Should Financial Statements Represent Fairly or be

Relevant?
Alain Burlaud

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11/10/2013

Should Financial Statements Represent Fairly or be Relevant?

Considering the IASC/IASB Conceptual Framework
Alain BURLAUD
Professor emeritus, Conservatoire national des arts et métiers (Cnam)
40, rue des Jeuneurs
75002 Paris
France
[email protected]

Abstract

To ask if financial statements should “represent fairly” or be “relevant” gives a political

dimension to the trade-off between reliability and relevance, two characteristics of financial
reporting that the IASC/IASB Conceptual Framework does not consider to be conflicting.
However, depending on the priority we give to these characteristics, the accounting system
differs widely. Some concepts from the behavioural sciences help to better understand the
underlying implicit and explicit hypotheses of IFRS’s Conceptual Framework and to have a more
critical perspective. The answer to the question of the choice between “fair representation” and
“relevance” cannot be purely technical due to the fact that the information produced shapes the
reality as well as describing it. Therefore, the standards setter has a political responsibility.

Keywords: conceptual framework, IFRS, true and fair view, fair representation, reliability,
relevance

***

Introduction

The 4th European Directive issued in 1978 introduced the British concept of true and fair view
into accounting law. It is a concept that has already been the subject of many publications but two
new elements have brought the question to the fore once again.

1. The first new element is the appearance of the idea of fair value. The concept was not
mentioned in the International Accounting Standards Committee (IASB)'s first
Conceptual Framework in 1989 though it appeared for the first time in 1982 in the IAS
16 Property, Plant and Equipment Standard. Moreover, the expression fair value still
does not figure in the 2010 version of the International Accounting Standards Board
(IASB's) Conceptual Framework. It was, in fact, the extension of this concept to financial
instruments (IAS 39 Financial Instruments: Recognition and Measurement) that created
an uproar and the matter was even the subject of a letter dated 4 July 2003 from the

1
 President of the French Republic, Jacques Chirac, to the President of the European
Commission, Romano Prodi (Burlaud & Colasse, 2010, p.171).

2. The second new element was the financial crisis of 2008, which led many researchers
(Colasse, 2009a ; Laux & Leuz, 2009, p. 829 and Marteau & Morand, 2009) and
politicians (Baert & Yanno, 2009) to draw attention to the pro-cyclical impact of the fair
value valuation of financial assets. The public authorities had already made this diagnosis
and the European Commission, during a meeting of the Ecofin Committee on 7 October
2008, put pressure on the IASB to authorise companies, and in particular banks, to
reclassify their financial instruments in a category where they would no longer be subject
to fair value valuation (Burlaud & Colasse, 2011, p. 39). The same observations were
made in the United States by the American Bankers Association, Congress and the
Securities and Exchange Commission. (Laux & Leuz, 2009, p. 826, 831 & 832).

If political intervention can modify the rules of accountancy in order to manipulate the results of
companies to intervene in a crisis, is a true and fair view still possible?

The aim of this article is not to respond to the question of the legitimacy of political intervention
or of the legitimacy of the international standards setter in the shape of the IASB, since these
questions have already been widely discussed (Hoarau & Teller, 2007, p. 5 & s. and Burlaud &
Colasse, 2011, p. 24 & s.). Neither does it aim to discuss the difficulties and consequences of the
introduction of fair value into accounts (Jeanjean, in Colasse, 2009c, p. 1025 & s.).

Similarly, we do not intend to criticise here the internal coherence of the IASC/IASB's
Conceptual Framework. If we accept the postulate of market efficiency and the fact that financial
reporting is first and foremost intended for the investors and that by virtue of the hypothesis of
market liquidity the latter can withdraw at any time, then it is logical to introduce holding gains
into comprehensive income through the valuation of certain assets at their fair value.

The question we wish to discuss lies elsewhere. Can financial reporting, that we reduce here to
the financial statements (balance sheet, profit and loss account and footnotes) both represent
fairly and be relevant? The IASB's 2010 Conceptual Framework confirms this, "The fundamental
qualitative characteristics are relevance and faithful representation." (IASB, 2010, § QC5). We
are not certain that these two qualities are always compatible.

We will try to answer the question posed in the title by exploring two hypotheses.

1. The first, adopted by most authors and confirmed by most accounting standards, is that
the accounts should "represent fairly" (give a "true and fair view"). This presupposes the
existence of a truth, an observable reality situated outside the observer. Is this the case?
Explicitly, certain authors contest this when they define accounting as an artefact that
enables observation mediated by a conceptual system of representation. (Hopwood,
1974; Colasse, 2005, p. 255). Furthermore, reliability should not be confused with
conformity. Even if, in general, respect for the standards leads to a true and fair view of
the financial position according to certain conventions, these two objectives may
nonetheless be conflicting. Although the IASB's Conceptual Framework does not deal

2
 with this possibility, it is envisaged in the 4th European Directive. The true and fair view
is an overriding principle.1
2. The second hypothesis, which we will explore more fully below, consists in thinking that
financial statements have another objective, that of inducing "relevant" behaviour. They
constitute a signal (stimulus) that produces a desired behaviour, considered opportune,
adequate, "relevant", that is to say in conformity with either values – ethical or moral -
or with objectives fixed by an authority, for example, the standards setter or a
stakeholder, and judged legitimate (Laufer & Burlaud, 1997, p. 1754-1772). Therefore it
is of no matter that they represent fairly. For example, the objective of financial
statements might simply be to contribute to the transparency of financial flows in order
to introduce an ethic into business life and avoid laundry washing. Accruals accounting
is, in this case, perhaps unnecessary. However, a possible alternative might be that their
objective is to stimulate investment thanks, for example, to the accelerated depreciation
of fixed assets, the consequence of which would be to reduce corporate income taxes and
the distributable dividend. The implicit or explicit conceptual framework of any set of
accounting standards should be to provide an answer to the question posed. This
hypothesis led us to explore the possible contribution of behavioural sciences to a
discussion of the Conceptual Framework. For the purposes of what follows, we are
defining behaviour thus: "behaviour is a set of adaptive reactions, observable
objectively, that an organism, generally possessing a nervous system, displays in
response to stimuli that are also objectively observable, issuing from the milieu in which
it lives".2 We would add that the stimuli can also come from the organism concerned
itself, in other words, have an internal origin. In the context of this article, we should
make it clear that we are interested solely in social behaviours, that is to say, highly
contextualised behaviours.

We will discover that the answer to the question posed can vary over time (Section 1), that the
implicit and explicit hypotheses of the new accounting model, that is to say of the Conceptual
Framework of the International Financial Reporting Standards (IFRS), are fragile and do not
allow us to distinguish clearly between "representing fairly" and "relevant" (Section 2), and
conclude with the idea that "relevant" is more important than "fair representation" (Section 3).

1. The evolution of accounting

The role of accounting in the organisation of Society has evolved over time since it reflects the
nature of economic exchanges. Accounting was originally practical knowledge and perhaps even
"practical knowledge in search of theories"3 with the codification of good practices then a certain
dose of state interventionism that was to result in continental European accounting principles and
charts of accounts and European Directives. It was only later, towards the end of the 1970s, that
1
See art. 2, § 4 & 5 of the 4th European Directive of 25th July 1978. “The annual accounts shall give a true and fair
view of the company’s assets, liabilities, financial position and profit or loss.” (art. 2 § 3) “Where in exceptional
cases the application of a provision of this Directive is incompatible with the obligation laid down in paragraph 3,
that provision must be departed from in order to give a true and fair view (...)” (art. 2 § 5)
2
Translated from Tilquin, 1942, quoted by Auroux (1998). p. 383.
3
After the title of an article by Colasse (1996): "La comptabilité : un savoir d’action en quête de théories
(Accounting: practical knowledge in search of theories)."

3
the theory became explicit since the standards setters felt the need to justify their choices using
theories to give them greater legitimacy through the publication of "conceptual frameworks". The
technical choices presented in the standards therefore take on an aura of scientific reasoning.

