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Critical Perspectives on Accounting 16 (2005) 613639

Accounting for crime

Cheryl R. Lehman, Fahrettin Okcabol

Department of Accounting, Taxation and Legal Studies in Business, Hofstra University,

Hempstead, NY 11549, USA

Department of Business, Management and Accounting, University of Maryland Eastern Shore,

Princess Anne, MD 21853, USA

Received 20 October 2002; received in revised form 1 August 2003; accepted 28 August 2003

Abstract

The major aim of this paper is to explore how crime has been re-presented in the late 20th century.

The work is part of broad critical accounting research. Accounting and issues regarding fraud are part

of our complex social fabric: including issues of regulation, governance, economic crises, poverty,

race, youth, politics, and class. We examine how crime is infused with these issues by revealing the

statistics and strategies of managing crime outside the walls of Wall Streetin prisonsand inside

the walls of Wall Streetwhite-collar crime. In revealing how the state, the media, and accountinghave managed crime, we support the lineage of others who see crime as a social phenomena and as a

social construction. We conclude in accepting the importance of assessing the power of institutions

including accountingin creating reality and reconstructing the frailties and errors of humans. As

we reflect on the resilience of accounting to maintain its role in the regulatory apparatus of business,

and on the lack of significant change in power relations and in the distribution of wealth, it behooves

accounting activists to work both within its terrain, and also with broader social movements in global

justice.

2003 Elsevier Ltd. All rights reserved.

Keywords: Accounting; White collar crime; Social construction

Corresponding author. Tel.: +1-516-463-6986.

E-mail address: [email protected] (C.R. Lehman).

1045-2354/$ see front matter 2003 Elsevier Ltd. All rights reserved.

doi:10.1016/j.cpa.2003.08.003


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614 C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

The notion that poverty causes crime is a slander on the poor.

Adapted from H.L. Mencken (18601956)

It is now widely agreed that corruption, wherever in the world it is occurring, is one of

the greatest challenges societies face as we enter the third millenium.

International Anti-Corruption Council (1999)

Oscar Wilde once said that it is an outrage for reformers to spend time asking what can

be done to ease the lot of the poor, or to make the poor bear their conditions with greater

dignity, when the only remedy is to abolish the condition of poverty itself.

Hall et al. (1978, p. x)

1. Introduction

The scrutiny imposed on financial reporting practice, and the contentious debates related

to The Accounting Industry, in Congress, the SEC, the courts, the business commu-

nity, and academia suggest it must have some significance and import. And, as invest-

ments and capital flows have an increasingly global range, accounting practice can pre-

sumably have a sphere of influence reaching across the globe in economic, and thus most

assuredly, in social well being. But the practices of accounting are fragile, and rely on a

complex system of legitimacy, reliability, and trust. What are the implications when

crime and fraud infiltrate financial reporting? How does accounting participate in Crime

Debates?.

Accounting practice has always been concerned with fraud, and has always been ef-

fected by financial collapses, management transgressions, and misstatements by corporateofficers. One might speculate that an essential premise behind the audit of publicly held

corporations, is that . . . managers cheat. If left to their own devices, managers may ma-

nipulate financial statements in a plethora of ways, such as: inflating earnings (Equity

Funding, 19631973); padding company books with non-existent inventory (Saxon In-

dustries, 19681981); speculating with company securities (ESM Government Securities,

Inc., 19771984); deceiving the auditors (ZZZZ Best, 19831988); and manipulating in-

ventory counts and values (Phar-Mor, 19861992) (see Bayou and Reinstein, 2001 for

details).

Most recently, we are witness to the dramatic and devastating collapse of Enron, at

one time the 7th largest US corporation. Accused of a multitude of criminal, financial,

accounting, and management abuses, including overstating earnings, hiding debt from itsfinancial statements, and manipulating employee investments, the company eventually lost

up to 90% of its value (19962001). Enrons downfall coincided with an unprecedented

collapse of their auditor, Arthur Andersen, in the unique position of being the first major

accounting firm to be indicted for a criminal chargeobstruction of justice (Eichenwald,

2002a, 2002b, 2002c). After 89 years, Arthur Andersen ceased operations as auditor of

public companies on 30 August 2002 (Glater, 2002; we return to the Enron case in Section

5 of thepaper). These transgressions fall under thesocial categoryof white-collar crime. In

this paper, we contrast the articulation or discourse regarding white-collar crime with the


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C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639 615

discourse regarding non-white-collar crime, and explore the social significance regarding

the difference.1

Fraud, corruption, and criminal activity take many formsfrom the petty to the grand.How good and bad is portrayed in society is a fascinating and complex issue. From

Robin Hood to Wyatt Earp, from Billy the Kid to Bonnie and Clyde, from Harriet Tubman

to Patty Hearst (see, e.g. Sifakis, 2001; Becker, 1968) the nuances of criminality and a

romanticism of heroes and villains has been nurtured. Novelists, storytellers, Hollywood,

the media, the Department of Justice, state police records, and academia have all endeavored

to create fairytales, myths, movies, statistics, and even names to describe crime, such as

white-collar crime.

Contemporary issues of crime exemplify this complicated literary and romantic tradition,

infused with social, political and financial nuances. Hall, Critcher, Jefferson, Clarke, and

Roberts in their landmark, Policing the Crises (1978) assert that crime is managed: for

example, crime statistics are underreported in some decades and highlighted in others, to

assure the public of safety (in the former) or to shock them (in the later), as part of a compli-

cated political process by re-constructing meaning and imbued with social practices. Their

analysis contributes to a long research tradition of re-interpreting history, and illuminating

the participation of the state and the media, as well as the power of villains and heroes.

DuBoff and Hermans (1980) fascinating and powerful rebuke of Alfred Chandlers view

of the efficiency of trusts revealed instead the quest for monopoly control and power by the

Rockefellers and Morgans, and their manipulation of institutions. Many researchers have

offered similar re-constructions of history (e.g. Baritz, 1960; Galambos, 1975; Hunt, 1980;

Hurst, 1970; Kolko, 1963; McCraw, 1975). These researchers have re-writtenthe laypersons

understanding of business practices, to illustrate the intersection of social, political and

economic issues, or the intersection of crime and the economy, themes we explore in this

research.So too in accounting there are challenges to the conventional viewinwhich accountings

linkages to its social and political environment are seen as separate. Accounting research,

practice, education, and theory intersect with political and social issues; with this enlight-

ened view the meaning and message of accounting must be re-constructed.2 A conventional

view of fraudulent business practices and accounting would be limited to assessing whether

financial statements are prepared according to Generally Accepted Accounting Practice

(GAAP in the US, or their counterpart in other countries). Debates regarding fraud would

revolve around departures from fairly present in US GAAP or true and fair in the UK

and the European Union, and traditional debates are concerned, for example, with how

1 White-collar crime is ordinarily associated with white-collar employeesworkers with professional jobs

(managers, lawyers, accountants, investment bankers) requiring a white collar or formal attire, in contrast to

blue collar employeesworkers who are associated as semi-skilled or as manual laborers. Thus, these terms

are imbued with social-class and gender, and in a society where racial discrimination is prevalent these terms also

denote complex racial dynamics. It is our intent to examine these dynamics in this work.2 See, for example, Arnold (1999), Arrington and Puxty (1991), Briloff (2003), Broadbent et al. (2001), Chua

(1986), Cooper (1992), Cooper and Sherer (1984), Dillard and Nehmer (1990), Gallhofer et al. (2001), Hammond

and Oakes (1992), Hammond and Streeter (1994), Kirkham and Loft (1993), Lehman (1992), Neimark (1994),

Neu (1992), Oakes and Hammond (1993), Okcabol (2002), Parker (1986), Tinker (1991), Tinker and Gray (2002),

Tinker et al. (1991), and Williams (1980).


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pension accounting practice or accounting-for-stock options depart from official standards

and principles.

But accounting practice is a contested terrain in its role as a social force. Accountingand issues regarding fraud and crime are part of a broad social fabric: including issues of

regulation, governance, economic crises, poverty, race, youth, politics, and class. The major

aim of this paper is to examine how crime in the late 20th century is infused with these

issues.

