Cooper & sherer political economy of acc

Accounting Organizations and Society, Vol 9, No 3/4, pp 207-232, 1984 0361-3682/84 $3 00+ OO Printed m Great Britain (~) 1984 Pergamon Press Ltd

T H E V A L U E O F C O R P O R A T E A C C O U N T I N G R E P O R T S :

A R G U M E N T S F O R A P O L I T I C A L E C O N O M Y O F A C C O U N T I N G *

DAVID J. C O O P E R

University o f E a s t Angl ia

and

MICHAEL J. SHERER

University o f Manchester

Abstract

Extstmg research on the chotce of accounting methods for corporate reports emphastzes prtvate interests In particular, shareholders' mterestS predominate m studtes of the effects of accountmg information on mdtvtdual users Attempts at assessing the soctai value of accounting reports, usmg the approach of marginal economtcs to reformation or the analysts of economic consequences also exhtbtt, m their execuuon, a pronounced shareholder orientation Thts paper suggests that an alternattvc approach, the Pohtmal Economy of Accountmg, may be fa'mtful This approach seeks to understand and evaluate the functions of accounting w,thm the context of the economtc, social and pohttcal environment m which it operates Research w,tfun thts framework ts tdentdied as hawng normattve, descrtpttve and crmcal qualities, and the paper concludes with some dlustrattons of potential research areas

T h e m a j o r o b j e c t i v e o f t h i s p a p e r is to o u t l i n e a n

a l t e r n a t i v e f r a m e w o r k fo r r e l e v a n t a c c o u n t i n g

r e s e a r c h . T h e i n t e n t i o n is to r e i n f o r c e r e c e n t

ca l l s ( B u r c h e l l et al., 1980 ; T i n k e r , 1 9 8 0 ) to

u n d e r s t a n d h o w a c c o u n t i n g s y s t e m s o p e r a t e in

t h e i r soc ia l , p o l i t i c a l a n d e c o n o m i c c o n t e x t in

o r d e r t h a t " b e t t e r " a c c o u n t i n g s y s t e m s m i g h t

e v e n t u a l l y b e d e s i g n e d . In o r d e r to se t o u r a rgu-

m e n t s f o r a p o l i u c a l e c o n o m y o f a c c o u n t i n g in

c o n t e x t , t h e f i rs t t w o s e c t i o n s o f t h i s p a p e r

r e v i e w m a n y o f t h e c u r r e n t a p p r o a c h e s to asses-

s i ng t h e v a l u e o f c o r p o r a t e r e p o r t s W h i l s t t h i s

r e v i e w m i g h t b e t h o u g h t t o d u p h c a t e o t h e r s

( e g . G o n e d e s & D o p u c h , 1974 ; F o s t e r 1 9 8 0 a ,

Le f tw ich , 1 9 8 0 , B e a v e r , 1 9 8 1 ) , t h e s y n t h e s i s

o f f e r e d in t h i s p a p e r is q u i t e d i f f e r e n t It is

d e s i g n e d to h i g h l i g h t t h e e m p h a s i s b y m o s t

a c c o u n t i n g r e s e a r c h o n i n d i v i d u a l s ( e s p e c i a l l y

s h a r e h o l d e r s ) a n d a c o n c e r n w i t h m a r k e t

e q u i l i b r i u m a n d t h e a s s o c i a t e d p a s s i v e a c c e p -

t a n c e o f t h e e x i s t m g soc i a l a n d p o l i t i c a l c o n t e x t

o f c o r p o r a t e r e p o r t i n g . I m p l i c i t i n o u r r e v i e w is

a n o t i o n o f s o c i a l w e l f a r e t h a t f o c u s e s o n s o c i e t y

as a n a g g r e g a t e ( r a t h e r t h a n a n a g g r e g a t i o n o f

i n d i v i d u a l s ) , a n e m p h a s i s o n d i s t r i b u t i v e as w e l l

as e x c h a n g e ( a l l o c a t i v e ) d i m e n s i o n s o f w e a l t h

a n d p o w e r a n d a c o n c e r n w i t h soc i a l l y n e c e s s a r y

r a t h e r t h a n m a r k e t d e t e r m i n e d p r o d u c t i o n . T h i s

v i e w o f s o c i a l w e l f a r e l eads to t h e c o n c l u s i o n

t h a t t h e s t u d y o f t h e i n s t i t u t i o n a l c o n t e x t o f

*Prevtous verstons of tfus paper were presented at the London School of Economics, the Umversmes of Bwmmgham, Shef- field and Southampton and at a meetmg of the Northern Accounting Group The paper has benefited from the helpful, ffoften crmcal, comments of Mtke Bromwtch, Anthony Hopwood, Michael Mumli~rd, Marllyn Nlemark, Jtm Ohlson, Ted O'Leary, Tony Tmker and colleagues at the Umversmes of East Angha, Manchester and Sheffield The remamlng errors and the vtews expressed are the responstblhty of the authors

207

208 DAVIDJ COOPER and MICHAELJ SHERER

a c c o u n t i n g is a l eg i t imate and necessa ry area of s tudy for a c c o u n t i n g r e sea rch The d o m i n a n t c o n c e r n wi th s h a r e h o l d e r in te res t has l imi ted the d e v e l o p m e n t o f r e sea rch abou t h o w a c c o u n t i n g sys tems o p e r a t e and for des ign ing c o r p o r a t e a c c o u n t i n g r epo r t s w h i c h may lead to a fundamenta l i m p r o v e m e n t in social wel fare 1

It is impor t an t at the ou t se t to h ighl ight a cru- cml t ens ion in this p a p e r w h i c h arises ou t of ou r c o n c e r n to c r ea t e accoun t ings that are va luable m soc ie ty O u r pos i t ion , that the ob jec t ives of and for a c c o u n t i n g are fundamenta l ly con te s t ed , arises ou t of the r e c o g n i t i o n that any accoun t i ng con ta ins a r e p r e s e n t a t i o n o f a specif ic social and pol i t ica l con tex t . Not on ly is a ccoun t i ng po l i cy essent ia l ly po l i t i ca l in that it de r ives f rom the pol i t ica l s t ruggle m soc ie ty as a w h o l e bu t also the o u t c o m e s of a ccoun t i ng p o h c y are essen- t ially pol i t ica l in that they o p e r a t e for the benef i t o f some g roups in soc ie ty and to the d e t r i m e n t o f o the r s However , it does not fo l low I and this is h o w the t ens ion in the p a p e r manifests i t s e l f - - that an i m p r o v e m e n t in a c c o u n t i n g po l i cy can necessar i ly be ach ieved wi th in the accoun t i ng d o m a i n Rather, t he re as the impl ica t ion that the poh t i ca l ly d e t e r m i n e d na tu re of the value of a ccoun t i ng p r e v e n t s any such re so lu t ion wathm a ccoun t i ng i tself

Socml wel fa re as l ikely to be i m p r o v e d if a c c o u n t i n g p rac t i ces are r e c o g m s e d as be ing cons i s t en t ly part ial , that the s t ra tegic o u t c o m e s of a ccoun t i ng p rac t i ces cons i s ten t ly ( i f not mva rmb ly ) favour specif ic anterests in socaety and d i sadvan tage o the r s Therefore , w e are argu- ing that t he re a l ready exis ts an es tabl ished, if implici t , c o n c e p t u a l f r a m e w o r k for a ccoun t i ng practace. This p a p e r offers an analysis of the value of c o r p o r a t e a c c o u n t i n g r epo r t s w h i c h r ecogn i ses bo th the tact ical d i scon t inu i t i e s and varlataons in a ccoun t i ng pol ic ies , inc lud ing the poss ib i l i ty that ac tual po l i cy o u t c o m e s may be an imper fec t m a t c h wi th the unde r ly ing inten- t ions and mot iva t ions and the s t ra tegic consen-

sus and pa t t e rns of o u t c o m e s that m o r e or less cons i s ten t ly s u p p o r t financial and s h a r e h o l d e r In teres ts in soc ie ty In o r d e r to ach ieve an i m p r o v e m e n t in a c c oun t i ng p rac t i ce s ( t o make t hem m o r e a c c o u n t a b l e to soc ie ty m a democra - tac w a y ) at is impor t an t to cast asade the ideolog- acal mask w h i c h h ides the rea l i ty of a c c o u n t i n g research , to adentify h o w a c c oun t i ng r e sea rch justifies c u r r e n t pol i t ica l a r r angemen t s and patterns of advantage and disadvantage, and h o w a c c o u n t i n g r e sea rch samllarly amplies that such a r r angemen t s and pa t t e rns are ammutable, effi- c ien t and even effect ive That as the p u r p o s e of this p a p e r

The first s ec t ion of this p a p e r rev iews many of the s tudies w h i c h mm to assess the usefulness of c o r p o r a t e accoun t ing r epo r t s for users These studies, because they have amphcataons mere ly for the pr iva te value of informataon, p r o v i d e lit- t le gu idance for the des ign of, and c h o i c e between , al ternatave a c c oun t i ng r epo r t s that are i n t e n d e d to con t rabute t owards social wel fare

In the nex t sec t ion some r e c e n t deve lopmen t s whach p u r p o r t to address the ques t ion of the social, as against the pr iva te value of co rpora te a c c oun t i ng r epo r t s are d i scussed These a t tempts , too, p r o v i d e an i n c o m p l e t e analysis of the social value of a c c oun t i ng in format ion The i r de f i c iency hes in the i r focus on issues of effi- c i ency ( r a the r than e f fec t iveness ) and the i r emphas i s on a small set of users and the p roduc - ers of a c c oun t i ng r epo r t s

An a l te rna t ive f r amework for analysing the role of a c c oun t i ng anformation, des igna ted as a poh t i ca l e c o n o m y of account ing , is p r e s e n t e d thereaf te r A poh t i ca l e c o n o m y of a c c oun t i ng emphas izes the infras t ructure , the fundamenta l re la t ions b e t w e e n class an soc ie ty It r ecogn izes the ins t i tu t ional e n v i r o n m e n t w h i c h suppor t s the ex is t ing sys tem of c o r p o r a t e r e p o r t i n g and sub jec t s to cr i t ica l sc ru t iny those assues ( s u c h as the assumed ampor tance of sha reho lde r s and secur i t i es marke t s ) that are f requen t ly taken for

Tlus paper adopts a conventional viewpoint m that at focusses on corporate reports A full discussion of the value ofaccount- mg would revolve discussion of mtm (e g household) and macro (e g national) accountmgs (Gambhng, 19"74) and why accountmg research assumes the tmmutabthty (and deslrabthtv) of legahstlc definitions of corporations (Burchell et a l .

1982)

THE VALUE OF CORPORATE A C C O U N T I N G REPORTS 2 0 9

granted in current accounting research. Finally this alternative paradigm of political economy of accounting is applied to three examples of potential research.

PRIVATE VALUE APPROACHES

There is a long tradition of accounting theory being concerned with the interests of the users of accounts (Sterling, 1972). This theoretical concern with users has influenced practice in the form of conceptual frameworks offered by professional bodies (AICPA, 1973; FASB, 1978b; Stamp, 1980; Macve, 1981). In this section we review the user orientation in order to highhght two features, the emphasis on shareholders and the partial equilibrium approach adopted. Emphasis on users in a partial equilibrium context may indicate necessary conditions for the prwate value of information. It does not provide a sufficient basis for prescriptions about socially desirable accounting policy and reports.

