Chambers on Price and Price-Level Variations: Exiting Intellectual Grooves

From early in his enquiry, Chambers perceived the price variation problem in accounting to not be a separate phenomenon related to inflation or deflation, but to be the failure in conventional accounting to incorporate the full financial effects of the medium, money, in which its calculations were made and its output expressed. He absented himself from the inflation accounting focus early in the 1950s and set about an enquiry into the nature and meaning of monetary calculation and measurement, within a framework of accounting functioning to provide indications of the wealth and progress of firms. Accordingly, when the substantial literature on the topic and the report of governmental enquiry into accounting and inflation emerged during the early 1970s he addressed the various proposals by drawing upon his theory of Continuously Contemporary Accounting (CoCoA) with devastating effect.     

Accounting for Fair Competition between Private and Public Sector Armaments Manufacturers in Victorian Britain

Failures in rifle supply during the Crimean War (1853–56) caused the British government to seek a more reliable method for procuring weapons for military use. Fact‐finding missions to US rifle manufacturers led to the introduction of the ‘American system of manufacturing’ at a purpose‐built factory in north London. The extension of gun‐making facilities at the Royal Small Arms Factory, Enfield Lock, was accompanied by major accounting innovations driven by society's desire for ‘cheap and efficient’ government and, within a laissez‐faire environment, the need to ensure fair competition between private and public suppliers of military goods. Accounting practices based on ‘strictly commercial principles’ were then disseminated to other government military manufacturing establishments located at the Woolwich Arsenal. The historical knowledge revealed in this paper adds a new dimension to existing accounting historiography, which focuses principally on the business sector as the driving force for accounting change in Britain.     

Economic and Accounting (Book) Rates of Return: Application of a Statistical Model

Harcourt's (1965) classic paper has spawned a considerable literature dealing with the relationship between economic and accounting rates of return. Kay (1976), Ijiri (1979), Salamon (1982) and Kelly and Tippett (1991), for example, can be interpreted as extensions of Harcourt's seminal analysis, while Kay (1976), Salamon (1982, 1985) and Gordon and Hamer (1988) provide empirical evidence on the sustainability of basic propositions. The present paper's focus is on the latter area; we apply the statistical procedures laid down in Kelly and Tippett (1991) to about 200 British companies to assess the correspondence between the ex post accounting rate of return and the prospective economic return. The economic return is estimated using three cash flow definitions. For all three, the accounting rate of return is significantly lower than the economic return. Further tests show the economic return to be inversely related to the accounting rate of return, although the relationship is weak. In addition, ‘large’ firms tend to report lower accounting rates of return than ‘small’ firms, but again the relationship is weak.     

Valuation and Accounting for Inflation and Foreign Exchange

Inflation and foreign exchange raise new issues with respect to accounting representations of equity value. For example, inflation creates an earnings illusion as an artifact of the mismatching of expenses based on allocations of historical costs with current revenues in determining earnings. This mismatching distorts mappings of aggregate earnings and book values into equity value such that value‐relevant information is lost. In this article we consider the consequences of inflation and foreign exchange accounting policies, including those contained in accounting standards, on the value relevance of bottom‐line accounting numbers. Policies are identified that achieve efficient accounting in the sense that aggregate (comprehensive) earnings and book values are sufficient for an accounting representation of equity value. The linear relations that emerge provide predictions on capitalization coefficients that help explain results of empirical inquiries. As well, our analysis provides a theoretical foundation for policies contained in accounting standards that contributes to the resolution of controversies such as that concerning foreign exchange accounting.     

A Marxist accounting history of the British industrial revolution: a review of evidence and suggestions for research

An important debate neglected by accounting historians concerns the existence, origins and significance of the British Industrial Revolution (BIR). A key problem is explaining why Britain was such a technologically creative society. Part one uses accounting ideas to explain Marx's theory that industrial capitalism first appeared in Britain and was revolutionary because it took control of production to maximise the rate-of-return on capital employed. Part two shows that accumulating evidence of the use of modern management accounting by leading firms during the BIR supports Marx's view that it was a capitalist revolution in his sense. Part three argues that the accounting history of Boulton and Watt supports the hypothesis that the capitalist mentality and accounts drove revolutions in the technical and social relations of production during the BIR. Part four re-examines other well-known key sites for the study of accounting history and argues that these cases support the hypothesis that the primary cause of variations in accounting during the BIR was variations in the social relations of production. The paper makes suggestions for further research and concludes that, by thoroughly testing Marx's theory, accounting historians can make an important contribution to a major historical debate.     

