Superestructura

The political economy of accounting literature

Introduction

The thesis aims to develop a theory of the accounting firm from political economy to gain a better understanding of the problems of accounting. The aim of this chapter is to discover the existing state of knowledge in political economy of accounting (PEA), including the results so far obtained, concepts, theories and models used, methods and methodologies employed, unresolved problems and gaps in the literature. These explorations will refine the research aim and point the way towards methodology and methods, the subjects of chapters four and five.

The existing literature on PEA is distinct from that on accounting firms. PEA is a recognized branch of critical accounting, alongside the labour process tradition, Foucauldian scholarship, and critical theory approaches (Cooper and Hopper, 1990). In contrast, the literature on accounting firms is dominated by mainstream thinking, that is, the application of economics to accounting (Otley, 2002). Strictly speaking, an accounting firm literature does not exist. Rather, there are a number of papers addressing a range of topics such as audit fee determination, for example, Pong and Whittington (1994), and concentration studies, for example, Moizer and Turley (1989), which obliquely address accounting firms. In only a few studies are accounting firms the main

provides only part of the context of the study. Because of the sharp distinction between the literatures, this chapter focuses on PEA while chapter three is devoted to literature on accounting firms and the development of the research aim. PEA has only reached maturity in the last 15 years and, consequently, this review covers most of the published papers on the subject, including those on its boundary. Literature on accounting firms, on the other hand, is more diverse and some selectivity is required.

Tinker: origins of political economy of accounting

The first paper attempting a PEA was Tinker (1980) which was inspired by the “capital” debate (Dobb, 1973; Keen, 2001). In this debate, critics of neo-classical economics suggested that its notion of capital was not meaningful, and profit could not therefore be understood as a return on capital, and profit was not determined in the neo-classical system. This was a theoretical argument having little relation to the practicalities of accounting. Tinker (1980), however, saw in accounting a means of enlivening the debate. The paper was termed “towards” a PEA, because it did not attempt to give a full exposition of what a PEA might entail, but it powerfully made the point that distribution of profit was a social process.

Chapter one argued that a difficulty with political economy is its lack of an agreed theoretical framework. This created an immediate difficulty in Tinker (1980), who recognised that there was no agreed framework within which to craft a PEA. Working from within the “capital” debate, Tinker (1980, p.153) begins with the concept of capital:

“Political Economy differs from neo-classical (marginalist) thought in that it recognises two (not one) dimensions of capital: firstly as (physical) instruments of production and secondly as man’s relationship to man in social organisation. The first dimension represents the economic forces of production, the second the social relations of production”.

Tinker (1980) argued that the “institutional realm” links these two dimensions. Here, different types of society create the institutions (legal, political, educational, etc) to organize physical production. Tinker (1980) places culture and belief within the institutional realm and his model does therefore have the capability of combining the real and the nominal, for example, by showing how accounting can be a legal institution and “power knowledge”. The two domains of capital have a reciprocal relationship. Following Marx, Tinker argues that changes in physical production, such as technical change, can influence the social relations of production as well as social relations determining physical production.

The empirical element of the paper was a case study, the detail of which contrasts sharply with the broad theoretical framework. The case involved financial information from an African company over a period of 46 years showing the distribution between different capitalist agents and African constituents. The 46 year period was broken down into sub- periods, early colonial, late colonial, and post colonial, each sub-period representing

different institutional regimes. The numbers revealed changing patterns of distribution as the level of colonialism declined.

The first problem was that the change in the pattern of distribution was not significant and the causality unclear. Over the whole period, African participants’ received a 17.25% share, which in the different sub-periods reached a high of 20.75% and a low of 11.25% both of which were in the post colonial era. It is not clear whether the decline during colonialism represents institutional change or a change in the social relations of production. The second limitation of Tinker (1980) was that it did not study changes in the physical aspects and therefore did not consider the reciprocity between social and physical dimensions.

