Critical Perspectives on Accounting 22 (2011) 236–242

Contents lists available at ScienceDirect

Critical Perspectives on Accounting

journa l homepage: www.e lsev ier .com/ locate /cpa

Collective intentionality and aggressive earnings management:Developing Norman Macintosh’s arguments in the debate overprinciples- versus rules-based accounting standards

Noriaki Okamoto ∗

Ryutsu Keizai University, Ryugasaki 120, Ibaraki 301-8555, Japan

a r t i c l e i n f o

Article history:Received 14 March 2009Received in revised form28 November 2009Accepted 22 June 2010

Keywords:Collective intentionalityReality in accountingAggressive earnings managementPrinciples-based accounting standardsTrue and fair override

a b s t r a c t

The purpose of this paper is two-fold. First, the author considers Norman Macintosh’s recentarguments regarding the “bullshit” prevalent in accounting, and explicates the crux of prob-lems raised in disputes concerning corporate aggressive earnings management. Second,the author suggests a theoretical and institutional framework to reconcile the disputes byapplying implications from the Searlean theory of collective intentionality. To these ends,this paper draws mainly on related philosophical investigations, and attempts to shed newlight on the present debate over principles- versus rules-based accounting standards andaggressive earnings management. Based on a theoretical analysis, this paper concludesby supporting principles-based accounting standards accompanied by the true and fairoverride provisions.

© 2010 Elsevier Ltd. All rights reserved.

1. Introduction

After a rash of accounting scandals such as the cases involving Enron and WorldCom in the United States, the truthfulnessof corporate accounting numbers has become a controversial issue. The issue whether corporate financial statements canobjectively reflect the underlying reality of corporate transactions has attracted much attention from accounting scholars.This issue deserves greater attention given the current heated controversy over the appropriateness of suspicious fair-valuations of subprime securities and collateralized debt obligations.

Considering such a situation, this paper at the outset attempts to identify the crux of the current contentious problems inaccounting. Taking Norman Macintosh’s recent arguments as a starting point, this paper looks at aggressive earnings man-agement (hereafter, AEM) and elaborates various inquires into the issue. Based on the elaboration and additional prominentinsights from philosophical and ethical arguments, this paper presents some implications for a regulatory framework withinprinciples-based accounting standards. Those implications may in some way contribute to the current controversy over thetreatment of true and fair override in the realm of a prospective globally united single set of accounting standards.

This paper is organized as follows. The next section considers the current fundamental issues about AEM by reviewingrelated studies of accounting, especially Macintosh’s poststructuralist ones (Macintosh, 2006, 2009). The third section expli-cates problematic aspects of AEM by reconsidering Searlean arguments. Based on the explication, this paper speculates thepossibility for an institutional space where the aggressiveness of earnings management and its acceptability are deliberated.Taking the speculation more concretely, the fourth section considers current global movements towards principles-based

∗ Tel.: +81 47188 2951.E-mail address: nokamoto@rku.ac.jp.

1045-2354/$ – see front matter © 2010 Elsevier Ltd. All rights reserved.doi:10.1016/j.cpa.2010.06.012

N. Okamoto / Critical Perspectives on Accounting 22 (2011) 236–242 237

accounting standards and the position of true and fair override. The fifth section revisits the main arguments made in thispaper.

2. The crux of raised problems

2.1. Poststructuralist perspective on issues in accounting

To date, some accounting scholars, especially those with critical or interdisciplinary perspectives, have sought thehelp of philosophical theories in their attempts to resolve issues concerning the truthfulness or objectivity of account-ing representations.1 One of those scholars, Norman Macintosh, has approached the issue by consistently espousing apoststructural viewpoint.

While Macintosh’s major contributions from his poststructural perspectives are compiled in “Accounting, Accountantsand Accountability: Poststructuralist Positions (Macintosh, 2002)”, this paper focuses on his more recent arguments that areprimarily based on the concept of “bullshit” as propounded by Frankfurt (2005). At the outset, a summary of Macintosh’srecent research is presented.

