Why accounting problems reflect the orientation of the society and social change precedes changes in accounting practice Essay Example

Why accounting problems reflect the orientation of the society and social change precedes changes in accounting practice

Introduction

This essay is about the relationship between the practice of accounting and changes in the society in which the practice is carried out. Cooper and Sherer (1984, p. 222) observe that accounting can be viewed as a product of the changes that take place in the society. It is further observed that the problems or issues that are experienced in the practice of accounting are reflections of the issues that are taking place in the society at large (Cooper & Sherer 1984, p. 222). The same authors also argue that for one to understand accounting or even attempt to change its principles, laws and procedures, one should first understand the society and attempt to change it.

In this essay, a critical analysis of the points made by Cooper and Sherer (1984) as noted above is presented. The essay is organised in such a manner that various reasons why Cooper and Sherer’s (1984) observation is regarded as true are presented. To complement the argument, the case of the Enron scandal is used to highlight various reasons why social awareness and change are prerequisites for changes in accounting. Therefore, in this essay, the Enron case is used to provide examples to prove that as Cooper and Sherer (1984) argue, major issues and problems in accounting normally reflect the orientation of the society and that for one to change accounting practice, it is necessary to first understand the society in general and attempt to implement social change.

The Enron scandal: A brief introduction

The Enron scandal is used as an example of how a major issue related to accounting reflects the issues that are taking place in the society as presented in this essay. The Enron scandal was a major corporate scandal that occurred because of a series of blunders by Arthur Anderson, the firm that was handling the auditing work for Enron Corporation. For one to appreciate the nature and impact of the scandal, it is necessary to revisit the background information of the issue. Enron was a major energy company that rose to prominence during the late 1990s and early 2000s, thanks what was touted as its revolutionary model of doing business (Pavel & Encontro 2012, p. 4). The company was said to have revolutionised energy trade by introducing new methods of trading energy as well as focusing on a highly aggressive approach towards growth (Li 2010, p. 38). Given the nature of the company at the time, its size and the relationship that its senior executives had with the political leadership at the time, the company rose to prominence. However, it later occurred that the huge profits that the company was posting as well as the rapid growth that it was experiencing were based on a form of accounting referred to as mark-to-market. This form of accounting allows a firm to book profits the moment the firm signs a deal and long before the real money is received (Lang 2003, p. 3). It was discovered that Enron, in collaboration with Arthur Anderson, had managed to hide the huge losses that the company was making at the time and also duped shareholders and other stakeholders by posting fictitious profits (Li 2010, p. 39). The scandal led to the fall of the two companies, the jailing of some executives of Enron, and of course the loss of jobs for the thousands of the employees of the two companies.

Why accounting reflects societal orientations and social change precedes changes in accounting

One of the reasons why it is proper to argue that changing the society is a prerequisite to changing the way accounting is practiced relates to the nature of accounting. In general, accounting is a form of representations. Accounting practitioners attempt to represent the status of an organisation by relying on numerical models and principles of reporting (Morgan 1988, p. 489). Thus, corporate financial reports are documents that attempt to represent the value of the complex phenomenon that is business operations. Accountants rely on accounting principles and agreed-upon processes to report the progress of organisations. However, it is imperative to point out that the models, principles and procedures that are used in accounting practice have limitations (Morgan 1988, p. 489). What this means is that it is only possible to appreciate corporate financial reports when one views the reports within a given context. In the case of Enron, it was only possible to assess the financial health of the company by looking at the financial reports of the company, which, incidentally, had been developed using the controversial mark-to-market form of accounting (Thomas 2002). At the time, as long as was one was viewing the accounts from the perspective of the mark-to-market form of reporting, everything appeared perfect. This implies that as much as accounting is a form of representation of complex organisational phenomena through succinct numerical data, it is possible to view the process from two different perspectives. Therefore, for one to successfully change the way financial reporting is done, one must first change the overall society.

