SOCIAL ANALYSES OF ACCOUNTING INSTITUTIONS: ECONOMIC VALUE,ACCOUNTING REPRESENTATION AND THE CONCEPTUAL FRAMEWORK

The paper is a commentary on Bryer's article “A Marxist Critique of the FASB's Conceptual Framework”; the commentary is divided into three main sections. The first section begins by addressing the changing relationships between accounting and economics and, more specifically, the ideas of economic value and accounting representation (often called “representational faithfulness”, see Bryer, p. 582) that underlie Bryer's concerns with the FASB project. The second section considers the role of the FASB conceptual framework project in order to address the different ways that the “impact” of the FASB's Conceptual Framework project upon accounting practices can be considered. Several of the existing studies of this project that consider its purpose in social and political terms are reviewed. This is not to suggest that the FASB's work has had @9pno@2p effects, but rather that its consequences might be thought of in institutional and political terms. In the final section some of the specifics of Bryer's Marxist analysis are addressed. In particular the relationship between Marxian analysis and accounting change is considered.     

Fair value accounting and the present value fallacy: The need for an alternative conceptual framework

The major functions of company accounting identified by the IASB and the FASB are (1) reporting on ‘the custody and safekeeping’ of the company's resources and (2) reporting on ‘their efficient and profitable use’. The joint IASB/FASB project for improving the conceptual framework for financial reporting is directed towards better performance of both functions within the conventional ‘accrual’ system of accounting through the use of ‘fair value’. Although the disclosure of fair values is a development to be welcomed, the requirement that changes in fair value should be reported as ‘gains’ or ‘losses’ appears to rely on the ‘Hicksian’ concept of income as a theoretical ideal.The object of the present paper is to establish that this concept is fundamentally flawed by what may be called the ‘present value fallacy’. Even in an economic utopia of perfectly competitive markets (with no discrepancies between objective market values and subjective present values), the concept of income or profit as value growth can be seriously misleading.If the prevailing Hicksian conceptual framework is discarded in favour of an alternative based on Fisher's theory of income, the two major, but incompatible, functions of financial reporting can be carried out independently and without compromise. The conventional ‘hybrid’ system of accrual accounting, in which backward-looking measures of volume and forward-looking measures of value are mixed together, would be replaced by a ‘segregated’ system in which they are kept strictly apart. A logical extension of Fisher's theory suggests the disclosure by agent/managers of the return on investment that they are planning to deliver to their principal/owners. This type of ‘decision-useful information’ is vital for the efficient operation of capital markets and for removing the accounting incentive to short-termism.     

An Analysis of Concepts and Evidence on the Question of Whether IFRS Should be Conservative

Do international accounting standards require conservative accounting? The IASB's conceptual framework suggests that they should not, while the research literature is largely silent on the matter, typically presuming conservatism to be an outcome of private contracting rather than standardized, public, general purpose financial reporting. In this paper, we analyze the actual requirements of IFRS. We find multiple examples of recognition requirements that lead to unconditional conservatism, measurement requirements that lead to conditional conservatism, and also presentation/disclosure requirements that further support a conservative reporting environment. These findings complement, support and deepen existing evidence in the empirical literature that accounting is in practice conservative. We show, however, that the requirements for conservatism in IFRS conflict with, first, the IASB's stated position in its conceptual framework that accounting should not be conservative and, second, the private contracting explanation for conservatism that is generally accepted in the literature. What is missing, and lies behind both conflicts, is an acknowledgement and understanding of the role of an agency/contracting perspective in enhancing the decision‐usefulness of general purpose accounting standards, given the information/incentive asymmetry and uncertainty that characterizes the real‐world context in which those standards operate. From a policy perspective, such an understanding would reconcile the IASB's conceptual framework with the actual requirements of IFRS. From a research literature perspective, such an understanding would re‐position accounting standards as central to the practice of accounting conservatism, which would in turn require revision to the generally accepted theory of a private contracting explanation for the empirical evidence of conservative accounting practice.     

‘Knowledge Preservation in Accounting’: Does It Deserve to Be Preserved?

This is my third in a series of critical pieces on the accounting education field. The first, ‘What Accounting Can Learn from Legal Education’, was published in Issues in Accounting Education (Fall 1987) and dealt with the problems resulting from teaching accounting as a science. The second, ‘Wisdom or Widgets: Whither the School of Business?’ (Abacus, September 1988) dealt with the price we pay in our research for our obsession with quantitative methods. The current piece evaluates Robert Bricker's 1988 article in this journal.     

