Inside accounting the sociology of financial reporting and auditing

List of AbbreviationsACCA Association of Chartered Certified Accountants BSA British Sociological Association CIMA Chartered Institute of Management Accountants FASB Financial Accounting

A Gower Book

Inside Accounting

For my mother and father

Inside Accounting

The Sociology of Financial

Reporting and Auditing

DaviD Leung

University of York, UK

First published 2011 by Gower Publishing

Published 2016 by Routledge

2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN

711 Third Avenue, New York, NY 10017, USA

Routledge is an imprint of the Taylor & Francis Group, an informa business

Copyright © David Leung 2011

David Leung has asserted his moral right under the Copyright, Designs and Patents Act,

1988, to be identified as the author of this work

All rights reserved No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers

1 Accounting Practice 2 Accounting Decision making

3 Accounting Case studies 4 Corporate culture

ISBN: 978-1-3155-8870-4 (ebk)

Acknowledgements xi Preface xiii

Bibliography 133 Index 139

This page has been left blank intentionally

List of Abbreviations

ACCA Association of Chartered Certified Accountants

BSA British Sociological Association

CIMA Chartered Institute of Management Accountants

FASB Financial Accounting Standards Board

FRS Financial Reporting Standards

FRS 3 Financial Reporting Standard 3: ‘Reporting financial performance’FRS 5 Financial Reporting Standard 5: ‘Reporting the substance of transactions’FRS 18 Financial Reporting Standard 18: ‘Accounting policies’

FRSSE Financial Reporting Standard for Smaller Entities

IAS International Accounting Standards

IAS 18 International Accounting Standard 18: ‘Revenue’

IASB International Accounting Standards Board

IASC International Accounting Standards Committee Foundation

SOP Standard Operating Procedure

SSAP Statement of Standard Accounting Practice

SSAP 9 Statement of Standard Accounting Practice 9: ‘Stocks and

long-term contracts’

UITF Urgent Issues Task Force

UITF 40 Urgent Issues Task Force Abstract 40: ‘Revenue recognition and

service contracts’

WIP Work-in-progress

This page has been left blank intentionally

About the Author

Dr David Leung is a Lecturer in Accounting and Finance at York Management School at the University of York in the UK, where he teaches Critical Perspectives on Accounting and Finance, and Governance and Audit Dr Leung is himself a qualified accountant and worked as a financial controller and consultant in a number of sectors (including biotechnology, printing, financial services, tourism and retail) before joining academia He gained his MBA at Durham University and his MSc by research in Science and Technology Studies, and his PhD in Social Studies of Finance at the University of Edinburgh He is a published author

This page has been left blank intentionally

I wish to thank Professor Donald MacKenzie and Professor David Hatherly for supervising the PhD research (Leung 2008) that led to this book being written Professor MacKenzie has been instrumental to its completion I am indebted to him for his guidance in sociology and for the financial support provided by his Professorial Fellowship in Social Studies of Finance Had it not been for his interest in this area, these pages would not have been written I am also indebted to Professor Hatherly, who has been equally enthusiastic about the project He was willing to share and endure, with a fellow accountant, the joys and tribulations of finitism and ethnoaccountancy His knowledge and experience of accounting and auditing have ensured that the project is informed in its views I was truly fortunate to have had them both as supervisors

I also wish to thank Dr Ingrid Jeacle, Professor Michael Power, Professor Richard Swedberg, Professor Trevor Pinch, Dr Mike Brennan, Dr Neil Lunt, Professor Josephine Maltby and delegates at the British Accounting and Finance Association 2009 conference (University of Stirling) for their valuable advice I am grateful to the participants in the case study for allowing me to conduct the research, especially Sara Finally, I should thank Sufei and my family for their patience and generous support throughout the project It would have been a difficult journey without them

This page has been left blank intentionally

This book examines the finance department of a commercial subsidiary company of a renowned UK scientific research organization The nine-month ethnography, which covers a one-year financial reporting cycle, addresses how accountants and non-accounting managers construct their company’s earnings Addressing issues in both internal management accounting, such as budgeting, performance evaluation and control,

as well as external financial accounting and reporting, such as book-keeping, monthly/year-end accounts and auditing, the book focuses on how people classify transactions, make professional judgements and use computer software for accounting, and prepare for and facilitate the auditing process In tackling these questions, it also addresses accountancy training, the impact of people’s affiliations to the accounting profession or other professions on their accounting and on their perceptions of financial statements Other contingent or contextual factors that influence the choice of accounting method such as time pressures, reward structures, management authority and institutions are also considered here

The research uses Donald MacKenzie’s ‘ethnoaccountancy’ concept, which employs a blend of finitist theory, as developed by Barry Barnes and David Bloor, and ethnographic practice that redresses the imbalance in relation to ethnographic studies of financial accounting, as compared to management accounting The result helps close the gap between the academic curriculum and the experiences of practitioners It also answers accusations that writers of academic books give insufficient attention to societal issues and that accounting research is of little relevance to and is largely ignored by accounting practitioners

As advocated by the interdisciplinary field of social studies of finance, the research finds that using social studies of science as a means to understand accounting, particularly the financial reporting process, is useful The research documents numerous examples

of finitism in the definition and classification of accounting terms and of related epistemological issues, for example, ‘meaning is use’ and interpretation As predicted by finitism, the meanings of terms such as ‘materiality’ and ‘true and fair view’ are not fixed; previous terms and acts of classification, such as ‘asset’ and ‘expense’, are revisable; and the future applications of terms and classifications are open-ended and contingent upon local circumstances and previous applications, for example, new legislation and social expectations

Consequently, no act of accounting classification is ever indefeasibly correct The analogy with scientific culture and Kuhnian paradigms, such as paradigm shifts, problem-solutions and exemplars, is strong The accounting community’s institutions and authority are central to the accounting process and to the ‘truth and fairness’ of accounting numbers; accounting training involves extensive use of ostensive learning and learning from doing; and both accountants and non-accounting managers have goals and interests that result in ‘good enough’ accounting and satisficing behaviour

xiv I n s i d e A c c o u n t i n g

I trust that this book will be useful to accounting-finance professionals and academics,

as well as to sociologists and researchers interested in research methods and science studies As consumers of financial information, it should also be of benefit to the general public In the light of recent accounting scandals and corporate governance failings, more knowledge about the accounting process can only be a good thing for our society I sincerely hope that this book will contribute to that end

David Leung

August 2011

This book is the result of a change in career After six years working as an accountant, financial manager and controller after my undergraduate degree in accounting (a period which was also spent gaining an MBA and membership of a UK professional accounting body) I wanted to learn something new about accounting practice I wanted to discover some theory or body of knowledge that hitherto had not been taught to me in academia,

by the profession or in ‘continuing professional development’ (work-related) courses, that

is, courses other than ‘positive’ economics, ‘behavioural science’ and related business/management areas I had found myself at a standstill, as one of those accountants who

was engaged full time in doing accounting work rather than thinking about his or her work

– a situation typical of most members in the profession (Montagna 1990: 244)

Finding something new, however, was not the only motivation I was aware that there was a knowledge and image gap On the one side there was a picture of the accountant as portrayed in academia (especially from standard textbooks) and by the accounting profession,1 and on the other side there was my own experience and that

of other practitioners At an undergraduate level, students are taught the quantitative, the normative and the factual (for example, legislation and the accounting and auditing standards) and are not in a position to question that body of knowledge (In my own undergraduate four-year syllabus there were only passing references to social or rather behavioural issues in accounting In fact the only module that allowed the student to choose his or her topic was the final-year dissertation.) After graduation the aspiring accountant is again in no position to question the professional knowledge which he or she would have had to acquire and demonstrate (via rigorous exams) to be formally admitted into the profession (Professional knowledge consolidates, and often largely repeats, academic knowledge.) At the end of this often seamless journey between academia and professional life, the accountant is then expected to behave in a prescribed ‘professional manner’ – a manner which, although arguably well-intentioned, is remarkably discordant with how people actually do accounting

Social Studies of Finance

The above motivations thus led to further postgraduate study The research began with an MSc by Research in Science and Technology Studies (Leung 2005) which explored Social Studies of Finance (SSF) – a relatively new area of research inspired by the social scientist Michel Callon and developed by, notably, Donald MacKenzie and Karin Knorr-Cetina (See MacKenzie 2009 for an introduction to SSF and references to the literature.) In that thesis interviews with senior accountants from a variety of listed companies demonstrated

1 However, the accounting profession has been trying to change the accounting stereotype, albeit to an image of the

‘trendy and fun loving’ accountant (Jeacle 2008).