Patrick Colquhoun

Patrick Colquhoun, ‘the father of Glasgow’, established his reputation as an able accountant, businessman and manager in the 1780s. This reputation was overshadowed by his contributions to penal reform which he made in the 1790s when he resided in London. Radzinowicz (1956) and Foucault (1977) showed that Colquhoun, in conjunction with his friend Jeremy Bentham, the famous utilitarian economist, made a significant impact on penal reform. Their contribution was encouraged by the British government in the period of turmoil which followed the French Revolution. Bentham understood the role of accounting in the management of businesses (Goldberg, 1956; Hume, 1970; Gallhofer and Haslam, 1993). He alone recognized the importance of Colquhoun's accounting knowledge and business experience and how his pragmatism enhanced his powerful cases for the adoption of new socioeconomic systems. Until now this view of Bentham has been ignored. Other historians, driven by their special interests, concentrated on one phase of Colquhoun's diverse life. None attempted to analyse the relationship between his ideas for the reform of punishment, police and poor systems and his prior experience as an accountant, businessman and manager. That relationship is the subject of this article and the objective of my research is to answer two questions. First, where did Patrick Colquhoun acquire his knowledge of business and accounting techniques? Second, how did he use his knowledge in the 1790s to build cases which influenced those in power to adopt new socioeconomic systems?     

The Ex‐Ante Monitoring Role of Accounting Covenants in Public Debt

In contrast to what is known about accounting covenants in private debt, little empirical evidence on the role of accounting covenants in public debt exists. Diffuse ownership, arm's length monitoring, and collective action problems are unique to the public debt setting and raise the question of whether these covenants serve their intended role. As such, this study investigates whether including covenants reliant upon accounting inputs influences borrowers’ actions to prevent adverse credit events. Accounting covenants in the public debt setting provide firms with a disciplining mechanism to renegotiate ahead of costly technical default – a stark contrast to the ex‐post renegotiation ‘trip wire’ role covenants play in private debt. In particular, the results show that including accounting covenants in public debt is associated with an increased probability of ex‐ante renegotiation, that is, negotiation through consent solicitations ahead of covenant violation. This ex‐ante renegotiation, in turn, is associated with decreased adverse credit events. Cross‐sectional results support these findings as the ex‐ante renegotiation role of accounting covenants varies with bondholders’ and trustees’ monitoring ability.     

Commentary: Business Black Swans and the Use and Abuse of a Notion

Historical enquiry reveals how ideas mutate. This paper traces how ideas and practices underpinning initial understandings of fair value accounting (FVA) have changed as the concept drifted from the utility rate‐setting context to that of corporate financial reporting. The recall of history for the purpose of ‘learning lessons from the past’ has frequently resulted in misunderstandings of the historical record and misapplication of so‐called lessons. A more fruitful approach to recalling history is to gain insights into the development of the ideas (good and bad) that have contributed to current predicaments. Initially fair value was the basis for specific pricing calculations related to companies with a highly restricted scope of operations. Later, more by accident than design, the concept became a general purpose application used in the financial statements of highly and freely adaptive companies. The mark‐to‐market (MtM) dispute emerging in the global financial crisis (GFC) has given rise to a further mutation of the use of FVA. Discarding MtM contradicts what history tells us was the purpose of adopting fair value into accounting for adaptive companies. This analysis also highlights how conducive accounting theory and practice are subject to politicisation. Accounting is an apparently unresisting victim of interested parties’ special pleading, resulting in the corruption of its technical function – in this case primarily because it is inconvenient to have accounting data tell it how it is.     

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.     

Bridging the academic–policy-making gap: practice and policy issues

How policy-makers engage with academics is both a current ‘hot’ topic and a perennial problem. Policy initiatives such as the Research Excellence Framework's (REF) so-called ‘impact agenda’ have ‘pushed’ academics towards seeking more such engagement, whilst others ‘pull’ towards it, such as ‘open policy-making’. Apart from some biographical accounts and case studies, surprisingly little is known at a more general level about how policy-makers do actually engage with academic research and expertise. Analysis of these policies, as well as empirical evidence from the British civil service, suggest these engagements may be generating more ‘endarkenment’ (to use Weiss's term) than enlightenment.     

