The Gap in the Perception of the GAAP

II. FINANCIAL ACCOUNTING MECHANISMS

A. Accounting as a Language

Contemporary textbooks describe financial accounting as the "language of business," 28 allowing management, analysts and other interested parties in the corporation to discuss its financial performance and exchange opinions and estimates regarding its status and future. The transfer of information, generated mainly by the corporation to external parties, allows those that are not part of its inner circle to make an informed judgment that facilitates better decision-making regarding the firm. 29 The use of financial accounting as a medium for expressing information about a company's financial affairs allows an efficient and effective transfer of that information. Under financial accounting, information is organized in fixed templates and transferred in condensed and exact patterns that optimize users' resources and ease understanding and processing of the information. 30 In addition, the use of consensual templates and patterns in the discourse allows the information transferred by one firm to be compared with information provided by other firms. The ability to compare information generated by distinct firms, all following the same financial accounting rules, enhances overall understanding 31 and improves the usefulness of the information in decision making.

The high degree of efficiency in exchanging financial information is achieved by the use of a consensual set of symbols and expressions to represent recognized financial meaningsan accounting terminology. 32 Each symbol in accounting terminology represents a distinct financial concept, calculation and meaning known to the users. Instead of reporting large amounts of raw financial data accompanied by explanations required to make the data available to users, accounting terminology enables the company itself to process the data, summarize it, and then report the outcomes as accounting expressions that are easily consumed by the users. 33 The greater the complexity of the information communicated by financial accounting, the greater the savings generated by the use of accounting as a vehicle for financial information. 29 See, e.g., ELDON S. HENDRIKSEN & MICHAEL. F. VAN BREDA, ACCOUNTING THEORY (5 th ed., 1992) at 198-226. 30 BEAVER, supra note 8 at 87-115; See also Heidt, supra note 19 at 1264 (discussing similar features of production and design standards). 31 We understand that a lawn is green, since the green of the lawn is very similar the green we see in traffic lights. However, we better understand the meaning of the lawn being green, when we compare it with another lawn that is yellow. We understand that that green is not only a color that is found in grass and traffic lights, but also that it is different than the color yellow; we also understand that the lawn does not necessarily have to be green, it can also be yellow. As the French philosopher Jacques Derrida put it: The process of signification is a play of differences such that no element can function as a sign without referring to other elements that are not themselves present, and every element is constituted on the basis of the trace within it of the other elements of the chain (THOMAS MCCARTHY, IDEALS AND ILLUSIONS ON Another benefit of using financial accounting terminology is the information's effectiveness in improving informed decision making. 34 Due to the broad acceptance of accounting terminology and its consensual use by distinct reporters 35 (e.g., all public companies prepare consolidated reports), accounting parameters of different companies can be compared and provide a better understanding of the financial information, 36 as well as more informed decision making.

B. Synthesizing Facts into Financial Meanings

An example of an accounting expression is "$1000 in Inventory." In this case, the accounting expression contains a concept combined with a number. The verbal part of the expression, i.e., "Inventory," refers to an accounting category that represents a financial conceptbusiness inventorywhereas the number expresses its monetary value. The whole expression -"$1000 in Inventory"symbolizes goods held by the company, planned to be sold by the company in the due course of business, and which are valued at one thousand dollars on the company books. 37

Company inventory is one piece of information in a broad spectrum of facts expressed by financial accounting. The spectrum limits are determined by the information required by users as one of GAAP's declared objectives of financial reporting is to communicate information that supports informed judgment and improves decision-making. 38 Therefore, all relevant items of information that assist in decision making are generally disclosed by accounting.

The relevant group of information items disclosed by accounting contains facts that have an obvious and explicit financial meaning for the company, such as the company's cash reserves; however, it also includes facts whose financial value to the company is less obvious, but are still important for the users, e.g., the reputation 34 Id. at 1267. 35 37 Due to the accounting practice of presenting inventory according to the lower of cost and net realizable value for inventory (also known as "lower of cost or market" principle), inventory value in companies' books represents not only the resources which were invested by the company in comprising the inventory (either by manufacturing or by buying from external suppliers), it also represents the minimal net amount that is expected to be received through realization of the inventory. See of the company's products, a fact which obviously has a financial meaning to the company since it affects a company's ability to generate income and is therefore of interest to financial statement users (e.g., imagine how Starbucks' sales would be affected were its coffee to suddenly lose its reputation among coffee consumers). 39 However, the exact financial meaning of facts whose effect on a company is not obvious must be first established by financial accounting in order to be reported efficiently and effectively to the users. So, for example, in order for Starbucks to inform its investors about the contribution of its beverages' reputation to overall sales, the contribution of Starbucks Frappuccino's reputation to Starbucks's general sales of frozen coffee must be determined. Therefore, when GAAP is used to report facts whose financial effects on the company are not self-evident or obvious, their accounting expression is supported by an underlying "financial synthesis process." In that process, social, legal and even political facts regarding a company's affairs that are important to accounting users, take on a financial form and value determined by GAAP. 40 The reputation of a company's products, acquired as part of a merger, for example, 41 becomes for the purposes of reporting the merger's results, an intangible asset that is evaluated, generally speaking, by its fair value, i.e., according to the price a second party would agree to pay in order to buy only the product's manufacturing right (as a proxy for their reputation), or, if such price cannot be determined, according to the prospective monetary contribution of the reputation to the firm's future income. 42 The exact economic concept and its monetary value are determined exclusively according to financial accounting rules and the methodology these rules apply. 43 39 Nevertheless, due to the accounting principle of prudence (conservatism), the financial value of the reputation of a company's products, as other intangible properties (IP) internally created by the firm, is only disclosed under GAAP in instances where substantive external evidence exists for the IP being valuable for the company; e.g., when the IP was developed by others, and only then purchased by the company. When reputation, or any other IP, is internally created, IP assets will only be recognized if the company (and therefore the reputation of its products) is acquired by another company, or if the company sells the IP. In both cases, the reputation will be recognized as an IP in the statements of the acquiring entity. An exception to this rule are research and development expenses which, after achieving a certain stage of feasibility, will be recognized as an asset in the developing company's statements. See 43 As discussed in Section IV infra, once synthesized for the purpose of reporting, the financial meaning given to a fact such as the reputation of a company's products tend to adhere, and becomes BUS. L. J. (forthcoming 2017) GAAP's active role in synthesizing financial meaning is more dominant and common than people have been led to believe. 44 The financial value and nature of most facts regarding the firm are actually determined synthetically by financial accounting. Even facts that are presumed to have an obvious and self-evident effect on the company are actually fine-tuned according to accounting rules. For example, in the case of business inventory, although the financial nature and value of the inventory might seem obvious, especially if we think of a simple inventory comprised of items purchased by the company, once inventory is comprised of goods manufactured by the company itself, determining its value becomes less obvious and more similar in its complexity to the evaluation of Starbucks Frappuccino's reputation. Should inventory be evaluated according to manufacturing costs, or according to the consideration the firm is expected to receive in exchange for the inventory? 45 Even if the former seems obvious, 46 a second set of questions arise: What should be seen as manufacturing expenses, and therefore as cost of inventory, and what should not? 47 Should the salary of the factory's cleaning person be allocated to manufactured goods, or should only that of production line workers? 48 What about expenses resulting from delivery of goods to stores; is this also part of inventory value or should it be considered expenses associated with sales? 49 As can be seen, determining an inventory's financial value is dependent upon many accounting premises, and although in some cases it might be determined simply, it is an accounting manifestation in most instances.

