by Glenn Cheney

The Association for Integrity in Accounting has recently issued a white paper that probes and questions the very foundations of accounting, its purposes and the education of its practitioners.

Paul F. Williams, one of the paper’s authors and a professor of accounting at North Carolina State University, said that the paper isn’t radical.

“What was radical occurred in the latter part of the 19th century, when the 14th Amendment to the Constitution was successfully used to extend personhood to corporations,” Williams said in a discussion about the paper. “Rights were given to creatures of the state that had been previously reserved only for flesh and blood human beings. I don’t think this is a radical position. It’s just a historical situation.”

The paper, “Reflections on Accounting Education post-Andersen,” questions accounting’s orientation to the needs of management and investors, and suggests that auditors should be reporting to employees, communities, governments and other interested parties. Some of those parties, the paper said, have more interest in corporate dealings than most investors have, yet there is no mechanism for reporting information that is relevant to them. Likewise, auditors are not expected to consider those interests when assessing financial reports.

Citing a traditional textbook summation of double-entry bookkeeping — “What is owned = what is owed” — the paper analyzed the fundamental concepts of ownership and obligation. It found that, since accounting is oriented around earnings and cash flows while ignoring many other aspects of economics, it has become more than just a system of counting beans.

It has become a reinforcement of dogma.

That dogma, according to the paper, holds that the purpose of corporations is nothing more than to produce dividends for the owners of equity.

Williams cited two cases where taxpayers subsidized corporate facilities. The city of San Jose, Calif., built an office building for IBM, and the State of Alabama contributed $600 million in subsidies to attract Mercedes-Benz. Though taxpayers had a vested interest in the performance of those companies and an expectation of jobs and tax revenues that had been promised, financial reports did not offer any information on any return on investment.


“The accounting model is so ideologically narrow that the only interest that matters is equity interest provided by investors, and there is no other interest that is deserving of some kind of report or information that faithfully indicates the economic reality from the perspective of that individual or group,” Williams said.

The authors challenge that dogma by noting that corporations serve many other socio-economic purposes. Most investors, they say, don’t even know where their money is invested, and a day trader’s investment may last but minutes. The long-term, big-time stakeholders are employees who know where their income comes from, usually spend years at one company, depend on that company for almost all revenue, and have little option for diversification. In a certain sense, they “own” the company — i.e. have a vested interest in it — more so than most “investors.” Nonetheless, financial reports are produced in the interest of the investors in equity.

Williams said that the ideas presented in the paper are neither liberal nor leftist. Rather, they reflect ideas and warnings that were expressed by the founders of the United States.

In his classes in intermediate accounting at NCSU, Williams teaches the historical background of accounting. He finds that students are very interested to see how the nature of accounting has changed since the profession was created in 1898 in response to corporate abuses. Unfortunately, the need to prepare students for their CPA exams precludes the possibility of much discussion outside of the technicalities of accounting.

Five key myths
In his classes and in the white paper, Williams points out that the auditing profession has moved from an essentially regulatory function to one of service to business.

“The regulatory function of service to the public is the only thing that accountants can hang their hat on to claim that they have the same stature as law and medicine and other traditional professions,” Williams explained.

The paper explores five key myths that are currently taught as fact. The myths deal with the nature of corporations, the significance of investors, the technical status of auditing, the purposes of accounting reports, and ethics.

Courses on the ethics of accounting, the paper says, tend to present students with typical dilemmas. They usually fail, however, to look for the source. Those sources are often found in the key myths.

The paper also questions the auditing profession’s exclusive franchise on performing audits. It identifies two purposes: to provide assurance that management narratives are “truthful,” and to determine the rules of grammar and syntax of these narratives.

“The profession has been notably derelict on both counts,” the paper stated. “It has constructed an incoherent language for managerial narratives and, perhaps not surprisingly, been lax in trying to enforce the use of that language. We now have a system of financial reporting that cannot be audited — one of hypothetical, present-value accounting.”

The authors believe that “more epistemological honesty about what auditing is as a human practice would go a long way to helping accounting students understand what significant personal responsibility they assume when they presume to provide assurance and what are the multitude of consequences accompanying an audit.”

In their discussion of the myth of accounting reports, the authors cite an old idea of a triple bottom line that evaluates corporate performance in terms of financial, environmental and social performance. The current form and purpose of financial reports, the paper said, reflects the current dogma that accounting serves only the purposes of shareholders.

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