Corporate reports and indiv idual shareholders Accounting theory has long been concerned

with the mterests of individual private shareholders. Whilst many theories have concentrated on aiding shareholders in decisions concerning their income, wealth and even utility 2 (Edwards & Bell, 1961; Chambers, 1966; Sterhng, 1970; Beaver & Demski, 1974), much of the empirical research has been limited to studies of shareholder usage and understanding of accounting reports. Shareholders usage and understanding has been assessed in two ways; firstly, by the application of techniques to measure readabil- ity, and hence understanding, of accounting reports (e.g. Smith & Smith, 1970; Still, 1972; Haried, 1972, 1973; Adelberg, 1979); secondly,

by shareholders', or their representatives', responses to questionnaires about their use, and hence understanding, of financial reports (e.g. Epstein, 1975; Lee & Tweedie, 1977, 1981; Chang & Most, 1979; Advisory Committee on Corporate Disclosure, 1977).

In addition to certain technical difficulties and inconsistencies mherent in the types of empirical tests used, 3 both approaches suffer from problems of interpretation. There is an absence of references to any theories of how investors do or should use accounting information. Possible theories might include the bounded rationality model (Clarkson, 1962), or the portfolio model (Ball & Brown, 1969) Without such a theory against which to evaluate the empirical findings, it is impossible to determine whether "poor" usage or understanding is a material factor affect- mg individuals' actions. Other problems of interpretation include the focussing on parts rather than the full contents of the accounting reports (Gonedes, 1978) and the level of self insight required of respondents (Nisbett & Wil- son, 1977)

A second limitation of this type of empirical research concerns the benefits which are expected to accrue from a concentration on the interests of the individual shareholder. The prescriptions derived from this research include calls for accounting reports to be simplified, accounting policy makers to concentrate on the needs of naive investors, and the need for education of individual shareholders in accounting and financial matters (e.g Tweedie, 1981). A potential consequence of these prescriptions would be to redistribute wealth from one group of "knowledgeable" shareholders to another group of "naive" shareholders (Findlay, 1977). Indeed, it is an implicit value judgement of this type of research that such a redistribution ts a

2 This e m p h a s i s m c l u d e s s h a r e h o l d e r d e c l s t o n s to a l loca te w h a t a re d e s c r i b e d as " t h e t r " r e s o u r c e s b e t w e e n f i rms ( so -ca l l ed " f inanc ia l a c c o u n t m g " ) a n d to a l loca te r e s o u r c e s w t t h m a f i rm c o n s t s t e n t w t t h t h e m a x t m l z a t t o n o f s h a r e h o l d e r u t i h t y ( so-

ca l l ed " m a n a g e m e n t a c c o u n t m g " )

For e x a m p l e , C o o p e r et al (1977) a n d Br t s ton ( 1 9 7 7 ) q u e s t i o n the va lue o f t he Lee & T w e e d i e s tud ie s ( 1 9 7 7 ) m p a r t m

r e l a t i o n to t he v a h d t t y o f t h e i r r e s e a r c h m s t r u m e n t s a n d tn p a r t in r e l a t t on to t he t r r e su l t s T h e s a m e dtff icul t tes r e l a t e to t h e t r

la te r r e s e a r c h (Lee & T w e e d i e , 1981 )


benef ic ia l c o n s e q u e n c e in itself. In effect, s ha r eho lde r s are d e p i c t e d as indiv iduals opera t - ing wi th in an env i ronmen ta l v a c u u m and this a l lows the des ign o f c o r p o r a t e a ccoun t i ng r epo r t s to be c o n s i d e r e d as if it w e r e on ly of private in te res t But the omis s ion of any cons idera - t ion for the i m m e d i a t e env i ronmen t , the capi ta l market , in w h i c h the s h a r e h o l d e r class opera tes , ignores w i d e r effects w h i c h may ensue f rom such p r e s c r i p t i o n s Research into s h a r e h o l d e r usage and u n d e r s t a n d i n g canno t by i tself assess w h e t h e r the above r e -d i s t r ibu t iuon w o u l d lead to a m o r e a p p r o p r i a t e a l loca t ion o f r e sou rce s wi th in the capi ta l market , let a lone to a h igher level of wel fa re for all m e m b e r s o f the e c o n o m y As B u t t e r w o r t h et al. argue ( 1981, pp. 58--62), u n d e r s t a n d i n g indiv idual r e sponses may be of in te res t in c o n t r i b u t i n g to a genera l unders t and- ing of a c c o u n t i n g ( e l a b o r a t i n g users and the i r se t t ings) ; bu t It is un l ike ly that individual behav iou r t rans la tes to aggregate marke t r e sponses (Schelhng, 1978)

Corporate reports and aggregate shareholder behaviour

Research ind ica t ing capi ta l marke t "effi- c i ency" ( o r o t h e r w i s e ) wi th r e spec t to pub- l i shed financial in fo rmat ion might be though t to ho ld p r o m i s e for u n d e r s t a n d i n g and des ign ing a c c o u n t i n g systems. By e x p h c i t l y taking accoun t of the effects of the aggregate b e h a v i o u r of investors in a marke t env i ronmen t , s tudies of the impac t o f a ccoun t i ng in format ion on s tock market p r i ces might p r o v i d e insights in to sharehol- d e r use of a c c o u n t i n g r epo r t s and the cho i ce b e t w e e n a l te rna t ive r e p o r t i n g methods .

Fos te r ( 1 9 8 0 ) suggests that a l te rna t ive a c c o u n t i n g r epo r t s may affect the cash f lows of indiv idual firms, the cova r i ance o f cash flows o f indiv idual f i rms wi th the market , the r i sk-re turn cha rac te r i s t i c of the en t i r e capi ta l marke t and the in format ion set used by marke t t raders On ly the first two effects s eem to have b e e n systemat- ical ly inves t iga ted Studies in the U S (Ball & Brown, 1969) and in the U K (Fir th, 1977) indica te that the re ~s some in format ion c o n t e n t in a ccoun t i ng earn ings r epo r t s bu t this in format ion is not "t~mely" s ince the marke t p r i ce changes

p r e c e d e pub l i ca t i on of the a c c oun t i ng r e po r t s Reviews of the empi r i ca l l i t e ra tu re (Fos ter , 1978) also suggests that the s tock marke t can "see th rough" and adjus t for changes in account - ing po l i cy w h i c h do not affect the e c o n o m i c pos- i t ion of the r e p o r t i n g firm. Thus the wea l th of e v i d e n c e f rom many o f the empi r i ca l s tudies of the re la t ionsh ip b e t w e e n pub l i shed a c c oun t i ng in format ion and s tock marke t p r i ces seems to ind ica te that the pr iva te sha reho lde r c anno t make cons i s t en t abnorma l gains f rom using such in format ion

H o w e v e r t he re are a n u m b e r o f reasons w h y a c c o u n t i n g po l i cy makers shou ld be wary of us ing marke t r e sponses to assess the p r iva te and pa r t i cu la r ly the social value o f the r epo r t s cho- sen First ly t he re are c ons ide r a b l e p r o b l e m s in def in ing and h e n c e assessing the eff ic iency of re format ion marke t s (Fama, 1976; Beaver, 1981 ). A s e c o n d diff icul ty wi th the eff icient market l i t e ra ture occu r s be c a use mos t ex is t ing tests are, in fact, jo int tests o f the capi ta l asset p r i c ing m o d e l and the eff ic iency of the in format ion market I n t e rp re t a t i on of the resul ts of tests is a cco rd ing ly ambiguous (Ball, 1978, Foster, 1979). Many of the above diff icult ies might be r e m o v e d by careful theore t i ca l w o r k abou t the me a n ing of eff ic iency (Beaver , 1981), exp l ic i t m o d e l l i n g of sha reho lde r r eac t ion to po ten t i a l gains (Ohlson , 1979, Patell, 1979) and m o r e soph i s t i ca t ed e c o n o m e t r i c w o r k (e g deahng wi th be ta s ta t ionari ty , the no rma l i ty of secur i ty r e tu rns and measures of the marke t po r t fo l i o )

Perhaps of m o r e i m p o r t a n c e in re la t ion to the value of a c c oun t i ng r epo r t s is that this l i t e ra tu re is c o n c e r n e d wi th the eff iciency of the marke t for in format ion ra the r than the eff ic iency of the marke t for the secur i t i es t hemse lves It may wel l be that the empi r ica l resul ts ind ica te the pr iva te value ( o r o t h e r w i s e ) of in format ion (Ohlson , 1979, Patell, 1979) But on ly m the mos t unhke ly of c i r c ums t a nc e s is it poss ib le that capital marke t reac t ions also ind ica te the social value of in format ion or have impl ica t ions abou t the des i rabi l i ty of a l te rna t ive accoun t ing measu res o r d i sc losures Work hnklng capi tal marke t reac- t ions and the value of in format ion (e g Beaver & Dukes, 1972a, Ohlson, 1980) may eventua l ly

THE VALUE OF CORPORATE ACCOUNTING REPORTS 211

provide guidance to accoun t ing pol icy makers. Under p resen t inst i tut ional a r rangements ( in particular, those that give rise to the free r ider effect, reformation asymmetry and market i ncomple t enes s ) it is however logically invalid to suggest that capital market efficiency tests can be used to assess the desirabil i ty of al ternative accoun t ing measures or disclosures (Beaver and Demski, 1974; Gonedes and Dopuch, 1974)

The desirabil i ty of al ternative accoun tmg measu remen t systems can only be assessed ffthe

object ives of the accoun t ing f u n c u o n wi th in society are made explici t (Ronen, 1979). And, if such object ives are c o n c e r n e d with the effi- c iency of resource al location and the distribu- t ions of weal th wi th in the e c o n o m y as a whole rather than one part icular market, then capital market research is of l imited value. Focusing on informational efficiency in the capital market may con t r ibu t e towards an efficient al locat ion of capital resources from the perspect ive of the shareholder class, bu t the resul t ing equi l ibr ium may not be efficient for o ther member s of the e c o n o m y 4

Cons idera t ion also needs to be given to the impor tan t bu t f requent ly neglec ted ques t ion of efficiency intra and inter all the mechanisms for al locating capital in the economy. Capital is allo- cated by several markets, inc lud ing the p roper ty and labour markets (for h u m a n capital) as well as by a n u m b e r of publ ic ly o w n e d ins t i tu t ions and p lann ing authori t ies such as nat ional ized and regulated companies , and nat ional and local governments .

Wi th in this wider set of al location mechanisms, the choice of an accoun t ing measu r emen t system becomes m u c h more complex

These mechan i sms are direct ly affected by the accoun t ing informat ion p r o d u c e d by listed corpora t ions Many allocators of capital resources o ther than the stock market also have an interes t in the choice of accoun t ing measures and disclosures. Although in the future it may be shown that what is "good" for the stock market is also "good" for these o ther allocators of capital and hence the e c o n o m y as a whole, it is a ques t ion that is rarely addressed in the li terature.