C. Complications in the Accounting Synthesis Process

Things become complicated when a single set of facts can be reasonably synthesized into more than one financial meaning, and expressed by more than one accounting expression. In extreme cases, a given set of circumstances, i.e., a single set of facts regarding a firm, can be synthesized as a valuable asset for the company and, at the same time, as a liability levied on the company, thereby potentially resulting in an incoherent accounting depiction between different statement preparers. The potential problems involved in the translation and expression of its exclusive financial meaning. Hence, the financial meaning of facts, whose effect on a company's financials is not self-evident or pre-quantified, is determined by financial accounting and therefore, by GAAP norms. 44 Jack wishes to build on a plot he owns. Because the plot is covered with construction waste, Jack contacts a scrap dealer named Jill, who is interested in the scrap metals mixed in the construction waste. Jill makes a binding commitment to clear Jack's plot in 30 days in exchange for all the metal scraps mixed in with the waste. Jack, who wishes to assure Jill will not back out at the last minute, leaving him with a plot full of junk, asks Jill for a deposit of $500 that will assure Jill's seriousness.

How will the financial aspects of the contractual arrangement between Jill and Jack be depicted in Jill's financial statements? To be more accurate, how will Jill represent the $500 deposit given to Jack in her books?

On the one hand, the $500 deposit can be synthesized to (and expressed as) a new asset for Jill: In exchange for the deposit, Jill has bought the right to clear Jack's plot and take possession of the metal scraps mixed in with the construction waste, a transaction that should result in recognizing an asset worth $500. 50 On the other hand, it can be depicted as a liability for Jill or, a contingent loss: Jill is obligated to clear the land and will lose the deposit and might even be sued for other collateral damages, if she backs out. 51 Hence, two possible accounting expressions are available. The arrangement can be expressed as an asset in Jill's statements, or it can be expressed as a liability. Left in the hands of the financial statement preparer, i.e., Jill's accountant, the final synthesized financial expression may be subject to opportunism on Jill's part. If she wishes to present optimistic expectations, e.g., in a presentation made to potential investors, then the agreement and the deposit will be expressed as an asset, suggesting benefits expected by Jill. However, if she wishes to present pessimistic financial results, e.g., for tax purposes, on her K1 tax return, then the deposit is expressed as a liability for Jill, emphasizing the obligation levied on Jill due to the agreement, and the probable loss.

If Jill expresses her contract as a liability, while other scrap dealers describe their contracts as assets, Jill's financials will not be very useful, in the best case, and in the worst case, will be misleading. In order for financial accounting to fulfil its intended purpose, i.e., transfer of financial information in an effective and efficient manner that enables informed judgment and better decision-making, consensual depiction must prevail. 52 50 And derecognizing an asset of $500 cash. 51 Above all, if Jill now finds a more lucrative opportunity, and wishes to exit the contract, it becomes a liabilityin a non-accounting context, as wellshe must fulfil in order to be able to enter into any other transaction. 52 Churchman, supra note 32 at 87; see also Lawrence A. Cunningham, SEC's Global Accounting Vision: A Realistic Appraisal of a Quixotic Quest, 87 N.C. L. REV. passim (2008) (discussing the importance of comparability in accounting); VAN RIPER, supra note 3 at 55-67 Who regulated the consensus and what are its characteristics? The required consensus is created and safeguarded by rules that regulate the use of accounting terminology -"accounting norms"which presumably prevent contradictory uses of accounting expressions that can harm the discourse, 53 and while doing soalso determine its characteristics.

III. ACCOUNTING NORMS

Similar to other normative systems that regulate how people conduct their affairs, 54 the accounting consensus is governed by multiple layers of norms set by more than one player. 55

A. Layer I: GAAP's Normative Grounds

Financial accounting and GAAP are often treated as interchangeable terms. However, accounting practice and generally accepted accounting principles (GAAP) are two separate things. While the former is in essence a methodology for maintaining business accounts that began in the 13 th and 14 th centuries in northern Italy and gradually developed into the form known to us today, i.e., double-entry bookkeeping, 56 the latter is a modern 57 body of doctrine that contains the rules governing the methodology. 58 (discussing the controversy following 1975 Congressional demand for a single accounting practice for oil and gas production). 53 . 57 The origins of GAAP as a body of doctrine associated with accounting and serving as an explanation of its practices and as a guide in the selection of conventions and procedures to be followed, are attributed to the 1917 issuance of the American Institute of Accountants (AIA) "Uniform Accounting" document, which mainly stressed the audit steps necessary for a balance sheet audit, but did however include what is now called GAAP (see Generally What causes GAAP to dominate contemporary accounting discourse? Why are GAAP and financial accounting treated interchangeably? Two distinct sources can be ascribed as empowering GAAP's normative status. The first is SEC regulation, 59 requiring public companies to prepare and submit financial statements prepared in accordance with generally accepted accounting principles. 60 The second is the common use of GAAP by market firms, and even in cases where no regulatory obligation for GAAP implementation exists, e.g., in the case of private companies. 61

The de-facto widespread use of GAAP as the exclusive set of accounting rules, and its SEC-bestowed authoritative status over public companies, 62 both serve to confer special normative status on GAAP vis à vis the public. In the market sphere, GAAP is seen by accountants and the general public as the most appropriate GASB and the Federal Accounting Standards Advisory, this article refers to GAAP only in the context of its use by non-governmental entities. 59 The federal securities laws set forth the broad authority and responsibility of the SEC to prescribe the methods to be followed in the preparation of accounts and the form and content of financial statements to be filed under those laws. For example § 19(a) of the Securities Act of 1933 (15 U.S.C. § 77s(a) (2012)) and § 13(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 77s, § 78m (2012)) grant the Commission authority to prescribe the items or details to be shown in the balance sheet and the earnings statement, and the methods to be followed in the preparation of such financial reports submitted to the Commission and published to investors. In addition, regulation S-X, which sets the form and content of financial statements, explicitly requires that financial statements be prepared using U.S. GAAP: "Financial statements filed with the Commission which are not prepared in accordance with generally accepted accounting principles will be presumed to be misleading or inaccurate, despite footnote or other disclosures, unless the Commission has otherwise provided." (17 C.F.R. §210.4-01 (2012)). 60 The Commission has historically looked to the standard-setting bodies designated by the accounting profession to provide leadership in establishing and improving accounting principles, hence empowering the standards promulgated by these bodies with normative supremacy over the accounting conduct of public companies. See language for use in describing corporations' financials 63 and hence, as rules that market participants should follow. 64 GAAP becomes the custom in the market, resulting in authorized financial statements to be seen as such, i.e., as statements that are relied upon in financial decision making if, and only if, a certified public accountant has given his unqualified opinion that the statements follow generally accepted accounting principles. 65 Alternative accounting principles are simply not treated as legitimate by market participants. 66

