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Norman B. Macintosh, Queens University, professor emeritus.

The author is grateful to the Social Science and Humanities Research Council of Canada for its support of this research.
API
Volume Six
2006
COMMENTARY
The FASB and Accounting for Economic Reality
AccountingTruth, Lies, or Bullshit?
A Philosophical Investigation
Norman B. Macintosh
INTRODUCTION
In his provocative essay, Lee (2006) (hereafter, Lee) evaluates the Financial Accounting Stan-
dard Boards (FASB) proposal to produce principle-based accounting standards (PBAS). The idea
behind the FASB initiative is that PBAS would rest upon and be underwritten by the FASBs
conceptual framework (CF), the latter conceived of as a body of coherently related objectives
and fundamentals that would serve as an unassailable, solid, and permanent foundation for its
formal generally accepted accounting principles (GAAP).
1
With accounting relying on principles
rather than rules, as is currently the case, the FASB believe that the recent surge of accounting
scandals could be arrested.
2
Over the years, however, various attempts to establish such a
comprehensive CF have not been particularly successful. Often these efforts have resulted in
discourses that simply articulated the conventional practices used by practitioners at the time
to prepare nancial statements and so their prescriptive statements simply mirror current prac-
tices. The result, as Hines (1991) and Clarke et al. (2003) observe, is a circular kind of reasoning
whereby the CF reects conventional practices (CP) and the CP reects the CF. So, efforts which
are intended to be prescriptive are mainly descriptive.
A major reason for this state of affairs, Lee argues, is that the standard setters of the FASB
have ignored (or misunderstood) the philosophical underpinnings of their institutionalized shared
cognitive domain including their conceptual framework (CF) initiatives and their promulgated
GAAP. Moreover, the profession-at-larges common sense understanding of the basic nature of
income and capital assumes that an enterprise has some real economic substance to which
accounting signs of income and capital do (or should) refer, a perspective that (perhaps only
1
To date, the FASB have issued seven ofcial Conceptual Statements for the CF.
2
Yet as Sterling (2003, 1) astutely observes, The current accounting scandals are quite similar, identical in some cases, to the
thousands that have preceded them. An important difference is terminology. Previously we were concerned about false prots,
cooked books, inated income, and the like, but now we are concerned about managed earnings. It is the same with
different names. In the 1960s and 1970s this was called income smoothing and many saw it as welcome since it dampened
short-term uctuations in reported income. Yet it would seem that accountants could just as easily manage earnings following
principles rather than rules.
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Accounting and the Public Interest Volume 6, 2006
implicitly) rests on the philosophical correspondence theory of truth in regards to the referents
of these accounting signs. Lee rejects this realist line of thinking.
A SOCIAL CONSTRUCTIONIST APPROACH
Lee argues instead, on the basis of Searles (1995, 1998) social construction of reality phi-
losophy, that income and capital accounts refer, not to any intrinsic, brute reality of economic
substance, but rather to the socially constructed abstract notion of economic reality. He con-
cludes, therefore, that until standard setters come to understand the ontological and episte-
mological nature of these socially constructed objects, the FASBs initiative to develop principles-
based standards as a supplement (or even a replacement in the longer term) to its present
rules-based accounting standards (GAAP) will amount to no more than a short-term palliative
to the long-term ills of the nancial accounting world, and so the FASBs CF will remain chiey
as a means of legitimating standard setting activities (Lee 2006a). In order to remedy this, he
proposes that standard setters adopt a social constructivist philosophy that incorporates some
kind of epistemic measures of socially constructed realities, rather than continuing to rest their
prescriptions on a positivistic, scientic epistemological philosophy.
Lees position, importantly, problematizes the traditional common sense notion, underwritten
with the philosophical correspondence theory, that accounting signs of income and capital reect
in a factual manner an underlying brute economic substance. Such a stance assumes that there
is an economic brute reality (a material thing-in-itself) existing independently of its capture and
representation in accounting reports and that it might be possible for accountants to objectively
and transparently represent it by following the professions generally accepted accounting prin-
ciples and rules. Lee dissents from this view but, along with other social constructivist accounting
academics,
3
he thinks it is possible to represent and measure the socially constructed earnings
surrogate, which stands in for a nonexistent brute economic reality. However, standard setters,
Lee argues, do not recognize that economic income is a socially constructed thing with a func-
tion, like a chair with a physical wooden part and its socially constructed function as a thing to
sit on. What seems to be at stake, then, is whether the accounting profession can make the
claim that accounting reports can tell the truth, or some close enough approximation to it, about
the economic reality of the enterprises for which they account.
So for Lee, the matter is at base a philosophical issue that standard setters do not address
or of which they seem to be unaware. Lee concludes that until standard setters take into account
these ontological and epistemological issues, neither rules nor principles nor some combination
will make much difference except as a short-term, cover story (what Lee [2006b] calls a cun-
ning plan) to bypass the issue again. In taking this stand, he implies that if the FASBs CF,
GAAP, principles-based initiative, interpretation bulletins, etc., are built around the meta-narrative
of social constructionism, then the intellectual material of the accounting profession will come
to constitute a coherent body of concepts and practice. Such a hope is underpinned by the
philosophical coherence theory of truth. But perhaps a more basic issue is whether a corporation
exists as a brute reality out there and if it does not, as with the bald King of France example
(discussed below at some length), then it seems to me that any premises about accounting for
its economic reality and the debate over rules versus principles become nonsequitors.
