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Acco unting, Orgunizution.sand Society, Vol. 16, NO. 3, pp. 287-295, 1991. 0361-3682/91 S3.00+.00
Printed in Great Britain Pergamon Press plc
ACCOUNTING AND SOCIAL CHANGE: A NEUTRALIST VIEW*
DAVID SOLOMONS
Wha r t o nSchool , Un i v er s i t y f Pennsy l v an i q Ph i l a de l p h i a
Abstract
This paper takes the position that the task of accountants is to provide information as free from bias as
possible that will be useful to decision makers (possibly including accountants themselves) who may be
concerned with social and economc issues. Though accountants may sometimes fail to achieve the faithful
representation of economc phenomena, that should be their goat. In developing this argument, the paper
criticizes Badical Accounting, as represented by Tony Tinker’s Paper f%@&.r, and others who assert that
accounting policies should be chosen for their supposedly desirable economc consequences rather than
for their capacity to depict relevant phenomena faithfully. Like journalists, accountants should report the
news, not make it. Neutrality in accounting may not always be easy to secure, but without it the credibility
of accounting is endangered.
With social change in the broadest sense ac-
counting has ittle to do. One of the most signifi-
cant social changes that has occurred in this cen-
tury is the dramatic improvement in the position
of women. Like most social changes, this one has
been accompanied by economic changes, such
as changes in the pattern of consumption and the
distribution of income. Another great social
change during the last ifty years is the disappear-
ance of colonialism. That too has brought econ-
omic changes in its wake. To suggest any direct
connection between those broad developments
and accounting would be farfetched indeed.
But on a smaller stage, accounting does have a
part to play. It has been asserted, for example,
that an accounting standard that requires re-search and development expenditure to be writ-
ten off as ncurred, in spite of the probable future
benefits that are expected to flow from it, de-
presses the earnings of small immature high-
technology companies and thereby discourages
technological innovation. Without regard, for
the moment, to the truth or falsity of that asser-
tion, it well exemplifies the part that accounting
may play in encouraging or inhibiting social and
economic change.
The question to be addressed here is this.
Should accountants see themselves and their dis-
cipline as agents to promote (or sometimes to
retard) social and economic change? Or should
they see themselves as providers of unbiased in-
formation, to facilitate social and economic
activity by others? By “others” I mean, of course,
to include accountants themselves in their
capacity as citizens, not as accountants.
A RADICAL VIEW OF ACCOUNTING
I want to leave no doubt as to where I stand on
this issue. I believe that accountants are like
journalists. They should report the news, not
make it. This is the view that I shall explore more
fully in what follows. But in case it is thought that
‘Earlier versions of my paper were presented as a Lee Kuan Yew Lecture in the National University of Singapore in December
1 9 8 6nd to the European Accounting Association at the annual meeting in Stuttgart in April 1989. My thanks are due to the
fate Steven B. J ohnson, formerly of Columbia University, for his help in formulating my ideas on the subject of this paper.
287
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288 DAVID SOLOMON
the opposite view is merely a straw man, I pro-
pose to bring into court an outspoken propo-
nent of that other view, and, so far as possible, I
shall allow him to speak for himself. I am refer-
ring to Dr Tony Tinker, of Baruch College,
CUNY. His views are set out at length in a book,
published in 1985, entitled Pa per Pr opbets : A
Soc i a l C r i t i q u e o f Accoun t i n g . Tinker and
others who think like him use the term “radical
accounting” as a label for their views, and it will
be convenient if I follow their example.
Let me warn you, before I set out on this
examination of radical accounting, that it is not
easy to come to grips with it. It is fairly easy to
see what radical accountants find to criticize in
traditional accounting; and it would not be dif-
ficult to suggest modifications of traditional ac-
counting that would go some way to meet those
criticisms. But modifications are not what this
argument is about. The argument, in fact, is more
about the nature of capitalist society and the
marginalist theory of value that economists use
to explain the working of capitalist economies.
This is what Tinker has to say about the depen-
dence of accounting on the marginal theory of
value.