Above we described numerous financial collapses and management transgressions de-

scribed as white-collar crimevery few resulting in significant imprisonment. Charles

Keating, a major protagonist in the demise of Lincoln Savings and Loans during the late

1980srequiring a government bailout estimated at over $1 billionhas served 51/2 years

in a privileged prison (Collingwood, 1994). Ivan Boesky, a main player in the 1970s1980s

insider trading and takeover frauds served 3 years (Eichenwald, 2002c), and Michael Mil-

liken, one of the commanders of the takeover wars of the 1980s is a private citizen after

spending 2 years in jail (Isa, 1996).

During this same periodthe last three decadesthe number of state prisoners rose

500%. And among the 1.3 million people in state and federal prisons, 33% are black men

age 20 through 29 years old (or 9.7% of the total black men in that age group, compared

with 2.9% of Hispanic men and 1.1% of non-Hispanic white men) (Butterfield, 2001a). (We

return to these statistics in Sections 3 and 4).

Are we witnessing racial profiling, incarceration rates skewed by race, youth, and class

while limited penalties are imposed for elite, white-collar crime? Has the United States

developed a prison industrial complexa set of bureaucratic, political, and economic

interests thatencourage increasedspendingon imprisonment, regardless of the actual need?

(Schlosser, 1998). How has crime been managed?.

In addition to the above queries, we ask other questions. What image regarding white-collar crime is promoted in accounting? What issues regarding crime should be explored?

In accountings defense of property and management is accounting complicit in the crim-

inalization and victimization of the poor? How is accounting practice implicated in crime

management? In limiting the range of what is considered acceptable accounting practice

and research regarding crime, who is protected and who is harmed?.

We examine these issues by revealing the statistics and strategies of managing crime out-

side the walls of Wall Streetin prisonsand inside the walls of Wall Streetwhite-collar

crime. In the following section, we cover a range of issues as to how the state, the media,

and accounting have managed crime. We reveal crime as a social phenomena and as a social

construction, concluding the importance of assessing the power of institutions (including

accounting) in creating reality and reconstructing issues of crime as part of a social andeconomic milieu. Section 3 reviews the relationship between increases in incarceration rates

and shifting economic and social realities, and shifting methods and ideologies in order to

manage crises. Section 4 presents more on the statistics, profits, budget strains, and race

issues regarding prisons. Section 5, Dj vu concludes that we have been here before:

business failures, accounting complicity, clarion calls for regulation and business ethics,

and a management of accounting legitimizationthey have all manifested before. In con-

cluding, in Section 6 with our Implications, we reflect on the resilience of accounting

to maintain its role in the regulatory apparatus of business, and on the lack of significant


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change in power relations and in the distribution of wealth. Recognizing this resilience, it

behooves accounting activists to work both within its terrain, and also with broader social

movements in global justice.3

2. Managing crime

Although many scholars have enhanced our knowledge regarding the intersection of the

state, the media, and crime, one of the finest expositions may be found in Hall, Critcher,

Jefferson, Clarke, and Roberts, Policing the Crises: Mugging, the State, and Law and Or-

der (1978). We rely, liberally, on their insights. Although mugging in British society in

the 1970s is the specific theme of their analysis, it is the notion of mugging as a social

phenomenaas a social construction rather than a particular form of crimethat is their

major contribution. How and why, they ask, did themes of race, crime, class, and youthserved as an articulator of unique crises in Britain in the 1970s? Such questions comple-

ment ours: How and why is the articulation and the media image of crime in the 1990s

part of a crises in the US, manifesting in and infused with, issues of race, crime, class, and

youth? How have prevailing images of crime been a part of created belief systems, which

manifest in other social phenomenaignoring the interests of some, and protecting the

interests of others? These phenomena include racial profiling, incarceration rates skewed

by race and youth, limited penalties imposed on elite white-collar crime, etc. As the US

experiences it economic booms and busts in the late 1990s and early 21st century, what

changes occur in crime management?.

How crime is portrayed and reacted to is an ideological conduit: in the case of mug-

ging in the UK it was part of a construction of an authoritarian consensus, a conserva-

tive backlash, a slow build up towards a soft law-and-order society ( Hall et al., 1978,

p. viii). We pose similar questions raised by Hall et al.: how is a law-and-order ideology

constructed in the US? What social forces stand to benefit from it? What role does the

state play in its construction? Specifically, how is crime, when related to white-collar

crime portrayed and reacted to, i.e. socially constructed, in ways that differ from non-

white-collar crime? How does this construction relate to the specific economic and so-

cial crises, or milieu, of the US in the 1990s and first years of the twenty-first cen-

tury? We, thus need to link the state, the media, and economic strains as part of our

framework.

Economic crises are distinctive features of contemporary capitalist social systems, and

within these societiessuch as the UK and the UScomplex conflicts and contradictions

emerge along with these economic crises. The managing of these crises is imposed by anarray of social practicesaccounting, ideological, budgetary, regulatory, and so onthat

emerge, shift, and change, and are always in flux. Why they present themselves in particular

forms at particular times is the challenge of our analysis.

3 This paper is part of a broad critical accounting research project, and has an inherently ambitious agenda

enhancing our understanding of the interconnections regarding culture, accounting conflict of interest, economic

crises, the media, racism, etc. We provide our qualification here: this paper inevitably cannot do full justice to all

of the issues in sufficient detail, but it offers a contribution to the accounting literature on these crucial themes.


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2.1. Ideology and social conflict

Ideology should not be conceptualized as an illusion or false consciousness, becausesuch a view ignores the rich socio-historical importance and creative process manifest in

ideology. We value Althussers (1971) concept of ideologyas the social cement

necessary, illuminating, and the way in which we relate to our world in a socially signifi-

cant way, because it interprets and mediates what individuals experience (Althusser, 1971;

Laclau, 1977). It is only through ideology that conscious subjects live (Giddens, 1979),

not mere false beliefs. Thus, ideology is not passive but active, a changing and re-invented

part of social practice, enmeshed on its own in the reproduction of society, shaping expec-

tations and possibilities and incorporated into language, culture, and tradition. We rely on

the rich tradition within Marxism which uses the term ideology in a sociological way:

to refer to the vehiclesthe forms of significationthrough which people make sense of

the social reality that they live and create day to day, and through which the continuanceof prevailing systems of domination are both reproduced and sanctioned (Neimark, 1994,

p. 90, referencing Eagleton, 1991).

2.2. Creating and maintaining knowledge

The power of the media, professional bodies, educational institutions, and the state to

contribute to the creation of reality has been codified by many. Chomsky (1992) uses the

term the state propaganda apparatus to describe the process by which reality is created,

or by which indoctrination occurs. In the US, the process relies on a privatized system,

including the media and the broad participation of the educated population, who essentially

control educational apparatuses (Chomsky, 1992). These groups create systems of beliefs

undermining independent thoughtand preventing understandingand analysis of institutionalstructures and their functions; they may even be quite unaware of this social role of their

activities. These experts of legitimation using a term by Gramsci (1971), are the ones

who labor to make what people in power do seem legitimate, [they] are mainly the privileged

educated elites. The journalists, the academics, the teachers, the public relations specialists,

this whole category of people have a kind of an institutional task, and that is to create the

system of beliefs which will ensure the effective engineering of consent ( Chomsky, 1992,

pp. 6667). State power and the media have the same effect: to perceive issues, and to

suppress, control and shape them in the interest of private ownership of the economy, and to

discourage dissent, to silence thevoices of theunempowered,and to privilege what is known.

The power of the media and other institutions in constructing reality is referred to as

Manufacturing Consent in Edward Hermans book with Chomsky (Manufacturing Con-sent: The Political Economy of the Mass Media, 1988). Under conditions of inequality and

concentrated power, including in democratic countries, the public must be convinced of

the soundness of existing institutions. State policies must be seen as reasonable, rationale,

preferable, and proper. The forces that insure control over the media where media organiza-

tions are under private control and where formal censorship is absent include: concentrated

ownership and profit orientation of dominant mass media firms; advertising as the primary

source of income of the mass media; dependence of the media on information provided by

government, business, and experts funded by primary sources of power; and pressure placed


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on the media for negative positions regarding the state (Herman and Chomsky, 1988). The

major media institutions and the state can manage the news, by virtue of their resources

and outreach. They can decide to privilege certain issues and neglect others, based on theirown values and agenda (Herman and Chomsky, 1988).