In sum, Lee addresses the accounting reality issue by drawing on social construction theory.
He proposes that social reality exists, not as a brute physical reality, but as an objective linguistic
3
See, for instance, Shapiro (1997), Alexander and Archer (2003), Mattessich (2003), and Mouck (2004).
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Accounting and the Public Interest Volume 6, 2006
thing, independently of the subjectivity of any one individual but intersubjectively since many
agents in the particular collectivity treat it as if it does exist. Along these lines, he argues that
accounting information does reect an economic reality, but only a socially constructed one. And
so the issue for him is how to develop or nd epistemic criteria for representing socially con-
structed things (which are not amenable to the positivistic scientic method.) Until this gets
sorted out, he concludes, standard setting exercises are merely stop-gap (no pun intended)
measures to legitimate to the world at large the professions standard setting activities, and,
more crucially, its privileged status in society. So, Lee concludes, we need new philosophical
epistemic criteria for measuring and representing this socially constructed linguistic formation.
Some Philosophical Conundrums
But philosophically, the reality issue is not as straightforward as brute fact versus social fact,
as Lee implies. Take the statement The King of France is bald. (This is the famous Bertrand
Russell problem.) Once having been said, then the statement exists in the form of a social fact.
But that does not make the statement either true or false in the sense that it corresponds to any
brute reality. Nonetheless, the statement exists as a logical proposition and we can think about
it, discuss it, and debate its truth status. For example, drawing on the correspondence theory
of philosophy, we can make the claim that the statement is false because France is a republic
and does not have a monarch, and so the statement does not correspond to this fact. Yet,
paradoxically, we can also say that the bald King of France exists in the same sense as we can
say Santa Claus comes on the night before Christmas day bringing presents for children. Both
statements are socially constructed linguistic formations even though we know (or are pretty
sure by using common sense or rational scientic epistemology) that these socially constructed
things do not exist as brute reality physical things-in-themselves. Now what is interesting and
strange about this (and the same applies to the idea of economic income and capital as I will
argue later) is that we can talk about and discuss these nonexisting objects even though we are
pretty sure they do not physically exist. How can this be?
One answer is to simply state that we can be certain that some bald King of France does
not exist. But there is something queer about such a sentence in that it refers to an object and
then we say that no such object exists. So someone can ask us, What is it that does not exist?
And the answer, The bald King of France, seems to confer some sort of reality on a nonexistent
thing. Now even though France is a republic, (thus it does not have a King) we readily understand
the sentenceit makes sense to us even though we know it is nonsense or not-sense. Yet
someone unfamiliar with Frances constitution might believe it to be true. One response to this
puzzle (proposed by the logician Alexius Meinong) is that the fact that we can refer to a bald
King of France means that there is a way in which such an object is out therenot physically
but in a metaphysical intersubjective realmexisting as a logical but false statement. This Kings
very existence in the world of logic is what allows us to deny his existence and yet treat the
statement seriously.
Russell, however, was not satised with this response. He reasoned that we tend to think
of the signiers in descriptions like this as necessarily denoting some object in order to have
meaning. But signiers do not always function to name things as the early Wittgensteins (1922)
picture theory of language held. They also function to make statements that can be assessed
logically for their truth or falseness. So, the logical construction of the bald King of France
statement, as Russell showed, hides its complex three premise logical structure: (1) There is a
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Accounting and the Public Interest Volume 6, 2006
King of France, (2) There is only one King of France, and (3) This King of France is bald. With
the logical structure thusly unmasked, it can readily be seen that the statement makes sense
but is false because the rst premise, There is a King of France, is untrue, and therefore
premises (2) and (3) are nonsequitors.
But the Santa Claus issue goes further. If a child asks, What does Santa look like? we
can reply that he is short and pudgy, sports a large white beard, a cherry red nose, has a friendly
smile, and is prone to saying in a jolly way, Ho, ho, ho. This description makes logical sense
and both children and adults understand it, but in different ways. So with Meinong, we can say
that there is a way that Santa Claus exists and this is logically but not necessarily as a real
physical, living, material person. We say not necessarily because unlike the case of the King
of France, it would be logically incorrect to say, Santa Claus does not exist because this would
be claim that we know something to be true like The statement that Santa Claus exists is false,
is to claim we know the truth about something we say is falsewhich is a logically inconsistent
statement. This is how a logical positivist philosopher might address the Santa Claus matter.
But, for say a poststructuralist philosopher, whether Santa Claus exists is not a veriable or
falsiable matter. It is simply a socially constructed logical statement. And so she sets it aside
in order to focus on the real material consequences of such a social construction. (I will return
to this perspective later in an accounting context.) And we can say that even though the bald
King of France and Santa Claus may not exist except as logical statements which are easy to
understand, and that while it is likely that they do not correspond to any brute reality, we can
say that they do have functions, just as a screwdriver exists as a brute reality made of wood
and metal and functions for a practical social purpose (Searle 1995, 1112).
4
In the Santa Claus
case, He functions, even if he only exists logically, for example, as a way to discipline and
dominate young children (You better be nice, you better be good, or else ...), and as a way to
give gifts to them and hide their real givers, and as a way to have some fun singing about Santa
Claus. (Some sing sexy songs about Santa and others even make rude jokes about him, thus
serving other social functions.) So it seems we can mobilize nonexistent things for real social
functions by simply by treating them as if they exist even though we are pretty sure they do
notbut do not want to go quite that far. Surely it is the same with accounting reports of income
and capital.