2 I n s i d e A c c o u n t i n g

that the sociological approach – particularly the theory of finitism as developed by Barnes (1982), Barnes, Bloor and Henry (1996) and Bloor (1997) – may be an insightful way to understand accounting practice

During that research I was also introduced to MacKenzie’s ethnoaccountancy (MacKenzie 1996: 59–61; 2003) which advocates the use of ethnography as a research method to examine the finitist character of the financial reporting process However,

it was not until the PhD research, which was funded by Donald MacKenzie’s Professorial Fellowship to research SSF, that an attempt was made to realize the aims of ethnoaccountancy, that is, to blend ethnographic practice with finitist theory The title

of the PhD, ‘Accounting in the wild: an adventure in ethnoaccountancy’, captured the

spirit of the endeavour The title sprung from Edwin Hutchins’ book Cognition in the Wild

(1995), which shares many of the concerns of ethnoaccountancy Hutchins demonstrated that human cognition is always situated in a wider, complex, dynamical, sociocultural world and cannot be unaffected by it He argued that it is in real practice that culture is produced and reproduced, and as such pure research on cognitive practices in its context

or natural habitat is needed The title also refers to Anthony Hopwood’s (1983: 303) call for more sociological approaches, for ‘adventurous researchers seeking to explore what lies behind today’s accounting condition’.2

Justification

There are at least three justifications for this book First is the paucity of studies to date that have explicitly applied finitism theory to the financial accounting process There have been references to implicitly finitist ideas in some of the classic accounting studies (for example, Chua 1986a, 1986b; Hines 1988) but there appears to be only one study (MacKenzie’s 2008 interview-based study of a UK mid-market listed company) which demonstrates empirically the potential for using the finitist viewpoint

Second is the remarkable fact that there are relatively few ethnographic studies of financial accounting practice (Tomkins and Groves 1983: 364; Miller 1994: 31, note 8) – a situation that has not changed at the time of writing In contrast to the numerous ethnographic case-based studies of management accounting – which cover internal organizational areas such as budgeting, performance evaluation and planning systems (see Chua 1988; Puxty 1993; and Baxter and Chua 2003 for overviews of ethnographic research in management accounting) – there are few if any substantial ethnographic studies of the financial reporting process which cover, inter alia, book-keeping, the preparation and finalization of monthly and year-end accounts, and the facilitation of the audit process, despite exhortations to conduct such research (for example, Tomkins and Groves 1983; Grimwood and Tomkins 1986; Chua 1988).3 As Miller (2000) would put

it, sociology has forgotten (financial) accounting

Moreover, there are very few substantial ethnographic studies of audit practice Only Pentland (1993) seems to offer an observational ethnography in a naturalistic setting comparable to the ethnoaccountancy approach (See Power 2003 for a useful review.) A

2 I owe the Hutchins’ reference and the apt thesis title to Donald MacKenzie and the title of this book, Inside

Accounting, to Trevor Pinch.

3 An exception is Suchman’s (1983) study on the accounts payable function in an accounting office.

I n t r o d u c t i o n

main reason behind this, no doubt, is the problem of client confidentiality But there is also the view that we live in an ‘audit society’ (Power 1994) where ‘the establishment

of a “system” whose operations can be verified is more important than the operations

themselves’ (1994: 310), that is, ‘how an audit is done is less important than that it is

done’ (1994: 304, emphasis in original)

A third and related justification already noted in the introduction is the gap between the academic curriculum, including academic research, and the experiences

of practitioners This gap has led to accusations that writers of textbooks have given insufficient attention to societal issues4 and to the related claim that accounting research – particularly mainstream (financial economics) accounting research – is of little relevance

to accounting practice and is therefore largely ignored by practitioners.5

As participants in the recent ‘polyphonic debate’ (Ahrens et al 2008; Parker 2008) and countless others before them have pointed out, there is ample anecdotal evidence to suggest that practitioners and students more readily identify with the modus operandi of the ‘interpretive’ or qualitative researcher and the accounts of how accounting is actually done in practice as opposed to the sanitized versions typically portrayed in textbooks and

by the profession Boedker’s own experience, for example, is typical amongst interpretive researchers:

… the impression I get from ‘industry’ is one of [interpretive accounting research’s] relevance I observe Senior Leadership Teams as they ‘strategise’, ‘tinker’ and ‘manage’, I speak to CEOs and business leaders about their management challenges and achievements, and my observations tell me that decoding symbols, managing power and politics, and reflecting on self in relation

to others, are important skills for young ‘wisdom workers’ in today’s organisations (Baxter, Boedker and Chua 2008: 883)

The ethnographic approach has some fundamental advantages over other research methods Tomkins and Groves (1983) argue that, as a result of direct interaction with practitioners, the approach is more likely to produce reliable theories about accounting

in action and the effects of alternative accounting procedures The approach is holistic:

it studies phenomena in their practical or ‘natural’ setting It is argued that a simple observation resulting in a datum contains very little information and that the meaning

of the datum only becomes apparent when it is considered as part of a wider whole or in its context (Hägg and Hedlund 1979: 137) When gaining insights into all the relevant aspects of the observed phenomena, the approach does not exclude ‘variables’ as would typically happen in the positivist tradition Thus, there may not be a more suitable method to ascertain what techniques, procedures, systems and so on are being used, the way in which they are used and why

Ethnographic research could also form the basis of action or ‘interventionist’ research (Jönsson and Lukka 2005, 2007) in which the researcher is an active agent – a position

I frequently experienced in the case-study company As with other research methods,

interventionist research has its critics (see ‘The Researcher’ section in Chapter 3) However,

4 For example, see Accounting Education: An International Journal, 16(1), March 2007.

5 Echoing Ball and Foster’s (1982a: 166) well-known study, Dillard (2008), Baxter, Boedker and Chua (2008) and numerous others argue that mainstream (financial economics) accounting research, especially US research, is largely ignored by accounting firms, industry and the authorities.

4 I n s i d e A c c o u n t i n g

they are countered by the method’s merits, notably its ability ‘to overcome the weakness

of research where subjects do not have to commit to action in their own organisational life’ (2005: 8) – the very situation that the case-study participants had found themselves

in Also, the method can ‘examine what participants actually say and do in circumstances, which really matter to them, as compared to what they might say or do hypothetically’ (2005: 8) Moreover, from my encounters out in the field, I cannot help but sympathize with those who advocate that the purpose of accounting research is to influence practice and indeed to serve organizations and society to make them better (for example Davila and Oyon 2008) In light of recent corporate-governance failings and the financial crisis, the normative sentiment seems more pertinent than ever

Aim

Thus, this book aims to show how accountants and non-accounting managers construct their company’s earnings Its objectives are to explore the theory of finitism by examining how people classify transactions and make professional judgements, how computer software is used in accounting and how people prepare for and facilitate the auditing process

a controversial proposal to change to a ‘responsibility accounting’ system Chapter 5,