B. Layer II: GAAP Norms

The second layer in the normative structure governing accounting discourse consists of the GAAP norms themselves. 67 Following the decision to delegate accounting standard-setting, 68 norms prescribed by private organizations, rather than regulator-instituted norms, 69 constitute the major portion of accounting norms regulating the discourse. 70 More than one party is endowed with the legal or social legitimacy to prescribe GAAP, and therefore engage in privately promulgating accounting standards: 71 1. Financial Accounting Standards Board (FASB) 63 E.g. Lisowsky & Minnis, supra note 61 at 4 (indicating that audited GAAP statements play a managerial monitoring role and an informational role in valuing equity, particularly at the time of equity transactions). 64 Nonetheless, GAAP supremacy over accounting discourse is somehow curtailed by other than SEC regulations. Some regulators, such as the Federal Communications Commission (the FCC), are empowered with the authority to compel regulated entities, as necessary to promote their distinct and exclusive regulatory objectives, to maintain accounts according to rules different than GAAP (see 47 U.S.C § 220 (2012)). Nevertheless such lex specialis accounting rules are only common in a number of regulated markets and apply for only limited usessuch as rate determination for incumbent local exchange carrierstherefore, GAAP supremacy over the discourse as a whole is not truly affected. 65 Economic theory suggests that firms will generate audited GAAP financial statements even in the absence of regulatory mandates. However the extent and conditions under which firms actually provide audited statements are empirical questions (Lisowsky & Minnis, supra note 61 at 9). Although cumulative findings of empirical studies indicate that private firms do not produce audited statements (id. at 10-11, 19-21), detailed findings show that in instances where the statements have increased weight in understanding firm's status (e.g., high level of intangible or ownership dispersion) the tendency for providing audited statements increases (id. passim). 66 The most prominent private organization involved in creating accounting norms is the FASB, a private organization, 72 whose board members are appointed by another private foundation, a non-stock Delaware corporation: The Financial Accounting Foundation (FAF). 73 The FASB derives its legitimacy (and authoritative powers) 74 from the Securities acts and SEC recognition. 75 Historically speaking, the SEC exercises its delegated powers to set accounting principles for public companies (conferred by Securities acts) by looking to standard-setting bodies designated by the accounting profession to provide leadership in establishing and improving accounting principles. 76 In the beginning, the SEC relied on the American Institute of Certified Public Accountants. Since the enactment of the first Securities Act (1933) and until 1959, this was the AICPA's Committee on Accounting Procedure (CAP). 77 The CAP was then replaced by an enhanced version of accounting standards setter (although still governed by the AICPA), the Accounting Principles Board (APB), 78 which lasted until 1973, when it was replaced by the Financial Accounting Standards Board (FASB). Since its establishment in 1973, the SEC has relied on the FASBa private organization, completely separate from the AICPAto prescribe accounting standards. 79 Recognizing FASB standards as the only standards with substantial authoritative SEC support 80 granted the FASB with a mandate 81 to set accounting standards for public companies regulated by the Securities acts and the SEC. The FASB gained additional authority over non-public firms as well (those not subject 72 The FASB is an independent private-sector organization operating with the goal of establishing and improving standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports. The organization is part of a structure that includes the Financial Accounting Foundation, the FASB, the Financial Accounting Standards Advisory Council (FASAC), the Governmental Accounting Standards Board (GASB), and the Governmental Accounting Standards Advisory Council (GASAC) (FACTS ABOUT FASB, http://www.fasb.org/facts/index.shtm (last visited July 3, 2016)). 73 The FAF is an independent, private-sector organization with responsibility for the oversight, administration, and finances of its standard-setting boards, the FASB and the GASB. It is a nonstock Delaware corporation that operates exclusively for charitable, educational, scientific, and literary purposes within the meaning of § 501(c)(3) of the Internal Revenue Code (FACTS ABOUT FAF, http://www.accountingfoundation.org/cs/ContentServer?c=Page&pagename=Foundation%2FPage %2FFAFSectionPage&cid=1176157790151 (last visited July 3, 2016)). 74 Authority over public companies subject to SEC regulation. FASB authority over private companies is derived from AICPA recognition, see infra.

75 Supra note 60. 76

The American Institute of Certified Public Accountants

The Institute is the world's largest member association representing the accounting profession, 85 and enjoys broad acceptance among parties involved in preparation of accounting statements, AICPA members and non-members alike. Along with designating FASB as the accounting standards promulgator for its members, the AICPA itself remained a prominent and independent prescriber of accounting norms through the work of four of its senior committees: (1) The Accounting and Review Services Committee (ARSC), the (2) Auditing Standards Board (ASB) and the (3) Management Consulting Services Executive Committee. The ARSC is designated by AICPA to issue pronouncements in connection with the unaudited financial statements of non-public entities; the ASB, to develop comprehensive standards that enable high-quality audit services to non-issuers; and, the Management Consulting Services Executive Committee to issue pronouncements in connection with consulting services provided by Institute members. Although these committees are not designated to promote or promulgate accounting standards par excellence, as further demonstrated, 86 their pronouncements affect accounting issues.

In addition to these three committees, which issue authoritative Institute publications and not standards, the AICPA is more directly involved in accounting standards promotion and promulgation via the (4) Financial Reporting Executive Committee (FinREC). 87

C. Layer III: GAAP Implementation

In their day-to-day occupation with auditing financial statements, accounting firms develop genuine accounting norms. Some are interpretations of existing GAAP standards required for proper application; others are novel accounting norms that provide guidance for rare accounting issues that have not been covered by existing accounting standards. Although the big accounting firms lack clear institutional statusat least in comparison to the status the FASB has over public firms and the AICPA committees over its membersauditing firms maintain a very dominant role in the accounting discourse. Audited clients must adhere to their accountants' stipulations, otherwise their financial statements will not receive an unqualified opinion (and will therefore not be applicable for investors). 94 In addition, when financial accounting standards are contemplated and issued by the FASB and the AICPA, prevailing accounting treatments, as applied by the big accounting firms, are taken into consideration and greatly affect final policy decisions. 95 Another accounting quasi-norm prescriber are corporations themselves. 96 In recording daily business transactions and in interim preparation of comprehensive financial statements, firms make accounting decisions that evolve into accounting norms. These norms regulate the firm's in-house accounting conduct and are created, inter alia, when a company elects an accounting treatment that affects other of the firm's practices. In part, such decisions are made in the rare cases where the accounting consensus allows more than one legitimate accounting treatment for recording a given transaction, 97 or when non-financial matters are synthesized and expressed by accounting terms. 98

D. The Limits of Legal Tolerance toward Accounting Norms

The normative structure of accounting discourse contains multiple norms prescribed by governmental and private entities. 99 Although some of the GAAP's normative foundations result from the legal and social endorsement of the GAAP, the main and most dominant accounting norms, including the GAAP standards themselves, are promulgated exclusively by private institutions.

As mentioned in the introduction, the private regulation of accounting in the US is a fait accompli. Nevertheless, the limits of legal tolerance toward the privatization of the accounting discourse, i.e., towards the use of accounting rules promulgated by the FASB, AICPA, accounting firms and corporations themselves, depend on two issues. One is the nature of the promulgated norms and whether they affect nonaccounting social mechanisms that may be important for the general public, e.g., property rights, access to resources, private wealth, etc. And, the second is the nature of accounting standards: Are they neutral and therefore do not have a substantive political effect on social order, whether promulgated privately or by the 94 See Regulation S-X, art. 2 (17 CFR Part 210 (2012)) and FIN. REPORTING MANUAL § 4220.1 (Div. Corp. Fin., updated August 25, 2015) https://www.sec.gov/divisions/corpfin/ cffinancialreportingmanual.pdf. 95 See also e.g. Gipper et al., supra note 17 at 544-49 (discusses studies that show that audit firms lobby directly in their own interests as well as in the interests of their clients) 96 In that context see also Patricia M. Dechow, Amy P. Hutton & Richard G. Sloan, Economic Consequences of Accounting for Stock-Based Compensation, 34 J. ACCT. RESEARCH 1 (1996) (present evidence of management lobbying standards-promulgating directly in their own selfinterest). 97 See, e.g., Zeff Economic Consequences, supra note 6. When a firm prefers one legitimate accounting option over another, the accounting decisions create a private accounting norm that binds the corporation in future cases. All future transactions of the same type and all future representations of the recorded transaction, are made according to that accounting decision. 98 See discussion supra Section III.B. 99 Cf., HENDRIKSEN & VAN BREDA, supra note 29, 234-45; Hawes, supra note 9. government or, do they contain a hidden political agenda, which affects the political social order?

Generally speaking, as the general social effects of accounting norms increase and their neutrality decreases, we will be less tolerant towards privatization and require private promulgation to be carefully monitored. And conversely, as nonaccounting effects decrease, and neutrality increases, the legal system should care less about the privatization of accounting standards setting, and be exclusively focused on enforcing compliance. The next section discusses accounting norms' overall social effects, while the section following that discusses the GAAP political agenda.