CORPORATE REPORTS AND OTHER USERS

There have b e e n a n u m b e r of at tempts to assess the use of p u b h s h e d accoun t ing reports by external users o ther than shareholders, inc lud ing employees (e.g. Cooper & Essex, 1977; Foley & Maunders, 1977, Carlsson et al., 1978), lenders (e.g Libby, 1979), tax authori t ies (e g Mace, 1977a; Lawson, 1980), g o v e r n m e n t ( eg . Enthoven, 1973; Gambling, 1974) and researchers (e.g. Gonedes & Dopuch, 1979) Even if homogene i ty wi th in the user groups is assumed, ~ confl ict ing object ives b e t w e e n these user groups may result in different preferences for the c on t e n t and form of accoun t ing reports. These confl ic t ing object ives and hence preferences may be satisfied by publ i sh ing different accoun t ing reports d i rec ted towards each specified group (Revsine, 1973; ASSC, 1975), al though the cost to the e c o n o m y in terms of resources used wou ld be greater than t fonly one set of accounts were published. The al ternative approach is to design general purpose accounting reports (Iilri , 1975; Mace 1977b) which a t tempt to satisfy the preferences of all user

4 It is of course the case that a substantial body of recent research has been concerned with the redistribution effects of accounting and investment decisions between different parties holdmg clmms on the firm Jensen & Meckhng ( 1976 ), Myers (1977) and Kalay (1982), for example, have shown how the capital structure of the firm can alter the distribution of funds between bond and stockholders However, such work sn'nply provides further support for our argument that capital market research ts concerned with redistribution effects only on a very restricted level, bond and stockholders, particularly ff they hold a portfolio of assets, frequently belong to the same class Capital market research demonstrates very little concern for other groups m society, notably workers, consumers etc

There ts little reason to assume the validity of this assumption Even the shareholder class who have a relatively well developed market in which they can trade according to their preferences, may have imperfectly resolved conflicts concern- mg information (e g Hakansson, 1981 )

212 DAVIDJ COOPER andMICHAELJ SHERER

groups. The difficulty wi th this approach is that any inter-user confl ict over preferences must be dealt wi th by a decis ion to choose one m e t h o d of accoun t ing over another , i.e social choice. However, as has b e e n demons t r a t ed by Arrow ( 1 9 5 1 ) for the general case and by Demski ( 1 9 7 3 ) for the case of financial report ing, it IS logically impossible to make social choices that are rational, reflect individual preferences and are not dictatorial. 6 In o ther words, the recogm- tion, p e r se, of mul t ip le external users for accoun t ing reports is insufficient for assessing the overall e conomy-wide value of accoun t ing reports. It fails because the approach lacks a theory about how these users should or do in terac t wi th each o ther in the social and pohti- cal env i ronmen t . Such a theory wou ld need to ar t iculate differing interests in society, their in terac t ions and means of resolut ion.

Corporate reports in a contract ing con tex t One of the more r ecen t deve lopmen t s m

theories of corpora te repor t ing has been a shift from an emphasis on the use of accoun t ing m pred ic t ing variables "of interest" to a c o n c e r n wi th the use of accoun t ing in cont rac tua l re lat ionships b e t w e e n corpora te s takeholders As this deve lopmen t is well summar ised m But- t e rwor th e t a l ( 1981 ), only the main issues will be discussed m thts paper

Fol lowing Coase ( 1 9 3 7 ) and Alchlan & Demsetz (1972) , corpora t ions have b e e n vie- wed as a set of rater-related contrac ts b e t w e e n par t ic ipants In this v iew a significant role for accoun t ing repor ts and informat ion is as a mon i to r ing device to record the behav lour of con t rac t ing parties involved. There are several critical issues for the value of corpora te reports Firstly what are the des i red at t r ibutes of such a mon i to r ing system ( e g Ijiri, 1975, 1981)7

Given the complex way the cont rac tua l system adapts to " imperfect ions" in the mon i to r ing sys- t em and the difficulty of ident i fying an opt imal system, a t ten t ion has b e e n placed on adaptive processes in the cont rac tua l relat ionship (Watts, 1977; Leftwlch, 1980, Milne & Weber , 1981) It w ou l d appear, however , that this a t ten t ion has b e e n s t ronger in assert ing the ex is tence of processes which result in perfect adaptat ion rather than in demons t r a t ing how they operate. Finally a t t en t ion has b e e n focused on the behaviour of the parties m the re la t ionship and the design of the reward systems to share the risks and re turns der ived from the in terac t ion (Holmst rom, 1979, Harris and Raviv, 1978)

Applicat ions of the con t rac t ing approach with its emphasis on agency relationships, have b e e n used to provide explanat ions for the develop- m e n t of GAAP (But t e rwor th et al., 1981 ) and the audi t ing func t ion as mechan i sms for mcreasmg the a m o u n t of disclosure above that which managers might pr ivately wish to p roduce (Watts, 1977, Ng, 1978) Similarly, the c o n t i n u e d exis- t ence of ins t i tu t ions such as the FASB in the U S and the ASC in the U K., and the regulat ion of accoun t ing by g o v e r n m e n t has been expla ined in te rms of p u b h c good characteris t ic of accoun t ing reports and he nc e the social value which the p roduc t i on of accoun t ing reports can confer on the e c o n o m y as a whole (Benston, 1976, Findlay, 1977, Foster 1980b) The iden- tiffed deficiencies of these explanat ions (e g Leftwich, 1980) do not detract from the insight der ived from the approach

Nevertheless, there seem to be at least two p rob lems with th~s approach. Firstly it tends to elevate markets to the status of an immutab le and ideal b e n c h m a r k That is, markets are t reated as the s tandard by which o ther institu- t ional a r rangements are to be ludged (Demsetz ,

6 There are limited cases where rational collective choices can be made about information (Cushing, 1977, Hakansson, 1977, Bromwlch, 1980) There is considerable potential in identifying and evaluating alternative institutional arrangements for makmg social choices (Abdel--Khahk, 1971, Beaver & Demski, 1974, Mueller, 1979) Moreover, not all economists accept the proposition that interpersonal comparisons should not be made For example, Sen (1970) argues tor makmg interpersonal comparisons by imagining oneself in the place of another and Goodln (1975), based on the ethical postulate that everyone has an equal capacity for happmess, argues that interpersonal utility comparisons simply require asking men hox~ far along towards their "bhss points" (l e when the capacity for happiness is fully reahsed), a change m the distribution ot goods would take them and comparing their response~


1969). Market failures such as information asymmetry and non-excludability may be recognised but by assuming the perfect adaptability and omniscience of market participants, other institutional possibilities are dismissed (Leftwich, 1980). There is no recognition of the social, contrived nature of markets (White, 1981 ) or of their historical specificity (Routh, 1975). Consequently this approach almost invariably reinforces the existing market system or recommends reduction in intervention in market operations so that the market can operate according to its logic. In short, the emphasis on market efficiency which is inherent in this approach relies on the belief (derived from marginal welfare economics), that market efficiency is a necessary condition for social welfare improvements. The problem with this belief, which is considered further in the next section, is that it is based on extremely dubious assumptions (Graft, 1957) and an untenable instrumen- talist philosophical position (Tinker et al., 1982).

The second problem with the contracting approach is common to all the approaches discussed in this section A concern with "users" of corporate accounts (for decision making involv- ing prediction or for stewardship) may be able to address issues of private value but does not seem able to deal with the social value of these reports. By focusing on one subset of participants in society - - active market agents - - it ignores issues of social welfare which mcorpo- rate the well being of all members of society. It has been recognised that the welfare of pro- ducer of accounting reports (Cyert & Ijiri, 1974) and corporate managers (Watts & Zim- merman, 1978) may be affected by corporate reports. It has also been recognised that accounting reports may themselves influence firms' financing and operating decisions (Prakash & Rappaport, 1977; Heald, 1980, But- terworth et al., 1981 ) Yet all these developments cannot avoid the problem of partial equilibrium approaches to valuing accounting reports, namely their failure to model the total interaction between these reports and all mdi- viduals and classes in society.

SOCIAL VALUE APPROACHES

It is perhaps not surprising, given the claim of accountants to be professional (Sterling, 1974), the increasing concern about the value for money of accounting reports in society (Briston & Perks, 1977), and the public concern about the accounting profession (U.S. Senate, 1976, Davidson, 1979), that increasing attention has been placed on the social value of corporate reports. In this section we review the general equilibrium approach to the economics of information and the analysis of economic consequences. Both approaches attempt to understand and explain the production and use of accounting reports from an economy-wide perspective and hence directly address the broader issue of the social value of accounting information.

General e q u i l i b r i u m ana lys i s General equilibrium economic analysis

(GEEA) typically involves the analysis of information in a market context. It aims to identify conditions which result in economic efficiency in the allocation of resources through time between all market participants. In particular, GEEA of information seeks to identify the role of information in these allocations. Ohlson & Buckman ( 1981 ) synthesise much of the literature on the welfare implications of public information within the framework of marginal economics. Whereas Hirschleifer (1971) suggested that public information was socially useless, Ohlson & Buckman ( 1981 ) demonstrate how this information will affect the sharing of risks in an economy and so has welfare implications. The nature of these imphcations is not well specified, however, as they depend on market arrangements and the set of available resources to be traded

The failure to produce specific welfare implications is also evident in the analysis of the production of private information. Htrshleifer (1971) and Demski (1974) have argued that there are incentives for one individual to pri- vately produce information (thereby consuming recources) in order to make gains at the expense of another who does not have this information.


D e m s k i & F e l t h a m ( 1 9 7 6 ) also sugges t tha t it

m a y b e w o r t h w h i l e for an i nd iv idua l to pay to

s u p p r e s s i n f o r m a t i o n if o t h e r i nd iv idua l s m a y act

o n this i n f o r m a t i o n in an u n f a v o u r a b l e w a y

In shor t , then , t h e w e l f a r e i m p l i c a t i o n s o f

GEEA are u n c l e a r b u t d e p e n d o n ( e x o g e n o u s l y

d e t e r m i n e d ) marke t s , a l t e r n a t i v e s and ini t ial

r e s o u r c e e n d o w m e n t s For ins tance , Hakansson

( 1 9 8 1 ) s h o w s h o w g r o u p s tha t d i f fer in ini t ial

e n d o w m e n t s ( e g . w e a l t h ) wi l l take d i f f e ren t

p o s i t i o n s o n a c c o u n t i n g d i s c l o s u r e s Fur the r ,

t h e u se o f GEEA to e x p l a i n t h e f u n c t i o n o f

a c c o u n t i n g in s o c i e t y and to p r o v i d e c r i t e r i a for

e v a l u a t i n g a l t e r n a t i v e a c c o u n t i n g sys tems , is

l i m i t e d by its h igh l eve l o f g e n e r a h t y and abs t rac-

t i on W t t h o u t d e t a i l e d s p e c i f i c a t i o n of, for e x a m -

ple , u t i l i ty func t ions , c o s t s t r u c t u r e s o f in fo rma-

t i on and p r o d u c t i o n t e c h n o l o g i e s , it is n o t possi -

b le to i den t i fy w h i c h f o r m s o f a c c o u n t m g o r

m s t l t u t i o n are e f f i c ien t Fur the r , O h l s o n &

B u c k m a n ( 1 9 8 0 ) i n d i c a t e t h e sens t t tv i ty o f t h e

c o n c l u s i o n s o f t h e analysis to c h a n g e s in t h e

a t t r t bu t e s o f t h e m o d e l o f t h e e c o n o m y . For

ins tance , t h e y sugges t tha t t h e c o n c l u s i o n s

d e r i v e d f r o m a s i m p l e ( ana ly t i ca l l y t r a c t a b l e )

m o d e l m a y n o t app ly for m o r e c o m p l e x m o d e l s

( w h i c h i n c l u d e s s u c h " c o m p l e x i t i e s " as t h r e e

t i m e pe r iods , h e t e r o g e n e o u s e x p e c t a t i o n s and

e n d o g e n e o u s i n f o r m a t i o n p r o d u c t i o n ) . T w o f u r t h e r h m i t a t i o n s o f GEEA re la t e to t h e