While there is general agreement (by researchers on both the left and right side of the

political spectrum) regarding the mediating and conflict-resolving role of the states appa-

ratuses, Gramsis work enhances ones understanding of the states critical role in social

reproduction, illustrating how social and political life is disciplined by class and productive

relations, in order to reproduce the conditions necessary for the valorization and realization

of capital. The social democratic state accomplishes this task through its cultural apparatus

to obtain ideological conformity and cohesion, for example through social contracts, wage

and price controls, immigration policies, environmental legislation, etc. Cultural leadership

or hegemony is achieved not by force in social democracies, but through the states role

in organizing consent through its policies regarding the media, education, local govern-

ments, etc.

Pivotal to this cultural hegemony is the various branches of the media, ranging from

popular forms of art and fashion to the variants found in business and academia. Included

in cultural and ideological conditions are business education and research. These business

practices represent primarily symbolic forms of social interactions. In this sense they are

social discourses that shape social beliefs and thereby predicate the manner in which social

members engage society (this is important as we seek to identify the effects of marginalizing

some themes over otherssuch as white-collar and non-white-collar crime).

Knowledge in accounting is policed through institutions limiting access to ideas, thus

restricting the dissemination of valid claims challenging the status-quo. Accounting knowl-

edge is controlled through an interplay of economic, social, and political factors (Tinker

and Puxty, 1995). Within the accounting profession, Tinker (2001) asserts: The AAAs(American Accounting Associations) allegiancesto traditional education, research, and

professional valuesare being transformed as the institution is assimilated into market

processes (p. 120). Tinker points to the allegiances of large accounting firms with academic

and professional bodies with the resultantproduction of knowledge, ideas, education, and re-

search that is biased in benefiting Big 5 interests, resulting in partisanship that exacerbates

the silencing of significant viewpoints criticizing these firms. Mitchell et al. (2001), reflect-

ing on accounting policy, also recognize an established body of literature illuminating how

governments, professional bodies, and major organizations are actively engaged in creat-

ing reality or policing knowledge (see also, Barsamian, 2000; Chomsky, 1989; Gilroy,

2000; Mitchell et al., 1998; Said, 1994; Sikka, 2000; Tinker, 2000; Tinker and Puxty, 1995).

We posit that the state and the media, including the institution of accounting, havere-constituted issues of crime as part of an important fabrication allowing certain inter-

ests to be fostered and others to be silenced. The media do not simply and transparently

report events which are naturally newsworthy in themselves. News is the end-product of

a complex process which begins with a systematic sorting and selecting of events and topics

according to a socially constructed set of categories (Hall et al., 1978, p. 53). In the case

of mugging, Hall et al. observe, Strictly speaking, the facts about the crimes which both

police and the media were describing as novel were not new; what was new was the way

the label helped to break up and recategorise the general field of crimethe ideological


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frame which it laid across the field of social vision (ibid.). Thus, we look toward the state,

the media, the law, and accounting, to assess knowledge production regarding crime.

3. Media myths and why incarceration?

Popular perceptions about crime have blurred the boundaries between factand politically

expedient myth. The myth is that the United States is besieged, on a scale never before

encountered,by a pathologicallycriminalunderclass. Thefact is that we arenot (Abramsky,

1999, p. 30). Abramsky offers a number of statistics: murder rates have been falling in the

mid-1990s; murder rates are lower today than they were more than 20 years ago; and in

some cities murder rates are lower than in the nineteenth century. Non-violent property

crime rates are generally lower in the United States than in Britain and they are comparable

to many European countries. Yet, horror stories (Abramskys words) have led to calls

for longer prison sentences, for the abolition of parole, and for the increasingly punitivetreatment of prisoners. These observances resonate with Hall et al. that the state and the

media present . . . a new construction of the social reality of crime . . . a widespread belief

about the alarming rate of crime in general, and with a common perception that this rising

crime was also becoming more violent (Hall et al., 1978, p. 29).

Marc Mauer, the assistant director of the Sentencing Project, and advocate group based

in Washington, DC, asserts, Fifty years ago rehabilitation was a primary goal of the system

[but not now, and] . . . . The number going through the system dwarf that in any other period

in U.S. history and virtually any other country as well (in Abramsky, 1999, p. 30).

3.1. The many facets of Why?

Theories regarding shifting economic and social realities and the management of eco-nomic crises such as those by Wright (1975) and Mandel (1975) offer significant insights.

They observed long waves in economic booms and slumps, explaining a natural tendency

for capitalist countries to experience cycles of changing pressures on economic produc-

tion, realization of profit, financial expansion, inflation, employment opportunities, and the

management of state and federal budgets, to name a few. Periodic economic crises emerge

from the contradictions inherent in the process of capital accumulation, and in the process

of extraction of profits. And, economic crises have transitions, from one configuration of

constraints, conflicts, pressures, and contradictions, to different emergent ones. The prob-

lems are manifest in the problem of realizing surplus value, the falling rate of profit, the

contradictory role of the state, and the competition between different forms of capital

(financial, industrial, among industries and nation-states).Crises must be managed. In a non-deterministic manner, but in complicated and sub-

tle ways, owners of the political economy see that moderate wealth and income for the

masses ensures political stability (Barsamian, 2000). Recognizing this mix of interests,

motivations, power, stability, crises management, economic necessity, and ideology, Egbal

Ahmad notes, Thats what the New Deal was about . . . Franklin D. Roosevelt was one of

the finest capitalists around. What he understood was that a modicum of safety, of security,

of distributive justice and the stimulation of hope in people is necessary for stability (Egbal

Ahmad, quoted in Barsamian, 2000, p. 64).


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The contradictions in capitalist social systems affect and reflect a variety of social con-

flicts, and responses to them have the potential to create other crises. The welfare state of

the US and the UK at various points in the 20th century is illustrative. The states support ofworkers, for example, through unemployment and social security benefits is initially bene-

ficial to corporations that might otherwise have to incur these costs directly (for example,

through corporate benefit packages to employees). However, as the state becomes increas-

ingly obligated to make these payments, the state competes with business for funds, driving

up the cost of capital, and taxation to business. Another example, particularly relevant to

the management of crime and prisons, is the inherent contradictions regarding the reserve

army of labor (unemployment). Unemployment holds down wage rates and thus the cost of

production. Yet the lack of wage income can impede the business imperative of realization

of profits because of a lack of marketconsumersfor the goods produced.

Marxist analysis refers to purposeful unemployment and low wage pressure as a distinc-

tive feature of capitalist systems, to insure this reserve army of labor. This refers to a class

of lowwage, insecure, less skilled, less educated (schooled), and frequently racial/ethnic/

religious minority category of workers whose wages significantly under-represent their

real contribution to society. For the extraction of a surplus by capital (the category of

owners of capital) low wages are a facilitating mechanism. We propose that in the period of

US economic upward economic expansion of the late 1980s and 1990s, a prison population

expansion was part of a complicated economic and ideological manifestation of this reserve

army. Minority and low-skilled workers not considered employable were kept out of

the formal labor market, becoming part of a profitable prison building force in the economy.

Western and Beckett (2000) suggest that one of the reasons Americas unemployment

statistics look so good in comparison with those of other industrial democracies, is that

1.6 million mainly low-skilled workersprecisely the group least likely to find work in a

high-tech economyhave been incarcerated and are thus not considered part of the laborforce. Rendering such a large group of people invisible, the authors claimed, creates a

numerical mirage in which unemployment statistics are as much as two percent below the

real unemployment level, and which has been made possible only by what Beckett terms an

American intervention in the economy (the growth of the prison system) comparable finan-

cially to Western Europes unemployment benefit and welfare programs (in Abramsky,

1999, p. 34). Social programs more favored in Western Europe regarding unemployment

were discredited in the US in the 1990s, and as we discuss below the surge in a prison

building was a US alternative to the social benefits policies.

