The ethics of creative accounting

Science and Engineering Ethics

Volumn 2, Issue 1, 1996, Pages 55-70

  Archer, Simon ^a  

^a UNIVERSITY OF SURREY   (United Kingdom)

Author keywords

Creative accounting; Deceit; Epistemology; Ethics; Fairness; Managerialism

Indexed keywords

EID: 5644258557     PISSN: 13533452     EISSN: None     Source Type: Journal    
DOI: 10.1007/BF02639318     Document Type: Article

References (64)

1. Bok, Sissela (1978) Lying: Moral Choice in Public and Private Life. Random House, New York, NY.
2. Foster, George J (1986) Financial Statement Analysis, second edition. Prentice-Hall, Englewood Cliffs, NJ: ch. 11, Appendix A.
3. Briloff, Abraham J (1982) Anacomp's Accounting: a Critic Finds Plenty to Fault It With, Barron's, August 2, 1982.
4. Citron David B (1985) The Incidence of Accounting based Covenants in UK Public Debt Contracts: an Empirical Analysis, Accounting and Business Research, 99, Summer.
5. "[T]he 'fairness' concept implies that accounting statements have not been subject to undue influence or bias .... [F]aimess has become one of the basic objectives of accounting." (Belkaoui, 1985:18)
6. Hines, Ruth D (1988) Financial Accounting: In Communicating Reality, We Construct Reality, Accounting, Organisations and Society, No. 3.
7. Ijiri, Yuji (1975) Theory of Accounting Measurement, Study in Accounting Research #10, American Accounting Association, Sarasota, FL: p. 189.
8. For a further discussion of this point, see Ijiri, 1975: 40-45.
9. Bok, 1978: 13, italics in original.
10. Bok 1978: 74-75.
11. Bok, loc. cit.
12. Ijiri 1975: 35-40.
13. Ijiri, op. cit.: 45.
14. Bok, 1978:7-8.
15. Beaver, William H (1989) Financial Reporting: an Accounting Revolution, second edition, Prentice-Hall, Englewood Cliffs, NJ: ch. 6.
16. Gaa, James C (1988) Methodological Foundations of Standard Setting for Corporate Financial Reporting, Studies in Accounting Research #28, American Accounting Association, Sarasota, FL: chs.7 & 8.
17. Bok 1978, ch. II.
18. Bok, loc. cit.: 24-30.
19. Bok 1978: 74-75.
20. Foster 1986, ch. 11.
21. Archer S, Alexander D, Collins L and Pham D (1995) Goodwill and Other Intangibles: Theory Standards and Practice in France and the UK, Institute of Chartered Accountants Research Board, London: ch. 6.
22. Bok op.cit.: 74-75.
23. As one of the referees of this paper commented: "Company executives have a vested interest in presenting company results in the best possible light; not just to conceal problems, but they can argue that such presentation is in the best interests of the company and its shareholders". In fact, it is not obvious that being given financial statement information with a misleading rosy bias is in the interests of existing shareholders. It reduces the capability of those financial statements to provide the shareholders with the means of 'monitoring' management (the internal agency problem), and may for example induce them to continue supporting the management when they would do better to change it. Quite apart from that, however, such a comment appears to overlook the external agency problem which arises in the context of the relationship between the management of the company and potential investors, who might be duped by such misleading information into making an investment they would not otherwise have made.
24. Lev, Baruch (1988) Toward a Theory of Equitable and Efficient Accounting Policy, The Accounting Review, January.
25. Bok, op.cit.: 45
26. ibid., ch. VIII
27. loc. cit.: 113-119
28. Rawls, John (1971) A Theory of Justice, Harvard University Press, Harvard University Press, Cambridge, MA.
29. Bok, op.cit.: 92-93
30. The use of certain kinds of lease for the purpose of Off balance sheet financing' has been prevented by the accounting regulators in several countries, including the U.K. and the U.S.A. Such leases ('finance leases'), according to which the lessee has substantially all the rights and obligations of ownership, have to be accounted for as though the assets so financed had been purchased with the aid of a loan, a treatment reflecting the accounting principle of 'substance over form'. This action on the part of the accounting regulators suggests that they did not regard as negligible the risk of users of financial statements being misled by Off balance sheet financing'. However, it is still possible to use other forms of lease, the nature of which is closer to hiring the assets (Operating leases'), as Off balance sheet financing'.
31. If the bank participates in its client's equity capital and has access to confidential management information, then a very different situation obtains.
32. Bok (1978)
33. Lev (1988)
