Financialisation
and
the
Conceptual
Framework
Ying
Zhang
*
,
Jane
Andrew
DisciplineofAccounting,UniversityofSydney,NSW2006,Australia
1. Introduction
Byconnectingaccountingtoitsbroadersocialcontext,researchershavebeenabletoshowthataccountingisdeeply ideological(ArnoldandHammond,1994;DingandGraham,2007,p.301;Hopwood,1987;Tinkeretal.,1982).Atnotimehas thisbeenmoreevident;thepressuresresultingfromtheglobalfinancialcrisis(GFC)havedrawnaccountingbackintothe spotlight.Itwasacrisisthatrequiredanimmediateresponse.Regulatorssteppedintobailoutandstabiliseaspeoplelost theirhomesandtooklossesontheirinvestments.Althoughthecrisisbroughtaboutsignificantpain—experiencedbymany ashousingforeclosuresandunemployment—itopenedupspaceforabroaderdebateaboutthedominanceoffinancial capitalanditssocial,environmentalandeconomicconsequences.
ARTICLE INFO
Articlehistory:
Received17October2011
Receivedinrevisedform12September2012 Accepted12September2012
Availableonline17December2012
Motscle´s: Critique Inte´reˆtpublic
Palabrasclave: Crı´tica Intere´sPu´blico
Keywords: Critical Publicinterest Financialisation ConceptualFramework Comprehensiveincome
ABSTRACT
The ongoing neoliberalisation of global economies has been well documented. Neoliberalism requires a commitment to a broad set of ideas about how political economiesshouldoperate,andtheseideasunderpinthetransformationsofpracticeinthe processofneoliberalisation—bothatatechnicalandconceptuallevel.Transactionswithin aneoliberaleconomyneedtobeaccountedforinawaythataccordswiththisbroaderset ofideas.Specifically,thegrowthofaccumulationthroughfinancialmarketshasseena concurrentgrowthinaccountsthatbothreflectsandreproducesfinanceatitscentre. Theseaccountsaremorethanjustreports;theyconditionourexpectationsandsupport the production of further accounts, which in turn reinforce the dominant political economy.Despitetheconnectionbetweenneoliberalism,financialisationandthepractice ofaccounting,theroleofaccountingintheprocessofneoliberalisationhasreceivedonly limitedattention.Inordertocontributetoadeeperunderstandingoftheseprocessesand totherolethataccountingplayswithinthem,thispaperre-examinestheConceptual Framework (CF) to show how it forms an important part of the architecture of neoliberalism,providingcoherenceandlegitimacytoitskeyideas.ThecurrentCFproject wasjointlyconductedbytheInternationalAccountingStandardsBoard(IASB)andtheUS Financial Accounting Standards Board (FASB), and is positioned within the broader literature on neoliberalism and financialisation. This paper shows how changes in terminology,shiftsinnotionsofincomeandthepopularityofmarketvaluations(fairvalue accounting) work to normalise the speculative characteristics of financial markets. ThroughthisnewlyconfiguredglobalisedCF,theregulatoryarchitectureofaccounting mayworktosustainthecentralityoffinanceinapost-GFCeconomy,despiteitsmany deficiencies.
CrownCopyrightß2012PublishedbyElsevierLtd.Allrightsreserved.
* Correspondingauthor.
E-mailaddresses:eagle.zhang@sydney.edu.au(Y.Zhang),Jane.andrew@sydney.edu.au(J.Andrew).
ContentslistsavailableatScienceDirect
Critical
Perspectives
on
Accounting
j o urn a l hom e pa ge : ww w. e l se v i e r. c om / l oca t e / cp a
TheGFCpromptedsometowonderifourcollectivefaithinthefinancialmarketsmightcomeundone.Thepopularpress ranstorieswithprovocativeheadlineslike‘CasinoCapitalism’(Ferguson,2008,p.33);theycalledfora‘freshlookatthe apostleoffreemarkets’(Goodman,2008,p.3);andidentifiedagrowingsuspicionofstate/marketrelationswithstoriesthat pointedouthow‘free-marketeersabhorthecrutchofthestate—untiltheystartlimping’(Freedland,2008,p.29).
Despitethispublicdiscussionaboutthefutureofcapitalism,thecrisispresentedanopportunitytoreconfigurethe relationshipsbetweenmarketsandregulatorsinwaysthatsustainedapost-crisisstatusquo(Cahill,2010).InSeptember 2008theFinancialTimesranastoryoutliningsixexpertviewsontheglobalfinancialcrisisandhowto‘restoremarket confidence’(Ishmael,2008,p.26).Unsurprisingly,thesixexpertswereheadsofavarietyoffinancialinstitutions,andtheir positionsdemonstratedhowfinancialmarketsuccesshadbecomealmostunrecognisableasanythingotherthanapublic interest endeavour that needed a ‘powerful policy response’ and ‘exceptional government action’ to ‘help reliquefy, recapitaliseand re-regulate thesystem’ (Ishmael, 2008, p. 26). Capitalismin crisis neededtheactive intervention of regulatorstoensureitsongoingsurvival.InthemidstoftheGFC,accountingregulatorsworkedhardtoproduceanew ConceptualFramework,andinmanywaystheyweredoingexactlywhatthesixexpertswanted.Theyactivelyreconfigured theconceptualunderpinningofaccountingtoreinforcemarkets.