One of Macintosh’s research interests has been to consider whether one role of accounting is to reflect objective realityor truth of corporate transactions and financial conditions.2 A poststructural perspective is a notable characteristic of hisconsiderations. He asserts that structuralism holds out the idea that the parts of any system are the grip of some kind ofgrand structuring scheme or master plan that organizes and controls the parts (Macintosh, 2002, p. 13). That is to say, theindividual parts of any purposive system have meaning, not in their own right, but only by virtue of their relationship withother parts in the system (Macintosh, 2002, p. 29). To give an example of language: for structuralism there is nothing, nointermediate object or term, between the linguistic system and the individuals who use it. Instead, poststructuralism arguesthat linguistic signs are filtered through ideologically tainted social discourses that play a large role in shaping their meaningin the minds of both writers and readers (Macintosh, 2002, p. 13). Thus, poststructuralism departs from the objectivity andcomprehensiveness of structuralism and instead emphasizes the plurality of meaning, rejecting the fixed binary oppositionsof structuralism.

From this viewpoint, Macintosh has considered the major issues in accounting. One such consideration can be seen inhis novel arguments grounded in the works of Baudrillard3; he insists that “many accounting signs no longer refer to realobjects and events, and accounting no longer functions according to the logic of transparent representation, stewardshipor information economics” (Macintosh et al., 2000, p. 13). Even though past direct correspondences are admitted betweenreal objects and accounting signs, in a complex modern financial economy an accounting sign precedes (and even createsthrough its ‘sign value’) the referent that it once purported to represent (Macintosh et al., 2000, p. 38).

Macintosh also mentions the issue of accounting and truth. He indicates that the correspondence and coherence theoriesare no longer relevant for understanding the nature of accounting (Macintosh, 2002, p. 126). This is because from hispoststructuralist stance, he basically denies the idea that there is something like truth ‘out there’ existing independentlyand before its capture in language or in other kind of representations (Macintosh, 2002, p. 119). Poststructuralists neitheroffer a kind of a theory of truth nor admit the very idea that hidden or absolute truth exists (Macintosh, 2002, p. 119). Thus,his perspective rules out the contention that accounting information and reports should, or can, reflect some real out-therereality4 (Macintosh, 2002, p. 119). Poststructuralists see that the legitimacy of the current state of accounting stems from theresult of historical and ongoing battles of discourses that were and are historically embedded in society and its institutions(Macintosh, 2002, pp. 127–128).

2.2. “Bullshit” in accounting and aggressive earnings management

In connection with the above philosophical underpinnings, Lee (2006) proposes accounting standard setters need tounderstand the socially constructed ontological nature of accounting representations and their related epistemological issueof how to measure a socially constructed object. Addressing this proposition, Macintosh (2006) introduces the concept of“bullshit” in accounting. This concept is founded on his belief that poststructuralist accounting scholars should not see theirapproaches as falling into the abyss of nihilism, such as believing that accounting is meaningless, but need to develop newfinal vocabularies and discourses for understanding the state of accounting in contemporary society (Macintosh, 2006, p. 30).Indeed, he applies a traditional moral philosopher’s analysis of today’s culture to current prevalent problem in accounting.

1 Related recent works are, for example, Alexander and Archer (2003), Alexander and Jermakowicz (2006), Lee (2006), Macintosh (2006, 2009), McKernan(2007) and Mouck (2004).

2 It is an arduous task to distinguish such concepts as objective reality and truth; thus this paper assumes, ideally, both objective reality and truth ofcorporations are expected to be reflected in their financial statements.

3 For example, see Macintosh and Shearer (2000) and Macintosh et al. (2000).4 This does not mean that the perspective denies that reality exists ‘out there’; it does not accept the claim that the truth about it is also ‘out there’

because it cannot be shown objectively that a dubiously non-existent thing does not exist (Macintosh, 2009, p. 163).

238 N. Okamoto / Critical Perspectives on Accounting 22 (2011) 236–242

Based on the arguments of Frankfurt (2005), Macintosh classifies the attitudes that accountants as agencies have intothree types5: “the truthteller”, “the liar”, and “the bullshitter” (Macintosh, 2006, pp. 32–33). Truthteller accountants generallybelieve financial statements present a true and fair view of (or present in a fair manner) the actual economic affairs of theenterprise and try to comply with GAAP. In this respect, we hopefully believe most accountants in today’s society aretruthtellers. Contrastively, the liar accountants deliberately falsify the financial statement numbers to fool the informationusers such as stockholders and investors. This means that liar accountants present falsified financial numbers even thoughthey are able to access or know the real, true numbers.6 Therefore, liar accountants are definitely unacceptable and must bepunished if their distortions of fact become apparent.

