Fair Value vs Conservatism?

Aspects of the History of

Accounting, Auditing, Business and Finance from Ancient
Mesopotamia to Modern China
Richard Macve, LSE and ICAEW
R.H. Macve, 2013
file: BAFA2011WCAH2012plenaryforBARrevisedforreresub17.11after CJAS(3unabridged forcirc).

An editorially abridged version is forthcoming in British Accounting

Review
BAR MS 130115: accepted for publication 13.12.2013
wordcount: 17218 / 19876
submitted to BAR: 14 December 2012
resubmitted 28 March 2013 This version 20.11.2013
Contact address:
Prof. R. H. Macve, FCA, Hon FIA
Department of Accounting
LSE, London WC2A 2AE, UK
Tel:
+44 (0)20 7955 6138
e-mail: [email protected]

Electronic copy available at: http://ssrn.com/abstract=2389305

Fair Value vs Conservatism? Aspects of the History of

Accounting, Auditing, Business and Finance from Ancient
Mesopotamia to Modern China

ABSTRACT
To help understand modern financial accounting theory [FAT] and its role in the development of
finance and business, I consider two current mainstream histories of its development and offer a third
alternative. The standard setters version is that increasingly FAT is rationally derived from a basically
coherent conceptual framework, currently focussed on comprehensive income as measured by
changes in assets and liabilities, in turn preferably measured at fair values. However, examination
here of several recent FASB/IASB standards and exposure drafts shows that instead they unavoidably
bear the marks of the history of a variety of now embedded practices that have shaped thinking about,
and vested interests in, what is good accounting. By contrast, some recent academic versions of
history focus on how conservative, historical-cost based accounting principles have rationally
evolved to provide an anchor on which to base appraisal of firms and managers performance,
prospects and risks, and supply the kind of information that investors and other parties in the capital
markets need to help overcome the information asymmetry between them and corporate managers.
After analysing the limitations of this second type of history, I argue that even a brief genealogical
examination of the conditions of possibility that have led to the growth and changes in accounting and
auditing practices and discourses, and in the power-knowledge relations that they have engendered at
different stages over the millennia of recorded history, suggests that their power has always been more
that of institutional rationalised myth. The twin rational myths of the objectivity of accounting and of
auditing together provide the structure that offers the comfort necessary to enable the various agents in
the modern, increasingly global, economy to undertake and finance the risks of acting at a distance
and across time. This modern, grammatocentric accountability increasingly extends throughout the
institutions that coordinate modern societies, in the rising East as well as in the established West.
Exploring how much of FAT is rational and reflects some objective economic reality and how much
is myth and is subjectively, socially constructed; and, again, how much might be improved and how
much is intractable, are the major questions now for accounting, auditing and finance policy-making
and research. This requires further detailed comparative international historical understanding of how
accounting and auditing have variously operated, within businesses and other organisations and in
shaping markets, across different countries and cultures.

KEYWORDS: Business history; China; comparative international accounting history;

conceptual framework; conservatism; fair value; institutional rationalised myth.

Electronic copy available at: http://ssrn.com/abstract=2389305

Fair Value vs Conservatism? Aspects of the History of

Accounting, Auditing, Business and Finance from Ancient
Mesopotamia to Modern China
distinguish clearly each item...assigning the usual value to each. Set the price
higher ('fatter') rather than lower ('leaner'), so that if you believe it is worth 20,
attribute 24 etc. so that you can more easily obtain a profit. [Luca Pacioli,
1494, Ch.12: instructions for the journal entries for opening assets (emphasis
added)]1
The definition [of Prudence] basically says that if you are in doubt about the
value of an asset or a liability it is better to exercise caution. This is plain
common sense which we all should try to apply in our daily life. [Hans
Hoogevorst, Chairman IASB, 2012, The Concept of Prudence: dead or alive?
(emphasis added)]2
1. Introduction3
1.1 Fair Value [FV] vs conservatism
Paciolis easy-going instruction on valuing inventory (favouring target pricing over
historical cost [HC], or even over current value, for its desirable behavioural
consequencesMacve, 1996; 2010a) indicates that valuation issues in accounting
were not always regarded as matters of central principle. However, today they are
central to the debates on modern accounting standards where the promotion of FV by
standard setters has met increasing academic as well as practitioner resistance (e.g.
1

The English translation of the bookkeeping section of Paciolis 1494 Summa, called Particularis de
Computis et Scripturis, is by von Gebsattel (1994, p.54).
2
Speech to FEE Conference on Corporate Reporting of the Future, Brussels, Belgium, Tuesday 18
September 2012:
http://www.ifrs.org/Alerts/PressRelease/Documents/2012/Concept%20of%20Prudence%20speech.pdf
(accessed 7/11/2012).
3
It was both a great honour and a great surprise to receive the 2010 Distinguished Academic Award
from the British Accounting Association (BAA), now the British Accounting and Finance Association
(BAFA). This paper is based on my plenary addresses at the 2011 BAFA annual conference at Aston
University, the 2011 5th MBS/LSE/LUMS Conference at LSE and the 2012 World Conference of
Accounting Historians at Newcastle University, together with related presentations at workshops held
in 2011, 2012 and 2013 at Sad Business School, University of Oxford; at SMBA, Aberystwyth
University; and at Zhongnan University of Economics and Law (ZUEL), Wuhan, PRC. I am grateful
for all the comments received on those occasions as well as from the editors of this special edition of
BAR, Mike Jones and David Oldroyd, and from Liu Tianran of Xiamen University, PRC. Now that I
have retired from my full-time chair at LSE and become an Emeritus Professor I suppose this could
be regarded as an exaugural lecture (cf. Macve, 1979). This is my excuse for unashamedly citing my
own (and my co-authors) work throughout. But I hope to show there is plenty still to do to continue
the work I have been engaged in so far, and also hope to encourage some of my readers to join the
journey along the road that still lies ahead.

Penman, 2007; Kothari et al. 2010; cf. Power, 2010)4. Do the arguments over
financial accounting theory [FAT] simply go round and round or is there some
discernible progress (or indeed regress) with each iteration? (cf. Macve, 2013a).
I aim to illustrate here how we cannot understand modern FAT (or the conceptual
framework of financial accounting principles [CF]) in isolation from the history of
its social, institutional and market contexts; and also how, in spite of their lack of an
agreed conceptual basis, the development of FAT and its twinauditinghave
shaped and will continue to shape important developments in business, financial,
accounting and auditing history [BFAAH]. Some of my arguments may be familiar
(cf. Jones & Oldroyd, 2009; Carnegie & Napier, 2012) and others speculative, but I
attempt here to make a tighter connection between the broader historical context and
individual modern accounting events and issues. However, this is still work in
progress so there will be many unanswered questions for further research.

1.2 Setting the scene

How does one explore the historical linkages between BFAAH and FAT? And
what light does the development of each shed on the other? In this paper I can only
skim the surface of a history that stretches back millennia and across many arenas,
although what we nowadays call FAT (or coherent financial accounting principles,
or the CF) may be regarded as a relatively recent phenomenon. It only took off with
the development of joint-stock companies, the increasing separation of ownership and
control, and the emergence of big business, of the accounting and auditing
profession, and from then on of the increasingly international stock marketswhich
have led to the movements first for domestic and now for international financial
accounting standardization (Yamey, 1977; Macve, 1983b; Zeff, 2009; 2013)
alongside the growth of multinational audit firms (cf. Deng & Macve, 2013). Will the
fascinating historical and geographical diversity of accounting practices soon
disappear into a standardized, uniform, international rule-book and remain of interest

Plantin, Sapra and Shin (2008) explore potential adverse behavioural consequences of FV (relative to
HC) for financial institutionsat least when short-term horizons dominate decision making.
However, their main analysis is based on a mischaracterisation of normal HC accounting practice
(which is actually lower of HC and recoverable amount, e.g. Solomons, 1961), so the policy
implications remain unclear.

only to antiquarian curiosity-hunters? Does accounting face a Fukuyama-type end of

history? I will argue it does not.
In Macve (2002) I briefly addressed how ancient accounting history illuminates
four of the big historical questions: (1) the relationship between accounting and
economic rationality / business decision making; (2) the significance of accounting
as writing; (3) the significance of double-entry bookkeeping and (4) the relationship
between accounting and the State.5 I do not want to repeat that analysis here so
instead will focus on some important historical work that has emerged in the last few
years and just pick out a few illustrative examples from todays topical issues.6
1.3. Old laudanum in new bottles?7
The official history of the evolution of the current state of financial accounting
principlesthe creed of the FASB and IASBis that financial accounting and
reporting is continually improving, largely through the efforts of the standard setters.
Through developing their accounting principles and more recently their CF, they
claim to have gradually articulated an increasingly coherent set of concepts (i.e.
FAT), that guides practice towards ever more consistent recognition and measurement
of assets and liabilities, and thereby of the changes in them that constitute accounting
income, profit, or earnings.8 Although the occasional crisis on both sides of the
Atlantic (e.g. the 1929 Crash, the Royal Mail Case, Enron, and most recently the
Global Financial Crisis) is necessary in order for their reform proposals to become
widely accepted and bring about change in practice (i.e. when everyone agrees
something must be donee.g. Gwilliam, Macve & Meeks, 2000so that the
current equilibrium must be puncturedWaymire & Basu, 2007, p.103; 2011), the
standard setters story is one of increasingly triumphing over the tangled mess of
5

However, with respect to government, I did not fully address either the roles of accounting and audit
in government administration in ancient societies (e.g. Guo et al., 2011 for Imperial China; Ezzamel,
2012 for Ancient Egypt) or the how the relationship has changed under the phenomenon of modern
governmentality (e.g. Miller & Rose, 2008; cf. Hoskin, 2013a). Power (2009) has now addressed the
current situation where the rapid spread of international accounting standardisation is increasingly
detached from the historically developed practices and discourses within any one state.
6
References here to recent developments are generally based on knowledge publicly available at 14
December 2012.
7
This was the title of my plenary presentation at BAFA 2011.
8
Such consistency is of course desired both to reduce opportunities for accounting arbitrage and
earnings management (e.g. Athanasakou et al. 2011) and to improve comparability across time and
across businesses globally (Barth, 2013; cf. Macve, 2013b).