Thispaperexplorestheconnectionbetweenaccountingregulations,neoliberalisationandfinancialisation,bydiscussing some of the key changes in the current Conceptual Framework (CF) project that is being jointly developed by the InternationalAccountingStandardsBoard(IASB)andtheUSFinancialAccountingStandardsBoard(FASB).Thestatedaimof thisjointprojectistodevelopanimprovedCFfortheconvergenceofInternationalFinancialReportingStandards(IFRS)and USGenerallyAcceptedAccountingPractices(GAAP)(FASB,2008).Thetwoorganisationsarebothhighlyinfluential,andthus the convergence project has drawn significant interest from accounting practitioners, academics and the broader community.ThisisreflectedinthenumberofresponsestodiscussionpapersandexposuredraftsreleasedbytheIASB/ FASB,1andisfurthersupportedbytheconsiderableacademicresearchdedicatedtothetopic(Bradbury,2008;Cauwenberge andBeelde,2007;DickandWalton,2007;Goldbergetal.,2006;McGregorandStreet,2007;Rayman,2007;Wagenhofer, 2009;Whittington,2008a).However,discussionssofarhavebeenlargelytechnical.Fewresearchershaveexploredthe motivationsthatunderpintheprojectandtheimplicationsthesehaveonemergingpractice.
AlthoughthejointIASB/FASBprojecthaseightphases,2thediscussionpresentedinthispaperfocusesonPhaseA,which wascompletedinSeptember2010whenChapter1TheObjectiveofGeneralPurposeFinancialReportingandChapter3 QualitativeCharacteristics of Useful FinancialInformation of thenewCF (hereaftercalled theFramework 2010) were released.OurreadingoftheFramework2010anditsrolewithintheconvergenceprojectsuggestsastrategicrepositioningof accountingpracticeaspartofthearchitectureofneoliberalismandasafacilitatoroffinancialisation—andwearguethatthe improvements(howeversubtle)aredeeplyideological.TheFramework2010embedsthevaluesofneoliberalismwithinthe CF,makingthemalogicalcoreinaccountingpractice.SuchalinkbetweenideologyandtheCFisnotnew(Bromwichand Hopwood,1983;Hines,1989,1991;Robson,1999;Young,2003,2006),butweextendthisanalysistosuggesthowthe
Framework2010workstoreinforcetheinterestsoffinancialcapital,andassuch,constitutesanimportantpartofthestoryof bothneoliberalismandfinancialisation.
Theremainderofthispaperisstructuredasfollows.Section2explorestherelationshipsbetweenneoliberalism,capital marketsandfinancialisation,inordertoconstructatheoreticalbasisfortheanalysis.Section3examinestheCFproject withinthetheoriesofneoliberalismandfinancialisation.Section4summariesthepaperanddrawssomeconclusions.
2. Neoliberalism,capitalmarketsandfinancialisation
Duringthelastthreedecades,thestatehasplayedanactive,indeedactivist,roleintheintroduction,implementation andreproductionofneoliberalism(Cahill,2010,p.301).
OverthelastfortyyearstheNewRighthasadvocatedtheprivatisationofpublicservices;thederegulationoflabourand financialmarkets;theopeningofmarketstofreetrade;and theshrinkingofgovernmentsthroughtax cuts,austerity measuresandreducedregulation—acombinationbroadlyreferredtoasneoliberalism(Harvey,2005).Neoliberalism,itis argued,isinthepublicinterestbecauseafreemarketcanultimatelysecurethebestpossiblesocialandeconomicconditions forall.Discussionsofneoliberalismhavethuscentredonthischangingrelationshipbetweenthestateandthemarket.
Althoughneoliberaltheoryrejectsaninterventionistorprotectioniststateasinefficient,inpractice,proponentsoffree marketsrecognisethatthemarketstheypromotecannotexistwithoutaparticulartypeofstate.3FriedmanandFriedman arguethatgovernmentshould:
1
Theresponselettersareavailablefrom:http://www.ifrs.org/Current+Projects/IASB+Projects/IASB+Work+Plan.htm. 2
PhaseA:Objectiveandqualitativecharacteristics;PhaseB:Definitionsofelements,recognitionandderecognition;PhaseC:Measurement;PhaseD: Reportingentityconcept;PhaseE:Boundariesoffinancialreportingandpresentationanddisclosure;PhaseF:Purposeandstatusoftheframework;Phase G:Applicationoftheframeworktonot-for-profitentities;PhaseH:Remainingissues,ifany.PhaseAwascompletedinSeptember2010,andPhasesB,Cand D are currently active (February 2012). More details can be found from IASB’s website: http://www.ifrs.org/Current+Projects/IASB+Projects/ Conceptual+Framework/Conceptual+Framework.htm.
3
...facilitate voluntaryexchangesby adoptinggeneral rules—therules oftheeconomic andsocial gamethat the citizensofafreesocietyplay...avaliddutyofagovernmentdirectedtopreservingandstrengtheningafreesociety (FriedmanandFriedman,1980,p.30).