Macintosh worries greatly about another type of accountants: “the bullshitters”. They are indifferent to the truth of theobject they are representing in their narratives (Macintosh, 2006, p. 3). Their goal is to satisfy stakeholders regardless ofwhat may or may not be the true economic condition of a company. However, they are different from the liar accountants,as the former contemplate literally complying with GAAP and other official pronouncements as much as possible. This kindof attitude is a greater enemy of truth than liars, since the ends (producing earnings numbers that conform to accountingprinciples, rules and guidelines) dominate the means (the technical accounting skills and experiences) without any moralsense (Macintosh, 2009, p. 158). Here, since bullshitter accountants tend to be indifferent to the true economic condition ofa company because they do not care the existence of truth in accounting, they seem to be somewhat compatible with thepoststructuralist position.7 While poststructural philosophers are highly skeptical of the idea of any such extra-linguisticobjective truth, they do not, however, want to go as far as to claim that there is no truth out there since this would openthem up to charges of self-referential inconsistency (Macintosh, 2009, p. 163). To poststructuralists, “truth” is not somethingexisting independently of the human mind, but might indeed be found, discovered, or socially constructed.8

Thus, to either a structuralist or a poststructuralist position, the bullshit type of accountants is problematic philosophicallyas well as regulatorily. From a regulatory perspective, as noted below, the problems bullshit accountants pose are close to theones that accompany the current controversy about AEM in the corporate world.9 Both AEM and bullshit accountants sharecommon traits; they are neither obviously unacceptable nor clearly motivated by deliberate intention to deceive recipientswith their information.

Unfortunately, there is no universally accepted definition of earnings management. The term has been described in severaldifferent ways (McKee, 2005, p. 3). Even so, the controversial points do not usually concern illegal earnings managementor liar accountants’ manipulations such as by fraud. Rather, the point at issue concerns legal earnings management thatcompletely conforms to GAAP. Opinions vary though; on the one hand, for example, Arya et al. (2003, p. 111) state, “Differentpeople know different things and nobody knows everything. In such an environment, a managed earnings stream can conveymore information than an unmanaged earnings stream”. Based on their viewpoint, McKee (2005), while qualifying that onlylegal earnings management is acceptable, presents a number of earnings management techniques. He contends that a positivedefinition of earnings management is needed to portray managers’ motives in a positive light, rather than the negative viewadopted by others (McKee, 2005, p. 38).

On the other hand, Mintz and Morris (2008) state that the result of earnings management is to distort the application ofGAAP, thereby bringing into question the ethics of the practice. The question to be answered is whether the distortion is theresult of appropriate decision-making given that choices exist in the application of GAAP or is it motivated by a consciouseffort to manipulate earnings for one’s advantage (Mintz and Morris, 2008, p. 227). However, it is often difficult to ascertainwhether a corporation’s actual action was aimed at manipulating earnings or was dictated by strategic considerations (Lev,2004, p. 33).

Based on the above considerations, there are divided opinions of earnings management that seem to connote both positiveand negative nuances. In other words, the characteristics of earnings management are still dubious. However, at least in thispaper, it is necessary to clarify the viewpoint on AEM. According to Giroux (2004), specific forms of earnings managementcan be located within the whole spectrum from conservative accounting to fraud (it ranges from conservative accounting tomoderate accounting, to aggressive accounting and fraud10). With reference to this range, this paper focuses on the aggressivelevel and characterizes AEM as the egoistic selection of optional accounting policies and unduly self-interested judgmentsfor the formation of accounting estimates. Many will acknowledge intuitively that AEM as well as bullshit accountants arenot commonly acceptable in our society. Why they are problematic and how the current situation can be remedied arediscussed in the next section.

5 Since Frankfurt takes a modernistic and structuralist perspective, it seems to be incompatible with Macintosh’s poststructuralist philosophical approach.But Macintosh (2009, p. 167) would acknowledge merits of introducing different views to consider current problems in accounting, and argues thatFrankfurt’s concepts open up a space for a poststructuralist critique of the realist philosophical position.

6 One’s interest in telling the truth or in lying presupposes that there is a difference between getting things wrong and getting them right, and that it isat least occasionally possible to tell the difference (Frankfurt, 2005, p. 61).

7 I am thankful to an anonymous reviewer for this insight.8 To explain this process, Searlean concept of collective intentionality can be a useful tool. It is discussed in detail below.9 Macintosh (2006, p. 35) concludes “earnings management would seem not to be the major issue”. I assume whether one agrees with this statement or

not depends on how one defines the concept of earnings management. Specifically this paper views aggressive earnings management (AEM) matters.10 Presumably, to consider various factors surrounding reporting companies as well as other stakeholders is still not enough to discern how much

aggressiveness is actually included in AEM.

