Transcript Critical Perspectives of Accounting

Topic
Lecture-17
CORPORATE SCANDALS AND
CRITICAL PERSPECTIVE OF
ACCOUNTING
9
Readings Reference :
 Text chapter 12: Critical Perspectives of Accounting;
Financial Accounting Theory; McGraw-Hill; 2nd Edition;
2006; pp 427-449.
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Learning Outcome/Objectives
 Analyze
particular perspective that challenges
conventional opinions about the role of accounting
within society.
 Evaluate the basic arguments that suggest that
financial accounting tends to support the positions
of individuals who hold wealth and social status,
while understanding the position of others.
 Analyze the fact that disclosure and non disclosure
of information can be constructed to be an
important strategy to promote and legitimize
particular social order.
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Introduction


Critical Perspectives on Accounting aims to provide a
forum for the growing number of accounting researchers
and practitioners who realize that conventional theory
and practice is ill-suited to the challenges of the modern
environment, and that accounting practices and
corporate behavior are inextricably connected with many
allocative, distributive, social, and ecological problems of
our era.
From such concerns, a new literature is emerging that
seeks to reformulate corporate, social, and political
activity, and the theoretical and practical means by which
we apprehend and affect that activity.
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Cont..

"Every company in the country is fiddling its
profits. Every set of published accounts is based on
books which have been gently cooked or
completely roasted. The figures which are fed
twice a year to the investing public have all been
changed in order to protect the guilty. It is the
biggest con trick since the Trojan horse. ... In fact
this deception is all in perfectly good taste. It is
totally legitimate. It is creative accounting.“
------Ian Griffiths in 1986
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Cont..

Ethics, as a branch of philosophy deals with the
issue of whether truth exists as an absolute (i.e.
independently of our perceptions) or if truth is a
construct of our minds. In financial reporting,
concepts such as faithful representation, neutrality,
prudence and completeness all contribute to the
qualitative reliability of financial reports (para. 31 to
38 of the IASB Framework).

From a philosophical perspective, truth has no
single definition; it is expressed in a number
different theories:
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Cont..

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Correspondence Theory: Truth corresponds to the
actual state of affairs - implies that an objective
reality[6].
Coherence Theory: Truth has coherence with some
specified set of propositions or beliefs.
Constructivist Theory: Truth, reality and knowledge
are "constructed" in our minds, there is no absolute.
Consensus Theory: Truth is borne from consensus
between parties.
Pragmatic Theory: Truth is that quality which has the
most value when applied in actual practice.
Pluralist Theory: There may be more than one
property that makes something true - and therefore
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more than one version of the
truth.
Critical perspective defined
Refers
to accounting research that goes
beyond questioning whether particular
methods of accounting should be
employed
Focuses on the role of accounting in
sustaining the privileged positions of
those in control of resources (capital)
while undermining or restraining the
voice of those without capital
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Critical perspective defined (cont.)
Critical
accounting theorists seek to
highlight, through critical analysis, the key
role of accounting in society
Challenges the view that accounting can
be construed as objective or neutral
Accounting
seen as a means of
constructing or legitimising particular
social structures for the benefits of those
that currently have wealth
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Philosophical basis of critical
accounting research
• Much of the critical research is informed by the
works of Karl Marx
• However, some critical research adopts a
‘deep ecologist’ philosophy
– questions the trade-off between economic
performance and ecological damage
• Other critical accounting research adopts a
radical feminist perspective
– believe that accounting maintains and reinforces
masculine traits such as ongoing quests for
success, conflict and so forth without any
consideration to cooperation, respect, loyalty, caring
and so forth
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Criticism of Capitalist System
Critical
theorists tend to oppose aspects of
the capitalist system and accounting
Emphasise that systems of accounting are
built around the prevailing social order—and
support the social order
Given the practice of accounting is in the
hands of large corporations and accounting
regulation in the hands of government,
accounting information will never do
anything but support the current system
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Origins of critical perspective
 Grounded
in Political Economy Theory
 ‘Political economy’ is the social, political
and economic framework within which
human life takes place (Gray, Owen &
Adams 1996)
 Based on ‘Classical’ branch—challenges
the existing nature and structure of
society
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Classical political
economy perspective
• As already indicated, much critical
accounting research is related to the works
of philosophers such as Marx
• Explicitly considers structural conflict,
inequity and the role of the State at the
heart of the analysis
• Highlights issues which may not otherwise
be addressed
– social welfare
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Disclosure of social responsibility
information
Critical theorists argue that disclosure of
social responsibility information is wasted
unless accompanied by fundamental
changes in how society structured
 Acts to legitimise, not challenge, those
providing the information
 Need social reform, and not more
‘accounting’

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Views on social and environmental
accounting
As accounting deemed to sustain
particular social structures, introduction
of new forms of accounting only help to
sustain that social system
 Considered
wasted effort to use
accounting to solve problems
 One is using the very process that caused
the problem to try to solve the problem

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Role of the State

The State is seen as a vehicle of support
for holders of capital and for the capitalist
system as a whole

Government will take action to enhance
the legitimacy of the social system

social disclosures seen as a means of
pacifying challenges against the capitalist
system where corporations given many
rights and powers
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Role of the State—continued
Restricting the flow of information, or
availability of specific types of information
seen as a means of maintaining particular
organisations and social structures
 Government does not operate in the
public interest, but in the interests of ‘well
off’ groups
 Corporation
typically lobby against
regulation that could increase their
accountability to society

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Role of accounting research

Accounting researchers are seen as
providing research results and perspectives
that help to legitimise and maintain certain
political ideologies
◦ e.g. anti regulation stance and EMH during the
late 1970s and 1980s matched the views of
government at the time
◦ rise of PAT consistent with political views at the
time
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Role of accounting research—
continued
◦ Rise of ‘economic consequences’ research seems
to have been motivated by desire of large
corporations to counter attempts to change
reporting systems and levels of disclosure
◦ Research efforts into inflation accounting were
seen as being motivated by a desire to alleviate
shifts in real wealth from owners to higher
wages, not by rate of inflation
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Role of accounting practice

Critical
theorists
see
conceptual
frameworks as legitimising the accounting
profession and of financial reports
produced by reporting entities

Accountants seen as imposing their own
views
about
what
performance
characteristics are important or not
important
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Role of accounting practice—
continued
Attention is directed to particular measures (e.g.
profits) through accounting
 In communicating reality, accountants simultaneously
construct reality


Political economy perspective emphasises the role
of accounting reports in maintaining social
arrangements

See corporate social reporting as harmful as it
gives the impression of concern and change
without any real change occurring
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