‘Software’, describes how managers and staff used three software packages in the company

to do their accounting: Sage Line 100, which was used for book-keeping and producing the monthly and year-end financial accounts; ‘Synergist’, which was used for contract costing and performance evaluation; and Microsoft Excel, which was used to derive and analyse accounting values for the Sage accounts and design the new revenue recognition system Chapter 6, ‘The Year-end Accounts’, documents the problems that occurred after the end of the initial six-month project and the accounting adjustments that the staff and I made to the year-end accounts in preparation for the auditors Chapter 7, ‘The Audit’, documents how the staff and I dealt with the auditors during the audit of the year-end accounts It describes the relationship between the auditors and the staff, the book-keeper’s room where the entire audit was conducted and various audit tests that were carried out Chapter 8, ‘Truth and Fairness’, draws the main themes together from the previous chapters It discusses and provides examples of accounting materiality as part of

I n t r o d u c t i o n

the truth and fairness concept in the accounting and auditing processes, the finitist nature

of accounting rules, learning accounting from doing, the technical constraints of the accounting software, goal-oriented action and resource issues Chapter 9, ‘Conclusion’, ties together the discussion in Chapter 8 to the key aspects of finitism theory: the role of ostensive learning, the accounting paradigm, meaning is use and interpretation, and the role of authority and institutions

This page has been left blank intentionally

This chapter discusses the theory of finitism and scientific culture as an analogy to the practice of accountancy It examines: the implications for the ‘meaning’ and learning of rules; ostensive learning and the use of exemplars; the accounting paradigm (accounting theory, textbooks and paradigm shifts); the role of institutions; Wittgenstein’s slogan

‘meaning is use’ and interpretation; and authority and the impact of people’s goals and interests on their accounting

Central Tenets of Finitism

Hatherly, Leung and MacKenzie (2008) explain that finitism is an account of meaning which it views above all through the prism of classification It has philosophical roots in Ludwig Wittgenstein (1972) and Mary Hesse (1974), but the version of finitism used here (as well as in Hatherly, Leung and MacKenzie 2008; and MacKenzie 2008, 2009) has been largely developed by the sociologists of science Barry Barnes and David Bloor (especially Barnes 1982; Barnes, Bloor and Henry 1996; and Bloor 1997)

At the heart of finitism is how people classify items Finitists argue that the terms used to describe such items or classifications (for example, ‘asset’ or ‘expense’) do not have inherent meanings: ‘there is no fixed division of the infinite universe of activities, entities and states of affairs into instances of X and instances of not-X’ (Hatherly, Leung and MacKenzie 2008: 133) That is, the meaning of terms is not progressively revealed but

instead is derived from people’s usage of terms (Barnes, Bloor and Henry 1996).

As meaning is created when we move from case to case, a significant implication

of finitism is that as any term has been used only a finite number of times in the past,

it follows that past usages do not determine future usages As Barnes, Bloor and Henry (1996: 54) explain: ‘future use of our conventions of classification is underdetermined

and indeterminate It will emerge as we decide how to develop the analogy between the

finite number of our existing examples of things and the indefinite number of things we shall encounter in the future’ (emphasis in original)

Specifically, Barnes, Bloor and Henry claim that finitism has five main implications:

1 the future applications of terms are open-ended;

2 no act of classification is ever indefeasibly correct;

3 all acts of classification are revisable;

4 successive applications of a kind term are not independent; and

5 the applications of different kind terms are not independent of each other

(1996: 55–9).These implications as applied to accounting terms and classifications can be formulated as follows The future applications of accounting terms and classifications (for

8 I n s i d e A c c o u n t i n g

example, normal activity level, cost rate, materiality,1 asset, expense, liability, income, capital and reserves) are open-ended and are contingent upon the local circumstances and previous applications (for example, the changing usage of an accounting term due to changing legislation and training practices) The act of using an accounting term will also affect the act of using other accounting terms (for example, the act of classifying a chargeable and therefore a non-chargeable labour hour for the purposes of recognizing income) As a consequence of this indeterminacy and interdependence, no act of accounting classification is ever indefeasibly correct, and it follows that all acts of accounting classification are revisable, that is, the amounts in the various sections of the current and previous balance sheet(s) and profit and loss account(s) of an entity can be subject to change

MeAnIng FInITISM And leArnIng

The central tenets of finitism imply that the very ‘meaning’ of terms is subject to change Bloor (1997: 136) argues that meanings do not pre-exist but instead are created as we move from case to case Accordingly, ‘there is nothing in the meaning of a term, or its previous use, or the way it has previously been defined, which will serve to fix its future proper use’ (Barnes, Bloor and Henry 1996: 78) In fact the accounting literature appears

to be in complete agreement with the finitist argument that there is no single generally accepted usage of terms

The debate about arguably the most important UK accounting term, the ‘true and fair view’ term, is a case in point As described later in the ‘Institutions’ section, the true and fair view term is documented in legislation and in official accounting and auditing standards However, as numerous studies have shown, there is no universal agreement on the term’s meaning (for example, Rutherford 1985; Houghton 1987; Walton 1993; Karan 2002; Kirk 2001, 2006) Studies have shown that the true and fair view term is contingent upon numerous, complex factors, for example, legal issues (McGee 1991; Ordelheide 1993; Evans 2003) and translation and cultural issues (Alexander 1993; Burlaud 1993; Hudack and Orsini 1993; Van Hulle and Leuven 1993; Parker 1994)

These studies show, inter alia, that different nations may not share the same meaning

of terms Similarly, the same meaning of terms may not always be shared by different stakeholders For example, Houghton’s (1987) Australian study found that public practice accountants and private shareholders did not share the same meaning for the true and fair view term (This is to be contrasted with Kirk 2001 and 2006, who found that financial directors, shareholders and auditors all had the ‘same understanding’ of the meaning

of the true and fair view term.) Studies have also shown differences in perception, risk profile and preference over the UK ‘true and fair view’ and the US ‘present fairly’ terms (Kirk 2001, 2006; McEnroe and Martens 2004) (It is instructive to note that the UK’s Financial Reporting Council still ‘believes that the intent and substance’ of the above two expressions are ‘similar’: Financial Reporting Council 2005: 3.) Indeed, there is also evidence showing that different stakeholders (for example, directors and auditors) make

1 The IASB (2001a: para 30) states that: ‘Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement.’

F i n i t i s m

different distinctions between the two words ‘true’ and ‘fair’ (Nobes and Parker 1991; Parker and Nobes 1991)

Moreover, as the meaning or content of a rule and its application (that is, the exercise

of ‘professional judgement’) is contingent upon company level factors (for example, corporate culture, industry best practice and the professionalism of the finance staff), each company is likely to have a different interpretation of the meaning of the accounting rules and will apply the rules in accordance with its own particular understanding

The meaning of the rules needed to construct financial reports is therefore negotiated

(Rutherford 2003) as they are continuously generated during the corporation’s reporting cycle

As predicted by finitism, the meaning of accounting terms (in the sense of usage) changes over time as they are applied to different companies under different social, economic and political contexts Consequently, the reporting of a true and fair view should be perceived as a dynamic process rather than as a static state (Ekholm and Troberg 1998) or as a moving frame of reference which alters with society’s changing expectations (Tweedie 1983: 425) Indeed, legal opinion also accepts that the true and fair view concept is ‘dynamic’ (Hoffmann and Arden 1983: 156; Arden 1993: para 14) which

is ‘subject to continuous rebirth’ (Arden 1993: para 14)

Meaning finitism also points to an interesting aspect about the learning process If meanings are generated in a step-by-step fashion as we go along (Bloor 1997: 136), then

we would also imagine that the learning of terms or rules would follow a similar process Thus, we would expect the accountant (especially the trainee accountant) to undergo a series of steps (training courses, textbook readings, spreadsheet modelling and so on) in his or her learning and understanding of accounting rules, classifications and methods before he or she can be considered to have grasped accounting or, as Wittgenstein (1972:

para 199) might have put it, mastered the accounting technique.