N. Okamoto / Critical Perspectives on Accounting 22 (2011) 236–242 239

3. Explication of aggressive earnings management: views from collective intentionality

The previous section identified that AEM and bullshit accountants are both worrisome societal problems. Why are theyso problematic and prevalent in the current state of accounting? Frankfurt (2005) gives hints of the answer. “Bullshit isunavoidable whenever circumstances require someone to talk without knowing what he is talking about. Thus, the pro-duction of bullshit is stimulated whenever a person’s obligations or opportunities to speak about some topic exceed hisknowledge of the facts that are relevant to that topic” (Frankfurt, 2005, p. 68).

It is certain that the recent widespread situation of complex corporate transactions such as derivatives and accompa-nying rules-based accounting standards make truth or objective reality in accounting obscure. In some complex financialtransactions, some reporting companies may not even clearly understand what they present in their financial statements,and this makes it possible for them to stimulate AEM. Accordingly, what is now necessary is a fundamental perspectivethat understands corporate AEM and reality in accounting. As Macintosh (2009, p. 166) implies, a social constructivist per-spective would be quite useful for such a task. As stated above, a number of related works have tried to cope with the taskby referring to the Searlean theory of social reality. Although Searlean perspective can be superficially regarded as realistas illustrated below, Searle admits the existence of relational and cultural concepts such as “collective intentionality” and“background” that would construct epistemologically objective reality. Therefore, the Searlean relational perspective onsocially constructed reality can coincide with Macintosh’s poststructuralist stance.11

According to Searle, institutional facts are distinguished from brute facts. Institutional facts are so called because theyrequire a human institution for their existence (Searle, 1995, p. 2). By contrast, brute facts require no human institution fortheir existence. For example, a piece of paper is money because the institution of a monetary system exists; that this is a1000-yen bill is an institutional fact. By contrast, to state a brute fact we require that it exists independent of language andother institutions. Institutional facts are embraced in social reality and require three elements for their existence: assignmentof status function, collective intentionality and constitutive rules (Searle, 1995, p. 13).

First, we usually assign a function to so many kinds of objects and events. For example, we assign a transportable functionto a river and assign the function of timber to natural trees. The important point here is that those functions are never intrinsicto the physics of any phenomenon, but are assigned from outside by conscious observers and users (Searle, 1995, p. 14).

Second, we have a capacity for collective intentionality12 to assign many objects and events for the creation and mainte-nance of institutional facts. Collective intentionality means that not only do we engage in cooperative behavior, but also thatwe share intentional states such as beliefs, desires and intentions (Searle, 1995, p. 23). Obvious examples are cases where Iam doing something only as part of our doing something (Searle, 1995, p. 23). According to Searle, collective intentionalitycannot be reduced to individual intentionality. A crucial element in collective intentionality is a sense of doing somethingtogether, and the individual intentionality that each person has is derived from the collective intentionality that they share.

Third, constitutive rules (X counts as Y in C) mean that the Y term must assign some new status function that the entitiesnamed by the X term do not already have, and this new status function must be such that human agreement, acceptance andother collective intentionality are necessary and sufficient to create it in context C. This is the formula of constitutive rulesthat Searle argues makes institutional reality exist. In addition to these three elements, with “Background” that works whenwe unconsciously follow rules, Searle proposes a theory that explains how social and institutional reality is constructed andmaintained.

Then the concept of AEM is reconsidered based on the above three elements. The aggressiveness of AEM is usuallyproblematic compared to conservative accounting.13 Hypothetically, if a corporate accounting policy is changed just solelyto increase earnings numbers and its amount is material, then, even if the treatment is perfectly legal and complies with GAAP,some may say the treatment is unacceptable. Contrarily, antagonists may oppose the opinion by arguing that we cannotalways know or recognize the real purposes or intentions of CEOs/CFOs (chief executive officers/chief financial officers)who ultimately decide to adopt such a measured treatment. This type of opinion usually presents because items such asassets, earnings and their treatments in accounting have observer-dependant characteristics. According to Searle, since evenmoney is observer-dependant (Searle, 2008, p. 21), almost all of reality in accounting is undoubtedly observer-dependant.This means that the very existence of it depends on the attitudes, thoughts, and intentionality of observers, users, and so on(Searle, 2008, p. 21). However, as Mouck (2004) suggests, even though the characteristic of observer-dependence of realityin accounting is ontologically subjective, it does not itself imply epistemological subjectivity. In many societies that haveintroduced official GAAP, earnings numbers in a corporate financial statement are generally epistemologically objective.

