quantify the changes (Palmrose et al., 2004, p. 61). It appears that companies have certain latitude in the information disclosed in 8K_PRs. 12.3.2.1 Transgression of the maxims In general, literature attempts to classify the various methods of manipulating information into two groups: commission, consisting in voluntarily providing false information, and omission. Commission takes three different forms: exaggeration/minimization, ambiguity, and falsification. Omission occurs when the speaker induces the receiver to believe something that is false by omitting some parts of the story. This could take three forms: half-truth/secret, diversion, and collusion. Most researchers examine one or two methods (Hubbell, ChoryAssad, & Melved, 2005; McCornack, 1992). In 1992, McCornack developed the IMT that consolidates within a single theory four primary ways of manipulating information. Grice (1989) offers four maxims describing the cooperative principle used as the basis for IMT, proposing that messages are perceived as deceptive when they discreetly violate the following conversational maxims:

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• Quantity: the amount of information needed to communicate between the sender and receiver, • Quality: the veracity of information, • Manner: the clarity of information, • Relation: the relevance of information. These maxims have been applied in an organizational context (Fisher & Downes, 2008; Hubbell et al., 2005) and in the text-based communications (Fuller et al., 2009). Some studies have analyzed the relationship between the quantity maxim and accounting manipulation (Hollander, Pronk, & Roelofsen, 2010; LapointeAntunes, Cormier, Magnan, & Gay-Angers, 2006) or the quality of information and accounting manipulation (Holder-Webb & Cohen, 2007; Lapointe-Antunes et al., 2006; Shaw, 2003). These studies investigated only one or two maxims from the IMT. Since the SEC issued the restatement disclosure rules in 2004, researchers found more negative stock price reactions when restatements are disclosed prominently in the headline (Files, Swanson, & Tse, 2009). Other studies find that the market reaction to RA in Form 8-K depends on the characteristics of the restatement (Feldman, Livnat, & Segal, 2008; Hennes, Leone, & Miller, 2008; Scholz, 2008). More negative returns are associated with restatements involving fraud, affecting core earnings, being of high magnitude, or imposed by auditors. Researchers also examined the determinants of the timing of a firm’s decision to release an earnings restatement (Badertscher & Burks, 2011; Myers, Scholz, & Sharp, 2013). For example, Myers et al. (2013) suggest that more severe restatements tend to be disclosed in a less timely manner. In particular, companies, having larger income-decreasing restatements, restating to correct lease accounting, for the second and third time, or those having more aggressive ex ante reporting practices, would delay issuing a Form 8-K. In substance, accounting literature has looked at how restatement characteristics could influence the market reaction and the timing of disclosure. Restatements may be induced by the SEC or the external auditor. The number of such investigations increased by 65% between 1991 and 2000 (general auditor office, thereafter GAO, 2002). If the SEC allocates resources to impose a restatement, it can be assumed that the situation is serious (Hee, 2008). Files et al. (2009) find the probability of litigation to be higher when the SEC initiates the restatement. Some studies use a SEC restatement notification as a proxy for poor quality financial statements (Richardson, Tuna, & Wu, 2002; Wu, 2002). The external auditor is responsible for notifying the company of the presence of material errors and/or frauds. The survey conducted by Graham et al. (2005) shows that approximately two-thirds of respondents (CFOs) admit delaying disclosing bad news in hopes of improvement before the next required report. Previous studies show that restatements initiated by the external auditor induce (1) a greater increase in the cost of capital (Hribar & Jenkins, 2004) and (2) a sharper decline in the market price (Palmrose et al., 2004).

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12.4 Testing the Truthfulness of Statements In the recent decades, methods to test the truthfulness of spoken statements have been developed. We all know the polygraph, which effectuates a comparison between the content of the discourse and the physical reaction of the speaker. Ekman (2010) developed a method to triangulate the content of the speech with the facial and body attitudes of the speaker. However, such models are difficult to apply to written material. Previously we had graphology, but with the invasion of computers, we have little handwritten material these days. So, what to do with written statements? The FBI, in the US, has developed a computer program to analyze the written answers of an interrogation to detect certain elements prone to indicate truth or lie. However, it is not sure if it can be applied in other contexts. McCornack’s method is supposed to apply at large, in the day-to-day life. Is it the case for specialized sectors? Moreover, McCornack tested his model in quasi-experimental settings. Therefore he had the control of the situations he proposed to his subjects and of the messages he sent to them. Are the results of McCornack exportable at large? It remains to be demonstrated through time and studies. Other methods have been proposed to detect deception. Many of them had been developed by or around the judicial system. One, proposed by Humpreys et al. (2011), is the Criteria-Based Content Analysis following 19 criteria based on the idea that an experienced situation will not be told the same way as a fantasy. They also report a number of “methods” or proceeds used for the same purpose. The problem is the use of the words: hypothesis or theory, where there is, at best, only a wild guess about the structure of a phenomenon. It is easy to say that the experience and the fantasy will differ; it is less obvious to explain how that may be applied to other situations.