Most accounting practice has achieved a harmony with
marghtahst value theory without much conscious delib-
eration. This is mainly because marghrahsm is the only
value theory with which most accountants are familiar;
thus they reduce all economics to marginahsm . . Mar-
ginalism has virtually monopolized ah accounting retlec-
tion about value theory, notwithstanding the fact that in
order to resolve technicll problems of concept
operationahaation and measurement, accountants have
deviated from the marginahst model. These deviations
and compromises have alI been in terms of the fine print,
however; even the much vaunted area of “social account-
ing” is nothing more than marginahsm with externalities.
The obliviousness of accounting to ah other theories of
value is sufficient reason for concluding that accounting
is unabashedly marginaIist in its intellectual aiEIiation.s
(Tinker, 1985, p. 111).
Tinker then goes on to attribute what he re-
gards as accounting’s antisocial bias to this “in-
tellectual affiliation” with marginalism. For him,
theories are “weapons of social conflict”, and ac-
counting theory is no exception. Here is what he
has to say on that subject.
Accounting theory, like any social belief, is not merely a
passive representation of reality, i t is an agent in changing
(or perpetuating) a reality. Marginahsm provides ac-
counting with a slanted picture of reality that affects both
how the latter misperceives, and how it acts on, reality.This slant is ideological insofar as it misconstrues cir-
cumstances and events in order to promote certain parti-
san interests (Tinker, 1985, p. 28).
In a related passage, Tinker has this to say
about the social role of accounting.
In addition to reflecting economic exchanges - albeit
partially - accounting practice also helps effect econ-
omic exchanges. Accounting statements are used in mak-
ing decisions about the purchase of a company’s sec-
urities, in assessing a &m’s tax liability, in determining
the rates a public utility can charge its customers, in de-ciding whether an employer can afford to pay a wage in-
crease, and so forth. This is not a passive and representa-
tional role for accounting; ultimately accounting is part
of that exchange process itself - as an informational
commodity that promotes exchange. If accounting prac-
tice did not participate in exchange in this way, then pre-
sumably, competitive pressures would eradicate it as an
unnecessary cost of production” (Tinker, 1985, pp. 83-
84).
I do not understand the distinction that Tinker
draws here between accounting’s “passive and
representational role” and its role as an “infor-mational commodity that promotes exchange”.
A telephone is an informational commodity that
promotes exchange; but surely it does this by
being passive and “representing” the speaker’s
thoughts to the listener. One could conjure up a
bizarre picture of a telephone that not only con-
veyed one party’s thoughts to the other but be-
came itself an actor in the exchange, Tinker’s
book leaves me with a strong suspicion that this
is what he would like accounting to do.
Another source of confusion in trying to inter-
pret Tinker’s views stems from the fact that most
of the sins of capitalism, as he sees them, are vis-
ited on the heads of accountants. Accounting, it
seems, has much responsibility for pollution,
monopolies, and fraud, as well as other
shortcomings of our economic system. We have
already noted his view that accounting plays an
active role in effecting exchanges and in arbitrat-
ing conflicts (a phrase that he uses more than
once, by the way). Slaying the messenger that
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A NEUTRALJST VIEW 289
brings bad news, as they did in ancient times, is
a custom that Tinker seems to approve of. Ac-
counting reports on an economic system of
which Tinker disapproves. Therefore, account-ing is to be condemned.
RADICALACCOUNTING AND VALUE THEORY
But there is more to it than that. The malign in-
fluence of accounting on society, as Tinker sees
it, stems from the values that are attached to
goods and services and resources by the mar-
ginalist theory of value in accordance with
which our capitalist economy is regulated or
self-regulated. I am at a total loss to understand
what other values accountants could use. Tinker
espouses a Marxist-Labor Theory of Value,
which presumably he thinks would give relative
values that would be more to his taste. I myself
would be happy if teachers and nurses were
better paid and business executives, Bhn stars
and baseball players were less well paid. But it is
obvious that it is society that would have to be
changed, not accounting, to bring about such a
result. It makes no sense at all to blame account-ants for using values determined in the market
when they are accounting for market transac-
tions.
There are, it is true, some transactions in
which accountants play an active part in deter-
mining values. One is the case of regulated in-
dustries, such as public utilities, where account-
ing calculations of cost are used in determining
utility rates. Another case is when a value has to
be placed on a whole enterprise or a large block
of shares in an enterprise that is changing hands.But here, too, there are limits to the values that
accountants can determine, and there are other
factors at work as well. The most important limit
is set by the need for a business to be profitable
if it is to survive. A corporation that changes
hands at an inRated value will soon flounder if it
cannot earn an acceptable rate of return on its in-
vestment; and public utility rates that are kept
artificially low to benefit consumers will create a
demand for state subsidies or will leave the util-
ity unable to raise capital or to replace its equip-
ment when it wears out.