On further reflection, the aggressiveness of AEM is not only observer-dependant but is also epistemologically subjective.Thus, the problem of AEM comes down to the content of collective intentionality of AEM in our society, because we stilldo not have an objective method to measure aggressiveness of corporate earnings management. In short, the core of the

11 In connection with this, see in particular Prado’s (2006) attempt to investigate commonalities between the perspective on truth of Searle and Foucault;the latter is thought of as a poststructuralist by most Europeans (Prado, 2006, p. 69).

12 Intentionality does not imply any special connection with intending in the ordinary sense, but rather intentionality is a very general notion having todo with the directedness of the mind (Searle, 2005, p. 6).

13 Here, conservative accounting can be defined as the attempt to select GAAP that results in any of the following: (1) slower revenue recognition, (2)faster expense recognition, (3) lower asset valuation, and the like. It is supposed that conservative accounting does not involve a company’s self-seekingintention or attempt to present financial numbers better than or beyond its actual financial performance or conditions.

240 N. Okamoto / Critical Perspectives on Accounting 22 (2011) 236–242

problem is that neither accounting standard-setters, reporting companies nor auditors have reached consensus on whatkinds of earnings management are aggressive and unacceptable. In practice, it may have to be judged case-by-case.

The other two elements of Searlean theory are also considered. For example, if we collectively accept a constitutiverule such as “a specific form of earnings management counts as unacceptable in our society (or in the realm of financialaccounting)”, we may be able to simultaneously impose a negative status function on it. Then, it is possibly acceptable forregulators to limit earnings management through their standard settings. In regard to this point, Searle (2008) states thatwhen the practice of imposing a status function becomes regularized and established, it then becomes a constitutive rule.He argues, “it is especially important that there should be publicly available constitutive rules, because the nature of statusfunctions requires that they be collectively recognized in order to do their work, and the collective recognition requires thatthere be some antecedently accepted procedure in accordance with which institutional facts can be acknowledged” (Searle,2008, p. 25). The implication of this statement is that an institutional action, for which an agency imposes a status functionon a specific item, needs to at least be open and collectively recognized, accepted or acknowledged in society.

As regards corporate earnings management, although some authors mention several types,14 most are neither publiclyavailable nor collectively recognized in our society.15 So it is important that there should at least be a kind of institutionalframework or a space where the aggressiveness of earnings management and its acceptability can be deliberated by peo-ple who are involved in accounting institutions. This paper suggests such an institutional framework is possible throughprinciples-based accounting standards accompanied by clauses related to true and fair override.

The next section applies this suggestion to a more concrete situation by considering various arguments on the system ofprinciples-based accounting standards. The process tends to focus on the movements of FASB and IASB since they are theorganizations that have widely accepted systems of status functions in global financial accounting regulation.

4. Considerations for movement towards principles-based accounting standards

The current pervasive controversy about principles- versus rules-based accounting standard setting arose from beliefsthat many listed companies are just following detailed and complex accounting rules with AEM to achieve desired financialnumbers. This implies that more and more people are coming to suspect that the existence of complex rules-based GAAPencourages AEM as long as companies need to comply with detailed accounting rules. In the US, after extensive research, theSEC reached the conclusion that accounting standards setting should not be based on detailed rules but on simpler principlesin conjunction with reliance on auditors’ (or preparers of financial statements’) professional judgment; this then leads to areflection of the economic reality of transactions (SEC, 2003). Then in 2004, the FASB published a report expressing its view insupport of the results of the SEC’s investigations (FASB, 2004). As for IASB, its chairperson, Sir David Tweedie, masterly usedrhetoric of its principles-based accounting standards and emphasized the advantages of international financial reportingstandards (IFRS) over rules-based US GAAP (Tweedie, 2007), such that it would gradually advance the spread of IFRS in eachcountry. Consequently, the system of principles-based accounting standards is in the spotlight in terms of global accountingregulation.