However, to have mastered a technique does not mean that the accountant is then able to determine the future usage of accounting terms Irrespective of his or her level of experience or competence, a judgement is still required in the assessment of whether or not an instance falls under a term For example, the International Accounting Standards Board’s (IASB) Framework, which sets out the concepts that underlie the preparation and presentation of financial statements, requires the preparer to make an ‘assessment’ (that

is, a judgement) on the basis of the evidence available of the probability that the future economic benefits associated with assets and liabilities will flow to or from the entity (IASB 2001a: para 85) As Barnes argues:

When an individual confronts a putative new instance of a term, he confronts an array of similarities and differences, between the new and the past instances, and among the past instances Formally, his assertion that an instance falls under a term is only his contingent judgement to the effect that similarity outweighs difference Past usage offers precedents for his usage, but is not sufficient to fix it because there is no natural or universal scale for the weighing of similarity against difference (1982: 28–9)

As explained in the ‘Institutions’ section, the accountant does appeal to the accounting community, particularly to the audit profession, to establish the ‘correctness’ of an application of an accounting rule For example, Nobes and Parker (1991) found that UK finance directors take no specific action (for example, provide additional information or

10 I n s i d e A c c o u n t i n g

depart from the specific requirements of the Companies Act) but rely heavily on auditors

to ensure that the annual accounts give a true and fair view Similarly, Lee (1994) argues that there is a temporal and situational variation in the meaning given to financial reporting terms such as ‘true and fair view’ in the UK and ‘present fairly’ in the US, which

is largely controlled by the audit profession

However, as Bloor (1997: 26) argues, the community may furnish us with norms, but

it does not remove or correct the indeterminacy of finitism Indeed, he claims that it can never be removed As Barnes, Bloor and Henry (1996: 52) explain:

The practical value of definitions and rules in specifying more precisely how terms should

be applied is not in question But they cannot solve the formal problem A definition or rule could only solve this if its constituent words were themselves devoid of indefiniteness in use But how are such words themselves learned? If by their role in other word-word connections, then we enter upon a vicious regress; if by ostension [see next section], then we lapse back into indefiniteness once more … As T.S Kuhn has put it, there is always a point where we have to recognize that some things are the same as others, without being able to say in what respect they are the same.

Similarly, Barnes (1982: 26–7) argues that:

… there are no terms for which meaning or use is self-evident; nor does meaning accompany

a concept as a mysterious halo Hence any use of rules and definitions in conveying meanings either relies upon earlier ostensive acts of learning, or generates the further problem of the meanings of the terms in the rules These problems may in turn be resolved by appeal to more rules and definitions, but this strategy alone would lead to an infinite regress.

OSTenSIve leArnIng

A distinct feature of finitism is the unavoidable use of ostension or practical demonstration

in the learning of similarity relations or terms and classifications (as nothing can be learned ab initio purely by verbal means – Barnes 1982: 27) and in the sustaining and transmission of terms and classifications in communities (Barnes, Bloor and Henry 1996: 52–4) Barnes, Bloor and Henry (1996: 49) define an act of ostension as any act whereby

a direct association is directly displayed, shown or pointed out between an empirical event or state of affairs and a word or term of a language The process involves the learner being taught by a teacher whom he or she trusts and acknowledges as having cognitive authority, and the use of the conventions of the teacher’s community to decide the

‘rightness’ or ‘wrongness’ of an application of a term

In the accounting community, ostension is used to teach its accounting terms, classifications and rules to the student At its most basic level the financial accounting student is taught the six classifications (expense, asset, income, liability, capital and reserves) and their double entry form, that is, whether they are a ‘debit’ or a ‘credit’ item They are introduced to the ‘books of original entry’ (for example, the cash book, sales and purchases day books) and the ledgers (sales, purchases and nominal ledgers) Students are then shown a number of accounting techniques (for example, depreciation and stock valuation methods) and how to construct the main financial statements: the profit and loss account, balance sheet and cash flow statement At the advanced level, students

F i n i t i s m

are shown financial statement analysis (for example, ratio analysis) and are directed to the Accounting Standards and the conceptual framework which attempt to explain how items are classed

Thus, students acquire accounting knowledge and skills by accepting what was ostensively offered It is only when the student has passed his or her academic and/

or professional studies that he or she is entrusted (in an organization) with making accounting judgements (that is, when he or she extrapolates what he or she has learned

to future applications) that require less direct ostensive learning As Bloor (1997: 47) explains, at the basic level:

teaching does not proceed by explanation, and hence escapes the sequential and linear requirements of definition It is concrete and holistic, exploiting a form of trust that does not require each step to be justified in turn, and where the learner is prepared to understand the earlier in terms of the later.

It is suggested that because the trainee accountant rarely if ever questions the knowledge

that is learned in training programmes, ostensive learning introduces a conventional

character into the structure of knowledge (Barnes 1982: 26–7) To paraphrase Barnes (1982: 17), this type of training therefore does not generate or encourage traits such as creativity or logical rigour; rather, it equips accountants so that it is possible for them to

be creative, or rigorous, or whatever else, in the accounting context or culture As described

in the ‘Accounting Paradigm’ section later, accountants do accounting according to what they have learned from their training and perceive accounting matters within their learned framework or paradigm

exeMplArS

Finitism also points to another fundamental learning problem: as only a finite number of examples and illustrations can be presented to a student, there is an ineradicable problem when the student attempts the next application of a term or a rule by himself or herself The problem is that the student can only apply what he or she has learned from the finite number of examples to an open-ended, indefinitely large range of future applications (Bloor 1997: 10) So how is the leap made? Barnes, Bloor and Henry (1996: 103) explain that training provides resources in the form of exemplars and solved problems, and illustrates their use in processes of modelling and analogy They argue that:

It renders the unknown in terms of the known, and hence allows calculations about the unknown to be made by analogy with calculations about the known Once the connection between the known and the unknown is made, inductive inference can flow from the former

to the latter directly, without passing through any ‘general theory’, and expectations can be developed about the unknown Thus, knowledge can develop from case to case piecemeal … (Barnes, Bloor and Henry 1996: 103)

In the case of the trainee accountant, he or she would have to extrapolate what he or she has learned from textbooks and his or her various in-house and external training courses (including accounting terms, techniques, standards and best-practice guidelines)

to new and unique situations Academic and professional examinations again offer

12 I n s i d e A c c o u n t i n g

another set of examples that the student has to negotiate through if he or she is to be

‘qualified’ in accounting, and the extrapolation of examples to new situations is of course

no less a problem once the student attains qualified status, as shown, for example, by the problematic application of the ‘true and fair view’ term as discussed above As with the scientist, the accountant ‘must hope that the analogy claimed between the solved and the unsolved problem will be an analogy found appropriate or attractive by fellow practitioners, that there will be agreement in practice amongst them all’ (Barnes, Bloor and Henry 1996: 102–3)

Accounting paradigm

Analogous to the culture of science, the culture of accounting is passed on in the form of

paradigms, that is, collective achievements, specific concrete problem-solutions which have

gained universal acceptance throughout the accounting community as valid procedures and as models of valid procedure for pedagogic use (cf Barnes 1982: 17–18).2 Akin to scientific training, the accounting paradigm is upheld through academic and professional training Students are taught: accounting theory (especially in academia); the profession’s conceptual framework (for example, the IASB’s Framework); official accounting standards (for example, International Financial Reporting Standards); official auditing standards (for example, International Standards on Auditing); best practice in management accounting (as advocated for example by the UK’s Chartered Institute of Management Accountants [CIMA]) and other areas; and to produce statements that give a ‘true and fair view’ of the financial state of affairs of an organization Eventually, after rigorous training, students recognize the accounting paradigm as the sole legitimate representation of, and mode of dealing with, an aspect of the economic environment (cf Barnes 1982: 18–19)