1.1. Accounting: "knowledge in search of action"

We have schematically adopted a periodization that distinguishes between three periods: 1) from
the inventory of the assets (description) to 2) measuring the profit or loss (convention) then to 3)
evaluation of the financial situation (diagnosis).4 Any periodization is questionable. It depends
mainly on the choice of a starting-point for the subsequent evolution and is largely a question of
the interpretation of this evolution. We have adopted the traces of the most ancient of accounting
systems, the Sumerian tablets. These represent inventories of flocks (Degos, 1998, p. 9). They are
accounts in physical units, that is to say with no valuation attached. As time went by, with the
development of civil law, the idea of the inventory became more precise, leading to the
elaboration of the concept of assets and the development of money, which led to valuation. But
the logic remained the same. It was a question of describing a set of material goods. The second
period adopted, that of the appearance of companies to fit ships engaged in transatlantic trade, led
to the laying down of rules for profit-sharing, and therefore to the calculation of income on the
basis of conventions that included calculated costs. Lastly, the third period, that of the
development of global financial markets and European and international accounting standards,
introduced the concepts of true and fair view and fair value. Today, the three stages we chose can
be found, as an example, in the three objectives the French Commercial Code has assigned to
accounting. Although the first two date back some time, the third objective, true and fair view,
was introduced into French accounting law by the 4th European Directive in 1978 leading to a
major modification of the French accounting standards in 1982. Previous standards had only two
objectives for the financial statements:

- conformity, that is to say conformity to the rules of accounting standards5 and

- sincerity, that is to say the absence of any intention to deceive.

There was therefore an obligation of means, conformity to the rules and a moral obligation,
sincerity, but no obligation regarding results, that is to say to provide the user of the financial
statements with a true and fair view of a reality at a risk of having to bypass the rules when they
were not adapted to the situation encountered. In other words, the search for the true and fair
view was an overriding principle.

Conformity, sincerity and true and fair view apply to three aggregates: the assets, the bottom line
and the financial position as Table 1 below shows, taking France as one example.

Table 1: The three ages of accounting and the French Commercial Code
4
This division into three ages bears no relation to that of Auguste Comte (Cours de philosophie positive.Hachette,
1927, p. 3 & s.), who identified the three following "states": theological, metaphysical and positive or that of André
Piettre (Les trois âges de l économie et de la civilisation occidentale [The three ages of Western economy and
civilisation]. Fayard, 1964, 158 p.) who saw three stages in the economic development of civiliations: the
subordinate economy, the independent and dominant economy and lastly, the directed economy ordered by Men.
5
The conformity to regulations is known, in certain disciplines by the term "veridicity" as opposed to "truth".

4
Art. L123 – 14 of the French Commercial Code:
"Accounts shall be honest and truthful and shall ensure a fair representation…"
(1)"…of the assets…" (2) "…of the profit or loss…" (3)…of the financial
position…"6
Describe (inventory) the Calculate eligibility for income Provide information useful in
assets of an entity to sharing (statement) on the basis expressing a judgement
constitute an instrument of of conventions: (opinion) on the financial
proof binding to the - dividend position of an entity to aid
contracting parties. - tax economic decision-taking
This conception of the role - self-financing (future commitment) by a
of accounting, founded on - employee participation "wide range of accounts
property law as defined by schemes users."7
the Civil Code, dates back to - etc. The IFRS (the first
Summer. This conception of the role of international accounting
Accounting is a private accounting appeared with the standard was published in
matter that does not need to creation of limited partnership 1974, accompanying the
th
be standardised and is companies (Florence, 15 globalisation of the financial
limited to an exhaustive century) and the development of markets) leaving more room
inventory of the elements joint-partnership companies (16th for intention (intentional
that make up the assets and century) (Lemarchand, 1993). accounting, particularly
to the recording of It became widespread in France important for the classification
transactions relating to these with direct corporate income of the elements of a stock
assets. The accounts "give taxation from 1917. portfolio) and forecasting
account" of their Accounting becomes a public (updating of future cash flows).
management. This matter (public call for savings The information must be
expression applies, for and tax) that has therefore to be relevant,8 that is to say useful
example, to guardians: standardised. The standards setter to investors taking economic
"every guardian is expresses a consensus between decisions.
accountable for his different stakeholders. Need for a The internationalisation of the
management when it comes profit and loss account in financial markets presupposes
to an end" (Art. 469 of the addition to the balance-sheet, global standards. The accent
1804 Civil Code); and public hence double entry bookkeeping. placed on the financial position
officials: "Society has the Distinction between the "true" leads to the development of the
right to require of every and the "false". But the "true" balance-sheet and footnotes
public agent an account of becomes relative since it depends rather than of the profit and
his administration" (Art.15 on accounting conventions with loss account.
of the Declaration of the the appearance of calculated costs Distinction between the
Rights of Man and of the (example: depreciation). "good" (what is useful to
Citizen of 1789). homo oeconomicus) and the

6
The French Commercial Code places "the financial position" before "profit or loss". However, we do not think that
the order of the terms is significant of an order of priority.
7
We have not adopted here the formulation of the Commercial Code or that of the French accounting standards
which do not make explicit their conceptual framework, but the formulation of the IFRS conceptual framework
(1989), art. 12. Moreover, this text does not use the term "result" but "performance", a much more general term.
8
Art. 26 to 28 of the IFRS Conceptual Framework (1989).

5
Distinction between the "bad" which does not serve the
"true" and the "false". needs of the rational investor.

The search for a true and fair view involving at one and the same time the assets, profit or loss
and the financial position is presented as an objective that poses no particular problem. There can,
however, be conflict as can be seen from the example of the calculation of depreciation (Burlaud
& Cossu, 1977). One can, for example, identify three ways of calculating depreciation:

- measure the depreciation of the assets;

- distribute the cost of the investment over production;
- hold back part of the cash flow by deducting it from the taxable and/or distributable income
in order to reinvest it, thereby bringing into play the depreciation multiplier or Lohmann-
Rüchti effect (Lemarchand & Nikitin, in Hoarau et al., 2011, p. 41 & s.).

It can also be seen that our periodisation has description as its starting-point, which favours "fair
representation" (1), and moves towards the true and fair view of the financial position (3) which
favours relevance and retains what is "relevant" for the taking of economic decisions. Since it is
linked to accounting objectives, techniques have obviously evolved too. Therefore the historic
cost that "represents fairly" (a transaction involving one element of the assets really took place
for a recognised sum) gives way to what are supposed to be market values within a framework of
hypothetical transactions (mark-to-model). Nothing could be less "fair". For all that, is it more
relevant, useful and therefore "good"? That is the question.

1.2 . Accounting: towards a hypothetico-deductive approach

Jurists have turned the law into an academic discipline with its long history, philosophy, theories
and reasoning. Quid accounting if it breaks away from the law?

We have, in fact, seen that accounting gradually moved away from a purely legal conception
(reference to property law the only definition in the Civil Code) and extended to other branches
of the law (company law, criminal law, tax law etc.), finally freeing itself from the law for lack of
an international law, in favour of an economic vision founded on a global market economy and in
particular a global financial market, ignoring as far as possible governments and inter-
governmental organisations.

This evolution in accounting also shows the growing importance of conventions when it moved
from one stage to the next, hence the more important role of the standards setter whose task is to
provide a framework for these conventions. In leaving the private domain to move towards the
public sphere, rules had to be introduced that were the product of a consensus between groups
representing different stakeholders. However, a distinction must be made between consensus,
compromise and surrender of principle.