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.     

Value creation and business models: Refocusing the intellectual capital debate

There is currently significant debate worldwide regarding business reporting. The concept of the ‘business model’ has entered into the discourse, as has the concept of ‘integrated reporting’, adding to the established debate regarding accounting for intangible assets and, more generally, intellectual capital (IC). Despite the tradition of extensive interdisciplinary borrowing in accounting, relevant literatures on business models and on modern managerial perspectives on competitive advantage have, to date, largely been ignored within the accounting literature. The main contribution of this conceptual paper is to identify and discuss the key features of these literature strands and their linkage to contemporary debates on narrative reporting. These conceptual linkages between IC, value creation and business models are illustrated by means of interview evidence from eleven company cases. It is concluded that the business model concept offers a powerful overarching concept within which to refocus the IC debate. The concept is holistic, multi-level, boundary-spanning and dynamic. The analysis supports the current calls for integrated disclosure around the central business model story. Suggestions for future research are offered.     

Pro-producer regulation and accounting for assets: The case of electric utilities

This paper's thesis is that rate-of-return regulation of the electric utility industry was a pro-producer regulatory policy, and that supra-competitive returns were earned by regulated utilities even while their accounting rate-of-returns met the ‘fair’ return constraint established by law. It is argued that this was accomplished by using the accounting system to revalue upward the asset bases of regulated utilities. The empirical results support this hypothesis in that utilities regulated by state commissions had abnormally high book values for their assets compared with unregulated utilities in 1917 and 1922.     

The Italian economia aziendale and chambers' CoCoA

At first glance the Italian accounting tradition of Economia Aziendale and Chambers’ system of Continuously Contemporary Accounting (CoCoA) appear extreme opposites. The ex ante financial calculation of distributable income drawing on the net present values of the aggregative net assets in the former, and in the latter a system of accounting for an all‐inclusive income with the separable assets measured in terms of their current cash equivalents, appear irreconcilable, unlikely bedfellows. But the International Financial Reporting Standards present a system using separable and aggregative assets’ fair values and calculations of their net present values in assessing asset impairment. Whether Economia Aziendale and CoCoA are indeed so opposed deserves renewed examination. Anglo‐American accounting, of which expositions of CoCoA are part, is said to lack a business economics tradition of the kind said to justify Economia Aziendale. This stands in stark contrast with European traditions manifested in the Dutch Bedrijfseconomie, the German Betriebswirtschaft, and the Italian Economia Aziendale. This article seeks to understand that absence by contrasting—the Economia Aziendale framework and accounting theory developed in the Anglo‐American tradition. The primary elements of space and time coordination—the lynchpins of the pure theory of the azienda (the core of Economia Aziendale)—are generally regarded as missing in the Anglo‐American tradition. But the original construction of Economia Aziendale leads to the generalization that any attempt to determine a firm's value or to measure and analyse its performance during its lifetime would result in an unacceptable interruption of the space and time coordination, and yield unreliable results. Curiously, the analysis here exposes an unexpected complementarity of Chambers’ CoCoA and some postulates of the pure theory of Economia Aziendale. The theory that has been only partially acceptable to the Anglo‐American profession (namely its use of market [fair] values) emerges as highly compatible with the most theoretically extreme in the Italian tradition.     

Measurement in Financial Reporting: Half a Century of Research and Practice

The paper explores developments in the choice of measurement method in financial reporting over the half century that has elapsed since the foundation of Abacus in 1965. The discussion is confined to the specific problem of measuring individual assets and liabilities, rather than the wider problems of the choice of measurement unit (as in inflation accounting) or capital maintenance (as in income measurement). Changes in financial reporting practice and standards are considered in relation to developments in academic research. This has been a two‐way process: research has been stimulated by problems of practice, and practice, particularly as embodied in standards, has been influenced by the results of research. Both have been influenced by significant events in the world economy, notably the inflation of the 1970s and the global financial crisis that started in 2007. Historical cost has retained its position as the predominant measurement technique in practice, but considerable progress has been made in the implementation and understanding of current value measurements, although the principles for choosing between alternative current values (particularly ‘entry’ values as opposed to ‘exit’ values) require further exploration by standard setters, assisted by academic research.     