Some Accounting Implications
Conventional accounting thinking about income and capital seems to parallel this way of
thinking about the bald King of France and Santa Claus. For example, FASB Concepts Statement
2, Representational faithfulness is correspondence or agreement between a measure or de-
scription and the phenomenon it purports to represent. In accounting, the phenomena to be
represented are economic resources and obligations and the transactions and events that
change those resources and obligations (para. 63). And Schipper and Vincent (2003, 98) write,
We dene earnings quality as the extent to which reported earnings faithfully represent Hicksian
income, where representational faithfulness (emphasis added) means correspondence or agree-
ment between a measure and the phenomenon it purports to represent. They go on to say
that while, Hicksian income is not observable ... there are better or worse approximations, and
4
Collectively most people take a screwdriver to be a useful thing for turning screws; yet it can be taken to be used for other
purposes such as opening paint cans, mixing paint, and stabbing persons.
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Accounting and the Public Interest Volume 6, 2006
we argue that higher quality earnings are closer to Hicksian income. And later in the article,
Both comprehensive income and earnings measure Hicksian income imperfectly, but clearly
comprehensive income is the higher quality (more representationally faithful) number (Schipper
and Vincent 2003, 107).
5
In the same issue, Hodge (2003, 41) writes, I dene earnings quality
as the extent to which net income reported on the income statement differs from true earnings.
While Nelson et al. (2003, 17) write, Earnings management occurs when managers use judgment
in nancial reporting and in structuring transactions to alter nancial reports to either mislead
some stakeholders about the underlying economic performance of the company or to inuence
contractual outcomes that depend on reported accounting numbers. And Storey and Storey
(1998, 152) observe, The concepts statements describe but do not dene earnings and income
because they cannot be dened. Both result from applying generally accepted accounting prin-
ciples and are determined by what is done in practice at a particular time.
So here we have from the conventional scholarly academic viewpoint concepts such as
true earnings, underlying economic performance, and more representationally faithful to
Hicksian income. Now if real earnings and underlying true economic wealth cannot be dened
or observed, then it is hard to support the claim that they exist as things-in-themselves inde-
pendently of human minds before being captured in accounting reports. As with our bald King
of France and Santa Claus examples, however, people can and do treat accounting information
and reports as if they refer to some brute economic reality existing out-there before their
representations in accounting signs. And they can mobilize them for real social functions and
purposes such as: issuing stock options, executing contracts such as ownership claims, paying
dividends, bonus arrangements, union contracts regarding pay rates, laying off numbers of em-
ployees, etc. Now by adopting this stance it does not matter whether an economic reality exists
as a thing-in-itself and so we can set aside discussing the mattersimply bracket it off as a
nonsequitor.
With this in mind and returning briey to our Santa Claus example, we can see how such
social constructions of reality play a real role in the power structure of the family and its pro-
duction and distribution of its real material wealth. Similarly, socially constructed accounting
representations play a vital role in societys power arrangements (socially constructed) and the
arrangements for the production and distribution of real economic wealth. And it is these matters
that I think accounting academics should be addressing. Lee, however, takes a more neutral
stance. He proposes that standard setters and conceptual framework designers need to under-
stand the socially constructed ontological nature of accounting representations and its related
epistemological issue of how to measure a socially constructed object before progress can be
made in improving corporate nancial reporting. Lee seems to imply here that a CF is needed
and that it is possible to erect or nd one that is epistemologically suitable to the task. I will
return to this issue later, but before doing so there is another closely related aspect of the CF
project that I wish to address.
Lees central thesis holds that a principles-based accounting standards approach (as op-
posed to the current rule-based approach) would be only a short-term palliative because as
5
I must admit that I am somewhat bemused by this line of reasoning. How can accounting comprehensive income be more
representationally faithful to something that cannot be observed than are other representations? Perhaps, the authors simply
meant that the denition of comprehensive income (a socially constructed artifact) corresponds more closely to the denition
of Hicksian income (also a socially constructed artifact) than do earnings or net income (also socially constructed artifacts).
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Accounting and the Public Interest Volume 6, 2006
things now stand, a solid conceptual framework upon which to build accounting principles re-
mains an incomplete project. I agree with this claim but I would like to push on it further. My
argument is that the very idea of developing (or discovering) a conceptual framework as a logical
foundation for nancial reporting rests on a very structuralist line of thinking. Such a framework,
the argument holds, would consist of a set of permanent, universal, untouchable, transcendental
linguistic building blocks that do not change (or that change only slowly) with time and cir-
cumstance. Each building block would stand on its own feet and also be logically interrelated
to, commensurable with, and not inconsistent with the rest of the building blocks. Such a frame-
work would be both internally consistent (i.e., coherent) and externally valid (i.e., corresponding
with reality). The hope is that a conceptual framework would emerge upon which all accounting
practices, knowledge, rules, and principles could rest, thus guaranteeing that accounting state-
ments would present fairly (or provide a true and fair view of) the enterprises economic nancial
transactions and related events. A brief historical account of the professions efforts in this di-
rection will act as a backdrop for some poststructuralist positions that problematize this line of
thinking.