Accordingtothetheory,governmentsshouldpromote‘freedom’throughmarkets.Thosecriticalofneoliberalismseethis asaformofre-regulationforthemarket,withoutwhichthefreemarketcouldnotoperate(Freeden,1996;Gamble,2006; Harvey,2005;MacEwan,2005;Palley,2005).Extendingthiscritique,inthecontextofcontemporaryeconomicglobalisation, theestablishmentoftheglobalmarkethasrequiredasuiteofinternationalrulesandinstitutionstoregulatethegrowing volumeofinternationaltrade(withsomeexamplesincludingcontractlaw,patentsandarbitrationproceduresandtheIMF, WorldBankandtheWorldTradeOrganization).Whileneoliberalismadvancespoliciesofderegulationentailingtheremoval ofstateregulatorysystemsthatinterveneinmarkets,italsoworkstoreconfigureregulationtofacilitatethecentralityofthe market,whichisincreasinglyafinancialone.Giventhattheaimoftheneoliberalstatehasbeentoprivilegetheconditions necessary forcapital accumulation, therising significance of financialcapital in theglobal economy iscentral tothe advancementofneoliberalism(Epstein,2005;Gamble,2006;Harvey,2007).Muchoftheliteratureonthisrelationship (Dore,2008;DumenilandLevy,2005;Epstein,2005;Foster,2008;Helleiner,1994;Krippner,2004;Misheletal.,2007; Palley,2007;vanTreeck,2009)suggeststhattheprocessoffinancialisationinvolvesasystemictransitionofprofitmaking fromtraditional production tothefinancial sector—such thatthestate nowfunctionsto ‘guaranteetheintegrity and solvencyofthefinancialsystem’(Harvey,2006,p.20),andalso:
Neoliberalismmeant,inshort,thefinancialisationofeverythingandtherelocationofthepowercenterofcapital accumulationtoownersandtheirfinancialinstitutionsattheexpenseofotherfactionsofcapital.Forthisreason,the supportoffinancialinstitutionsandtheintegrityofthefinancialsystembecamethecentralconcernofthecollectivity ofneoliberalstates(Harvey,2006,pp.24–25).
ThisviewisreinforcedbyLucarelli(2012,p.3)whoarguesthatfinancialisationischaracterisedbyatransformationof futurestreamsofincomeintomarketablesecurities,andthatthisrepresentsa‘profoundshiftawayfromdirectinvestment in productivecapacity,towardstheopen financialmarketsin whichprofitability canbetemporarilyboosted through speculativeoperationsinthestockmarkets’.Thisshifthasseentheproliferationofcomplexfinancialinstrumentsand derivatives,andamovementawayfromtherealeconomyintermsofprofit-seekingactivity(BIS,2007;Dore,2008).
Althoughfinancialmarketshaveahistoryofspeculation(Keynes,1936;Parenteau,2005),thetypesoffinancialinstruments tradedincontemporarymarketsofferunprecedentedrisksandreturns.Inaddition,thepenetrationoffinancialcapitalinto othersectorsbeyondfinancialinstitutionshasbeenpossible,inpartbecauseofthechangingmanagerialbehaviourin non-financialcompanies(NFC)(BoogleandSullivan,2009;Colesetal.,2006;Crotty,2003,2009).Agreateremphasisonthe financialshasmeantthatshareholdervaluecouldbetemporarilyboostedthroughmergers,acquisitionsandbuybacks,and managershavebecomemorelikelytomanageNFCstosafeguardmanagers’capitalmarket-basedrewards(i.e.,stockoptions and bonuses)(Palley,2007).4 Financialisationhas meant thatcorporate performance isnow equatedwith itsfinancial performance—asreflectedinthebalancesheets—butnotthefirm’scashflowsorproductiveactivity(LazonickandO’Sullivan, 2000;Mouck,1992).Inaddition,thefinancialinnovationsoccurringoverthelasttwentyyears(suchasleveragedbuyoutsand privateequityinvestingfinancedbyjunkcommercialpapers)wereregardedasmarketefficiencyimprovements.Accordingto manyeconomists(e.g.,MorinandJarrell,2001;Palley,2005;vanTreeck,2009),thesecompelCEOstomanagefirmsinaway thatsatisfiestheshort-terminterestsofshareholdersasdepictedinsharepricevaluations.Inrecentyearsbalancesheetshave becomelesstangibleandarenowincreasinglydominatedbyfinancialassets(Krippner,2005),andevenmorecashandprofits aredistributedtoshareholders(Anderssonetal.,2007;LazonickandO’Sullivan,2000).
Given the contextoutlined above, we arguethat it is throughongoing adjustments to regimesof regulationthat financialisationoftheglobaleconomyhasbeenmadepossible(Frenchetal.,2011).AccordingtoFrenchetal.(2011,p.801):
Thisnewformoffinanciallybasedregimeofaccumulation...hasledtothedevelopmentofnewinstitutionswhich servetostabilizeandnormalizeit.
Globalisedaccountingregulationformsanimportantpartofinstitutionsthatstabiliseandnormalisefinancialisation. The developmentof internationalaccounting standardshasbeendrivenlargelybytheneedtoaccommodateglobal capital markets. The International Organization of Securities Commissions (IOSCO), the world’s securities markets regulator, has been a powerful lobbygroup for the establishmentof single anduniversal international accounting standards,andhasclaimedthatinconsistent,nationallyimposedaccountingstandardscreateuncertaintyforinvestorsin readingfinancialreports.This,wearetold,hinderstheinternationalflowoffinancialinvestment(Gaffikin,2008),and underminesthecapacityforfinancialprofits.TheendorsementoftheIOSCOwasseenascriticaltothelegitimacyofthe InternationalAccountingStandardsCommittee(IASC).5ThisledtheIASCtorefocusitsworkby1987ontoobtainingthe
4AccordingtoCrotty(2003,p.274):‘theaverageproportionoftheearningsofthetoponehundredCEOsthatcameintheformofexercisedstockoptions rosefrom22%in1979to50%inthelate1980s.Inthefinancialboomyearsof1995through1999,thisaverageroseto63%.Meanwhile,topCEOpayinall formsrosefrom$1.26millionin1970to$37.5millionin1999.
5
IOSCOssupport,sothatanymembercountriesmustfollowitsstandardsforinternationalsharelistings(Camffermanand Zeff,2007).