Issues arising for accounting harmonization: The case of stock options in Italy

In Italy, national generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) regulations coexist, despite differences that lead to their antagonist forms of accounting relativism. In this context, the two accounting systems provide for different representations of stock options plans, with significant effects on year-end income measures. This study therefore considers the emblematic case of stock options with the goal of demonstrating, on the basis of the dominant accounting principles and conventional wisdom in Italy, that the aforementioned difference cannot be explained by reasons connected with the accounting conceptual framework of reference in each system. Rather, inquiries should focus on weaknesses in national GAAP.     

A simple template for pitching research

In this article, I propose a simple new research tool – a template designed for pitching research. The two‐page pitching template begins with four ‘preliminaries’: working title, research question, key papers and motivation. Following this is the core of the template based on a ‘3‐2‐1 countdown’, namely THREE elements – idea, data and tools; TWO questions – What's new? and So what?; and ONE bottom line – contribution. The template ends with ‘other’ considerations. Finance and accounting examples are given to illustrate application of the template.     

Reciprocal and Non-Reciprocal Transactions: The FASB's Stock-Based Compensation Project

Whether the FASB's conceptual framework can be used to derive accounting treatments has been debated. Mozes (1998) argued that the conceptual framework's high level of abstraction meant that several alternative views were possible for the treatment of stock-based compensation and that this was unhelpful. This article identifies a problem at the abstract level of the conceptual framework that requires resolution before Mozes' proposals to remedy the high level of abstraction may be acted upon—the inappropriateness of the conceptual framework's distinction between liabilities and equity. The conceptual framework is clear that equity transactions are non-reciprocal but the accounting treatment to be derived from this view is unacceptable and was not presented as an option in the stock-based compensation project. Instead, the FASB's basis for conclusions is based on reciprocal transactions, disguising the inappropriateness of the conceptual framework's definitions. Failure to revise the conceptual framework leaves the FASB, and other standard-setting bodies drawing on the FASB's concepts, open to developing serious inconsistencies in other pro-jects where the distinction between liabilities and equity is important, and without conceptual support for their stance on stock-based compensation.     

A commentary on “Why DCF capital budgeting is bad for business and why business schools should stop teaching it”

‘Towards a conceptual framework for auditing’ suggest a conceptual framework, which it is hoped may help in the teaching and understanding of external attest auditing. Briloff's (1986) view that ‘as concern for ecology and the wellbeing of consumers in posterity intensifies, this responsibility (accountability) will extend to the total society and environment’ is taken as the philosophical departure point for the conceptual framework.

The paucity of attempts to develop a unifying theory of auditing is noted and a brief history of developments is traced commencing with Mautz and Sharaf in 1961. Flint's 1988 work (The Philosophy and Principles of Auditing) is adopted and developed. Each of Flint's concepts is examined in some detail to consider its significance in the conceptual framework and its implications for audit practice. Reasons for changes from earlier frameworks are offered.

In order to illustrate the effectiveness of the framework as an holistic tool of analysis, the concepts identified are then related to the Auditing Standards and Guidelines of our national professional accounting association, the New Zealand Society of Accountants (NZSA). Whilst considerable correlation is noted, some inconsistencies are also identified. It is suggested that the standards and guidelines may not have derived from any philosophical analysis and that the inconsistencies between the concepts and the standards appear to have resulted from a lack of a clear theory as to what constitutes a standard and what constitutes a guideline; higher and lower order ideas would appear to fall somewhat indiscriminately in both. It is noted that this analysis may be repeated in respect of the auditing standards of any professional organization.

It is concluded that the application of these concepts can lead to more informed discussion of some of the controversial issues that face the auditing profession at this time, and to an holistic understanding of the discipline of auditing as well as of professional audit promulgations. It is recommended that standard setters should give thought to the adoption of a more holistic approach to standard setting, grounded in a conceptual framework, and that auditing educators should adopt such a framework in order to assist students towards an understanding of the role and process of auditing and away from the memorizing of techniques.     

Voluntary Disclosures as a Mechanism for Defining Entity Status in Australian Not‐for‐Profit Organisations

This study examines managerial efforts to portray an entity's not‐for‐profit (NFP) status based on voluntary disclosure practices. The annual report text of 61 NFPs are analysed in accordance with Salamon and Anheier's (1997) NFP definitional framework. Results indicate a predominant application of the structural‐operational definition. Furthermore, the ‘organised’ attribute of this definition prevails over the ‘non‐profit‐distributing’ criterion that has been advocated by various parties. Standard‐setting bodies may want to consider: (1) NFP management perspectives in any revised NFP definition; and (2) greater clarity in conceptual framework and standard‐setting arrangements to improve overall transparency in NFP reporting practices.     

