12-1 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

Financial Accounting TheoryCraig Deegan

Chapter 12

Critical perspectives of accounting

Slides written by Craig Deegan

12-2 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

Learning objectives

• In this chapter you will be introduced to :– particular perspectives that challenge conventional

opinions about the role of accounting within society– the basic arguments that suggest that financial

accounting tends to support the positions of individuals who hold wealth and social status, while undermining the positions of others

– the fact that disclosure (or non-disclosure) of information can be construed to be an important strategy to promote and legitimise particular social orders

12-3 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

Critical perspective defined

• Refers to accounting research that goes beyond questioning whether particular methods of accounting should be employed

• Questions prevailing social arrangements and how accounting practices actually contribute to inequities

• 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

12-4 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

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

• Rejects a ‘pluralist view of society’ wherein many stakeholders have power to influence government, corporations, and so forth

– Rather, power resides in the hands of a ‘small elite’

12-5 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

The critical perspective (cont.)• Accounting seen as a means of constructing or

legitimising particular social structures for the benefits of those that currently have wealth

• Critical theorists do not seek to appear objective

• They seek to highlight the role of accounting in maintaining social structures that they perceive as unjust

12-6 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

The critical perspective (cont.)

• They believe that development of particular theories can bring about social changes in social structures and practices, that is, the promotion of a particular theory becomes a social actuality

• View that, if theorists have well developed theories which question the objectivity of financial accounting, and if they are able to generate sufficient support for the theory then ultimately this could create the necessary impetus for changes in the way financial accounting is practiced and how society is organised

12-7 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

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

12-8 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

Philosophical basis of critical accounting research (cont.)

• 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

• Critical theory is an ‘umbrella term’ for a wide variety of theoretical approaches perhaps more united in what they oppose than what they agree upon (Hopper et al.1995)

12-9 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

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

12-10 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

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

12-11 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

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

12-12 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

Disclosure of social responsibility information

• Critical theorists argue that disclosure of social responsibility information is wasted unless accompanied by fundamental changes in how society strucutred

• Acts to legitimise, not challenge, those providing the information

• Need social reform, and not more ‘accounting’

12-13 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

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

12-14 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

Criticism of critical perspective

• Critical theorists often marginalised to a greater extent than others

• Often do not provide solutions to perceived problems

– inconsistent with normal training of accountants which is to provide solutions if problems are evident

• Critical of accountants

12-15 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

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

– securities acts throughout the world were designed to maintain the ideological, social, and economic status quo while restoring confidence in the existing system and its institutions (Neimark 1982, p.49)

• Government will take action to enhance the legitimacy of the (unjust) social system

• Social disclosures seen as a means of pacifying challenges against the capitalist system where corporations given many rights and powers

12-16 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

Role of the state (cont.)

• 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

– Contrast with ‘public interest theory’ considered in previous lectures

• Corporations typically lobby against regulation that could increase their accountability to society

12-17 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

Role of accounting research

• ‘Mainstream’ 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 The story of PAT can be told in such terms. Its rise was not

just due to its addressal of academic threats and concerns at the time of its inception but it was also in tandem with and connected to the right wing political ideologies dominant in the 1980s (Hopper et al.1995, p.518)

12-18 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

Role of accounting research (cont.)

– rise of ‘economic consequences’ research seems to have been motivated by the desire of large corporations to counter attempts to change reporting systems and levels of disclosure

– results supported corporations’ call for reduction in regulation

– 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

12-19 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

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 which performance characteristics are important or not important

• Attention is directed to particular measures (e.g. profits) through accounting

12-20 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e

Role of accounting practice (cont.)

• In communicating reality, accountants simultaneously construct reality

• Political economy perspective emphasises the role of accounting reports in maintaining social arrangements

– any accounting report will tend to present selective and biased information in a manner designed to lead to the construction of a single view of the underlying reality, with this view being the one that most favours management and providers of capital

• See corporate social reporting as harmful as it gives the impression of concern and change without any real change occurring