IV. FINANCIAL ACCOUNTING: A LANGUAGE AND A SOCIAL PRISM

When we discuss financial "phenomena" such as a company's financial value and even a state's national budget, we see these phenomena through a prism of financial accounting. 100 Financial accounting shapes our financial perception of the surrounding world 101 primarily because unaided observation, made without knowledge of accounting, cannot provide comprehensive financial understanding of complex commercial affairs. Once affairs become complex, casual observation cannot grasp the overall financial meaning of the cumulative parameters. Financial accounting enables insight into the financial properties of complex commercial affairs, especially those conducted over long periods of time, or by large corporate groups made up of many subsidiaries engaged in synergistic activity. The role financial accounting plays as society's financial prism facilitates two distinct social effects: a downstream effect and an upstream effect.

A. Financial Accounting's Downstream Effect

When entities, such as companies and partnershipsand most importantly, their managementknow that the firm's activities are expected to be depicted according to financial accounting rules, i.e., that the firm's actions will result in accounting expressions, it causes them to change their conduct so as to fall within accounting's requirements that gain the accounting expression they desire most. 102 If no accounting expression existed, entities' behavior would not be affected by an alien need to conform to external criteria, and entities would behave differently. 100 The downstream influence accounting has on entities' conduct, i.e., the pursuit of desirable accounting expressions, has the power to distort economic decision making. 103 It affects management's priorities and leads to different decisions than would have resulted if accounting depictions did not exist. 104 In consequence, commercial arrangements sometimes take on the most efficient accounting form, i.e., the one that yields the most desirable accounting expression, rather than the most efficient business form, that is, the one that will maximize overall benefits for the firm. A positive accounting expression that shows the firm to be generating profit in the short run does not necessarily mean that the firm and its shareholders actually gain overall positive outcomes, 105 to wit, one year before going bankrupt, Enron's reported earnings increased 25% and revenues more than doubled, to over $100 billion. 106 The pursuit of favorable accounting expressions causes transaction conditions to be shaped in the form needed to report the numbers, rather than their actual effect on the firm's stability and long term prosperity. As history shows, the tendency toward accounting outcomes might even encourage fraud. 107 In extreme cases, accounting considerations can cause executives to engage in ineffective arrangements and sacrifice real resources through unreasonable choices made only in order to generate a plausible accounting expression. A firm, for example, may decide to irrevocably waive its right to appoint directors to the board of a subsidiary it holds and hence, lose any option to affect the subsidiary's managerial decisions and control it, in order to evade the accounting requirements mandating a company to consolidate its financials with the financials of subsidiaries it controls. 108

The effect accounting expressions have on management's actions can produce some severe moral hazards created by incentivesin the form of plausible and legitimate accounting expressionsgiven to managers' actions that negatively affect the firm and others. One such morally ambiguous incentive includes the accounting expression of early debt extinguishment. Early extinguishment of debt is a reacquisition of debt securities by their issuer before the scheduled maturity of the debt ("debt buyback"). 109 In debt buyback transactions, the amount paid upon early extinguishment is usually lower than the amount due at maturity, and if the market demand yield increases (above the yield demanded when the debt was originally issued) it is also lower than the present net carrying amount of the debt as recorded on the books. 110 In instances of early debt extinguishment, the difference between the value of the debtas carried on the booksand the amount paid to debt holders at buyback is recorded according to GAAP as profit for the firm. 111 GAAP treatment of debt buyback incentivizes a firm's management to take advantage of occasions when the company's debt is traded at lower prices, and therefore at higher yields than when initially issuede.g., when the market mistrusts the company's stability due to the company's financial underperformance 112and to buy debt back while generating immediate accounting profits. And yet, at whose expense are such profits created? A strong argument can be madeand specifically in cases where the market value of a company's debt decreases due to management's poor performancethat these profits are actually made at the expense of firm's creditors, and the transaction is laden with extreme moral hazards. 113 The firm that underperformed, causing the debt's price to go down, is now enjoying profits at the expense of its creditors. 110 According to GAAP, issued debt is measured according to the interest prevailing when the bonds are issued; later changes in the bond's interest (i.e. market demand yield) do not affect the amount of the debt on the books although they change the market price of the bonds. For example, if the firm issued $100,000 10-year zero coupon bonds in an interest environment of 1%, resulting in proceeds of a little more than $90,500 ($100k/(1.01)^10), and a year laterdue to a Federal Reserve decision to raise general interest rates, or due to a change in the market valuation of the company's stabilitythe interest environment changes to 2%, i.e., the market now demands a higher yield, the market price of the same bonds decreases to a little less than $84,000 ($100k/(1.02)^9). However, the bond's book price, determined by the interest prevailing upon debt issuance, i.e., 1%, is $91,434 (($100k/(1.01)^9). Since the increase of one percent (from 1% to 2%) does not affect a company's debt carrying amount on the books though it does change the market price of the debt, the company can buy back its debt at market price ($84,000), which is less than it owes to the creditors according to the debt contract ($100k) and less than the carrying amount of the debt in the books ($91,434). 111 See APB NO. 26, supra note 109 § § 8, 9, 11 (GAAP sees early extinguishing of debt as identical to early extinguishment of other contracts made in exchange for cash, and is therefore recognized as generating income (or loss) for the firm). 112 In cases when external circumstances cause firm's debt price to decrease (e.g., a change in the Federal Reserve's interest rate) GAAP's treatment of debt buyback transactions has different consequences: It incentivizes the firm's management to replace existing debt (carrying "old" and low interest) with new, more expensive, debt (issued in the updated and higher interest rate), a step that creates profits in the short term, but results in excessive loss of value for the firm in the long run. See APB NO. 26, supra note 109 § 10. 113 In that context, see also S. P. Kothari In addition, the accounting treatment of buyback transactions also incentivizes misuse of resources by troubled companies. Instead of investing funds in healing real business activitiesa step which might not culminate with accounting profits managers are incentivized by GAAP to buy back issued debt, an action which immediately creates a profit on the books. 114

The Importance of Financial Accounting Expressions for the Firm

The effect financial accounting has on the firm is derived by the use of accounting in internal firm mechanisms and a great number of external social, legal and political systems surrounding the firm. 115 Accounting expressions play an important role in determining how resources are allocated in society, 116 in making hiring and layoff decisions, 117 in the compliance with legal duties, 118 in granting state benefits, 119 and in many other decisions that affect the financial status of our lives. 120

While some internal uses of accounting are voluntary and the firm can replace accounting with other assessment toolse.g., executive bonuses can be tied to parameters other than those determined by the firm's financial statementsother external circumstances in the life of the firm cannot be avoided. For example, when a firm wishes to raise capital from the public, 121 it must publish a prospectus which includes financial statements. In addition, the tax system also relies (to some (2010) (discussing conservative accounting rules as a precondition to lending and as a means to prevent transfer of wealth from debt holders to shareholders). 114 When the financial status of a company deteriorates resulting in a decrease in the market price of its trading debt, the fastest way for management to present accounting profits is by carrying debt buyback. The accounting result of any other action, such as an attempt to recover business operations, are uncertain and even if they culminate in success, will not generate immediate reported profits. 115 The use of financial statement figures in many contractual and statutory arrangements 123 enhances the downstream accounting effect on a firm's activities, and simultaneously, also creates another effect for financial accountingan upstream effect.

B. Financial Accounting's Upstream Effect

Social, legal and political arrangements utilize existing accounting depictions as the conduit to the financial character of a company and other parties involved with it. Besides facilitating better understanding of complex transactions in which the firm is involved, ad-hoc understanding of the firm's conduct is also achieved easily, and relatively cost-free, through existing accounting records. However, such use comes with a price. When financial accounting is used in non-accounting systems, accounting conduct gains an influential role over these systems and accounting norms that control the preparation of financial records become a part of the normative structure governing these non-accounting systems. 124 Such nonaccounting uses of accounting parameters can affect the functioning of these systems, and may transfer primacy over the system from the pre-designated authority to the accounting standards promulgator.