THE RADICAL VIEW OF ACCOUNTING
EDUCATION
Accounting education does not emerge in a
good light from Tinker’s criticism of accounting.
Here is a passage from his book that reinforces
my view that it is society that is really the focus
of his attack, not accounting.
Accounting education cannot escape unscathed from
this discussion . . . The accounting education system
elevates monetary values as ends in themselves; the suc-rogate role of money as a mere token expression of
human and social needs is ignored. Marx distinguished
between the surface appearances of market phenomenon
and the underlying social structure that generates the ap-
pearances
Accounting education appears to have outstripped
Marx’s worst fears in this regard: students are not merely
taught to contlate appearance with reality; they learn to
reify deceitful appearances and ignore the structure of
social reaiity . . Ignorance of this kind multiplies when
an accounting education system elevates profit and
wealth as ends in themselves and iUs to articulate the
so&i purpose of profit and its tenuous COMeCti0tI.S to
social weifare” (Tinker, 1985, p. 28).
The idea that accountants should take on the
task of looking beyond “market appearances” to
the “underlying social reality” is, to say the least,
farfetched. It is ditficult enough to get consensus
as to what constitutes “economic reality”, a con-
cept derived horn the fabric of mu& et
phenomena. What hope could there possibly be
of finding a consensus as to the nature of “social
reality” that is somehow different from market
realities?
POSITIVE ELEMENTS IN RADICAL
ACCOUNTING: NEGLECTED
CONSTITUENCIE!S
There are, to be sure, some elements in radical
accounting that should be taken seriously. One
is the charge against what Tinker calls “main-
line” accounting that it is biased in favor of one
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290 DAVID SOLOMONS
or two of the constituencies that it should serve,
namely, investors and, to a lesser extent, cre-
ditors, while other constituencies are neglected.
At least this bias is recognized by the accounting
rule-making body in the United States, the
Financial Accounting Standards Board. The
board has defended the bias, as regards general
purpose financial statements, on pragmatic
grounds, as follows:
To identify investors’ and creditors’ needs as the focal
point of financial statement information greatly narrows
the range of economic decisions and varied needs for
specialized information that general purpose Enancial
statemen= must try to sad@, thereby increasing the pos-
sibility that the statements can reasonably satis@ the nar-
rower range of needs (FASB, 1976).
That defense is not implausible, so Ear as gen-
eral pu ipose fJnanciaJ statements are con-
cerned. But there are other forms of financiaJ re-
porting that could have been developed to serve
the information needs of other constituencies,
notably labor and the consumem of the goods
and services supplied by business enterprises.
Accountants have shown little interest in meet-
ing those informational needs.
It is somewfiat di@JcuJt to generaiize about
Fiat might be done to fiJJ these gaps, for more
information is already being provided in some
countries than in others - the gaps are not the
same everywhere. American companies prob-
ably make more information available to inves-
tors and prospective investors than companies
in most other countries. But even there, little
thought is given to the needs of labor. Many of
these needs were listed in a working paper pre-
pared by the Trade Union Advisory Committee
of the Organization for Economic Cooperation
and Development (OECD) for a conference on
harmonization of accounting standards con-
vened by the OECD in Paris in April 1985
(OECD, 19B6). They include:
-statistics of employee turnover, by categories
of employee;
- information bearing on job security, such as
company plans for expansion and shutdowns;
-shares held by insiders, e.g. management, fam-
ily proprietors, etc.
This is only a small selection from a longer list of
needs that the trade unions presented.
POSITIVE ELEMENTS IN RADICAL
ACCOUNTING: EXTERNALITIES
A second charge JeveJJe.d by radical account-
ing theorists against traditional accounting that
needs to be taken seriously is its neglect of exter-
nalities. Accounting records transactions that an
enterprise enters into, and it therefore takes ac-
count of costs for which the enterprise is Jcnown
to be JegaJJy liable. But there may be other costs
that it imposes on society for which, under pre-
sent Jaws, it is not JegaJJy liable. These are not
recognized in a company’s records and there-
fore are not included in its financial statements.