u se o f marg ina l i s t ( n e o - c l a s s i c a l ) e c o n o m i c s as

t h e t h e o r e t i c a l basts o f t h e analysts T h e first gen-

era l l i m i t a t i o n r e l a t e s to t h e e x c l u s i o n o f effec-

t i v e n e s s c o n s i d e r a t i o n s T h e u n w i l l i n g n e s s o f

m a r g i n a h s t e c o n o m i c s to e n q u i r e m t o t h e fac-

to r s that shape p r e f e r e n c e s and m o t i v a t e m a r k e t d e m a n d s ( and the c o r o l l a r y o f fa i l ing to c o n s i d e r

d e m a n d s w h i c h a re n o t s u p p o r t e d by r e s o u r c e s

o r a re n o t e x p r e s s e d in a m a r k e t ) m e a n s that

GEEA fails to d i s t i ngu i sh b e t w e e n e f f i c iency , t h e

r e l a t i o n s h i p b e t w e e n r e s o u r c e s u s e d and out-

p u t s a c h i e v e d , and e f f ec t iveness , t h e r e l a t ion-

sh ip b e t w e e n t h e o u t p u t s a c h i e v e d and t h e satis-

f ac t ion o f s o c i e t y ' s n e e d s and e x p e c t a t i o n s (Pfef-

fe r & Salancik, 1 9 7 8 ) 7 Whi l s t r e c e n t r e v i e w s

d e m o n s t r a t e t h e t h e o r e t i c a l d i sa r ray o f m u c h o f

t h e socia l s c i e n c e l i t e r a tu r e w h i c h a d d r e s s e s

i ssues o f e f f e c t i v e n e s s ( p a r t i c u l a r l y tha t r e l a t i n g

to o r g a n i z a t i o n s - - cf. K a n t e r and Brmkerhof f ,

1981, G o o d m a n & Penn ings , 1 9 7 7 ) tt is

n o n e t h e l e s s e v i d e n t tha t p o h t i c a l i ssues c a n n o t

b e d i v o r c e d f r o m e c o n o m i c analysis in r e l a t i o n

to socia l c h o i c e s T h e f u n d a m e n t a l i ssues

r e v o l v e a r o u n d p o w e r and w h o s e m t e r e s t s pre-

d o m i n a t e in s o c i e t y In o r d e r to add res s ques -

t ions o f e f f e c t i v e n e s s m r e l a t i o n to a c c o u n t i n g

r epor t s , it is n e c e s s a r y to m a k e e x p l i c i t a socia l

w e l f a r e f u n c t i o n w h i c h e n a b l e s t rade-offs to b e

m a d e b e t w e e n ind iv idua l s and c lasses o f mdl-

v tdua l s m s o c i e t y This ts n o t to say that it is t h e

r e s p o n s t b i l i t y o f an a c c o u n t i n g r e s e a r c h e r ( o r

a c c o u n t a n t ) to p r o d u c e a soc ia l w e l f a r e func-

t ion , s u c h f u n c t t o n s s h o u l d b e a r t i c u l a t e d in t h e

po l i t i ca l a r e n a H o w e v e r , it is t h e c a s e that an

analysis by an a c c o u n t i n g r e s e a r c h e r ( o r

a c c o u n t a n t ) that fails to i n c o r p o r a t e tha t a r ena

has l i t t le c r e d i b i l i t y w h e n d i s c u s s i n g va lues and

' b e t t e r " cho i ce s . B e c a u s e GEEA e m p h a s i z e s t h e

s lgnLficance o f m d i v i d u a l s and avo ids m a k i n g

m t e r - p e r s o n a l c o m p a r i s o n s o f uti l i ty, tt ts n o t an

a p p r o p r i a t e m e t h o d o f analysts for fac i l i t a t ing

the c h o i c e b e t w e e n a l t e r n a t i v e a c c o u n t i n g mea-

s u r e m e n t s y s t e m s w h i c h h a v e d i f f e r m g d is t r ibu-

t i on ef fec ts in t e r m s o f w e a l t h a n d / o r w e l f a r e

b e t w e e n c lasses in t he e c o n o m y

T h e s e c o n d h m t t a t i o n o f marg ina l e c o n o m i c

t h e o r y for g u i d a n c e a b o u t d e s t g n i n g a c c o u n t i n g

sy s t ems r e l a t e s to w h a t m t g h t b e t e r m e d its

" Of course, efficiency is itself a problematic concept Its use by economists is ambiguous ( Hall and Wmsten, 1959 ), the concept is socially constructed (influencing and being influenced by ideological preferences) and it is given different emphases m different historical situations (e g Haber, 1964, Seale, 1971 ) Hence, its measurement is an overtly value laden political activity - - it ts not a technical task Since any measure of efficiency requires a method of valuing inputs and outputs, and given that any valuation system is value laden (Tinker et a l , 1982), the measurement of efficiency inevitably depends upon the prevalhng power and interests tn society, vlz how "things" (men women, land, capital, air, water, freedom, democracy etc } are valued Moreover, although it can be ufferred that effectiveness is a h~gher level order than efficient} effectiveness/cffi- c~enc~ will always need to be traded off against equality if, as we argue, interpersonal comparisons are made (Goodm, 19"5 )


micro foundations Marginal economics implies that individual preferences for accounting information should be treated as exogenous wants although it has been suggested that such preferences may be influenced by learning through action (Sterling, 1972, March, 1978; Einhorn & Hogarth, 1981). Similarly, accounting researchers might also question the normative and descriptive validity of the notion of rational choice assumed by marginal economic theory. That is to say, individuals may not only be unable to behave consistently (Tversky and Kahneman, 1974) but they may also wish not to do so (Slovic & Tversky, 1974). Thus, some of the seemmgly innocuous assumptions about rational choice that form the basis of much of the public choice literature (including Arrow's Impossibility theorem) may indeed be contested

These observauons notwithstanding, it seems probable that developments in GEEA, as they incorporate more "realistic" models of the economy, will not only produce more robust analytical welfare implications relating to the efficiency of resource allocation in a capitalist economy but also will provide some insight into the roles of both pubhcly and prwately pro- duced information in this process However, such implications and insights will be dependent on the essentially value laden conceptualisation of the variables analysed Differing views of such variables as eft]clency, effectiveness and information would lead to a range of general economic equilibrium analyses, each offering differing implications and interpretations. There are alternative approaches to the value of corporate accounting reports which offer a better basis for informed debate and discourse than the currently dommant one of a single analytical view derived from marginal economics and a particular conceptualisation of the variables

Economic consequences analysis Economic consequences analysis (ECA) has

recently emerged as an alternative approach for understanding and valuing the role of accounting reports in a broader societal context In con- trast to the largely abstract approach of GEEA,

the ECA literature tends to be empirical and seems to have the potential for assessing a wider range of effects of changes in the accounting measurement system and hence for understanding the social role of corporate accounting reports (FASB, 1978a) Any changes to the status quo can, it is suggested, be assessed in terms of the "impact of accounting reports on the decision making behaviour of business, government, unions, investors and creditors" (Zeff, 1978, p.56). It seems unfortunate, however, that the "rise of economic consequences" (Zeff, 1978) seems to have been motivated, at least in the United States, by a desire by large corporations to counter attempts to change the existing reporting systems and levels of disclosure To date, it would seem that accounting researchers have generally reiterated the complaints of investors and businessmen about the consequences of changes in required accounting practice (AAA, 1978).

As the 1980 Supplement to the Journal of Accounting Research illustrates, studies using ECA have almost invariably evaluated the consequences of accounting reports solely in terms of the behaviour and interest of the shareholder and/or corporate manager class (Selto & Neumann, 1981 ). Many of the empirical studies have attempted to assess the stock market reaction to changes in the content of published accounting information For example, Gril~n (1978) suggested that the market reaction to SFAS 8 (Translation of Foreign Currency Trans- actions) was a consequence of the additional currency hedging which management was likely to undertake to minimize the fluctuations in corporate earnings. Similarly, the possibility that management of "full-cost" oil and gas corpora- ttons would reduce exploration activity as a consequence of a switch to "successful efforts" accounting under SFAS 19 may have explained the market reaction to such corporations (Lev, 1979). But as Foster (1980a) has observed, the inconsistency of the results m the numerous tests of the market reaction to SFAS 19 is indica- tive of a general failure in such tests to specify a theory of expected effects (and thence identify necessary control variables). Vigeland (1977)


found that the stock market did no t react to SFAS 2 This result may be in te rp re ted as indicat ing that investors ' expecta t ions about manage- ments ' R&D decis ions were unaffected by accoun t ing standards. Two disclosure require- ments enac ted by the SEC have also b e e n evaluated in terms of stock market impact: l ine of bus iness ( s e g m e n t e d ) disclosure (Horwi tz & Kolodny, 1977; Collins & Dent, 1979), and r ep lacemen t cost disclosures (Beaver et al ,

1980, Ro, 1980). Similarly, Morris ( 1 9 7 5 ) found that the U K. stock market found little n e w informat ion in early inflat ion adjusted corpora te reports. All these studies have relied on the effi- c ien t markets paradigm in order to measure any impact of accoun t ing changes on market pr ice Even al lowing for the criticisms, discussed previ- ously in the first sect ion of the paper, which this paradigm has recen t ly e n c o u n t e r e d and for the possibil i ty that such studies can be in te rp re ted as negat ing the efficient market hypothesis itself (Lev, 1979, p 501 ), the concen t r a t i on on stock market reac t ion hardly fulfills the expec ta t ions established for the ECA approach by May & Sun- dcm ( 1 9 7 6 ) who had emphasised the impor- tance of ob ta in ing ev idence of the total economy-wide impact of changes in publ i shed accoun t ing information.