To take one example, in the U.S., under state corporate laws, 125 distributions to shareholders are generally regulated according to a "solvency test." 126 Distributions may not be made if they result in the firm not being able to pay its debts as they become due. 127 Solvency, and eligibility for dividend distribution, is generally determined by the firm's financial statements. 128 Broadly speaking, the excess of the firm's assets over its liabilities is equal to the amount of dividends that the firm is legally permitted to distribute. Hence, accounting's asset (and liability) 122 See infra Section IV.B.2. 123 See supra note 1. 124 126 In Europe, a more formal doctrine, which relies directly on financial statements, is generally used to regulate distribution. The European "capital maintenance" doctrine regulates distribution using two accounting tests: 1. a "balance-sheet test," which restricts the distribution to shareholders, provided that a company's nominal capital and restricted reserves would be diminished; and 2. "retained earnings test," also known as a "profit and loss test," according to which profits of prior periods establish a ceiling for distributions (See Arminger , id at 2). 127 MBCA, supra note 125 § 6.40(c). 128 Id. In fact, the effect of financial statement use in regulating dividend distributions goes beyond mere determination of distributional amounts. The use of accounting statements in regulating distributions also means that accounting norms determine the extent of shareholders' financial exposure to a company's hazardous activities. Since solvency is tested by a company's financial statements, recognizing an accounting liability causes a portion of a firm's profits to become non-distributable. Hence, the question of the extent to which shareholders are exposed to ongoing hazardous activities of the firm is not determined solely by a legal "limited liability" regime, but rather by accounting standards. If GAAP recognizes a company's hazardous activity as risky enough to fulfill the accounting requirements for the creation of an accounting liability, 129 then a company's ability to distribute dividends will be reduced in the amount of the accounting-recognized liability, leaving shareholders' profits "locked in" at the company in order to cover the risk. However, if the risk is not recognized by GAAP as justifying creation of a liability on the books, then no profit is locked-in to cover the hazardous activity, and no shareholder exposure exists. 130 The "Normative Boiling Point"

For some non-accounting systems, the upstream effect, precipitated by the use of financial statements for regulatory purposes, had become so dominant and disturbing to the system's normative functioning that later regulatory development involved a reduction in the extent of system's use of GAAP figures. Taxed income, for example, was principally computed on the same basis by which the taxpayer regularly computes his income in keeping his books, i.e., GAAP. 131 130 Therefore, an accounting norm that determines which risks will require recording a liability e.g., potential environmental damage caused by the firm's factories -actually determines for which risks shareholders will be liable and for which risks they will be released from responsibility because no liability is recorded and distributions to shareholders are not limited. Thus, if a risk is not covered by a liability matures, the firm can be left without resources due to dividends distribution. To the contrary, if the risk was covered by a liability, then distribution is limited, and the firm must maintain undistributed resources covering the risk. For a critique on GAAP treatment of contingent liabilities, See Mundstock, supra note 24 at 831-832. 131 Internal revenue code § 446(a) (I.R.C § 446(2012)) stipulates that "[t]axable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books," meaning, according to the firm's existing accounting records, hence, GAAP. 132 Thor Power Tool Co. v. Comm'r, 439 U.S. 522 (1979). 133 In the Thor Power Tool case the Supreme Court ruled that due to differences between GAAP's objectives and the tax code's objectives, the IRS could modify a company's reported tax loss, even though the loss conforms to the company's financial accounting statements prepared in paving the way for the Treasury to develop elaborate tax regulation, which substantially diminished the role GAAP plays in taxation.

However, Thor Power Tool is the exception, not the rule. In most systems, the use of financial statements did not reach the "normative boiling point," wherein the use of GAAP financial statements is replaced with alternative measures. Hence, the GAAP enjoys a substantive normative role in regulating these systems, at least until the advent of their own version of Thor Power Tool will appear.

V. THE POLITICAL NATURE OF FINANCIAL ACCOUNTING

The Jack and Jill metal scraps example (discussed in section II.C.) demonstrates how the financial expressions of complicated commercial transactions are not selfevident and should not be viewed as obvious. If accounting expressions are not neutral, and financial accounting's regulatory framework, i.e., the GAAP, contains a political bias, 134 then by means of accounting, GAAP's political substance filters down into the social order and affects not only preparers' conduct but also nonaccounting arrangements that utilize accounting parameters. Supposedly, if financial accounting has a hidden agenda to promote Jack by shaping accounting norms to express Jack's action as more appealing than Jill's identical actions, then Jack will be promoted at work, pay lower electricity bills, pay less taxes, and obtain cheaper credit than Jill, who is depicted in a less favorable light according to the rules created for maximizing Jack's financial expressions.

Is accounting's consensual expression politically neutral? Does GAAP's regulatory framework contain political biases?

A. A New Look into Financial Accounting

In providing comprehensive information regarding firms, GAAP, through the process of gathering a firm's information and expressing it in accounting terms, acts as a narrator, telling the story of the firm to financial statement users. Though it may not be evident at first glance, GAAP's depiction of the firm has a narrative manifest in a specific pre-determined point of view and voice used in depicting a firm's affairs. The specific perspective and specific voice used by the GAAP accordance with GAAP, hence making accounting expression subject to the tax system's principles. See, e.g., Celia Whitaker, Bridging the Book-Tax Accounting Gap, 115 Yale L.J. 680, 688 (2005) (discussing Thor Power Tool's "contribution" to maintenance of the book-tax accounting gap, however, while arguing for a system of near-total accounting conformity that uses financial income as reported to investoras the starting point for taxable income).

Since the Thor Power Tool case, income computing for tax purposes according to GAAP is overridden whenever GAAP treatment, in the opinion of the Treasury, does not clearly reflect taxable income. See, id. at 685. 134 constitute the narrative of financial reporting, narrative that affects financial outcomes outside the accounting world.

B. The GAAP Narrative

A narrative is an account of events formed as part of the representation process that takes place in human discourse. That is to say, the world was not given to humans in pure form; instead, it is always mediated or represented to them. 135 The Russian Formalists, 136 and especially Viktor Shklovsky in his groundbreaking 1917 essay, Art as Technique, distinguishes between "fabula," the raw material of a story, and "sujet," the way a story is organized (its discourse and plot). The sujet represents the narrative used by the story-teller in the interpretation of the fabulameaning the perspective and voice used in story-telling when pure story-facts are organized in a story and are presented to the audience. 137

The accounting process, in which the firms' affairs are expressed by accounting terms and concepts, creates a similar distinction between fabula and sujet. A firms' activitiesand the consequential data recorded in the firm's information systemsis not provided to statement users in its pure and raw form. Rather, it is mediated by GAAP and represented, i.e., expressed using the consensual accounting terminology to the users. In Shklovsky's terms, accounting's fabula are a firm's activities, whereas accounting's sujet is the financial statements prepared according to GAAP.