It is hopefully understood that as principles-based accounting standards permit giving plenty of room for professionaljudgments in the preparation of financial statements as well as in audits, that it can eventually lead to corporate AEM beingrestrained. In other words, this understanding is grounded on the assumption that corporate AEM is generated by rules-basedstandards such as numerical thresholds or blight-lines. This possibly increases managers’ ability to structure transactionsthat meet these rules while violating the intent of standards (Nelson et al., 2002).

However, too much emphasis on principles is not desirable. Principles alone cannot completely remove the possibilityof earnings management (Nelson, 2003). Principles simply give managers more discretionary room than rules in preparingtheir financial statements. Under such principles-based accounting standards, many estimates are necessary compared withrules-based accounting standards and it is conceivable that conflicts of opinions between a preparer of financial statementsand an auditor can occur. That is to say, detailed accounting standards may not only reduce the incidence of after-the-factdisputes with enforcement agencies, but may also reduce the incidence of litigation over accounting treatments (Shipper,2003, p. 69). Considering the above arguments, therefore, both principles- and rules-based accounting standards carry therisk of leaving room for AEM.

From the considerations based on Searlean theory discussed in the previous section, more opportunities are necessaryfor collectively recognizing, accepting, and acknowledging the appropriateness of particular instances of earnings manage-ment. In this sense, the system of principles-based accounting standards is preferred to the rules-based one because moredeliberations among corporate managers, auditors and regulators are expected under the principles-based system. However,here we should bear in mind the thought-provoking contrast between accounting and legal systems (in particular, taxation)noted by Melone (2004). Based on his assertion that the principles-based system entails ex post decision-making in contrastto the ex ante nature of the rules-based system, the most significant weakness in the employment of a principles-basedsystem of accounting standards is the lack of a credible arbiter (Melone, 2004, p. 1207). This means that although under a

14 For example, McKee (2005) and Giroux (2004).15 Even though the actual states of severe fraud are occasionally revealed to the public, they would be the tip of the iceberg because most AEMs literally

comply with GAAP and are usually unnoticed.

N. Okamoto / Critical Perspectives on Accounting 22 (2011) 236–242 241

legal system, especially that covering taxation, the appropriateness of dubious corporate treatments (such as tax shelters) isdisputed within the court system; accounting issues, unlike tax disputes, must be resolved prior to the release of the issuer’sfinancial statements. It can be easily imagined that capital markets will not tolerate regular earnings restatements. Also, thecourts are not well suited to resolve such issues (Melone, 2004, p. 1207). Thus, his argument implies that we also need tobe mindful that any lengthy discussion about the appropriateness of corporate earnings management may be worthless.Accordingly, we need an institutional framework that not only leaves ex post room for deliberating the appropriatenessof earnings management, but also simultaneously emphasizes ex ante accounting standard setting. The ‘principles-only’accounting standards will not work well, as SEC (2003) acknowledges. To sum up: in practice, accounting standards muststrike a form of balance between rules and principles16 (McKernan and Kosmala, 2007, p. 745).

Therefore, to achieve desirable principles-based accounting regulation, professional ethical judgments of accountantsand auditors are required, above all. Such professional judgments need to reflect collective intentionality of those who areinvolved in accounting. With regard to this point, Shearer’s perspective on broader accountability is worthy of notice. Basedon Schweiker (1993), Shearer (2002, p. 555) states the moral obligation to account is itself derivative of the intersubjectiverelationships that are taken to characterize a member of a given moral community.17 She further mentions that “accountantscan help to make our economic institutions more responsive to the other, by seeking an accountability that formally recognizesthe obligation to the other—even if it does not and cannot reflect the originally relationship from which this obligationderives” (Shearer, 2002, p. 570). Even though she does not specifically mention to what the “moral community” actuallycorresponds, it can be understood from her arguments that the emphasis was on “the other”, and this implies that professionalethical judgments should recognize to some extent obligation derived from “the other”, especially under the system ofprinciples-based accounting standards.

Then, apart from the subject of AEM or corporate managers, who is “the other”? A document recently published by theInstitute of Chartered Accountants of Scotland (ICAS) reflects this point. The document clearly mentions that to achieve asystem of principles-based accounting standards, regulators are required to accept a range of judgment-based outcomes(ICAS, 2006, p. 3). For that there has to be greater trust between and among regulators, standard setters, auditors, usersand preparers of financial statements in allowing management to exercise judgment in presenting the underlying economicreality of transactions and events (ICAS, 2006, p. 5). It is interpretable that this sense of trust originates from “the other” thatShearer (2002) has emphasized.