conflicting conventions.9 Good accounting, they assert, should be the product of

clear concepts, not historical accidents (FASB/IASB, 2005).
The FASB/IASB do have some authoritative historical support for their current
clean surplus view of how business income should be measured, and indeed support
for moving to FV (albeit not defined precisely as they do). According to Fletcher
Moulton LJ in Re Spanish Prospecting Co Ltd [1911] (1 Ch 92 at 98 = All ER Rep
573 at 576):
For practical purposes these assets in calculating profits must be valued,
not merely enumerated...We start, therefore, with this fundamental
definition of profits, namely, if the total assets10 of the business at the two
dates be compared, the increase which they show at the later date as
compared with the earlier date (due allowance, of course, being made for
any capital introduced into or taken out of the business in the meanwhile)
represents in strictness the profits of the business during the period in
question....
But with due deference to the learned judge (who is correct about the articulation of
financial statementsthe clean surplus equationbut whose reference to valued
seems also to imply that a current valuation of the assets is needed), modern business
practice (reinforced by the orientation of the accounting and audit profession) has not
often followed his view but has generally preferred the matching costs and revenue
approach to realised profits based on HC (Ernst & Young, 1996; cf. French, 1977).
And this is the approach that still generally prevails.
I shall argue that the FASB/IASB view of what is good accounting is naive and
potentially dangerous and correspondingly its story of the triumph of FAT is largely a
myth. Not only does it conflict with much of the evidence that accounting and finance
researchers have painstakingly examined over the last 40 years or so since Ball &
Brown (1968) and Beaver (1968) launched the capital markets based accounting
research revolution (Beaver, 1998) into the roles of audited accounting earnings and
other disclosures. It also ignores the constellation of forcesnot just free markets
but also organisational and institutional, legal, political, religious and social forces
9

Sunder (1997) restricts conventions to rules that are wholly arbitrary (e.g. a country determining
which side of the road to drive on). I use the term in a wider sense to include rules and practices which
may originally have been chosen for a particular purpose but which have become socially embedded
even though the original purpose may no longer be relevant or their purpose is no longer unambiguous
(see also Bromwich et al., 2010).
10
Strictly this should be net assets. But Hicks (1979) argued that conceptually this is not the relevant
comparison for decision making but rather the change in the estimated value of the business as a whole
(Bromwich et al, 2010), as in the practice of partnerships adjusting for estimated goodwill on a
partnership change.

that have shaped accounting and related financial and commercial institutions in the
past, and will continue to do so even, or perhaps even more, in the increasingly
globalized present and likely future (e.g. Wysocki, 2012; Macve, 2013a). And we
must also think about how in turn FAT has helped to shape the modern forms of this
constellation of forces (including accountability in Government and NGOs).
In the remainder of the paper I will therefore first look in section 2 at modern
disputes over FAT. To bring out the underlying problems I will take three examples
(executive stock options [ESOs]; liabilities; and life insurance). In each case there
has been more than an element of conflict between the recent balance-sheet oriented
FV approach to attempting to resolve the problems and the more traditionally based
approach reflecting HC thinking about earnings and profit.11 After drawing out some
implications of these examples, in section 3 I will critique recent arguments that there
is an alternative to the standard setters purported rational design of FAT (with its
underlying logic of FV), namely that accountings history (until interfered with by
regulation), showed an overall natural rational evolution to the widely accepted
accounting principles of traditional GAAP, and especially conservatism. I will suggest
instead that a different kind of Foucaultian genealogical history can better explain
how the institutional rationalised myths of the objectivity of accounting and auditing
have spread and shaped modern individuals, organizations, institutions and society. In
section 4 I will critique some recent analyses of how FAT should now develop and in
section 5 consider what future possible paths and related research issues I now see
ahead. Section 6 concludes the paperbut not the arguments.

2. Some examples of modern FAT

2.1 Executive Stock Options [ESOs]

The debate over ESO accounting has now become mired in technicalities about the
applicability of the Black-Scholes model to provide relevant information about the FV
of the options expensed where trading is restricted and where risk may be more

11

Other examples from the current IASB agenda would include both the revision of the CF itself (e.g.
Bromwich et al., 2010; Macve, 2010b; Macve, 2013b) and the issues over revenue recognition (e.g.
Horton et al., 2011; cf. Nobes, 2011) and leases.

concentrated than in an optimal investment portfolio that the executives might hold
(cf. Ravenscroft & Williams, 2009).
But the most remarkable thing to my mind is that the standard (internationally
IFRS2IASB, 2004) was passed at all, given the longstanding opposition first in the
US and then in Europe (e.g. Zeff, 1997).12 Moreover, ESO accounting does not seem
to fit the asset/liability model of FASB/IASBs CF, and in terms of value
relevance it appears to recognise the cost without also recognising the asset for future
performance enhancement that the stock-market appears to acknowledge. This only
partial recognition of the ESO impact (i.e., the expense without the intangible for the
benefit) means that evaluation of any accounting choice, or of change in accounting
standard, already faces the economic problem of the second best (Lipsey &
Lancaster, 1956), i.e., that fixing only one element of the problem may make the
overall situation worse (e.g., Landsman et al., 2006).
Paradoxically there is actually no overall change in recognised net assets under
IFRS2/SFAS123R as option expense is simply offset by increase in paid-in capital.13
So there appears to be some much more conventional notion of proper matching
providing the justification for this treatment. As Warren Buffet famously said (see
e.g., Macve, 1998):
If options arent a form of compensation, what are they? If
compensation isnt an expense, what is it? And, if expenses shouldnt go
into the calculation of earnings, where in the world should they go?
It is clear that the CF definitions of income, assets and other such fundamental
elements can serve as signposts but cannot provide definitive answers to practical
questions such as this. The opportunity for the IASB and the FASB finally to succeed
in 2004 in requiring expensing of stock options probably had more to do with changes
in attitudes to business transparency following the Enron debacle (e.g., Gwilliam &
Jackson, 2008). As the summary of FASBs SFAS 123R noted:
Over the last few years, approximately 750 public companies have
voluntarily adopted or announced their intention to adopt Statement
123s fair-value-based method of accounting for share-based payment
transactions with employees.
12

This section is drawn from the Appendix to Bromwich et al., 2010.

Landsman et al. (2006, pp.211-12) helpfully illustrate the alternative bookkeepings for different
possible accounting methods. Although it has been argued that there is a creation of an asset
accompanied by its instantaneous simultaneous expensing, thereby constituting a change in net assets
(e.g. FASB SFAS123R BC88 fn.14), this is essentially a metaphysical assertion from the perspective of
the reporting process, as at no time is this asset visible in the accounts themselves.
13

The cost (in lower reported earnings) to companies of adopting option-expensing

could thus be interpreted as a countersignal that companies accounting numbers
were now more credible overall. Of course, this also created new incentives for
different kinds of firms to underreport that expense either as free-riders or because the
immediate crisis of public confidence had soon abated (Aboody et al., 2006).
Understanding the history points up that there would appear to have been
perceived changes in societal expectations of business legitimacy that made the new
convention now more useful and acceptable to society. The resulting political forces
were probably more important than the conceptual niceties, which had been
insufficient to resolve the controversy during the period leading to the issue of
FASBs previous version of SFAS123 in 1998 (e.g., Zeff, 1997). That is not to say
that the conceptual considerations are irrelevant: clearly the anomaly of the
asymmetric recognition of the cost of the grant vs its anticipated future benefits has
added yet another factor (alongside other cases such as Research & Development) that
undermines the consistency of the Boards CF as asset/liability based, while
increasing opportunities for earnings management (e.g. Athanasakou et al., 2011).

2.2 Liabilities

There are many ways in which liabilities are troublesome for accounting. In the
FASB/IASBs CF they are essentially just defined as negative assets, and their FV is
defined as the price that would be .. paid to transfer a liability in an orderly
transaction between market participants at the measurement date (IASB, 2011a). The
current attempt to revise IAS37 has stumbled over what used to be called contingent
liabilities such as lawsuits (cf. Morley, 2011) and is currently paused.
Here I will just mention a key issue that has undermined the FASB/IASB
asset/liability approach to the measurement of income.
2.2.1 Credit risk changes14

14

This section is updated from Macve (2010a) and from my comment letter of 2nd Sept 2009 on the
IASB Discussion Paper: (IASB, 2009a) and on other IASB papers referred to there. Arguments about
reflecting risk in initial recognition of liabilities are also further developed there (available at
http://www.lse.ac.uk/collections/accounting/facultyAndStaff/profiles/macve.htm).

The arguments in the IASBs Exposure Draft (IASB, 2010a) illustrate why it is not
clear that accounting for liabilities at FV is always useful. Although the issue of credit
risk arises whatever the underlying measurement basis, FV, which conceptually
clearly requires remeasurement when credit risk changes, makes the question more
acute. The major controversy arises from the related issue of the appropriate reporting
of the change in value with regard to the measurement of the entitys income or profit.
Three observations on this crucial aspect of the arguments are relevant:
(i). As acknowledged by IASB, changes in credit risk have counter-intuitive
consequences for earnings if these are measured as change in FV, unless the
complementary falls in asset values could also be recognised. Recent empirical
research by Barth et al. (2008) claims that in practice, for a majority of ordinary
US firms, downward asset revaluations15 do outweigh the debt revaluation effect to
give an overall value-relevant net downward effect on equity.16 But even if their
measurements are accepted, this is not the most important issue. By definition any
reported asset devaluations cannot include what (in addition to falls in previously
unrecognised upward asset revaluations) may be the biggest impact for previously
successful firms, i.e. the fall in the value of their unrecorded internal goodwill as
their credit risk rises (e.g. Macve, 1984; Horton & Macve, 2000).17
(ii). In the case of liabilities representing contractual business obligations, such as
deferred revenue for long term contracts, there is widespread unease that using
FV could often give a Day 1 profit. The latest FASB/IASB ED on revenue
recognition (IASB, 2011c) is therefore against using FV as the Boards members
were uncomfortable about this outcome (see e.g. Horton et al. 2011; cf. Nobes,
2011).18 Obviously, their discomfort should be even greater at the idea that a Day
2 (or later) profit can arise simply through the contractors credit rating having
subsequently worsened (and therefore the FV of its liability fallen).