- The word "consensus" has been rather freely bandied about so let us adopt the definition
given in political sociology. "The idea of consensus designates the explicit or implicit
agreement between individuals on the essential values of their company and their willingness
to resolve any conflicts likely to arise between them by means of deliberation, with the aim

6
 that what they have in common shall triumph over what divides them and in the respect of
procedures that have the approval of each"(translated from Auroux, 1998, p. 435). The "idea
of accounting standardisation as a balanced agreement between stakeholders" as practiced by
the French Accounting standards setting body (Conseil national de la comptabilité [CNC]), is
a good illustration of this search for consensus (Colasse & Pochet, 2009, p. 30).
- Compromise designates an imperfect agreement. "If by solution we mean an answer that
completely satisfies all aspects of a problem, the very nature of a political problem is that it is
insoluble. (…) If a solution in the strict sense of the term can be found to a problem, then that
problem is a technical one. But a political problem can be settled, most often by way of the
difficult path of negotiation and compromise. Compromise is this type of resolution or
prevention of conflicts in which the parties concerned agree to withdraw or reduce some of
their initial demands" (translated from Auroux, 1998, p. 390).
- Lastly, "compromise turns into (…) surrender of principle when one begins to compromise on
principles" (translated from Auroux, 1998, p. 390).
We consider that there is more or less a consensus on the objectives declared by the Conceptual
Framework (which can run counter to true and fair view?) but compromise on the technical
measures relating to the allocation or valuation of certain transactions. This puts "fair
representation" or the true and fair view of reality into perspective. Producing accounting law in
dribs and drabs as the American and British standards setters and then the IASC have done,
results in problems of internal coherence in the end. To remedy this, the Accounting Standards
Committee published a first conceptual framework in 1975, The Corporate Report. Starting in
1978, the FASB published its Statements of Financial Accounting Concepts and taken together,
these made up the American conceptual framework9. Drawing on these experiences, in 1989, the
IASC published its own Framework for the Preparation and Presentation of Financial
Statements and this became The Conceptual Framework for Financial Reporting in 2010. The
latter was prepared as part of an agreement signed in October 2004 between the IASB and the
FASB with a view to preparing a joint conceptual framework on the basis of those predating their
agreement. The work remained unfinished, so much so that the 2010 conceptual framework was
composed provisionally of part of the 1989 version.

The FASB's conceptual framework is defined as "a coherent system of interrelated objectives and
fundamental concepts that prescribes the nature, function and limits of financial accounting and
reporting and that is expected to lead to consistent guidance." (FASB, 2010, p. 5).

The IASB's conceptual framework describes the basic underlying concepts of the preparation and
presentation of financial statements intended for users outside the entity (IASB, 2010, p.5). It
serves mainly as a guide for the IASB in the development of future standards and therefore
constitutes a metarule. It does not, however, constitute a standard and cannot deviate from nor
justify deviation from a standard. Although the IASB recognises that in a limited number of cases
a conflict may exist between the Conceptual Framework and a standard, it is the standard that
prevails and the number of cases of conflict will fall over time (IASB, 2010, p.5).

In defining the objectives of accounting standards and the qualitative characteristics required for
financial reporting, the conceptual framework contributes to the coherence of standards by

9
On this subject, see Zeff (1999).

7
creating a stable constraint for the standards setter to apply to itself. "The Conceptual Framework
therefore appears as a sort of accounting theory. It is a deductive approach to the extent that using
the first question as a starting-point, the answers to the others can be deduced. (…) Seen in this
light, the Conceptual Framework appears as a tool for the standards setter. It constitutes an
intellectual instrument intended to guide decisions, a generator of standards (…)" (Chantiri-
Chaudemanche & Pochet, in Nikitin & Richard, 2012, p.150).

The IASB's 2010 conceptual framework assigns two principle characteristics to accounts:
relevance (IASB, 2010, art. QC 6) and faithful representation (ibid., QC 12). Relevant
information is that which is useful, that is to say "relevant" to the needs of those who have to take
economic decisions and in particular, for the supposedly rational investor within the framework
of economic theory. In other words, it is a question of satisfying the needs of those who have the
power to appoint or dismiss ad nutum the directors and to retain, sell or buy stock (IASC, 1989,
art. 14). Faithfulness to a reality, hence the word "image", and not faithfulness to a rule, reflects
the truth.

This calls for a great deal of clarification. The object, that is to say the entity, described by the
financial statements must obviously be defined, something that the IASB's Conceptual
Framework for 2010, as yet unfinished, has still not done. Moreover, who is exercising power
and to what end must be defined. In other words, the construction is based on hypotheses that we
will detail in the second section.

2. The implicit and explicit hypotheses of IASB’s accounting model.

Preliminary remark: up until 2003, standards were referred to as accounting standards

(International Accounting Standards – IAS). After this date, the IASB renamed its standards
International Financial Reporting Standards (IFRS). A distinction was made between accounting
and financial reporting, meaning that the two can be dissociated. Was this a figure of speech
intended to highlight the IASB's production of standards by associating it with market finance,
supposedly more distinguished than accounting? This was before the 2008 crisis, however… The
bases of the standards, whether IAS or IFRS have not changed for all that.

The IFRS are based on two implicit hypotheses (Burlaud & Colasse, 2011, p. 33, §2.2.2):
- the efficiency of the markets, which includes the hypothesis of the conformity of the
behaviours of the users of financial reporting (the investors) to Expected Utility Theory but is
not limited to it;
- the subjection of the directors to the users-investors (agency theory)
and three explicit hypotheses (Burlaud & Colasse, 2011, p. 33, §2.2.2):
- the reliability of the view constituted by the accounts;
- the neutrality of financial reporting and
- compatibility between the reliability and relevance of the accounts.

2.1. The implicit hypotheses of IASB’s accounting model

The implicit hypotheses are those that have permitted the construction of an instrument of
observation of reality that is operational thanks to a reduction in complexity. Moving from the

8
general to the particular, three closely interdependent theories are used that are not explicitly
mentioned in the conceptual framework: a theory relative to human behaviour, to the functioning
of the markets and to the functioning of the company. This led us to tackle Expected Utility and
Efficient Market theories separately.

2.1.1. Expected Utility Theory or the theory of rational choices.

Expected Utility Theory constitutes one of the bases of Efficient Markets Theory. It comes from
classic economics and is based on a certain number of axioms relating to the attitude of a
"rational" individual who has to take decisions in a risky situation. It has been criticised in
particular by Daniel Kahneman and Amos Tversky (1979), founders of behavioural finance with
their Prospect Theory. They have shown in particular that:

- profits are weighted by their probabilities but we overweight the certain results (certainty
effect);
- preferences are not symmetric, that is to say that the pain engendered by a loss is greater than
the pleasure procured by gains of the same amount (reflexion effect);
- utility curves are concave and as a result, for example, we often prefer to underwrite an
insurance contract even for relatively low risks that we could take without fearing ruin,
although mathematically, the hope of gain for the policy-holder is negative if the insurer has
calculated the amount of the premium carefully;
- we are more sensitive to variations in income or assets than to their absolute value.

Investors are not therefore necessarily "rational" in terms of classic economics, that is to say they
do not display behaviour that conforms to the model of homo oeconomicus, which claims to be
the archetype of the new global elite. Clichéd anthropomorphic expressions that underline the
importance of mimetism in decision-taking bear witness to this: the markets "think" that…, the
markets "have confidence" in the policy formulated by such and such Head of State, the markets
are "nervous", etc. The market, an invisible being, but capable of intentions, exercises a power
without counter-power since it cannot be located (where does the market reside?) and remains
anonymous (Who represents the market? Who speaks in its name?) How to attack it? If it is a
question of a collective behaviour, who can ensure that a set of individual behaviours obeying a
common rationality leads to a collective behaviour that obeys the same rationality?