There have also b e e n a few studies, wi th in the ECA framework, which have direct ly investi- gated the impact of changes in accoun t ing repor ts on corpora te m a n a g e m e n t decisions. Dukes et al ( 1 9 8 0 ) and Horwitz & Holodny ( 1 9 8 0 ) invest igated the impact of SFAS 2 on corporate R&D expend i tu res The incons is ten t results of these studies may be due to differmg samples bu t even w h e n a r educ t ion m R&D expend i tu re occured, these studies are unable to de tec t whe the r there was a change in the na ture and d is t r ibu t ion of R&D th roughout the

e c o n o m y In short, the focus is on firm-level effects and not economy-wide effects. Similarly, Wilner ' s expe r imen t s (1982) , albeit in a laborat- ory, suppor ted earlier surveys which suggested that SFAS 8 affected managers ' exchange risk decis ions And Biddle ( 1 9 8 0 ) found that the LIFO-FIFO choice affected the size of inven- tories held by corpora t ions The theoret ical jus- tification for the effects identif ied in these studies tends to be based on some vers ion of agency theory (Jensen & Meckling, 1976; Watts, 1977). This theory suggests that corpora te managers will have an incent ive, based e i ther on di rect changes in expec ted corpora te cash flows (e g. cost of capital, tax, informat ion processing, poli t ical or p roduc t i on costs) or on changes to the managers ' ow n compensa t i on systems, to adjust their behaviour as a result of changes in accoun t ing methods

The re levance of these studies to an assess- m e n t of the social value of accoun t ing reports can be ques t ioned on a n u m b e r of grounds. Firstly, there has been very little mode l l ing of the process by which managers respond to accoun t ing changes s The outputs , managerial at t i tudes and actions, are observed in association wtth the inputs, the change in accoun t ing reports, bu t no ev idence is p re sen ted concern - ing the way managers actually arrive at their at t i tudes or act ions Thus, the whole issue of why managers act, or have the att i tudes they do, is subsumed by the rat ionali ty assumpt ions in agency theory 9 Alternative explanat ions such as the na ture of the informat ion i tself(Kelly-New- ton, 1980) or the role of corpora te personal i ty (Sorter & Becker, 1964) are no t explici t ly considered Secondly, these studies have b e e n unab le to dis t inguish b e t w e e n opera t ing decis ions b rought about by ne w accoun t ing standards and opera t ing decis ions which wou ld still have b e e n

Btddle (1980) has made a recent attempt to model this process but although he found cash flow incentives have considerable power tn explammg voluntary LIFO-FIFO choices, he also found other umdenttfied factors were important

9 We may challenge the descrtptwe and normative vahdtty of the notion of raUonahty mherent m agency theory Social psychologists have indicated the descriptive hmltatlons of the axioms which form the bas~s of the economic theory of choice We also doubt the deslrabnty of destgmng accounting reports predicated on a model of individual economic serf interest These issues aside, the agency theory hterature seems to view rattonahty inconsistently It assumes that individual managers and the stock market have incentives not to interpret accountmg numbers at their face value but that "bureaucra~Aes" such


taking because of changes in o ther factors (Ball,

1980). More fundamental ly , studies adopt ing the

ECA approach have focused their a t ten t ion on a very l imited subset of the total economy, namely, the impact on the shareholder or manager class. The effects of accoun t ing reports direct ly on o ther users, e.g gove rnmen t s and unions , and indirect ly on "non-users", e.g. consumers, employees and taxpayers, have b e e n ignored The basis of such a decis ion can, at best be that any such effects are e i ther secondary and/or lacking in economic significance Thus, these studies have made an implici t value state- m e n t that the needs of the shareholder and manager class are of pr imary impor tance and that concen t r a t i on on those needs is sufficient for an unde r s t and ing of the role of accoun t ing reports in society. Unless the insignif icance of the effects on o ther users and "non-users" is demons t ra t ed rather than mere ly assumed, the conc lus ion from this research canno t be general ised for the e c o n o m y as a whole and these studies are insuffi- o e n t for making accoun t ing prescr ip t ions i n t ended to improve overall social welfare.

In addit ion, ECA research has b e e n at the level of the single enterpr ise so that the possibili ty of subs t i tu t ion effects (e.g. the re-dis t r ibut ion of research expend i tu re from one set of enterprises to ano the r ) has b e e n ignored. Macro- economic , social and political consequences of corpora te repor ts are h in ted at ra ther than inves- t igated The emphasis on the legalistic defini- t ions of single corpora t ions (as compared, for example, wi th p roduc t ion units or regional en terpr i ses) means that bo th micro and macro effects of accoun t tng policies canno t be identified wi th any clarity. Despite its promise, ECA has at p resen t adopted a partial equi l ib r ium or ten ta t ion to the consequences of corpora te accoun t ing reports

Finally, it should be no ted that many of these empirical studies u n d e r the ECA approach have

been funded by the SEC and the FASB. The acceptance of a partial equ i l ib r ium or ien ta t ion by these ins t i tu t ions may suggest e i ther that they have failed to operate in the interest of society as a whole, by w h o m they are financially sup- ported, or that they too hold the bel ief that society's interests are identical to those of the shareholder and manager class. If research into the social value of accoun t ing reports is to be taken seriously, then we need to cons ider not only al ternative methodologica l f rameworks bu t also al ternative ins t i tu t ions for suppor t ing those frameworks. These are the main issues we dis- cuss in the next sect ion

A POLITICAL ECONOMY APPROACH

In the previous two sect ions we have crit ically reviewed the prevai l ing approaches adopted m the l i terature for evaluat ing the form and con- ten t of al ternative corpora te accoun t ing reports. Our cri t icisms have been d i rec ted towards the partial equ i l ib r ium analysis of these approaches and the bias which they exhibi t in favour of the shareholder and manager classes in society. The remainder of the paper conta ins our a rguments for an al ternative approach which explici t ly at tempts to counte r -ba lance this bias. In this way we hope to encourage research which looks at the accoun t ing funct ions wi th in the broader s t ructural and inst i tut ional e n v i r o n m e n t tn which it operates. To dist inguish this approach from those above, we shall descr ibe it as a Politi- cal Economy of Account ing (PEA) (Tinker, 1980).

The s tudy of accoun t ing w ou l d benefi t from an approach that emphasizes inst i tut ional features and influences, a trans-disciplinary mode

as the government or trade unions do not In other words, agency theory seems to suggest that mdtvtdual managers and the stock market can see behind the arbttrary conventions of accountmg measurement but other potenttal users are fooled by them However, managers are not always qutck to see the consequences of changes m accountmg standards, as when U K. corporate managers did not immedtately appreciate that the proposal of the lnflatton Accounting Commtttee(1975) for current cost accounting would not produce any tmmedtate tax benefits which was a major reason for thetr imtial support for the proposals (Brennan, 1979) Similarly, governments can adjust conventtonal accounts to produce both replacement cost and funds flow data for nattonal mcome accounts (Maurtce, 1968)


of invest igat ion and the s tudy of processes moving towards dynamic equi l ibr ia Although there may be many different variants of polit ical

e c o n o m y (Frey, 1978), most emphasize the inter-re la t ionship b e t w e e n political and e c o n o m i c forces in society In relat ion to an assessment of the value of corpora te accoun t ing reports, a PEA suggests that any such value is likely to be con tes ted as it is shaped in ( and shapes) bo th the poli t ical and e c o n o m i c arenas

Features o f a pol i t ical economy approach The PEA we are emphasiz ing is character ized

by three features. The s tudy of accoun t ing should recognize power and confl ict m society, and consequen t ly should focus on the effects of accoun t ing reports on the d i s t r ibu t ion of income, weal th and power in society t0 Lowe &

Tinker ( 1 9 7 7 ) argue that most accoun t ing research is based on a pluralist c o n c e p t i o n of society This v iew assumes that power is widely diffused and that society ts composed of individuals whose preferences are to p r edomina t e in social choices and wi th no individual able to

cons is tent ly inf luence that society (o r the accoun t ing func t ion the re in ) As Lowe & Tinker ( 1 9 7 7 ) indicate, such a pluralist v iew seems to ignore a substantial vo lume of ev idence that pre- sents al ternative views of society One alternative v iew suggests that the mass of people in society are con t ro l led by a wel l def ined elite (e.g Stanworth & Giddens, 1974) A second alternative view is that there ts a c o n t i n u i n g conflict in society b e t w e e n essentially antagonist ic classes ( e g Mihband, 1969; Westegaard & Resler, 1975)

By br ing ing power to the forefront o faccount - mg analysts, we suggest that these al ternat ive views of society be taken seriously by accounting researchers Instead of assuming a basic har- m o n y of interests in society which permi ts an unprob lcma t i c view of the social value of accoun t ing reports, a polit ical e c o n o m y of

accoun t ing wou ld treat value as essentially contested, wi th accoun t ing reports opera t ing in specific interests (e g. of elites or classes). The way these reports might operate inc lude mystifi- ca t ion and legi t imat ion (Burchel l et al., 1980) Hoogvel t & Tinkler ( 1 9 7 8 ) and Tinker ( 1 9 8 0 ) il lustrate these t endenc ies They illustrate how the d is t r ibut ion of i n c o m e for a specific enterprise (a mul t ina t iona l ) may be d e t e r m i n e d by the d i s t r ibu t ion of pow e r amongs t its participants ra ther than by any e c o n o m i c imperat ive Their work also implies that the classifications used in corpora te accoun t ing reports focus a t ten t ion away from an accoun t of the beneficter ies from the en terpr i se More generally, Tinker et aL (1982) indicate how accountmg theories themselves are a p roduce of the soc- Iety m which they operate and canno t be regarded, except in the most trivial sense, as neutral ; they serve specific interests

A second feature of the PEA which we wish to emphasise is the specific historical and institu- t ional e n v i r o n m e n t of the society in which it operates Most accoun t ing research treats the e c o n o m y as ff it were made up of pr ice taking uni ts with cons tan t re turns to scale, instantane- ously moving from one equ ihb r ium to ano ther equ i l ib r ium on the Paretian front ier There is little r ecogn i t ion that the e c o n o m y is domina ted by large corporat ions, often opera t ing in ohgopolis t lc or monopol i s t ic markets (Prats, 1976, Hannah & Kay, 1977) Disequi l ibr ium is a s tandard feature of the e c o n o m y (Kornai , 1971 ) And the state, far from be ing the passive reposit- ory of social welfare, is actively involved in man- aging the e c o n o m y The role of the state ts indeed central to an under s t and ing of accounting policy, for the latter is s t rongly in terre la ted wi th at least one obvious e l emen t of state activity, namely taxat ion With the increasingly appa- ren t "fiscal crisis" where gove rnmen t s canno t fund their level of spending, the contradictory. posi t ion of the state in act ing on behalf of large

~o The concept of power ts of course, contested We are referring tn the abthty of a group to mtlucnce the allocation ot resources and indeed the definition of what constitutes a resource and an appropriate allocation Thls vlew of power ts related rather more to Lukes' thlrd dlmenslon of power ( Lukes, 1974 ) and to the artl(.ulatl()n of interests m soclet~ (Benton, 1981 ) It has httle relationship with the individualistic, one-dimensional views of power (Wrong. 19"79) wh~(.h influence much accounting research (e g Brown, 198 l, Newman, 1981, Hope & Gray, 1982)


f irms and c o m m e r c i a l in te res t s whi ls t at the same t ime a t t emp t ing to p r e se rve social har- m o n y and its o w n leg i t imacy has b e c o m e increas ingly appa ren t ( O ' C o n n o r , 1973, Block, 1981).