15

Insofar as these can be satisfactorily proxied by the reported fall in net income before extraordinary
items (p.657). However, this fall could represent only the effect of current adverse trading results,
without any recognition of consequences of the deterioration in expected future results that largely
drives long-term asset impairments.
16
If the company defaults on its debt the equity holders will receive zero. The value to the equity
holders of the limited liability put option is that it protects their value from becoming negative.
17
The paradox is mirrored when credit rating improves. Now the FV of the liability rises so, with
clean surplus accounting, comprehensive income falls even though the entitys financial position has
now improved overall.
18
Although this discomfort intuitively seems very wise, it is surely a new CF concept that has not
been exposed before?

(iii). The issues get even more complex with pension and other post-retirement
benefits and with life insurance liabilities: should we be accounting on the basis of
immediate transfer (FV / CEV?) or settlement over term (i.e. a PV of future
cash flows measure) (e.g. Horton et al., 2007).19 Either way, the issue of credit
risk requires special consideration. From the point of view of the pensioners and
policyholders (and the regulators who act to protect them and aim to ensure they
are paid in fulle.g. Harte & Macve, 1991), should the institutions promising
these future protections be allowed to show that their liabilities have got less
because their credit rating has fallenthereby giving an improvement in their
statement of financial position just when it has in fact become less likely (in the
eyes of the market) that they will be able to pay them in full? This is more likely to
conceal the reality of what is happening to pensioners or policyholders security
than to reveal it.
The IASB has acknowledged the widespread criticisms of its original DP and has
finally revised IFRS9 by requiring that where the fair value option is taken for
financial liabilities, changes in own credit risk are to be excluded from the P&L
account and only included in other comprehensive income [OCI].20 But OCI is
now itself becoming a major focus of concern as it increasingly becomes the basket
in which ever more of the too difficult gains and losses are dumped. Its purpose
needs to be addressed directly (e.g. Horton & Macve, 1996) but the related
FASB/IASB project is currently paused pending progress on the revised CF (cf.
IASB, 2013; Macve, 2013b).
Apart from the problem of changing credit risk (where the essential problem is the
second best problem arising from the failure to report the much greater asset and
intangible value that will have changed in the opposite direction) there is a related but
distinct problem arising from changes in the interest rate at which liabilities are
discounted to give current market value, where these changes reflect changes in
interest rates generally. In the case of liabilities that are financial instruments, if they
are traded then FV works reasonably well (subject to issues about transaction costs);
but where they are not traded, the paradoxes of Hickss Income No. I [has value
19

CEV = Current Exit Value was proposed in the IASB 2007 Discussion Paper Preliminary Views on
Insurance Contracts. At that time, the Board could not identify any difference between this and FV
(Horton et al., 2007). Now the ED (IASB, 2010b) proposes measurement based on the consideration
received (see e.g. Horton et al., 2011 and section 2.3 below).
20
http://www.ifrs.org/News/Press+Releases/IFRS9+October+10.htm (accessed 27/03/2011).

10

changed?] vs Hickss Income No. II [has maintainable income changed?] make

deciding how most usefully to report earnings conceptually intractable.21 Rather than
further debate over the concepts, what is needed is more focus on what are the most
socially useful conventions to adopt / retain to meet the objectives of financial
reporting (e.g. Bromwich et al., 2010; Ryan, 2012).

2.2.2 Can we explain the persistence of the present confusion over liabilities by taking
a historical perspective?
Liability accounting has become ever more complicated. Initially debts owed to
their depositors were recorded by banks, supplemented by merchants recording
purchases on credit and other accruals for unbilled expenses (e.g. Hoskin et al. 2013).
These required almost no estimation. Today liabilities include not only long-term
loans at fixed-interest rates but all manner of complex financing instruments
(including hybrid debt-equity instruments). It is not just insurers who face ever more
long-term and uncertain potential costs. Provisions are needed in ordinary
businesses too, from product warranties through to liabilities for pensions and other
post-retirement benefits, environmental liabilities, and contingent liabilities for legal
fines and damages, while professional accountants have added their own creation,
deferred taxation. There are also contracts where consideration is received in
advance of performance of the obligation to provide goods or services, some of which
may extend over many years. In parallel the growth of financial markets has both
expanded the treasury operations of major companiesoffering an increasing array
of (originally off-balance sheet) leases and derivativesand also offers market
benchmarks (e.g. replicating portfolios) for estimating the value of such liabilities,
given that they all ultimately represent an obligation to pay out future cash flows.
This higgledy-piggledy growth has resulted in a plethora of seemingly inconsistent
treatments as accounting standards, which have traditionally focussed on problems of
accounting for assets, have been struggling to catch up with these developments (e.g.
Barker and McGeachin, 2013). While discounting at the effective interest rate was
an early US solution, now adopted almost universally despite resistance from lawyers
who generally regard the face value as the liability (e.g. Macve, 1984), standard
21

A Hicks No. II approach would exclude the effect of interest rate changes from income (whether or
not the value change is realised by redemption in the market) (e.g. Macve, 1984; Horton & Macve,
2000: cf. IASB, 2009a, paras. 41; 60).

11

setters have increasingly looked to FV and its basis in financial economics (Power,
2010) for a more clear-cut universal solution that can better reflect changing interest
rates during the life of the liability. But they have run up against the corresponding
income measurement problems that derive from changes in interest rates, from
changes in credit risk, and from uncertainty about the risks of failing to perform on
obligations within the consideration obtained, and have begun to surrender the FV
ideal to fixing the problems along more traditional lines by adapting, but not
abandoning, more traditional conventions in the manner outlined above. How far
these approaches can be reconciled remains an open issue (Horton et al., 2011; cf.
Nobes, 2011) but finding one overall solution that resolves all these issues is surely
conceptually intractable.
2.3. Life insuranceand Embedded Values
The latest Exposure Draft on insurance contracts (IASB, 2010b)22 has abandoned
the FV oriented approach of the 1997 Discussion paper (Horton et al. 2007) in favour
of a spreading of initial consideration approach (with some partial revaluation of
only elements of the valuation, cf. Foroughi et al. 2011). While this change of
approach will help preserve comparability with that now proposed for contract
revenue recognition more generally, it remains unclear how useful such an approach
will be to investors. There is also divergence between IASB and FASB on how to
measure the elements of the liability and their changes. IASB still believes that
insurance companies share prices suffer because of the information asymmetry
resulting from the lack of a comprehensive and reliable international accounting
standard to provide the most relevant information for investors to rely on.23
However, Serafeim (2011) provides evidence that information asymmetry has been
reduced by the voluntary production of supplementary embedded value [EV]
performance measurement by European life insurers, which casts doubt on the
relevance of the GAAP accounts. The EV approach is based on the changes in an
economic balance sheet reflecting market consistent valuation of insurance assets
and liabilities relating to the inforce business. Correspondingly it provides a
22

revised June 2013.

Comment in discussion at Public Lecture at LSE, 6 November 2012, by IASB chairman, Hans
Hoogevorst. http://www.ifrs.org/Features/Pages/Hans-Hoogervorst-Speech-LSE-November-2012.aspx
(accessed 13/11/2012).
23

12

comprehensive analysis of the impact of changes in assumptions, and calculation of

the new business profit, i.e. the NPV (or present value of economic residual
incomes) on the new contracts undertaken during the reporting period (e.g. Horton et
al., 2007).
Without going further into the technical details here and the conceptual confusion
now surrounding the FASBs and IASBs (somewhat differing) proposals for
reforming IFRS4,24 it is important to note that the apparently valuable EV information
does not comply with the model of accounting useful for investors to anchor on
promoted by Penman (2011). It is unashamedly based in a balance sheet approach
and oriented to the future rather than the past (as it is an economic balance sheet).
So why is it (alongside a focus on current cash flows) apparently emphasised by
preparers and focussed on by investors, while the IFRS4 accounts appear to have
become increasingly redundant?
Again history can help us to understand. The early 19th century saw many large life
insurance scandals and, although it may be argued that dealing with these rather than
ordinary companies was perhaps the main objective of the Companies Act 1846, no
satisfactory way could be found of measuring the liability on the policies written
(which if accounted for at potential maturity/death value would completely dwarf any
assets held). So the temptation was to pretend the liability did not exist and run
companies as Ponzi schemes, i.e. covering claims on existing policies out of the
premiums on new policiesuntil the music finally stopped hopefully many years in
the future (Horton and Macve, 1994).
It was not until the actuarial profession became seen as sufficiently respectable and
reliable that their discounted present value valuations of policies were accepted in
the 1870 Life Assurance Companies Act as more than mere puffs. For a long time
the accounting then followed the extremely conservative practices required for
regulators supervisory purposes ( i.e. the determination of solvency and capital
adequacy), albeit with increasing modifications, in particular following the
implementation of the EU Insurance Accounts Directive in 1995although this still
left many measurement options open (Struyven, 1995).
Meanwhile in the USA (and perhaps because each state has its own regulatory
rules), US GAAP was developed as a nationwide alternative to the solvency bases of
24

See my comment letter at

http://www.lse.ac.uk/accounting/facultyAndStaff/profiles/MacveInsED13.pdf

13

accounting. This was more like the normal spreading of revenues and the matching of
costs associated with other long term contracts, giving a fairly even spreading of
profit over the contract life by locking in the original assumptions (unless
deterioration became manifestly so severe that some provision for overall loss became
necessary). So US insurers and US analysts appear to have become conditioned to
using the GAAP numbers and remained largely uninterested in the economically more
relevant developments, especially in Europe and increasingly globally, of EV
reporting and in the intense debates that have surrounded the IASBs insurance
project since the IASC started it in 1997. FASB joined the project much more
recently, and it has veered away from moving towards FV preferring more
conventional revenue and profit spreading.
Given that the EV provides at least a relevant triangulation, from an alternative and
expert perspective, on the constituents of a life insurance companys financial position
and performance, it is hard to explain the apparent irrationality of the continuing lack
of interest in EV shown (at least publicly) in the US, although there is some evidence
that US industry experts, and companies themselves internally, are taking more
interest. There has been much lower hostile takeover activity in the US than in the UK
and Continental Europe which may explain the relative lack of concern by US
executives (Serafeim, 2011). But one might have expected a more prominent role for
EV (which is much closer to FV) and so the continuing support for traditional US
GAAP again seems to be more a product of historical conditioning than the result of
rational analysis of its strengths and weaknesses.25

3. Some lessons about FAT from BFAAH

3.1 FATintelligent design or evolution?

Reviewing these recent examples of standard setting clearly shows that they are
not the rational outcomes of the standard setters professed CF and its balance sheet
model. Private sector standard setters need to claim conceptual legitimacy for their
activity by representing it as the sphere of technical experts (e.g. Macve, 1983b), and
25

Amid the volatility following the global financial crisis of 2008 UK analysts have again shown
greater interest in the IFRS4 results but this may simply reflect their own need for a more stable EPS
number to extrapolate for their routine earnings forecasts.