Mass imprisonment is what the urban scholar Mike Davis terms carceral Keysnesia-

nismusing prison building and maintenance as an enormous public-works program to

shore up an economy in which blue-collar jobs havebeen exportedto theThirdWorld(Davis,1998). The United States has developed a prison industrial complex states Schlosser

(1998), a set of bureaucratic, political, and economic interests that encourage increased

spending on imprisonment, regardless of the actual need. This prison industrial complex

is not a conspiracy but a confluence of special interests that has given prison construction

a seemingly unstoppable momentum, under which politicians use the fear of crime to gain

votes; where prisons have become a cornerstone of economic development in impoverished

rural areas; and where private companies regard the roughly $35 billion spent each year

on corrections not as a burden on American taxpayers but as a lucrative market (Schlosser,


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1998). (We provide, in the Section, Prisons in the Late 20th Century details of the prison

expansion process.) The prisonindustrial complex is not only a set of interest groups and

institutions. It is also a state of mind (Schlosser, 1998).

3.2. Evolving states of mind

The decade of Kennedy and Johnson in the mid-1960s and mid-1970s (in the US) is

a contested terrain for many historians. It represents for some the ultimate in government

profligation and extravagance, leading to an inevitable fiscal crises of the state. For others,

there was the potential of a Great Society, epitomized by the emergence of the Civil Rights

Movement, the War on Poverty, the Womens Movement, the Environmental Moment,

and so on. The 1980s marked a disquiet with, and discredit of, the liberalism, civil rights

movement, and welfare state of the Kennedy and Johnson administrations. Faludis 1991

testimonies and statistics inBacklash: The Undeclared War Against American Women

revealthe media and ideological backlash against feminism as part of revisionist politics. In the

1980s, new policies were sought: the state spending of its surplus (both on the federal and

state levels) wouldnot be to build extensively on a support systemin the inner cities. Schools,

infrastructures, job training programs, head start programs, low income housing, and a

variety of services for the poor would be cautiously maintained and not widely expanded

and the War on Poverty and programs to combat racism would be under-funded. The

state was no longer sanctioned to improve inner cities if that spending was discredited as

throwing away good peoples money on the bad.

In the US the notable conservative backlash moved previously held center political

views to the right, and re-presented policies ensuring a kinder and gentler nation. This

included associating prisons as the law. Franklin Zimring, Professor of Law at the Uni-

versity of California at Berkeley, suggests that the explosive growth of prisons, more thanefforts by the police, or changes in the law, or tougher sentences by judges, has been the

most dominant characteristic of the American criminal justice system in the last three

decades (Butterfield, 2001a).

The media contributed to this strategy by revealing that society was under siege, that there

was an onslaught of criminals in these inner cities. The drug economy in the inner cities was

real. Observing how it was portrayed in the mass mediafrequently in racist, demoralizing,

and frightening imagesis what we propose as the social constructive aspect of criminality

at work. Contrasting observations of inner city life abound, including spokespersons with

insider views and inner city voices of popular cultureSpike Lee, Jill Scott, Chris Rock,

Marvin Gaye, Stevie Wonder, Curtis Mayfield, India Arie, Puff Daddy, 2 Pac, Nikka Costa,

Erykah Badu, and an array of prolific, insightful, and controversial young rappers. Thelatter hold alternative views of social forces, revealing the reality of racial stereotypes,

racial profiling, drug abuse, and violence. Representing their world not as victims, these

alternative interpreters of social and economic experiences reveal a backlash against poverty

and racism. Their work addresses the effects and images of a society separated by race, class,

and opportunity, specifying in word and song the difference between how white-collar and

non-white-collar crime is tolerated, sanctioned, ignored, and rationalized.

Accountings allegiances in these social conflicts are manifest in its own messages, dis-

courses, and journal articles, i.e. in a range of discursive practices revealed to its supporters


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and critics alike. Accounting journals, articles and educational resources all re-present strug-

gles over the distribution of wealth as part of the states symbolic, cultural and hegemonic

force, as envisioned by Gramsci (1971). As we have indicated, Gramsci recognized thestates central role in organizing economic, social and political life by forming allegiances

and alliances and replacing open conflict with a sense of order, or harmony, or authoritar-

ianism, or unity. In other words, using a range of organizing ideologies the state responds

to the contradictions and crises of a particular era.

Accounting forms part of these state apparatuses of ideological persuasion, contrasting

the conventional and expedient view of accounting as a passive data provider, dedicated

to unbiased reporting. Rather, accounting contributes to the states organization of cultural

hegemony. We need to recognize accountings force in ideological practices as part of the

state (but also unique) in creating social cohesion, allegiances, and forms of cooperation. For

example, the early 1960s social movements witnessed accounting considerations of social

audits (even though limited in their effects); while the 1980s critique and backlash against

the Great Society coincided with an accounting discourse critiquing state intervention in

accounting affairs, and a support for professional independence and professional reviews

(see Lehman, 1992; Lehman and Tinker, 1987; Tinker et al., 1987). Accounting is part

of the broad social fabric of hegemony of consent and hegemony of authoritativeness ob-

served by Hall et al. (1978) as the means by which social conflict is managed (accountings

participation in creating social reality is expanded upon in Section 5).

Integration among regulatory institutions (such as accounting, the law) and the media

creates unexpected alliances in the US regarding white-collar crime and black youth

crime, illustrating Hall et al.s assertion that The law remains one of the central coercive

institutions of the capitalist state; and it is coupled in the most fundamental way with the

structure of crime,with the way crime is perceived, andin theway crime forcesthose whoare

subordinated in society to shelter beneath a hegemonic order (1978, p. 177). The complexideologies of crime provide the basis, in certain moments, for cross-class alliancesin support

of authority (1978, p. 177). The move toward privatizing prisons represents a strange

alliance: the intersection of the free market with democracy and its concepts of freedom.

4. Prisons in the late 20th century

Visitor: Youre on Death Row and you write, draw, educate yourself and help others . . .

Why???

Inmate: Because Im Human

Fortune News (2000), front cover

The number of state prisoners rose 500% over the last three decades, growing each

year in the 1990s as crime dropped. The total number of people incarcerated in state and

federal prisons, local jails and juvenile detention centers was 2,017,686 at the end of 2000

(Butterfield, 2001a). The Justice Department reported in a release August 12, 2001, that the

number of inmates in state prisons fell modestly in the second half of 2001, the first such

decline since the nations prison boom began in 1972, a decline attributed by experts to

several factors: the continuing decline in crime, which began in 1992; new attitudes about


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offering drug offenders treatment instead of locking them up; and a greater willingness by

parole officers to help parolees instead of sending them back to prisons for minor infractions

(Butterfield, 2001a).If a decline continues, it could benefit state budgets because prisons have been the fastest

growing item of state spending over the last 20 years. In a number of states, including

California, spending on prisons has depleted money for state colleges and universities

(Butterfield, 2001a). But a decline in the number of inmates could be bad news for private

prison companies, whose stock prices depend on a steadily growing number of inmates, and

for some prison guard unions, such as the California Correctional Peace Officers Associa-

tion. The association has been the biggest contributor to a number of California politicians

and the most powerful force in the state pushing for tougher sentencing laws (Butterfield,

2001a). (This is not to deny the importance of jobs and security for working people in

general, but rather to illustrate the dilemmas imposed within the prison system.)

Butterfield (2001b) notes that in a reversal of the 20-year trend toward ever-tougher crim-

inal laws, a number of states have quietly rolled back some of their most stringent anticrime

measures, including those imposing mandatory minimum sentences and forbidding early

parole. The new laws reflect a political climate that has changed markedly as crime has

fallen, the cost of running prisons has exploded, and the economy has slowed, according to

state legislators and criminal justice experts (Sack, 2001).

After a two-decade boom in prison construction that quadrupled the number of inmates,

states now spend a total of $30 billion a year to operate their prisons, according to the

Bureau of Justice Statistics. And with voters saying they are more concerned about issues

like education than street violence, state legislators are finding they must cut the growth

in prison inmates to satisfy the demand for new services and to balance their budget

(Butterfield, 2001b).