"Keynes had already drawn attention to the effect of psychology and the role of conventions in
the market value of share prices (…) fruit of the mass psychology of a large number of ignorant
individuals (…). Those professional investors whose competence and professional judgement
enable them to correct the fantasies of ignorant individuals acting according to their own lights,
are in fact concerned not with the true value of an investment for a man who acquires it to put in
his portfolio, but the value that the market, under the influence of mass psychology, will attribute
to it three months or a year later. So for Keynes, share prices can deviate from fundamental
values under the effect of mass psychology. He compares the technique of investment centred on
short-term anticipation of the traditional basis for valuation to the sort of competitions organised
by newspapers where the competitors have to choose the six most handsome faces from amongst
a hundred photographs, with the prize going to the person whose preferences are closest to the

9
average selection of the competitors as a whole. (..) The investor uses his faculties to decide what
idea the average opinion will make in advance of his own judgement."10
2.1.2. The Efficient Markets hypothesis

Efficient Markets theory, which integrates Expected Utility Theory, presupposes moreover that
all the information is free and accessible to all, that the market is atomized, that the behaviour of
the players is "rational" in the sense described above and that they are capable of assimilating
instantaneously and completely any new information (Fama, 1970). Market efficiency is a useful
hypothesis for modelling but has never been validated. It has, moreover, no need to be validated
since it has a normative value. Governments, standards setters and securities commissions are
moreover invited to work on setting up conditions that favour market efficiency. This does not
guarantee that they really are and in any case, shows that it is not "natural" to them. Fama has
identified three forms of informational efficiency:

- the weak form postulates that the information the players possess is public and only contains
the history of the stock prices already integrated into the prices;
- the semi-strong form is the most commonly accepted and supposes that all the players
possess, exclusively and immediately, all the public information, which is far more extensive
than just past prices;
- the strong form envisages the existence of private information but this is integrated into the
prices (Hoarau & Teller, 2001, p. 112 and Goffin, 2001, p. 121).
Although financial information is partly available free of charge, the cost of having it interpreted
is very high, which as a result, excludes many investors. Consequently, accounting is not a
"public good" in Ostrom's strict sense of the word since it has traits that are characteristic of
"common goods" (Burlaud & Perez, in Nikitin & Richard, 2012, p. 228). In addition, everyone
does not receive the information at the same time, confidential or private information exists and
financial statements alone, which is nonetheless the only information to be standardised, do not
set prices. International events, the vagaries of the climate, the health of a director, the prospect
of a big contract, a promising technical innovation, etc. all contribute to prices.
Efficient Markets Theory is associated with Agency Theory. According to the latter, those who
possess the resources the company needs and in particular the financial resources, are free to
contract with the company or to refuse to entrust their management to the company directors.
"Agency theorists see the firm surrounded by efficient markets ( )." (Hill & Jones, 1992, p. 134).
The two theories do not overlap but are closely linked.

2.1.3. Agency Theory

By placing financial reporting at the service of investors, the IASC/IASB's Conceptual

Framework adopts a representation of the entity that conforms to Agency Theory.

According to this theory situated at the crossroads of law, economics and management, the
company is a knot of explicit or implicit contracts and not an institution and collective

10
Hoarau & Teller (2001), p. 116. Analogous reasoning (the desire of each investor is a function of the desire of
others) enables André Orléan (2011).

10
organisation with its own life and a soul. Financial reporting reduces the asymmetry of
information between the mandator or principle (the shareholder) and the representative or agent
(the manager) to whom the power to act is delegated whilst the power to control is retained in
order to ensure the latter's loyalty (Jensen & Meckling, 1976). This power of control is exercised
partly through the financial statements to ensure that the profitability objectives have really been
met, but also through governance mechanisms that encourage identical objectives between
principal and agent, such as stock options, for example.

The company is not a lone player but the place where opportunist players with diverging interests
affront and cooperate with each other. The balancing of these interests leads to agency costs in
order to reduce moral hazard (non-respect of the set of rules and agreements laid down by the two
parties): the cost of surveillance for the principal and the cost of accountability for the
representative or agent. These agency costs are just a sub-set of the transaction costs defined by
Coase (1937) and then Williamson (1979). Adam Smith had already explained the particular
nature of this relationship between owners and managers: "Since the directors of this sort of
company (public limited companies) are managing other people's money rather than their own,
we can scarcely expect that they pay the same precise, concerned attention as the partners often
bring in the handling of their funds"(Smith, 1991 [original edition 1776], p. 401). Berle and
Means (1932) delve deeper into the question of the divergence of interests between those who
manage and those who own the company. Jensen and Meckling (1976) go still further and
examine all the contracts that exist within the company.
However, the Table below reveals that the power relationships do not necessarily conform to
liberal theory and company law that sees the managers as subordinate to the owners of the
capital. For example, the dilution of the capital can explain the absence of a relationship between
the manager's remuneration and share price movements.

Table 2: Relationship between remuneration of the chief executive officers and share prices
(examples from France)

Data from 2002 in millions of euros

Company Name of Director Annual remuneration Stock options Share price
(evolution compared attributed movements:
to 2001) 2002/2001
Vivendi Messier 5.720 (+11.6%) 0 -70%
Vinci Zacharias 3.039 (+16%) 750,000 -15%
Total Desmaret 2.410 (-26.8%) 60,000 -10%
Danone Riboud 2.400 (+4.3%) 50,000 -5%
Suez Mestrallet 2.271 (+1.3%) 350,000 -50%
Bouygues Bouygues 1.994 (+22.1%) 200,000 -30%
AXA De Castries 1.963 (-2.8%) 800,000 -50%
Lafarge Collomb 1.789 (+30.9%) 20,000 -33%
Renault Schweitzer 1.664 (+52.5%) 130,000 +12,5%
Saint Gobain Beffa 1.640 (-0.6%) 240,000 -35%
Sources: Forbes – Le Monde 23 May 2003

11
Jensen & Murphy (1990) also found a very weak link between CEOs' remuneration and the
performance of the company.

Agency Theory, centred on the manager/shareholder relationship, developed to include all the
stakeholders to produce Hill & Jones's Stakeholder Agency Theory (1992). The other
stakeholders are the employees, clients, suppliers, creditors, local authorities and more generally,
the public. All these stakeholders are linked to the company through explicit or implicit contracts
and contribute resources that the company directors manage and have at their disposal to create
value. Yet all do not expect the same return. For example, some aim to maximise the stock-
market value if the company is quoted and others, such as the employees, seek the guarantee of
an income and therefore a job. It follows therefore that financial statements should be capable of
giving an account of the many aspects of performance (Christensen, 2010, p. 292). Conceptual
frameworks, since their vocation is universalism, have always rejected the idea of accounting
pluralism since a single entity only publishes one set of accounts. The IASB's conceptual
framework nonetheless recognises the multiplicity of users and the diversity of their needs.
However, whilst favouring investors, that is to say the shareholders and creditors (IASB, 2010,
art. OB2 & 10), the Conceptual Framework aims to produce information that corresponds to the
needs of a maximum of other stakeholders (ibid. OB8) whilst not giving them priority (ibid.
OB10). Since it cannot, for comprehensible technical reasons, implement general agency
relationships in accordance with Stakeholder Agency Theory, the Conceptual Framework falls
back on an Agency Theory reduced to the relationships between managers and shareholders.

Moreover, Agency Theory simplifies the complexity of the company excessively by ignoring the
psychological and social aspects of a human organisation. We do not intend to tackle the question
of the managerial effectiveness of this method of organising power here (Saussois, 2011, p. 61).
However, by keeping this model in its conceptual framework, the annual accounts clearly cannot
serve the interests of all the stakeholders.

To conclude this discussion of the implicit hypotheses in the accounting model promoted by the
IASB, we can see that their validation poses serious problems to say the least. Behavioural
Finance demonstrates the limits of Expected Utility Theory since the complete, immediate and
free information of the operators is a fiction and Agency Theory presents an over-simplified
vision of the company. Moreover, there is an internal contradiction. Since if the markets are
efficient, there cannot be, by construction, asymmetry of information. The principal can therefore
retain permanent and total control of the agent. There is no longer really any moral hazard since
any "misdemeanour" on the part of the agent is immediately detected without having to wait for
the latter to provide the information likely to confound him and in particular financial statements
describing facts that are on average more than six months old. Consequently, the simultaneous
recourse to these two theories cannot be justified.

2.2. The explicit hypotheses of IASB’s accounting model

The explicit hypotheses are those that define the required characteristics of the instrument of
observation, that is to say its ability to provide reliable, neutral information that contributes to the
maximisation of the allocative efficiency of the resources.

12
 2.2.1. The existence of a "true and fair view" or “faithful representation” provided by
financial reporting.