The1989ConceptualFrameworkemergedfromthisprocess,withtheexpressedambitiontoprovide:
abasisfordecidingwhichoptionsshouldberemovedorretained,andfordevelopingnewstandards...inthesense thatareductionofoptionswasacentralcriterionindeterminingtheacceptabilityofIASCstandardsforcross-border securitiesofferings(CamffermanandZeff,2007,p.253).
Theideawastosupportglobalcapitalflowsthrougharobust,reliableandrelevantaccountingsystem,suchastheIFRS (IASB,2005).Thisunhinderedflowofcapitaliscriticaltoaglobalneoliberaleconomy,aspointedoutbyHarvey:
Thefreemobilityofcapitalbetweensectors,regions,andcountriesiscrucialwhichhencerequiresaremovalofall barriers(suchastariffs,punitivetaxationarrangements,planningandenvironmentalcontrols,orotherlocational impediments)tounhinderedcapitalflow(Harvey,2005,p.66).
Theglobalisationofaccountingstandardsfreesoneofthelocalimpedimentstooptimisetheconditionsforcorporations andcapital.
The implications of global politico-economic transformation on accounting have drawn significant attentionfrom sociologistsinthefieldofpoliticaleconomy(Boyer,2007;Martinez-Diaz,2005;MattliandButhe,2005;Porter,2005;Power, 2009).However,therelationshipbetweenaccountingandthebroaderpoliticaleconomyhasbeeninadequatelyaddressed bytheaccountingliteraturesincethe1990s(Arnold,2009a).Themajorityofstudiesthatexaminetherelationshipbetween accountingand neoliberalismhaveonlyemergedrecently(Anderssonetal.,2010;Andrew,2007;Andrewetal.,2010; Arnold,2009a,2009b;Cooperetal.,2010;Cronin,2008;Haslam,2010;Ishikawa,2005;Mennicken,2010;Zhangetal., 2012).CommentingonthecurrentGFC,Arnoldremindsusthat:
Accountingresearch’sfailuretoanticipatethecrisisorproblematizetherelationshipbetweenfinancialaccounting, thegrowthoftheshadowbankingsystem,andmacroeconomicinstabilitycanbeattributed,inpart,tothiscultural turnawayfrompoliticaleconomyanditscritiqueofcapitalism(Arnold,2009a,p.805).
Thispapercontributestotheaccountingliteraturebyengagingwiththiscallforadeeperunderstandingoftheunderlying impactsof accountingon thepolitical economiesin whichit operates.Therecent instabilityassociated withtheGFC providedanopportunityforcautionandretreat,andsoitisinterestingthatinstead,wehaveseenanewdeterminationto ensurethesurvivaloffinancialmarketsinspiteoftheirapparentfailings.
TheremainderofthispaperconsiderstherolethataccountingplaysinsustainingfinancialisationbeyondtheGFC.We suggestthattheFramework2010embedsaglobalisedcommitmenttofinancialisationwithinthepracticeofaccounting, whichin turnworkstosupportand sustainthecentralityof financialmarketsin contemporaryeconomies.Although financialmarketsareundeniablyimportant,manyotherinterestsexistthatcanandshouldbeservedbythepracticeof accounting; these,we argue, have been made more difficult toimagine and conceptualise. Along withother critical accountingresearchers,wearguethatthemovementtowardsneoliberalismandthefinancialisationoftheglobaleconomy hasbeenlubricatedandlegitimised,inpartthroughtheadoptionofglobalaccountingregulations(Boyer,2007;Hopwood, 2009;McSweeney,2009;NewberryandRobb,2008;RobertsandJones,2009).
3. Framework2010:reflectingfinancialisation
3.1. Reframingtheusersandredefiningthepurposeofaccountinginformation
AlthoughthechangestoFramework2010havebeensubtle,ineffect,manyofthemhavebeentransformative.Specifically,
Framework2010hasreframedtheidentityofusersandredefinedthepurposeoffinancialreporting,bothofwhichhave significantimpactsontheconceptualandtechnicalorientationofaccountinginformation.
First,Framework 2010 locatesinvestors at the centreof the reporting process.Inthe past, the primaryusers of generalpurposefinancialreporting,asdefinedbytheIASB,were‘presentandpotentialinvestors,employees,lenders, suppliersandother tradecreditors, customers, governmentsandtheir agenciesandthe public’ (paragraph 9, 1989 framework).This verybroad definitionoffereda conceptual appreciation of thebroader publicinterest function of accounting practice. It contrasted starkly with the original FASBConcepts Statement No. 1 Objectives of Financial ReportingbyBusinessEnterprises,issuedinNovember1978,whichdefinesusersasinvestorsandcreditors(Zeff,1999). Duringtheprocessofthe2010convergence,thedefinitionof‘user’wasnarrowedto‘existingandpotentialinvestors, lendersandother creditors’ (paragraph OB2,Framework 2010)—reflectingFASBscommitmentto capitalmarkets. In explainingthedecisiontoincludeonly‘investors,lendersandothercreditors’astheprimaryusers,theIASBnotesthat theseplayers ‘havethemost criticalandimmediate need forthe informationinfinancial reportsandmanycannot requiretheentitytoprovidetheinformationtothemdirectly’(paragraphBC1.16,Framework2010).Further,theIASB emphasisesthat:
Information that meets the needs of the specified primary users is likely to meet the needs of users both in jurisdictionswithacorporategovernancemodeldefinedinthecontextofshareholdersandthosewithacorporate governancemodeldefinedinthecontextofalltypesofstakeholders(paragraphBC1.16,Framework2010).