I think these new laws are pretty significant, with legislators taking politically riskysteps that would have been unthinkable even a couple of years ago said Michael Jacobson,

a former corrections commissioner for New York City who is now a professor at John Jay

College of Criminal Justice. According to Jacobson, When the spigot stops, you are forced

to look at the items that have grown the most, an inevitably, in every state, it is corrections

(Butterfield, 2001b).

Perhaps the most surprising change has come in Louisiana, which has the highest incar-

ceration rate in the nation and has long had a reputation for brutal prison conditions and

wide racial disparities in who is sentenced to prison. The situation in Louisiana has reached

a point, said State Senator Donald R. Cravins that we had half the population in prison, and

the other half watching them (an exaggeration but poignant), while the state spent $600

million a year on corrections and was facing a budget deficit. We were pouring money intoa bottomless pit, but we could not address the real causes of crime like the lack of early

childhood education, a particular problem in Louisiana, which has the lowest per capita

income in the nation (Butterfield, 2001b).

With the number of inmates in states either stabilizing or dropping, New York has frozen

hiring at 36 prisons across the state. The change threatens the livelihood of thousands.

Many of the children of laid off paper-mill workers and struggling dairy farmers chose

a booming field that offered a steady salary, a pension, and health insurancebecoming

corrections officers. Across upstate New York, shrinking rural communities and their leg-


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islators clamored and competed for prisons, a seemingly recession-proof industry. But the

boom times are coming to a jarring end (Rohde, 2001). Regions and towns that have

based their whole economies on prisons are going to be confronted with some really seri-ous problems, said Michael Jacobson, a professor of criminology at John Jay College of

Criminal Justice. This is going to be a problem for the governor and Legislature. In the

same way towns lobbied to open prisons, they are going to lobby against closing them

(Rohde, 2001).

Prison growth is assailed by critics as a shortsighted use of state resources and de-

fended by supporters as necessary for public safety. New Yorks sprawling 70-facility $2.4

billion-a-year prison system pours hundreds of millions of dollars into the upstate econ-

omy each year. Groups that criticized explosive prison growth in the past are using the

slowdown to again call for change. Jennifer Wynn, director of the Prison Visiting Project

for the Correctional Association of New York, questioned the wisdom of making prisons

such a large economic force in upstate New York. Suggesting that rural upstate communi-

ties have relied on prisonersmostly poor people of color from New York Cityto fuel

the economy. Maybe its time to invest in more positive and sustainable industries than

warehousing people (Rohde, 2001). We turn next to describe the make-up of the prison

population.

4.1. Race and prisons

According to a Justice Department report of August, 2001, among the 1.3 million people

in state and federal prisons 33% (428,000) are black men age 20 through 29 years old, or

9.7% of the total black men in that age group. That compares with 2.9% of Hispanic men

and 1.1% of non-Hispanic white men in that age group who were in prison (Butterfield,

2001a). Blacks account for 12.3% of the US population in the 2000 census, while Hispanicsmade up 12.5% (White accounts for 75.1%; Asian 3.6%; these do not add to 100% do to

overlaps; see www.census.gov). The racial disparities are more pronounced than theyappear

in these figures, according to Alfred Blumstein, a professor of criminology at Carnegie

Mellon University and one of the nations most respected experts on prisons. The even

greater over-representation of blacks in prisons is partly a result of the tougher sentences

for crack cocaine that for powdered cocaine. Powdered cocaine is more commonly dealt

by whites and crack cocaine is more commonly dealt by blacks. But the discrepancies also

reflect differences in prior arrest records and some level of racism, he suggests (Butterfield,

2001a).

StateRepresentative Michael Lawlor, who is chairmanof the Connecticut House judiciary

committee, says one advantage of rolling back stringent anti-crime measures would be toreduce huge racial disparities in who goes to prison. Nine out of 10 people in jail and prison

in Connecticut for drug offenses are black or Hispanic, but half of those arrested on drug

charges are white (Butterfield, 2001b).

Governor George E. Pataki, a Republican with a tough-on-crime record, has promised

to soften New Yorks most severe tough-on-crime laws: the mandatory sentences for drug

offenses passed in the 1970s. The main reason is that Mr. Pataki is running for re-election

next year andhas been tryingto make inroads among black and Hispanic voters (Butterfield,

2001b).


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4.2. Racial profiling and race

Evidencing the concern with racial profiling, Public Broadcasting Systems sponsoreda forum Is Racial Profiling Real? (Public Broadcasting System, 2001). Ben Wattenberg,

facilitator of the program stated From California to Cincinnati, to New Jersey, police de-

partment are being confronted with the incendiary topic of racial profiling. David Cole,

Professor of Law at Georgetown University Law Center, asserts that In terms of the evi-

dence, the evidence is astoundingly one-sided, that is, there have now been probably 1520

studies of racial profiling and every one of them has found that African Americans and

Latinos are disproportionately stopped and searched (Public Broadcasting System, July

19, 2001). Cases filed in 1997 and 1999 in New Jersey prompted Attorney General Peter

Verniero to release a report admitting to the practice of racial profiling by New Jersey State

Police, admitting to the unconstitutional practice (American Civil Liberties Union, 2001).

According to a survey by The Washington Post, The Henry F. Kaiser Family Foundationand Harvard University, More than half of all African American men report that they have

been the victims of racial profiling by police some time in their lives (Washington Post,

2001). More than a third of all blacks interviewed said that they have been rejected for a job

or failed to win a promotion because of their race. One in five Latinos and Asians also said

that they had been discriminated against in the workplace because of their race or ethnicity.

President Bush told Congress in February (2001) that it is wrong, and we must end it but

to date, his Administration has failed to act (Washington Post, 2001).

TheFederal Investigationof New YorkCitys streetcrime unit, which beganafterthe 1999

shooting of Amodou Diallo, has found officers engage in racial profiling. Mayor Giuliani

responded with a furious attack on the motivation behind the investigation and its method-

ology, denying the prosecutors findings that blacks and Hispanics were disproportionately

singled out (Fortune News, 2000, p. 6).The importance of race as a primary factor in distinguishing among the rights and priv-

ileges in US history is undeniable (Morrison, 1992; West, 1993). The instances and man-

ifestations of discrimination based on race are ubiquitous. It is impossible to do justice to

these all. We rely on Bells (1987) And We Are Not Saved: The Elusive Quest of Racial

Justice for a brief illumination.

Bell writes, Jeremiahs lament that we are not saved echoes down through the ages

and gives appropriate voice to present concerns of those who . . . pledged publicly that

the progeny of Americas slaves would at last be Free by 1963 . . . Not even the most

skeptical of that convention [in 1959] could have foreseen that, less than three decades later,

that achievement would be so eroded as to bring us once again into fateful and frightful

coincidence with Jeremiahs lament (Bell, 1987, p. 3).Recognizing that most of what can be said about racial issues in the US has been said,

and likely more than once, Bell concludes that while full racial equality may some day

be achieved, it will not be in our time. Library shelves creak under the weight of serious

studies on racial issues (Bell, 1987, p. 4). Throughout Americas history, racial issues have

been high among, if not central to, the countrys most important concerns. At no time has

race slipped far down the list of the most crucial matters facing both the nations top policy

makers and its most humble citizens . . . . On the agenda of unfinished business, Americas

continuing commitment to white domination looms especially large for those citizens of


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color whose lives are little less circumscribed than were those of their slave forebears (Bell,

1987, p. 4).

Knowing that racism is more than a pejorative hurled in powerless frustration at anomnipotent evil, Bell quotes Charles Lawrence, Racism in America is much more complex

than either the conscious conspiracy of a power elite or the simple delusion of a few ignorant

bigots. It is part of our common historical experience and, therefore, a part of our culture. It

arises from the assumptions we have learned to make about the world, ourselves, and others

as well as from the patterns of our fundamental social activities ( Bell, 1987, pp. 45).

Gilroy provocatively provides testimony to the power of culture and its infusion with is-

sues of race, reality construction, and the quest for profit, in his book,Against Race: Imagin-

ing Political Culture Beyond the Color Line (2000). He writes, It is impossible to deny that

we are living through a profound transformation in the way the idea of race is understood

and acted upon (Gilroy, 2000, p. 11). Concerned with the power of raciology, Gilroy

asserts that we must engage the pressure and demands of multicultural social and political

life, noting this mixture of concerns is part of the answer tentatively offered . . . to the au-

thoritarian and antidemocratic sentiments and styles that have recurred in twentieth-century

ultranationalism (p. 6). Gilroy suggests that race-thinking is a powerful, seductive, and

destructive force, a form of fascism, making a spectacle of our identities and differences.