The Problematic Nature of FASBs Conceptual Framework
The search for an unassailable foundational conceptual framework to underpin rules or prin-
ciples based standards began on very shaky ground and, I will argue, has remained there ever
since. In the early 1930s, the Special Committee on Co-operation with Stock Exchanges of the
American Institute of Accountants (the counterpart of todays American Institute of Certied
Public Accountants) recommended that an authoritative statement of broad based accounting
principles ... be formulated [but] did not dene principles of accounting (Storey and Storey,
1998, 45). The Committee debated whether to use rules, conventions, postulates, prin-
ciples, or laws. The Committee rightfully so rejected rules since it implied some rule-setting
body, which did not exist. The Committee decided that principles was the more lofty term and
would resonate better than rules, conventions, postulates, etc. especially with those parties who
regularly relied on nancial reports, and the general public at large and who looked to the ac-
counting profession for special expertise and authority. In support of this choice, after a long
search, the Committee found just the denition it wantedthe seventh and last denition of
principle in the Oxford English Dictionary (OED) A general law or rule adopted or professed
as a guide to action; a settled ground or basis of conduct or practice.
6
But, as Storey and Storey (1998, 6) observe, The special committees use of the word
principle set the stage not only for the Institutes (AICPA) efforts to identify accepted principles
of accounting but also for future confusion and controversy over what accountants meant when
they use the word principle. The Committee provided ve examples of principles, but these
were much less fundamental, timeless, and comprehensive than what most people perceive to
be principles. They had little or nothing in them that made them more basic or less concrete
than conventional rules (Storey and Storey 1998, 6). In fact, the Institute called them rules in
promulgating them to their members and the Committee referred to them as rules. And, as May
(1936, 335) observed, The half dozen basic principles the committee laid down were rules rather
6
See May (1943, 3738) and Storey and Storey (1998, 321) for a detailed historical review of the debates on the rules versus
principles controversies and the selection of the term principles.
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Accounting and the Public Interest Volume 6, 2006
than principles, and were, moreover, admittedly subject to exception. So the current rules versus
principles debate, given that rules and principles concepts are indistinguishable, seems like a
nonstarter. In poststructuralist terms, the boundary between a rule and a principle implodes.
Nevertheless, the Committees denition stuck. It was later incorporated verbatim in Ac-
counting Research Bulletin No. 7 (1940). In 1953 it was attributed only to the New English
Dictionary in Accounting Terminology Bulletin No. 2, Review and Re sume . And it has been in-
corporated in various pronouncements since then without reference to the original OED source.
As well, the Securities and Exchange Commission (SEC) as early as 1937 was pressuring the
profession to come up with a set of generally accepted accounting principles (GAAP), threatening
that if it did not the SEC would take on the task. (Of course, if the SEC did take it on it would
be in the same pickle as the private sector standard setters in addressing all these issues and
conundrums.) Ever since these former times several attempts have been initiated to develop an
unshakable permanent conceptual framework including a core of fundamental concepts which
do not depend on transitory pragmatic consensus. Yet, as Storey and Storey (1998) observed,
and it seems to be the same today, the framework remains very much unnished and there are
no signs of it being completed in the near future, if ever. The CF project, then, looks more like
a constantly changing and never ending venture than some kind of a solid foundation. Without
it, and this is the point to underscore, a principles approach will ounder on the same rocks as
has the current rules-based situation.
But there is an even more vital issue to be addressed. In the larger scheme of things, the
idea of establishing a foundational framework runs aground at the outset since accounting rules
and practices have economic, social, and political consequences. A foundational building block
based on rational, economic thinking (e.g., the value of nancial accounting lies in its ability to
reasonably represent, within acceptable limits, an enterprises true and fair nancial position and
its income and cash ows) might easily contradict a foundation based on the broader social
welfare rule of an equitable distribution of the enterprises and societys wealth. Furthermore,
any tradeoffs between economic and social foundations would have to be settled by political
process where power relations (not rational economic or idealistic thinking) come to the fore.
This means that any conceptual framework would not constitute some solid, permanent, un-
changing foundation but instead would be a constantly moving, shaking, agonistic, and con-
tested undercarriage, teetering between economic, social, and political pillars. Little wonder that
the accounting profession at large has been unable to discover, construct, or complete this
project.
Regardless of the lack of success in developing an unimpeachable CF, the ongoing attempt
has served a very valuable purpose for the profession. It underwrites the idea that with a proper
set of principles and rules, resting on its solid CF foundation, that accounting reports which
faithfully follow them will transparently represent and reect the enterprises real, economic
wealth (income and capital). This gives the impression, albeit perhaps only implicitly, that there
is such an objectsome real, intrinsic thing-in-itself out-there, as with atoms and mountains
before its capture in an accounting report and that the accounting report should correspond with
the underlying economic events and transactions. As Lee (2006, 14) observes, The FASBs use
of terms such as reliability, faithful representation, and economic substance (emphasis added) is
sufcient to infer at least an unconscious realist approach to accounting. The continuation of
the CF effort, underpinned, if only implicitly, by the correspondence theory of philosophy, legit-
imates this line of thought to the general public.
In light of the above arguments, perhaps the profession would be better off to face up to
the distinct possibility that accounting may never rest on a rock-solid foundation of fundamental
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Accounting and the Public Interest Volume 6, 2006
concepts and set aside the search. They could just admit that what exists today as accounting
knowledge is a labyrinth of one-off, separate, often incommensurable and frequently contra-
dictory, axiomatic statements which get espoused as universal rules and principles for account-
ing problems and practices. As FASB chairman Herz (2005, 4) recently observed, The fact is
that what we call U.S. GAAP is comprised of over 2,000 individual pronouncements by various
bodies and organizations in a variety of forms. He goes on to describe this vast corpus of
accounting principles, rules, concepts, regulations, interpretations, implementation guides, etc.
as disjointed, frequently in conict, extraordinarily detailed, and complicated, so much so, that
only a rapidly decreasing number of CFOs and professional accountants can fully comprehend
all the rules and how to apply them (Herz 2005, 4). He also notes that a diverse array of public
and private bodies, institutions, and committees contribute to this vast body of ofcial pro-
nouncements.
