aos287-2951631991 ( ABET )

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Acco unting, Orgunizution.sand Society, Vol. 16, NO. 3, pp. 287-295, 1991. 0361-3682/91 S3.00+.00

Printed in Great Britain Pergamon Press plc

ACCOUNTING AND SOCIAL CHANGE: A NEUTRALIST VIEW*

DAVID SOLOMONS

Wha r t o nSchool , Un i v er s i t y f Pennsy l v an i q Ph i l a de l p h i a

Abstract

This paper takes the position that the task of accountants is to provide information as free from bias as

possible that will be useful to decision makers (possibly including accountants themselves) who may be

concerned with social and economc issues. Though accountants may sometimes fail to achieve the faithful

representation of economc phenomena, that should be their goat. In developing this argument, the paper

criticizes Badical Accounting, as represented by Tony Tinker’s Paper f%@&.r, and others who assert that

accounting policies should be chosen for their supposedly desirable economc consequences rather than

for their capacity to depict relevant phenomena faithfully. Like journalists, accountants should report the

news, not make it. Neutrality in accounting may not always be easy to secure, but without it the credibility

of accounting is endangered.

With social change in the broadest sense ac-

counting has ittle to do. One of the most signifi-

cant social changes that has occurred in this cen-

tury is the dramatic improvement in the position

of women. Like most social changes, this one has

been accompanied by economic changes, such

as changes in the pattern of consumption and the

distribution of income. Another great social

change during the last ifty years is the disappear-

ance of colonialism. That too has brought econ-

omic changes in its wake. To suggest any direct

connection between those broad developments

and accounting would be farfetched indeed.

But on a smaller stage, accounting does have a

part to play. It has been asserted, for example,

that an accounting standard that requires re-search and development expenditure to be writ-

ten off as ncurred, in spite of the probable future

benefits that are expected to flow from it, de-

presses the earnings of small immature high-

technology companies and thereby discourages

technological innovation. Without regard, for

the moment, to the truth or falsity of that asser-

tion, it well exemplifies the part that accounting

may play in encouraging or inhibiting social and

economic change.

The question to be addressed here is this.

Should accountants see themselves and their dis-

cipline as agents to promote (or sometimes to

retard) social and economic change? Or should

they see themselves as providers of unbiased in-

formation, to facilitate social and economic

activity by others? By “others” I mean, of course,

to include accountants themselves in their

capacity as citizens, not as accountants.

A RADICAL VIEW OF ACCOUNTING

I want to leave no doubt as to where I stand on

this issue. I believe that accountants are like

journalists. They should report the news, not

make it. This is the view that I shall explore more

fully in what follows. But in case it is thought that

‘Earlier versions of my paper were presented as a Lee Kuan Yew Lecture in the National University of Singapore in December

1 9 8 6nd to the European Accounting Association at the annual meeting in Stuttgart in April 1989. My thanks are due to the

fate Steven B. J ohnson, formerly of Columbia University, for his help in formulating my ideas on the subject of this paper.

287

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288 DAVID SOLOMON

the opposite view is merely a straw man, I pro-

pose to bring into court an outspoken propo-

nent of that other view, and, so far as possible, I

shall allow him to speak for himself. I am refer-

ring to Dr Tony Tinker, of Baruch College,

CUNY. His views are set out at length in a book,

published in 1985, entitled Pa per Pr opbets : A

Soc i a l C r i t i q u e o f Accoun t i n g . Tinker and

others who think like him use the term “radical

accounting” as a label for their views, and it will

be convenient if I follow their example.

Let me warn you, before I set out on this

examination of radical accounting, that it is not

easy to come to grips with it. It is fairly easy to

see what radical accountants find to criticize in

traditional accounting; and it would not be dif-

ficult to suggest modifications of traditional ac-

counting that would go some way to meet those

criticisms. But modifications are not what this

argument is about. The argument, in fact, is more

about the nature of capitalist society and the

marginalist theory of value that economists use

to explain the working of capitalist economies.