14

so they attempt to caricature the resistance they often encounter, where not due to
alleged misunderstanding of what they say, as resulting from vested interests or
political interference. But the trick of defusing political etc. debate by creating socalled expert agencies is itself part of the history of modern governmentality
political action at a distance mediated by calculative routines (Miller & Rose, 2008;
cf. Hoskin, 2013a, 2013b). For example US agencies, such as the Corps of Engineers
(which developed cost-benefit analysis) and the SEC (charged with the development
of accounting standards that it has largely delegated to FASB and its predecessors),
represent a form of supposedly disinterested action at a distance. Their invention was
a means of helping to reconcile divided interests across a vast new country, that
lacked a shared cultural history, to try and mitigate the recurring tendency to porkbarrel politics (e.g. Porter, 1996; Vile, 1999). As there are now multiple competing
actors and networks claiming legitimacy in the international regulatory space of
accounting standard setting (e.g. Macve & Chen, 2010; Freeman & Rossi, 2012; Zeff,
2013; Macve, 2013a), FASB/IASB must assert their technical expertise through their
CF.
But what kind of historical explanation should we be looking for? It is often argued
that, without the interference of regulation, accounting (including audit) would have
evolved naturally in the private sphere to reflect the needs of businesses and
markets. This evolutionary story, in different forms, is also reflected in the economic
rationalist school of accounting history that I discuss further in section 3.2 below,
with regard primarily to management accounting; and also by the more explicitly
efficient-contracting school of Ball and Watts in the US with regard to financial
accounting. They have explored an impressive array of historical archives in building
their stories and I do not propose to challenge their data in detail here. If only the
stories they build on it were true! And that I will contest.

3.2. Economic rationalism and accounting history.

First I briefly examine the arguments that accounting history shows a rational
evolution both in particular adaptions to new demands, and overall in supporting, and
even enabling, overall economic progress.26
26

Clear challenges have previously been raised, for example, by Napier (2001) and now by Carnegie &
Napier (2012), but I will add some emphases of my own.

15

A balance towards rationality would be supported by those who see the history of
accounting and auditing as continually evolving to adapt to new economic and
business demands, albeit with interference from regulation. So Johnson & Kaplan
argued that early US management accounting practices were later perverted by
regulated financial accounting rules for inventory costing, depreciation etc.: but both
their history and their theory of the respective roles of management and financial
accounting must be challenged (see Ezzamel, Hoskin & Macve, 1990 which
introduces the alternative history outlined in section 3.3. below). Others, such as
Fleischman & Parker and Boyns & Edwards for the UK and Tyson for the US, have
argued for the role of industrial revolution cost accounting in adapting to provide
useful information for management of the new technologies: but its efficacy in this
sphere must similarly be challenged (e.g. Hoskin and Macve, 2000).
In similar vein Watts and Zimmerman (2003)followed by Waymire & Basu
(2007) [henceforth W&B] and Penman (2011)see the principle of conservatism
as evolving to meet an essential business need, although the important question is
surely not FV vs conservatism but how much conservatism for different purposes?
(Lambert, 2010; cf. Ewert & Wagenhofer, 2012; Ryan, 2012) as it has not always
been universal (e.g. Yamey, 1977).27 Moreover, Zeff (2007a) notes that until recently
it was successive chairmen of the SEC (each a pupil of his predecessor) who would
not countenance proposals to depart from historical cost [HC], which casts doubt on
any thesis that HC has been the natural evolutionary state that unfettered markets
prefer while FV has been constructed by accounting regulators such as the FASB and
IASB (cf. Penman, 2011, p. 158).28
But deeper than the contesting of the interpretation of individual episodes lies the
historiographical question of what is the social evolutionary process for accounting
principles? It cannot be simply the same as Darwinian biological evolution which
requires both random mutation (i.e. experiment with alternatives) and genetic

27

W&B note (2007, p.100) that even before PacioliItalian organisations werewriting down
inventories under lower of cost and market citing Chatfield and Littleton. But Chatfields reference to
the Datini accounts of around 1400 gives no illustrative examples (and nor does de Roover, 1956);
while Littleton (1966) (e.g. pp. 151, p.341) gives examples of writers as late as the 19th century
recommending valuation at selling price and Littleton (1941), while arguing that the general rule now
should be FIFO cost, also illustrates the variety of practices found at different times in different places.
28
Serafeim (2011) provides a strong contemporary counter-example of unregulated experiment with
FV (see section 2.3 above).

16

inheritance (to pass on the successful mutations).29 W&B (pp. 80ff) explain that we
need to consider the interactions between genetic and cultural evolutiongeneculture co-evolutionin the development of social institutions (like accounting).

Culturally evolved economic institutions thus result from a social process rooted in learning
through imitation or knowledge transfer via education.Culture alters an organisms
environment through specific cultural variants (ideas, concepts, or institutions) that have
average fitness consequences for all members of the group that adopts such practices.

They have attempted to demonstrate statistically the already generally accepted

argument that basic record-keeping in early societies is correlated with the extent of
economic exchange (Basu et al., 2009 cf. Goody 1996). Beyond bookkeeping, their
arguments for the development as a social institution of the traditional accounting
principles of HC accrual accounting (such as conservatism, going concern,
matching) rest more on their claimed consilience with characteristics of the human
brain. Here they emphasise tendencies towards risk avoidance and to building the
trust over time that facilitates exchange relationships on the basis of reliable evidence
of satisfactory outcomes consistently measured (as exhibited for example in
neuroscientific experiments with individual humans and other primatesDickhaut et
al., 2011).
The conceptual problems with W&Bs arguments must include, first that
individuals alone and individuals within social institutions may be very different in
their behaviour. Indeed social institutions are in many cases designed to overcome
individual traits such as excessive risk avoidance or excessive aggression (both within
and across individuals).30
Secondly, their accounting principles (which are like those in the UKs SSAP2
ASSC, 1971) have long been recognized to be inconsistent and inadequate to explain
29

However Darwin himself was not immune to transposing concepts such as survival of the fittest
between the biological and social mechanisms (Rogers, 1972). See also Napier (2001). Padgett &
Powell (2012) now draw on the biochemistry of evolutionary biology to explain the autocatalytic
invention of new organizations and markets (cf. Hoskin et al., 2013)
30
History is full of socially organized risk-seeking adventures that go beyond simple cost-benefit
calculation: as, for example, when in 1492 the Spanish government (together with private Italian
financiers) enabled the highly risky and uncertain venture of seeking a route westward to Asia that
instead discovered America. By contrast, many legal institutions are designed to restrain individuals
aggressive impulses and reactions. (Explaining structured forms of social cooperation in other lifeforms, ranging from collectivised insects, such as ants, bees and wasps, through schools of fish,
swarms of birds, hunting packs of wolves etc. to non-human primate individuals, e.g. West African
chimpanzees, remains an area of intensive scientific research with highly contested implications for the
understanding of human forms of cooperation and rule-making.)

17

actual accounting choices (e.g. Macve, 1997a: Introduction). Moreover the vaunted
consistency of conventional money measurement of HC in accounts evaporates when
the numraire is distorted across time by inflation (e.g. Baxter, 1984).
W&B do agree that, beyond the broad principles, it is difficult to demonstrate
how individual accounting policy choices are advantageous for good management, or
for other organizational or social advantage, given the low signal to noise ratio. An
alternative explanation to Whiggian rational progress (cf. Fleischman, 2009) would
suggest that their spread may mainly reflect the various forms of an institutional
isomorphism (copying of peers, aided by prevailing educational doctrines), such that
it is not verifiable that they are the most efficient (DiMaggio & Powell, 1983).31
Moreover a key characteristic of Darwins biological evolution is the need for
adaptation if there is to be survival, as current environmentally optimal species
solutions (such as the dinosaurs once were) are made extinct by environmental
changes (Jones, 1999). However, economic rationalist histories of accounting tend
to be supportive of current practices and the status quo, or else of returning to the
practices of some supposed previous golden age when they were not distorted by
inappropriate regulation.
So there are both theoretical and historical doubts about an economic rationalist
history as explaining the development of current accounting practices. From the
theoretical perspective, Edwards (1937), Coase (1938) and Wells (1978) challenge
their rationality and argue for the irrelevance, if not danger, of historical costs and
overhead allocations for rational management decision making. Similarly Hicks
(1979) argues (implicitly contradicting for example Bryer, 2006) that accounts are
largely irrelevant to the assessment a 19th-century mill-owner would rationally make
to estimate his income (Bromwich et al., 2010). From the historical perspective,
Littleton (1941; 1968) and Yamey (1977) illustrate the variety of financial accounting
principles for income and valuation that co-existed before the influence of the 19-20th
century accounting profession and regulation (and later, standards); while Hoskin &
Macve (2000) (following Chandler, 1977) observe the excessive level of
accounting/administrative routines in new 19th century US big business beyond the
needs of economic efficiency. One must not ignore the essential interdependency
between markets and regulation (e.g. Sunder, 1997; Moran, 2010), as illustrated by

31

Consistent with Basu et al. 2013. But cf. now Lunawat et al. 2013.

18

the infrastructure of the regulation of financial activity that was established in the UK
in the 19th century (e.g. Edey & Panitpakdi, 1956; Horton & Macve, 1994). Rational
natural evolution is not sufficient, and often appears invalid, as an explanation of
changes in accounting and auditing.
We need an alternative history where the functional usefulness of accounting and
auditing techniques is at best only part of the story.

3.3. A different historical perspective?

Let us start again with trying to understand, in the light of BFAAH, how FAT and
its partner auditing have reached their present form in our world of global capital
marketsand how they have helped to provide the basis of confidence that has
shaped and continues to support that world.
First we need some working definition of accounting (cf. Hacking, 1999), so we
can theorise accounting and its history, even though its margins are continually
shifting (e.g. Miller, 1998). In line with Ezzamel & Hoskin (2002) one can say:

First, [it] is a practice of entering in a visible format32 a record (an account)

of items and activities.