34. In both the U.S.A. and the U.K., the accounting regulatory bodies were reorganised (in 1972 and 1990, respectively) in order to reduce the influence over them of the accounting profession. But the influence of the managements of companies does not seem to have been thereby reduced. For a discussion of the problems of authority faced by such bodies, see Archer (1993).
35. Accounting Standards Board (1995) Goodwill and Intangible Assets, Working Paper, ASB, London.
36. Arrangements for Public Hearing, ASB, 1995.
37. The term 'public accountant' is used (following the U.S. practice) to designate accountants who work in professional accounting firms, and not in other kinds of organisation such as the companies which are the accounting firms' clients. Quaint though this may seem, the term is intended to imply that public accountants have a professional duty to the public, over and above that to their clients. As such, the term may perhaps be seen as a throwback to a more idealistic age, or at least an age in which the vigorous assertion of professional ideals retained a certain credibility (see, for example, Spacek, 1969).
38. Watts, R L & Zimmerman J L (1986) Positive Accounting Theory, Prentice-Hall, Englewood Cliffs, NJ, ch. 13.
39. Danley, John R (1994) The Role of the Modern Corporation in a Free Society, University of Notre Dame Press, Notre Dame, IN.
40. Danley, op. cit., chapters 9 & 10.
41. Rawls (1971)
42. Walzer, Michael (1983) Spheres of Justice: A Defense of Pluralism and Equality, Basic Books, Inc., New York, NY.
43. Ijiri (1975)
44. Danley op. cit., ch.10.
45. Ethical conventionalism holds that the ethical principles of a society are those which the society has created or chosen. This might seem analogous to legal positivism (i.e. the view that existing legal rules and principles have their own validity within an actual legal system). But while there are established procedures for determining 'positive law', positivistic identification of ethical principles is insuperably problematic. One may conduct opinion surveys to find out which principles people hold to be morally legitimate, but this raises two sorts of problems. First, how large a majority is needed for a principle to be accepted as being created or chosen by a given society? Second, what can one conclude if a large majority states that it holds a particular principle to be morally legitimate, but few act upon it in practice. Given these problems, it hardly seems that ethical conventionalism is a tenable theory of ethics (Danley, 1994 ch. 10).
46. Ought' implies 'can'; Danley, 1994: 265.
47. Accounting Standards Board (1995) Goodwill and Intangible Assets, Working Paper, ASB, London.
48. Archer, Simon (1993) On the methodology of constructing a conceptual framework for financial accounting, In: Mumford M J and Peasnell K V, eds. Philosophical Perspectives on Accounting: Essays in Honour of Edward Stamp, Routledge, London.
49. Archer S, Alexander D, Collins L & Pham D (1995) Goodwill and Other Intangibles: Theory Standards and Practice in France and the U.K., Institute of Chartered Accountants Research Board, London.
50. Beaver, William H (1989) Financial Reporting: an Accounting Revolution, second edition, Prentice-Hall, Englewood Cliffs, NJ.
51. Belkaoui, Ahmed (1985) Accounting Theory, second edition, Harcourt Brace Jovanovich, Orlando, FL.
52. Bok, Sissela (1978) Lying: Moral Choice in Public and Private Life, Random House, New York, NY.
53. Briloff, Abraham J (1982) Anacomp's Accounting: a Critic Finds Plenty to Fault It With, Barron's, August 2, 1982.
54. Citron David B (1995) The Incidence of Accounting based Covenants in UK Public Debt Contracts: an Empirical Analysis, Accounting and Business Research, 99, Summer.
55. Danley, John R (1994) The Role of the Modern Corporation in a Free Society, University of Notre Dame Press, Notre Dame, IN.
56. Foster, George J (1986) Financial Statement Analysis, second edition, Prentice-Hall, Englewood Cliffs, NJ.
57. Gaa, James C (1988) Methodological Foundations of Standard setting for Corporate Financial Reporting, Studies in Accounting Research #28, American Accounting Association, Sarasota, FL.
58. Hines, Ruth D (1988) Financial Accounting: In Communicating Reality, We Construct Reality, Accounting, Organisations and Society, 3.
59. Ijiri, Yuji (1975) Theory of Accounting Measurement, Study in Accounting Research #10, American Accounting Association, Sarasota, FL.
60. Lev, Baruch (1988) Toward a Theory of Equitable and Efficient Accounting Policy, The Accounting Review, January 1988.
61. Rawls, John (1971) A Theory of Justice, Harvard University Press, Cambridge MA.
62. Spacek, Leonard (1969) A Search for Fairness in Financial Reporting. Selected addresses by Leonard Spacek, Arthur Andersen, Chicago IL.
63. Walzer, Michael (1983) Spheres of Justice: A Defense of Pluralism and Equality, Basic Books, Inc., New York, NY.
64. Watts, R L & Zimmerman J L (1986) Positive Accounting Theory, Prentice-Hall, Englewood Cliffs, NJ.