This hypothesis presupposes the existence of a reality that is exterior to the observer. The
financial position is taken to be an objectively observable reality expressed in the accounts.
Hence the expression true and fair view, used in British accounting law and adopted by the
European Directives and of faithful representation in the IFRS Conceptual Framework (IASC,
1989, art. 33 & 46). This underlying hypothesis is already to be found in the FASB Conceptual
Framework. “The ontological assumption underpinning the CF is that the relationship between
financial accounting and economic reality is a unidirectional, reflecting or faithfully reproducing
relationship: economic reality exists objectively, intersubjectively, concretely and independently
of financial accounting practices; financial accounting reflects, mirrors, represents, or measures
this pre-existent reality” (Hines, 1991, p. 315). In other words, that is also what Zeff (1999) says,
quoting the FASB CF (1980, § 63): “representational faithfulness was also defined as
correspondence or agreement between a measure or description and the phenomenon it purports
to represent.”

This objectivity is thwarted by the fact that the transactions and events accounted for in
accounting are those that interest the investors and not necessarily the other stakeholders. In
addition, the recourse to value in use or usefulness for impairment tests is also not compatible
with objectivity since this value is necessarily subjective. For example, Didier Marteau pointed
out that 98% of the valuation of Goldman Sachs assets was mark-to-model and that the
approximations of fair value valuation exceeded the bottom line.11
2.2.2. The hypothesis of the neutrality of financial reporting

Is homo oeconomicus, producer of information, neutral? By this, we understand that he abstains

from all value judgements. This is clearly false since he favours the choices that maximise his
profits or more generally, his advantages. The hierarchisation of objectives is, after all, the
expression of a value judgement. The decision to remain unbiased is also a form of bias. The
existence of a demand from the users, expressing the need for accounts to be neutral, has never
been demonstrated even though the confirmation of this characteristic legitimises the standard.
On the other hand, employers regularly complain of the instability of the standards and would
very much like to see consistency in the methods.

Is accounting neutral nonetheless? By this we mean not taking sides in opposing needs such as
shareholders anxious to know the company's core value and employees anxious to know that the
business will last. According to the IASB, financial reporting serves the needs of the investors
(therefore it is not politically neutral) but since the other stakeholders are supposed to have the
same needs, it becomes neutral (IASC, 1989, art. 12 & 13)! The answer given by IFRS’s
Conceptual Framework amounts to rhetoric (Burlaud & Colasse, 2010, p. 164).

On the question of the qualitative characteristics that the financial statements should have, the
Conceptual Framework states that to be reliable, they must above all be neutral, that is to say

11
Didier Marteau : Aléa moral, asymétrie d information et crise financière (Moral hazard, asymmetry of information
and financial crisis). Conference held on 29/3/2012 at Intec (Paris).

13
exempt from bias (IASB, 2010, art. QC 14). They "are not neutral if by the selection or
presentation of information, they influence the making of decision or judgement in order to
achieve a predetermined result or outcome" (IASC, 1989, art. 36). According to this definition,
the producer of the accounts, the CFO or the CEO of a company must display neutral behaviour.
Any possible desire to manipulate the reader's diagnosis of the financial statements is strictly
limited by the restrictive nature of the accounting standards. But the neutrality of the producer
does not mean that the standards setter is neutral. "Neutral information does not mean
information with no purpose or no influence on behaviour" (IASB, 2010, art. QC 14). In actual
fact, the bias is clearly towards privileging the needs of investors operating in a global capital
market that must be as liquid as possible.

If we place ourselves in the position of the producer of the accounts, can we conceive of and
construct a signal without intention? And if we place ourselves in the position of the reader of the
financial statements, can we imagine that his interpretation is not influenced by his experience
and preferences, by subjective elements, therefore? Can we imagine a neutral reading of the
financial statements? Lastly, if we place ourselves in the position of the standards setter, he
cannot be politically neutral when he chooses to favour one category of users. “Accounting
theories... are the product of the society in which they operate and cannot be regarded... as
neutral; they serve specific interests” (Bryer, 2012, p. 512)

2.2.3. The hypothesis of the compatibility between the faithful representation and
relevance of the accounts

The compatibility of the two characteristics of faithfulness and relevance is not challenged by the
IASB's Conceptual Framework, which links them closely (IASB, 2010, art. QC 5). "Neither a
faithful presentation of an irrelevant phenomenon nor an unfaithful representation of a relevant
phenomenon helps users make good decisions" (ibid. art. QC 17). If financial reporting must
necessarily possess these two characteristics, which we would agree to be ideal, are there cases of
incompatibility?

The Conceptual Framework defines relevance as follows: "Financial information is capable of

making a difference in decisions if it has predictive value, confirmatory value or both" (IASB,
2010, art. QC 7). “Financial information need not be a prediction or forecast to have predictive
value.” (ibid. QC 8). It is sufficient for it to help users make their own predictions and in
particular predictions concerning financial flows. When the financial statements confirm or
negate previous predictions, they enable future predictions to be more precisely formulated.

The Conceptual Framework defines "faithful representation" as being "complete, neutral and free
from error." (IASB, 2010, art. QC 12) Of these three characteristics, the one that poses the most
problems is neutrality as discussed above. Relevance, by definition, makes an impact on
decisions (ibid. art QC 14).

Although faithful representation does not lead ipso facto to usefulness, that is to say the relevance
of the information (IASB, 2010, art. QC 16), the Conceptual Framework does not envisage
conflict between these two qualities (Hoarau, Teller & Walliser, in Hoarau et al. 2011, p. 95). But
how then are we to explain the political pressures of 2008?

14
"The application of Standard 39 in its pre-October 2008 form had the effect, given the situation
of the financial markets, of obliging banks to record any depreciation that had dramatically
amputated their profits or equity and prevented them from respecting the prudential ratios (Basel
1 and Basel 2) to which they were subject. There was a strong risk that some of them, and in
particular investment and corporate banks, would go bankrupt12 and that this would produce a
new bearish trend in the markets and complete their destabilisation. At this stage, it has to be said
that the search for efficiency led to instability. (…) The amendment, published on 13 October
2008, permitted, which was hitherto forbidden, the reclassification of elements in the "trading
assets" and "available-for-sale assets" categories as "loans and receivables issued by the
company" thereby avoiding fair value valuation since the reclassification could be applied
retroactively as from 1 July 2008. This IAS 39 and IFRS 7 "amendment" adopted on 15 October
2008 by the European Union, was an important one. Its impact can be measured after the fact by
reading, for example, the 2008 accounts of the Société Générale bank. The bank had applied the
amendment from 1 October 2008 and as a result was able to reclassify in "loans and receivables"
28.6 billion euros' worth of assets assessable at market value, a reclassification that in 2008
enabled it to avoid reducing its net banking income by 1.5 billion euros and allowed it to record a
consolidated result of 2.01 billion euros" (Colasse, 2009a). Political pressures therefore led to
biases with regard to rules that were supposed to generate a faithful representation or view.
However, these biases can have desirable consequences (Christensen, 2010, p. 288).

In conclusion, this discussion of explicit hypotheses demonstrates their weakness. The use of
internal valuation models cannot give a true and fair view of an objective reality, neutrality at the
service of the nomad stock-market investor is mere rhetoric and the conflict between the faithful
representation and relevance of the accounts, which was not anticipated by the IASB, came to
light during the 2008 crisis.

To conclude this second section on the implicit and explicit hypotheses of the IASB accounting
model, we would observe that these have not been validated but constitute an attempt at
modelling that has led to a dramatic reduction in the complexity of a reality and the financial
position of a company for which no direct observation is possible. In the third section of this
article we explain the position we take regarding the relevance of the accounting model and the
utility of the information produced.