Examples of these social costs that may be cited
are environmental pollution, the impact of plant
closings on unemployment in a local commun-
ity, the effect on health ofproducing noxious but
not iJJegaJ substances such as tobacco, and the
effect on the environment of erecting unsightly
billboards on hitherto unspoiled roads. A par-
ticularly clear example of a private cost being
transferred to the public arises when a producerof beer or soft drinks switches from using retum-
‘able containers to nonreturnables. The cost to
society of disposing of the nonreturnable con-
tainers strictly should be a deduction in arriving
at the ,producer’s social value added; but of
course the social cost wiJJ not appear in the com-
pany’s financial statements.
There are positive externalities that go unre-
corded also. Thus a company will record the
cost of taking down a billboard but will not take
credit in its accounts for the improvement in theenvironment that follows. The same is true for
other acts of beautifkation, e.g. landscaping the
area around corporate offices. The multiplier
effect of increasing employment by opening a
new plant may go far beyond the benefits di-
rectly accruing to the employer himself.
Not aJJ externalities are the responsibility of
business. As Robert Jensen puts it:
The well-known quotation from Pogo that “the enemy is
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A NEUTRALIST VIEW 291
us” implies that the public-at-large is a source of external
diseconomies as well as being the damaged party. Re-
sponsibilities for automobile air pollutants, for instance,
are d&At to pin solely on the manufacturers, because
the drivers themselves are also partly to blame in terms ofthe condition in which they keep their cars, the way they
drive, when they drive, etc. The beer can thrown on my
front lawn was not thrown there by the Budweiser Com-
panyJ ensen,976).
Financial statements capture only those costs
and revenues that are internal to an enterprise.
This omission of external economies and dis-
economies is significant for two reasons. One is
that the contribution that an enterprise makes to
society, its social value added, may be more or
less than the value added that is reported in itsstatements. Thus its social performance is
under- or over-reported. The second reason why
ignoring social costs that are not recognized as
private costs is significant is that they may make
an enterprise liable for compensation to persons
who suffer as a result of its activities. There have
been four notable examples in the United States
in recent years. The Johns ManvilIe Corporation
has had to pay out huge sums to workers and
others whose health was impaired by inhaling
the company’s asbestos. The A. H. Robins com-pany was made bankrupt by claims from women
whose health had suffered from the use of a con-
traceptive device, the DaIkon shield, made by
the company. More dramatically, there has been
the Bhopal disaster in India. It is too early to say
whether Union Carbide has finally settled that
matter. In none of these cases did the company’s
balance sheet show a liability for the compensa-
tion payable to the injured parties. The Union
Carbide case is different from the other two,
because the disaster was sudden and unforesee-able. But in the other two cases, costs were being
imposed on society welI before the matter came
into court. More recently there has been the
Alaska oil spill.
Although radical accountants are justified in
calling attention to the problems caused by ex-
ternalities, these problems have been under dis-
cussion for many years. The radicals have no-
thing new to tell us about how to measure the
effects of externalities; and unless and until we
learn how to solve these measurement prob-
lems, this accounting failure is not likely to be
remedied.
I have now said alI I can say by way of approval
of radical accounting. As I have said, what the
radicals really want to change is our present
form of society and its values. Their attempts to
change accounting are almost incidental to their
main purpose. How you view radical accounting
will therefore depend largely on how you view
our present social and economic arrangements.
SUPPLEMENTARY DISCLOSURE AS A MEANS
OF CHANGING CORPORATE BEHAVIOR
A desire to use accounting to effect or to in-
hibit social and economic change is not a
monopoly of the radicals. Other accountants
who would like to see accounting play an active
part as a change agent can be divided into two
camps. There are those who are content to en-
courage or to require supplementary disclosure
by corporations about their social behavior,
with the expectation that market forces or polit-
ical pressures wiIl reward good behavior and
penalize bad (Colantoni et a 4 1974). And thereare others who argue that accounting regulators
should look to the economic consequences of
accounting standards when formulating them,
with a view to securing some allegedly desirable
objective, e.g. to promote investment in a par-
ticular direction, or perhaps to inhibit some
wealth transfers that might otherwise take place.