In a discussion of Tinker (1980), Cooper's (1980) main concern was with supporting the criticism of neo-classical economics. In so far as it was concerned with PEA, Cooper (1980) suggested that Tinker (1980) was successful, but had reservations about making generalizations from one case study, the appropriateness of the periods, and the fact the model does not account for increasing black salaries. He suggested some ideas for future research in ‘knowledge as capital’ and ‘accounting as ideology’, directing PEA into the idealist realm, but neither he nor the critical accounting community have followed up these ideas.

Tinker, Merino and Neimark (1982) is a theoretical paper that does not directly promote a PEA, but gives a detailed treatment of the labour theory of value (LTV), a theoretical

framework long associated with political economy (Dobb, 1973). In this paper Tinkeret al trace the development of value theory to make the point that theories reinforce the societies creating them, a view they call “historical materialism”:

“We illustrate the application of historical materialism by means of a brief history of Value Theory. Our review highlights the central role that arguments about the meaning of value have played in social struggles through history” (Tinker et al, 1982, p.168).

Tinker et al perform an important service by illustrating how theories of value reflect power struggles in society, but they accept the main criticism of value theory is that it may be unnecessary or incoherent (e.g., Dobb 1973; Elson, 1979; Bryer 1994a). The fact that Tinkeret al (1982) explain how powerful groups manipulate the idea of value does not help answer this criticism. Chapter four argues that Tinkeret al’shistorical approach to value reduces the current political relevance of the concept.

The concept of control and the limits of neo-classical approaches to control is the subject of Neimark and Tinker (1986). As chapter one has already shown, the concept of control is a key focus of political economy and accounting, encompassing agency, labour process, and value, but Neimark and Tinker’s approach to it is based on dialectics alone rather than a partnership of dialectics and political economy. The concept of dialectics employed has four major elements: the pervasiveness of social change; contradiction as the source of social change; the reciprocal relationship between organizations and

environment; the academic as part of social change. This approach is similar to Cooper and Sherer’s (1984, see below) “features and imperatives” approach to political economy. The problem with Neimark and Tinker’s dialectic is the lack of a sense of priority or discipline. There are many contradictions and reciprocities between firms and society. Reuten and Williams (1989) show the importance of establishing priorities or “systematic dialectics” as they term it. Neimark and Tinker’s dialectics provide a possible framework for understanding control but, without a sense of priority, control can take any number of trajectories. In short, they provide a context for understanding the ideology of control rather than a theory of control in real life. The empirical aspect of the paper, a study of General Motors, throws more light on internationalization than control. Chapter one argued that political economy needs dialectics and Neimark and Tinker (1986) shows us that dialectics has little meaning without political economy.

Tinker (1988) exposes weaknesses in mainstream accounting research compared to PEA, but Tinker (1999, p.645) is openly hostile to political economy, labelling it “empiricism”. Tinker abandons political economy because of an intensified methodological desire to emphasize the phenomenological and ideological aspects of accounting and society. The obvious problem with Tinker’s developed philosophical position is that he now does not consider data, evidence and facts as tests of hypothesis, an extreme view having more in common with post modernism than political economy.9 No basis therefore exists on

which to build theory and, as a result, Tinker falls back on an extended (and often pointed) critique of others.

Cooper and Sherer (1984) studied the perspectives of users of accounts. This suggested that accounting information should meet the needs of users, that different forms of accounting may help different users, and that a single set of accounts must be a compromise between users. Cooper and Sherer (1984) criticized existing approaches, because they did not accept accounting as social, and suggested a political economy approach. The lack of agreed theoretical tools again presented a difficulty for the authors, which they avoided by sketching the PEA in terms of “features” and “imperatives”.