The second issue relates to the need for accounting processes to be relevant to situations. In practice, accounting rules and procedures are fashioned by individuals to address issues within a given context (Lowe & Puxty 1991, p. 54). In other words, accounting procedures are fashioned to provide specific information about the performance of an organisation. Given that different parties, who are the stakeholders of the organisation in question, may require specific pieces of information about the performance of the organisation, it follows that accounting must provide the required information. In the case of Enron, the choice to use the mark-to-market form of accounting was agreed upon by the senior management team of the organisation because the management team and the board needed to interpret the financial position of the company in certain ways (The Economist 2002). What this implies is that for accounting procedures to be changed, it is necessary to take into consideration the need to change social norms and practices. Within the context of Enron, it was necessary to change the demands of the board, the senior management team and even the shareholders of the company first before one attempted to replace the mark-to-market form of accounting with another one.

The third point is that if accounting can be regarded as a product of its environment, it is important to point out that the factors of the social environment that shape accounting laws, principles and procedures are in constant evolution. It is pointed out that the fluid nature of the social environmental factors that shape the evolution of accounting practice determines the relevance and irrelevance of accounting processes at any given time (Onegbu 2014, p. 3). In other words, a given form of accounting procedures is only relevant within a particular time frame. Changes in social needs and conditions may easily render accounting practices totally irrelevant or otherwise (Onegbu, 2014, p. 4). Within the context of Enron, it was clear that mark-to-market accounting was a non-conventional form of accounting at the time. Many organisations, practitioners and even professional accounting bodies did not favour the method at the time. However, Arthur Andersen and Enron could still use the method, although many observers considered the method inappropriate within the context of Enron. Therefore, when one considers the changes that have taken place since the Enron scandal erupted, it can be understood why it is almost impossible for an organisation to use this type of accounting now. An increase in criticisms against mark-to-market accounting has forced practitioners not to even consider using the method. As a result, the changes that have occurred in the society have rendered the mark-to-market form of accounting totally irrelevant.

The fourth reason relates to the objective of the accounting practices that are used at any given time. It is observed that the objective of any accounting process largely determines the way the accounting is done (Gaffikin 2005, p. 8). It is also argued that these objectives that shape the choice of any accounting method do change over time (Gaffikin 2005, p. 7). In the example of Enron, the main objective of the company’s board of directors and the senior management team was to reflect a desired financial position for the company (Thomson 2002). Therefore, the board of the company approved the use of mark-to-market accounting because it had to acquiesce with the demands of the senior management team (Thomson 2002). The senior management team was driven by the desire to portray Enron as a highly profitable and liquid company that was growing rapidly (Thomson 2002). This denotes that the motivation of some important stakeholders often determines the kind of accounting practice that is in use. If the objectives change, organisations and accounting practitioners must adapt the process that they use to the new changes. Any attempt at changing the accounting method in place, therefore, largely depends on sensitising the stakeholders who make the decision.

Fifth, accounting practice has been described as an ideological representation of the social and political milieu of the society (Horvat & Korosec 2015, p. 38). Accounting is described as a practice that has its foundations on the social and political dynamics of the society in which it is practiced (Horvat & Korosec 2015, p. 39). This suggests that accountants work to reinforce socio-political views that have been entrenched in the fabric of the society in which they practice. Because accounting is integrated in the socio-political dynamics of the society, it is difficult to isolate and separate accounting from the social, political and even cultural development process of the society. Thus, the practice of accounting not only reflects the prevailing social and political thoughts in the society in which its practiced, but also tends to evolve with the changes in dominant socio-political thought in the society. This argument can be used to explain the situation that was prevalent at the time during the Enron scandal. The tendency of the company and its auditors to use some accounting tools such as special purpose vehicles, the mark-to-market accounting approach and other tools of off-balance sheet accounting reflected the evolving social and political thought of the larger society at the time. It can be argued that the fact that the Securities Exchange Commission allowed the company to use mark-to-market accounting, and that other bodies and organisations that were supposed to offer checks and balances allowed the company to carry out its radical accounting practices, means that many parties considered the approach that the company was using appropriate. Therefore, it can be argued that the approach to accounting that was used at the time represented the social and political thoughts that were prevalent at the time and that it was used to serve the various interests of the stakeholders.