7
The result, Herz (2005) believes, is a body of ofcial accounting literature that
is hard to understand and difcult to use. In one word, nuts! (Herz 2005, 5). But rather than
leave it at that, I want to expand on this speculation drawing on a few poststructuralist notions.
Some Poststructuralist Perspectives
For poststructuralists, the desire for some kind of a nal, fundamental conceptual framework
is part of the long-standing impulse in Western society (given a large boost by the Enlightenment
project) to bring some permanent, nal meaning, some logos into our presence. This word-of-
words would be the axis around which all other accounting rules, principles, etc., would orbit
in its solid gravitational legitimating grip. This logocentric impulse reects the general disposition
and the longing for a transcendental discourse of some kind that would directly relate to, cor-
respond with, and secure a stable set of permanent truths and wisdoms that would withstand
the contingencies of time, history, and language. This impulse is reected in the accounting world
by its institutionalized desire for a totalizing accounting conceptual framework upon which a
coherent and cohesive set of accounting rules and practices would rest.
Social philosophers with poststructuralist leanings, however, are highly suspicious of any
such totalizing impulses. They see the desire for such a transcendental discourse as a hopeless
cause. They would also be skeptical about the argument that accounting theory and principles
are progressing on some kind of a linear historical trajectory toward an accounting utopia where
the profession and its practices will nally be able to deliver a true and fair view of the economic
essence of commercial enterprises in an impartial, objective, consistent, timely, transparent, rel-
evant, and veriable manner (in all material respects) with its principles and pronouncements
built at last on a rock-solid conceptual framework. And some would even see it heading toward,
or already arrived at, a dystopia of nonsensical, contradictory, and often self-reecting, axioms,
discourses, and utterances circulating in an endless regress. How, for example, can one objec-
tively verify the legitimacy of a future stream of cash ows without producing another subjective
discourse about its veracityand so on in an endless regress?
7
These include: the FASB and its predecessors, the Accounting Principles Board, the FASBs Committee on Accounting Pro-
cedures, the FASB Emerging Issues Task Force (EITF), and the Accounting Standards Executive Committee of the American
Institute of Certied Public Accountants. The Securities and Exchange Commission (SEC) alone has a vast number of core
rules, including Regulations S-X and S-K, more than 100 specic Staff Accounting Bulletins, nearly 50 Financial Reporting
Releases, and hundreds of Accounting Series Releases. Herz points out that the SEC also proclaims their latest views on
particular reporting and disclosure matters through speeches and comments at EITF and other professional meetings, which,
while not ofcial, effectively carry the same weight for anyone trying to comply with all the rules (Herz 2005, 45).
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Accounting and the Public Interest Volume 6, 2006
A poststructuralist accounting scholar might also see the recent scholarly debates regarding
drawing on Searles (1995, 1998) notions of subjective and objective ontology and epistemology
as a misguided venture.
8
From the poststructuralist position, the border between the concepts
of ontology (brute reality versus social reality) and epistemology (scientic objectivism versus
subjective feelings, intuitions, and physical senses) is not only fuzzy but also indistinguishable.
The idea of identifying some brute ontological reality is by denition epistemology (a way of
knowing this thing) while the idea of knowing something is ontology in the sense that to know
is to be. On this view, the difference between ontology and epistemology implodes which means
that the differences in Lees (2006, 14, Figure 1) scheme collapse. Yet the question remains,
What should we, as academics, do or not do? As it turns out, there is rather a lot to be done.
In the rst instance, we should not see poststructuralist approaches as falling into the abyss
of nihilism such as believing that accounting, and also the life of an accounting academic, is
meaningless and the feeling of extreme skepticism regarding the usefulness of researching ac-
counting. Instead, we can try, as Rorty (1989) urges us, to develop new nal vocabularies and
discourses for researching and understanding the state of accounting in contemporary society.
A starting point is to realize that truth is not found but made. As well, we need to recognize
that religion, science, and philosophy are not unlike novels, poems, plays, paintings, and even
architecture. Scientists, for example, do not discover truth, rather they invent and create narrative
descriptions of the physical world which are, nonetheless, useful for predicting, controlling (and
even destroying) the natural world. Importantly, however, this is not to say by any means that
the real world only exists in our heads and in our senses. Most of us are pretty sure that things
are out there (stones, mountains, atoms, animals, etc.) that are not just a creation of human
minds and language and that they do exist as things-in-themselves, as Nietzsche calls them.
We believe that when a tree falls in the forest it does make a physical sound in the scientic
sense even if no one is within earshot.
The vital point is that the physical world is out there but the truth or falseness about it, its
essential meaning, is not. For a statement to be true about the meaning of such things, vo-
cabularies and languages would also have to be out there waiting for us to discover and use.
As Rorty (1989, 5) neatly makes the point, To say that the truth is not out there is simply to say
where there are no sentences there is no truth. Sentences and languages are human creations
and so truth cannot be out there because descriptions of the world are not out there. This
is what Derridas (1976, 158) much misunderstood, taken out of context, and maligned sentence,
Il ny a pas de hors-texte, was meant to convey.