Secondly, [it] involves a particular kind of signs which both name and
count the items and activities recorded.

Thirdly, [it] is always a form of valuing:

(i)

extrinsically as a means of capturing and re-presenting values

derived from outside for external purposes, defined as valuable by
some other agent; and (ii) intrinsically, in so far as this practice in
itself constructs the possibility of precise valuing.33

It is important to note that the appearance of money of account (i.e. a numraire

such as equivalent quantities of grain, copper, silver, gold in Egypt) predates
physically exchangeable money.

32

This includes scratches on stone, marks on shells, knotted Inca quipus and notched tally sticks,
although our primary interest will be in later written records containing words and numbers (Basu,
2009; cf. Robinson, 2009).
33
Although the earliest records may appear to simply count objects (e.g. sheep, grain) the fact that the
record was worth making implies the objects were valuable and normally that the record was needed to
attest to the relationship between the accountable parties.

19

This implies that there are two main dimensions of historical change (Macve
2002). First there are technological changesin both practices and discourses
comprising both a) what kinds of thing are named and counted (e.g. late C13th AD
fully monetised items in double-entry bookkeeping [DEB]; mid-C18th (depreciable)
industrial capital assets; mid-C19th statistical populations and probable outcomes
(Hacking, 1990); C20th intangibles, standardised profit measures, and environmental
and social externalities (Macve, 1997b); and b) how (e.g. the introduction of writing,
Arabic numerals, paper, printing, IT (Macve, 1996)).
The second dimension is the interpersonal, where new accountability
relationships are established: so one must ask accounting by and to whom? (both
public and private / individual and collective).
An important feature is that accounts are normally bounded to include only some
of all the possible accountable items and relationships and so are compartmentalised
(as for example with the various Schedules for UK income tax which have then to be
combined to obtain total taxable income e.g. Sabine, 1966). But what is ruled in and
out of an account can change over time and within different contexts: so interpretation
always requires understanding what has been left out of account. Psychologically it
is within these compartments that individuals and groups score their gain or loss
and construct their mental accounts (Kahneman, 2011, 342-6).
Some key historical features emerge. Audit (internal or external) is accountings
twin, although audit by and for whom varies with the particular agency relationship
involved. Accounting and audit have always played a role from the earliest city states
in taxation and redistribution (which provides incentives to bias the reporting).
Although accounting and audits professionalisation dates only from C19th AD, we
can also identify high-status cadres of ancient Egyptian scribes and Chinese
Imperial civil servants in the public sector.34 From the later C19th roles for
information intermediaries (analysts, press etc.) have grown rapidly with the growth
of capital markets and passive stockmarket investment.
In the ancient form of accounting and audit for the public state, its written naming
and counting is part of the visible ordering of political, social and economic life
across space and time, and also across the physical and the spiritual words, which
34

However it may be noted that in the private sector in ancient Greece and Rome the roles of what
are now modern professions (with the exception of lawyers who had high status through their
connections to political life) were all carried out by slavesincluding most physicians (Macve, 2002;
cf. Hoskin & Macve, 2012).

20

enables both public accountability (e.g. to the gods and for city/state administration)
and private contracts and work organization (Ezzamel, 2012). Transaction records
(bookkeeping) are the origin of writing and support impersonal exchange (Basu et
al., 2009) and economic coordination. This is seen, not only in Ancient Egypt but
also, for example, in Mesopotamian bakeries (Macve, 2002); in Ancient China (Guo
et al. 2011); and in Classical Greece and Rome and Roman Egypt (where evidence
has even been found of accrualsRathbone, 1994). However in Europe in the Dark
Ages almost all was apparently lost until rediscovered from Arab sources (e.g. Jack,
1966; Goody, 1996; cf. Oldroyd, 1997).
Clearly a major step was the introduction of DEB with its full monetisation of all
recorded assets and liabilities, which has now become the iconic emblem of modern
commercial accounting and of the accounting and auditing professionand has
recently been introduced into UK government accounting too as part of the transition
to full accrual accounting and adoption of IFRS.35 There is not space here to discuss
the controversies over DEBs origins and significance (or otherwise) both for the
economic development of Western capitalism and its business organizations, and for
wider social and cultural influences in the West.36 DEB has acquired a status that is
now surrounded by myth. For example, W&B (2007, p. 87) appear to accept what
Goethe had Werner say about DEB: 'It is among the finest inventions of the human
mind' (Wilhelm Meisters Lehrjahre, I.10). But, along with many others who have
quoted this, they overlook the significance of the fact that Werner is an anti-hero to
Wilhelm and is the equivalent of a modern day computer nerd37so Goethes
intention was surely ironic (Macve, 1996).38
The DEB myth has become so deep-rooted (e.g. Macve & Yamey, 2013) that it is
hard to disentangle the surviving evidence and gauge how far it is has been either a
sufficient or necessary response to meeting the information-processing demands for
decision-making and control within a new economic and social order, or a sufficient
or necessary instrument in creating that orderor exhibits both characteristics in a
35

See http://www.hm-treasury.gov.uk/d/wga_200910_cpack_guidance.pdf (accessed 14/12/12).

W&B (2007) regard DEB as very significant, citing several previous authors, although they do not
include Bryers (e.g. 2006) purported Marxist restatement of DEBs Sombartian significance, which
however appears to be unsupported either by reading Marx (Macve, 1999) or by the archival evidence
(Toms, 2010; Fleischman & Macve, 2012).
37
See e.g. http://www.101funjokes.com/nerd_jokes_2.htm (accessed 28/11/12).
38
This illustrates clearly the dangers of doing history without re-checking original sources (cf. Funnell,
2007), which is not to say that the texts must be privileged over other historical evidence (e.g.
MacGregor, 2010; cf. Gaffikin, 2011).
36

21

positive feedback system.39 These issues can now perhaps now more fruitfully be redebated in the wider context of parallels and contrasts with the successful
development of the economy in late Imperial China and emerging evidence of the
limits of the duality that can be found in its bookkeeping and accounting, which
tends to reinforce scepticism about the claims for the significance of DEB in the West
(Goody, 1996, Chapter 2; Hoskin & Macve, 2012; Yuan et al., 2012; Hoskin et al.,
2013).
More significantly, the invention of DEB in the West around C13th has been shown
to have been more a precipitate of the new textual orientations in the new
universitiesthat produced examined graduatesthan a wholly business invention
(Hoskin & Macve, 1986). The linkages between its development and advances in
examination processes in the educational sphere would continue. Much later at
USMA West Point, in an arguably even more important breakthrough after 1817, new
practices of writing and counting were now coupled with those of written
examination, in new grammatocentric ways of learning, examining and grading.
These were internalized by West Points elite engineering graduates, who through
their subsequent involvement in early American big business (the armories and then
the railroads) translated their examination marks into accounting dollars, thereby
constructing objective performance and calculable persons (Hoskin & Macve, 1988;
Miller, 1992) and enabling the administrative coordination of new business
organizations (Hoskin, 2013b). These unprecedented grammatocentric practices and
discourses of norms, performance and accountability (Hoskin & Macve, 2000)
became the modern internalized systems of control that quietly order us about
(Foucault, quoted by Megill, 1979).
This dramatic new power of accounting then permeated external financing and
accountability and thereby accountancy as a new profession. It inexorably extended
beyond big businesses to networks of financial markets, regulation, and now
international financial reporting standards. It extended beyond listed companies, e.g.
into slave plantations (Fleischman et al., 2011); Oxford colleges (Jones, 1992);
Lloyds of London (Gwilliam et al., 1992; Gwilliam et al., 2000, 2005); and beyond
the private sphere into New Public Management and Whole of Government

39

It may act as an autocatlyst (a product that then further speeds up a reaction), e.g. Padgett & Powell
(2012).

22

Accounting.40 It has now established its place among many other such modern
constructs: indeed it may be seen to have been instrumental in spawning these as,
following ROI in the late 19th century (Toms, 2010), we are now obsessed with how
to construct the most meaningful performance index number in a world of
increasingly powerful indices that give (the illusion of?) control at a distance,
including IQ (intelligence); HPI (poverty); HDI (development); RoL (rule of law);
GII (gender equality), as well as providing the essential proxies needed for
statistically based empirical research on these policy issues (Rottenburg, 2012).41
This new power of human accountability had not evolved in the British Industrial
Revolution, even though accounting then embraced technological advances in assets
and changes in the organization of and the accounting for labour costs (piece rates
vs day rates) (Hoskin & Macve, 2000) as shown by studies of the C18th Newcastle
mines (Fleischman & Macve, 2002), of the C18th Carron Co ironworks (Toms, 2010;
Fleischman & Macve 2012; cf. Bryer 2006) and in the early C19th Boulton & Watt
Soho foundry (Fleischman et al., 1995). Nor had it evolved in early C19th US textile
mills (Hoskin & Macve, 1996).
This accounting and accountability regime is now so pervasive that it has become
almost invisiblewe can now only think and express ourselves within it. It is only
when particular rows over detailed measurements break outwhether over new
accounting standards; over alleged fixations on short-term performance measures in
financial markets (e.g. Kay, 2012); over alleged grade inflation in A level
examination marks and in university degree classifications; or in other social arenas
such as tracking the success of Government policies on reducing crime statisticsthat
we are prompted to try and ask the bigger question of whether there could be an
alternative to the perceived inadequacy of the current forms of representation and
measurement (naming and counting) in these systems of accountability (and
associated audit inspection) within which we seem historically trapped (Power,
1997). But the embeddedness of this discourse as a truth-regime for our thinking and
action is more significant than the technical rationality or irrationality of any
40

https://www.gov.uk/government/publications/whole-of-government-accounts-guidance-forpreparers-2012-to-2013 (accessed 15/11/2013)

41
As Gendron & Baker (2005, pp. 558-9) document, serendipitous discussion of the claimed
objectivity of IQ by Solomons as a model for accounting was the entry point for the start in 1983 of
the interdisciplinary collaboration between Hoskin and Macve looking at the relationships between
educational and accounting practices and discourses, that led to the writing of Hoskin & Macve (1986)
and subsequent papers.