Optimal allocation to hedge funds: an empirical analysis

What percentage of their portfolio should investors allocate to hedge funds? The only available answers to the above question are set in a static mean-variance framework, with no explicit accounting for uncertainty on the active manager's ability to generate abnormal return, and usually generate unreasonably high allocations to hedge funds. In this paper, we apply the model introduced in Cvitanic et al (2002b Working Paper USC) for optimal investment strategies in the presence of uncertain abnormal returns to a database of hedge funds. We find that the presence of the model risk significantly decreases an investor's optimal allocation to hedge funds. Another finding of this paper is that low beta hedge funds may serve as natural substitutes for a significant portion of investor risk-free asset holdings.     

Do principles‐based accounting standards lead to biased financial reporting? An Australian experiment

International accounting standards are deliberately designed to be principles‐based (i.e. ‘substance over form’). With Australia's recent adoption of international accounting standards, a relevant question is, do principles‐based accounting standards lead to biased financial reporting? The present paper describes a study that analysed the consolidation judgements of senior accounting officials from Australian listed companies. Participants made consolidation judgements based on AASB 1024 Consolidated Accounts. Although AASB 1024 is not identical to IAS 27 Consolidated and Separate Financial Statements, there are many similarities and both follow a principles‐based approach. In aggregate, the present study finds that principles‐based accounting standards do not necessarily lead to biased financial reporting.     

Green accounting: Reflections from a CSR and environmental disclosure perspective

In this commentary, we reflect on Thornton's (2013) extension to his original CA Magazine article on environmental accounting (Thornton, 1993) as well as the original contribution. Given our background in social and environmental disclosure research, we question Thornton's narrow focus on environmental accounting as it relates to the debits and credits of financial reporting, and we attempt to illustrate the problems that voluntary environmental disclosure creates with respect to reduced incentives for companies to improve environmental performance. We conclude by identifying our concerns with the future of environmental accounting given the recent ‘rediscovery’ of the topic by mainstream accounting researchers.     

New approaches to measuring welfare

Economics has traditionally understood ‘welfare’ (what makes a life go well) as the satisfaction of preference. This conceptualisation of welfare is typically measured using revealed preferences, proxied through income and prices or stated in willingness-to-pay surveys. Recent decades have seen growing challenges to this paradigm. The climate crisis, among other phenomena, has called into question whether income and price data effectively proxy preferences, and willingness-to-pay surveys continue to struggle with accurately pricing important items such as biodiversity, digital goods, privacy and social connections. Preference satisfaction as a welfare criterion has also been challenged conceptually by psychologists and scholars working in the development space, among others. In this article, we review recent innovations in alternate ways of conceptualising and measuring welfare for the purposes of economic welfare analysis. We focus on using stated preferences over aspects of well-being, life-satisfaction scales and the WELLBY approach, and well-being frameworks such as Bhutan's Gross National Happiness Index. While not without weaknesses, these approaches also have marked strengths relative to the traditional approach.     

Accounting for the Social Relations of Feudalism

It is becoming increasingly accepted that accounting concepts and practices can only be understood in their socio-historical context (e.g., Hopwood and Johnson, 1986). From this perspective, accounting scholars can both learn from historians, and may contribute to broader historical debates. The main purposes of the paper are: to make an accounting contribution to the debate between historians about the nature and development of feudalism in England and the transition to capitalism; to illustrate the general argument that accounting concepts and practices must be understood in the specific historical context in which they occur; and to suggest that a useful conceptual framework for understanding the emergence and development of feudal and capitalist accounting is Marx's concept of the ‘mode of production’.     

Testing and Evaluating a Conceptual Framework of Accounting

As a step toward developing a widely accepted theory to guide the standards-making process and the accounting profession, the Financial Accounting Standards Board submitted a conceptual framework to the profession for its consideration. Its purpose is to provide guidance in the choice among alternative accounting methods for an issue. Whether the conceptual framework performs its function can be objectively evaluated only when it is applied to issues and tested through a rigorous procedure. A rigorous procedure to evaluate a theory has two conceptually distinguishable but interrelated parts: (a) testing the set of sentences constituting the logical structure of the theory and its inferences by way of mathematical or logical proofs, and (b) evaluating the content of the sentences constituting the theory and its inferences by way of evidence, be it empirical, intuitive, or otherwise. The purpose of this study is to test the logical structure of the conceptual framework. The results of the study provide a demonstration that the structure of the conceptual framework is logically consistent and that inferences from the structure of the conceptual framework to alternative methods for an issue are deductively valid. The study also exemplifies an application of the structure of the conceptual framework in the selection of an alternative method for an issue. The application explicitly interrelates the structure and content of the conceptual framework.     