9
More simply put, the referent of a word is
absent in any text. And, just as there is no intrinsic, true nature of physical objects, no brute real
essence of man to be found and known, there is no true brute, intrinsic essence of accounting
income or capital out there before their representations in accounting reports.
8
See Alexander and Archer (2003), Archer (1998), Mattessich (2003), Mouck (2004), and Shapiro (1997, 1998) who support a
Searlean ontological / epistemological distinction.
9
Derridas (1976) point is that since the meaning of any text is not out-there, somewhere beyond the text waiting to be found,
then a careful critical reading (as opposed to a reading that merely doubles or paraphrases the original text) cannot legitimately
transgress the text toward something other than it, toward, say, a referent, a reality that is metaphysical, historical, psycho-
biographical, etc. (Derrida 1976, 158), or toward a signied outside the text. A reading that imports any such referents to
give the text its true meaning cannot be called a critical reading since this would risk developing in any direction at all and
authorize itself to say almost anything. But this indispensable guardrail has always only protected, it has never opened the
text (Derrida 1976, 158). In contrast, a deconstructive reading opens up the text, identies its privileged metaphysical hier-
archy, temporarily reverses the hierarchy, reveals the texts ultimate undecidability, and exposes its politics.
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Accounting and the Public Interest Volume 6, 2006
What we do know, however, is that these key accounting signiers are sentences and ut-
terances that humans using language invent, create, and describe. This position negates the
common sense notion that language and numbers are a transparent medium providing a window
on reality. But crucially, that to say that the truth is not out there waiting to be discovered is not
to say that we have discovered that there is no truth. Rather, the way the world is, is true in
the sense that it truly exists. So we invent linguistic entitiesnarratives, discourses, discursive
formations, regimes of truth, etc.to give meaning to them and to speak about the world. Such
linguistic formations are not found, we make them, we invent them using language.
10
They are
historically, linguistically, and socially constructed. This signals that their truth properties, the
meanings we give them, are a function of the particular narrative we construct or select. The
economic world of an enterprise, even if it does exist, does not speakwe speak for it.
In the accounting context, then, and following Lyotards (1984) language game ideas, we
can depict each formal GAAP as an independent micro-narrative, one that is not orbiting within
the gravitational pull of any grand conceptual framework serving as a controlling meta-narrative.
Instead we have a labyrinth of mainly incommensurate, free-oating accounting micro-narratives,
which we call GAAP. The meaning we give to each account on a nancial statement depends
on the particular GAAP put into play and the accountants interpretation of it. This also signals
that each account reported in a nancial statement is a stand-alone mini-regime of truth based
on a particular GAAP, which has its own agonistic historical background. This historical struggle
gets ignored by, or is lost on, most of the readers of an accounting report.
An enterprises inventory, as a simple example, gets reported quite differently depending on
which micro narrativeFIFO, LIFO, or NIFOis appropriated for that purpose. And for some,
the most meaningful micro-narrative depicts the physical inventory as a container of future cash
owsnot one depicting it as the historical cost of acquiring it. FASB Concepts Statement 6
(para. 25) supports the latter view, Assets are probable future economic benets obtained or
controlled by a particular entity as a result of past transactions. While some accountants might
adopt this view, others might reject it as did Schuetze and Wolnizer (2004, 52) quoted in Lee,
(2006a). In reacting vociferously to this denition they commented,
Egad, that is mind boggling stuff. Most accountants do not understand it. Ordinary
people are mystied by it ... the current denition (as above) is an abstraction. Under
that denition, the asset I call a truck is not the FASBs asset. The FASBs asset is the
present value of the net cash ows the truck will produce by hauling coal or lumber or
steel, viz. The probable future benet. I call it a truck.
The truck account, as with inventory, is a problematic and contested linguistic terrain.
In sum, the micro-narrative (the specic GAAP) for almost every account reported is the
result of a human struggle engaged by the handpicked (not democratically elected) standard
setters, by lobbyists, by academics who contribute to the debate, and by various players in the
10
They are, in the later Wittgensteins (1958a, 1958b) terms, language games.
Macintosh 32
Accounting and the Public Interest Volume 6, 2006
capital market. Almost every formal GAAP has an agonistic historical trajectory.
11
Yet, the ac-
countants relying on them tend to forget, or ignore, this important fact and just draw on them
to prepare nancial statements. So instead of seeing each account as the present embodiment
of a historical struggle, they are taken for granted to be the accepted way to do the accounts.
They get naturalized and doxied.
The Accountants Agency
The above discussion, however, is tilted heavily toward a structuralist perspective and so
marginalizes the accountants agency in terms of his or her attitude to the truth when preparing
the accounts. In the last section of this essay I want to push some of the above philosophical
issues in another direction by speculating how practicing accountants might respond to the
philosophical issue of accounting truth. This seems especially important in light of the wide-
spread concerns about the recent plethora of headline-making, so-called earnings manipulation
scandals.
What I propose in this respect is that the accountants agency can be thought about in
terms of three attitudes to accounting truth. For convenience I will categorize these as the
truthteller, the liar, and the spinner and I will distinguish them on the basis of their philo-
sophical attitude toward the truth in accounting reports.
12
The truthteller accountant conforms
to the common sense view of accounting and the accountants agency, the perspective advo-
cated by professional accounting bodies and many academics alike. These are the accountants
who dutifully, and to the best of their ability, try to comply with both the form and the substance
of promulgated GAAP. And they believe that the nancial statements they produce do indeed
represent a true and fair view of (or present in a fair manner) the actual economic affairs of the
enterprise. This realist perspective assumes that such a reality exists as an independent object
and that its truth can be captured in accounting reports. The truthteller accountant believes this
and faithfully pursues it when doing the accounts.