ACCOunTIng TheOry And TexTbOOkS

Despite the accounting community’s attempts to foster notions of accounting ‘truth’ and ‘science’ (for example, the object of CIMA is ‘to promote and develop the science

of Management Accountancy’: CIMA Royal Charter 2007; the Institute of Chartered

Accountants of Scotland’s motto is Quaere Verum – ‘seek the truth’), there is in fact no

single generally accepted theory of accounting Conceptual frameworks, however, have been offered by the standard-setters as a paradigm or ‘theory’ (that is, ‘a body of discourse originally employed routinely to describe a familiar, well-understood set of situations’: Barnes, Bloor and Henry 1996: 93) for external financial reporting purposes The standard-setters’ theory attempts to give consistency to their accounting standards, which the

2 Kuhn (1963: 358) defines a paradigm as ‘a fundamental scientific achievement and one which includes both a theory and some exemplary applications to the results of experiment and observation More important, it is an open- ended achievement, one which leaves all sorts of research still to be done And, finally, it is an accepted achievement in the sense that it is received by a group whose members no longer try to rival it or to create alternates for it Instead, they attempt to extend and exploit it in a variety of ways’ However, there has been much debate about the meaning of the term ‘paradigm’ Masterman, for example, argued that the term was used in at least twenty-two ways by Kuhn in his book

The Structure of Scientific Revolutions (cited in Kuhn 1977: 294; and 1996: 181) Consequently, Kuhn attempts to refine the

term under two different senses: ‘On the one hand, it stands for the entire constellation of beliefs, values, techniques and

so on shared by the members of a given community On the other, it denotes one sort of element in that constellation, the concrete puzzle-solutions which, employed as models or examples, can replace explicit rules as a basis for the solution

of the remaining puzzles of normal science’ (Kuhn 1996: 175) Both of these senses are employed here.

of powerful groups, notably the professional bodies, standard-setters and auditors) and the authority imputed on them Indeed, the use of authorized textbooks and textbooks which have been specifically written for the professional bodies have become standard practice in professional accountancy training programmes To paraphrase Barnes (1982: 16–17) and Kuhn, accountancy training (particularly the specific training required to become a member of a professional body) is dogmatic and authoritarian, and it is hard

to see how it could be otherwise Analogous to scientific research, the economic world ‘is vastly too complex to be explored even approximately at random Something must tell the [accounting student] where to look and what to look for, and that something, though

it may not last beyond his generation, is the paradigm with which his education as [an accountant] has supplied him’ (Kuhn 1963: 363)

Consequently, accounting students, particularly students in their early years of undergraduate studies,3 are directed more towards textbooks than towards ‘source readings’ or historical classics – ‘works in which he might encounter other ways of regarding the questions discussed in his text, but in which he would also meet problems, concepts, and standards of solution that his future profession had long-since discarded and replaced’ (Kuhn 1963: 350) (As described later in the ‘Meaning is Use and Interpretation’

section, accountants also learn accounting by doing accounting Although highly trained

accountants learn from textbooks and the official accounting standards, lower level accountants – book-keepers, non-accounting managers and so on – tend to learn rules, definitions and the various accounting activities from doing the activities, for example, spreadsheet modelling and experimenting on dummy accounting software.)

pArAdIgM ShIFTS

Conceptual frameworks and theories, of course, do not stay still, as the history of accounting practice has shown (for example, see Hines 1989b) As a consequence of the standard finitist argument about the meaning of empirically instantiated terms, accounting theory and classifications will change over time as theory and classifications are applied to new situations As Barnes, Bloor and Henry explain:

[Theory is] created by a shift of familiar discourse to new contexts … The pattern and order

in the familiar discourse become available to [accountants] as a framework which may create coherence out of the phenomena in the unfamiliar contexts But the entire content of the familiar body of discourse is never carried over to the new area Only a part shifts … And what discourse shifts and what does not as [accounting activity] proceeds cannot be predicted

in advance Nor does it settle and stabilize (1996: 93–4, emphasis in original)

3 In the US in the 1950s, it was noted that there was already an unabated shift from industry-specific, on-the-job accountancy training to formal college courses – pre-employment training (Simon et al 1954: 99).

In the early stages of these periods of crisis where the paradigm is still firm in the mind of the accountant, any criticism of or attempt to challenge existing practice with proposed alternative methods is typically greeted with suspicion, an initial position

of denial, hostility and even ridicule Surprisingly, this is demonstrated by both the accounting standard-setters and the profession itself (Hines 1989b; Lee 1994; Young 2003) Note for example the hostile treatment of respected academic Stella Fearnley by the IASB when she criticized the role of fair values in the recent sub-prime market crisis

(Fearnley and Sunder 2007) On the front page of the UK trade journal Accountancy Age,

a senior member of the IASB described her claim as ‘idiotic’ (Neveling and Hawkes 2007).Hines (1989b) found that conceptual frameworks were more a political and strategic resource for providing legitimacy to standard-setting boards and the accountancy profession during periods of competition or threatened government intervention, as opposed to a purely technical resource In the US, Young (2003) found that the Financial Accounting Standards Board (FASB) is continuously engaged in a variety of efforts to persuade people that their work is valuable, appropriate and correct Rhetorical strategies were found in the accounting standards which attempt to: persuade us that a specific standard is ‘good’; silence alternatives and possible criticisms of the standard; and construct the FASB as a ‘good’ standard-setter He argues that these strategies help to construct standards as rational, acontextual, technical products which help to maintain the myth of accounting objectivity Similarly, Lee (1994) argues that financial reporting quality labels (such as ‘true and fair view’ in the UK and ‘present fairly’ in the US) are used as elements in the social construction of the audit profession The undefined nature

of the labels and the vagueness of the descriptions of the associated body of knowledge provide auditors with the power to control any temporal and situational variation in

the meaning given to designated labels, and therefore represent a considerable economic

resource (that is, a monopoly) to the profession

However, as legislative responses to recent corporate scandals have shown (for example, the US Sarbanes-Oxley Act 2002), self-protectionism has not continued unfettered (See Cooper et al 1994 for a revealing analysis of how the UK accounting profession employed self-protectionist strategies to deal with new regulations.) To paraphrase Barnes (1982: 11), ‘[e]ventually practice rearranges itself around new procedures and new concepts which are thought to deal more adequately with the anomalies of the old scheme of things: [an accounting] revolution occurs, and creates the basis for a new sequence of normal [accounting]’

F i n i t i s mInstitutions

As described previously, finitism implies inherent and ineradicable indeterminacy in the meaning of terms and their application But, as we know, the accountant does appeal to the accounting community or authorities to establish the ‘meaning’ and the ‘correctness’

of an application of an accounting rule In other words, corporations would appoint an expert, the external auditor (as required by accounting and auditing standard-setters and legislators), to audit and produce an opinion on the ‘truth and fairness’ of their financial statements

This appeal to authority and expertise in the search for ‘truth and fairness’ can

be understood if we accept that accounting rule-following is an institution, that is, a collective, performative and self-referring activity (Bloor 1997: Chapter 3) In other words,

it is the legal and accounting communities themselves (which are acknowledged and

accepted by corporate staff and third-party recipients of the financial statements) who decide whether or not the application of a rule is ‘correct’ and financial statements are

‘true and fair’ This performative character of financial accounting was vividly illustrated

by Hines (1988, 1989a), who argued that there is an interactive and mutually constitutive relationship between ‘reality’ and accounting She claimed that financial accounting does not merely report information about the organization but also plays a part in defining the conceptual boundaries of the organization and therefore the very construction of the organization: that is, ‘in communicating reality, we construct reality’.4

The self-referential and self-validating character of rule-following in accounting is evident, for example, when there is a challenge to the accounting authorities: whenever there is direct state intervention in a company’s accounting process (for example, as per the UK Companies Act 2006: sections 455, 486, 490 and 1248), the experts appointed

by the government are invariably from the accounting and legal professions (for example, at the time of writing virtually all the members of the UK Financial Reporting Council’s Financial Reporting Review Panel were from these two professions); and, similarly, whenever there is a dispute over the application of an accounting rule, it is the accounting authorities that issue the interpretation advice, for example, the International Financial Reporting Interpretations Committee of the International Accounting Standards Committee Foundation.5 In the latter case, additional rules are generated in order to ‘clarify’ what was intended by the original rule But as the history of accounting demonstrates, the generation of rules continues as the interpretation matter never ends: at first there is an amendment; then an amendment on the amendment; then amendment

on that amendment and so on, which eventually leads to the wholesale replacement of accounting standards As implied by finitism, there is a potentially endless regress

However, despite the way in which this infinite regress could affect the legitimacy of rules, the self-validating nature (that is, success) of institutions is shown by the widespread

4 For empirical studies which illustrate the performative or social constructionist nature of financial reporting, see Arnold and Oakes (1998), Preston and Oakes (2001) and Rutherford (2003).