The l%st group wants to influence corporate be-
havior by encouragement, the second by active
involvement in the standard setting process. I
shall calI this second group accounting activists.
Most people will welcome improved report-
ing by companies on their social behavior so
long as it comes about voluntarily. Presumably
the companies will have addressed the costs of
the disclosure and will have decided that it
brings more than equivalent benefits. Mandated
disclosures, on the other hand, must raise a ques-
tion whether the costs are justified by the bene-
fits to soc ie ty . Th e fact that the disclosure was
not made voluntariIy is not conclusive. The
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292 DAVID SOLOMONS
benefits to individual companies may fall short
of their costs and yet for society as a whole the
costs may be justified. In any case, supplemen-
tary disclosures of this kind for the purpose of
modifying corporate social behavior, whether
they are voluntary or mandated, do not impair
the integrity of the financial reporting system.
They may even improve it.
ACCOUNTING ACTlVISM AND ECONOMIC
BEHAVIOR
Accounting activists are not content to rely on
disclosure to bring about changes in corporate
behavior. They want to inlluence behavior moredirectly, but yet draw back from invoking direct
interference by the govement. In a country like
the U.S. where accounting rules and standards
are spelled out with considerable precision, and
where they are numerous and extensive as to
their coverage, the activists see accounting
standards, which are set by a private sector
agency, the Financial Accounting Standards
Board, as a ready means of intluencing economic
activity that suits their particular ends. More
often than not, as it happens, ir&luence isbrought to bear toprevent a change, to maintain
the status quo, by trying to block an improve-
ment in financial reporting that the standard set-
ting body is trying to introduce.
There is some controversy among academics
as to the magnitude and direction of the econ-
omic consequences of accounting standards, but
there is no doubt that business executives take
the alleged consequences very seriously. am re-
ferring here principally to standards that change
accounting measurements, not those that simply
call for some change in the information that the
preparers of financial statements have to dis-
close. Most standards do both. Two of the most
important such standards worked on recently by
the FASB are Statement of Financial Accounting
Standards No. 87, Employers’ Accounting for
Pensions (December 1985), and a proposed
Statement, Employers’ Accounting for Post-
retir ement Benefi ts Other Than Pensions, an ex-
posure draft of which was issued in February
1989. The most important postretirement bene-
fit other than pensions is health care coverage,
but such benefits may also include legal services,
tuition benefits and others. The amount of con-
troversy generated by these standards can be
judged by the fact that the subjects were put on
the FASB’s agenda way back in 1974. It took
eleven years to get the pensions standard out.
The controversy over Other Postretirement
Benefits is still raging. Both of these standards
have brought out the obstructionists, the oppo-
nents of change in financial reporting, in force.
These standards are controversial for two rea-
sons. They both involve much looking into the
future and many assumptions about what future
experience will be with respect to such mattersas retirement age, employee mortality, levels of
pay, future health care costs, rates of interest,
and the value of assets (usually securities) set
aside to fund pension and health plans. Actual
experience is bound to turn out to be di@erent in
some respects from the assumptions on which
pensions and health care costs are accrued, with
a resulting over- or under-accrual of those costs.
Moreover, changes in the assumptions can
greatly affect the present value of the benefit ob-
ligations disclosed in an enterprise’s financialstatements. The many uncertainties surrounding
the accounting for these benefits have made the
whole subject an irritant in the eyes of many
American preparers.
The second ground for controversy, which is
even livelier in connection with “other benefits”
than with pensions, arises because many enter-
prises have been content to deal with such bene-
fits on a pay-as-you-go basis, treating benefits as
an expense when they are paid out and making
no provision for them during employees’ work-
ing lives, as the proposed new standard will re-
quire them to do. The recognition of these obli-
gations, even allowing for the gradual phasing in
required by the proposed standard, will have a
major impact on financial statements and is de-
cidedly unpopular with American industry.