3. The financial statements are a stimulus: "relevance" is more important than "fair
representation".

We have seen that the financial position of an entity can only be observed with the help of tools
capable of modelling reality, that is to say that reducing its complexity and make it intelligible in
concrete terms. Yet the IASB model is founded mainly on a debatable representation of
behaviours. Moreover, the fidelity to a reality of the financial reporting and political neutrality of
the standards setter are also debatable. Yet virtually universal accounting practices are emerging

12
The term "bankruptcy" is not completely accurate. Bankruptcy is a statement of fact: at the moment the cash-flow
does not allow due dates to be honoured. We are in the sphere of "fair representation". On the other hand, the
emission of a negative signal can only create a risk and not a fact. The fall in the results of banks could generate
concerns as to their future solvability with a risk of the obstruction of the interbank market. The signal was not
"relevant". It could create loss of confidence.

15
from this Conceptual Framework. This paradox is only explicable if we abandon the desire to
express "fair representation" to seek to express the "relevant" information.

These apparently technical issues raise a more fundamental question: what is the social or the
political responsibility of the standard setter? The FASB has had to mention this debate. “While
rejecting the view that, financial accounting standards should be slanted for political reasons or to
favour one economic interest or another, the Board recognizes that a standard setting authority
must be alert to the economic impact of the standards that it promulgates.”13 A similar point of
view is expressed by Richard Macve: “Standards’ setter major problems are more often
political.”14

3.1. What is the reality of a "fair representation"?

If a "fair presentation" is a function of hypotheses, can we still call it a "fair presentation"?

In Table 1, which traces the development of accounting, we have said that the "relevant" can
exist. Cash accounting, for example, gives the amount of cash available to the nearest cent and
we can check this by "cashing-up". The cash balance is real, objective, verifiable and is a relevant
information to take some decisions. Similarly, when an owner wanted to make an inventory of a
flock he had entrusted to a shepherd, he had to count the animals, which can be done simply and
objectively. Although…Can one simply add up calves, cows, pregnant cows, bullocks and bulls,
etc.? Should one not take account of their age? Their state of health? So categories have to be
created. But this immediately poses boundary problems. When, for example, does a calf become
adult? Or a healthy animal, ill? We can only settle these questions by conventions, deciding for
example, on an age at which adulthood is reached. We thus create rules, standards that simplify
and pacify the relationships between economic agents on condition they are the subject of a
consensus.

Starting with this very simple example, we can imagine the difficulty the construction of a "true
and fair view" of the financial position of an entity such as a big company represents. It is
obviously a wonderful simplification mechanism. Is it conceivable that it could be neutral?

If we accept the fact that the amount of equity and the net result of the financial year are the most
important signals provided by the financial statements the following examples show the extent to
which these indicators are sensitive to the conventions adopted upstream.

Table 3: Examples of deviation between equity and income in IFRS and in US GAAP
(examples from the 2005 financial statements, in millions of euros)

13
Zeff (1999), p. 110, quoting FASB (1980), § 106
14
Macve (1997) p. XXII, quoted by Zeff (1999) p. 119

16
Companies Difference in The difference Difference in The difference
(group accounts) amount: Equity represents a % amount: Income represents a %
in IFRS and US of equity in IFRS in IFRS and US of the income in
GAAP of: GAAP IFRS of:
Total 32,410 80% - 676 -6%

France Télécom – 11,710 - 47 % - 12 Not significant

Suez 4,864 29 % - 755 - 30%

Alcatel - Lucent 2,485 40% - 167 - 18%

Axa 2,256 7% 1,059 25%

Vivendi - 939 - 5% - 583 - 18%
Sodexho - 554 25% - 83 - 25%
Thomson - 438 - 20% - 145 25%
Danone 154 3% - 129 - 9%
Source: VA, 2007, p. 15.

By simply changing the standards, the same company can make its bottom line vary by a billion
euros or transform profit into loss. Can we still refer to "true and fair view" therefore?

But the fundamental question is to know whether, in the absence of the ability to represent what
is "true", the signal modifies behaviour. Yes, undoubtedly (Christensen, 2010, p. 293). Indeed,
when one sees the pressure exercised by the Ecofin Committee on 7 October 2008 on the world
standards setter, the IASB, to modify the rules of the game in order to save the banks from chain
bankruptcy, one cannot but be convinced. So the reclassification of certain financial assets
decided in October 2008 and backdated to 1 July 2008 had the following impact on the financial
statements of three banks among many others: an increase in the bottom line (although no new
financial transaction had been observed) of:

1.5 billion € for the SG as we have already seen;

845 million € for Deutsche Bank and
310 million € for Natixis (Burlaud & Colasse, 2010, p. 174)

When information is likely to provoke stock-market panic, the rules of the game are changed, the
"thermometer" is modified and financial statements are given the objective of producing a "good"
signal. As it happens, this was effective since confidence was rapidly restored.

After casting doubt on faithful representation and the political neutrality of financial reporting,
comes question-time.

3.2. How can the image create the real?

The relationship between knowledge and action has been the subject of many studies. It lies at the
heart of psychologist, biologist, logician and epistemologist Jean Piaget's work (1949) on the
construction of intelligence. It is a relationship that can be found in another form and context in

17
Michel Foucault (1981) with the idea that reality is modified by the observation that Man adapts
his behaviour when he becomes aware of the fact that he is being observed or is likely to be. This
approach is part of the constructivist movement of which Piaget was a promoter.

To account for is to first enter the data and process it to produce information supposed to give a
true and fair view.15 But this image is not interpreted in the same way by all users since the reader
superposes the context in which he finds himself, his experience and his memory onto the image
to produce an interpretation, a meaning and a diagnosis that can only be subjective. Two
individuals or the same individual placed in two different situations, will have a different
interpretation of the financial statements. The producer of the information obviously has no
understanding of the context in which the reader is placed. However, depending on the nature of
the information he produces, he will nonetheless have an influence on the course of events.
Indirectly, the producer of the accounts participates in the transformation of the world and in the
creation of the real. This transformation will, in turn, result in a new image. There is therefore an
interaction between the image and the real, illustrating, in this particular case, the dialectic
relationship that exists between knowledge and action. In other words, Hines expresses the same
idea: “there is a bidirectional, interactive relationship between financial accounting ratios and
financial distress” (Hines, 1991, p. 324).

Where goods or living beings devoid of consciousness are concerned, the image does not interact
with the real. So the fact of measuring, drawing a plan or photographing a building has no impact
on the latter since he has no behaviour as defined in our introduction. Showing an animal its
picture (mirror, photograph, statue, etc.) generally has no consequences for its behaviour since it
is not conscious of being represented. It is quite another matter with certain human behaviours.
For example, the CEO who will be judged on his financial performance will anticipate, and
depending on the hypotheses adopted in constructing them, try to create, the most flattering
image possible of his action. Through the financial statements, he will, in particular, be
compared, for example, to his competitors and therefore assessed. The image, here the financial
statements, are a signal that either stimulates or inhibits social behaviours. However, the signal
makes certain aspects visible but cannot make them all visible. Yet what you see is what you get.
Voluntarily or not, the signal cannot therefore be neutral as we have seen above at § 2.2. If it is
not "fair representation", it remains to be seen whether it is "relevant".

A signal can obviously not be "relevant" in general, "relevant" in itself. It can only be so in
relation to an objective desired by a person or group of people. The optimum may be a non-
neutral signal, that is to say, one that seeks to manipulate (Christensen, 2010, p. 294). It is the
implicit or explicit conceptual framework that defines for whom and why financial statements are
produced. We will now list several alternative possibilities showing the relativity of the message,
grouping these possibilities into four main categories of objectives or needs:

- to make commercial exchanges possible through confidence;

- to make the agency relationship possible thanks mainly to control;
- to make an economic policy possible through tax-based accounting;
- to make an entity legitimate thanks to economic, social and governance reporting.

15
See Table in the Appendix.

18
 3.2.4. Making commercial exchanges possible thanks to confidence

Accounting is consubstantially linked to commercial exchange. However, this exchange cannot

take place without a minimum of confidence that accounting can contribute to establishing by
producing non-falsifiable inventories and ensuring the traceability of the financial flows.

Creditors can, for example, search the accounts for a prudently assessed and exhaustively listed
inventory of the assets that will give them real guarantees in case of failures.

