Americanism and financial accounting theory – Part 1: Was America born capitalist?

This paper (Part 1), and two related papers (Part 2: The ‘modern business enterprise’, America's transition to capitalism, and the genesis of management accounting; and Part 3: Adam Smith, the rise and fall of socialism, and Irving Fisher's theory of accounting), explore historical links between American ideology and Irving Fisher's theory of accounting. They explain Fisher's theory as the product of America's exceptional transition to capitalism and the ideological consequences. Part 1 uses Marx's theories of the transition in England, of colonisation, and of ideology, to construct an accounting history model of America's transition to capitalism that identifies the dominant social relations of production and calculative mentalities, and uses them to predict the accounting signatures and political ideologies we should observe if the theories are correct. Parts 1 and 2 test the model. Part 3 explores the ideological consequences of America's transition, for America and financial accounting. Scholars generally assume that America was ‘born capitalist’; historians argue it became capitalist sometime from the late 18th to early 19th centuries. The model, however, identifies early farmers as ‘simple commodity producers’ who, it predicts, kept only single entry accounts of debt, and had a ‘producer’ ideology of ‘equality’ and ‘freedom’. It identifies planters and manufacturers as ‘semi-capitalists’ – part merchant capitalist and part simple commodity producer – who it predicts calculated ‘profit’ as consumable surplus, pursued the ‘simple rate of profit’, controlled only prime costs, and had an ideology of ‘individualism’ that combined the producers’ ideology with the merchants’ ‘laissez-faire’. Part 1 re-examines evidence from accounts to around the mid-19th century, which confirms that farmers were not capitalists and that even the most advanced merchants, manufacturers and planters were semi-capitalists. Part 2 searches for capitalists in the second half of the 19th century. It re-examines evidence from the accounts of the Boston Associates who historians have seen as ‘proto-industrial capitalists’; from the railroads heralded by Chandler as the beginning of ‘managerial capitalism’; and from ‘entrepreneurial capitalists’ like Andrew Carnegie who created the large corporations that conquered America from the 1880s. Their financial accounts and cost management systems reveal the same semi-capitalist mentality found in the early 19th century. Re-examination of the ‘costing renaissance’ in the 1890s and evidence from the DuPont Powder Company and General Motors from 1900 to 1920, suggests that only from around 1900, after escalating conflict between ‘capital and labour’, did the capitalist mentality appear in new management accounting systems focused on ‘return on investment’. Part 3 shows that the accounting evidence closely correlates with the history of American political ideology. It argues that Adam Smith's Wealth of Nations dominated American politics until the late 19th century because it theorised a nation of simple commodity producers and semi-capitalists. It explains the delay in America's transition compared to Britain's, and the decline in the popularity of laissez-faire from the 1880s, as consequences of this exceptional starting point. ‘Big business’ capitalism created an ideological problem for America's ruling elite, particularly the threat of socialism from around 1900 to 1920. Part 3 argues that Fisher's neoclassical theory of ‘capital’ and ‘income’, designed as a critique of Marx, responded to this problem and played an important role in undermining middle class support for socialism. Fisher said he based his theory on accounting practice, particularly double entry bookkeeping, but Part 3 shows he did not use or understand it, which divorced his accounting from reality. American history's legacy to the world, the papers therefore conclude, is a pathological theory of financial accounting.     

Americanism and financial accounting theory – Part 2: The ‘modern business enterprise’, America's transition to capitalism,and the genesis of management accounting

The paper uses accounting evidence to explore when and how capitalism came to America. It continues the search for capitalists in American history begun in ‘Americanism and financial accounting theory. Part 1: Was America Born Capitalist?’ Part 1 concluded that America was not ‘born capitalist’ in Marx's sense, and that the capitalist mentality had not appeared in farming even by the late 19th century, on southern slave plantations by the Civil War, or in manufacturing enterprises by the 1830s. This paper (Part 2) challenges Alfred Chandler's thesis that the ‘modern business enterprise’ brought ‘a new type of capitalism’ from around the mid-19th century. It re-examines accounting evidence from the Boston textile mills, the railroads, and the iron and steel industry. It concludes that the Boston Associates who historians often see as ‘proto-capitalists’, the ‘managerial capitalists’ Chandler sees on the railroads, and the ‘entrepreneurial capitalists’ he sees in the iron and steel industry and elsewhere, remained semi-capitalists because their capitals and workers were not ‘free’. The paper re-examines the ‘costing renaissance’, the introduction and spread of product costing, standard costing, ROI and flexible budgets, and the evidence in Chandler's and Johnson and Kaplan's studies of the DuPont Powder Company and General Motors. This suggests that capitalism only appeared in America by around 1900, after more than two decades of intense conflict between ‘capital and labour’, and became established by the 1920s. This is the critical turning point in American business history, not the appearance of ‘managerial capitalism’, the paper argues. It concludes that America did not catch up with British capitalism until the late 1920s because its ruling elite faced an ideological problem created by its exceptional transition from a society of simple commodity producers and semi-capitalists, particularly the threat of popular socialism. The final paper, Part 3: ‘Adam Smith, the rise and fall of socialism, and Irving Fisher's theory of accounting’, argues that Fisher made a seminal contribution to solving this problem, but his legacy is a pathological theory of financial accounting.     