The last reason relates to how accounting and financial scandals provide an opportunity for meaningful changes to be implemented in the way accounting is practiced. It is observed that corporate scandals that are rooted in accounting malpractices act as incentives for stakeholders to re-examine the values that are used to guide the practice of accounting and change them if a need arises (Cooper, Everett & Neu 2007, p. 373). In other words, major incidents of accounting malpractices trigger various forms of social change. This means that accounting and the society are intertwined and affect each other. In the case of Enron, far-reaching changes were implemented in response to the effects of the crisis (The Economist 2002).

Conclusion

In conclusion, the argument that major accounting problems reflect the orientation of the society and that changes in the accounting processes should be preceded by social changes is true. The case of the Enron scandal provides a perfect example of how accounting practices that are used at a given time reflect the existing social, economic and cultural values. Also, the accounting practice exists within a social and political context, and thus the way it is practiced reflects the socio-political objectives of various groups of stakeholders in the society. Further, it is because of major financial scandals that changes in accounting processes are conceptualised and implemented. Therefore, accounting reflects the society and for one to change it, it is necessary to start with changing the society.

References

Cooper, DJ & Sherer, MJ 1984, ‘The value of corporate accounting reports: Arguments for a political economy of accounting,’ Accounting, Organisations and Society, vol. 9, no. 3/ 4, pp. 207–232.

Cooper, DJ, Everett, J & Neu, D 2007, ‘Financial scandals, accounting change and the role of accounting academics: a perspective from North America,’ European Accounting Review, vol. 14, no. 2, pp. 373-382.

Gaffikin, M 2005, ‘Regulation as accounting theory,’ University of Wollongong Working Paper, 05/09, viewed 1 May 2017, <http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1049&context=accfinwp>.

Horvat, R & Korosec, B 2015, ‘The role of accounting in a society: only a techn(olog)ical solution for the problem of economic measurement or also a tool of social ideology?’ Our Economy, vol. 61, no. 4, pp. 32-40.

Lang, MH 2003, ‘International accounting in light of Enron: evidence from empirical research,’ North Carolina Journal of International Law & Commercial Regulation, viewed 30 April 2017, <http://public.kenan-flagler.unc.edu/faculty/langm/Publications/International_Accounting_in_Light_of_Enron.pdf>

Li, Y 2010, ‘The case analysis of the scandal of Enron,’ International Journal of Business Management, vol. 5, no. 10, pp. 36-41.

Lowe, T & Puxty, T 1991, Accounting as social science: some implications for teaching and research, Paper Presented at the Research Seminar Series at the Department of Accounting and Financial Management, University of the South Pacific on 11 March 1990, viewed 1^st May 2017 via, http://www.directions.usp.ac.fj/collect/direct/index/assoc/D769992.dir/doc.pdf

Morgan, G 1988, ‘Accounting in reality construction: Towards a new epistemology for accounting practice,’ Accounting, Organisations and Society, vol. 13, no. 5, pp. 477-485.

Onegbu, AO 2014, ‘Theories of accounting: Evolution and developments, income determinations and diversities in use,’ Research Journal of Finance and Accounting, vol. 15, no. 19, pp. 1-13.

Pavel, T & Encontro, M 2012, The Enron scandal, viewed 30^th April 2017, <http://www.math.chalmers.se/~rootzen/finrisk/GR7_TobiasPavel_MyleneEncontro_ENRON.pdf>.

The Economist 2002, ‘The lessons from Enron,’ The Economist, 7 February, viewed 1May 2017, <http://www.economist.com/node/976011>.

Thomas, CW 2002, ‘The rise and fall of Enron,’ Journal of Accountancy, 1 April, viewed 1 May 2017, <http://www.journalofaccountancy.com/issues/2002/apr/theriseandfallofenron.html>.