23

particular individual measure, and recognition of its power has little to tell us about
how we could improve those particular measures, although we know we are bound to
be continually striving to do so.42

3.4. Rationality and myth

We have already seen that W&B believe that DEB is a crucial tool for capitalism,
albeit that they recognise that we cannot wholly explain FAT (either as it is or should
be) as rationally designed (the aim of the standard setters CF (e.g. FASB/IASB
2005)) given that individual developments are the outcome of a constellation of
historical and institutional factors (Burchell, Clubb & Hopwood, 1985)but, W&B
believe, with survival of the fittest (cf. Fleischmans review, 2009)
However as I have argued I believe this view of modern accounting and auditing as
an evolutionary success story is not only historically insufficient but also rests on two
underlying myths on which its apparent rationality is based.
Myth ONE: HC accounting is objective.43
Authors such as W&B (2007), Penman (2011) and Shivakumar (2013) subscribe to
the view that engineering good accounting requires maintaining as much objectivity
as possible through conservative, auditable HC accounting.44 But every first-year
accounting student knows that there is no objective HC for items such as selfconstructed assets (e.g. how much overhead to allocate?) or inventory (e.g. is the
cost FIFO, LIFO or weighted average?Macve, 1979). There are many uncertain
items requiring subjective estimates, e.g. short-term provisions against recoverability
of receivables and inventory as well as provisions for longer term liabilities and
impairment of long-term assets.45 Indeed, modern HC accounting is more accurately
described as recoverable cost accounting (Solomons, 1961) but the relevant level of
42

The claimed advantages of a standardised accounting regime like IFRS probably lie more in the
network effects (Liebowitz & Margolos, n.d.) of its increasing mandatory worldwide adoption
(together with the increased knowledge about and focus on accounting reports emphasised thereby) and
the increased comparability thereby provided than in the supposed quality of its individual standards
(e.g. Barth, 2013, although Horton et al. (2013) identify indications of both advantagescf. Zeff,
2007b; Meeks & Swann, 2009; Macve, 2013b).
43
It cannot be assumed that cash flows are more objective. Their timing can be manipulated for
period-end window dressing and there is still a need to account for liabilities.
44
On the other side, much of the appeal of FV (at least at Level 1) is that market prices also provide
an equally objective alternative, consistent with modern financial economics (cf. Power 2010).
45
And here management incentives have scope for affecting the quality of reported numbers (e.g. Ball
et al. (2003)).

24

asset aggregation (what the FASB/IASB (2005) call the unit of account) at which to
determine recoverable amount is a matter of accounting convention/rule (as in oil
and gas accounting (e.g. Macve, 1983a)). HCs much vaunted asymmetric
timeliness (e.g. Basu, 2009) only requires recognition of losses that bring expected
NPV46 below cost, while ignoring losses of originally expected NPV above this bar,
even though the latter may also signal that management should switch investment
plans or investors should divert their resources to where a better more-thancompetitive rate of return can still be obtained (e.g. Edey, 1963). Intangibles may be
argued to be too uncertain to include in published accounts (Solomons 1989; cf.
Macve, 1989), but surely highly specific tangible plant and equipment also has very
uncertain economic valuewhile consolidation standards such as IFRS3 currently
assume that FV can readily be assigned to intangibles in acquisition accounting,
itself a departure from the full-bloodied HC approach of merger (or pooling)
accounting. And where there are managerial choices of accounting treatment, Positive
Accounting Theory (Watts & Zimmerman, 1986) can at best explain choices between
alternative available policies that are / could be accepted as GAAP but does not
explain what limits the available range of acceptable choices (cf. Basu et al., 2013).
The modern form of HC accounting is a relatively recent invention and a by-product
of particular historical circumstances (e.g. Parker, 1965).
Myth TWO Audit is an effective control monitor in reducing agency problems
This is a very ancient myth and still a mantra (e.g. Ball et al., 2012). Ancient
Mesopotamian bakeries in 3rd millennium BC had a strict system of accountability
and inspection but the fact that the audited overseers were apparently able to pay the
very large amounts surcharged for shortages implies they were probably concealing
even larger underperformance and diversions of resources (Macve, 2002); and the
same appears to be true with regard to the English medieval manorial audits (Noke,
1991). And despite the professionalization of the auditing profession since the 19th
Century, and the establishment of international auditing standards [ISAs], scandals
and audit failures clearly still abound today, including in the most sophisticated
Western economies (e.g. Jones, 2011).
This myth is fuelled by Myth ONE: if the accounts are objective it should be
straightforward to check objectively if they are correct. However what is regarded as
46

Or, in much accounting practice, only when the prospective undiscounted cash flows themselves no
longer equal the cost.

25

auditable is also necessarily socially constructed (Power, 1996). Nevertheless,

continually extending the audit regime (e.g. the Sarbanes-Oxley Act) is the only
remedy we know for its failuresauditing (like many other social institutions) grows
on the back of its expectations gap (Power, 1997: 9-10).
The combined influence of the two myths enables audited accounts to sustain
corporate and public sector activity and its financing by providing a perception of risk
reduction that may be in large part be no more than an illusion of control / action at a
distance (Miller & Rose, 2008). It can also have alienating and amoralising effects on
its practitioners (Mennicken, 2012). Nonetheless, it may be objected, there is surely
some objectivity in both accounting and auditing. The question is how much?. It is
therefore helpful to regard FAT and IFRS as powerful institutional rules which
function as highly rationalised myths (Meyer & Scott, 1992; McMillan, 1998) and
thereby become taken for granted. But how much is rational? And how much is
myth? What is the linkage between the end of maximising profit and the means of
tracking performance through (audited) IFRS accounts? (e.g. Bromley & Powell,
2012). Modern-day individuals and organizations face the demands of an array of
such rational myths (each with their own performance metrics), through which they
have to negotiate a survival path and which are more or less loosely coupled with, or
even decoupled from, their main goal47but in many spheres, and not just in for
profit enterprises, it is still the demands of the original myths of accounting and
auditing that remain the most powerful.
In these last two sections (3.3 and 3.4) I have argued for an alternative history,
namely that a genealogy of accounting and of the examinationas rational
institutional myths that are mutually supportivetraces their modern characteristic
discourses and practices through a history of disciplinary power-knowledge (Hoskin
& Macve, 2000; cf. Power, 2011) that cannot be reduced to rational evolution. And
this must in turn influence the possibilities for future development.

4. Future FAT?

What are the implications for the future of FAT and for the contribution of
accounting and auditing research? I consider next the two recent influential
47

E.g. Power (2013) traces the development of the Foucaultian apparatus of modern fraud risk
management.

26

monographs/books I have already referred toPenman (2011) and W&B (2007)

that seek to draw insights from history into the shaping of the future of FAT.

4.1 Penman (2011)

Penman (2011) argues that for valuation purposes investors do not want the kind of
accounts that FASB/IASB have been promotingon the basis of increasing
recognition of FVsbut want to get back to a balance sheet that cannot come back to
hit you significantly (p. 200). Starting from this, and from the information in recent
earnings that enables a reasonable estimate of ongoing residual income [RI] or
abnormal earnings in the near-term (i.e. income/earnings in excess of the required
rate of return on capital employed) that they can capitalise, they can challenge the
stockmarket price as to its apparent assumption about future earnings growth. But, of
course, obtaining such a balance sheet and its related earnings measure needs good
accounting. Here (pp.195ff.) Penman offers some appealingly simple utilitarian
remedies. The primary need is for earnings based on historical (or transaction) costs
from arms-length transactions and earned revenues from sales for measuring the
results of operating (success in adding value through converting factor inputs into
more valuable outputs) not of speculating (success in guessing changes in market
values, i.e. FV). Operating and financing activities must be kept distinct with FV (at
Level 1) useful only for financial items where return depends wholly on external
market price movement. Accounts should be conservative and not attempt to include
soft, speculative intangibles: their value (e.g. that of Coca-Colas brand) can be
reverse-engineered from the high rate of return earned on the tangible assets (e.g.
Penman, 2007, pp.37-8).
But Penman does not get to discussing what his recommendations would be for
most of the accounting issues that are currently in the too difficult box, such as
leases, pensions, insurance, deferred tax, hedging and goodwill.48 He does not address
the issues relating to determining control of other entities and accounting for business
combinations.

48

Note that many of these issues relate to liabilities where there often is no historical cost (just as
there may not be for some derivatives, so that using a FV is the only option for recognising them). See
again the discussions in section 2 above

27

Penman is suspicious of deferred revenues and big baths (cookie-jar

accounting) but nevertheless insists that revenues and profits must be earnedeven
though what this means of course remains one of the most fundamental accounting
issues that has so far defied resolution by FASB/IASB (Stubben, 2010; Horton et al.,
2011). At what point from the original gleam in an entrepreneurs eye to the final
liquidation of the firm and settlement of all its liabilities is it sufficiently certain that
revenue and profit have been earned?cf. Jones (2011). Standard setters and
accounting theorists deplore the messy variety of revenue recognition conventions to
be found in practice and assume this represents a lack of theoretical consistency.49 But
there may be good reason why different conventions have emerged as suitable for
different industries or in different settings, and before they are swept away in the
name of comparability, historical understanding is needed to analyse whether these
conventions have advantages that need to be preserved under different conditions, or
whether they have indeed outlived their usefulness (Bromwich et al., 2010).50
At the theoretical level Penman does not engage with the business reality that
todays large, multinational corporations have to make decisions that span not only
how best to operate with existing physical resources but include the related financing
options (e.g. by raising long-term fixed interest borrowings to hedge investment in
long-term productive assets; or through securitisations); and also need to evaluate
whether to sell existing facilities and relocate to a location with cheaper labour and
other costs (which requires estimating the deprival value of the existing assets).51
His arguments for ignoring value changes are suspect: rather than HC it is surely
replacement cost (and even future replacement costs) that are relevant for
forecasting sustainable margins in the near future (as well as for dealing with price
regulation) and for hedging decisions (cf. Macve, 2010a).52 And if intangible values
can be reverse engineered from rates of return, why not tangible fixed assets too
given that, especially in the case of highly specialized assets, their continuing value
may be equally speculative? Consider for example the difficulties that were faced by
49

See IASB (2011c). A deeper question would ask if it is now time to separate revenue recognition
and profit recognition (Horton et al., 2011; cf. Nobes, 2011) as well as profit recognition and change
in net assets (Horton & Macve, 1996; 2000).
50
Penman (2011, pp.150ff) suggests that these various deferrals of revenue recognition may signal risk
conditions that may require a higher hurdle rate for residual income measurement of the growth in
earnings to come, therefore properly keeping market to book (MB) low: cf. Ryan (2012).
51
See e.g. Macve, 2007. Penman also ignores the distortions of inflation on accounting numbers.
52
While Penman introduces the possibility of FV as entry value (2007, p.34, model (2)) his
arguments are directed against FV as exit value (model (3)).

