Chapter 12 Critical Perspective Q & S PDF

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Chapter 12 Critical Perspective Q & S...

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Chapter 12 Critical Perspective Solutions 12.1 What is a critical perspective of accounting? LO 12.2 12.1 A critical perspective of accounting is a perspective that critically evaluates the role of accounting in society. The label ‘critical perspective’ is a broad umbrella term which has been used to describe research undertaken by many researchers that sometimes applies different philosophical perspectives. As Hopper et al. (1995, p.535) state ‘critical theory is an umbrella term for a wide variety of theoretical approaches perhaps more united in what they oppose than what they agree upon’. Consistent with the above perspective of critical theory, Reiter (1995, p.53) states: In the critical world, there is no single established theory or approach, and little consensus on how to proceed, aside from an absolute horror of modernity and neo-classical economics.

Nevertheless, we can generalise by saying that a critical perspective does not consider issues such as which accounting methods should be used in which situations (an issue that often dominates the thoughts of many other accounting researchers)—rather, it tends to dismiss most of accounting as being against the interests of many people in society, and often views accounting as a major contributor to perceived social problems and inequities. A ‘critical perspective’ considers accounting to be a highly partisan activity and it is generally considered that accounting is not a neutral or unbiased process (neutrality, objectivity and similar characteristics are promoted within vehicles such as conceptual framework projects) but is a process which tends to favour those people in control of capital (the ‘powerful elite’). Accounting is seen as a ‘tool for constructing, sustaining and legitimising economic and political arrangements, institutions and ideological themes’ (Guthrie and Parker 1990, p.166). 12.2 What are some of the fundamental differences between the research undertaken by critical theorists, relative to the work undertaken by other accounting researchers? LO 12.1, 12.3 12.2 The focus of the research is different. Most accounting researchers tend to accept current social systems as a ‘given’ and do not question whether current systems of accounting systematically favour certain classes in society at the expense of others. Consideration is given to such things as what accounting methods are most appropriate in certain circumstances, what motivates managers to use one accounting method in preference to another, how the share market will react to a particular disclosure, what information best suits particular users’ needs, and so on. Critical theorists, on the other hand, tend to dismiss the whole of accounting as being highly partisan, favouring the interests of those with control of scarce capital and undermining the interests of those people without power or wealth. They do not tend to debate which methods of accounting should be employed — rather they would generally believe that we need to reconsider the structures of society in terms of whether the structures are equitable, and we need to explicitly consider the role of accounting in sustaining such structures and inequities. As Cooper and Sherer (1984, p.222) state, ‘a critical approach to accounting starts

from the premise that problems in accounting are potentially reflections of problems in and of society and accordingly that the latter should be critically analysed’. Accounting is seen as ‘a social practice within political struggles and not merely a market practice guided by equilibrium in an efficient market’ (Hopper et al. 1995, p.528). 12.3 From a critical perspective, what is the role of the IASB Conceptual Framework for Financial Reporting? LO 12.3, 12.4 12.3 From a critical perspective, the role of conceptual frameworks is not to improve the practice of financial accounting. Rather, conceptual frameworks legitimise the role of the accounting profession within society. Conceptual frameworks (CFs) emphasise the qualitative characteristics of objectivity, neutrality, reliability, and so on. Such characteristics are deemed to have positive connotations. As Hines (1991, p.328) states: CFs provide social legitimacy to the accounting profession. Since the objectivity assumption is the central premise of our society … a fundamental form of social power accrues to those who are able to trade on the objectivity assumption

By further legitimising the role of accountants in society, conceptual frameworks are a source of ‘power’ for the accounting profession, and if it is accepted that accounting acts as an instrument to maintain existing social structures (and the perceived inequities), then conceptual frameworks also provide a source of power, or legitimisation, for those people currently holding positions of power and wealth. 12.4 From a critical perspective, can financial statements ever be considered objective or neutral? Explain your answer. LO 12.3 12.4 From a critical perspective, financial statements would probably never be considered as objective or neutral. Critical theorists consider that accounting serves to maintain the interests of those individuals with financial capital. Accounting is seen as a means of constructing and legitimising particular social orders. Arguments are also provided that those responsible for regulating accounting, and those involved in accounting research, act to sustain current social orders as such individuals typically benefit from the existing systems. So, while regulators (for example government) may look as though they are putting in place rules or mechanisms to further the interests of particular disadvantaged groups, in essence, the government is probably only attempting to legitimise the current social system. Merino and Neimark (1982, p.49) relate this view to the development of Securities Acts in the United States. They contend that ‘the securities acts were designed to maintain the ideological, social and, economic status quo while restoring confidence in the existing system and its institutions’. This view is also held by Puxty. He argues (1986, p.87): financial information is legislated by the governing body of society (the state) which is closely linked to the interests of the dominant power group in society (Offe & Ronge, 1982; Miliband, 1969, 1983) and regulated either by agencies of that state or by institutions such as exist within societies like the United Kingdom, United States, and Australia that are linked to the needs of the dominant power group in partnership with the state apparatus (albeit a partnership that is potentially fraught with conflict).