On the convergence of management accounting and financial accounting – the role of information technology in accounting change

In this article we theorize and conceptualize the recent convergence of management accounting (MA) and financial accounting (FA) with the advancements in information technology (IT), and explicate not only how this convergence is manifested in the technical and technological domain, but also how it is reflected in their convergence at the behavioral and organizational level.Drawing on the analytical model by Hemmer and Labro (2008), in which the forward-looking perspective of FA leads to forward-looking MA, we build a conceptual framing to analyze this convergence. According to this framing, information technology (IT) serves as a facilitator, catalyst, motivator, or even an enabler for the convergence of MA and FA. We further argue that convergence is a much broader phenomenon than claimed by Hemmer and Labro. It firstly covers the technical and technological domain, including the intentional integration of information systems and software, as well as the intentional combination of methods or standards, extending thereafter to the behavioral and organizational domain with the (un)intentional alignment regarding both functions and processes as well as the (un)intentional convergence regarding both work and roles. The applicability of this conceptual framing is illustrated with a set of examples.We present illustrations of the manifestations and outcomes of convergence in both the technical and technological domain (related to accounting standards, discretionary reporting, performance measurement, transfer pricing, competitor, customer and contractor analysis, due diligence in M&As), and the behavioral and organizational manifestation domain (related to accounting processes, work and the role of accountants, incentive systems, accounting and control in multinational companies, the control of business networks, the board of directors and venture capitalists). Based on our observations, we conclude that the forward-looking FA elements are often intertwined with MA, and vice versa, and that convergence in the technical and technological domain appears to precede convergence in the behavioral and organizational domain. In most of our observations, IT plays an important or even crucial role in this convergence process. In the light of these convergence observations, we open several avenues for further research.     

Repoliticalization of accounting standard setting—The IASB,the EU and the global financial crisis

Since its inception, the IASB has been able to set standards with relatively little political influence in its governance or standard setting process. But this changed with the outbreak of the global financial crisis. Political bodies began to view accounting standards as a contributing factor that amplified the consequences of the crisis on banks, financial markets and the overall economy. Regaining control over accounting standard setting was seen as imperative. In this article, we investigate how the EU sought to gain control over the IASB and how the global standard setter responded to limit political influence. Our findings show that a re-balancing of power in favor of political interests has occurred between the stakeholders of international accounting standard setting. Further research in this area looks promising. We suspect that the heightened influence of political actors may lead to further power struggles and efforts to cope with on-going changes in the institutional environment.     

Recap of the 29th annual conference on financial economics and accounting,November 16–17, 2018

Review of Quantitative Finance and Accounting -     

Audit committee financial expertise,gender, and earnings management: Does gender of the financial expert matter?

The effectiveness of the presence of financial expertise on the audit committee (AC) in reducing earnings management has been the subject of many previous studies with mixed findings. This paper suggests that the mixed findings may be due to prior studies not distinguishing between the genders of the financial experts on the AC. We investigate how financial expertise affects earnings management taking into account the gender of the financial expert. We use the data of a sample of 5660 US firm-year observations from 2007 to 2013 which was analysed using least squares regressions clustering by firm. The results indicate that proportion of financial expertise on the AC and gender reduces earnings management. We then group the AC financial experts by gender, and examine whether the gender of the financial expert matters. The results show that the proportion of female financial experts on the AC is significantly associated with less earnings management while the proportion of male financial experts does not significantly affect earnings management; this suggests that previous studies indicating that the presence of a financial expert on the AC may have been influenced by gender of the female financial experts. Further, our findings may also partly explain the contradictory findings of prior studies on the effect of financial expertise on the ACs effectivness.     

Implications of the “momentum” theory of digitalization in accounting: Evidence from Ash Cloud

We aim to demystify digitalization in accounting (DIA) based on the case study of Ash Cloud, a digital factory in Shenzhen, China. From the perspective of dynamic capabilities, we develop the “momentum” theory of DIA to illustrate that firm and executive characteristics drive digital transformation and organizational capabilities. Ash Cloud’s CEO values and cultivates an organizational culture of transparency and openness, while the firm is characterized by cost pressures. Organizational capabilities shape digitalization in business processes and different approaches to DIA. Our findings suggest that the core competence of Ash Cloud is its capability for systems integration, which includes knowledge of redesign, reconfiguration and redefinition. Ash Cloud stands out because of its knowledge extending beyond the firm’s boundaries.     

On the prediction of financial distress in developed and emerging markets: Does the choice of accounting and market information matter? A comparison of UK and Indian Firms

We examine differences in price delay for a sample of real estate investment trust (REIT) and non-REIT matched pairs. Results suggest an economically and statistically higher level of price delay for REIT securities, which implies heightened frictions that increase the time needed for new information to be impounded into the prices of REIT shares. The primary drivers for the observed delay differential include differences in idiosyncratic volatility, market risk, and the number of days traded. Within-REIT determinants of delay confirm findings for the pooled sample of matched pairs. Importantly, we infer find that REIT investors are not compensated for restricted information flow, as excess returns are unrelated to the price delay.     