Inpractice,andforalongtime,standardsettersthoughtoftheshareholderastheprimaryuseroffinancialreports (CooperandSherer,1984);however,thishadneverpreviouslybeenstipulatedasovertlyasitwasinFramework2010. Undeniably,theseinterestswereofconcerntoallaccountingstandardsetters,butthedecisiontoexcludebroaderusersfrom theprojectissymbolicofthesuccessoffinancialisation,whereinfinancialmarketsbecameaproxyforthepublicinterest. Thisisreflectedinthebeliefthatgoodinvestmentandlendingdecisions,madepossiblethroughgoodaccountingpractice, willtrickledownandbegoodforallofus.
A conceptual shiftalso occurred, regarding the underlyingpurpose of financial reporting. Specifically, the ideaof stewardshipisdiscussedextensivelywithinthecommentletterstotheIASB/FASBsDiscussionPaperandExposureDraft(ED).6 TheEDdiscussesthe‘ObjectiveofFinancialReportingandDecision-usefulness’inseparatesections.7Itacknowledgesthe rolethatfinancialstatementscanhaveinsupportingdecisionsrelatedtothestewardshipofanentity’sresources,butnotes thatitsreportingrequirementscouldbeembracedbyprovidinginformationrelevanttofuturecashflows,
...because management’sperformance in discharging its stewardship responsibilities usually affects anentity’s abilitytogeneratenetcashinflows,management’sperformanceisalsoofinteresttopotentialcapitalproviderswho areinterestedinprovidingcapitaltotheentity(paragraphOB12,ED,May2008).
Consequently,inFramework2010theIASBcombinedthosetwosections,which‘resultedineliminatingtheseparate subsectionsonusefulnessinassessingcashflowprospectsandusefulnessinassessingstewardship’(paragraphBC1.27,
Framework2010).Further,‘theBoarddecidednottousethetermstewardshipinthechapter’,because,itclaims,‘therewould be difficultiesin translatingit into otherlanguages’ (paragraph BC1.28,Framework 2010). Sidelining the objectiveof stewardshiphasbeencontroversial(Wagenhofer,2009;Whittington,2008a),because‘accountabilityentailsmorethanthe predictionoffuturecashflows’(Whittington,2008a,p.144).Wagenhofer(2009,p.68)warnsthat‘thegrowthstrategies adoptedbytheIASBarerisky’,becausetheyfailtotakeintoaccountthediverseobjectivesoffinancialreporting.Because stewardshipisconcernedwithmonitoringthepastaswellaspredictingthefuture,fromtheperspectiveofpublicinterest,it isoftentiedtotheintegrityofmanagement(Puxty,1986;Whittington,2008b).
Theinterestsofcapitalhavebeenprivilegedinthepast,butthisobjectivewasnotadoptedgloballyandneitherwere theseinterestsasovert.TheIASB’sdeclarationto‘servetheinformationneedsofparticipantsincapitalmarkets’(paragraph BC1.23,Framework2010)reflectsthisemphasisshift.InstitutionalisingthisobjectivethroughtheCFensuresthatmarkets areconceptuallyandmateriallycentraltothepracticeofaccountingandfinancialreporting.Financialmarketshavelong beencentraltothereportingprocess,butthisovertchangeinemphasiswithintheFramework2010providesaninsightinto howneoliberalisationhasbeensustainedinapost-GFCworld.
Thenextsectionconsidershowfairvalueaccountinghasworkedtoreinforcethisnewconceptualframing.
3.2. Fairvalueaccounting:financialisationandtheamplificationofrisk
Fairvalueaccounting(FVA)reliesonmarketstoofferaccurate,up-to-datemeasurementsofthevalueofassetsand liabilities.Theoretically,theassumptionunderlyingFVAisthatpricesderivedfromarm’slengthmarkettransactionsreflect effectiveanalysesofallnecessaryinformationrequiredtocreateanaccuratevaluation(McSweeney,2009).Theadoptionof FVAmeansthatthevalueofthefirmisderivedfromanincreasinglyfinancialisedbalancesheet(andnotfromthecashflows generated fromproductive transformationsand marketexchange). In essence, FVAcanonly providethesevaluations throughthemarketmechanism;therefore,ensuringtheviabilityofafreemarketiscritical.Somewhatparadoxically,afree marketmustbecreatedandsustainedthroughregulationssuchasFramework2010inordertoenableFVA.Thisshiftin emphasisissupportedintwoways:conceptually,throughashifttowardsfaithfulrepresentationinwhichmarketestimates areallowed;andtechnically,throughareconfiguredcomprehensiveincomestatement.
3.2.1. Reliabilitycomparedtofaithfulrepresentation
BoththeIASBandFASBagreedtousetheterm‘faithfulrepresentation’toreplacetheterm‘reliability’asaqualitative characteristicoffinancialinformationintheFramework2010.Thisshiftrepresentedamoveawayfrompreviouslyaccepted ideasofsubstanceoverform,prudence(conservatism)andverifiability,whichhadallbeenaspectsofreliabilityinthe1989 framework.
IndevelopingtheFramework2010,theIASBhasarguedthattheterm‘faithfulrepresentation’(thefaithfuldepictionin financial reports of economic phenomena) encompasses the main characteristics of reliability. Although ‘faithful representation’underpinnedtheinterpretationof‘reliability’inboththeFASBandIASBspreviousframeworks,thecomplete
6
Availablefromhttp://www.fasb.org/project/cf_phase-a.shtml. 7
removaloftheterm‘reliability’inFramework2010wasasignificantdecisionbecausethischangeinterminologyeliminated thepossibilityofatrade-offbetweenrelevanceandreliability(Bradbury,2008;Whittington,2008a).Whittington(2008a,p. 148)arguesthatthistrade-offhasbeen‘frequentlyinvokedasareasonfornotusingfairvaluemeasurements,whichare perceivedasoftenbeingrelevantbutunreliable’.Accordingly,thisreframingofthequalitativecharacteristicsoffinancial informationlaid theconceptualfoundation forfair valueaccounting todominateapproaches tomeasurementwithin accountingpractice.