The media and commodity culture of the 1960sand especially the 1980s rise of hip-hop

and other militanciessacrificed the contributions of black culture, in order to serve the

interests of profit and corporations, and new technologies. The triumph of the image

spells death to the finest promises of modern democracy, reducing people to mere symbols.

Gilroys hope is that race will be denounced as a political language, and he champions

instead a new humanism and a new moral vision for what was once called anti-racism.

Culture, racism, profit, the media, the commodification of identities, crime, incarceration,

and economic crises, are all linked. How does white-collar crime illustrate the complexityof this social fabric? We turn to this issue in the next section, Section 5, Dj vu.

5. Dj vu

There are many linkages between white-collar crime, culture, accounting conflict of

interest, and our social fabric. As previous sections illustrate, in capitalist societies the quest

for profit and economic crises drive businesses (people) into an array of practicessome

socially productive, and others socially unacceptable and labeled fraudulent, unethical and

criminal. There is an inevitable social construction of crime, and the management of

white-collar crime which includes calls for regulation, calls for business ethics, and theparticipation of Congress, the SEC, accounting firms, analysts, academics, and the media in

presenting these issues. In the management of these frauds there are calls to constrain them,

but something broader is taking place, which is our interest in revealing. How are these

frauds and crimes re-presented, i.e. how is the articulation of white-collar crime and what

is to be done about them part of ideological crime-management? They form ideological

management, because this is part of the necessary state apparatus of intervention to assure

consensus, cohesion, legitimacy, and is ultimately symbolic: they do not change the inherent

nature of power relations and conflicts of interest in capitalist society.


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Among the range of activities possible, this section presents what we consider to be

prevalent, consistently used, resilient, effective, and interrelated forms of management of

the crises. We have been here before in their basic form, although the specific character-istics may be different than previously, we experience them as dj vu. The four forms

of managing white-collar crime that we illustrate here are first, the call for regulation: of

the business community and of the accounting profession, through various recommenda-

tions and by a range of protagonists. The second is a suggestion that the problem is the

conflict of consulting and the conflict of interest inherent in accounting firms offering both

audit and consulting services, as characterized as the fox guarding the hens (this claim is

already inherent in the audit process whereby auditors are paid by the same managers they

scrutinize). The third is the call for ethics and discussions regarding business ethics and

ethical instruction to the business community and in universities. The fourth is the rhetoric

regarding the numbers: if accounting got the numbers a little better, these transgressions

could be prevented, ameliorated, and society would be okay. We illustrate the general con-

cepts with the specific case of Enron. In the period beginning October 2001, when warnings

regarding Enrons demise were heightened by news of the SECs inquiry into the company,

through April 2002, over 750 articles on Enron appeared in the New York Times alone.

5.1. Dj vu 1: regulation

Regulation has been a quasi-solution to intra-capital disputes many times in our past.

In the late nineteenth and early twentieth century, monopolies, trusts, and tycoons were

restrained by antitrust acts. Research reveals that these acts were promoted by business

itself as a means of preserving a semblance of legitimacy of the business community, lu-

bricating the machinery necessary for capitalism (Galambos, 1975; Kolko, 1963). Hurst

(1970) evidences that accounting practices justified the corporate entity in the early 1900sby legitimizing corporate power and maintaining investor and public confidence. The re-

ally effective pressures for shareholder information grew out of concern for maintaining

confidence in the market for corporate securities, rather than for the legitimacy of the in-

ternal government of the corporation (Hurst, 1970, p. 91). Merino and Neimark (1982)

conclude that the passage of securities regulation in the US in the 1930s was an example

of this symbolic legislationa means of restoring investor confidence and preserving the

status quo. Their work reveals that the major protagonists in the formation of the regulations

were banking, investment, and financial institutions requiring legitimacy to ensure access

to capital flows. Merino and Mayper (2001) remark: the passage of securities regulation in

the 1930s must be examined as a response to a moral crises of capitalism, generated by the

immoral behavior of the capitalist elite (p. 501). Regulation is ultimately symbolic (i.e.not expected to result in significant changes in distribution of economic resources) (Merino

and Mayper, 2001, p. 502).

In the current post-Enron milieu, similar regulatory, but ultimately symbolic recom-

mendations have appeared in, literally, thousands of articles. By February 2002, regulators,

legislators and the Financial Accounting Standards Board were proposing changes in ways

companies do business and report their finances, including closing loophole[s] that Enron

used to hide hundreds of millions of dollars of debt and inflate it profits (Norris and Kahn,

2002). The Financial Accounting Standards Board is considering forcing companies to in-


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18/27


pany stock rather than consider a more diversified (and less risky) portfolio. Employees

were not permitted to sell Enron stock until age 50 and inadequate notification was given

regarding a blackout period caused by a change in pension plan administration. Duringthis period employees were not permitted to sell Enron stock, yet top Enron executives

were. In a six week period during which Enrons problems were escalating, employees lost

an estimated $1 billion (stock investor loses have been estimated at $63 billion) (Spinner,

2002). The House of Representative reform bill passed in March 2002 was largely based

on President Bushs recommendations, with Democrats calling for further protections for

employees, claiming that the House and Bush plans are insufficient and contain conflicts of

interests detrimental to employees (Spinner, 2002; Strope, 2002).

In the spirit of the contradictions revealed in these complexities, it should be noted that

calls for regulation occur under certain circumstances, are debated in contradictory manners

by a variety of protagonists, and form the crime management ideology we assert takes

place. Thus, media images and clarion calls for reform and regulation are likely to emerge

in the wake of the Enron crises, but we note that resistance to them was virulent prior to

the melt down of Enron and the accounting professions loss of legitimacy.

The power of auditing firms to exert influence on the process of regulation through

lobbying, and political contributions has been documented, and lamented by Arthur Levitt

Jr. former chair of the Securities and Exchange Commission (Labaton, 2002b). When Levitt

sought conflict-of-interest rules on the accounting industry 2 years ago, he was hit by a

barrage of high-powered lobbying, including calls from 10 or 11 senators. The senators,

whom he didnot identify, warnedthat if he didnot relenton thenew regulations, the agencys

appropriations could be cut, he said . . . I have never been subjected to a more intensive

and venal lobbying campaign (Labaton, 2002b). Since 1990, the accounting industry has

contributed more than $53 million to congressional and presidential candidates.

Congressional aides and some experts say significant oversight and toughened enforce-ment of accounting firms will not happen because of the accounting industrys political

muscle. Its just whimsical, said James D. Cox, a law professor at Duke University who

has written a text-book on accounting and legal issues. There will be a lot of posturing

about how bad Enron and Andersen are. But at the end of the day, if we cant get campaign

reform, its hard to believe we get tighter standards (Labaton, 2002b).

We regard calls for regulation as symbolic legislationa means of restoring investor

confidence and preserving the status quo, and that among the major protagonists in the

formation of the regulations are accounting, banking, investment, and financial institutions

requiring legitimacy to ensure access to capital flows. These responses and contradictions

appear in the consulting as the culprit issue as well as we indicate next.

5.2. Dj vu 2: consulting as the culprit

Seventeen years ago, the American Institute of Certified Public Accountants (AICPA)

issued On the Quality of Independent Audits. This 1985 publication was prefaced with

the following. For the second time in less than a decade, the Subcommittee on Oversight

and Investigations of the House Committee on Energy and Commerce is conducting hear-

ings on the performance of the public accounting profession. In their 1985 testimony to

the US House of Representatives, the AICPA acknowledged that concerns over providing


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Management Advisory Services to audit clients had been raised a number of times in re-

cent years (AICPA, 1985). Management Advisory Services (MAS, currently referred to as

consulting services) had been under scrutiny for its potential for impairing auditor indepen-dence but the AICPA referred to studies finding no evidence that MAS had been a cause of

audit failure, or had resulted in an impairment of independence, and thus there should be

no restrictions on these services.