The truthtellers opposite number is the liar accountant. Ironically, this type believes in and
cares just as much about the truth as does the former. They, however, want to lead those who
rely on nancial statements, the ubiquitous users, away from what they believe to be the real
economic truth about the enterprise. They deliberately falsify the nancial statements in order to
fool stock market players (and other so-called stakeholders) in order to manipulate the stock
prices, often for personal gain. They want to deliberately fool users.
13
The accounting liar typies
11
SFAS # 130, Reporting Comprehensive Income (June) (FASB 1997), is not untypical. Two members of the Board dissented
strongly arguing that, The Boards conceptual framework does not dene earnings or net income, nor does it provide criteria
for distinguishing the characteristics of items that should be included in comprehensive income but not in net income. The
qualitative characteristics of the items currently classied as items of other comprehensive income have not been consistently
distinguished from those items included in net income. (FASB 1997, 11). Consequently, items of other comprehensive income
(OCI) can be as signicant to measurement of an enterprises economic and nancial performance as those items of other
comprehensive income that are currently included in measuring net income (FASB 1997, 11). They concluded, therefore, The
Statement should have required that items of other comprehensive income be reported in a statement of nancial performance,
preferably in a single statement in which net income is reported as a component of comprehensive income. (FASB 1997,
12). Thus, the dissenters concluded, the aim of clearly distinguishing net income from comprehensive income is seriously
compromised.
12
The inspiration for these types came from Frankfurts (2005) short (67 pages) book, On Bullshit, which to his surprise became
a best seller. Frankfurt is a distinguished moral philosopher and Professor Emeritus at Princeton University.
13
They do this not just for the delight of deception, as is the case for the classic pathological con man, although some ac-
countants might be of this ilk.
Macintosh 33
Accounting and the Public Interest Volume 6, 2006
individuals that the popular press, and most academic accountants, see as the nancial ofcers
in the Enrons and the WorldComs of the world who are generally thought to have perpetrated
accounting scandals.
14
Paradoxically, both the truth teller and the liar are seriously concerned
with and have a stake in knowing the truth. They believe that there is an accounting truth that
could be reported.
But it is the third type of accountant, the bullshitter, who should be the most worrisome
for all concerned.
15
They are indifferent to the truth of the object they are representing in their
narratives. Ironically, then, they are not burdened with either the weight of the scruples that are
carried by the truthteller, or with the liars fear of being exposed. The stereotype of the used car
salesman is the archetypical spinner. He has a story he uses to sell the car. He tells potential
buyers that the car is in great shape, that the mileage is very low for a car of this vintage, and
that it was driven by an old professor who only took it out on Sundays and who faithfully followed
the dealers maintenance program. Crucially, he would tell this story regardless of whether he
knew it to be true or false. The philosophical issue that arises with the car salesman is that
he is not at all concerned with the truth, but is indifferent to the truth.
The bullshitter accountant is similar. She takes the books of accounts, draws on the ofcial
GAAP, interprets some of the key principles/rules (e.g., revenue recognition, matching, cost al-
location, materiality, and the like), keeps in mind the ofcial conceptual framework, and creates
an accounting narrative about the enterprise in question. In doing so, she is indifferent to whether
the nancial statements tell the truth. She is only concerned to construct nancial statements
that accord with GAAP and which will satisfy the market for accounting informationthe in-
vestment analysts, the shareholders, the bankers, the top executives, the SEC, the tax authori-
ties, and other related partiesthe so-called stakeholders. While the used car salesmans goal
is to sell the car regardless of its true condition, the accounting spinners goal is to satisfy these
parties regardless of what may or my not be the true economic condition of the company. The
endstelling a good storydominate the meansthe technical skills and experiences. Truth
and lies are matters to be left for trained philosophers to investigate. (Ironically, following this
line of reasoning, it can be said that for the most part, the accountants at Enron were not
necessarily liars but simply bullshitters. In contrast, the accountants at WorldCom were liars.
They deliberately and knowingly violated GAAP by treating expenses as capital expenditures.
They wanted to lead users away from what they believed was the truth.)
A thoughtful accounting bullshitter, however, might question the very existence of some such
true economic reality. In which case he might come to the conclusion that the nancial state-
ments are indeed what Black (1985) calls humbug and what Frankfurt (2005) calls bullshit.
And he might, having read some of Friedrich Nietzsches thoughts on the origin of morals, come
to believe that there are no factual accounts of income and capital, only interpretations, and that
the accounting truth is not out there to be discovered, rather it is manufactured using the
linguistic, semiotic accounting material at handGAAPs, CFs, interpretation guides, etc. And,
if he followed the later Wittgenstein (1958a, 1958b), he might also come to believe that the
14
A list of recent such scandals includes Enron, WorldCom, Tyco, AOL Time Warner, Adelphi Communications, Bristol-Myers
Squibb, Global Crossing, Kmart, Xerox, Merck, Mirant, Nicor Energy, Pereque Systems, and sundry energy trading companies
like Dynergy, El Paso, and Reliant Energy, to mention only some. It is likely that a similar list could be compiled for companies
in Europe and Asia.
15
Frankfurt (2005) calls his type the bullshitter but he does not mean it in the usual pejorative sense. Perhaps the real scandal
is that such practices are the order-of-the-day and so cries of scandal serve to dissimulate this. See Baudrillard (1988, 171
174) for a discussion of this scandal effect.