Froma technical perspective,substantialconcerns remainover thereliabilityof thesekinds ofmarket valuations. Althoughmark-to-marketvaluationsofmanyfinancialassets(suchassecuritisedassets,swapsandcollateraliseddebt obligations)arethoughttobereadilyavailableinactivemarkets8(Plantinetal.,2008),otherresearchindicatesthatfinancial assetscanbeoverstatedbymarketvaluations(Ackermann,2009;ChristensenandNikolaev,2009).Inaddition,infrequently tradedornon-tradedassetsrequireconsiderablemanagementdiscretionindeterminingtheamountandtimingofasset valuationand/orrevaluation(McSweeney,2009).Theshifttowards‘representationalfaithfulness’removestheabilityto contestFVAonthebasisofreliability,andgiventheobviousrelationshipbetweenFVAandthemarket,thisshiftreaffirms thecentralityoffinancialmarketinformationneedsinthereportingprocess.
InparagraphQC15oftheFramework2010theIASBsays:
Freefromerrordoesnotmeanperfectlyaccurateinallrespects.Forexample,anestimateofanunobservablepriceor valuecannotbedeterminedtobeaccurateorinaccurate.However,arepresentationofthatestimatecanbefaithfulif theamountisdescribedclearlyandaccuratelyasbeinganestimate,thenatureandlimitationsoftheestimating processareexplained,andnoerrorshavebeenmadeinselectingandapplyinganappropriateprocessfordeveloping theestimate.
Manywouldagreethatthecommittee’sacknowledgement ofthe uncertaintywithwhichaccounting dealsis an appropriateobservation,butitneverthelessrepresentsa significantdeparturefrompastapproaches.Accountinghas traditionallyseenitselfasrigorousandneutral,andnotionsofprudenceandconservatismareemphasisedinearlierCFs (e.g.,inthe1989framework).Ascitedabove,paragraphQC15providesadditionallegitimacytotheestimationsthat havelongbeenpartofaccountingpractice.Inaddition,inparagraphOB11oftheFramework2010theIASBemphasises that:
Toalargeextent,financialreportsarebasedonestimates,judgments,andmodelsratherthanexactdepictions.The ConceptualFrameworkestablishestheconceptsthatunderliethoseestimates,judgments,andmodels.
Thisrecognitionofestimationisnotpresentinthe1989framework.Rather,wecantracethisbacktotheoriginalFASB StatementofConceptsNo.1ObjectivesofFinancialReportingbyBusinessEnterprises,issuedinNovember1978:
[t]heinformationprovidedbyfinancialreportingoftenresultsfromapproximate,ratherthanexact,measures.The measurescommonlyinvolvenumerousestimates,classifications,summarizations,judgments,andallocations(FASB, 1978,p.12).
Accountinginvolvesaconsiderabledegreeofestimationandsignificantchoice—therecognitionofthishasthecapacityto empoweruserstoengagecriticallywiththereportingprocessandtoconsiderthekindsofassumptionsthatunderliea report.However,ithasbecomevirtuallyimpossibletosustaintheprofessionasareporteroffinancialreality.Whilesuchan acknowledgementiswelcome,thisshiftintheCFhasthecapacitytodistanceaccountingpracticefromtheideological natureofsuchestimationsandjudgements.
Withinthecontextoffinancialisation,suchashiftintheCFcanbeinterpretedasamovetoaccommodatetheinherent uncertaintyandvolatilityoffinancialmarketsandtheimpactthishasonaccountingvaluation.Becausetheglobaleconomy reliesonhighlymobilefinancialflows,manyofthesechangesreflecttheneedforup-to-dateinformationwithinmarkets. Thishelpsensurethatusers (shareholdersand creditors)do not missout ontimely opportunitiesforshortsellingin speculativefinancialmarkets.
TheGFCpromptedmanytoexpresstheirconcernsabouttheroleofaccountinginformationplaysinmarketvolatility. However,theIASBdismissedtheseconcerns:
Theboardacknowledgedthattheinterestsofinvestors,lenders andothercreditorsoftenoverlapwiththoseof regulators.However,expandingtheobjectiveoffinancialreportingtoincludemaintainingfinancialstabilitycouldat timescreateconflictsbetween theobjectivesthat theBoard is notwell-equippedtoresolve(paragraphBC1.23,
Framework2010).
DespitetheconcernsraisedaboutmarketstabilityaftertheGFC,thestandardsettersdidnotconsiderthistobeacentral concern for the Framework 2010. Instead, theIASB notes that providing relevant and faithfully represented financial informationcanimprovetheconfidenceofusers(i.e.,investors,lendersandothercreditors,or,inotherwords,theproviders ofcapital)intheinformation,andthuscontributetopromotingfinancialstability(paragraphBC1.23,Framework2010).This
8
mirrorsthelogicofneoliberalism:iftheinformationcanbefaithfullyrepresentedtoinvestors,themarketwouldensure betteroutcomesforallthancananyregulatoryinterventionscouldpossiblydeliver.