Several a ccoun t i ng r e sea rche r s (e.g. Zeff, 1972; Mer ino & Neimark, 1982) have recog- n ized the s ignif icance of an h is tor ica l focus in o r d e r to u n d e r s t a n d the changing roles of a ccoun t i ng p rac t i ce and by impl ica t ion the his- tor ica l speci f ic i ty of an assessment of the social value of these roles. Similarly, t he re has been a gradual r e c o g n i t i o n of the s ignif icance of gov- e r n m e n t and the s ta te in the d e t e r m i n a t i o n of a c c o u n t i n g r epo r t s and po l ic ies (e.g. Sterling, 1974; Shakleton, 1977). This recogni t ion , however, has gone l i t t le fur ther than a t t empts to mainta in pr iva te con t ro l of accoun t ing in the face of wha t is seen as in t e r fe rence by an o ther - wise neut ra l g o v e r n m e n t Notab le excep t i ons are the analyses by H o p w o o d et al. (1979) and Burchel l et al. (1981) w h i c h suggest that the state - - t h rough its i nvo lvemen t in the administ- ra t ion o f war, the m a n a g e m e n t of nat ional e c o n o m i c p lann ing and c o n c e r n s for g rea te r accoun tab i l i t y (o f t en in the c o n t e x t of ex ten- s ions to e c o n o m i c d e m o c r a c y ) - - has b e e n act ively involved in the d e v e l o p m e n t of accoun t ing p rac t i ces

The th i rd e l e m e n t o f a PEA of accoun t ing involves the a d o p t i o n of a m o r e e m a n c i p a t e d v i ew of h u m a n mot iva t ion and the ro le of accoun t ing in socie ty , that is, a v i ew that a c k n o w l e d g e s the po ten t i a l o f p e o p l e ( and a c c o u n t i n g ) to change and ref lec t differing in te res t s and concerns . It has been a t ene t of conven t iona l e c o n o m i c s and accoun t ing that the factors that shape h u m a n p re fe rences and mot iva t ions canno t be inves t iga ted Con- sequen t ly it has not s e e m e d poss ib le ( o r desira- b l e ) to d is t inguish the cause and na ture of "genu ine" needs and those w h i c h resul t f rom demons t r a t i on , os ten ta t ion , adver t i s ing and o t h e r learn t factors (Hol l i s & Nell, 1975) To the e x t e n t that p e o p l e are c o n c e r n e d solely wi th e c o n o m i c self interest , this self- interest may be seen as a c o n s e q u e n c e of the way soc ie ty is o r g a m z e d ra the r than an una l t e rab le character is -

t ic of p e o p l e (Marcuse , 1964) A c o n c e r n for a m o r e e m a n c i p a t e d v i ew of h u m a n mot iva t ion w o u l d r ecogn i se the possibi l i ty , for example , that a c c oun t i ng p rac t i ces may c o n t r i b u t e to alie- na t ion at w o r k and to the pur su i t o f p r iva te in te res t (Cherns , 1978). For instance, ignor ing ex te rna l i t i e s ( soc ia l cos t s ) w h e n "accoun t ing" for c o r p o r a t e act ivi t ies may e n c o u r a g e self- in teres t at the e x p e n s e o f social interests .

Con t ra ry to an e m a n c i p a t e d c o n c e p t i o n of the ro le of a c c oun t i ng in socie ty , a ccoun t ing prac- t ice is f r equen t ly v i ewed as a passive func t ion ( e g Peasnell , 1978) w h i c h r e s p o n d s to, ra ther than changes, the e n v i r o n m e n t in w h i c h it oper - ates. In the same way as the med ica l p rofess ion may have a leg i t imate c o n c e r n wi th housing, social cond i t ions and pub l i c hea l th ( e g the qual i ty of s ewerage and w a t e r supp l i e s ) in o r d e r to ca r ry ou t a ro le of say, improv ing the hea l th o f the c ommun i ty , so the a c c oun t i ng profess ion may have leg i t imate c o n c e r n s in re la t ion to its immed ia t e e n v i r o n m e n t ( e g . the c o m m e r c i a l and financial sec to rs of the e c o n o m y ) At t empt s to reso lve t echn ica l Issues w i thou t cons idera- t ion of this e n v i r o n m e n t may resul t in an imper - fect and i n c o m p l e t e r e so lu t ion due to the accep- t ance of c u r r e n t ins t i tu t ions and pract ices . One of the s t reng ths of the C o r p o r a t e Repor t s (ASSC, 1975) was that it saw the n e e d to change legal def ini t ions of accoun tab i l i t y if a ccoun t ing r epor t s are to have value in improv ing s t ewardsh ip and t h e r e b y social welfare

Imperatives o f a pol i t ical economy approach The charac te r i s t i c s of a PEA a p p r o a c h may be

encapsu la t ed in th ree impera t ives : be normative, be desc r ip t ive and be cri t ical . These impera t ives are i n t e n d e d to b e m o r e radical than the usual e xho r t a t i ons of this kind. Incorpora t - ing all t h ree impera t ives may be a necessa ry ( t h o u g h not suff ic ient) c o n d i t i o n for "valuable" accoun t ing research.

Be explicit ly normat ive Accoun t ing resear- che r s shou ld be exp l i c i t abou t the no rma t ive e l emen t s of any f r a m e w o r k a d o p t e d by t h e m All r e sea rch is no rma t ive in the sense that it con- tains the r e sea rche r ' s value j udge me n t s abou t h o w soc ie ty shou ld be o rgan ized (Robinson ,


1964; Mattesich, 1978) However , ve ry few a c c o u n t i n g r e sea rche r s make the i r value judge- m e n t s exp l i c i t

For example , T inker ( 1 9 7 7 ) d raws a t t en t ion to a cr i t ica l issue that is f r equen t ly ignored in the a l legedly neu t ra l c o n c e r n wi th p red i c t i ve abil- i ty any c h o i c e o f " o b j e c t s of p r e d i c t i o n " ref lec ts the r e sea rche r ' s values abou t the i m p o r t a n c e and des i rabi l i ty of p r e d i c t i n g cash flows, sys- t ema t i c risk, ea rn ings e tc Similarly, w e have d r a w n a t t en t ion to the impl ic i t value judge- m e n t s i n h e r e n t in par t ia l equ i l i b r ium analyses of the value o f a ccoun t i ng r epo r t s C o n c e r n for the pr iva te investor , for capi ta l marke t agents, o r for c o r p o r a t e m a n a g e m e n t is in effect a no rma t ive s t a t emen t that the in te res t of these pa r t i cu la r par t ies shou ld p r e d o m i n a t e in the c h o i c e o f an a c c o u n t i n g sys tem Yet the re la t ionsh ip bet- w e e n these in te res t s and o t h e r in teres ts in soci- e ty is ra re ly ar t icu la ted , let a lone justified.

In con t ras t to ou r pos i t ion , Wat t s & Z immer - man ( 1 9 7 9 ) have a rgued that no rma t ive theor ie s are i napp rop r i a t e in scient i f ic r e sea rch because they are m e r e l y a c loak for fu r the r ing self- interest Even ignor ing the logical and ph i lo soph ica l p r o b l e m s of the i r a r g u m e n t ( s ee Chalmers , 1978, Chr is tenson, 1981, Lowe et al., f o r t h c o m i n g ) the i r espousa l of the pos i t iv is t agency t heo ry means that t hey have t hemse lves taken a no rma t ive pos i t i on However , the i r normat ive stance, that the wel fare o f the sharehol- d e r class ( t h e p r inc ipa l s ) is pa ramoun t , is no t exp l i c i t ly e x p o s e d o r eva lua ted

The suggcsUon that a ccoun t i ng r e sea rche r s shou ld be exp l i c i t abou t the no rma t ive e l e m e n t s of the i r r e sea rch is i n t e n d e d to facifitate coher - ence in a c c o u n t i n g r e sea rch and to e n c o u r a g e r e sea rche r s to ident i fy the p u r p o s e s of the i r activit ies. O u r sugges t ion for making such values exp l i c i t w o u l d se rve two b road p u r p o s e s Firstly, it w o u l d aid the ident i f ica t ion and evalua- t ion of ind iwdua l p i ece s of r e sea rch wi th in the c o n t e x t of a pa r t i cu la r pa rad igm (Kuhn, 1970) o r r e sea rch p r o g r a m m e (Lakatos, 1970) Thus, r e sea rch c o u l d be classif ied into one o f the existing parad igms, for e x a m p l e ECA, and assessed by r e f e rence to the un re fu t ed theor ies of that pa rad igm

Secondly, exp l i c i t s t a t emen t s abou t the value j u d g e m e n t s of the r e sea rche r s w o u l d faci l i tate an evalua t ion of the a l te rna t ive pa rad igms themselves. Lakatos ( 1 9 7 8 ) p r o v i d e s a set of c r i t e r ia for d i s t inguish ing b e t w e e n d e g e n e r a t e and prog- ress ive scient i f ic r e sea rch p r o g r a m s Al though such d i s t inc t ions vary ove r t ime, it shou ld be r e c ogn i s e d that pub l i c ly s u p p o r t e d inst i tut ions, such as the SSRC in the U.K and the FASB in the U.S., make cho ices b e t w e e n theor ie s each and ever}" t ime they a l loca te funds for pa r t i cu la r pro- jec ts H o w e v e r cho i ce b e t w e e n theor ie s does no t necessar i ly imply c h o i c e b e t w e e n r e sea rch p rog rammes . An essent ia l c l e m e n t of the argu- m e n t in this p a p e r is that one p r o g r a m m e has b e e n dominan t . By encou rag ing a var ie ty of r e sea rch p r o g r a m m e s wi th exp l i c i t no rma t ive e lements , pub l i ca l ly funded ins t i tu t ions and o the r s such as c o n s u m e r associat ions, t rade un ions and e n v i r o n m e n t a l g roups may recog- nise the uses and l imi ta t ions of pa r t i cu la r "accoun t ings" Fur ther , cho i ce of a c c oun t i ng pohc i e s will be r e c ogn l s e d as a social one w h i c h is the leg i t imate c o n c e r n o f all g roups in soc ie ty Deba t e abou t the value of a c c oun t i ng can then be r e c ogn i s e d as be ing in the pol i t ica l arena ra the r than the pr iva te c o n c e r n of accoun tan t s and the f inancial s ec to r o f the e c o n o m y (U S. Senate, 1976).

Be descriptive Recent ly , t he re have b e e n n u m e r o u s calls for 'pos i t ive ' r e sea rch in a c c oun t i ng ( e g Wat ts & Z imme rma n , 1978) To the ex t en t that these argue for a value-free a p p r o a c h to a c c oun t i ng research , w c have indi- c a t e d above the imposs ib i l i ty as wel l as undes i ra- b i l i ty of this a p p r o a c h to r e sea rch To the e x t e n t that they argue for inc reased d e s c r i p t i o n o f ' a c - coun t ing in act ion ' , that is the effects o f account - ing on soc ie ty ( and vice ve r sa ) and for inc reased unde r s t a nd ing of the re la t ionsh ips b e t w e e n account ing , the a c c oun t i ng profess ion and the ins t i tu t ions in socie ty , then w e are in sympa thy wi th t hem

Above it was a rgued that m u c h o f a c c oun t i ng resea rch w h i c h ut ihses r igorous marginal e c o n o m i c analysis to make s t a t emen t s abou t the na ture and value of a c c o u n t i n g is unable , due to


the lack of descriptive validity, to provide an adequate basis for understanding or designing accounting systems Accounting is essentially practical, it is executed by and it influences the behaviour of individuals and classes inside and outside organizations To understand the practice of accounting, or accounting in action, we suggest more attention be given to descriptive studies in accounting research. Such studies would attempt to describe and interpret the behavlour of accounting and accountants in the context of the institutions, social and political structures and cultural values of the society in which they are historically located

The descriptive imperative is not intended to suggest that descripttons of accounting (or accounting descriptions themselves) are value free or objective The interrelationship between facts and interpretations has been acknow- ledged even by spokesmen of the accounting profession (Carmichael, 1979). Similarly, all descriptions are "structured by the conceputal framework that is applied as well as by the technical instruments used in their production" (Ir- vine, e t a l , 1979, p 5)

It is important to go beyond description based on "commonsense" views of the world and actors' own definitions of their realities Whilst study of these views may yield much of interest about the taken for granted view of the world (e g. Tomkins & Groves, 1983), there is a ten- dency for such studies to ratlonalise the ideology of the status quo. That is, the conceptual framework implicit in commonsense views IS frequently little more than rationalisation for the established view. This argument is illustrated by Kuhn (1970) in his analysis of changes in scien- tific theories. Likewise a political economy of accounting needs to be based on descriptions of accounting practice based on alternative theories of soctety and accounting's role therin. For example the recent analysis by Jones ( 1981 ) of the relationship between the British accountancy profession and the economy uncritically utilises the arguments and theories of the accountancy profession itself to explain changes in the profession's organisation and structure. Such commonsense descriptions can be com-

pared with Larson's (1977) analysis of the rise of professionalism (in general) Rather than describing what a profession wishes (or pre- tends) to be, Larson aims to elucidate what a profession is through a description of the changing institutional structure that supports (to greater or lesser degrees) the functions of a profession.

