Financial Accounting Theories - Essay Example

Running Head: FINANCIAL ACCOUNTING THEORIES Financial Accounting Theories s Financial Accounting Theories Introduction The perspective taken by those who follow the Political Economy Theory is one which questions the use and value of such disclosures in society. The Political Economy has been defined by Cunningham (2006), as "the social, political and economic framework within which human life takes place." (1) Political Economy Theory, therefore, focuses on the idea that social, economic and political issues all have a bearing on the other and one issue cannot be successfully evaluated with the incorporation of its effects on the other two issues. In effect the three issues are conjoined within this theoretical approach. Political Economy Theory questions the supposed neutrality of corporate reports both regulated and unregulated. According to Howieson (2004), Political Economy Theory recognises the existing system of corporate reporting and "subjects to critical scrutiny those issues...that are taken for granted in current accounting research". Classical Political Economy Theory Political Economy Theory (PET) is divisable into two broad streams of thinking. One being the Classical Political Economy Theory, the other, Bourgeois Political Economy Theory. For the purpose of this writing the Classical Approach will be the main focus. Classical Political Economy Theory follows the basic ideas of P.E.T, but goes further in its bid to highlight and scrutinise structural conflicts and inadequacies within society. The followers of the Classical approach are of the strong opinion that within society even in these modern and seemingly liberal times, a class divide is still very apparent. This theory is based around the works of such philosophers as Karl Marx and therefore opposes the very basis of the Capitalist system. In the writing of Howieson (2006) it is stated that "a Classical Political Economy places structural conflict, inequality and the role of the state at the heart of the analysis". The Critical Perspective is a branch of the Classical Political Economy Theory. The "Critical Perspective explicitly considers how the practice of accounting tends to support particular economic and social structures", Deegan (2000). Critical theorists do not simply question which methods of accounting should be used, instead they investigate the role accounting as an entity takes within society and cast doubt upon the very underpinnings of the profession. In order to understand the critical theorist's view of unregulated corporate disclosures, the bigger picture of their theory must be investigated. The basis for most of the Critical theorists judgements is based upon the idea that "most rights, opportunities and associated power resides in a small (but perhaps well defined) elite," Deegan (2000). They believe that power is not spread evenly throughout society and is not something one can easily acquire but is instead controlled by this so-called "elite". Included in these elite are those who are already in power and who use this power to remain in such a position while also keeping those without power in a position where they will not be able to achieve power. The Critical view is that these elite will inevitably wish for their own good to maintain the status quo, which is already in existence and is to their benefit. If these powerful individuals were to work towards giving more opportunities to those without power it would decrease their own power level, and, in effect, their social standing. The only people who would benefit from the radical reforms, which would be entailed in the re-distribution of power throughout the various social levels, are those who do not have the ability to bring about those changes. The elite comprises of, the state, those who hold a large capital share in the economy, accountants, accounting researchers, large corporations etc. These groups of powerful people may seem very separate, but, are in fact interlinked in their control of power according to Critical theorists, in their control of information, in order to keep the current status quo. The Critical view is that they do this by their way of corporate reporting. Large corporations who dominate the economy, often by operating in "oligopoliostic/monopolistic markets" as reported by Howieson (2004), employ accountants to comprise a set of published accounts. The accountant is then governed by agencies administered by the state and large corporations, creating a regulation loop in which companies can almost be seen in very simplistic terms to self regulate. Those who take the classical view point of the economy believe that, left to their own devises companies will act in their own self interest in a bid to keep as much of the available opportunities and share of power to themselves. Commensurate with those holding a Classical Political Economy view, the state plays a very important role in maintaining the status quo. As Deegan (2000) states, the Critical perspective sees the state as "being a vehicle of support for the holders of capital, as well as the capitalist system". The government/state are seen by these theorists to work very much in favour of those who have capital and power to the detriment of those who do not, i.e. they are not acting as much in the public interest as many politicians would like the public to believe. Far from acting in the best interests of disadvantaged groups within society, the state actively keeps these groups at bay by impeding their access to information. Cunningham (2006) goes further to explain this government strategy by stating that "financial information is legislated by the governing body of society which is closely linked to the interests of the dominant power group in society." In short, Cunningham is saying that through its legislative powers, the state is determining the content and amount of disclosure an accountant must give when preparing reports for companies. Therefore the state can restrict the information available to society, meaning their choices are limited. Abstraction & Reality of Financial Accounting Theories The government can from time to time be seen to go against this theory by seemingly acting in the interests of the underprivileged members of the community. Government does in fact bring out legislation on the premise that they are working in favour of the disadvantaged groups, i.e. the "Green Papers" published by government or when government makes mandatory disclosure demands from companies, such as their policy on disabled workers. Although these types of reforms might be seen as acting in the interest of society as a whole, those who scrutinize this from a Critical perspective such as Arnold (2000), may say that in imposing these disclosures government are merely attempting to "pacify the challenges that may be made against the capitalist system as a whole". Arnold makes the point that prima facie many government actions seem to be for the public good. However when they are considered more critically it can be said that every movement of government may have an ulterior motive or hidden agenda, i.e. the government may say they are creating such a policy in order to benefit disabled members of the public. However, this reform can also be viewed in a way that, if a disabled member of the public holds a grievance as regards to his/her treatment, the government can use this policy as a shield to answering the real question. Howieson (2004), give a reminder in their writing that the government cannot make decisions in a neutral manor as the "state has a contradictory position as it acts on behalf of large firms but also try's to preserve social harmony". These two goals are almost impossible, as doing one will always be to the