The gap that separates what is conceptually
pure and what is politically feasible for standard
setters was vividly illustrated by the FASB in its
1985 standard on pensions, when it admitted
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A NEUTRALIST VIEW 293
with disarming frankness (in paragraph 107)
that the gradual amortization of actuarial gains
and losses (which the standard requires) rather
than their immediate recognition was not ideal.“The Board,” it says, “believes that it would be
conceptually appropriate and preferable to rec-
ognize a net pension liability or asset measured
as the difference between the projected benefit
obligation and plan assets, either with no delay
in recognition of gains and losses, or perhaps
with gains and losses reported currently in com-
prehensive income but not in earnings. How-
ever, it concluded that those approaches would
be too great a change from past practice to be
adopted at the present time.”
The reason for the delayed recognition of
gains and losses in the Board’s standard is the op-
position among many of its constituents to the
volatility that would be introduced Into financial
statements if the gains and losses were fully rec-
ognized as they occurred. No matter that volatil-
ity is a fact of life. It does not belong, it seems, in
financial statements, whatever the representa-
tion of economic reality might require.
AN’EXTREME ACTMST VIEW
This example of the FASB’s bending to politi-
cal pressure is a mild one. The result, it seems to
me, is to subordinate faithful reporting of
financial information to what is politically ac-
ceptable to the Board’s constituents in industry.
If, one day, that constituency becomes more en-
lightened, it may be that faithful representation
will prevail. But one can find more striking
examples where the Board has been urged quite
openly to subordinate sound accounting to thealleged economic effects that might follow from
a new accounting rule or a change in an old one.
Some rich examples of this point of view will be
found in an Emanuel Saxe lecture by David Haw-
kins, delivered at Baruch College in New York
City in 1973. Hawkins argued there that “. . .
because the [Financial Accounting] Standards
Board has the power to influence economic be-
havior it has an obligation to support the govern-
ment’s economic plans ” (Hawkins, 1975, p. 11).
His lecture is studded with examples of how this
might be done. The Board at that time was con-
sidering a new standard on leasing, and it was ex-
pected to require that long-term leases, which atthe time were noted in financial reports but
were not required to be included an assets and
liabilities in the balance sheet, should be so in-
cluded. Hawkins argued that putting leases on
the balance sheet might raise the cost of financ-
ing for certain industries and therefore the board
should go slow in pressing for lease capitaliza-
tion in a period of economic recession. The
Board did not take Hawkins’s advice. On the sub-
ject of accounting for research and develop-
ment, he argued that because a requirement to
expense such costs might make it more dUBcult
for small high technology companies to raise
capital for growth, the Board should not outlaw
the capitalization of R&D altogether. On this
matter, too, the Board declined to follow Haw-
kins’s advice.
Another example from Hawkins demonstrates
to what absurdities an “activist” approach can
lead. After reviewing some earlier advice he had
given to the Accounting Principles Board In
1962 urging them to reject the “flow through”
treatment of the investment tax credit at thattime because he “assumed it was unsound be-
havior to adopt an accounting method that en-
couraged corporations to earn material profits
immediately by purchasing assets,” he explains
why he later changed his mind.
Such an approach may have been acceptable and toler-
ated by the economc ptiers ifthe ~nomywas strong
and untroubled. But the economy was’wkak and troubled
.Under these conditions 1 believe now it was irrespon-
sible for me to urge the [APB] to deliberately take action
which would lessen the e&ctiveness of the tax credit in
a situation where sound accounting arguments could he
made for both the deferral and flow through approaches
(Hawkins, 1975, p. 16).
In other words, what is sound accounting
when the economy is strong is unsound when
the economy is weak. One can conjure up a pic-
ture of a standard setting body wetting its collec-
tive finger and holding it up to the wind to see if
it is blowing hot or cold, and then formulating a
standard accordingly.
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GAAPVSRAP view the accounting radicals and accounting
activists. I believe they are both misguided,
The recent debate about GAAP vs RAP (Reg- though for different reasons. The radicals really
ulatory Accounting Practices) in connection want to change society, and accounting is
with the savings and loan association (SLA) merely incidental to that desire. The activists
fiasco has provided another striking example of want to use accounting to change society, usu-
the subversion of accounting to supposedly ally in quite small ways, or they want to preserve
serve social ends. Generally accepted account- the status quo by obstructing change. Accoun-
ing principles clearly require that ifa financial in- tants, as c i t i zens , should be as much concerned
stitution is insolvent, its financial statements to bring about desirable changes in society or to
should show it as being insolvent. But various prevent undesirable changes as anyone else. But
regulatory accounting devices have been used as accountants that is not their job, and they have
to hide the fact of insolvency. One device was to no special expertise in that direction. Their job
disguise the negative net worth of insolvent SLAs is to portray certain aspects of society, not to
taken over by sound institutions as goodwill in change it. There are other and better ways to do
the balance sheets of the acquirers. Another de- that.vice was legalized in the Competitive Equality If accountings to retain any credibility-and
Banking Act of 1987. “Under this Act, agricul- without credibility it is worthless - its guiding
tural banks may be permitted for regulatory pur- light must be neutrality in financial reporting.