In all, for the trust of “the other” to be posited in accounting regulation, an institutional framework that makes possible adeliberative opportunity among those various actors needs to be formulated. Here it should be noted that, as McKernan andKosmala (2007, p. 745) argue, the provisions of true and fair override can play such a role under a system of principles-basedaccounting standards. It is the traditional United Kingdom framework, and ongoing treatment of it differs in the US and theUK18 (Nobes, 2009). The override would allow, indeed it would require, companies and attesting auditors to not follow astandard or rule if its application would result in financial statements that would not present a true and fair view of thecompany’s financial position, result of operations, and cash flows (Benston et al., 2006, p.176).

Within a system of principles-based accounting standards, principles exist at a number of very different levels, andaccounting standards cannot be crafted so that they can exclude contradictions among them (Benston et al., 2006, p. 177).Thus, to consider a simple example of a fair valuation of a complex financial instrument, the principle of “relevance” (todecision usefulness) and “reliability” conflict to some degree. In this case, the hierarchy of principles is obscure because it isnot clear which principles are stronger than others. This is the reason why we need true and fair override within a frameworkof principles-based accounting standards.

This framework of the override is consistent with the above Searlean arguments in the sense that disclosure of reasonsand the effects of an override are usually required under UK and IASB standards. The required disclosure makes it possiblethat dubious accounting treatments are exposed to the public and their appropriateness can be deliberated.19

As to actual overrides, an empirical study (Livne and McNichols, 2009) shows that overridden UK cases have in the pastbeen rare and most occurred as a result of discrepancies between the Companies Act and accounting standards. Thus, it canbe understood that the use of the true and fair override is a method for overcoming problems where outdated laws wouldotherwise restrict the development of accounting standards (Benston et al., 2006, p. 181). This type of logic is applicable toother accounting standards and in other jurisdictions. Considering the widespread diffusion of IFRS, which carries on thetradition of UK accounting regulation, it may possibly be achieved in the future.

16 In terms of the justice and law dichotomy, the balance is to be struck between on the one hand freedom of judgment in the pursuit of accountingfairness, the pursuit of justice, and on the other the constraints of the framework of laws and rules within which justice or fairness is articulated andenacted (McKernan and Kosmala, 2007, p. 745).

17 Here it is suggested that the accountants’ self-interest, profit motive, or fidelity to self-integrity is always met and tested by other needs and goods(Schweiker, 1993, p. 248).

18 For those differences among European Union countries, see Alexander and Eberhartinger (2009).19 It is argued that the meaning of concepts in accounting and auditing, such as true and fair view, emanate from the practice of the field (Hamilton and

hÓgartaigh, 2009, p. 917).

242 N. Okamoto / Critical Perspectives on Accounting 22 (2011) 236–242

5. Concluding remarks

The purpose of this paper was to analyze current controversies surrounding AEM and to suggest a suitable institutionalframework from a consideration of the concept of collective intentionality by Searle (1995). It initially considered NormanMacintosh’s concern from his poststructuralist perspective, in which bullshit accountants may be widespread and thus aworrisome issue in current global accounting regulation. The core problem related to bullshitter accountants is their indif-ferent attitude towards the truth in accounting. In current situation where the truth in accounting has become increasinglyobscure in consequence of complex corporate transactions, the attitude gave rise to a problem of AEM.

This paper then presented a philosophical analysis of the problem by considering the concept of collective intentionality.Based on Searle’s latest arguments, the paper argued that it is at least necessary that the appropriateness of earnings man-agement be judged within a more publicly accessible manner. In other words, it is important to emphasize society-widecollective intentionality rather than that of an individual to exclude bullshitters’ excessively indifferent attitude towardstruth in accounting. In developing the argument, the paper supported an institutional framework in which the collectiveintentionality of the aggressiveness of earnings management could be recognized, accepted or acknowledged by thosewho are involved in accounting regulation. It is noted that such an institutional framework may possibly be achieved byprinciples-based accounting standards accompanied by the provisions of true and fair override, which can hopefully copewith the now widespread complex corporate transactions and bullshit accountants.