5 However, panels and committees of experts do not and cannot determine the meaning of terms or the ‘correctness’

or ‘wrongness’ of a rule application As argued in the following section, rule-following depends on the community’s agreement and its use of terms As Tweedie points out in his discussion about the true and fair view, ‘The true and fair view develops by consensus and usage Rules developed by a committee of professional men [that is, standard-setters], no matter how eminent, cannot arbitrarily change the boundaries of the concept unless such rules meet with professional and social acceptance’ (1983: 428) Moreover, the courts in the UK still require evidence as to the practices and views of accountants when interpreting the true and fair view requirement (Arden 1993: para 2).

16 I n s i d e A c c o u n t i n g

adoption of the ‘true and fair’ term or the US ‘present fairly’ term In fact the accounting and legal communities have continued for a number of decades (at least since 1947 in the case of England’s Companies Acts) without a formal written definition of the term Even the most recent UK Companies Act (2006) does not offer a definition of the term, but instead simply states that the directors of a company must not approve accounts ‘unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and profit or loss’ (section 393) Nor is there any guidance for the auditor whose report ‘must state clearly whether, in the auditor’s opinion, the annual accounts give a

true and fair view’ (section 495) That is, the term is only the opinion of a group of experts,

and even when the auditor’s opinion is challenged in the court of law, again a true and fair view can only be the opinion of a group of (legal) experts such as Hoffmann and Arden (1983) and Moore (2008) It is also instructive to note that there have been court cases where accountants with differing interpretations of the accounting rule were used

as expert witnesses on each side (for example, see McGee 1991: 879) and that there is a dearth of reported cases of successful prosecutions on the specific question of whether accounts show a true and fair view.6

Similarly, the IASB Framework (IASB 2001a: para 46) states that it does not deal directly with the concept but that ‘the application of the principal qualitative characteristics and of appropriate accounting standards normally results in financial statements that convey what is generally understood as a true and fair view of, or as presenting fairly such information’ Thus, an interpretation of the qualitative characteristics (understandability, relevance, reliability and comparability: paras 24–42) is required as well as an assessment

of the ‘appropriateness’ of accounting standards Indeed, it is argued that the weightings given to such qualitative characteristics are important for the FASB/IASB convergence issue (see Bennett, Bradbury and Prangnell 2006) Moreover, ‘professional judgement’ is required in achieving a balance between the qualitative characteristics and the benefit derived from information as well as the cost of providing it (IASB 2001a: paras 43–5)

In the UK at least, the accounting standards and the law can be regarded as two separate institutions – the self-referential, performative and self-validating character of which reinforces each other As Arden (1993) states:

Just as a custom which is upheld by the courts may properly be regarded as a source of law, so too, in my view, does an accounting standard which the court holds must be complied with to meet the true and fair requirement become, in cases where it is applicable, a source of law in itself in the widest sense of that term.

As described in the section previously on meaning finitism and learning, accounting terms including the true and fair view term must have been at some point ostensively learned

by the accounting student In the early stages of the accountant’s career, such terms will in a sense be ‘real’ in the mind of the accountant (cf the scientist’s realist strategy – Barnes, Bloor and Henry 1996: Chapter 4) It is argued here that the institutional nature

of accounting activities as embodied in legislation, accounting standards and every audit report ever produced serves to sustain the terms Indeed, such is its constitutive and public character, it is argued that the terms have ceased to be associated only with

6 The author is grateful to Donald MacKenzie for pointing out this fact See also Moore (2008: 6).

F i n i t i s m

particular persons or factions (Barnes, Bloor and Henry 1996: 83) Accounting terms are truly an institution

MeAnIng IS uSe And InTerpreTATIOn

Bloor’s definition of an institution is consistent with Wittgenstein’s (1972) slogan

‘meaning is use’ (1972, paras 30 et seq), that is, the claim that the meaning of rules is constituted by a community’s use of the rules Although Wittgenstein did not precisely

define the ‘use’ concept, he argues that rule-following is a practice and/or custom established by the agreement of the community Thus, in the accounting profession there are General Accepted Accounting Principles (that is, rules which are widely used in practice) and formal training and disciplinary procedures to ensure that rules are being followed ‘correctly’

Wittgenstein also argues that one can only understand rules or derive meaning from the rules when one is able to use them Indeed, he claims that the user will need to

‘master’ the rules (1972: para 199) In the accounting context, this suggests that expert (master) users of accounting rules (for example, corporate accountants and auditors) should be in a better position to understand the rules compared to mere observers of the rules (for example, regulators and financial analysts) In other words, the people ‘in the

know’ are the ones who are doing accounting.

This ‘doing’ aspect also plays an important role in accountancy training As the usage of rules enables the understanding of rules and the generation of the meanings of

rules, learning from doing (as well as ostensive learning) should play an important role in

the learning process and rule-following Indeed, it is suggested here that learning from doing is an extension of ostensive learning, especially for ‘non-qualified’ accountants (for example, book-keepers and non-accounting managers): initially there is practical demonstration from a teacher which is then followed by individual practical learning Analogous to scientific training:

Students learn [accounting] not by learning rules for doing it, but by doing it, albeit in an attenuated form; they have to learn the vocabulary of [accounting] by exposure to concrete examples of how it functions in use: knowledge of [socioeconomic] nature and of [accounting] language have to be acquired together (Barnes, Bloor and Henry 1996: 102)

Another issue connected to meaning is use (and alluded to in several of the sections

previously) is that of interpretation The continuous usage of rules and generation

of meanings will mean that there will be different interpretations of the meaning of rules and how they should be applied Bloor makes a distinction between usage and interpretation in the generation of meanings He claims that while the use of rules can generate meanings, the interpretation process cannot Instead, the act of interpretation

is merely ‘a transformation that takes the notion of meaning for granted’ (1997: 18) We must therefore be careful of the (erroneous) assumption that there is already a meaning

or ‘correct’ understanding of the rule (before any usage of the rule) which merely requires further elaboration or explanation by using other words As Bloor (1997: 35) explains:

A ‘social object’ … is constituted by the descriptions actors and participants give it It has no existence independent of their beliefs and utterances about it; hence it cannot be described

Authority, goals and Interests

We can also understand how people follow rules by examining how organizational authority shapes the accounting process inside the corporation There are at least two distinct organizational dynamics at play here First, there is the authority of the accounting experts (for example, the finance director, members of the finance department and internal and external auditors) over non-accounting management and staff Analogous

to how scientists draw boundaries between science and non-science in order to present a credible image of specialist expertise and intellectual authority (Barnes, Bloor and Henry 1996: x and Chapter 6), accounting experts control accounting matters by demarcating

‘qualified’ accountants from unqualified accountants and non-accounting staff As Hines (1988: 258) puts it: ‘Social power accrues to those who influence conceptions of reality, since by influencing conceptions of reality – what is considered to be “rational, “moral”,

“true”, “efficient” – one influences social action.’ That is, social action is mobilized by institutions Non-accounting staff would generally accept the authority and expertise of the accounting experts because a sufficient number of trusted institutions are referred

to by the accounting experts, namely: the accounting standard-setters (for example, the IASB, the UK Accounting Standards Board); the professional bodies (for example, the