This is what Tinker has to say about the depen-

dence of accounting on the marginal theory of

value.

Most accounting practice has achieved a harmony with

marghtahst value theory without much conscious delib-

eration. This is mainly because marghrahsm is the only

value theory with which most accountants are familiar;

thus they reduce all economics to marginahsm . . Mar-

ginalism has virtually monopolized ah accounting retlec-

tion about value theory, notwithstanding the fact that in

order to resolve technicll problems of concept

operationahaation and measurement, accountants have

deviated from the marginahst model. These deviations

and compromises have alI been in terms of the fine print,

however; even the much vaunted area of “social account-

ing” is nothing more than marginahsm with externalities.

The obliviousness of accounting to ah other theories of

value is sufficient reason for concluding that accounting

is unabashedly marginaIist in its intellectual aiEIiation.s

(Tinker, 1985, p. 111).

Tinker then goes on to attribute what he re-

gards as accounting’s antisocial bias to this “in-

tellectual affiliation” with marginalism. For him,

theories are “weapons of social conflict”, and ac-

counting theory is no exception. Here is what he

has to say on that subject.

Accounting theory, like any social belief, is not merely a

passive representation of reality, i t is an agent in changing

(or perpetuating) a reality. Marginahsm provides ac-

counting with a slanted picture of reality that affects both

how the latter misperceives, and how it acts on, reality.This slant is ideological insofar as it misconstrues cir-

cumstances and events in order to promote certain parti-

san interests (Tinker, 1985, p. 28).

In a related passage, Tinker has this to say

about the social role of accounting.

In addition to reflecting economic exchanges - albeit

partially - accounting practice also helps effect econ-

omic exchanges. Accounting statements are used in mak-

ing decisions about the purchase of a company’s sec-

urities, in assessing a &m’s tax liability, in determining

the rates a public utility can charge its customers, in de-ciding whether an employer can afford to pay a wage in-

crease, and so forth. This is not a passive and representa-

tional role for accounting; ultimately accounting is part

of that exchange process itself - as an informational

commodity that promotes exchange. If accounting prac-

tice did not participate in exchange in this way, then pre-

sumably, competitive pressures would eradicate it as an

unnecessary cost of production” (Tinker, 1985, pp. 83-

84).

I do not understand the distinction that Tinker

draws here between accounting’s “passive and

representational role” and its role as an “infor-mational commodity that promotes exchange”.

A telephone is an informational commodity that

promotes exchange; but surely it does this by

being passive and “representing” the speaker’s

thoughts to the listener. One could conjure up a

bizarre picture of a telephone that not only con-

veyed one party’s thoughts to the other but be-

came itself an actor in the exchange, Tinker’s

book leaves me with a strong suspicion that this

is what he would like accounting to do.

Another source of confusion in trying to inter-

pret Tinker’s views stems from the fact that most

of the sins of capitalism, as he sees them, are vis-

ited on the heads of accountants. Accounting, it

seems, has much responsibility for pollution,

monopolies, and fraud, as well as other

shortcomings of our economic system. We have

already noted his view that accounting plays an

active role in effecting exchanges and in arbitrat-

ing conflicts (a phrase that he uses more than

once, by the way). Slaying the messenger that

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A NEUTRALJST VIEW 289

brings bad news, as they did in ancient times, is

a custom that Tinker seems to approve of. Ac-

counting reports on an economic system of

which Tinker disapproves. Therefore, account-ing is to be condemned.

RADICALACCOUNTING AND VALUE THEORY

But there is more to it than that. The malign in-

fluence of accounting on society, as Tinker sees

it, stems from the values that are attached to

goods and services and resources by the mar-

ginalist theory of value in accordance with

which our capitalist economy is regulated or

self-regulated. I am at a total loss to understand

what other values accountants could use. Tinker

espouses a Marxist-Labor Theory of Value,

which presumably he thinks would give relative

values that would be more to his taste. I myself

would be happy if teachers and nurses were

better paid and business executives, Bhn stars

and baseball players were less well paid. But it is

obvious that it is society that would have to be

changed, not accounting, to bring about such a

result. It makes no sense at all to blame account-ants for using values determined in the market

when they are accounting for market transac-

tions.