Macintosh 34
Accounting and the Public Interest Volume 6, 2006
accounting principles, fundamental concepts, conceptual statement documents, etc., are simply
the tools in the accountants tool box that accountants use in the accounting language game
called nancial reporting. He might conclude, therefore, that accounting truth rather is made, not
discovered or revealed by accountants. (Some would even label him a poststructuralist account-
ant). Either way, he is not lumbered with the philosophical burden of seeking and understanding
truth. After all, the enterprises year-end is long gone and the deadline for nalizing the nancial
statements is fast approaching (or the quarterly reporting date is looming). Regardless of their
truth status, the nancial statements must be released on time.
At the end of the day, then, these accountants pose the biggest challenge for the nancial
world at large. Since they are not concerned with the truth status of the nancial statements
they prepare, they cannot be regarded as presenting statements that do not represent the true
economic realities of the enterprisethey do not presume to know the truth. So they can only
be faulted, if fault them we must, for not trying to tell the truth, for not trying to get things right,
for not seeking the truth. Philosophically, it is their indifference to the truth that is of major
concern. Yet, this seems more like a quibble. If income (in its various forms including Hicksian
income, comprehensive income, net income, earnings) cannot be dened, only described, and
if income is only a socially constructed linguistic object, their indifference seems both practical
and reasonable, and so justiable. They cannot be justly accused of deliberately promulgating
nancial statements that they presume to be false. Their nancial statements are grounded nei-
ther in a belief that they are true, nor, as a lie must be, in a belief that they are not true. Their
lack of connection to a concern with the truth, and this is the big message, means that they are
simply spinning tales, what Frankfurt (2005) calls bullshit.
Frankfurt (2005) also distinguishes bullshit from Blacks (1985) notion of humbug. Hum-
bug refers to deceptive, pretentious linguistic misrepresentations that nevertheless are short of
lying in that they are distinct from what the humbugger has in mind. A case in point is a
Fourth of July orator who goes on bombastically about our great and blessed country, whose
founding fathers created a new beginning for mankind. This is surely humbug. As Black (1985)
argues, the orator is not lying. His intention is not to convince the audience about these matters,
nor does he care about what his audience thinks about these matters, nor does he care about
his own beliefs about them, which may not be the same. He only wants to have the audience
think of him as a great patriot, Someone who has deep thoughts and feelings about the origins
and mission of our history, whose pride in that history is combined with humility before God,
and so on (Frankfurt 2005, 18). Since he does not deliberately utter something that differs from
what he himself believes about these matters, his oration is short of lying. In this sense, Frankfurt
(2005) concludes, bullshit is similar to humbug in that both discourses are unconnected to a
concern for truth. But the two also differ in one important respect.
The bullshitters discourse, in contrast to the humbuggers, is very carefully crafted. It pays
meticulous attention to details, it requires great discipline and objectivity, and it eschews any
self-indulgent impulses. It is wrought with the greatest care even though it is not germane to
describing the way things really are. And, It is this lack of connection to a concern with the
truththis indifference to how things really arethat I regard as the essence of bullshit (Frank-
furt 2005, 34). Frankfurt (2005) sees contemporary society as saturated with bullshit. The realms
of advertising and of public relations, and the nowadays closely related realm of politics are
replete with instances of bullshit so unmitigated that they can serve among the most indisputable
and classic paradigms of the concept (Frankfurt 2005, 22). The creators of such tales are, like
Macintosh 35
Accounting and the Public Interest Volume 6, 2006
the accountant, highly sophisticated craftsmen, greatly dedicated to getting every word, phrase,
and image precisely right.
Paradoxically, this does not mean that accountants tales are not for real. The topic of
their discourse has to do with vital aspects of nancial, social, and political life. And they take
their task seriously. They want the users to perceive a high level of candor in their presentations.
This is evidenced by the ostensible factualness in appearance of annual reports including the
nancial statements. Todays annual reports of most enterprises of some size run to nearly 100
pages and include highly technical notes explaining how the various accounts were prepared.
They give the impression of being for real and that the accountant is sincere in preparing them.
So while bullshitter accountants do not want to deceive, they may inadvertently misrepresent
the nature of the narratives they prepare. What they want to do is to convey a sense of sincerity
to the telling of the tale rather than being concerned with some underlying economic truth of
the nancial statements they prepare.
16
In this regard, accounting is well suited. It has the trappings of professional designations, a
multitude of ofcial pronouncements, and its auditors opinion which attests that the statements
present a true and fair view of (or present fairly) the nancial position, the results of its operations,
and the cash ows of the reporting entity, in accordance with generally accepted nancial ac-
counting principles. And, given the amount of latitude in the GAAPs themselves, and the amount
of professional and technical judgment necessary in interpreting and putting them into practice
involved, it is not surprising that earnings management is the order of the day. If there is no
bottom line, no nal word about the enterprises economic capital and income to be reported,
then philosophically it makes no sense to accuse the spinner of violating representational
faithfulness.
CONCLUSION
So earnings management would seem not to be the major issue. The bigger concern should
be that the reports of income and capital in nancial reports are bullshit in the above sense,
and that nevertheless a large part of the world today relies on and takes vital decisions based
on the accounting spinners nancial statements. That is the big message, the one that should
set the nancial world capital markets back on its heels. Surely this is the crucial concern that
academic accountants of all persuasions should be addressing today.
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