UK chartered accountancy bodies and the various international institutes of certified public accountants) which give the accounting experts their ‘qualified’ status; company legislation; and the auditors (cf Barnes, Bloor and Henry 1996: 26–7) As described in the

‘Institutions’ section previously, the whole process is legitimized by the accounting and legal communities

Second, there is the complex authority/power relationship between these accounting experts (particularly senior accounting experts such as the finance director and members

of the audit committee) and the senior non-accounting management (which may include the chairman, chief executive and other directors) However, although it is the accounting experts who construct the initial financial statements (the ‘management accounts’), the statements need to be ‘finalized’, that is, approved by other senior non-accounting

F i n i t i s m

management before they are issued to internal and external parties The balance of power

in the approval process between the two parties will be dependent on their relative bargaining power in the organization as well as numerous and varied case-specific factors, for example, the nature of the industry, the level of the accountants’ professionalism and the assessment of ‘materiality’ It is suggested here that a power struggle ensues: the chief accountant would appeal to his or her profession, legislation and his or her role in the annual audit, whereas senior non-accounting management would draw on their organizational authority and their day-to-day influence over lower level accounting staff The outcome of any disagreement over the application of an accounting rule between senior accounting experts and senior non-accounting management is therefore unclear and supports the claim that the ‘future use of our conventions of classification is underdetermined and indeterminate’ (Barnes, Bloor and Henry 1996: 54)

Consequently, Barnes (1982: 101–14) claims that reference to authority alone is

insufficient as an explanation and that we must turn to people’s goals and interests which

inform judgement when concepts are applied and usage is developed Consistent with Barnes, it is suggested that the rule-following decisions of key participants in organizations are made more intelligible by reference to goal-oriented action and ‘good enough’ accounting and auditing Like the concepts of ‘bounded rationality’ and ‘satisficing’ (Simon 1997), practical issues such as how time, costs and the availability of information are managed by staff (and how this administrative ability is perceived by superiors – especially in the context of career-minded trainee accountants)7 play an important role in how accounting rules are applied Thus, we would expect that good enough accounting would translate into goal-oriented/satisficing action, such as the goal of beating sales targets or meeting cost budgets, and satisficing criteria, such as ‘fair price’ and ‘adequate profit’ (Simon 1997: 119) It is also expected that once accounting procedures have become routine, vested interests within the organization are immediately generated which tend

to maintain it (cf Barnes 1982: 110) As Barnes would suggest, acquired competences and procedures in accounting (for example, the valuation of work-in-progress, the recognition

of revenue – Chapter 4 – or the use of software – Chapter 5) are valued as a sociopolitical and technical resource and as such are not abandoned lightly

Summary

Finitists argue that meanings do not pre-exist: the terms used to describe items, classifications or rules do not have inherent meanings Instead the meaning of terms

is derived from people’s usage of terms, that is, meanings are created as we move from

case to case Future applications of accounting terms and classifications are therefore open-ended and contingent upon the local circumstances and previous applications

As a consequence of this indeterminacy and interdependence, no act of accounting

classification is ever indefeasibly correct and it follows that all acts of accounting

classification (not just acts where accountants exercise a significant degree of judgement) are revisable But as we know, the accountant does appeal to the accounting community

or authorities to establish the ‘meaning’ and the ‘correctness’ (that is, the ‘truth and

7 Trainee auditors for example are often under intense pressure to meet their allotted budgeted hours (see Pentland 1993; Hanlon 1994).

20 I n s i d e A c c o u n t i n g

fairness’) of an application of an accounting rule, and the process can be understood

if we accept that rule-following is an institution, that is, a collective, performative and self-referring activity However, the appeal to the community (so important in practice) does not solve the formal problem as the continuous usage of rules and generation of meanings mean there will always be potentially different ways of applying rules

Analogous to the culture of science, the culture of accounting is passed on in the form of paradigms The paradigm is upheld through academic and professional training, which involves learning, inter alia, accounting standards and conceptual frameworks – often via textbooks Finitism, however, shows that this process is problematic: there is the unavoidable use of ostension or practical demonstration and the ineradicable problem

of extrapolating what has been learned from exemplars to future applications In line

with Wittgenstein’s slogan ‘meaning is use’, learning from doing accounting also plays

an important role in accounting training People ‘in the know’ are the ones who are

doing accounting Moreover, as predicted by finitism, there are shifts and revolutions in

the accounting paradigm In new situations the usage of terms will change and as such conceptual frameworks and theories will also change To understand how people follow rules we therefore always have to examine matters such as how organizational authority and people’s goals and interests shape the accounting process

This chapter provides details about the project, case-study company and participants It describes how I obtained access, offers reasons why ethnography is not a commonly used method in accounting research and addresses key ethical concerns

gaining Access for ethnography

Letters were sent to 263 organizations in a particular UK science sector The letter sought

a one- to six-month unpaid work placement in an organization to explore a number

of areas including: the practicalities of running the finance department; accountancy training; financial reporting and the application of accounting standards; the use of computer technology; and how companies interact with various stakeholders, for example, customers, suppliers, banks, investors, stock analysts, government departments, auditors and competitors

This led to 17 interviews with finance directors and other high-level accountants and four offers to conduct ethnographic research The first offer came from a listed company but was subsequently withdrawn due to an unexpected corporate restructuring The second offer was from a small start-up company, but the research data was of limited use

as access to its office amounted to seven hours (over two days) only and the role of the researcher was primarily consultancy/training as opposed to participant observation The third offer, however, was suitable for ethnographic research and in view of the previous withdrawn offer and its timing (it came midway through the three-year project) was quickly accepted The subsequent fourth offer was from another small start-up company This was an attractive proposition as the company was in the process of applying for its second round of financing and would have involved the researcher observing and facilitating the business planning and forecasting processes as well as the preparation of accounts However, due to time constraints, the offer was declined – though not without much discussion with the company directors and exhausting various options

Why researchers don’t do ethnography

The experience of this project suggests there are at least three major reasons for the lack

of ethnographic studies of the financial reporting process

22 I n s i d e A c c o u n t i n g

stakeholders and the wider community The reporting process and the outcome thereof (that is, the issuance of an audit opinion) are integral to, for example, an organization’s financial strategy and its related commercially sensitive business strategy, the decision of whether or not bonuses are to be given to management and staff, and/or the decision to recruit or lay off staff

These confidentiality issues not only include the risk of sensitive information being leaked to the public but also the exposure of ‘bad’ accounting practice to internal or external auditors and to fellow internal colleagues In the case study, keeping matters confidential from this latter group, particularly from inquisitive managers, was difficult

as a considerable amount of time was spent with them during work, including long coffee breaks and social outings (Indeed, the group finance director, the key decision-maker in the acceptance of the project, had told me that the managing director of the case-study company was ‘scared of being found out’ and as such this may have been one of the reasons why he had kept faith with his beleaguered senior manager For the managing director, there was a real danger that the researcher would form an unfavourable opinion about his ability to run the business and an even worse possibility that the researcher would communicate his views, intentionally or otherwise, directly or indirectly via staff

to the managing director’s superiors.) Thus, not all members of management welcome the prospect of showing people (strangers) who are beyond their control how things are done in their own departments Just the notion that senior management may have hidden agendas for such academic projects (for example, as a means of legitimizing future cost reduction or efficiency initiatives) would give middle managers cause for concern

COMpenSATIOn

A second and more pragmatic reason is the issue of compensation Access to the company should give the researcher every opportunity to achieve his or her objectives, but of course this can only come about at a price – the cost of company time and resources, from management and staff formal meetings, interviews, informal discussions and workstation space As such, six months’ unpaid employment was offered to the case-study company

in return for the access Indeed, the project may have ended up entirely interview-based had there not been such an attractive quid pro quo (The company accepted my offer and fortunately I was also asked to continue the project after the initial six months as a paid

‘visiting worker’ in order to cover a full one-year financial reporting cycle.) It should also

be noted that the academic framework, particularly the funding and supervisory support,

in which the researcher is a part is also a contributory factor I was very lucky to be funded and supported by the Social Studies of Finance initiative

on in the situation under study.