poses to defer and amortize loan losses over a The FASB has defined neutrality as the “absence
period of up to 7 years, rather than recognize in reported information of bias intended to
such losses immediately. In addition, regulators attain a predetermined result or to induce a par-
may permit an agricultural bank to reappraise ticular mode of behavior.” This is a guidepost
real estate or other property acquired as a result that all standard setting bodies should follow,
of a default on an agricultural loan and defer such and the FASB’s record in this respect has been
losses, if any, and amortize over a period of 7 good. Dennis Beresford, the chairman of the
years.“’ Board, reatkmed the importance that the BoardThe statements prepared for use by regulators attaches to this concept in an address on 1
that incorporated these devices did not purport November, 1988 to a gathering of financial
to comply with GAAP. Their only purpose was to executives. “Neutrality”, he said, “is written into
preserve an appearance that the SLA or bank that our Mission Statement as a primary considera-
was in trouble was complying with regulatory tion. And the neutrality concept dominates
requirements that, if breached, would require every Board meeting discussion, every informal
the institution to be closed down. Thus, in the conversation, and every memorandum that is
long run, they may have contributed to the mag- written at the FASB.”
nitude of the insolvencies. Of course, it would In a May 1986 address by Arthur Wyatt, then a
have been just as easy, and certainly more hon- member of the FASB, there is a clear recognition
est, for the regulators to waive or relax the reg- that neutrality is not always easy to achieve.ulatory requirements, but that would have made
the fact of insolvency, or at least losses, apparent. The Board believes that its conclusions should be as neut-
ral as they can be when considering the various compet-
ing interests within our society . Being neutral in this
activity does not mean being unaware of potential conse-
A PLEA FOR NEUTRALITY quences, but it does mean focusing on the accounting
and economc issues and submerging other biases that
There should by now be no doubt as to how I mght intluence the conclusions reached Asprivate
I-‘Pnxeedings o f t h e October8, 1987 Roundtable Di scussion on General lyAcceptedAccountin gPrtnciplesandRegulatoty
AccountingPractices, ed. J erry Arnold (Los Angeles: SEC and Financial Reporting Institute, School of Accounting, University
ofSouthern California). p. 59.
294 DAVID SOLOMONS
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A NEUTlL4UST VIEW 295
sector standard setters.. our mission is to establish and
improve standards of financial accounting and reporting
so that decision makers have available credible, concise,
and understandable Enanciaf information. That mission
precludes placing any particular interest above the in-
terests of the many who rely on Enancial information
(Wyatt, 1986).
I draw attention to Wyatt’s recognition that
neutrality means “submerging other biases that
might influence the conclusions reached.” Radi-
cals like Tinker question whether reported in-
formation can ever be neutral, because the pre-
parer will always have some biases that will
creep in. The bias may be due to a desire to avoid
taxation, or to increase managerial bonuses, or
to keep reported profits down to avoid public
censure for overcharging, or, for those who see
accounting as an instrument of the class struggle,
to benefit capital at the expense of labor. It is
perhaps true that perfect neutrality of informa-
tion can never be achieved. But it would be as
foolish to stop seek ing it on that account as itwould be to stop trying to reduce air and water
pollution because completely pure air and pure
water can never be attained, or to stop seeking
fair-minded judges on the ground that no human
being is entirely free from bias, or (to return to
an analogy that I used earlier) to stop esteeming
journalists who know the difference between re-
porting and editorializing. We know how much
credibility newspapers have in totalitarian coun-
tries. If those responsible for regulating account-
ing ever abandon neutrality as a guiding light, ac-
counting will have lost all value as a provider of
useful information. It would then be no more
than an exercise in futility.
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