As the chapter further states, given that the practice of accounting is in the hands of reporting entities, such as large corporations, and that accounting regulation is in the hands of government and associated regulatory bodies (which as we noted above, are viewed as having a vested interest in maintaining the status-quo), accounting information will, it is argued, never act to do anything but support our current social system – complete with all its perceived problems and inequities. Also, as accounting is deemed to support particular social structures, the introduction of new forms of accounting will only help to sustain that social system. In arguing that financial reports cannot be considered as objective or neutral, authors such as Hines also emphasise that accountants impose their own views about what items or factors the reporting entity should be accountable for and what factors are not worthy of consideration. Identifying what shall be ‘accounted’ is a subjective issue influenced by one’s own values. Hence, from the above overview, we can see that there are numerous arguments to support a view that while conceptual frameworks might embrace qualitative characteristics such as objectivity and neutrality, in practice, many forces operate against such ‘ideals’. 12.5 If it is accepted that there are many inequities within society, would critical theorists argue that introducing more accounting, or improved methods of accounting, would or could help, or would they argue that such a strategy will only compound existing problems? Explain your answer. Do you agree with the position taken by the critical theorists? Why? LO 12.3, 12.4 12.5 Critical theorists typically argue that introducing more accounting is not going to solve the inequalities they currently perceive exist within society. Accounting itself is considered a mechanism to sustain particular social structures and hence more accounting will only assist in furthering the interests of those who currently have ‘power’ while further undermining those who do not. Those in charge of regulating and applying accounting have a vested interest in maintaining the status-quo and they will support methods of accounting that succeed in doing this. Whether we accept these arguments is really a matter of personal opinion—do we accept that governments, accounting professions and accountants seek to serve the interests of those people with wealth, and at the same time, seek to undermine any possibility of the ‘less powerful’ succeeding? 12.6 Critical theorists would challenge the work of authors whose work is grounded within Positive Accounting Theory. What is the basis of their opposition? LO 12.1, 12.2 12.6 Critical theorists tend to be vocal opponents of economics-based research, such as Positive Accounting Theory (PAT). Reasons for this include: ฀ PAT, like many other theories, does not challenge the existing social structures, and this is considered to be naïve. ฀ PAT accepts that the functioning of markets (such as capital and labour markets) will lead to some form of ideal outcomes. Critical theorists believe that ‘leaving it to the markets’ will only act to undermine the interests of those people who should be protected. PAT is deemed to adopt a ‘conservative right-wing ideology’ in promoting the virtues of

markets, the rights of shareholders (the capitalist class), and so on. ฀ Tied to the above point, PAT relies in part upon work from the efficient markets hypothesis, which assumes that if information is useful, then it will evoke a capital market reaction. A problem with this however, is that it ignores whether information may be useful to other non-capital market participants (who nevertheless, have a right-to-know about the operations of an entity). ฀ PAT relies upon work from agency theory, which dictates that contractual arrangements should be put in place to minimise the agency costs of the firm and thereby to maximise the value of the firm—this will directly benefit the owners at the possible expense of others. Further, within the agency theory literature it is typically assumed that agents (employees) will always try to do things that benefit themselves at the expense of others. Critical theorists would probably argue that it is the owners of capital who are more likely to do this. ฀ PAT typically considers the motivations of managers, and owners (those with power) and pays little attention to the interests of others. ฀ PAT researchers typically undertake research that uses corporate data from many different organisations on the assumption that all entities in a sample can be treated the same for the purpose of the analysis. Many critical theorists would emphasise that no two organisations are the same; hence it is naive to treat them as such. PAT presumes that laws and principles can be generated that are expected to hold in different situations and that there is an underlying truth that can be determined by an independent, impartial observer who is not influenced by individual perceptions, idiosyncrasies or biases. ฀ PAT research has often been promoted in the past as being ‘valueneutral’ as it does not provide prescription. Many critical theorists have been critical of this claim. All research involves value-judgements. 12.7 Roslender (2006, p. 265) states:

Critical Theory makes no pretence of being objective. Those who embrace a Critical Theory perspective do so because they recognise and value its partiality. Explain the meaning of the above quote. LO 12.1, 12.2 12.7 It can be argued that all research is likely to be influenced to some extent by the (possibly subconscious) biases of the researchers involved. Therefore, generally speaking, no research can be totally objective or impartial. However, one key attribute of critical accounting researchers – and one that often differentiates them from other researchers – is that they are typically very open about the partisan nature of their research. There is a view amongst critical accounting researchers that to create social change it is necessary to be very open about the problems inherent within current systems, and to highlight areas that need to be changed. Critical accounting researchers generally seek to be explicitly associated with particular philosophical perspectives about how society should be ordered. In understanding what a ‘partisan’ approach means we can usefully consider a definition provided in the Oxford English Dictionary which states that a partisan approach is one taken ‘by an adherent or supporter of a person, party, or cause’.