There are, it is true, some transactions in

which accountants play an active part in deter-

mining values. One is the case of regulated in-

dustries, such as public utilities, where account-

ing calculations of cost are used in determining

utility rates. Another case is when a value has to

be placed on a whole enterprise or a large block

of shares in an enterprise that is changing hands.But here, too, there are limits to the values that

accountants can determine, and there are other

factors at work as well. The most important limit

is set by the need for a business to be profitable

if it is to survive. A corporation that changes

hands at an inRated value will soon flounder if it

cannot earn an acceptable rate of return on its in-

vestment; and public utility rates that are kept

artificially low to benefit consumers will create a

demand for state subsidies or will leave the util-

ity unable to raise capital or to replace its equip-

ment when it wears out.

THE RADICAL VIEW OF ACCOUNTING

EDUCATION

Accounting education does not emerge in a

good light from Tinker’s criticism of accounting.

Here is a passage from his book that reinforces

my view that it is society that is really the focus

of his attack, not accounting.

Accounting education cannot escape unscathed from

this discussion . . . The accounting education system

elevates monetary values as ends in themselves; the suc-rogate role of money as a mere token expression of

human and social needs is ignored. Marx distinguished

between the surface appearances of market phenomenon

and the underlying social structure that generates the ap-

pearances

Accounting education appears to have outstripped

Marx’s worst fears in this regard: students are not merely

taught to contlate appearance with reality; they learn to

reify deceitful appearances and ignore the structure of

social reaiity . . Ignorance of this kind multiplies when

an accounting education system elevates profit and

wealth as ends in themselves and iUs to articulate the

so&i purpose of profit and its tenuous COMeCti0tI.S to

social weifare” (Tinker, 1985, p. 28).

The idea that accountants should take on the

task of looking beyond “market appearances” to

the “underlying social reality” is, to say the least,

farfetched. It is ditficult enough to get consensus

as to what constitutes “economic reality”, a con-

cept derived horn the fabric of mu& et

phenomena. What hope could there possibly be

of finding a consensus as to the nature of “social

reality” that is somehow different from market

realities?

POSITIVE ELEMENTS IN RADICAL

ACCOUNTING: NEGLECTED

CONSTITUENCIE!S

There are, to be sure, some elements in radical

accounting that should be taken seriously. One

is the charge against what Tinker calls “main-

line” accounting that it is biased in favor of one

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290 DAVID SOLOMONS

or two of the constituencies that it should serve,

namely, investors and, to a lesser extent, cre-

ditors, while other constituencies are neglected.

At least this bias is recognized by the accounting

rule-making body in the United States, the

Financial Accounting Standards Board. The

board has defended the bias, as regards general

purpose financial statements, on pragmatic

grounds, as follows:

To identify investors’ and creditors’ needs as the focal

point of financial statement information greatly narrows

the range of economic decisions and varied needs for

specialized information that general purpose Enancial

statemen= must try to sad@, thereby increasing the pos-

sibility that the statements can reasonably satis@ the nar-

rower range of needs (FASB, 1976).

That defense is not implausible, so Ear as gen-

eral pu ipose fJnanciaJ statements are con-

cerned. But there are other forms of financiaJ re-

porting that could have been developed to serve

the information needs of other constituencies,

notably labor and the consumem of the goods

and services supplied by business enterprises.

Accountants have shown little interest in meet-

ing those informational needs.