One might also ask whether the role of the accounts is not simply to make the financial flows
visible and subject to control. Like the police officer, who by his mere presence, modifies the
behaviour of drivers thereby reducing the number of highway code infractions, the accountant
contributes greatly to the reduction of delinquency. The "relevant" signal that the accounts give
out is that the traceability of the financial flows is a lasting obstacle to the impunity of financial
or fiscal delinquency. Do we need, therefore, accounting standards focusing more on flows and
financial commitments including the off balance-sheet, or on the needs of the tax department who
would then abandon the idea of attributing a value-in-use to the assets?

3.2.2. Making the agency relationship possible through control

Agency Theory, which applies to all cooperation situations (Rojot, 2003, p. 245) but that we only
call upon here to deal with the separation of capital ownership and management, is obviously one
of the conditions of the investment of savings and consequently, of economic development. Yet
this relationship presupposes, besides appropriate governance, tools for supervising the agent in
order to:

- take account of his management;

- reveal his expectations;
- assess the durability or reproductive nature of his performance.

Accounts can be the instrument of an ex post control of the execution of strategic commitments,
exercised by the shareholders over the managers who must "give account" or, more generally, by
the principal over the agents. Do we not need therefore, accounting standards specific to strategic
choices? Can a long-term industrial strategy along the lines of Rhenish capitalism, be monitored
with the same accounting standards as a short-term maximisation of share values strategy?

The financial statements can also be revelatory of the expectations of the managers even
though they only record past events. Indeed, they are established on the basis of the going
concern principle. If this proves unrealistic, the accounts must be drawn up in terms of net asset
value. In the hypothesis of the continuation of the business, certain calculated costs are based on
forecasts. Depreciations, for example, are distributed over the probable time that the assets
concerned will be used. The classification of stock into categories (employee participation,
investment, etc.) with the consequences this has in terms of valuation and impact on the bottom
line, depends on intentions. The determination of a discount rate applicable to future cash-flows
in the valuation of certain items on the balance-sheet depends on expectations relating to the
value of time and level of risk.

19
Lastly, one can, for example, call on financial statements to have a predictive value. If they give
a true and fair view of the financial position at a given time, they enable us to follow past
developments, to trace a trend and, in case of degradation, they can induce panic phenomena
(self-fulfilling prophecies) whereby the creditors, of which shareholders are just one particular
case, behave like passengers on a boat caught up in a storm who all rush to one side for shelter
from the wind and cause the vessel to capsize as they so feared it might. On the other hand,
however, one can also reproach them for not having a predictive value and consequently, of
serving no purpose. By not ringing the alarm bell sufficiently early, we delay awareness of
danger and decisions, which had they been taken in time would have allowed the recovery which
has since become impossible. A detailed profit and loss account allows us to check the viability
of the company's economic model or business paln.

3.2.3. Making an economic policy possible through tax-based accounting

Accounting produces a conventional measure of the bottom line which will serve to divide the
added-value between the shareholders (dividend), the State (taxes), the employees (incentive
schemes and profit-sharing) and the company itself (investment). What each will receive
obviously depends on what the others will take, knowing that the impact on the national economy
and on social balance depends on the beneficiary. What is distributed to the employees is not
used in the same way as what is distributed to the shareholders, since these two categories do not
have the same savings rate. The State can use its supreme authority to dictate the amount of the
levy it imposes.16 More subtly, however, it can also favour one or other of the claimants by
taxing, for example, capital revenue at a lower rate than labour revenue, or by taxing the
distributed income more heavily than retained earnings. It can even target yet more subtly by
favouring investment in the production tool rather than in property, for example.

To the extent that taxation is the instrument of an economic policy that can be aimed at the
growth of employment, investment, innovation or exports, etc., accounting can then have as its
prime objective the measurement of the efforts made by the tax-paying company in the direction
of the desired behaviour. Accounting standard are, from this point of view contained in the Tax
Law, which is, for example, a possibility for non-public interest entities in the United States. This
is also largely, but not totally, the case with company accounts in France.

3.2.4. Making an entity legitimate thanks to economic, social and governance

reporting (ESG).

Certain companies reach a size, generate externalities and exercise power such that "the public in
general (and not only their clients) becomes aware of the fact that it is the object of the
management of these organisations" (Laufer & Burlaud, 1981, p. 52). This therefore poses the
question of the legitimacy of this power. The question of the political role of companies is not
new. In the 15th century, the banker Fugger, used his fortune to get Charles V elected Emperor of
the Holy Roman Empire of Germany. The colonisation of Asia and Africa by European nations
was based on big companies such as the Compagnie des Indes. ITT played an active role in Chile

16
These levies are, however, "modulated" by tax fraud that Eric Alt, quoting the Minister, Valérie Pécresse,
evaluates at 30 or 50 billion euros a year in France. [See Eric Alt & Irène Luc (2011) : L esprit de Corruption (The
Spirit of Corruption). Ed. Le bord de l’eau, 2011, 180 p.]

20
in the overthrow of Salvador Alliende's Socialist government by General Pinochet. We might
also mention the political interventions of the big oil and mining companies. Lastly, the current
crisis has demonstrated the fantastic power of ratings agencies. Their power is also their
weakness because of the political, environmental and social risks (Laufer, 1993). As a result, they
too must account to Society if they want to legitimise and therefore maintain their power.

Since the 1990s, the demand for reporting to be extended beyond the financial statements is
becoming institutionalised. In France, the Act of 15 May 2001 on the new economic regulations
created "an obligation for listed companies to produce social and environmental reporting"
(Capron & Quairel-Lanoizelée, in Nikitin & Richard, 2012, p. 163). The 12 July 2010 Act
supporting the national commitment to the environment, known as Grenelle 2, has extended this
obligation (ibid. p. 164). The European Directive on the modernisation and updating of
accounting standards (2003/51/EC) stipulates that: "To the extent necessary for an understanding
of the company’s development, performance or position, the analysis shall include both financial
and, where appropriate, non-financial key performance indicators relevant to the particular
business, including information relating to environmental and employee matters."(art. 46b) These
requirements come up against the weakness of the instrumentation and lack of consensus to
construct it. There is no lack of projects, however.

In 1997, the Global Reporting Initiative (GRI) was created in partnership with the United Nations
Program for the Environment (UNPE). This was to implement the promotion of sustainable
development whilst ensuring a three-way balance between the economic, environmental and
social or human aspects. "GRI guidelines organise sustainability reporting in terms of economic,
environmental and social performance (also known as the triple bottom line). This structure has
been chosen because it reflects what is currently the most widely accepted approach to defining
sustainability."17
A new standards setter was created in 2010: the International Integrated Reporting Council
(IIRC). It defines its sphere of competence as follows: "Integrated Reporting is a new approach to
corporate reporting that demonstrates the linkages between an organization’s strategy,
governance and financial performance and the social, environmental and economic context
within which it operates. By reinforcing these connections, Integrated Reporting can help
business take more sustainable decisions and enable investors and other stakeholders to
understand how an organization is really performing."18
As we have seen both on an institutional level and as regards tools, ESG reporting has not been
stabilised. However, a certain number of observations can henceforth be made:

- the accounting standardisation model exercises a strong appeal with the setting up of standard
setting bodies defining the information that must be produced and in what format in order to
ensure the consistency of quantification and comparability methods and to guarantee their
neutrality (in the sense of absence of manipulation);

17
GRI (2002) : Sustainability Reporting Guidelines. Version 2, quoted by Depoers & Richard in Nikitin & Richard
(2012), p. 181 – 182.
18
See website http://www.theiirc.org/

21
- the objectives are clearly wider with the desire to give account of several aspects of
management to the benefit of very many stakeholders and not just current and potential
investors;
- the question of the link between social and environmental reporting and financial reporting
has not been resolved. Should the information produced overlap or be produced
independently? By whom and how should it be audited?

But the main idea, whether it is a question of ESG reporting or the financial statements is that to
make visible is to constrain and that information produces behaviour.