3.2.2. Othercomprehensiveincome
Inadditiontothenewemphasisplacedon representationfaithfulness,inaccordancewiththeFramework2010,the ‘PresentationofItemsofOtherComprehensiveIncome’9(OCI)representsanotherwayinwhichaccountingpracticehas becomeincreasinglyfinancialised.
ThereportingofOCIrequiresaconceptualshiftinthedefinitionofearnings.AccordingtotheOCIapproach,earningsare determinedbythevaluechangesoftheassetsandliabilities,ratherthanjusttheresiduals,aftermatchingrevenueswith costsdirectlyincurredduringthefirm’sproductiveactivities.Theapproachhasalonghistory.In1980theFASBstartedto definerevenues,expensesandgainsandlossesintermsofassetsandliabilitiesinitsConceptsStatement3Elementsof FinancialStatementsforBusinessEnterprises1980:
Revenuesareinflowsorotherenhancementstoassetsofanentityorsettlementsofitsliabilities(oracombinationof both)duringaperiodfromdeliveringorproducinggoods,renderingservices,orotheractivitiesthatconstitutethe entity’songoingmajororcentraloperations(paragraph63,FASBConceptsStatement3,1980).
ThiswasthefirsttimethattheFASBmadeknownitspreferenceforthe‘assetandliabilityview’overthe‘revenueand expenseview’ofearnings(Zeff,1999).Aspartofthis(re)definition,theFASBdescribed‘comprehensiveincome’as‘the changeinequity(netassets)ofanentityduringaperiodfromtransactionsandothereventsandcircumstancesfrom non-ownersources’(paragraph56,FASBConceptsFramework3,1980).AccordingtotheFASB,thisdefinitionreflected‘areturn
onfinancialcapital’(paragraph58,FASBConceptsFramework3,1980).
Duringthe2010convergence,standard-settingbodiesproposedanewapproachtothepresentationofcomprehensive incomethroughanED:thePresentationofItemsofOtherComprehensiveIncome,releasedon26May2010.Thisproposedthe use of a single statement approach toreporting comprehensive income, with profit or loss as a subtotal, and total comprehensiveincomeasthebottomlinenumber.ManyrespondentstotheEDexpressedconcernthat:
...presentingtotalcomprehensiveincomeasthelastnumberinthestatementwouldconfuseusers...[and]requiring allitemsofincomeandexpensetobepresentedinasinglestatementwasthefirststepbytheboardstoeliminatethe notionofprofitorloss(paragraphBC11,ED,May2010).
InthefinalamendmentsofIAS1(June2011),theIASBdecidednottorequireasinglestatement,butgavetheoptionto presentonestatementofcomprehensiveincomeortwoseparatestatements:oneofprofitorlossandanotherofother comprehensiveincome.
Thereportingofcomprehensiveincomeisinterestingbecauseitrecognisesunrealisedgains/lossesfromvaluechanges ofassets/liabilitiesinincome,whichdepartsfromthetraditionalperformanceconceptofincome:throughmatching relevant expenses with revenues generated from operating activities, the income measures firms’ real operating performance.GiventhepressurespresentedbytheGFC,suchaviewmaybeworthreconsidering,becauseitemphasises performanceinrelationtotherealeconomy.However,underthecurrentapproach,thegainsorlossesexperiencedby financialspeculationbecomereal—eitherintermsofreinvestingtheearningsortheexperienceofdownsidelosses.As Heilpernetal.(2009)argue,increasedfinancialleveragehasledfirmstomaintainnarrowcashmarginsonthebalance sheet,aswellasverythinshareholderequityrelativetoassets/debtfinancing.Thisislikelytoprovideaninadequate cushionforfirmsiftheyneedtoabsorbtheimpactofassetvaluechangesduringacreditmarketcrisis.Asanexample,the creditlossesandgoodwillimpairment(s)reducedtheequitytothepointwheremanybankswerenolongerviableduring theGFC.10
AsoutlinedinSection2,investmentdecisionsarenowlargelydrivenbyfinancialspeculation,whichprivileges short-termgainsoverlonger-termearnings.Riskyinvestmentsnotonlycontributelittletotherealeconomy,butalsoattract significantresourcesawayfromotherproductivesectors.Insteadofprovidinginformationthatallowsanassessmentofrisk, thefocusofreportingcomprehensiveincomesignificantlyobscuresand/ornormalisestheriskassociatedwithfinancialised earnings.Inthis sense,thereportingofOCI reflectslittle,ifany,oftheperformanceoftraditionalearnings-generating activities.Increasingly,fairvaluemeasurementsprovidethebasisonwhichtoindicatechangesinthevalueofassetsand liabilities,or,inotherwords,theenhancementofinvestors’wealth(Whittington,2008a).However,fromtheperspectiveof creditorsandshareholders,itprovidescrucialinformationinthecontemporarybusinessenvironmentinwhichfinance dominatesotherproductionsectors(Bryanetal.,2009).Inlinewiththis,thestatementofcomprehensiveincomefocuses attentiononmovementsinthevalueofcapital—whethertheyarerealisedornot.Asthenextsectionshows,thisaccounting treatmentdisguisesthespeculativenatureoffinancialisationbymispricingandmisrepresentingfinancialrisk.
9ThisisdiscussedinPhaseE:Boundariesoffinancialreporting,andpresentationanddisclosureoftheCFconvergenceprojecthttp://www.ifrs.org/ Current+Projects/IASB+Projects/Conceptual+Framework/Conceptual+Framework.htm.