It is somewfiat di@JcuJt to generaiize about

Fiat might be done to fiJJ these gaps, for more

information is already being provided in some

countries than in others - the gaps are not the

same everywhere. American companies prob-

ably make more information available to inves-

tors and prospective investors than companies

in most other countries. But even there, little

thought is given to the needs of labor. Many of

these needs were listed in a working paper pre-

pared by the Trade Union Advisory Committee

of the Organization for Economic Cooperation

and Development (OECD) for a conference on

harmonization of accounting standards con-

vened by the OECD in Paris in April 1985

(OECD, 19B6). They include:

-statistics of employee turnover, by categories

of employee;

- information bearing on job security, such as

company plans for expansion and shutdowns;

-shares held by insiders, e.g. management, fam-

ily proprietors, etc.

This is only a small selection from a longer list of

needs that the trade unions presented.

POSITIVE ELEMENTS IN RADICAL

ACCOUNTING: EXTERNALITIES

A second charge JeveJJe.d by radical account-

ing theorists against traditional accounting that

needs to be taken seriously is its neglect of exter-

nalities. Accounting records transactions that an

enterprise enters into, and it therefore takes ac-

count of costs for which the enterprise is Jcnown

to be JegaJJy liable. But there may be other costs

that it imposes on society for which, under pre-

sent Jaws, it is not JegaJJy liable. These are not

recognized in a company’s records and there-

fore are not included in its financial statements.

Examples of these social costs that may be cited

are environmental pollution, the impact of plant

closings on unemployment in a local commun-

ity, the effect on health ofproducing noxious but

not iJJegaJ substances such as tobacco, and the

effect on the environment of erecting unsightly

billboards on hitherto unspoiled roads. A par-

ticularly clear example of a private cost being

transferred to the public arises when a producerof beer or soft drinks switches from using retum-

‘able containers to nonreturnables. The cost to

society of disposing of the nonreturnable con-

tainers strictly should be a deduction in arriving

at the ,producer’s social value added; but of

course the social cost wiJJ not appear in the com-

pany’s financial statements.

There are positive externalities that go unre-

corded also. Thus a company will record the

cost of taking down a billboard but will not take

credit in its accounts for the improvement in theenvironment that follows. The same is true for

other acts of beautifkation, e.g. landscaping the

area around corporate offices. The multiplier

effect of increasing employment by opening a

new plant may go far beyond the benefits di-

rectly accruing to the employer himself.

Not aJJ externalities are the responsibility of

business. As Robert Jensen puts it:

The well-known quotation from Pogo that “the enemy is

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A NEUTRALIST VIEW 291

us” implies that the public-at-large is a source of external

diseconomies as well as being the damaged party. Re-

sponsibilities for automobile air pollutants, for instance,

are d&At to pin solely on the manufacturers, because

the drivers themselves are also partly to blame in terms ofthe condition in which they keep their cars, the way they

drive, when they drive, etc. The beer can thrown on my

front lawn was not thrown there by the Budweiser Com-

panyJ ensen,976).

Financial statements capture only those costs

and revenues that are internal to an enterprise.

This omission of external economies and dis-

economies is significant for two reasons. One is

that the contribution that an enterprise makes to

society, its social value added, may be more or

less than the value added that is reported in itsstatements. Thus its social performance is

under- or over-reported. The second reason why

ignoring social costs that are not recognized as

private costs is significant is that they may make

an enterprise liable for compensation to persons

who suffer as a result of its activities. There have

been four notable examples in the United States

in recent years. The Johns ManvilIe Corporation

has had to pay out huge sums to workers and

others whose health was impaired by inhaling

the company’s asbestos. The A. H. Robins com-pany was made bankrupt by claims from women

whose health had suffered from the use of a con-

traceptive device, the DaIkon shield, made by

the company. More dramatically, there has been

the Bhopal disaster in India. It is too early to say

whether Union Carbide has finally settled that

matter. In none of these cases did the company’s

balance sheet show a liability for the compensa-

tion payable to the injured parties. The Union

Carbide case is different from the other two,

because the disaster was sudden and unforesee-able. But in the other two cases, costs were being

imposed on society welI before the matter came

into court. More recently there has been the

Alaska oil spill.