Prohibitions against providing audit and consulting services were never implemented

in the 1980s, and by 2001, according to a survey by the U.S. Securities and Exchange

Commission the accounting industry was earning $2.69 from non-auditwork for every $1

earned from audit services (Bilello, 2002; Financial Times, 2002).

The rhetoric in the battle between the Big 5 accounting firms (Arthur Andersen, Deloitte

Touche Tohmatsu, Ernst and Young, KPMG, and Pricewaterhouse Coopers) and the Se-

curities and Exchange Commission (SEC), over the latters proposal that public auditors

should not provide non-audit services to the same clients (because of conflict of interest

issues) has been bitter. Greed and arrogance have diverted the accounting profession from

its mission of providing sound financial reports for its shareholders claimed SEC former

Chair, Levitt, in 2000 (McNamee and Byrnes, 2002, p. 166). SEC Chair Levitt recognized

a wave of auditing failure which he claimed has cost investors $88 billion in the past

7 years (McNamee and Byrnes, 2002, p. 156), and he noted that in the 3-year period of

1997 through 1999, 362 companies restated their financial reports, perhaps a consequence

of audit impairment and compromises due to potential conflict of interestaccounting con-

sulting work and financial ties were compromising audits. On June 27, 2000, the SEC voted

unanimously to issue a proposed rule that would bar accountants from providing a range of

consulting services to clients that they audit. Levitt also proposed strengthening the public

oversight of accountants with a strong intention of sending the profession back to its roots

as vigorous guardians of investor interest (McNamee and Byrnes, 2002). With revenue fromconsulting services averaging 51% of their revenue, three of the Big Five firmsDeloitte

Touche Tohmatsu, KPMG, and Arthur Andersenvociferously protested the SEC actions,

suggesting that lacking the proof, the government is unnecessarily and unfairly meddling

in their affairs (Donock, 2000).

In disputing SECChair ArthurLevitts argumentto curb consulting work for audit clients,

Kenneth Lay, Chair of Enron wrote to Levitt in 2000 that In addition to their traditional

financial statement related work, the independent auditors procedures at Enron have been

extended to include specific audits and reporting on critical control processes. This arrange-

ment . . . has been extremely valuable (Farrell, 2001). The defeat of the proposals in 2000

allowed, for example, Andersen to bill Enron $27 million for consulting services while also

billing $25 million for audits (Labaton, 2002b).But after the Enron debacle, Paul A. Volcker, Chair of the Independent Oversight Board,

and former chair of the Federal Reserve, called on Arthur Andersen to separate auditing

from consulting and to assure that conflicts of interest do not harm the quality of audits

(Norris, 2002). Do we want reform, or do we not? That is the issue that we want to put on

the table (Norris, 2002). Mr. Volcker would separate the consultants from the accountants

in Andersen, As this reorganization is completed, there will be no partner interlocks, no

revenue or profit sharing, and no cross subsidies between the auditing and consulting

partnerships (Norris, 2002).


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In response, Deloitte Touche Tohmatsu are separating consulting from audit practices, a

reversal of the firms prior stance of maintaining that it provided better services to clients

through the synergy of its connected auditing and consulting business (Los Angeles Times,2002; Meyer, 2002). Four of the other Big Five accounting firms announced their support

of proposals preventing them from providing technology consulting and internal audit ser-

vices to clients they externally audit, a previously strongly opposed legislation (McNamee

and Byrnes, 2002).

Responding to growing criticism of accounting practices stemming from the collapse

of Enron, Harvey L. Pitt, chair of the Securities an Exchange Commission proposed that

outside experts police the accounting industry, instead of the current practice of Peer Re-

view (Labaton, 2002a). Although Mr. Pitt proposed that changes in the oversight rules and

disclosure requirements were essential, he dismissed suggestions that he take steps to keep

auditors from performing other work for the same clients.

Illustrating the complexity of these issues, Mr. Pitts comments are a significantly broad

indictment of the profession. He claims, Auditor independence is not the cause of the

problems that we are witnessing. The system has enough flaws in it that cry out for repair.

And it would be easy for some people to convince you that the entire problem is a question

of auditor independence and ignore the much bigger issues of the quality of our disclosures,

the penetrability or impenetrability of financial reports, and how audits are structured and

performed (Labaton, 2002a). Hence, a record number of accounting and financial reporting

cases have been opened: Following the implosion of Enron last winter, the agency received

a record number of tips from corporate insiders and investors about accounting and financial

reporting violations at other companies (Labaton, 2002c).

Levitt casts the Enron story as the story of the ninetiesa battle between public

and private interests that is being fought at a time when there is more corporate money

in politics than ever before. This is about corporate greed . . . two decades of erosion ofbusiness ethics (Mayer, 2002). This concern for ethics is our next consideration.

5.3. Dj vu 3ethics

In addition to a call for greater scrutiny and regulation, there hasbeen the moral equivalent

of mea-culpaa call for ethics, which has an historical precedence as well. In the 1980s,

the American Assembly of Collegiate Schools of Business (AACSB) and the Corporate

Council on the Liberal Arts stressed the importance of an ethical component in business

and accounting education. This clarion call came during previous shock-waves regarding

questionable business practices. General Dynamics had been suspended from bidding on

new contracts with the U.S. Department of Defense due to alleged fraudsuch as submitting$640 million in false claims on nuclear submarine contracts. E.F. Hutton had been charged

with extensive check fraud (check kiting), and Texaco was charged with knowingly inter-

fering with Penzoils acquisition of Getty. In requiring Texaco to pay over $10 billion to the

plaintiffs, Texas Judge Solomon Casseb, Jr. stressed Texaco has misjudged the importance

of integrityat least in appearancewithin the business community. Fraud within E.S.M.

Government Securities Inc. set the Ohio banking system reeling in the mid 1980s, and scan-

dals in investment banking, piranha-like takeovers, and greenmail disputes thrust firms

like Drexel Burnham Lambert, Shearson Lehman Brothers, Phillips Petroleum, CBS Inc.,


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and TWA, into controversial limelight in the media (Lehman, 1988). While some considered

takeovers as a positive form of natural market regulation, Harold Wilson, former Chair of

the Securities and Exchange Commission, claimed takeover activities are a major disasterfor shareholder democracy (Financial Times, 1985).

It was in this contentious environment, similar to the post-Enron era, that greater ad-

vocacy appeared for business ethics (as now), and for universities to include ethics and

codes of conduct education in business schools. Business Ethics New Appeal (Lewin,

1983) described academias increased interest in business ethics, as evidenced by a pro-

liferation of articles, new texts, and new courses. Yet during this same period, surveys

of literature and accounting curriculum revealed the promotion of individualism, com-

petitive behavior, material acquisitiveness, and social Darwinism in business (Lehman,

1988).

The Enron collapse is emblematic of a problem that is far more imbedded, more in-

tractable and, alas, far more universal than the board failures and malfeasance of a single

company . . . . The hard part inheres in the very nature and design of large-scale organiza-

tions, whose ethos and leadership too often create mindless and complacent cultures with

vacant sentry boxes. Unless the leadership and the social architecture of these behemoths

change, I can promise you Congressional regulations will get tighter, the Securities and

Exchange Commission more vigilantand the problems worse. The basic problem in most

organizations today, both public and private, is that they work to block transparency . . . .But

a culture of honesty, like a healthy balance sheet, is on ongoing effort. It requires sustained

attention and constant vigilance (Bennis, 2002).

The recent call promoting ethics by industry leaders have many interpretations, and we

refer to one as ensuring survival, but little change, to the economic system. Promoting ethics

constrains the system as an informal control over egregious business practices, disciplining

the untamed market place in which allparticipants are affected by the negative consequencesof competition. Scandals and frauds and the resultant loss of investor confidence create

precarious and volatile markets. At some point the effect of individualism and unbridled

competition becomes overwhelmingly detrimental, rather than purposeful to the system,

jeopardizing its survival. A belief in the system and the ethical nature of its stewards (man-

agers, accountants, auditors, regulators, investment bankers, consultants, etc.) is critical, as

is a belief in the numbers.