F o x r i v e r

In ethnographic (management) accounting studies the researcher typically had an academic and/or a professional work background in accounting, which presumably was perceived useful as the researcher could ‘hit the ground running’ at the company with minimal guidance and disruption Although the ‘inexperience’ of accounting researchers was alluded to by Anthony Hopwood (1983: 303) and many others more than 25 years ago, there still seems to be a lack of academic researchers who are experienced enough

to conduct ethnographic research in accounting Attracting (well-paid) practitioners to academia, it would appear, is still the exception rather than the norm

Many researchers in accounting simply do not like the amount of work that is required of ethnographic research My experiences so far suggest that ethnography is hard: it is intellectually and physically demanding as it requires the researcher, inter alia, to solve countless research problems and also real-life company problems, and to document ‘thick’ detail over a significant period of time (To record as much data as possible, I decided against taking any breaks in the first six months of the project.) In effect the researcher has two jobs: a ‘nine-to-five’ at the case-study company, which typically extends to late evenings in the days before the monthly deadlines, and then a weary evening shift as an academic.1

Many researchers do not like the emotional involvement As identified in a recent commissioned report into the well-being of researchers in qualitative research (Bloor, Fincham and Sampson 2007) emotional risk is a particular danger to the researcher and

as such should be appropriately managed During the project I experienced numerous emotional lows These ranged from the benign, for example, when the participants frequently described me as ‘nosey’ who tended to ask ‘inappropriate questions’ about what people did in their jobs – albeit in jest – to the serious and potentially problematic, for example, the redundancy incident2 and the many occasions when participants spilled their personal and work-related problems onto an unusually attentive and obliging researcher or ‘colleague’

Moreover, as noted in Chapter 1 in the ‘Justification’ section, some accounting scholars have a problem with action or interventionist research which may arise from the ethnographic approach For example, Scapens (2008: 918) advises: ‘If academics become rather like consultants, focusing only on solving practical problems, we are likely to lose the innovative thinking which leads to greater creativity in the long run.’ Similarly, Baxter, Boedker and Chua (2008: 884) warn that connections to practice may undermine

‘the intellectual autonomy of [interpretive accounting research] to pursue interesting and different research questions, theoretical frames, and knowledge constructions and

1 To avoid forgetting important information and issues, written notes were made during the working day and expanded upon at night after work However, this method of data collection was not always straightforward To avoid arousing suspicion (which could have jeopardized the project) and creating an ‘unnatural’ setting, the notes had to be done discreetly But this was difficult at times as the book-keeper sat directly opposite in the finance department – a room which was also frequently used by other staff A particular concern was one of the managers, Michael, who always hung around the room for the latest news and gossip, including what was happening with the accounting systems and what people were saying about each other.

2 Unfortunately there was an assumption that I (‘the accountant’) was somehow responsible for the redundancies

at the company – an assumption which reinforced the scientists’ existing perceptions of ‘finance people’ as preoccupied with costs and profitability I can recall that I could have heard a pin drop when I walked into the coffee room, which was full of staff, after the redundancies were announced This view was also echoed beyond the company to other parts

of the group organization In the changing room at the local sports centre, one of the group division’s employees (who had a reputation for being a joker) cheekily enquired in front of the whole group of footballers: ‘wasn’t it you who was responsible for those redundancies?’ – an accusation which of course I denied!

24 I n s i d e A c c o u n t i n g

connections’ But it is simply argued here that sometimes the researcher has to accept what is offered: as described previously, there were only four positive replies to conduct interventionist research from a mailshot of 263 letters Not doing interventionist research was not an option, as ‘fixing’ the company’s problems, at no monetary cost, was the quid pro quo for the access

ethics

The project attempted to follow two ethical guidelines: the British Sociological Association’s

Statement of Ethical Practice, particularly regarding the issues of anonymity, privacy and

confidentiality (BSA 2002); and the Code of Ethics for Professional Accountants of my own

professional institute, CIMA, particularly the principles of confidentiality, integrity, due

care and professional behaviour (CIMA 2006) Of all these issues, confidentiality was of

prime concern – especially at the outset when the trust of the participants had to be gained However, it was fortunate that the case-study company was part of a renowned scientific research institute, albeit its commercial arm, and as such had a culture and administrative structure that was conducive for researchers – even though the researcher was the first ‘social science’ researcher in its history (all the other researchers, which included numerous PhD students, were based in the sciences, statistics, information technology and informatics)

It was agreed between the participants and the researcher that the research was strictly for academic purposes only The real names of the company, the group organization and the participants have of course been changed (I invite the reader to work out why the pseudonyms were chosen.) No commercially sensitive information about the company’s operations is divulged Information about the nature of their business and their location are excluded or minimized In addition, a restriction was in place at the university library which prevented public access to the project for three years

However, despite the guidelines, I faced numerous ethical dilemmas during the project, for example, whether or not to carry out the managing director’s adjustments to the monthly accounts, which I frequently disagreed with, and whether or not to divulge important, no doubt, ‘material’ information to the auditors Although these issues were dealt with on a case-by-case basis as described in the following chapters, in many of these situations I tended to follow ‘the path of least resistance’, which typically meant acquiescing with management’s wishes to ensure the project’s continuance

A conflict also arose as a result of my dual role as a researcher and a worker, or effectively an employee, of the company There were times when the academic demands

of participant observation were put to one side in order to facilitate the accounting process, for example, when I decided that it was better that the book-keeper was left alone with the senior manager to test the new accounting system (see the ‘Sara and Paul’ section in Chapter 5) In that particular situation, I tried to refrain from helping the book-keeper to help prepare her for the time when I was no longer with company

F o x r i v e rThe project

Although the letter was addressed to the chief executive of Illinois Group, the project was largely directed by the group finance director, Brad, who wanted me to tackle a number

of accounting issues facing the subsidiary company, especially the revenue recognition issue

FOx rIver

The case-study company, Fox River, is part of a renowned scientific research institute, Illinois Group, based in the UK The wholly owned commercial company is one of seven subsidiaries and is classed as a ‘small company’ by UK company law.3 It generates approximately 10 per cent of the group’s annual turnover and employs 25 people: 17 staff, seven directors and a company secretary The senior management of Fox River consists

of a company secretary (Brad) and seven directors: the Managing Director (Fernando), the chairman and five ‘sleeping’ directors who took no active part in the company’s day-to-day management As with the other subsidiaries, Fox River is situated in Illinois Group’s science park and receives a number of services from the parent organization, for example: IT support, website design and maintenance, payroll, human resources training, consultancy, health and safety, marketing, conference facilities and canteen facilities, as well as the rental of the property The company also pays for their share of head-office accounting services, that is, a proportion of the salaries of Brad (the Group Finance Director and Company Secretary of Fox River) and Caroline (the Group Finance Manager)

The Full yeAr’S repOrTIng CyCle

I spent six months at the subsidiary from May to October 2006 assisting the book-keeper, Sara, in the finance department (mostly during normal working hours from 9 am to

5 pm) I then rejoined the company in January 2007 and worked as a paid part-time consultant until October 2007 In this latter period, I was given the role of supporting Sara through the financial year-end process and the annual audit In total I spent nine months on-site and witnessed effectively a full year’s reporting cycle (The company’s financial year ran from 1 April to 31 March; the April accounts were always delayed and prepared together with the May accounts to give the finance staff time to deal with the previous year’s audit.) And, as is typical of ethnographic research (see, for example, Ahrens and Mollona 2007), I also took part in social activities outside work, such as their twice-weekly football matches