Since the firm's events are regarded as primary and independent in relation to the discourse, the same course of events can constitute the basis of a number of different versions. 138 What is being presented at the level of discourse is only one of several possible versions of events. The narrator can choose to depict the firm's activities and events from different perspectives or viewpoints. 139 Recall Jill's deposit held by Jackdepending on the perspective chosen for depiction, it can be expressed as either an asset or a liability. 136 Russian Formalists belong to a Russian school of literary criticism (named "Russian Formalism") which emerged from the Russian Revolution with ideas about the independence of literature. Russian Formalists advocated a scientific method for studying literature, inter alia emphasizing research of the features that distinguish literature from other human endeavors, and the separation of "literature facts" from other factssuch as prior subjective preferences of the critic/readerthat affect the understanding of literature. 137 Representation, in general, is the production of meaning through language (Stuart Hall, The Work of Representation, in REPRESENTATION: CULTURAL REPRESENTATIONS AND SIGNIFYING PRACTICES 13, 16 (Stuart Hall ed., 1997)). 138 See Eva Broman, Narratological Focalization Modelsa Critical Survey in Essays on Fiction and Perspective, in ESSAYS ON FICTION AND PERSPECTIVE 57, 57 (Göran Rossholm ed., 2004); BEAVER, supra note 8 at 16 ( "the selection of a financial reporting system is a social choice"). 139 Id.

C. GAAP's Perspective

What perspective is used by the GAAP in narrating a firms' activities? The GAAP Conceptual Framework explicitly stipulates that: "Many existing and potential investors, lenders, and other creditors cannot require reporting entities to provide information directly to them and must rely on general purpose financial reports for much of the financial information they need. Consequently, they are the primary users to whom general purpose financial reports are directed." 140 Choosing investors as the primary users of financial reporting, and therefore the group whose information needs GAAP aims to fulfil, is done explicitly by the GAAP's regulatory framework, while other parties' information requirements (and perspectives) are shifted away by the GAAP. 141 The Conceptual Framework continues: "Other parties, such as regulators and members of the public other than investors, lenders, and other creditors, also may find general purpose financial reports useful. However, those reports are not primarily directed to these other groups." 142 Hence, although different perspectives exist, the GAAP sees capital investors as the primary group of users for financial reporting, and therefore the group it aims to serve by providing them with the information they require. As a result, GAAP measurements are all made using the investor perspective: 143 A gain for a firm's investors is expressed as a profit under GAAP, while a loss for its capital investors is expressed as an accounting expense. 144

The perspective of investors and creditors, who benefit directly by dividends, principal and interest payments resulting from the firm's prospective net cash inflow, is very different from the perspective of those who benefit by developments other than increased prospective net cash inflow. Others, such as the firm's employees, who benefit from reduction of the firm's risk to its stability; or the general public, which benefits from a variety of different aspects besides 140 FASB, OBJECTIVE OF REPORTING, supra note 38 para. OB5. 141 See VAN RIPER, supra note 3 at 21-22 (discussing some comment letters and testimonies at the FASB's public hearing on this issue). 142 FASB, OBJECTIVE OF REPORTING, supra note 38 para. OB10. 143 See Bratton, supra note 24 at 7; Cunningham, supra note 52 at 62-63 (2008). 144 Although at the surface level of the narrative, GAAP adopts the perspective of "investors," i.e., stockholders and creditors, practically speaking, on many occasions where stockholders' interests contradict the interest of creditors, GAAP favors stockholders exclusively. Early debt extinguishment, discussed above (supra notes 111-114 and accompanying text), is an example of such a scenario: Buyback of debt below its issue price is seen as a plausible and positive transaction by shareholdersthe firm pays less than it owed and hence, more resources are left for shareholders (which can result in the distribution of more dividends)but in the eyes of creditors, profits recorded due to buyback transactions are actually at their expense since they receive less than initially loaned to the company. GAAP expresses such transactions, which mainly serve stockholders' interests, as generating profits for the firm. It thus demonstrates a real inclination towards stockholders, one that incentivizes debt buyback transactions and improves the general accounting depiction, and as a result, the overall financial perception of firms that use financial resources in times of diminished market prices to transfer monetary and other resources from creditors to shareholders. Ironically, this includes improving such firms' future accessas compared to similar firms that utilize resources for uses other than debt buybackto more credit resources. BUS. L. J. (forthcoming 2017) prospective cash inflows, such as increased employment by the firm or increased tax payments by the firm.

An example that shows how determinist GAAP's perspective is for the financial expression of a firm's affairs, their effect on the firm's books and management's incentives, as well as overall society 145 is the accounting treatment of tax payments. This example illuminates once again the tremendous effects GAAP has on the social order as whole.

The Profits Distribution Dimension of Tax Expenses

Under GAAP, corporate income tax payments are recorded as an expense. 146 It is represented in the firm's statements as a reduction in the entity's resources made in the course of generating profit. Nevertheless, behind the current consensus regarding the treatment of tax payments as an expense stands a long controversy involving accounting scholars and practitioners regarding the proper accounting treatment of tax payments. Should tax be seen as an incurred result of generating revenues, and hence expressed as an expense? Or, should tax payments be viewed as incurring ex-post revenue-generation and hence, as similar to other distributions of ex-post profits to parties entitled to such payments?

At the heart of the debate 147 stands a political controversy regarding the status of the state in modern capitalist society: Is the state a partner, entitled to a share of its citizens' success or, is the state only a supplier of citizen's needs? While the former perception supports seeing tax payments as ex-post profits distribution, the latter supports seeing payments as ex-ante expenses. 148 The results of the position taken in this semi-political accounting controversy still affects contemporary attitudes toward taxation.

Although the GAAP's strict adherence to the perception of a company's capital investors does not provide answers to all of accounting's expression dilemmas (e.g., it does not provide a clear expression for Jill's deposit), 149 it did provide a conclusive and straightforward answer to the controversy regarding the accounting expression of corporate tax payments. Since tax payments made to the state are at the expense of a company's capital investors, who otherwisewere no taxes duewould have BUS. L. J. (forthcoming 2017) received a larger share of the company's profits, the payments are considered an expense. 150 In essence, depicting tax payments as an expense is a political statement made by the GAAP. Tax is seen just like any other expense of the firm. The fact that tax money is used to improve society in different ways and is not a simple transfer of wealth from one party to another, but rather from one party towards the general good, is ignored by the GAAP. The influences of the political position taken by the GAAP are tremendous. 151 One can only assume the results had the expenses/contribution debate been decided otherwise. Recording tax payments as an expense means that most important financial parameters according to which a company's -and its management'sperformance are measured, are negatively influenced by tax payments. Consequently, firms and managers are incentivized to reduce tax payments. Worse, firms that pay less tax (e.g., through aggressive tax planning) are rewarded with accounting expressions superior to those that pay more tax (on equal earnings). 152

D. GAAP's Voice and the Loss of Information

Perspective is only one element of the GAAP narrative; another element is the voice used by GAAP. In depicting and expressing a firm's activities, GAAP uses a univalent monetary voice and as a result, the firm's actions are all depicted in monochromatic images that present only monetary information and omit many nonmonetary nuances. Due to the role accounting statements play in the discourse, many non-monetary nuances regarding the firm go undetected, and crucial information regarding firms' actions is lost. Story parts (fabula) that directly affect future cash flow but also indirectly affect non-monetary aspects (such as employee welfare) are interpreted by accountingand seen and evaluated by investorsaccording to their monetary impact alone, i.e., the revenues they are expected to contribute to the firm and its shareholders. Other fundamental, though nonmonetary, features of these represented story parts, e.g., the effect on employee welfare, are lost in the accounting representation. BUS. L. J. (forthcoming 2017) Worse, although they differ substantially in their non-monetary effects, activities which are dissimilar are depicted and presented as similar solely because of their similar monetary effect on shareholders' interest. For example, when using a univalent monetary presentation, it does not matter if the firm sells juice in recyclable glass bottles or in non-biodegradable aluminum cans, 153 sales are recorded, measured, and treated the same wayaccording to sales proceeds, which is the only important factor in evaluating the firm's future cash flow. The fact that one practiceusing recyclable bottlesbears green qualities, while the otherusing non-recyclable cansis destructive to the environment, is obscured by accounting and omitted from the discourse.