Making imaginary worlds real: The case of expensing employee stock options

West [West, B. (2003). Professionalism and accounting rules. London: Routledge] and Chambers [Chambers, R. J. (1966). Accounting evaluation and economic behavior. Houston: Scholars Book Company] have provocatively argued that financial reporting has reached a state of near-total incoherence. In this paper, we argue that a source of this incoherence is the transformation of the US accounting academy into a sub-discipline of financial economics, a transformation in which accounting became a servant of the imaginary world of neoclassical economics. After noting the unusually prominent role of rules within the accounting profession, we describe the displacement of accounting’s centuries-old root metaphor of accountability by the metaphor of information usefulness, and situate that displacement within neoliberalism, a broader political movement that arose after World War II. Finally, we use SFAS 123R, the recently issued stock option standard, as a case study of the incoherence that West and Chambers assert. Through various issues – such as reflexivity, theory paradox, and unexplained questions of responsibility – we demonstrate the logical inconsistencies involved in SFAS 123F. The incoherence of stock option reporting rules raises serious questions about the information metaphor as a foundation for either individual rules or the standard setting process. The Financial Accounting Standards Board’s (FASB) attempts to make the imaginary world of neoclassical economics real have resulted in rules which are not defensible.     

Total accounting in action: reflections on sten Jönsson’s Accounting for Improvement

Sten Jönsson’s recent book Accounting for Improvement (1996) examines organizational change processes based on several in-depth case-studies, conducted during a period of about ten years. In this review essay the arguments of the book are placed alongside recent discussions on management accounting practices, which have increasingly discovered the “hidden” potential of accounting and accountants. Jönsson’s book offers exciting insights into organizational improvement processes, which are linked to accounting in a particularly broad, “total accounting” sense. The major limitation of the book is held to be that it places accountants in the background of the analysis, perhaps reflecting problems in empirical research designs of the case-studies. As a result, the relationships and communication patterns between accountants and line personnel remain largely unexamined.     

Getting management accounting off the ground: post-colonial neoliberalism in healthcare budgets

Taking Modell's [(2014) The societal relevance of management accounting: an introduction to the special issue. Accounting and Business Research, 44 (2), 83–103] ‘societal relevance of management accounting’ agenda forward, and based on a cost accounting initiative in a Sri Lankan hospital, this paper examines how management accounting is implicated in societal relevance. It reports on a post-colonial neoliberal state's use of cost-saving experiments and the resultant emancipation of the individuals involved. It conducts a bottom-up analysis, from micro events in the hospital to policymaking at the level of the Provincial Council. This analysis suggests that cost accounting acts as a mediating instrument: it begins to loosen the old Keynesian post-colonial bureaucratic budget confinements, creates a social space for individuals to consider cost-saving experiments, and addresses wider policy concerns about hospital resource management. The story is illuminated by Gilles Deleuze's and Zigmund Bauman's ideas on post-panoptic societies: old confinements are being problematised and new flexible, ‘liquid’ spaces created, in which individuals are emancipated in terms of their ability to influence resource management within and beyond the organisational constituency.     

The Effect of Personnel Characteristics in the Internal Accounting Control System on Discretionary Tax Accruals: Evidence from Korea

This study examines whether the characteristics of personnel in a firm's internal accounting control system (IACS) and auditor characteristics control managers’ discretionary behaviour for tax planning. The study uses a sample of 4210 firm‐year observations from 2006 to 2014. The results show that managers’ discretionary tax planning cannot be controlled when the personnel in charge of internal accounting control are at an optimum level or higher. On the other hand, when a CPA is included among the personnel, the manager's discretionary behaviour is somewhat controlled. Moreover, the results show that firms audited by a large accounting firm also control the manager's discretionary tax planning to some extent. Unlike previous studies that examine the effects of IACS on discretionary accruals mostly in terms of book income, this study's contribution is an examination of the effects of the characteristics of personnel in IACS on the relationship between discretionary book‐tax conformity accruals and discretionary book‐only accruals that can be used when the manager establishes a tax plan. Additionally, this study also provides indirect evidence that the characteristics of auditors and personnel in charge of internal accounting perform a monitoring role that controls the manager's opportunistic behaviour.