Although radical accountants are justified in

calling attention to the problems caused by ex-

ternalities, these problems have been under dis-

cussion for many years. The radicals have no-

thing new to tell us about how to measure the

effects of externalities; and unless and until we

learn how to solve these measurement prob-

lems, this accounting failure is not likely to be

remedied.

I have now said alI I can say by way of approval

of radical accounting. As I have said, what the

radicals really want to change is our present

form of society and its values. Their attempts to

change accounting are almost incidental to their

main purpose. How you view radical accounting

will therefore depend largely on how you view

our present social and economic arrangements.

SUPPLEMENTARY DISCLOSURE AS A MEANS

OF CHANGING CORPORATE BEHAVIOR

A desire to use accounting to effect or to in-

hibit social and economic change is not a

monopoly of the radicals. Other accountants

who would like to see accounting play an active

part as a change agent can be divided into two

camps. There are those who are content to en-

courage or to require supplementary disclosure

by corporations about their social behavior,

with the expectation that market forces or polit-

ical pressures wiIl reward good behavior and

penalize bad (Colantoni et a 4 1974). And thereare others who argue that accounting regulators

should look to the economic consequences of

accounting standards when formulating them,

with a view to securing some allegedly desirable

objective, e.g. to promote investment in a par-

ticular direction, or perhaps to inhibit some

wealth transfers that might otherwise take place.

The l%st group wants to influence corporate be-

havior by encouragement, the second by active

involvement in the standard setting process. I

shall calI this second group accounting activists.

Most people will welcome improved report-

ing by companies on their social behavior so

long as it comes about voluntarily. Presumably

the companies will have addressed the costs of

the disclosure and will have decided that it

brings more than equivalent benefits. Mandated

disclosures, on the other hand, must raise a ques-

tion whether the costs are justified by the bene-

fits to soc ie ty . Th e fact that the disclosure was

not made voluntariIy is not conclusive. The

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292 DAVID SOLOMONS

benefits to individual companies may fall short

of their costs and yet for society as a whole the

costs may be justified. In any case, supplemen-

tary disclosures of this kind for the purpose of

modifying corporate social behavior, whether

they are voluntary or mandated, do not impair

the integrity of the financial reporting system.

They may even improve it.

ACCOUNTING ACTlVISM AND ECONOMIC

BEHAVIOR

Accounting activists are not content to rely on

disclosure to bring about changes in corporate

behavior. They want to inlluence behavior moredirectly, but yet draw back from invoking direct

interference by the govement. In a country like

the U.S. where accounting rules and standards

are spelled out with considerable precision, and

where they are numerous and extensive as to

their coverage, the activists see accounting

standards, which are set by a private sector

agency, the Financial Accounting Standards

Board, as a ready means of intluencing economic

activity that suits their particular ends. More

often than not, as it happens, ir&luence isbrought to bear toprevent a change, to maintain

the status quo, by trying to block an improve-

ment in financial reporting that the standard set-

ting body is trying to introduce.

There is some controversy among academics

as to the magnitude and direction of the econ-

omic consequences of accounting standards, but

there is no doubt that business executives take

the alleged consequences very seriously. am re-

ferring here principally to standards that change

accounting measurements, not those that simply

call for some change in the information that the

preparers of financial statements have to dis-

close. Most standards do both. Two of the most

important such standards worked on recently by

the FASB are Statement of Financial Accounting

Standards No. 87, Employers’ Accounting for

Pensions (December 1985), and a proposed

Statement, Employers’ Accounting for Post-

retir ement Benefi ts Other Than Pensions, an ex-

posure draft of which was issued in February

1989. The most important postretirement bene-

fit other than pensions is health care coverage,

but such benefits may also include legal services,

tuition benefits and others. The amount of con-

troversy generated by these standards can be

judged by the fact that the subjects were put on

the FASB’s agenda way back in 1974. It took

eleven years to get the pensions standard out.

