Financial accounting: crisis and the commodity fetish

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  • ( )Critical Perspectives on Accounting 1998 9, 567]599Article ID: pa970263



    Departments of UAccounting and Finance and Psychology, TheUniversity of Glasgow, Glasgow, UK

    We analyse the controversy surrounding the UK Accounting Standards( )Boards ASB efforts to develop a Statement of Principles for Financial

    Reporting. We employ advances in experimental research in the psy-chology of human decision-making to ground an immanent critique ofthe ideology of the fetishised commodity in financial accounting. Weargue that the controversy reveals the contradictions and crises tenden-cies immanent to financial accounting, and we contend that in pressingthe logic of commodity fetishism towards its ultimate rationality, ineconomic income, the ASB threatens to bring those contradictions, andthe remoteness of financial accounting from human use-values, intosharp relief. We suggest that this underlies the resistance the ASBsproposals have encountered in some quarters. We conclude by outliningthe implications of our analysis for the possibilities of an emancipatoryaccounting.

    1998 Academic PressQ

    The aim of socialism is to liberate the rich diversity of sensuoususe-value from the metaphysical prison-house of exchange-value} toemancipate history from the specious equivalences imposed upon it by

    ( )ideology and commodity production. Eagleton, 1991, p. 127


    ( )The UK Accounting Standards Board ASB recently published a draft1 (conceptual framework for financial reporting Accounting Standards

    )Board, 1995 . The draft proposes, inter alia, that practice should movetowards a balance sheet orientated current value accounting model. Asmight well have been anticipated, the proposals have run into a wall ofopposition from preparers and auditors. In this paper we set out toexplore two questions. Firstly, why has the ASB adopted such obviously

    Address for Correspondence: John McKernan, Department of Accounting and Finance,The University of Glasgow, 65]71 Southpark Ave., Glasgow G12 8LE, UK.

    Received 4 November 1996; revised 14 May 1997; accepted 22 May 1998.


    1045-2354/98/050567+33 $30.00/0 1998 Academic PressQ

  • J. F. McKernan and P. ODonnell568

    controversial proposals? And secondly, why do the proposals provoke analmost visceral resistance in some quarters? It is not our intention togive full answers to these questions, and we will not draw on the vastliterature concerning the putative advantages and disadvantages of alter-native accounting models.

    We analyse the ASBs proposals and the reaction to them in terms ofthe crisis tendencies which are immanent to capitalism; we investigatethe pressures and contradictions which have impelled accountancy in theUK to the edge of the abyss: ... the Accountancy Profession is stand-ing on the edge of a precipice and is in danger of taking a giant step

    ( )forward... The Group of Scottish Finance Directors, 1996, p. 358The paper contains seven parts. We begin by briefly contextualising

    the ASBs proposals in terms of fundamental income measurement alter-natives. We then outline the ASB proposals and the response they haveprovoked. In part three we begin to develop the foundations of ouranalysis } accountings reflection and reproduction of commodityfetishism. In the fourth part of the paper we initiate an immanentcritique of commodity fetishism in accounting. We begin to unpickfinancial accountings false equation of exchange-values and use-values.We do so by developing the implications of research on the psychologyof choice, which reveals that use-values of prospects cannot be sepa-rated from how they are represented, in mental accounts, and under-stood by human beings, and therefore cannot be grasped byexchange-value relations between things. In the fifth part of the paperwe relate the analysis developed in the previous part more directly tofinancial accounting, and in particular the ASBs proposals. We arguethat whilst in terms of the abstraction of exchange-values wealth isconceptually homogeneous, in terms of use-values wealth is heteroge-neous. And we suggest that the ASBs proposals threaten to pushaccounting further towards the rational abstraction of exchange-valueand away from its traditional unquestioned legitimacy and residual con-nection with use-values. In the penultimate part of the paper we developour analysis of the origins of the ASBs proposals and the controversy

    ( )surrounding them, using Habermass 1976 exposition of the crisis ten-dencies immanent to advanced capitalism as an analytical framework. Inthe final part of the essay we return to the key issue of accountingsreflection of the commodity fetish}accounting as identity thinking}andconsider the implications for critical accounting.