10
3.2.3. Mispricingtheriskoffinancialisation
The financialisationof the global economy has produced ‘a powerful incentive topursue high-risk,high-leverage strategies’(Crotty,2009,p.565)inthecapitalistsystem.11Thedegreeofsystem-widerisks,madeapparentbytheGFC,has demonstratedthedamagecausedbyexcessiverisk-taking throughfinancialderivatives.FVAreinforcesthebeliefthat marketpricesofferacorrectvaluation,despitethecomplexnatureoffinancialassetsandliabilities—anditdoeslittleto supportriskavoidanceduringacrisis(McSweeney,2009).Takecollateraliseddebtobligations(CDO)asanexample:ina verygeneralsense,a mortgage-backedCDOconvertscash flowsfrommortgagesintotranchesthathavedifferentrisk characteristics(SumerlinandKatzovitz,2007).AccordingtoChackoetal.(2006),severalthousandmortgagesareoften combinedinasinglemortgage-backedsecurity(MBS),andasmanyas150MBSscanbepackagedintoasingleCDO,whichis extremelydifficulttovalue.Morespecifically,consideringthepricedetermination,
Evenwitha mathematicalapproach tohandlingcorrelation, thecomplexityof calculatingtheexpecteddefault payment,whichis what isneededtoarriveat aCDO price, growsexponentially withanincreasingnumber of referenceassets[theoriginalmortgages]...Asitturnsout,itishardtoderiveageneralizedmodelorformulathat handlesthiscomplexcalculationwhilestillbeingpracticaltouse.(Chackoetal.,2006,p.226)
Investmentbanks and rating agenciesthat create thesecommercial papers useextremely complicated simulation models12topricethem.Thesemodelsareunderstoodas‘unreliableandeasilymanipulatedstatisticalblackboxes’and ‘marketinsidersrefertotheprocessthroughwhichCDOsarepricedasmarkingto‘‘magic’’orto‘‘myth’’’(Crotty,2009,p. 567).However,theinevitableuncertaintyinvolvedinthepricingprocesshasbeenoddlyneglectedinmuchoftheFVA debate,letalonetheIASB/FASBsCFproject.
Evenmoredetrimentalistheinstabilityofthefinancialmarketwhenitisintroducedintothevaluationprocessof the firm through the market pricing mechanism, which does not necessarily reflect the implied systemic risks of financialisation.Undertheprevioushistoricalcostaccountingsystem, sharemarketpricesandestimationsbasedon hypothetical models were not part of the valuation process. Hence, the volatility of the share marketwas largely isolated,havinga verylimitedeffectonmeasuringvaluesinothereconomicsectors.Inthissense,togetherwiththe practiceof reportingcomprehensiveincome, FVAallows thevolatilityin market valuationstobeembedded in the internalevaluationproducedbythefirm.Decisionmakersfromothersectorsarelesslikelytobealertedbythispricing signal becausethe useof comprehensive income makes profits derived from speculative value changes difficultto detect.Thiskindofinformationasymmetryenableskeyfinancialactorstotransferriskstootheractorsinawaythatis substantiallyhidden.TheconceptualframingproducedbytheIASB/FASBsCFprojectmakesadiscussionoftheserisks difficult.
4. Conclusion
Accountingregulationhasplayedasignificantroleinthestoryofneoliberalismandfinancialisation.Inpart,theuptake in the ideas associated with neoliberalism has been possible because of the subtle transformation of regulatory architectureto reinforce itscentral ideas.This paper contributesto theextant understanding ofthe IASB/FASBsCF convergenceprojectthroughanemphasisonitsideologicalunderpinnings—itscapacitytorefocusaccountingpractice towardstheneedsofspeculatorsincapitalmarkets,awayfromthebroadersocialandenvironmentalconcernsthatmay reflecttheinterestsofthecommunityatlarge.Thisisnotanaccident,norshoulditbeconsideredthenaturalroleof accounting.
This paper showshow thereconceptualisation of accounting throughthe Framework 2010 embeds financialised markets at thecentre of accounting practice.Specifically, we show thatthe narrow definitionof users in financial reporting—ashiftin thepurpose of financialreportingandthe useoffaithful representationinsteadof reliability— indicatesa discursive shift towards theinterests of financial capital. Inaddition, the emphasis now placed onfair values in the calculation of comprehensive income obscures our capacity to identify the nature of profit-making activity.
Overthelastfourdecades,neoliberaltheories ofderegulation,privatisationandlabour flexibilityhaveemergedas popularcharacterisationsofsensibleand responsiblepublicpolicy.In practice,neoliberalismhasreliedheavilyonthe reconfiguration of regulation to support the interests of capital (Cahill, 2010; Harvey, 2010). We have also seen a correspondinggrowthinthepoweroffinancialmarkets.Thisisevidencedbyashiftawayfromprofitmakingactivities withintherealeconomy tofinancialised profitssecured through tradingactivitiesdirectedat maximising short-term speculativegains.AlthoughtheGFCcalledintoquestiontheviabilityofthesemarkets,theseeventshavenotbeenfataltothe logic of financialisation. Framework 2010 reproducesthis logic within the conceptualframing of accounting,turning ideologicalcommitmentstofinancial capitalintohighquality practicalresponsestocontemporaryfinancial reporting challenges.
11
AccordingtoCrotty(2009,p.575),‘in1981householddebtwas48%ofGDP,whilein2007itwas100%.Privatesectordebtwas123%ofGDPin1981and 290%bylate2008.Thefinancialsectorhasbeeninaleveragingfrenzy:itsdebtrosefrom22%ofGDPin1981to117%inlate2008’.
12
Acknowledgements
WewouldliketothankPatriciaArnoldandtheparticipantsatthe2011CriticalPerspectivesonAccountingConferencefor theirhelpfulcommentsonanearlierversionofthispaper.
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