Be critical. The final exhortation concerns the attitude of the researcher, him or herself. In order to develop and evaluate alternative paradigms and methodologies, the researcher needs to exhibit critical awareness, not only of the extant research but also of the relationship between the supply of accounting research and the demand for it by various interests, including the profession, managers and the funding institutions (Watts & Zimmerman, 1979). This need for a critical attitude has already been illustrated m the discussion of the descriptive imperative.

The criterion of critical awareness goes beyond conventional notions of researcher indepenence; it requires that the researcher considers the kinds of accounting which may be worthwhile outside the context of the existing environment as well as the process which led to and may lead from that context (Habermas, 1978). For example Bryer et aL ( 1 9 8 1 ) show that British Steel's plans, whilst they can be analysed in terms of unrealistic expectations and dubious accounting practices, can only be understood in the context of the organisation and history of the industry lteslf. The terms of compensation to the former owners when the industry was nationalised were such that mas- sive interest payments, unrelated to, and unsup- portable by, the assets acquired, resulted in the desperate plans undertaken Similarly, Tinker et al. ( 1 9 8 2 ) argue that concepts of value are socially determined and that alternative concep- tions of value are required which do not uncritically accept that market exchanges are an adequate indicator of social value In developing counter-information ( e g Ridgers, 1979) and social accounting (e g. Epstein et al., 1976; Les- sem, 1977) critical accounting research would suggest the need to go beyond current economic arrangements (e.g. markets) and

222 DAVIDJ COOPER and M1CHAELJ SHERER

d o m i n a n t theories (e.g. marginal i sm) Such research might develop al ternative concep t ions of value inc lud ing those based on socially necessary p roduc t ion , that ts valuing p roduc t s according to their ability to satisfy the needs of the com- mun i ty as ar t iculated through democra t ic ra ther than market processes

As a re lauvely immature subject, it is perhaps not surpr is ing that accoun t ing research has not b e e n as reflective as some of the o ther social sci- ences (e g. the cr i t ique of conven t iona l orgamsa- t ion theory found in Burrell & Morgan, 1979). A critical approach to account ing , however , starts from the premise that p rob lems in a ccoun tmg are potent ia l ly reflect ions of p rob lems in and of society and accordingly that the latter should be crit ically analysed Thus if a major p rob lem in accoun t ing is identified, say as its ove rwhe lming or ien ta t ion to investors, then a c rmcal perspective wou ld suggest that thxs p rob lem is a reflec- t ion of society 's o r ien ta t ion and to change accoun t ing pract ice requires bo th social awareness (e g. ident if icat ion of al ternat ive "accounts" and the roles of accoun t ing in socie ty) and ulti- mately social change.

Whe the r critical theory can m pract ice be applied to accoun t ing research (for recen t a t tempts see Puxty et al, 1980 and Chua et aL, 1981 ) depends on whe the r researchers can free themselves from the at t i tudes and or ien ta t ions which result from their social and educat ional t ra in ing and which are re inforced by the beliefs of the accoun t ing profession and the business c o m m u n i t y For this sociahzat ion process has p r o d u c e d accoun t ing researchers who may exhibi t subconsc ious bias in the def ini t ion of the p rob l em set of accoun t ing and the choice of theories to analyze and solve these p rob lems The cr i te r ion of critical awareness revolves rec- ognizing the con tes ted na ture of the p rob lem set and theories and demyst ifying the ideological character of those theories

The exhor ta t ion to be critical, then, goes b e y o n d the conce rns for i n d e p e n d e n c e in the face of increas ing professional pressures for "relevant and useful" accoun t ing research It also goes beyond conce rns to critically assess the claims by corpora te managers that changes m

accoun t ing reports will have undes i rab le consequences on the corpora te sector and the public interest It involves a recogni t ion of the contested na ture of the accoun t ing prob lemat ic and indeed the concep t of what is or is no t in the publ ic interest

SUGGESTIONS FOR RESEARCH WITHIN A PEA FRAMEWORK

A Political Economy of Account ing (PEA) is thus a normative, descr ipt ive and critical approach to accoun t ing research. It provides a broader, more hohstlc, f ramework for analyzing and under s t and ing the value of accoun t ing reports wi th in the e c o n o m y as a whole A PEA approach at tempts to expl icate and in te rpre t the role of accoun t ing reports in the d is t r ibut ion of income, weal th and power in society In so doing, a PEA approach models the inst i tut ional s t ruc ture of society that helps fashion this role and provides a f ramework for examin ing novel sets of inst i tut ions, account ings and accoun t ing reports This sect ion suggests a n u m b e r of potent ia l research studies which could be unde r t aken wi th in a PEA approach At this stage in the de ve l opme n t of a PEA approach, it would be arrogant to del ineate these studies as a cohe- rent p rog ramme of research, rather they should be cons idered as skeletal i l lustrations of the type of research wfuch may eventual ly induce such a p rog ramme

Accounting and social welfare Account ing research increasingly argues that

all accoun t ing pol icy decisions, inc lud ing the choice of the appropria te accoun t ing measure- m e n t system, must be made by reference to the con t r i bu t i on each al ternative makes to overall social welfare (Beaver & Demskl, 1974) A malor issue is then seen as revolving a round the defini- t ion and me a su r e me n t of social welfare Whilst the social role of accoun t ing has been recognised for some t ime (e.g. Scott, 1931 ) we have already argued in this paper that it is the pluralist vers ion of social welfare which domina tes accoun t ing research However, this perspect ive


p rec ludes a n u m b e r o f potent ia l ly useful

research areas w h i c h do not t reat p re fe rences as

e x o g e n o u s variables For example , research

w h i c h a t tempts to mves t iga te h o w accoun t ing

repor ts affect and modify p re fe rences or h o w

p o w e r is used to p r e v e n t accoun t ing al ternat ives

f rom be ing discussed by pol icy makers, might

r equ i re a l ternat tve conceptua l i sa t ions of social

welfare, based, for example , on e c o n o m i c and

social classes, or on character is t ics of socie ty as

a w h o l e ra ther than on an aggregat ion of indi-

vidual welfare.

Such conceptua l i sa t ions might suggest that all

no t ions of social welfare are essentially con-

tes ted and pol i t ical In that sense accoun t ing

researchers may have to dec ide in a m o r e

expl ic t t way w h i c h interests they in tend to

serve The pos i t ion argued in this paper ts that

accoun t ing (and a c c o u n t m g resea rch) cur ren t ly

serves very na r row interests 1 e those related to

the shareho lder and financial class An alterna-

t ive concep tua l l sa t ion o f social welfare might

take an aggregate v i e w of society, focussing on

social indicators of welfare e g levels of and

changes in national income, adult hteracy, dis-

t r ibut ton of wealth, mor tah ty statistics e tc ~j

Wtth a concep tua l i sa t ion of aggregate soctal wel-

fare, the value o f co rpora t e repor ts mtght lie in

thei r con t r ibu t ion to the cons t ruc t ion of aggre-

gate e c o n o m y statistics and to nattonal p lanning

In addit ion, the way social welfare is measured

interacts wi th the researcher ' s conceptual iza-

tton of social welfare. Accoun t ing researchers

shoud recognize , for example , that m choos ing

m o n e y values to measure the social costs and

benefi ts o f a l ternat ive accoun t ing systems, they

are accep t ing that the maximiza t ion o f weal th is an appropr ia te p roxy for social welfare There is

mcreas ing doub t about the w i sdom of such a

choice , part ly due to the exc lus ion of "free

goods" in such a calculus ( e g Schumacher , 1974) However , research cou ld be under taken

to assess the value of a l ternat ive accoun t ing sys-

tems in te rms of o the r parameters such as

employmen t , heal th or self-esteem, each of

wh ich may be equal ly appropr ia te candidates for

social wel fare proxies. An example of this kind of

social accoun t ing is the study by Rowtho rn &

Ward ( 1 9 7 9 ) o f the effects on a n u m b e r of

macro variables of the c losure o f a s teel plant in

the U.K. Such exerc i ses ut i l izing a mul t ip l ic i ty of

measures of soctal welfare, suggest that account-

mg researchers may need to w o r k c losely wi th

o the r soctal scientists, inc luding sociologists,

psychologis ts and economis ts . Note, however ,

we are not advocat ing conven t iona l social

accoun t ing or cost benefi t analysis w h e r e

i n c o m m e n s u r a t e d imens ions are com pre s sed

mto the single d imens ion of m o n e y and valued

in relat ion to market pr ices

A c c o u n t i n g as i d e o l o g y

In si tuations w h e r e the re ~s a confl ic t about

the ob jec t ives of social activity, Burchel l et al.

( 1 9 8 0 ) suggest that accoun t ing informat ion has

an tdeological funct ion in that it is used to

legi t imize par t icular act ivi t ies or ra t ionahze past

behav iour Research into this ideological role

may take the form of invest igat ing wh ich

interests in the e c o n o m y are bo l s te red and

wh ich interests are u n d e r m i n e d by the account- lng m e a s u r e m e n t system cur ren t ly used in cor-

pora te repor ts

O n e example o f this type of research w o u l d be

an exammat ton o f the role of a concep tua l

f r amework in the accoun t ing pol icy making pro-

cess (Burche l l et al., 1982) Rule making bodtes

may m o r e easily justify their act ions if they can

be said to be the o u t c o m e of "rat ional" proce-

dures and analysts (Pfeffer & Salancik, 1974;

Meyer & Rowan+ 1977) W h e t h e r the search for

ob jec t ives and scientif ic bases for dec ts ion mak-

ing by the SEC, FASB and ASC reflects a similar

use of ritualistic c e r e m o n i e s to legi t imize their

~ The suggested use of societal mdlcators should not be t',tken to imply that such mdtcators are unambtguous or value free Many of the concerns expressed about effictency and effectiveness (see footnote 7) also apply here The issue ofwhat is, and what is not, included m social and economtc statlsttcs ts a well known problem m social and economtc research Stmtlarly, the categories used to classify data, for example m the stattsttcs on money supply, cause of death and dlstnbutton of wealth, all presuppnse a parttcular theory of the economy or society These tssues have been recogmsed for a long-ttme, recent dts- cusstons can be found in Hmdess ( 1973)+ Irvme et al. (1979) and Tomhnson, ( 1981 )


act ivies and concea l c o n t e s t e d and incons i s t en t c ho i ce s would , therefore , be a w o r t h w h i l e p i e c e of r e sea rch wi th in a PEA f r a m e w o r k ( D o p u c h & Sunder, 1980; Boland, 1982)