28

19th century railways and other enterprises, investing for the first time in history in
such unprecedentedly large scale capital projects, in determining how they should
deal with these expenditures in their accountshow is the problem of intangibles now
different for us?53
So the argument that tangibles have sufficient reliability while intangibles do
not remains unconvincing when standard setters, at the same time as they virtually
ban the capitalisation of internally generated intangibles, also assert that identifying
intangibles and measuring their fair value in mergers and acquisitions is always
achievable. The reliability line does not map neatly onto the tangible-intangible line
(Macve, 1989 re Solomons, 1989), given both that many tangible fixed assets are so
highly specific that they will have virtually no value if the product they make fails in
the market place, and more generally that what is measurable/auditable is socially
constructed (Power, 1996) and what is regarded as sufficiently hard data is the result
of situated organisational and institutional processes.54
Penman accepts FV has its placeit is the natural basis for measuring the
outcomes of operations that are based on movements in market value, such as
investment funds ( 2007, p.36). However he does not pursue the conceptual difficulty
that, when considering income from marketable financial instruments, one needs to
distinguish the effects on their FV of changes in discount rates from changes in
estimated future cash flows, as Hicks No. 1 income may not be the most relevant
measure (Horton & Macve, 2000; Bromwich et al., 2010). Nor does he look more
closely at businesses that are a mixture both of market dealing in financial instruments
and of operating as intermediaries between savers and borrowers (i.e. performing
value-adding activities), such as banks and life insurers where the distinction
between operating and financial activities is necessarily blurred.
While initially appealing in their straightforward back to basics directness,
Penmans prescriptions for accounting are therefore essentially for more of the old
laudanum: they are yet another of the stirrings of the conventional accrual
accounting pot that have so far been unable to produce a conceptually consistent
53

Many of the issues were surveyed in the ICAEW Information for Better Markets conference in
December 2007, the papers from which are collected in Accounting & Business Research, 2008, vol.
38(3).
54
Chinas latest accounting standards (under the control of its Ministry of Finance) still differ from
IFRS with respect to more restrictive application of FV and prohibition of reversal of all impairment
losses on tangible and intangible fixed assets (Deloitte, 2006), presumably reflecting continuing
caution about dangers of excessive managerial manipulation (cf. Ball et al.(2003)).

29

framework for resolving accounting issues and for reconciling the different purposes
for which accounts may be useful (cf. Macve 1983b).55 And Penman does not venture
into issues relating to corporate environmental and social reporting [CESR],
presumably as he does not see their potential relevance to investors, even though the
business case has long been acknowledged (e.g. Macve 1997b; Eccles et al., 2012;
Servaes & Tamayo, 2013).

4.2 W&B (2007)

W&B (2007, pp.111ff.) offer suggestions how future research, including more
cliometric quantitative research may, through adopting their evolutionary
perspective on accountingoffer fresh insights on several fundamental issues that
accounting historians have grappled with for decades. Consistent with their view that
the high noise to signal ratio in evolutionary processes means that the fitness
consequences of highly specific methods are often difficult to identify (p.94; 112)
they do not draw implications from their historical review for specific individual
controversial accounting issues in modern FAT (or address CESR). Nevertheless,
their overall view tends towards preferring spontaneous rational evolution to
regulation and standard setting (which can have unintended consequences) in order
to produce the best outcomes. They see general principles such as conditional
conservatism as having evolved in this way and also that the unconditional
conservatism of writing-off intangibles can also be useful as a countersignal of
companies strength and their evolutionary advantage for survival. They give the
example of the favourable reaction to General Electrics write off of its patents,
franchises and goodwill down to $1 in 1907 (p.114). But the full context (pp.21-3) in
fact makes clear that the company also wrote off nearly two-thirds of the book value
of its expenditure on tangible plant toothis would nowadays be regarded as
creating secret reserves that allow the cookie jar accounting that Penman (2011)
excoriates.

55

Penmans intriguing suggestion (p.205) to circumvent the cookie jar accounting that may come
from impairment write-downs (cf. Mennicken & Millo, 2012) is that they be capitalized and smoothed
into earnings over the next few years. This is a reincarnation of the policy adopted by the directors of
the Carron Company, then on the road to financial ruin, in the early 1770s when faced with the
realisation that much of the original capital had been lost (Bryer, 2006; cf. Fleischman & Macve,
2012).

30

Clearly I agree with W&Bs endorsement of historical understanding as especially

important if conceptual frameworks guiding future accounting principles and
practices are based on inaccurate mental models that could be easily falsified by
reference to historical events and data (p.111). But, apart from what I have already
argued is their mis-located veneration of the power of DEB, I fear they overstate the
rationality of accountings evolution. Certainly the myth that historical cost
accounting is objective and conservative (and therefore valued by investors) is still
pervasive: but is it persuasive? I have already argued in section 3 why I am sceptical.
An interesting comparison is with the standard QWERTY keyboard (David, 1985;
Sunder, 1997).56 It is inefficient, but universal (outside specialist typing
competitions). An efficient keyboard would, at its mid-C19th invention by C.L.
Sholes, have been centred according to the relative frequency of the use of the
individual letters in writing the English language. But because this would have caused
the original hammer typewriters to jam, they had to be slowed down by spacing
out the most frequent characters. However, to help the marketing of the new
mechanical writing machine (to replace several thousand years of clerks familiarity
with handwriting), Remington, so the widespread belief goes, designed the top row so
that it contains all the letters of typewriter (plus Q, U and O for camouflage), which
is the word the salesforce would type when demonstrating the machines superior
speed. So the interactions between mechanical and marketing efficiency were
historically contingent on conditions at that time. But now the QWERTY keyboard is
so embedded (due inter alia to the ever increasing potential cost of retraining those
who have become familiar with using it) that we are still using it for electronic
machines, even though the most efficient layout to achieve maximum speed is now
known for each language.57 It still appears on the latest i-Pad (and British station
ticket-machines), so QWERTY seems likely to stay now, until keyboards themselves
are obsolete. And now that its use is worldwide, speed in which language should be
the criterion for any change?58
56

cf. http://home.earthlink.net/~dcrehr/myths.html [accessed 15/11/2013]. There is similar controversy

over whether Brunels wider gauge was the better engineering approach for railways but the
advantages were lost because of the need to standardize since Stephensons narrow gauge was already
so widespread e.g. http://www.brunel.ac.uk/about/history/isambard-kingdom-brunel/broad-gaugetrilogy/broad-gauge-trilogy2 [accessed 15/11/2013].
57
E.g. the 1930s Dvorak system for English. However Liebowitz & Margolis (1990) dispute the
evidence.
58
Levinson (2008) shows how many factors beyond engineering efficiency led to the now-standard
sizes for shipping containers.

31

Does the same apply to the relevance and reliability of accounting numbers,
given changing relative costs in different places at different times? The accounting
model we have is the outcome of many such past trade-offs (W&B, 2007) and is now
so embedded in many spheres that it is not clear, even if accounting theory could set
out a CF for a best model, that we would find it worthwhile to adopt it, given the
costs of transition, including re-education. And would a best model as defined for
example by a Washington consensus that includes IASB be best for all kinds of
economies (cf. Walker, 2010)?
Until some (necessarily unpredictable) breakthrough, perhaps in response to a
crisis, punctuates the equilibrium (W&B, 2007, p.7, 103) and produces a paradigm
shift (Kuhn & Hacking, 2012) that creates a wholly new vision and model for
accounting development, fixing whats broke may continue to have to be sufficient
(e.g. ICAEW 2009), especially if this is complemented by empowering users (e.g.
through internet drilling down to finer information levels) to tailor the accounting to
their own needs so that they are not constrained by the straight jacket of the standard
model and can again become more like the freely-contracting actors in scenarios such
as those outlined by Christensen (see Macve, 2010b).
Potential stimuli for such a major shift might include the impact of the rapid
growth in the Chinese accounting and auditing profession as China heads to becoming
the worlds largest economy (Deng & Macve, 2013), or the demands of developing
adequate CESR as the implications of climate change reach a tipping point (e.g.
Macve & Chen, 2010). Although neither Penman (2011) nor W&B (2007) venture
here, some historiansincluding Chinese accounting historianshave tentatively
begun to consider CESR to be the next arena for major development in accounting
(e.g. Macve, 1997b; Guo & Du, 2010).

5 Some implications for policy and research

5.1 Lessons from history?

From my review here of a number of instances of recent FAT development I have

argued that, although standard setters claim they are driven by the balance sheet
model of their current Conceptual Framework, the practical policy outcomes cannot
be understood without a more nuanced understanding of the historical context and the
32

constellation of organisational, institutional, political and social pressures within

which they arose (Burchell et al., 1985).
So, more important than any of its particular recognition and measurement
characteristics is the claimed, but still contested, role for FAT and the calculative
mentality it represents, first in promoting the historical development of capitalism
and now, in particular, in providing relevant and reliable information for investors,
creditors (and others) in capital markets.59 But measuring the comparative value of a
coordination network (like that of traffic-light systems) is generally beyond any
conventional micro-level cost-benefit analysis and raises wider issues of how different
regions and jurisdictions approach the political and social organisation of finance and
investment, and of how accounting and auditing shape the decision-making and
control, both internally of businesses and other organisations as well as externally of
those who finance and regulate them (Sunder, 1997).
History is central to this understanding but I have argued that rational
evolution of accounting is inadequate as an explanation of the genealogy of the
history of the present (Roth, 1981) and of its dominant institutional rationalised
myths and so cannot be relied on as the mechanism that will automatically secure the
optimal future development of accounting.

5.2. Some research implications?

Since Ball & Brown (1968) and Beaver (1968), statistically based empirical capital
markets research, complementing research in finance (Pope, 2010), has dominated US
accounting research and increasingly become the global standard. It is important to
continue to promote the much greater diversity of British and Continental European
Research (e.g. Ashton et al., 2009). While advanced statistical data mining of old
and new big data (Meyer, 2012) can reveal new patterns in the evidence (as now in
cosmology or the Fama-French factor models in finance), critical questioning and
analysis and the search for explanatory theories remain even more important,

59

There is a danger that focussing too much on the historical arguments about the role of DEB itself
can obscure this more far-reaching claim (cf. Hoskin & Macve, 2012 and Hoskin et al., 2013 in relation
to Chinas history).