GAAP's narrative could have been different. 154 Accounting could have used a multivalent voice to depict a firm's condition and activities, a pluralistic voice that would yield more information. However, more information might not provide advantageous service to all interested parties. Some sectors may benefit from blurring unflattering qualities about the firm's activities. For example pollution accounting measurements, made in the investor voice, only record and disclose monetary aspects of pollution, 155 e.g., possible fines or legal suits that the firm is exposed to due to polluting activity. Other measurements, such as pollution type, location, and discomfort caused to the populace (odor, etc.) are not presented in the statements, nor are any monetary aspects to which the firm is not directly exposed either because of lack of environmental regulation, or the low chances of being caught. In addition, indirect collateral environmental damage, which is not regulated by the state, but regulated by the market, such as producing nonrecyclable commodities, is not disclosed to the public, and hence, avoids market regulation. 156 The GAAP narrative adds a political dimension to financial accounting. The adherence to capital investors' perspective in general, and that of stockholders, specifically, 157 and the use of a univalent monetary voice that transfers information in patterns most usable for capital investors, both correlate superior accounting expressions with pro-investor activities and causes some parts of the firm's story to disappear from the final version of the firm's outcomes. In this manner, many features of a firm's practices are lost, perpetuating some negative qualities that go unnoticed by society. 158 153

VI. COURTS' (MIS) CONCEPTION OF FINANCIAL ACCOUNTING

As mentioned, adopting the investor narrative results in GAAP's correlation of positive accounting depictions with those that promote investor objectives in general, and those of stockholders, in particular. This correlation can have both a positive and a negative social outcome. Positive outcomes are incentives given by the GAAP to managers promoting stockholder interests. Correlating positive accounting depictionsinter alia used in measuring management's performancewith promoting the interests of investors mitigates some classic principal-agent problems that exist between investors and managerswho are motivated to act in their own best interests. 159

Nevertheless, the correlation can also have negative outcomes. GAAP's effects are not limited to intra-firm relationships; the entire social order is affected by accounting practices and thus, by the accounting rules regulating it. As such, GAAP's favorable inclination towards stockholders extends to social realms other than the shareholder-manager relationship, resulting in the political supremacy of investors over other parts of society expressed through many social aspects; e.g., access to resources such as credit. 160 Another negative outcome is the projection of accounting's political perception onto social attitudes, 161 e.g., society's perception of tax payments, which due to their accounting interpretation as an expense, are perceived in all social arrangements based on accounting outcomes as a negative economic phenomenon, which must be minimized.

The legal perception of financial accounting, as presented in court rulings, seems not to grasp the true nature of financial accounting and is held captive by a misconception that sees financial accounting and GAAP as socially neutral. The three seminal accounting-related court cases discussed in this section demonstrate the legal misperception of financial accounting and how this misperception has evolved into a perception that releases GAAP promulgators from bearing responsibility for social outcomes of their actions and from a material judicial review of the standards.

A. Appalachian Power Co. v. AICPA 162

The Appalachian Power Co. case, adjudicated in 1959, is the first (documented) 163 adjudication of accounting standards. In this case, three interrelated electric utility companies (Appalachians) sought a judgment enjoining 159 the AICPA from circulating to its members, or to any members of the accountancy profession, a letter from the AICPA Committee on Accounting Procedure (CAP) 164 specifying AICPA's opinion regarding the accounting treatment of "deferred taxes."

Deferred taxes are surpluses created on an entity's books due to temporary differences between tax liabilities calculated according to book numbers, and actual taxes paid (calculated according to the tax code). 165 The CAP held that deferred taxes must be recorded as a liability in the books and under no circumstances should be recorded as part of the entity's capital. 166 The Appalachians recorded tax deferrals as part of company capital, and not as a liability. 167 Since the Opinion contradicted Appalachians' existing accounting treatment for deferred tax, the companies sought to delay its distribution, arguing that the accounting treatment promulgated by the CAP contradicted existing accounting practice, and would cause their statements to lose credibility among other market parties affected by CAP opinions. 168 As an aside, it is worth noting that CAP's view of deferred taxes as a liability of the company, rather than as part of its capital, corresponds to the perception of deferred taxes as payments which the company (and therefore its stockholders) is expected to pay in the future. Since these payments are due to others than the firm's capital investors, under an investor perspective, deferred tax cannot be recorded as part of a company's capital, which represents the capital investors' equity share in the entity. However, if the firm is depicted using a different perspective, e.g., such that considers the state as a legitimate shareholder in the firm, then payments can be recorded as part of a firm's capitalrepresenting the state's share in the entity's equity. Interestingly, the question regarding the nature of the accounting treatment of taxesalthough heavily discussed by professionals at the time 169was not contemplated by the court in the Appalachian Power Co. case.

After Appalachians' request for an injunction was denied at first instance, the Court of Appeals for the Second Circuit affirmed the first instance judgment while also explicitly rejecting Appalachians' thesis for care duties owed to them by the 164 See supra note 77 and accompanying text. 165 Many factors can create such differences, among them are past losses carried forward that reduce current tax liability, or special tax credits which increase current deductions at the expense of later decreases in deductions, e.g., accelerated depreciation. 166 Therefore, any existing deferred taxes recorded in an entity's capital must be reclassified, and presented as a liability. 167 CAP's opinion was intended to create a consensual accounting treatment of deferred taxes; prior to the letter, no uniformity existed among preparers. 168 AICPA due to its public role as an accounting standards promulgator. The court stated:

We think the courts may not dictate or control the procedures by which a private organization expresses its honestly held views. Defendants' action involves no breach of duty owed by them to the plaintiffs. On the contrary every professional body accepts a public obligation for unfettered expression of views and loses all rights to professional consideration, as well as all utility, if its views are controlled by other criteria than the intellectual conclusions of the persons acting. 170

The court's ruling in the case clearly demonstrates a reluctance to intervene in the promulgation of accounting standards. The broad social implications that resulted from the restatements of tens of millions of dollars of company capital 171 are ignored, as is the effect the restatement had on rate determination 172 and stability of the utility companies. Alternatively, the court focuses on a narrow intention test, argued to exclusively justify a legal intervention in standards promulgation: "Absent a showing of actual malice or its equivalent the courts would be making a great mistake, contrary indeed to their own ideals and professions, if they assumed to restrict and denigrate this widely recognized and assumed professional duty [of accounting standards promulgators]." 173

The accounting expression was seen by the court in the case as an isolated factor examined by the court irrespective of any external social implications. Moreover, accounting standards promulgation was seen as a bias-free process, guided solely by an intellectual spirit which should not be deflected by external legal duties that would only limit pure professional considerations. Per the courts in the case, the GAAP is perceived to be almost scientific; resulting from "the intellectual conclusions of the persons acting," 174 and neither is political agenda present in the process, 175 nor are political biases created in financial accounting.

B. Credit Union National Association Inc. v. AICPA 176

The legal conception represented in the Appalachian Power Co. case was challenged nearly thirty years later, in the Credit Union National Association Inc. case, where plaintiffs argued against an accounting practice concerning credit union BUS. L. J. (forthcoming 2017) institutions. While in the Appalachian case, no argument was made against promulgated standards being false or fraudulent and therefore, arguably, not passing the narrow legal test for intervention, 177 in the Credit Union case, the plaintiffs' arguments were focused on factual errors in the accounting practice promulgated by the AICPA for credit unions, therefore, supposedly justifying court intervention according to the legal test presented in the Appalachian case.