A n o t h e r a rea of r e sea rch f rom this ideo log ica l p e r s p e c t i v e w o u l d be a cons ide r a t i on of h o w a c c o u n t i n g r epo r t s are used in s i tua t ions of e c o n o m i c and pol i t ica l confl ict . "Many o f the r e po r t s by C o u n t e r In fo rmat ion Services can be seen as a t t empt s to p r o v i d e in format ion r e s o u r c e s for w o r k e r s engaged in specif ic strug- gles, and to e x p o s e the na tu re of the social and e c o n o m i c sys tem w h i c h is the cause and c o n t e n t of these s t ruggles" (Ridgers , 1979, p .326 ) Wi th in the c o n t e x t of co l l ec t ive barga in ing Sherer et aL ( 1 9 8 1 ) suggest that managers are m o r e l ikely to d i sc lose a c c o u n t i n g in format ion to un ions w h e n it p r o v i d e s e v i d e n c e o f the i r ina- b i l i ty to pay h igher wages In contras t , w h e n the c onven t i ona l a ccoun t i ng n u m b e r s do no t present a favourable pos i t i on f rom m a n a g e m e n t ' s pe r spec t ive , i e the c o m p a n y appears to have the abi l i ty to pay h ighe r wages, managers e i the r refuse to d i sc lose a c c o u n t i n g in format ion o r emphas i ze the l imi ta t ions o f ex is t ing a c c o u n t i n g c o n v e n t i o n s

So lomons ( 1 9 7 8 ) has a rgued that to be useful a c c o u n t i n g shou ld be as ob j ec t i ve as car tog- raphy. However , it is un l ike ly that any m e t h o d of a ccoun t i ng can be neut ra l wi th regard to its effects on b e h a v l o u r and h e n c e on the d is t r ibu- t ion of i n c o m e and wea l th in the e c o n o m y Therefore , the m a n d a t e d use of one a c c o u n t i n g m e a s u r e m e n t sys tem inevi tab ly he lps to sustain the p o w e r of one set of in te res t s ove r o the r s in soc ie ty Research s tudies of a c c o u n t i n g as ideology w o u l d i l lumina te ou r u n d e r s t a n d i n g of the re la t ionsh ips b e t w e e n a c c o u n t i n g and the dis- t r i bu t ion o f r e sou rce s and p o w e r in soc ie ty and might sugges t types of a ccoun t i ng sys tems w h i c h w o u l d be a p p r o p r i a t e if the s t ruc tu re o f soc ie ty was changed .

Identification of accounting problems The a c c o u n t i n g p ro fess ion and r e sea rche r s

f r equen t ly justify the i r cho i ce of the accoun t i ng p r o b l e m to bc inves t iga ted by r e f e rence to the pub l i c in te res t However , the mean ing of the

phrase " the pub l i c in te res t" and the inf luences on the c h o i c e of a c c oun t i ng p r o b l e m s are themselves areas w o r t h y of r e sea rch G o u l d n e r ( 1 9 7 0 ) argues that the social sc i ences have t e n d e d to be grea t ly in f luenced by the d e m a n d s of the i r c l ients in def in ing re levan t r e sea rch Johnson ( 1 9 7 2 ) has sugges ted that the c l ien ts of a c c o u n t i n g are the indust r ia l and c o m m e r c i a l c o r p o r a t i o n s and that the a c c o u n t i n g p ro fess ion i tself ope ra t e s u n d e r c o r p o r a t e pa t ronage Sev- eral s tudies also suggest that t he re is a c o m m o n - ali ty of in te res t b e t w e e n investors , mul t ina t iona l c o r p o r a t i o n s and large mul t ina t iona l audi t f irms (e .g Rockness & Nicolai, 1977, US Senate, 1976, Husse in & Ketz, 1980) A co ro l l a ry of this c o m m o n a l i t y is that a ccoun t ing po l i cy does not r e p r e s e n t the in te res t s of o t h e r classes or g roups in soc ie ty For e x a m p l e Lowe etal ( 1981 ) a rgue that a c c o u n t i n g po l ic ies t end to serve the in te res t o f the financial s e c t o r as o p p o s e d to the indust r ia l s e c t o r in the U I~ A c c oun t i ng ( and espec ia l ly capi ta l m a r k e t ) r e sea rch may then be seen to be c o n t r i b u t i n g to the de- industr ia l isa- t ion of the U I~ e c o n o m y (Singh, 1977) Such resea rch focuses on faci l i tat ing the in te rna t iona l mob i l i t y of capi ta l funds to the mos t "prof i tab le" a l te rna t ives ra ther than the m a i n t e n a n c e and d e v e l o p m e n t of ope ra t i ng units

A PEA a p p r o a c h - - by emphas i s ing the insti tu- t ional fea tures of soc ie ty and a d o p t i n g a conf l ic t m o d e l of soc ie ty - - p r o v i d e s a f r a m e w o r k for s tudies w h i c h a t t e mp t to u n c o v e r the inf luence that n a r r o w sec t iona l in te res t s have in def in ing a c c o u n t i n g p r o b l e m s and i n d e e d the c h o i c e of feasible ways o f reso lv ing these p rob l ems . Thus the p r o b l e m s in a c c oun t i ng for mul t ina t iona l c o m p a n i e s are conven t iona l ly i n t e r p r e t a t e d in t e rms of the p r o b l e m s for the mul t ina t iona ls - - in re la t ion, for example , to c u r r e n c y t rans la t ion The p r o b l e m s of mul t ina t iona l c o m p a n i e s might h o w e v e r be seen f rom the p e r s p e c t i v e of hos t count r ies . F rom a hos t c o u n t r y pe r spec t ive , p r o b l e m s invi t ing so lu t ions in w h i c h a c c oun t i ng may have a par t to p lay inc lude t ransfer p r i c ing rules, p r i c ing o f t e c h n o l o g y and c on t ro l of remit - tances to h o m e coun t r i e s Instead, it has b e e n sugges ted by Rueschhoff ( 1 9 7 6 ) that the largest benef i t s f rom the in te rna t iona l s t andard iza t ion


of accounting pract ice accrue to multinational corporat ions and auditing firms. Similarly, the large research effort into inflation accounting in the U.K. in the late 1960s and early 1970s may have been influenced by factors others than the rate of inflation in the economy Thompson (1978) and Burchell et al. ( 1 9 8 0 ) suggest that there had been a significant shift in the distribution of income away from profits and dividends to wages and hence the pressure for an inflation accounting standard may be associated with a desire to re-distr ibute wealth "back" towards shareholder interests.

Research into the process of identifying accounting problems might also consider how financial sponsorship encourages types of accounting research. With the increased funding by professional firms since the late 1970s (e g. Peat, Marwick, Mitchell & Co, 1976) accounting research has appeared to shift almost exclusively towards the interests of large auditing firms - - e.g auditor 's judgements (e.g. Felix & Kinney, 1982) statistical sampling ( e g Duke et al.,

1982) and the management of audit workers (e.g. Jiambalvo, 1982; Wolf, 1981). Accounting researchers seem by and large, to have been overwhelmed by these firms' identification of accounting problems State agencies such as the SEC and the SSRC (in the U K.) and accounting organizations such as the FASB and the ASC together provide a significant propor t ton of the total funds available for accounting research These bodies not only respond to requests for funds, they also initiate research into problems which they believe are important and under- researched. Therefore, the extent to which these funding organizations are themselves inde- pendent of the chents of accounting and indeed their understanding of the nature of the public interest deserve the at tention of accounting researchers.

SUMMARY AND CONCLUSIONS

Our concern in thts paper has been to present a view of accounting research, particularly that related to views of the social value of accounting

reports, which offers some alternative to the current paradigm. The view expressed here is that accounting research should reflect upon the soctal, polit ical and economic context in which accounting operates. Failure to consider this context has led to an emphasis on designing accounting reports that are in the interests of shareholders, and not necessarily in the interests of other groups in society

The emphasis on shareholders ' interests is to be found in the studies concerned with the usefulness of corporate accounting reports for the decistons of individual investors and in the par- tlal equilibrium studies of the value of accounting information within an efficient stock market Moreover, the general equilibrium approaches using or thodox economic analysis are quickly reduced to a shareholder orientat ion by assuming the existence of perfect markets and by ignoring the effects of accounting reports on the distr ibution of income and wealth in the economy Finally, the interests of shareholders or their agents, corporate management, also predominate in the studies of the economic consequences of accounting reports, despite the recognit ion at the conceptual level of this approach that other groups in society do exist

We suggest an alternative approach, the development of a polit ical economy of accounting, which explicit ly considers the relationships be tween accounting and the instttutional structure of the economy. The attributes for relevant accounting research withm this approach may be summarized by the following exhortat ions to researchers be e x p l i c i t l y n o r m a t i v e - - make your value judgements explicit; be descr ip t i ve

- - descr ibe and interpret the pract tce of accounting, accounting in action; and be c r i t i ca l

- - recognize the contes ted nature of the accounting problematic and particularly the concept of the public interst We have also sketched three suggestions for the kind of research which might be undertaken within a political economy of accounting, the role and form of accounting within alternative definitions of social welfare; the use of accounting reports as ideological instruments, and the interests and institutions which influence the identification of


a c c o u n t i n g p r o b l e m s a n d h e n c e t h e t y p e o f

a c c o u n t i n g r e s e a r c h w h i c h is u n d e r t a k e n W e

a r e n o t s u g g e s t i n g t h a t s u c h r e s e a r c h wi l l b e

easy. G i v e n t h e d o m i n a n c e a n d i n t o l e r a n c e o f

t h e c u r r e n t a p p r o a c h to r e s e a r c h in c o r p o r a t e

r e p o r t i n g , o b t a i n i n g f u n d i n g a n d j o u r n a l s p a c e

for m o r e r a d i c a l r e s e a r c h is l ike ly to b e d i f f i cu l t

W e h a v e a l so i n d i c a t e d t h a t r e s e a r c h is n e c e s -

sa ry at a c o n c e p t u a l l e v e l a n d a t a n e m p i r i c a l

l eve l T h e p r o b l e m s o f t h e l a t t e r ( m c l u d m g

t h o s e r e l a t i n g t o t h e d i f f i cu l t i e s o f u s i n g soc ia l

a n d e c o n o m i c s t a t i s t i c s w h i c h a r e p r o d u c e d o n

t h e bas i s o f o n e p a r t i c u l a r c o n c e p t u a h s a t t o n o f

s o c i e t y ) wi l l h o p e f u l l y n o t d i s c o u r a g e r e s e a r -

c h e r s to i n v e s t i g a t e t h e k i n d o f i s s u e s o u t l i n e d ,

b u t m s t e a d wi l l r e p r e s e n t a c h a l l e n g e to t h o s e

r e s e a r c h e r s c o n c e r n e d to p r o d u c e " b e t t e r "

a c c o u n t s a n d a m o r e a c c o u n t a b l e a c c o u n t i n g

I t f o l l o w s t h a t a l t h o u g h w e a c c e p t t h a t it is

d e s i r a b l e ( w i t h i n a d e m o c r a t i c s o c t e t y ) to

e n c o u r a g e a v a r i e t y o f s c i e n t i f i c r e s e a r c h p r o g -

r a m m e s in a c c o u n t m g r e s e a r c h , it is a n i m p o r -

t a n t t h e m e o f t h i s p a p e r t h a t m a n y m a r k e t s a re

n o t n e u t r a l in t h e i r a c t i v i t t e s o r in t h e t r e f f ec t s

T h e r e f o r e , i t m a y b e i n s u f f i c i e n t t o r e ly o n t h e

m a r k e t for a c c o u n t i n g r e s e a r c h to f o s t e r

r e s e a r c h w h i c h is s t g n i f i c a n t l y d i f f e r e n t in

a p p r o a c h f r o m t h e e x t s t i n g p a r a d i g m Ra the r , in

o r d e r to d e v e l o p a p o h t i c a l e c o n o m y o f a c c o u n t -

ing, n o r m a t i v e , d e s c r i p t i v e a n d c r t t i c a l r e s e a r c h

n e e d s to b e a c t i v e l y p r o m o t e d a n d n u r t u r e d

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