Therefore, if critical theorists had a particular view (or theory) about how society should function to achieve certain ends or causes, then, in accord with a partisan approach, this will directly influence their choice about the practices they support or oppose. 12.8 Organisations need various resources to operate. Two such resources are labour and equity capital. Providers of labour and equity capital receive payments in return for their resources. Payments to labour are often referred to as wages, and payments to shareholders are referred to as dividends. Wages— which are a payment to one stakeholder group (employees) —are expenses which reduce profits, whereas dividends—which are a payment to another stakeholder group (owners)—are a distribution of profits and therefore do not reduce profits. Capital markets encourage organisations to maximise profits, which by implication puts pressures on organisations to reduce wages. At the same time, capital markets encourage higher dividend payments to owners. (a) From a ‘critical perspective’ how would critical theorists view the fact that payments to one group (workers) is to be minimised but payments to others (owners) is to be maximised? (b) Would critical theorists see this as an example of accounting practice advancing the interests of the owners over and above the interests of workers? (c) How do you, personally, feel about the different accounting treatments relating to payments that are made to parties that are both considered as providers of necessary resources to an organisation? LO 12.3, 12.4 12.8 (a) The way we practise accounting means that payments to suppliers of labour are deemed to be expenses (which, all things being equal, should be minimised), whereas payments to suppliers of equity capital are deemed to be dividends (which, in general, should be maximised). Obviously, critical accounting theorists would see this as an illustration of how accounting systems function to undermine the interests of workers whilst at the same time promoting the interests of owners of capital. Critical theorists would see this as an absurd basis of classifying corporate transactions. (b) Yes, critical accounting theorists would see this as an example of accounting practice advancing the interests of owners over and above the interests of workers. As Chapter 12 indicates, increases in wages are often described by such terminology as ‘ominous increases in wages’ but such terminology is not applied to increases in payments to owners (dividends). This is despite the fact that both workers and owners are supplying important resources to the organisation – one is supplying labour and the other is providing financial capital. Also, it is very common to see the news media praise companies for being able to reduce wage costs – such praise does not arise when dividend payments are reduced. (c) Students will have differences of opinion in relation to this part of the question. Nevertheless, it does appear a little odd that distributions to one resource provider (workers) are treated as expenses whereas distributions to another resource provider (owners) are treated as a distribution of profits. 12.9 Critical theorists would challenge the work of authors whose work is grounded

within Legitimacy Theory. What is the basis of their opposition? LO 12.1, 12.2 12.9 A number of critical theorists have been critical of the work of researchers whose work is grounded within Legitimacy Theory. Bases for this criticism include: ฀ Legitimacy Theory, like many other theories, does not challenge the existing social structures. Rather, it accepts the social system as a ‘given’ and does not question its fairness. By not addressing the underlying problems of society, it is considered that any concern with new systems of accounting is a waste of time. ฀ Following from the above point, researchers who adopt Legitimacy Theory often discuss how societal perceptions can influence how an organisation operates (for example that it must conform to the ‘social contract’). Critical theorists argue that this is naïve—to assume that society operates in a pluralistic manner, in which no individuals or groups dominate, is a simplistic and incorrect assumption. ฀ Some researchers who adopt Legitimacy Theory appear to have adopted a position that legitimising actions provide some form of benefits to society (for example, in the form of greater corporate disclosure). Legitimising disclosures mean that the organisation is responding to particular concerns that have arisen in relation to their operations. The implication is that unless concerns are aroused (and importantly, the managers perceive the existence of such concerns) then unregulated disclosures could be quite minimal. Disclosure decisions driven by the desire to be legitimate are not the same as disclosure policies driven by a management view that the community has a right-to-know about certain aspects of an organisation’s operations. One motivation relates to survival, whereas the other motivation relates to responsibility. Researchers working within Legitimacy Theory do not typically make this point. ฀ Following on from the above point, Cooper and Sherer (1984) would argue that legitimising disclosures simply act to sustain corporate operations that are of concern to some individuals within society. To the extent that the disclosures reflect or portray management concern as well as corporate moves towards actual change, the corporate disclosures may be merely forestalling any real changes in corporate activities. While researchers adopting legitimacy theory often do not question or, perhaps, consider this issue, some ‘critical’ researchers see legitimising behaviour as potentially quite harmful, particularly if it legitimises activities that are not in the interests of particular groups within society. For example, Puxty (1991, p.39) states: I do not accept that I see legitimation as innocuous. It seems to me that the legitimation can be very harmful indeed, insofar as it acts as a barrier to enlightenment and hence progress.

It is considered that proponents of Legitimacy Theory typically ignore this possibility. 12.10 If accounting is deemed to be complicit in sustaining social inequities, how would critical theorists argue that accounting can be ‘fixed’? LO 12.3

12.10 The argument is that as long as there is no fundamental change in the way society is structured then accounting cannot be ‘fixed’. As Gray, Owen and Adams (1996, p.63) state, a major concern of the critical (or ‘radical’ theorists) is that: the very way in which society is ordered, the distribution of wealth, the power of corporations, the language of economics and business and so on, are so fundamentally flawed that nothing less than radical structural change has any hope of emancipating human and non-human life. The social, economic and political systems are seen as being fundamentally inimical.

12.11 Tinker, Merino and Neimark (1982) argue that ‘the social allegiances and biases of accounting are rarely apparent; usually, they are “mask...