Industrial Cost Accounting Developments in Britain to 1830: A Review Article

Haydn Jones's Accounting, Costing and Cost Estimation (1985) uses the surviving records of numerous Welsh companies, engaged principally in metal manufacture between 1700 and 1830, to demonstrate the use made by managers of accounting data, as the basis for planning, decision making and control. This article relates the results of Jones's research to existing views regarding the development of industrial cost accounting, particularly because his findings call into question ‘single variable’ explanations for the development of management accounting, such as the level of industrialisation, the relative impact of fixed and variable costs, and the organisational structure of business activity. Jones's findings also require a reappraisal of established ideas concerning the relative sophistication of financial and management accounting procedures in use in earlier times, and our perception of the contributions of accountants and their techniques to business developments.     

An Empirical Evaluation of the Costs of Harmonizing Romanian Accounting with International Regulations (EU Directives and IAS/IFRS)

After the fall of communism, Romanian accounting has undergone several waves of reform. The first began with the 1991 Accounting Law and its 1993 Regulations implementing a French-inspired accounting chart and guidelines. The second wave of reform produced Regulations (in 1999 and 2001) for the harmonization of large entities' accounting with EU accounting directives and International Accounting Standards/International Financial Reporting Standards (IAS/IFRS). An interesting feature was the inclusion of IASB's conceptual framework into the text of these Regulations. Our study seeks to identify and evaluate the costs of harmonizing Romanian accounting with international regulations (EU Directives and IAS/IFRS). We hypothesize that three types of costs are prevalent: personnel training costs, consultants' fees and costs to adjust existing information systems. We also hypothesize that harmonization benefits are noticeable for those entities that make frequent use of foreign finance and for those entities with majority foreign shareholders. To collect data, we sent out questionnaires to the finance directors of listed Romanian companies. As full application of IAS/IFRS by non-financial companies has recently been postponed until 2007, we also comment on the benefits and costs of gradual reforms as opposite to a one-step adoption of IAS/IFRS.     

How frequently should listed companies report results?

On August 17, 2018, President Trump announced that he had asked the Securities and Exchange Commission (SEC) to study whether U.S. listed companies should file interim financial statements at half-year intervals instead of on a quarterly basis. This essay examines the question underlying the President's concern: how frequently should public companies file interim statements? A review of accounting standards, regulations, and research reveals that there is (i) no agreed-upon best practice for reporting frequency, (ii) compelling evidence that analyst earnings estimates arising from interim reporting give rise to executive angst, and (iii) some evidence that lengthening reporting intervals will harm investors. The short-term implication of this essay is that readers of this journal should participate in SEC deliberation on this issue. The long-term implication is that we need to encourage accounting scholars from various disciplines to try to answer the President's question.     

A MARXIST CRITIQUE OF THE FASB'S CONCEPTUAL FRAMEWORK

In developing its conceptual framework the FASB challenged supporters of traditional accounting to provide objective and operational definitions of the elements of financial statements that do not depend on definitions of assets and liabilities as future economic benefits. The paper answers this challenge by deriving a general theory of accounting from Marx's analysis of the circuit of industrial capital. It concludes that whereas the FASB's framework, based on the marginalist idea of economic value, is subjective and vague, the Marxist theory of financial accounting derived here provides critical accounting with a scientific foundation.     

In our ivory towers? The research-practice gap in management accounting

This study reports on an investigation of 64 senior management accounting academics from 55 universities in 14 countries about the extent to which academic management accounting research does, and should inform practice. Drawing on the diffusion of innovations theory as a point of departure, and based on evidence obtained from a questionnaire survey and subsequent interviews, our findings reveal the prevalence of two broad schools of thought. One school, represented by the majority of senior academics, holds that there is a significant and widening ‘gap’ between academic research and the practice of management accounting, and that this gap is of considerable concern. In contrast, the other school holds that a divide between academic management accounting research and practice is appropriate, and that efforts to bridge this divide are unnecessary, untenable or irrelevant. From this empirical evidence, we advance a conceptual framework distinguishing between the ‘type’ of academic research undertaken, and the ‘users’ of academic research, and on the basis of this framework, contend that framing the relationship between academic research and practice as a ‘gap’ is potentially an oversimplification, and directs attention away from the broader but fundamental question of the role and societal relevance of academic research in management accounting.