    Basic Income Measurement Alternatives

    Accounting income may be determined in two fundamentally different( )ways. It may be calculated as the change in the worth net assets of

    the business during a period, excluding the change resulting from thetransfer of resources to and from owners. This approach reflects along-standing consensus that business income must ultimately be under-

    ( )stood in terms of wealth enhancement see Gellein, 1987, p. 60 , and

  • Financial accounting: crisis and the commodity fetish 569

    corresponds closely with certain conceptions of income developed byeconomists. It implicitly requires current value measurement of assetsand liabilities as it makes little sense to define income in terms of thechange between two balance sheets unless those balance sheets reflectsome measure of current value. In this paper we will refer to thisapproach as either the current value or economic income approach.

    The alternative approach to income measurement allows only realisedgains to be recognised in accounting income. It requires the institutionof revenue recognition criteria and rules for the allocation of costs, that

    (is, the matching of costs against recognised revenue see Paton &)Littleton, 1940 . We will refer to this profit and loss account orientated

    method as the matching approach. It might seem that both systemsmight tend to produce the same results. This is not so} the currentvalue approach allows unrealised gains to be included in income whilstthe matching approach does not. Furthermore, the revenue recognitioncriteria applied under the matching approach are more demanding thanthe criteria for recognising changes in the value of assets and liabilitiesapplied under the current value approach. This is because the matchingapproach embodies the idea that revenue should only be recognisedonce it has been earned, that is, revenue recognition should be basedon performance. Financial accounting practice has been dominated bythe matching approach for almost all of this century2, and revenuerecognition criteria have been dominated by the concept of prudence.

    The current value approach has theoretical appeal. However, the ap-proach is unattractive to both preparers and auditors3, and its translation

    (from theory to practice has been difficult and highly controversial see)Miller et al., 1994, p. 142 . The American Financial Accounting Standards

    ( )Boards FASB efforts to develop a conceptual framework for accountingwere effectively derailed by the current value issue in the early 1980s.And experiments with its application, as current cost accounting, by

    ( ( )both the FASB Statement of Financial Accounting Standards SFAS No.)33 - Financial Reporting and Changing Prices, 1979 , and the Accounting

    ( ) (Standards Committee ASC in the UK, Statement of Standard Account-( ) )ing Practice SSAP No. 16 - Current Cost Accounting, 1980 , ended in

    failure. The collapse of SSAP16, due to preparer non-compliance, re-(sulted in a serious loss of confidence by and in the ASC Whittington,

    )1989, p. 195 .Despite the controversial nature of the current value issue, standard

    setters have been unwilling to drop it entirely from their agendas. Inrecent years the FASB has issued a number of accounting standards

    (requiring disclosure of fair value information see Barth & Landsman,)1995 . However, the FASBs approach has been cautious. They have

    required fair value information principally in respect of financial instru-ments. And whilst initiating fresh proposals for the reporting of compre-

    ( )hensive income Financial Accounting Standards Board, 1996 they haverecognised that given the lack of preparer enthusiasm for the fullerapplication of the concept4 a project that considers all aspects ofcomprehensive income. including recognition and measurement of its

  • J. F. McKernan and P. ODonnell570

    (components, is not practical at this time see Johnson et al., 1995, p.)133 . The same degree of caution has not been shown by the ASB in

    the UK5.

    The Way Ahead for UK Financial Reporting

    The publication in 1995 by the ASB of its Statement of Principles forFinancial Reporting; Exposure Draft has brought the current value ac-counting issue back to the centre of contemporary financial reportingdebate in the UK. The exposure draft is wide ranging. We will focus oncertain key features which are particularly relevant to the concerns ofthis paper.

    Gains and losses are defined in chapter 3 of the exposure draft asincreases or decreases in ownership interest, other than those relating to

    (contributions from or distributions to owners Accounting Standards)Board, 1995, para. 3.47 . Ownership interest itself is defined as the

    (entitys assets less its liabilities Accounting Standards Board, 1995, para.)3.39 . The determination of entity performance becomes essentially

    derivative of the measurement of assets and liab