The controversy over Other Postretirement

Benefits is still raging. Both of these standards

have brought out the obstructionists, the oppo-

nents of change in financial reporting, in force.

These standards are controversial for two rea-

sons. They both involve much looking into the

future and many assumptions about what future

experience will be with respect to such mattersas retirement age, employee mortality, levels of

pay, future health care costs, rates of interest,

and the value of assets (usually securities) set

aside to fund pension and health plans. Actual

experience is bound to turn out to be di@erent in

some respects from the assumptions on which

pensions and health care costs are accrued, with

a resulting over- or under-accrual of those costs.

Moreover, changes in the assumptions can

greatly affect the present value of the benefit ob-

ligations disclosed in an enterprise’s financialstatements. The many uncertainties surrounding

the accounting for these benefits have made the

whole subject an irritant in the eyes of many

American preparers.

The second ground for controversy, which is

even livelier in connection with “other benefits”

than with pensions, arises because many enter-

prises have been content to deal with such bene-

fits on a pay-as-you-go basis, treating benefits as

an expense when they are paid out and making

no provision for them during employees’ work-

ing lives, as the proposed new standard will re-

quire them to do. The recognition of these obli-

gations, even allowing for the gradual phasing in

required by the proposed standard, will have a

major impact on financial statements and is de-

cidedly unpopular with American industry.

The gap that separates what is conceptually

pure and what is politically feasible for standard

setters was vividly illustrated by the FASB in its

1985 standard on pensions, when it admitted

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A NEUTRALIST VIEW 293

with disarming frankness (in paragraph 107)

that the gradual amortization of actuarial gains

and losses (which the standard requires) rather

than their immediate recognition was not ideal.“The Board,” it says, “believes that it would be

conceptually appropriate and preferable to rec-

ognize a net pension liability or asset measured

as the difference between the projected benefit

obligation and plan assets, either with no delay

in recognition of gains and losses, or perhaps

with gains and losses reported currently in com-

prehensive income but not in earnings. How-

ever, it concluded that those approaches would

be too great a change from past practice to be

adopted at the present time.”

The reason for the delayed recognition of

gains and losses in the Board’s standard is the op-

position among many of its constituents to the

volatility that would be introduced Into financial

statements if the gains and losses were fully rec-

ognized as they occurred. No matter that volatil-

ity is a fact of life. It does not belong, it seems, in

financial statements, whatever the representa-

tion of economic reality might require.

AN’EXTREME ACTMST VIEW

This example of the FASB’s bending to politi-

cal pressure is a mild one. The result, it seems to

me, is to subordinate faithful reporting of

financial information to what is politically ac-

ceptable to the Board’s constituents in industry.

If, one day, that constituency becomes more en-

lightened, it may be that faithful representation

will prevail. But one can find more striking

examples where the Board has been urged quite

openly to subordinate sound accounting to thealleged economic effects that might follow from

a new accounting rule or a change in an old one.

Some rich examples of this point of view will be

found in an Emanuel Saxe lecture by David Haw-

kins, delivered at Baruch College in New York

City in 1973. Hawkins argued there that “. . .

because the [Financial Accounting] Standards

Board has the power to influence economic be-

havior it has an obligation to support the govern-

ment’s economic plans ” (Hawkins, 1975, p. 11).

His lecture is studded with examples of how this

might be done. The Board at that time was con-

sidering a new standard on leasing, and it was ex-

pected to require that long-term leases, which atthe time were noted in financial reports but

were not required to be included an assets and

liabilities in the balance sheet, should be so in-

cluded. Hawkins argued that putting leases on

the balance sheet might raise the cost of financ-

ing for certain industries and therefore the board

should go slow in pressing for lease capitaliza-

tion in a period of economic recession. The

Board did not take Hawkins’s advice. On the sub-

ject of accounting for research and develop-

ment, he argued that because a requirement to

expense such costs might make it more dUBcult

for small high technology companies to raise

capital for growth, the Board should not outlaw

the capitalization of R&D altogether. On this

matter, too, the Board declined to follow Haw-

kins’s advice.