References

Alexander D, Archer S. On economic reality, representational faithfulness and ‘true and fair override’. Accounting and Business Research 2003;33(1):3–17.Alexander D, Eberhartinger E. The true and fair view in the European Union. European Accounting Review 2009;18(3):571–94.Alexander D, Jermakowicz E. A true and fair view of the principles/rules debate. Abacus 2006;42(2):132–63.Arya A, Glover JC, Sunder S. Are unmanaged earnings always better for shareholders? Accounting Horizons 2003;17(Suppl.):111–6.Benston G, Bromwich M, Wagenhofer A. Principles-versus-rules-based accounting standards: the FASB’s standard setting strategy. Abacus

2006;42(2):165–88.FASB. FASB response to SEC studies on the adoption of a principles-based accounting system. Norwalk: Financial Accounting Standards Board; 2004.Frankfurt HG. On bullshit. Princeton: Princeton University Press; 2005.Giroux G. Detecting earnings management. Danvers: John Willey & Sons; 2004.Hamilton G, hÓgartaigh CÓ. The Third Policeman: ‘the true and fair view’, language and the habitus of accounting. Critical Perspectives on Accounting

2009;20(8):910–20.ICAS. Principles not rules: a question of judgment. Edinburgh: Principles versus Rules Working Group, Institute of Chartered Accountants of Scotland; 2006.Lee T. The FASB and accounting for economic reality. Accounting and the Public Interest 2006;6:1–21.Lev B. Corporate earnings: facts and fiction. Journal of Economic Perspectives 2004;17(2):27–50.Livne G, McNichols M. An empirical investigation of the true and fair override in the United Kingdom. Journal of Business Finance and Accounting

2009;36(1):1–30.Macintosh NB. Accounting, accountants and accountability: poststructuralist positions. Oxon: Routledge; 2002.Macintosh NB. Commentary: accounting- truth, lies, or bullshit? a philosophical investigation. Accounting and the Public Interest 2006;6:22–36.Macintosh NB. Accounting and the truth of earnings reports: philosophical considerations. European Accounting Review 2009;18(1):141–75.Macintosh NB, Shearer T. The accounting profession today: a poststructuralist critique. Critical Perspectives on Accounting 2000;11(5):607–26.Macintosh NB, Shearer T, Thornton DB, Welker M. Accounting as simulacrum and hyperreality: perspectives on income and capital. Accounting, Organiza-

tions and Society 2000;25(1):13–50.McKee TE. Earnings management—an executive perspective. Ohio: Thomson Higher Education; 2005.McKernan JF. Objectivity in accounting. Accounting, Organizations and Society 2007;32(1–2):155–80.McKernan JF, Kosmala K. Doing the truth: religion–deconstruction–justice, and accounting. Accounting, Auditing, and Accountability Journal

2007;20(5):729–64.Melone M. United States accounting standards-rules or principles?—the devil is not in the details. University of Miami Law Review 2004;58(4):1161–224.Mintz SM, Morris RE. Ethical obligations and decision making in accounting. New York: McGraw-Hill; 2008.Mouck T. Institutional reality, financial reporting and the rules of the game. Accounting, Organizations and Society 2004;29(5–6):524–41.Nelson M, Elliott J, Tarpley R. Evidence from auditors about managers’ and auditors’ earnings management decisions. The Accounting Review

2002;77(Supplement):175–202.Nelson MW. Behavioral evidence on the effects of principles and rules-based standards. Accounting Horizons 2003;17(1):91–104.Nobes C. The importance of being fair: an analysis of IFRS regulation and practice—a comment. Accounting and Business Research 2009;39(4):415–27.Prado CG. Searle and Foucault on truth. New York: Cambridge University Press; 2006.Schweiker W. Accounting for ourselves: accounting practice and the disclosure of ethics. Accounting, Organizations and Society 1993;18(2–3):231–52.Searle J. The construction of social reality. New York: The Free Press; 1995.Searle J. What is an institution? Journal of Institutional Economics 2005;1(1):1–22.Searle J. Social ontology and political power. In: Smith B, Mark DM, Ehrlich I, editors. The mystery of capital and the construction of social reality. Illinois:

Carus Publishing; 2008.SEC. Study pursuant to section 108(d) of the Sarbanes-Oxley Act of 2002 on the adoption by the United States financial reporting system of a principles-based

accounting system. Washington, DC: Securities Exchange Commission; 2003.Shearer T. Ethics and accountability: from the for-itself to the for-the-other. Accounting, Organizations and Society 2002;27(6):541–73.Shipper K. Principles-based accounting standards. Accounting Horizons 2003;17(1):61–72.Tweedie D. Can global standards be principles based? Journal of Applied Research in Accounting and Finance 2007;2(1):3–8.