The authors identified three features of PEA (1984, p.218): that it “recognizes power and conflict in society”; that it should be placed in a “specific historical and institutional environment”; that it should involve a “more emancipated view of human motivation”, that is, it should be aware that self-interest is not a universal motivation. The first two are consistent with the classical definition of political economy, but the third is not. I argued in chapter one that political economy tends to treat individuals as exemplars of groups, which is limiting. As a world-view, we must seek solutions to this limitation within political economy, for example, by making more explicit the role of individuals within powerful economic groups. The imposition of a particular view of ‘human nature’ from outside contradicts the nature of a world-view. Although the account of the individual offered by political economy is often partial and limited, we cannot correct this by the imposition of an assumption about human nature. We must find the solution to the problem within, rather than exogenously impose it.

Cooper and Sherer (1984) identified three imperatives for doing PEA, which are good common-sense advice for any critical researcher that the thesis accepts. The first is that the researcher must explicitly state the normative elements in their work. The other two imperatives are to be descriptive of the ‘real life’ of accounting, what Burrell and Morgan (1979) termed an “ideographic” methodology, and to be critical, to be aware that accounting knowledge tends to serve interest groups in society. However, Cooper and Sherer fail to engage with any major theories that might illuminate the whole system of accounting, and therefore do not make any theoretical advances. One critical accountant who has engaged with this problem as a theoretical task is Bryer, who offers a Marxist theory of accounting.

Bryer: a Marxist theory of accounting

Rob Bryer’s work is the first sustained research effort at developing a PEA, characterized by close study of the historical development of the capitalist system, mainly but not exclusively in the UK, and close attention to the text of Marx’s Capital (1954, 1956, 1959). In his early work, Bryeret al(1982) performed a “financial analysis of the failure of British Steel”, which was not explicitly a PEA, but placed accounting close to the issue of mass redundancies. The facts of the British Steel case, Bryer et al (1982) argued, exemplified the importance of accounting in the modern political and economic process.

Bryer and Brignall (1986) sought to develop an understanding of the power of investors and the relationship between investors, managers and financial accounts. In particular the paper argued that:

“… the development and implementation of inflation accounting was designed both to motivate managers to make divestment decision from manufacturing, and to provide information which allows investors to monitor them” (Bryer and Brignall, 1986, p.127).

Here accounting does not merely reflect social ordering (Tinker, 1980); it is an active participant in a system of order, for example, investors using accounting to order plant closures. In this paper, Bryer clearly identifies accounting as directly serving investors' interests.

Railway manias in 19th century UK were the subject of Bryer (1991) and certain important tendencies become apparent. It is a more explicitly Marxist political economy, more consciously a PEA and explicitly aware of other contributions to critical accounting research, for example, Armstrong (1987a) and Tinker (1980). It also shows an awareness of links between accounting and financial theory such as the capital asset pricing model. In common with Bryer and Brignall (1986), it links accounting with investment decisions. The paper begins by noting the size of the investment required to develop the railway network, taking up a significant portion of GDP. As all students of British economic history know (Hobsbawm, 1968, p.110), the development of the network has

been widely interpreted as a “mania” which itself has been understood as a natural part of the “free market” system. Bryer (1991) notes that Marx suggests a railway “swindle” and looking closely at the published evidence on railway accounts of the period, argues that:

“The accounts published by railway companies were deliberately manipulated as part of an orchestrated scheme perpetuated by the ‘London wealthy’ on the manufacturing and middle classes who were lured into investing into the railways during the ‘mania,’ and were forced to sell out at a loss” (1991, p.483).

One of the techniques of manipulation used was failure to depreciate fixed assets leading to overstatement of profits. Despite the mass of evidence presented, Bryer suggests only that the “swindle hypothesis” warrants serious consideration. McCartney’s and Arnold’s (2003) subsequent research questioned the significance of depreciation accounting, but the swindle hypothesis does not stand on particular facts, but on layers of determination and leaving no stone unturned (for example, Arnold and McCartney do not justify their judgement of ‘significance’ or consider other accounting manipulations). Bryer (1991) argues that the evidential material does not constitute final ‘proof’ of the hypothesis, showing an appreciation of the issue in political economy, highlighted in chapter one, regarding the amount of evidence required to explain a whole system.