Unlike deposits in commercial banks, which only grant depositors the right to the cash deposited and interest payments, a deposit in a credit union makes the depositor a member of the union. Among other rights, it grants the depositor the right to vote in union assemblies, to receive dividends and to share in remaining profits in instances of union liquidation. These additional rights characterize deposits in credit unions with equity-like features. Credit unions have therefore presented client deposits as part of their equity, rather than as liabilities. The latter presentation has been used by commercial banks, which depict client deposits as liabilities in their financial statements. 178

As mentioned above, 179 in order to help accountants prepare reports in the absence of formal statements of GAAP, the AICPA issues pronouncements stating its view on such non-treated accounting matters. In 1986, the AICPA published a manual titled "Audits of Credit Unions," in which the Institute instructed that no matter how clients' deposits are denominated between a credit union and its member-investors, deposits should be presented as liabilities in the credit union's financial statements.

Presenting deposits as liabilities rather than part of union's capital had a substantive effect on credit unions and, inter alia, their ability to fulfil regulatory minimal capital requirements. Therefore, the Credit Union National Association filed a suit against AICPA, arguing that the Institute's characterization of shareaccounts in credit unions as liabilities was incorrect. 180 Again, as an aside, it is worth noting that although the formal question presented in the case concerned the most appropriate accounting definition for credit union deposits, the real question underlying the case concerned society's attitude towards not-for-profit banks, and the social empowerment of the not-for-profit banking community, inter-alia, through financial depictions. As the discussion in previous sections implies, accounting's depiction of deposits as a liability or equity goes beyond simple accounting classifications. Recognizing member deposits as equity means that clients in credit unions are perceived, socially, as different from clients of commercial banks. Depicting financial institutions from a social perspective distinguishes between the depiction of deposits in credit unions and deposits in commercial banks. While credit unions are financial cooperatives operated for the 177 Supra note 173 and accompanying text. 178 832 F.2d at 105. 179 See text following note 90 supra. 180 Inter alia, causing the financial statements to misrepresent the true status of share deposits in credit unions and hence in violation of the common law in Wisconsin (832 F.2d at 105). BUS. L. J. (forthcoming 2017) purpose of promoting thrift to its members (who also control it) via supply of credit at competitive rates, commercial banks lack such features. If we care about these qualities and want statement users to be aware of them when making decisions regarding the firm, then financial statements should reflect them. Credit unions expressed these qualities inter alia through capitalizing part of the deposit as equity representing rights given to depositors. Nevertheless, depicting credit union deposits from a capital investor's perspective, interested only in prospective cash inflow, results in deposits being recorded as mere debts which the entity is expected to pay, in a fashion similar to commercial banks. 181

In affirming the district court's dismissal, the United States Court of Appeals for the Seventh Circuit based its reasoning on a perception that sees accounting standards as definitional rules, and as such, the credit unions' complaint against the AICPA is compared by the court to a baseless complaint the credit union might lodge against The Oxford Dictionary concerning the definition of the term "debt":

The Guide does not say that share deposits 'are' liabilities, as if words had meanings bestowed by natural law. The Guide states an axiom rather than a conclusion. It simply makes financial reports more consistent, and thus easier to understand. […] The Credit Union National Association might as well sue Oxford University for defining 'debt' the same way the AICPA does -as 'that which is owed or due;' anything . . . which one person is under obligation to pay or render to another. 182

The court then summarizes: "Arguments may be made for or against any particular classification of such a hybrid instrument. The NCUA [183] may prescribe a treatment. The judicial branch of government should stand clear of definitional disputes."

Both the court's perception of GAAP as definitional rules (as expressed in the Credit Union National Association Inc. case) and as being the product of pure intellectual efforts lacking any political content or substantive social impact (as expressed in the Appalachian Power Co. case) established zero intervention by the court in accounting issues. The court's (mis) apprehension of accounting standards' neutrality and the derived non-adjudication of the GAAP was reinforced and further developed in a third case, from the Connecticut Supreme Court, where investorssupposedly GAAP's declared primary user group 184argued against accounting standards promulgated by the AICPA, and against AICPA itself, arguing the Institute breached its duty of care owed to them. In Waters v. Autuori, legal discourse moved from contemplating the nature of standards to discussing the direct social consequences of their promulgation when a group of investors brought an action against the AICPA (and others) seeking damages for AICPA's negligent promulgation of professional accounting standards.

In this case, investors explicitly claimed that the AICPA owed a duty of care to them, as primary users who relied on statements prepared according to accounting standards promulgated by the AICPA. Arguing the Institute should be held responsible for a loss incurred to them due to an investment made while relying on financial statements prepared according to GAAP. 186 The case eventually reached the Supreme Court of Connecticut, which relieved the Institute of any such duty of care. 187 In affirming the motion to strike and granting partial judgment in favor of the Institute, the Supreme Court of Connecticut adopted the perception expressed earlier in the Appalachian Power Co. and the Credit Union National Association Inc. cases, 188 according to which accounting standards lack any independent effects and are bias-free, and further expanded that perception. According to the Connecticut Supreme Court, it all depends on the accountant, and the way he or she implements GAAP requirements. Standards themselves are neutral. The Connecticut Supreme Court stated:

The standards provide a framework for what ultimately is the opinion of the certified public accountant. That opinion is formulated and expressed in light of the accountant's professional judgment and discretion. Any liability arising from the standards therefore, would be premised on an accountant's application of AICPA standards in his or her exercise of professional judgment rather than on the standards themselves. 189 Per the Connecticut Supreme Court, 190 financial accounting standards themselves are not embodied with any independent social impact. Social outcomes, if such do exist, are attributed solely to the accountants that follow the standards. In consequence, promulgating accounting standards does not yield any special social 186 The exact legal question presented in the case concerned whether the promulgation of professional accounting standards is sufficient, by itself, to impose upon the promulgating professional organization a duty of care to a third party who relies on the opinion of a certified public accountant claiming to have followed those standards. In suing the AICPA, investors claimed that, while following AICPA standards, the partnership's accountant ("Kostin") prepared unreasonable financial forecasts. By allowing such forecasts to be made under existing standards, the AICPA had been promulgating accounting standards in a negligent manner (676 A.2d at 359).

187 "[T]he AICPA, as a matter of law, did not owe to the plaintiff a duty of care based solely on its promulgation of professional accounting standards." (676 A.2d at 365). 188 676 A.2d at 362. 189 676 A.2d at 363. 190 However, not all the justices agreed accounting standards and their promulgators to be held ex-jure. Justice Berdon of the Connecticut Supreme Court dissented, arguing that the AICPA owes a duty of care to investors and other individuals who are effected by accounting standards. 676 A.2d at 368. BUS. L. J. (forthcoming 2017) responsibilities or duties, not even when affected users are investors themselves, a user group identified by GAAP as its primary users.

The immunity endowed by the court to accounting standard-promulgation, and the misconception underlying it, further stands out in light of the prevailing legal attitude that views the conduct of other, non-accounting, private standardpromulgators as generally exposed to legal scrutiny in cases that involve tort liability: 191 Standards created by private voluntary organizations, such as blood bank protocols or even schedules for starting football practiceeven though promulgated in good-faith and without an underlying political agenda 192have been re-examined by juries in adjudications initiated by those injured or damaged by services conforming to such standards. 193 However, by following Appalachian Power Co. v. AICPA and Credit Union National Association Inc. v. AICPA, 194 the Waters v. Autuori case makes accounting standards promulgation and promulgators practically immune to tort liability and legal scrutiny in general.

VII. SEC'S (REVISED) GLOBAL ACCOUNTING VISION: A POSSIBLE GAME-CHANGER?

A recent SEC proposal to allow IFRS-based disclosures, 195 as supplemental to those of GAAP, might provide an answer to the existing hegemony of politicized accounting standards that seem to enjoy protected status. Enriching accounting discourse with additional non-GAAP-based financial results has the potential to curtail GAAP hegemony over the discourse, broaden the perspectives adopted and affect the conduct of existing GAAP promulgators.

For a number of years the SEC has been promoting a global accounting vision: 196 A single set of high-quality, globally accepted accounting standards to be used worldwide, including in the U.S. 197 -so far, though, without much