Another example from Hawkins demonstrates

to what absurdities an “activist” approach can

lead. After reviewing some earlier advice he had

given to the Accounting Principles Board In

1962 urging them to reject the “flow through”

treatment of the investment tax credit at thattime because he “assumed it was unsound be-

havior to adopt an accounting method that en-

couraged corporations to earn material profits

immediately by purchasing assets,” he explains

why he later changed his mind.

Such an approach may have been acceptable and toler-

ated by the economc ptiers ifthe ~nomywas strong

and untroubled. But the economy was’wkak and troubled

.Under these conditions 1 believe now it was irrespon-

sible for me to urge the [APB] to deliberately take action

which would lessen the e&ctiveness of the tax credit in

a situation where sound accounting arguments could he

made for both the deferral and flow through approaches

(Hawkins, 1975, p. 16).

In other words, what is sound accounting

when the economy is strong is unsound when

the economy is weak. One can conjure up a pic-

ture of a standard setting body wetting its collec-

tive finger and holding it up to the wind to see if

it is blowing hot or cold, and then formulating a

standard accordingly.

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GAAPVSRAP view the accounting radicals and accounting

activists. I believe they are both misguided,

The recent debate about GAAP vs RAP (Reg- though for different reasons. The radicals really

ulatory Accounting Practices) in connection want to change society, and accounting is

with the savings and loan association (SLA) merely incidental to that desire. The activists

fiasco has provided another striking example of want to use accounting to change society, usu-

the subversion of accounting to supposedly ally in quite small ways, or they want to preserve

serve social ends. Generally accepted account- the status quo by obstructing change. Accoun-

ing principles clearly require that ifa financial in- tants, as c i t i zens , should be as much concerned

stitution is insolvent, its financial statements to bring about desirable changes in society or to

should show it as being insolvent. But various prevent undesirable changes as anyone else. But

regulatory accounting devices have been used as accountants that is not their job, and they have

to hide the fact of insolvency. One device was to no special expertise in that direction. Their job

disguise the negative net worth of insolvent SLAs is to portray certain aspects of society, not to

taken over by sound institutions as goodwill in change it. There are other and better ways to do

the balance sheets of the acquirers. Another de- that.vice was legalized in the Competitive Equality If accountings to retain any credibility-and

Banking Act of 1987. “Under this Act, agricul- without credibility it is worthless - its guiding

tural banks may be permitted for regulatory pur- light must be neutrality in financial reporting.

poses to defer and amortize loan losses over a The FASB has defined neutrality as the “absence

period of up to 7 years, rather than recognize in reported information of bias intended to

such losses immediately. In addition, regulators attain a predetermined result or to induce a par-

may permit an agricultural bank to reappraise ticular mode of behavior.” This is a guidepost

real estate or other property acquired as a result that all standard setting bodies should follow,

of a default on an agricultural loan and defer such and the FASB’s record in this respect has been

losses, if any, and amortize over a period of 7 good. Dennis Beresford, the chairman of the

years.“’ Board, reatkmed the importance that the BoardThe statements prepared for use by regulators attaches to this concept in an address on 1

that incorporated these devices did not purport November, 1988 to a gathering of financial

to comply with GAAP. Their only purpose was to executives. “Neutrality”, he said, “is written into

preserve an appearance that the SLA or bank that our Mission Statement as a primary considera-

was in trouble was complying with regulatory tion. And the neutrality concept dominates

requirements that, if breached, would require every Board meeting discussion, every informal

the institution to be closed down. Thus, in the conversation, and every memorandum that is

long run, they may have contributed to the mag- written at the FASB.”

