CORPORATE SCANDALS AND CRITICAL PERSPECTIVE 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. 11/22/2017

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. 11/22/2017

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. 11/22/2017

Cont.. ------Ian Griffiths in 1986 "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 11/22/2017

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: 11/22/2017

Cont.. 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 more than one version of the truth. 11/22/2017

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 11/22/2017

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 11/22/2017

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 11/22/2017

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 11/22/2017

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 11/22/2017

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 11/22/2017

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’ 11/22/2017

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 11/22/2017

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 11/22/2017

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 11/22/2017

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 11/22/2017

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 11/22/2017

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 11/22/2017

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 11/22/2017

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