5.4. Dj vu 4: fact is fiction: the numbers lie

Months prior to the public revelations of Enrons problems, Bethany McLean ofFortune

magazine became thefirst journalist to highlighthard questions about Enrons balance sheet.The most startlingfact sherevealed was theabsence of crucial information in thecompanys

financial reports. How exactly does Enron make its money? she wrote (Barringer, 2002).

Ms. McLean is among a few financial reporters who have written corporate financial reports,

having worked for an investment banking division of Goldman, Sachs. She would review

the books of companies being offered for sale and describe their virtues and faults. I

learned, she said that numbers can lie. She also had an epiphany about accounting and its

potential for abuse. When you come out of a liberal arts background she said, you want

to know why something is the way it is. In accounting, there is no reason why. There is


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no fundamental truth underlying it. Its just based on rules. These rules create an incentive

to get around rules she said. This means getting way from any accounting portraying the

fundamental reality of a company (Barringer, 2002).Analysts lament the nature of accountings subjectivity in the current environment, and

its deleterious effects. Scrutiny of off-balance-sheet (OBS) transactions and accounting

gimmicky has increased . . . . Have no doubt: Enrons demise has shaken the financial

community, resulting in skittish equity markets that appear to respond daily to the mere

suggestion of infractions in corporate reporting policies with a heightened level of volatility.

Protection of auditor independence is also at stake. There is a need now, more than ever, for

financial statement users to delve into company reports to ferret out accounting smoke and

mirrors . . . to pause and reexamine the corporate reporting policies of companies around

which rumors may swirl (Napolitano et al., 2002, p. 1).

The desire for better numbers is revealed in the authors assertion that The United

States retains the blueprint for the most conservative and highest quality GAAP frame-

work and regulatory statues in the world. Nonetheless, there are areas in our accounting

model that lack the level of transparency needed to assess accurately the fair value of a

firm . . . . It is essential for analysts and investors to minimize the torpedoes in financial

reports by identifying companies that use liberal corporate reporting policies and OBS ar-

rangements to either mask weakness in operating fundamentals (Napolitano et al., 2002,

abstract).

But, if the numbers can lie, can accounting really deliver the true nature of what

prevails? Critiquing David Solomons quest for faithful representation in accounting,

Tinker (1991) recognizes the subjectivity and partisanship of accounting, and that it is

never neutral in issues of social justice. The diversity of conflicting social interests invested

in accounting suggests it inevitably takes sides in such conflicts. Numbers are informed by

a choice; in seeking faithful representation one ignores the choice of sides: a choice thatmust be socially reflective and critically self-conscious (Tinker, 1991).

Similarly, Everett et al. (2002) point to the myth making aspect of the accounting

profession, an important and frequently under-developed aspect of accounting practice,

teaching, and research. They provide an historical perspective on the development of ideas

regarding independenceand objectivity and its part in the ethical discoursein accountancy,

focusing on the Canadian Chartered Accounting Profession, 19112000. They illustrate

that terminology and discourse are a process of creating rationales and myths with no one

history or truth; history is socially constructed and subjective. The notion of accounting

objectivity is a characteristic used by the accounting profession to establish its legitimacy,

ethical high ground, and unique contribution to society. And, as the profession has created

unrealistic aims, given its inherent conflict in social practices, they speculate that therewill be new contradictions, that will continue to emerge as the profession creates myths to

legitimize itself (this phenomena has been referred to as the expectations gap in previous

manifestations4). The ambiguities of accounting, and the flexibility of what it should deliver

as truth, has served the complicated social systems in which it operates quite well.

4 Thesearch forobjectivity in accounting haspermeatedits practicefor itsentireexistence,as hasa critique of this

philosophy. Accountings subjectivity, social construction, mutability, and transformations have been researched

by many (see, e.g. research noted in footnote 1).


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6. Implications

Far from being a radical idea, Berenson states in the New York Times, that the biggestcasualty of Enrons collapse will be the loss of investor confidence. Enron may have

collapsed, but the market for esoteric accounting is still booming. And that is bad news . . .

If investors cannot believe the figures put out by public companies, they will be much less

willing to risk their money on stocks (Berenson, 2002). Yet, Berenson fails to reveal the

complexity of symbolism, social and business practices, and reality creation when he states,

Accounting, ordinarily a pillar of capitalism, was misused to prop up profits (Berenson,

2002). In actuality, accounting and business, and capitalism itself, has worked; it has been

resilient; and it has successfully created myth if, despite of evidence to the contrary, there

has been a strong belief in the objectivity of accounting.

We have been here before: the SEC acts in the 1930s, the replacement of the Accounting

Standards Board in the 1970s, the 1980s Dingell Commission investigations of audit quality,

and the clarion call for business ethics in the merger mania, takeover, and corruption years of

the 1980s. These mirror the rhetoric of todaydebates assessing independence, questions

of integrity and public interests, and the indictment by no less than SEC Chair Harvey

Pitt, quoted previously who has declared that the system cries out for repair, given the

much bigger issues of the quality of our disclosures, the penetrability or impenetrability of

financial reports, and how audits are structured and performed ( Labaton, 2002a).

Dj vu manifests in the frequent laments of our day. The reflection of our past in todays

mirror, in the investigations into Enrons collapse (or World Coms, or Arthur Andersens,

or some other pillar of capitalism) is clear. Investigators will seek to pinpoint whether the

same kinds of fraudulent acts that were at the foundation of the savings and loans scandals

of the late 1980s and early 1990s occurred at Enron, too. These include false valuation of

assets, bogus deals between related parties, and millions of dollars pocketed by participantsalong the way (Eichenwald, 2002a).

Our work is concerned with how well consent has been manufactured, and how well

reality has been constructed to generate a belief in corporate enterprises in the past. The

state, the media, the business community, and the accounting profession have contributed

to, and indeed succeeded, in portraying faithfulness, objectivity, integrity, reliability, and

fairness in a world that flaunts under capitalism many of these characteristics, but has the

ability to obscure that reality. At the same time, a re-presentation of the criminal justice

systems injustices have remained under examined.

Accounting failures and business failures also have included the markings of the

failures of free markets worldwide: continued global poverty, questionable privatization

of public enterprises and public goods, and greater divides between so-called first andthird world nations. In her study of globalization, Rosenberg remarks, It is often said that

globalization is a force of nature, as unstoppable and difficult to contain as a storm. This is

untrue and misleading . . . . Today it would be more likely for globalization to be sabotaged

by its own inequities, as disillusioned nations withdraw from a system they see as indifferent

or harmful to the poor (Rosenberg, 2002).

There will be new crises of investor and public confidence, and skepticism of the integrity

and wisdom of Wall Street and global enterprises in general due to the current collapses.

White-collar crime will appear less tolerated and will more prominently be declared as


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wrong. Our work demonstrates far from being a philosophical shift, or a desire for phil-

anthropic good, the stance is one of preservation. The powerful concern is for survival, as

even former SEC Chair Levitt stated, When the public loses confidence in our markets,or when the reliability of the numbers is diminished, the whole system is jeopardized

(McNamee et al., 2000, p. 158).

In accountings defense of private enterprise and in obscuring the winners and losers

regarding all financial activity, accounting contributes to victimizing outsiders and those

most vulnerable. The profession is ultimately and symbolically responsible, in its raison

detre, for punishing predators and violators of fiduciary duty. Our work provides a stark

contrast between white-collar crime punishment and that of the general prison population.

The criminal justice system reflects and amplifies the failure of our society to address a

wide range of social issues: poverty, homelessness, addiction, and racism with a concurrent

ignorance among the wider community of the root causes of incarceration. Accounting

and business rhetoric is part of the fabrication that equity and justice is manifest. Our

paper illustrates that in accounting practice, in the media, in the management of consent,

in white-collar crime, and among the incarcerated in our prisons, justice is not blind. If,

as Dostoevski wrote, the degree of civilization in a society can be judged by entering its

prisons, our civilization is indeed troubled.

Acknowledgements

The authors would like to gratefully acknowledge the input and encouragement from the

anonymous reviewers, and from Professor Theresa Hammond, Professor Prem Sikka, and

Professor Tony Tinker.

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article on accounting fraud

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