determent of the other. As can be derived from the opinions of Critical theorists, they do not view the state as a means for reform as it does not maintain the attributes of having objectivity, neutrality and representational faithfulness. The state "is not a passive repository of social welfare" Howieson (2004), but is actively involved in managing the economy. Therefore when it comes to the issue at hand, of valuing unregulated corporate reports to society, the classical perspective is that as far as government are concerned they will use these in the same manor as regulated disclosures and allow "organisations to use information.....to legitimate, to deflect and to control the debate being held in the wider community," Cunningham (2006). A step between the state and the organisations distributing these disclosures, both regulated and unregulated, are the accountants. Accountants have gained a reputation perhaps somewhat unfairly as being dull and un-opinionated, however, Critical theorists do not believe this common misconception and instead believe this dull exterior is a faade, masking a socially powerful individual. Accounting has been defined from a Classical perspective by Hopper et al (2005), as being "a social practice within political struggles and not merely a market practice guided by equilibrium in an efficient market". Similarly, Deegan (2007) said, "Accountings essence can be best captured through an understanding of its impact on individuals, organisations and societies". Deegan's definitions demonstrates that accounting does not stand alone as an entity, but is intertwined with its environment, thus meaning its neutrality and objectivity is compromised. Critical Perspective of Accounting Theories The Critical perspective of accounting is very similar to that of the Critical perspective of the state. Accounting is also seen to work in the interests of the social elite. As stated by Howieson (2004), "the strategic outcomes of accounting practices consistently (if not invariably) favour specific interests in society and disadvantage others." Due to this nature of accounting, Critical theorists do not see accounting as having representational faithfulness. The Political Economy approach according to Howieson (2004) suggests, that accounting "should recognise power and conflict in society and consequently should focus on effects of accounting reports on the distribution of income, wealth and power within society". Although Political Economy Theory gives this recommendation, Classical Theory gives no such proposals. Accounting has been defined by Elliot and Elliot (2002), as "the art of communicating financial information about a business entity to its users". From a Classical View accountancy is far from just being about the communication of information. According to Critical Theorists, accountants are very much in control of that information and can manipulate it in almost any way they see fit. Writers of the Critical view such as Deegan (2008), say that accountants can impose their own view of what is and what is not worthy of disclosure. Deegan goes further than this stating that, "In communicating reality, Accountants simultaneously construct reality". This is a very strong statement but paramount to the Critical perception of accounting. Critical Theorists see accountants, in basic terms, as people who construct information that they, the corporations and the government, want society to believe. Therefore when a new regulation is proposed or a change to a disclosure is made, accountants do not take into account the significance this will have to society as a whole but instead only value the effect this change will have on a few groups (these groups being the social elite). The Critical perception is that accounting is not the objective, neutral profession it acclaims itself to be, and therefore followers of this line of thought do not value accounting as a means for progressive transformation of what they see as an unacceptable status quo. Those opposed to the Classical Political Economy Theory, and indeed accountants themselves, may use the idea that conceptual frameworks to some extent prevent accountants from being able to simply construct accounts in whatever manor they desire. "However critical theorists see a different role for conceptual frameworks; a role that involves legitimising the accounting profession, as well as the financial reports produced by the reporting entities". This is a very similar line of argument as used in regard to the government release of mandatory disclosures. Accounting research and researchers do not go unscathed by the Critical Theorists. The Critical perspective is that accounting researchers also contribute to the maintenance of the status quo, believing that editors of accounting journals will reject materials which do not have themes which are "complimentary with themes prevailing in social milieu" Mouck (2002). This again highlights the idea that in limiting available information, this socially elite group are preventing individuals from making balanced judgements. Conclusion Classical Political Economy Theory and the Critical branch of this theory have " little to say about the details of unregulated corporate social reporting practice" Cunningham 2006. This is mainly due to the Critical view in regards to the accounting profession as a whole as well as the state which has been discussed. The Critical theorists see corporate social reporting as largely irrelevant as they believe the "way in which society is ordered.....is so fundamentally flawed that nothing less than radical structural change has any hope of emancipating human life", Gray Owen and Adam (2006). Due to this strong distain for the current status quo, Critical theorists according to Cunningham (2006) "have been concerned more with the broader issues of accountancy and accountants within that society than with particular issues such as social accounting which appears to be rearranging the deckchairs on the titanic." Similarly Howieson comment that "corporate social reports produced voluntarily can only be crumbs dropped from the table of capitalism". This view highlights the fact that those who follow the Critical view see that corporate social reports have little radical content, but even if they did, the structure around them is so defective that they could make little impact. Some may say that the increase in unregulated reporting is a step in the right direction but Critical theorists would argue that such efforts are a waste unless accompanied by fundamental change in how society is structured. Again the argument is presented by Critical theorists that "social responsibility information only acts to legitimise and not challenge those providing the information", Deegan (2000). The Critical view on unregulated corporate financial accounting disclosures and in fact any form of accounting reforms, is that without a major overhaul of the social system, these reforms are a mere drop in the ocean. Critical theorists hold strong the view that in trying to reform accounting statements or produce more unregulated disclosures, "one is using the very process that caused the problem to try and solve the problem" Cunningham (2006). This highlights the almost impossible position accountants appear to be in when viewed from a Critical perspective. End Notes 1. Cunningham, S 2004, ACCT29083: Theory of accounting: study guide, Central Queensland Univercity, Rockhampton 2. Deegan, C 2000, Financial accounting theory, McGraw-hill, Roseville 3. Howieson, B, 'International Harmonization: He Who Pays The Piper Calls The Tune', 2007, Australia Accounting Review 8 (1): pp 3-12 4. Cunningham, S 2004, ACCT29083: Theory of accounting: solutions manual, Central Queensland Univercity, Rockhampton Read More