Bryer (1993a) turns explicitly to theory building, explicitly contrasting two models, a new one he calls ‘investor capitalism’ and the existing managerial capitalism model dominating mainstream thinking, and tests them against the history of capitalist

accounting. Bryer's “accounting to investor capitalism” (AIC) model can be summarised as follows:

1. Managers report to capital markets, and take decisions to suit capital markets. 2. Financial accounting ensures that capital markets observe and therefore are able to control managers by holding them accountable for their actions.

3. Traditional financial accounts (prepared on a historical cost and accruals basis) are reliable and if they are manipulated it is usually for the benefit of the capital markets not managers.

4. Discipline by traditional financial accounts is effective enough to overcome agency problems.

5. Individual shareholders (capitalists) can move into and out of companies freely in order to maintain a diversified portfolio.

6. The purpose of financial accounting is accountability rather than decision-making.

Bryer collates evidence suggesting that we can explain the early development of financial accounting as AIC:

“Conventional accounting history explains the rise of modern financial accounting in the late nineteen century ... as a response to the emergence of ‘managerial capitalism,’ the divorce of ownership from control. It is almost universally suggested that modern financial reporting has no clear conceptual foundation and that management were able to manipulate published accounts in

their own interests … It is argued here that Modern Financial Reporting was clearly conceptualised, and the hypothesis is explored that its emergence and functioning … can more plausibly be explained as a response to the rise of ‘investor capitalism,’ the generalised socialisation of capital that Marx predicted” (Bryer, 1993a, p.649).

Bryer argues that the rise of modern financial reporting was a response to the demand of investors collectively for assistance in managing the new social relations emerging between them and management. In terms of the relationship between capital and labour, Bryer (1993a) highlights the fact that managers often have to understate profits for fear of igniting unrest among workers and, as a result, these manipulations are in the interest of capital not managers. Bryer shows that authorities on accounting were aware of the ‘labour danger’ (1993a, p.678). Chapter six interprets this as the fundamental contradiction in accounting, leading to a focus on the question of disguise.

Double entry bookkeeping’s (DEB) appearance in the context of medieval northern Italy is the subject of Bryer (1993b). DEB remains the foundation of financial accounting and its origins and development, therefore, are important to understanding modern financial reporting. This paper begins, as Tinker (1980) does, with the “social relations of production”, broadened to include the social relations of trade. Bryer (1993b) argues that, in northern Italy, some capitals accumulated during the Roman Empire remained intact through to medieval times. The activities of feudal merchants then grew to such an extent that they had to raise substantial capital, which they could do in a number of ways

by pooling capital and risk. This made demands on bookkeeping, particularly the need to demonstrate an equal return for equal capital. Consequently, accounting systems had to be able to show the return on capital at any time, which is what DEB achieves. In this paper, Bryer reminds critical scholarship that the pooling of capital is an ancient practice, not a modern invention, and that understanding its origins in social capital links DEB to modern capital markets.

Existing explanations of DEB, Bryer (1993b) argues, fail to explain its “double” character. Double entry aids decision making, but single entry records can also. Here Bryer makes a key point against economists’ notions of agency, that what is double in DEB is accountability for capital: debits are uses and credits are sources. Economists characterize the principal-agent relationship as a bilateral one, a contract negotiated between two parties. The pooling of capital in medieval northern Italy, however, was not bilateral rather it was multilateral, including not just relationships between the provider and user of capital, but between the providers as well. Bryer’s theorisation of the socialization of capital shows that DEB transcends bilateral agency relationships, it represents and controls a social and not simply economic process, which implies that, by contrast, the economists’ ‘theory’ of DEB merely describes the process.10 Put another

way, Jensen and Meckling (1976) conceptualize agency at the level of the firm, but in reality the discipline imposed on managers by capital markets is general, not firm