12.5 Summary As accounting is reputed to provide information for decision-making purposes, the quality of the decision is dependent on the quality of this information. Accounting is not the only source of information entering into account in these decision processes. The part accounting information takes in these processes is still debated. Despite this uncertainty, because the decisions that are arguably taken from accounting information are of the economic kind having considerable potential effects on the quality of life of many people, accounting numbers and reports have become stakes in the continuous economic struggle of the firms to survive. Therefore, a theory of accounting might consider the possibilities for manipulating information and the effects it can have. In fact, proposing bias numbers constitutes a way to use accounting and therefore must be an integrated part of such theory.

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Questions 1. What are the general goals in manipulating accounting numbers? 2. What are, as appearing in the literature, the different types of account manipulations? 3. What is the difference between window dressing and fraud? 4. What can be the specific objective for manipulating accounting numbers? (Which numbers are the main targets, and why?) 5. What are the types of income smoothing? 6. Do you believe it possible to practice “natural smoothing”? 7. What is “big bath accounting”? 8. Is accounts manipulation benefitting only to managers? 9. Do you believe the extraordinary increase in the number of restatements seen lately can be purely random? (Refer to the standards for being authorized to make a restatement.)

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Conclusion Normand Baillargeon (2005) wrote a very interesting book titled Petit cours d’auto-d´efense intellectuelle (A small course in intellectual self-defense). In the same spirit, we wanted to deconstruct accounting productions in order to show its components to those preparing the reports, but mainly to those using it. For that, we privilege a postmodern position (as it is not an approach) consisting briefly in doubting everything we believe to know and questioning any evidence we have learned as secular truths. Consequently, we are not searching for a consensus or a reconciliation of academics and practitioners, for instance. Our goal is to treat accounting as any other discipline of its kind and, while passing, to clearly define this kind. To make this epistemological tuning of accounting, we have to be clear about our own epistemological position and the theory of knowledge we believe is the only tractable one taking into account the actual state of the science. As these elements have been very lightly treated in traditional “accounting theory,” we review the preceding handbooks to schematize their vision of the question. This vision ignores the scientific process in general and what theories, paradigms, knowledge, etc., are. Consequently, they have blindly followed the traditional authors in considering the standards-setting process as a theoretical system. The adjunction of a “conceptual framework” as a smoke screen hiding the poverty of the basic conception has not helped to raise the level of the discussion. Another important classification relates to the social organization and the flowing hierarchies. The accounting profession is not a private affair but a public good as it is ruled by the governments. These hierarchies established that firms are social institutions and have to account for their realizations and the fulfillment of their social contract. Therefore accounting, defined as the activity of providing accounts, exists at multiple levels in the society and constitutes a crucial mechanism in a chain of delegation and corresponding accountability levels. In this spirit, we devoted some space to the dismantlement of some “theories” imported in accounting with huge damages like Hofstede’s or Kohlberg’s “theories.” We also had to battle with the concept of normative theory that had been used for years as a justification for calling standards theories. Accounting is a social institution by many aspects. Institutions are involved in a continuous fight against all the other institutions to obtain as much social

A Postmodern Accounting Theory, 215–217 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78769-793-520181013