nitude of the insolvencies. Of course, it would In a May 1986 address by Arthur Wyatt, then a

have been just as easy, and certainly more hon- member of the FASB, there is a clear recognition

est, for the regulators to waive or relax the reg- that neutrality is not always easy to achieve.ulatory requirements, but that would have made

the fact of insolvency, or at least losses, apparent. The Board believes that its conclusions should be as neut-

ral as they can be when considering the various compet-

ing interests within our society . Being neutral in this

activity does not mean being unaware of potential conse-

A PLEA FOR NEUTRALITY quences, but it does mean focusing on the accounting

and economc issues and submerging other biases that

There should by now be no doubt as to how I mght intluence the conclusions reached Asprivate

I-‘Pnxeedings o f t h e October8, 1987 Roundtable Di scussion on General lyAcceptedAccountin gPrtnciplesandRegulatoty

AccountingPractices, ed. J erry Arnold (Los Angeles: SEC and Financial Reporting Institute, School of Accounting, University

ofSouthern California). p. 59.

294 DAVID SOLOMONS

7/28/2019 aos287-2951631991 ( ABET )


A NEUTlL4UST VIEW 295

sector standard setters.. our mission is to establish and

improve standards of financial accounting and reporting

so that decision makers have available credible, concise,

and understandable Enanciaf information. That mission

precludes placing any particular interest above the in-

terests of the many who rely on Enancial information

(Wyatt, 1986).

I draw attention to Wyatt’s recognition that

neutrality means “submerging other biases that

might influence the conclusions reached.” Radi-

cals like Tinker question whether reported in-

formation can ever be neutral, because the pre-

parer will always have some biases that will

creep in. The bias may be due to a desire to avoid

taxation, or to increase managerial bonuses, or

to keep reported profits down to avoid public

censure for overcharging, or, for those who see

accounting as an instrument of the class struggle,

to benefit capital at the expense of labor. It is

perhaps true that perfect neutrality of informa-

tion can never be achieved. But it would be as

foolish to stop seek ing it on that account as itwould be to stop trying to reduce air and water

pollution because completely pure air and pure

water can never be attained, or to stop seeking

fair-minded judges on the ground that no human

being is entirely free from bias, or (to return to

an analogy that I used earlier) to stop esteeming

journalists who know the difference between re-

porting and editorializing. We know how much

credibility newspapers have in totalitarian coun-

tries. If those responsible for regulating account-

ing ever abandon neutrality as a guiding light, ac-

counting will have lost all value as a provider of

useful information. It would then be no more

than an exercise in futility.

BIBLIOGRAPHY

Colantoni, C., Cooper, W. W. & Dietzer, R., Accounting and Social Reporting, in Objecrives of F i n a n c i a l

S tu te?nents , ol. 2 (New York: American Institute of Certified Public Accountants, 1974).

Financial Accounting Standards Board, Tentative Conclusions on Objectives of Fiiciaf Statements of

Business Enteprises (Stamlbrd, Conn.: FASB, 2 December, 1976).

Financial Accounting Standards Board, SFAS No. 87, Employers’ Accounting for Pensions (Stamford, COM.:

FASB, December 1985).

Hawkins, D., Financial Accounting, The Standards Board and Economic Development, Eman u e l S u r e

D i s t i n g u i s b edLe fnAccounting 1973-74 (The Bernard M. Baruch College, City University ofNew

York).

Jensen, R E., Pban tasnw go r i c Accoun t i ng : Resea r ch and An a l ysi s o f Econom ic , Socia l and

Env f~m enk a l Im pac t o f Co rpo r a te Bus in ess , (Amer i can Accounting Association, Studies in

Accounting Research, NO. 14.1976).

Organisation for Economic Cooperation and Development, Ha r mo n i za t i o n of A cc ou n t f n g St a n d u n i s

Ach i evemen ts an dPr ospecb3 l ?wi s OECD, 1986).

Tinker, T., Pape r p r o phe t s (New York: Praeger Publishers, 1985).

Wyatt, A. R., Standard Setting: Process and Politics, FASB Status Report No. 179 (Stamford, Conn.: FASB,

1986).

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