Financial Accounting Theory Craig Deegan Chapter 12

Financial Accounting Theory Craig Deegan

Chapter 12 Critical perspectives of accounting Slides written by Craig Deegan and Michaela Rankin

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Learning objectives • In this chapter you will be introduced to  – particular perspectives that challenge conventional opinions about the role of accounting within society  – the basic arguments that suggest that financial accounting tends to support the positions of individuals who hold wealth and social status, while undermining the positions of others  – the fact that disclosure (or non-disclosure) of information can be construed to be an important strategy to promote and legitimise particular social orders

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Critical perspective defined • Refers to accounting research that goes beyond questioning questionin g whether particular methods of accounting should be employed • Focuses on the role of accounting in sustaining the privileged positions of those in control of resources (capital) while undermining or restraining the voice of those without capital

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Critical perspective defined (cont.) • Critical accounting theorists seek to highlight, through critical analysis, the key role r ole of accounting in society • Challenges the view that accounting can be construed as objective or neutral •  Accounting  Accounting seen as a means of constructing constructing or legitimising legitimis ing particular social structures for the benefits of those that currently have wealth

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Philosophical basis of critical accounting research • Much of the critical research is informed by the works of Karl Marx • However, some critical research adopts a ‘deep ecologist’ philosophy  – questions the trade-off between economic performance and ecological damage

• Other critical accounting research adopts a radical feminist perspective  – believe that accounting maintains and reinforces masculine traits such as ongoing quests for success, conflict and so forth without any consideration to cooperation, respect, loyalty, caring and so forth

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Criticism of capitalist system s ystem • Critical theorists tend to oppose aspects of the capitalist system and accounting • Emphasise that systems of accounting are built around the prevailing social order —and support the social order • Given the practice of accounting is in the hands of large corporations and accounting regulation in the hands of government, accounting information will never do anything but support the current system

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Origins of critical perspective • Grounded in Political Economy Theory • ‘Political economy’ is the social, political and economic framework within which human life takes place (Gray, Owen & Adams 1996) • Based on ‘Classical’ branch—challenges branch— challenges the existing nature and structure of society

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Classical political economy perspective •  As already indicated, indicated, much critical accounting accounting research is related to the works of philosophers such as Marx • Explicitly considers structural conflict, inequity and the role of the State at the heart of the analysis • Highlights issues which may not otherwise be addressed  – social welfare

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Disclosure of social responsibility information • Critical theorists argue that disclosure of social responsibility information is wasted unless accompanied by fundamental changes in how society strucutred •  Acts to legitimise, legitimise, not challenge, challenge, those providing the information • Need social reform, and not more ‘accounting’

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Views on social and environmental accounting •  As accounting accounting deemed to sustain sustain particular particular social structures, introduction introduction of new forms of accounting only help to sustain that social system • Considered wasted effort to use accounting to solve problems • One is using the very process that caused the problem to try to solve the problem

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Criticism of critical perspective • Critical theorists often marginalised marginalised to a greater extent than others • Often do not provide solutions to perceived problems  – inconsistent with normal training of accountants to provide solutions if problems are evident

• Critical of accountants

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Role of the State • The State is seen as a vehicle of support for holders of capital and for the capitalist system as a whole • Government will take action to enhance the legitimacy of the (unjust) social system • Social disclosures seen as a means of pacifying challenges against the capitalist system where corporations given many rights and powers

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Role of the State (cont.) • Restricting the flow of information, or availability of specific types of information, seen as a means of maintaining particular organisations and social structures • Government does not operate in the public interest, but in the interests of ‘well off’ groups • Corporations typically lobby against regulation that could increase their accountability to society

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Role of accounting research • ‘Mainstream’ accounting accounting researchers are seen as providing research results and perspectives that help to legitimise and maintain certain political ideologies  – e.g. anti-regulation stance and EMH during the late 1970s and 1980s matched the views of government at the time  – rise of PAT consistent with political views at the time

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Role of accounting research (cont.)  – rise of ‘economic consequences’ research seems to have been motivated by desire of large corporations to counter attempts to change reporting systems and levels of disclosure  – results supported corporations’ call for reduction in regulation  – research efforts into inflation accounting were seen as being motivated by a desire to alleviate shifts in real wealth from owners to higher wages, not by rate of inflation

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Role of accounting practice • Critical theorists see conceptual frameworks as legitimising the accounting profession and of financial reports produced by reporting entities •  Accountants seen as imposing imposing their own views views about which performance characteristics are important or not important

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Role of accounting practice (cont.) •  Attention is directed directed to particular particular measures (e.g. (e.g. profits) through accounting • In communicating reality, accountants simultaneously construct reality • Political economy perspective emphasises the role of accounting reports in maintaining social arrangements • See corporate social reporting as harmful as it gives the impression of concern and change without any real change occurring

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