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resources as possible. To do that, every institution has to keep a good level of legitimacy, which means to look important, if not essential, to the citizens, the ultimate locus of power in our societies (at least in theory). One way of doing that is to pretend to enter in a group of more prestigious and legitimated institutions. Teaching accounting, after becoming a profession, which means associating itself with old and essential activities like medicine, is entered into universities associating it with knowledge instead of technics that are taught at lower levels. Then, in the universities, accounting tried to be associated with mathematics, which is used all the time in “pure” sciences. So administrative “sciences,” being perceived as being in the middle of the pure and human sciences, have maneuvered to be associated with pure sciences through the use of mathematics. In fact, the kind of accounting that is taught at university is destined to help students pass their exams and enter into professional bodies. This is an almost pure technique and has little to do with the university. We might teach how to decode the accounting reports and not be fooled or misled by the financial information or even intoxication they may carry. The theory is the first component of science. Therefore, after having cleared the field, we will search for some theories for accounting. We do not believe there must be only one as we read often in accounting journals. To do so, we had to define what accounting is and to separate, in the accounting language, the code is from its uses. After having described accounting as a code, it became possible to describe the angles its “linguistic” will be able to take. These angles are firstly purely devoted to the mechanic of the language, but then we will take the sociological, psychological, and communicational angles to describe the accounting phenomenon. That leads us to the decision-making process and what we know of it. From a sociological point of view, accounting is used to convince the citizens of the relevance of certain decisions, like privatization, for instance, that are not always in the general interest. One of the main instruments to perform this task is the notion of profit that is presented as the alpha and omega of any organization in the society. From a psychological point of view, we will see how the shadow of the homo oeconomicus covers the accounting field. This concept eliminates the real human being from the definition of human and therefore transforms him into a machine. This constitutes a very bad start for understanding the decision-making process. The theories of decision are very meager and say little about the human processing of information. This fundamental weakness comes from their filiation from economics, a domain where establishing theories have nothing to do with human behaviors. Therefore, the incoherency of the assumptions eliminates all verisimilitude from these “propositions.” To end, we discuss another myth which is to “present fairly” the “financial situation” of the organization. In the first part, we see that, even in the best of cases, such a thing is impossible as there is no place where can be found a benchmark for the financial situation of the organization. So it is purely a construction. Secondly, we have seen that the accounting we know is not really “fair” and carries the interests of specific groups in the society, while pretending the

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contrary. So, in the last chapters, we consider how accounting numbers can be manipulated to manipulate the users and bring them to decide along the predetermined lines. This handbook is far from being definitive. It merely opens new doors without exploring the interiors. We can suppose that a better integration of accounting in the university and an equilibration of the system of recognition in the institution will lead to some better understanding of what can be accounting theory.

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Index Accounting double-entry, 29, 30, 165 intangibles, 83–84, 94, 109, 124 manipulation(s) big bath accounting, 201, 205 creative accounting, 201, 205–206 earnings management, 204 income smoothing, 201, 204–205 method, 45, 54 practices, 36 procedures, 45, 80 psychological aspects, 135–152 reports, 2, 39, 56, 150, 159, 184 research, 2, 21, 33, 45, 126, 142 sociology of, 115–130 theory. See Accounting theory Accounting theory conception of, 49 traditional vision of, 21–42 Adverse selection, 3, 40, 61, 62 AICPA. See American Institute of Certified Public Accountants (AICPA) American Institute of Certified Public Accountants (AICPA), 29, 65, 66, 67, 82 Argumentation, 186 technic, 23 Capital accounting, 83–94 intellectual, 84, 86, 95 political, 86 scientific, 86 social, 84–87 symbolic, 85, 86 CAPM (Capital Assets Pricing Model), 133

Communication functions, 136 scheme, 77, 185 Conceptual framework adjunction of, 215 approach, 28 financial information, 30 international, 39 self-designated, 55 Conservatism, 26 Constructivism, 53, 57–59, 128 Control cost, 136 economy, 102 Fordism, 136 people, 135–136 psychology, 133–135 shareholders, 176 Taylorism, 136

Decision citizen, 104–111 game theory, 160–162 governmental, 173–175 making. See Decision-making process theory, 30 Decision-making process accounting numbers, 67 basis for, 59 conceptions of, 154 individual, 115 political, 153 rational, 155 Deconstruction, 1 Discourse degree of truthfulness, 208 ideological, 104

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Index

multitude of, 68 parole, 67 philanthropic, 193 religion, 15 social, 130 Economics classical theory, 11 property rights, 11 utility curve, 155 Epistemology, 18, 32, 34 Ethics, 43, 101–103 Externalities, 100–101

Information manipulation theory (IMT), 140, 209, 210, 211 International Financial Reporting Standards (IFRS), 8, 26, 110, 137, 205 Kohlberg theory, 33

Historical cost, 25 Hyperreality, 14, 105, 138, 175

Language code, 74 discourse, 54, 76 jargon, 71, 73, 75, 77, 95 natural, 68, 71, 76, 77 parole, 67 semi-technical, 72, 73, 74, 193 technical, 73 Legitimacy activity, 9 legal, 120 process, 120, 123 public sector, 121, 122 social contract, 123 Linguistic l’arbitraire du signe, 70 connotation, 74 denotation, 72, 73 sign, 70, 199 signified, 70 signifier, 70 syntactic, 76