In conclusion to this third section, we see that "the choice of an accounting technique is merely
the reflection of far more fundamental choices that need to be made explicit, although this is
rarely done" (Burlaud, 1979, p. 20). The IASC/IASB's Conceptual Framework has partially
responded to this critique by identifying the stakeholder it intended to privilege. However, we
have shown that there was another way of tackling the question. Instead of asking for whom the
information is intended, one can ask with what aim and to what end the information is being
published. Several stakeholders can have a common objective. Moreover, certain stakeholders are
not homogenous categories. For example, the investors may be small savers or non-professional
investors, institutional investors who themselves may have different profiles, portfolio managers
who are sometimes judged on their daily performances or great industrial dynasties (Peugeot,
Michelin, Quandt, etc.) managing their assets with a horizon of several generations. It is far from
certain that they all have the same needs with regard to financial information. Lastly, if financial
statements are a tool at the service of a public policy, this supposes that the latter is supported by
a State or an inter-state organisation that also intervenes in the accounting standards setting
process.

Conclusion

Many of the questions raised, without claiming to be an exhaustive list, remain unanswered and
represent avenues for further research. They can be organised by first of all placing ourselves in
the situation of the political power that must manage the preparation of the conceptual framework
by the standards setter then, by placing ourselves in the position of the person reading the
accounts.

The political authority must ask questions on the "right behaviour" and the potential pro-cyclical
effects induced by the accounting standards. This is what the European Union has not done, "sub-
contracting" responsibility for defining accounting standards to the IASB, "subject to further
examination", however.

- What is the "right behaviour" that the financial statements should induce? A conceptual
framework is therefore a political act for which the technicians of the discipline cannot
legitimately take responsibility. To whom should they account for their decisions? This also
raises the question of knowing whether we can have the same conceptual framework for
providing relevant information for stakeholders when it is a question of private companies,
organisations involved in the social economy and public organisations that levy a tax, and
perhaps, issue their money? Should we be questioning the coming together of the
International Public Sector Accounting Standards (IPSAS) and the IFRS?
22
- How to avoid the signal producing chain reactions, panics or surges, pro-cyclical behaviours
and leading to self-fulfilling prophecies? Would the abandoning of fair value for a return to
historic cost allow us to reduce volatility?

The standards setter, in the dialogue he has with users, in particular during the publication of
Exposure Drafts, should question the simplicity of the message and whether or not it is
comprehensible as well as the learning effects it can induce.

- What is the link between credibility and the simplicity or clarity of the message? Of course,
the accounts can only be credible if they are comprehensible. Understandability is, moreover,
one of the characteristics required by the Conceptual Framework (IASC, 1989, art. 25). But
many voices are now denouncing the complexity of the standards and the loss of legitimacy
of financial statements.19 Can we imagine a return to a detailed profit and loss account that
would correspond to the needs of the various stakeholders? How far can the mechanism of
simplification of the signal go whilst still allowing the financial statements to make sense?
The most extreme example is that of the ratings agencies who reduce information on the
insolvency risk of a company, even of a country and therefore of its policy, to a single rating.
- Does the stimulus of financial reporting always act on behaviour in the same way over time?
Is there a familiarity effect? A learning effect?

IASB's Conceptual Framework presupposes that we can faithfully represent "economic

phenomena" (IASB, 2010, QC12) to allow existing and potential investors to take economic
decisions involving the purchase, sale or retention of stock (ibid. OB2). Previous studies have
often dealt with extending it to take in the needs of other stakeholders. This is the partnership
approach of accounting standardisation (Colasse, 2012, p. 66). The debate we would like to open
concerns the relationship between standard and decision or behaviour. More than ever, therefore,
we must favour the "relevant" over "fair representation". We should focus “on the effect of
accounting reports on the distribution of income, wealth and power” (Bryer, 2012, p. 512).

19
See the conference on accounting research organised by the Autorité des Normes Comptables (ANC), France's
national standards setter, on 16/12/2011.

23
Acknowledgements: the author would like to thank his colleagues and friends Charles R.
BAKER (Adelphi University) Larry BENSIMHON (Cnam), Bernard COLASSE (Université
Paris-Dauphine) and Christian HOARAU (Cnam).

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 Appendix

How accounting allows us to transform, in stages, data into information and information into
knowledge.

Table 4: The process of transforming data into knowledge

The stages of accounting The actions The outcome of the

operations (bound by a standard) accounting operations
1/ Entry List the events Collected data
Measure, that is to say express Ensures the traceability of the
in monetary units (valuation). financial and physical flows.
Enter the operations Standardises them.
Exhaustiveness of the set of
transactions and inventory of
the assets.
2/ Processing Classify the data Reduce the complexity of
Memorise abundance by transforming the
Summarise, produce a true data into information
and fair view. (example: amount of the wage
bill, annual turnover, etc.).
3/ Interpretation Analyse the information Transform the information into
(example: calculation of ratios) knowledge (production of
Compare (example: Central meaning by reducing the
Balance Sheet Office) complexity of meaning;
Diagnose (example: identify example: knowledge of
strengths and weaknesses). profitability, solvency, etc.)
with the introduction of
categories, rate (ratings
agencies, score functions),
arrive at a decision (role of
experience and categorisation).

26
 Vitae

Alain BURLAUD is currently professor emeritus at the Conservatoire national des arts et metiers
(Cnam). He has been the head of the French leading accountancy school: Institut national des
techniques économiques et comptables (Intec). He has been elected Vice-president of the
International Association for Accounting Education and Research (IAAER; 1993-1997 and
2012/-), President of the International Federation of Scholarly Associations of Management
(IFSAM; 1995-1996) and President of the French Accounting Association (AFC; 1997-1999). He
is a doctor honoris causa of two Romanian Universities: Academia de Studii Economice din
Bucuresti and Universitatea Valahia din Targoviste.

Highlights

• We explain how conceptual frameworks are moving towards a hypothetico-deductive

•
approach.

•
We discuss the explicit and implicit hypothesis of IASB’s conceptual framework.
We consider financial statements as stimuli borrowing this concept from the behavioural

•
sciences.
We conclude that “relevance” of disclosed financial statements is more important than “fair
representation”

27
Summary 
Introduction ...................................................................................................................................... 1 
1.  The evolution of accounting ..................................................................................................... 3 
1.1. Accounting: "knowledge in search of action" ....................................................................... 4 
1.2  . Accounting: towards a hypothetico-deductive approach................................................. 6 
2. The implicit and explicit hypotheses of IASB’s accounting model. ............................................ 8 
2.1. The implicit hypotheses of IASB’s accounting model.......................................................... 8 
2.1.1.  Expected Utility Theory or the theory of rational choices. ........................................ 9 
2.1.2.  The Efficient Markets hypothesis ............................................................................ 10 
2.1.3.  Agency Theory ......................................................................................................... 10 
2.2.  The explicit hypotheses of IASB’s accounting model .................................................... 12 
2.2.1.  The existence of a "true and fair view" or “faithful representation” provided by
financial reporting. ................................................................................................................. 13 
2.2.2.  The hypothesis of the neutrality of financial reporting ............................................ 13 
2.2.3.  The hypothesis of the compatibility between the faithful representation and
relevance of the accounts ....................................................................................................... 14 
3. The financial statements are a stimulus: "relevance" is more important than "fair
representation"................................................................................................................................ 15 
3.1.  What is the reality of a "fair representation"? ................................................................. 16 
3.2.  How can the image create the real? ................................................................................. 17 
3.2.4.  Making commercial exchanges possible thanks to confidence ................................ 19 
3.2.2.  Making the agency relationship possible through control ....................................... 19 
3.2.3.  Making an economic policy possible through tax-based accounting ....................... 20 
3.2.4.  Making an entity legitimate thanks to economic, social and governance reporting
(ESG). 20 
Conclusion ...................................................................................................................................... 22 
Bibliography ..........................................................................................Erreur ! Signet non défini. 
Appendix ........................................................................................................................................ 26 
Vitae ............................................................................................................................................... 27 
Highlights ....................................................................................................................................... 27 

28