Real effects of governmental accounting standards: Evidence from GASB statement No. 53 – Accounting and financial reporting for derivative instruments

GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, (GASB 53) significantly altered U.S. governmental sector accounting of derivative instruments by mandating the recognition of hitherto off-balance sheet derivative instruments in the government-wide statement of net assets and requiring that ineffective hedges be clearly identified. These requirements have an unfavorable financial statement impact for municipalities with net negative fair value derivative positions and municipalities holding ineffective hedges. Using a hand-collected, comprehensive dataset of municipal derivatives, we examine whether the level of U.S. municipal derivative holdings changed following the adoption of GASB 53. Consistent with GASB 53 affecting municipal officials’ derivative decisions, we find a significant post-GASB 53 reduction in derivative holdings for municipalities with net negative fair value derivative positions and ineffective hedges. Our findings suggest that governmental accounting regulations could affect real decisions of municipal officials and therefore could potentially have public policy implications beyond the provision of information to stakeholders.     

Money,politics, and the regulation of public accounting services: Evidence from the Sarbanes–Oxley Act of 2002

Because public accounting is a regulated practice, the profession actively manages its relationship with the state. While prior studies have analyzed the profession’s efforts to shape its regulatory environment, few studies have examined the profession’s pointed attempts to influence a specific regulatory policy that affects the practice of auditing in the United States. Drawing on extant theories of regulation and political economy, this study investigates the rationality and effectiveness of political action committee (PAC) contributions paid to members of the US Congress by the US public accounting profession during the policy formulation period of the Sarbanes–Oxley Act of 2002. Based on the results of empirical tests, we conclude that the US profession strategically manages its relationship with the federal government, in part, through direct involvement in the financing of political campaigns. Furthermore, the profession’s pattern of contributions implies an ideologically conservative as well as a professional regulatory motivation for providing financial support to federal legislators. Thus, although the US profession continues to proclaim the primacy of its public interest orientation, it does not appear to be politically neutral when attempting to influence public policy.     

An analysis of the research contributions of accounting,organizations and society, 1976–1984

This paper evaluates the research contributions of Accounting, Organizations and Society (AOS) during the years 1976–1984. We begin by investigating whether AOS has achieved its research objectives as defined by its “aims and scope”. We then examine two major attributes of AOS articles, the foundation disciplines they draw upon and the research methods they employ. Next we use citation analysis to determine the impact AOS's research has had upon research published in the social sciences. Finally, we identify those AOS articles which have exerted the greatest impact on the social sciences.     

Paradigms,theory and management accounting practice: A comment on Parker (forthcoming) “Qualitative management accounting research: Assessing deliverables and relevance”

Parker (forthcoming) provides a valuable discussion of the state of, and prospects for, qualitative research in management accounting. This comment amplifies three issues raised in Parker's (forthcoming) review: the multi-paradigmatic nature of qualitative research and the potential that this offers for the expanded use of qualitative methods in accounting research; the role of theory in qualitative management accounting research and the need for such research to contribute to the literatures from which it draws rather than simply being a consumer of theory; and the potential for qualitative management accounting research to inform management accounting policy and practice when research gains rigor through paradigmatic bracketing.     

The effect of chief financial officers’ accounting expertise on corporate tax avoidance: the role of compensation design

Review of Quantitative Finance and Accounting - Accounting expertise is closely related to corporate tax planning, and hence, corporate chief financial officers (CFOs) with accounting expertise may...     

The Third Policeman: ‘The true and fair view’, language and the habitus of accounting

This paper explores the role and context of the ‘true and fair view’ (‘TFV’) in accounting and auditing. Utilising the work of Bourdieu as a lens, the paper argues that the world of the TFV is a subjective world with which we think we are objectively familiar. Bourdieu's ‘practical theory’ of habitus suggests that the TFV is shaped by the practice of ‘native virtuosos’ who have a ‘feel for the game’. The paper argues that the conceptualisation of the TFV privileges practice and authenticates the accounting habitus. Hence, whilst language maintains and reinforces social structures, it is in turn created by the routines of practice. By dominating the declaration of the TFV, the auditor effectively reinforces the status quo and the constitution of hierarchy and inequity that exists in the accounting field: the TFV, in Bourdieu's terms, ‘becomes what they are’.     

Solvency II,asset liability management,and the European bond market – theory and empirical evidence

It is already foreseeable that Solvency II will tie capital requirements to a very comprehensive risk definition including underwriting and market risks. The new regulatory framework will demand more sophisticated tools to detect interest rate risks on both sides of the balance sheet in an integrated approach. Efforts by life insurers to level these risks could lead to an increased demand for long term fixed income securities. At this point the question arises if this industry wide change in asset demand will have or already has had an impact on prices of long-term bonds and the yield curve in the Euro-Zone?