Ideology, 33, 92, 121, 126, 190 IFRS. See International Financial Reporting Standards (IFRS) Impression management, 150 Industrialization, 17 Inflation, 26 Information faces, 69 financial, 30, 94, 216 quality, 2

Market efficient market hypothesis (EMH), 60, 133, 156 entrepreneur, 102 failure, 12, 62, 80, 155 firm, 81, 82 functional fixation, 82 laws, 17 Mathematics, 12–15, 154, 216 Moral hazard, 3, 40, 61, 159

Financial information, 30, 94, 216 statements. See Financial statements Financial statements GAAP system, 28 legitimacy, 124 traditional, 2 GAAP. See Generally accepted accounting principles (GAAP) Generally accepted accounting principles (GAAP), 27 Gross domestic product (GDP), 105, 106

Index Networks board of directors, 87, 94 external members, 94 resource dependence theory, 87, 94 Organization accounting, 77, 128 conception, 78 democracy, 185 entrepreneur, 62 financial situation, 216 information manipulation theory (IMT), 209 networks, 87-94 organizational culture, 143 people in, 2, 11, 38 social institution, 119 society, 174 storytelling organization, 104–105 technology in, 49 vision, 160 Paradigm, 50–54 Phenomenology, 24, 31 Positivism, 24, 25, 50, 58–59 Post-modernism, 1 Privatization monopoly, 80, 127 profit, 78, 126 tariffs, 82, 111 Probabilities, 135, 154, 163 Profession accounting profession, 48, 63, 78, 103, 170 goal, 169 jargon, 73, 75, 77 professionalization, 66, 71 vertical structure, 30 Profit accounting profit, 98 against market, 80–83 concept, 105 definition, 22, 46, 74 dividends, 38 maximization, 45

237

privatization, 78, 126 rates, 122 state-owned enterprise (SOE), 82, 125 subsidiaries, 37 tariff, 127 Psychology behavioral, 73 cognitive, 73, 154, 157, 197 conditioning, 134 Rationalism, 31 Reality constructivist, 50 economic theory, 177 objective, 53, 170 predictions, 44 research, 3 social responsibility, 98–99 socially constructed, 59 spatial model, 28 Reason pure, 24, 31 rational, 154, 159, 172 rationalism, 31 rationality procedural, 157, 158 substantial, 158 Representation social, 15, 28, 30, 51, 80, 81 spatial, 27–29 Reproduction school, 85 social, 85 Reputation, 120, 123 Research applied, 56, 57 assumption, 34, 36–40 hypothesis, 34, 205 pure, 57 School of thought, 1, 3, 7–19, 54 Science(s) hard, 9, 10, 18 human, 10, 14, 24, 53, 150, 162

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methodology, 24, 47 natural, 13–15, 17, 24, 35, 47, 53 philosophy, 14, 24 pure, 10, 14, 35, 57, 216 scientific process, 23, 50, 52, 202, 215 soft, 14 Society governments accounting for the deficits, 110 manipulating accounts, 201, 206 public accounts, 106, 111 grand narrative, 105 ideology, 121, 125, 126, 190 social decisions, 78, 101, 125–127 social responsibility, 96, 98–101 state-owned enterprise, 18, 82, 126 Sociology accounting, 18, 23, 68, 115–131 organization, 215 professions, 66, 71 social contract, 115–117 social institution, 8, 94, 117, 139, 215 Stakeholders Standards accounting period, 39 business entity, 36–37 GAAP, 27–28, 36, 207 going concern, 38 historical cost, 25, 39 matching, 39 money measurement, 39 objectivity, 24, 39–40 setters, 9, 28

setting, 1, 2, 21, 27, 48, 204, 215 stable monetary unit, 38, 72 Storytelling, 104, 105, 137 Syllogism, 23 Text analysis content analysis, 181–182 readability, 182–184 rhetoric, 52, 181, 185 semiotic actantial structure, 187–189 functions, 184, 187 Theory agency, 11, 40, 61, 154, 158–160, 199 institutional, 19 manipulation (IMT), 140, 209 normative, 26, 43–48 positive, 26, 45, 47, 52 Trueblood Committee, 7 Uniformity, 117, 143 Utility curve, 153, 154–155, 156, 162 Values, 43 Vision, 3, 15, 21–42, 134, 160 Wealth of Nations (Adam Smith), 81, 154 Websites, 182 Workplace, 145 World Bank, 104, 126 “Z” pattern, 197

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