33

especially given the low signal to noise ratios in statistical data relating to
hypothesised accounting impacts.60
Although the information needs of capital markets have now become the dominant
focus of financial accounting research (e.g. Ravenscroft & Williams, 2009) they may
not be the most fruitful place to look to understand the genealogy of accountings
roles and continuing power.61 Like Pacioli in1494, we should probably begin with
asking what is most useful for (owner/) management decision-making and control
purposes (e.g. Macve, 2010a; W&B, 2007, p.112) although naturally this will soon
extend to the contracts and other relationships made with employees and third parties
(including sources of finance, both equity and debt). Interestingly, Ronald Coasethe
Nobel Prizewinner in Economics who first wrote about accounting in the 1930s (e.g.
Coase, 1973)on approaching his 100th birthday, recently said in an interview:62
Most decisions regarding what people do are not made through the work
of a pricing system, but as a result of what their boss told them what to do.
What people do in the business is largely a result of administrative
decision. It is thus critically important to understand how firms operate,
how they make decisions, how they conduct business with each other,
how they interact with the government, and so on. We have done so little
work on these questions. As a result, we are very ignorant about how the
economic system operates.
This follows from the observations in his earlier retrospective (Coase, 1990) where he
acknowledged the powerful role played in these business decisions by the transfer
prices, internally generated by accounting, relative to external market prices and that
it is not just transaction costs but the cost of organizing activities that seems likely
to determine the institutional structure of production: and the cost of organizing
depends to a large degree on the efficiency of the accounting system (p.11). A theory
of the accounting system is part of a theory of the firm (and economics would benefit
from further development of it) (p.12). So we need to understand accountings central
role in the administrative coordination, strategizing and risk management of firms,
and the history of this modern power (Chandler, 1977; Sunder, 1997; Hoskin &
Macve, 2000; Hoskin et al., 2006; Hoskin, 2013b).
60

See for example Penmans discussion (2011 pp. 150ff.) of how the anomaly of the book to price
[B/P] risk factor found empirically in the Fama-French model might be explained; cf. Ryan (2012).
61
Much capital markets based research focusses on information asymmetry and moral hazard, i.e.
the governance risks that poor information allows distorted divisionand consequential reductionof
the potential wealth pie. An equally significant role of accounting is in assisting mangers and others
to understand what is needed to maximize the size of the pie efficiently.
62
LSE Beaver interview 17/3/2011 by Richard Dewey and Dominik Nagly: The Problem of Social
Coase: http://thebeaveronline.co.uk/2011/03/17/the-problem-of-social-coase/ (accessed 14/11/2012).

34

Accounting has provided the conceptual vocabulary for economics and finance, but
their discourses have moved ever further away from the real households and firms
that practice them to abstract formal theorising (e.g. Hatfield, 1934; Klamer &
McCloskey, 1992; Hoskin & Macve, 1993; Chiapello, 2007). Research that is based
in understanding why particular practices survive in different contexts is the best
starting point for asking whether improvement is necessary and how desirable the
consequences of change might be (Bromwich et al., 2010; Dennis, 2008)both its
cost-benefit ratio and on whom the cost and the benefits might fall: cf. Gwilliam et
al., 2005.
But the cost-benefit ratio can be extremely complex to determine. We should not
be surprised if such alternative kinds of CFfocussed on asking the relevant
questions rather than delivering answers (Macve, 1997a: Introduction)lead to
piecemeal, evolutionary improvements in accounting practice and disclosures rather
than wholesale replacement by a new, much more logically consistent accounting
model (e.g. ICAEW, 2009).63
I hope I have shown why I have learned that understanding the current and
potential role of the rational myth of accounting within firms and in capital markets
also requires understanding comparative international accounting history [CIAH]
(Carnegie & Napier, 2012). Accounting history is indeed more than just one damn
thing (or even just one damn person) after another (cf. Oldroyd, 1999). But a
rational evolution version not only faces the QWERTY kind of problem in
explaining how we have reached where we are today, or what constraints face us
going forward, but more seriously it privileges response to external needs over
accountings performative role in the constitution of new possibilities. Ever since the
first written naming and counting, accounting has shaped accountabilities and
thereby the pattern of behaviour within public and private organisations. What were
initially supplementary practices have later become central in new discourses that
enable new forms of economic, political and social interactionand their subversion
(Hoskin & Macve 2000; Ezzamel & Hoskin, 2002).
Generally, well educated practitioners, policy makers and the public are responsive
to the value of historical insights.64 But the majority of academic accounting
63

This passage follows Macve, 2010b.

E.g. Jolyon Jenkinss 10-part series on Radio 4 in 2010: A Brief History of Double Entry Bookkeeping (http://www.bbc.co.uk/programmes/b00r401p) (accessed 14/11/2012).
64

35

researchers (especially in US and increasingly mimicked by Continental Europe and

South East Asia, including most recently Chinae.g. Sunder, 2008) are now trained
towards a narrow, specialist quantitative focus which even usurps traditional historical
vocabulary (e.g. archival research)cf. Fleischman, 2009. Such empirical
investigation can yield useful information about current economic behaviours but
perhaps little insight into what the next major development will/should be.65 UK
research has so far been more eclectic (Ashton et al., 2009) but the initial journal
rankings by the Association of Business Schools [ABS] were ominous.66 However,
as W&B (2007, p.112) suggest, quantitatively trained new researchers may be
attracted to accounting history through perceiving cliometric research as being more
scientific.
Historical understanding of modern accounting and auditings complex pathdependency has to face the triumphalist conviction of standard setters wedded to
achieving the victory of rational concepts over historically inherited conventions
(FASB/IASB 2005; Bromwich et al., 2010). But their balance sheet focussed model
seems out of alignment with investors (and others) preoccupation with earnings.67
And is challenging the purported usefulness of individual accounting improvements
rendered near impossible if the value of audited financial accounting lies more in
coordination at network level (like traffic signals) rather than at the level of
individual firms (Edwards,1938; Macve, 2010b), so that impacts on regional costs of
capital may be more significant than on those of individual firms? But this is very
difficult economics and unavoidably intertwined with social and political priorities.
Technical solutions must often seem as far away as ever.
On the other side, the rational evolution histories of W&B (2007) and Penman
(2011) tend to imply that things will work out for themselves if the market is not
interfered with so much by regulators. But this pays inadequate attention to the
65

I believe it was Robert R. Sterling who pointed out that empirical research among users in relation to
road transport in the 1870s would have revealed continuing preferences (subject to cost) for such
features as thicker straw on the floor, plumper seat cushions, better springs and maybe faster horses, all
of which would enhance the passengers current environment of horse-drawn carriages; but there could
have been no mention then of what they would soon show they really wanted: motor cars (first
patented by Karl Benz in 1886).
66
See BAFA letter to ABS 19/04/10: http://www.bafa.ac.uk/assets/files/BAA%20%20Letter%20to%20ABS%20-%20April%202010.pdf (accessed 15/11/2013).
67
Walker (2013) observes that in a well-known survey of US executives, responding to the question:
Rank the three most important measures reported to outsiders, 51% ranked earnings first, and the next
most popular metrics were pro forma earnings (12%), revenue (12%), cash flow from operations (10%)
and free cash flow (10%). As Marshall (2013) comments, there is no mention of balance sheets here.

36

networked constellations of actors and institutions that have and will continue to
interact in shaping accounting and auditings future (e.g. Macve, 2013a).

6. Concluding remarks
In what has unavoidably been the broad sweep of a reduced history,68 I have
reviewedand attempted to bring togetherthe main areas in BFAAH I have been
interested in over nearly forty years. It is a long list: the CF of financial accounting
and reporting and its relationship to the setting of individual accounting standards
(whether based on HC or FV) and to conservatism; insurance accounting and
accounting in other non-mainstream arenas; CESR accounting; the genealogy of the
power of modern accounting and auditing in the West that enables the various agents
in the modern, increasingly global, economy to reduce information asymmetries (and
the accompanying risks to incentives) and to act at a distance and also across time
(the domain of finance); and now the further development of accounting and
auditings power in modern China (Deng & Macve, 2013).
In attempting to link these various strands I have cast doubt on both the standard
setters and recent academic versions of the kind of rationality underlying progress in
accounting and auditing, which I have argued to be more like that of institutional
rationalised myths. The twin rational myths of the objectivity of HC accounting and
of auditingdespite frequent, and occasionally catastrophic, failingsas reinforced
by conservatism now together sustain financial markets across the globe, coupled
with the belief that regulators can control them. Exploring how much of FAT is
rational and reflects some objective economic reality and how much is myth and is
subjectively, socially constructed (Hacking 1999) and, again, how much might be
improvedincluding potential extension to accountability for CESRand how much
is intractable are the major questions now for accounting and finance research. As in
other public policy arenas, implementing successful change will require historical
understanding of current practices as a precondition for identifying what may be
feasible in seeking to couple the myths more tightly to desirable real world
outcomes and for minimising adverse unintended consequences (Bromley & Powell,
2012). Innovations may continue to come from outside the regulators own projects
68

With acknowledgments to: http://www.reducedshakespeare.com/productions/the-complete-works-ofwilliam-shakespeare-abridged/ (accessed 15/11/13).

37

but then have to compete with them in regulatory space (e.g. Horton et al., 2007;
Serafeim, 2011). Unravelling the various forces at work internationally in turn
requires further detailed CIAH for understanding how accounting and auditing have
variously operated, with differing degrees of fair valuation and conservatism,
within businesses and other organisations, across different countries and cultures.
Such interdisciplinary research can complement and enrichas well as challenge
the more familiar, statistically focussed research in accounting and finance (e.g. Pope,
2010) and help us to understand how arguments within FAT (such as FV vs
conservatism) may play out.
So there is still much more to be researched and understood and I should remember
Wittgenstein:
My work consists of two parts: the one I have presented here plus all that I
have not written. And it is precisely the second part that is the important one.69

69

In a personal letter to the editor of Der Brenner, in 1919.

38

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