ChapterPDF Available
Fairness occupies an important role in accounting as it presents to the users and the market
the guarantee that the accountant (as preparer) and the auditor (as attester) have striven to be fair.
The conventional nature of the concept of fairness is fairness in presentation, a guarantee that the
diligence and care in the preparation and attestation of the financial statements are to ensure an
adequate presentation of the financial affairs of the firm. Because the central meaning of fair is
fairness in presentation, this chapter explains the concept understood in the Unites States as the
fairness doctrine and in Australia and Europe as the “True and fair” doctrine. The paper extends
the concept of fairness to the more progressive notions of fairness in distribution and to motivate
calls for expanded disclosure and accounting innovations.
Fairness as Neutrality in Presentation
Fairness is best understood in the professional accounting literature and pronouncements
as an expression of neutrality of the accountant in the preparation of financial reports. The first
suggestion of the use of fairness in accounting was made by Scott in 1941 when he listed it as a
principle of accounting and stated: Accounting rules, procedures and techniques should be fair,
unbiased and impartial. They should not serve a special interest.”1 Since then fairness has become
a value statement that is variously applied to accounting. In 1960 Arthur Anderson & Co. published
a monograph on the subject that states:
Thus, the one basic accounting postulate underlying accounting principles may be stated as that of fairness-
fairness to all segments of the business community, management, labor, stockholders, creditors, customers
and the public, determined and measured in the light of the economic and political environment and the
modes of thought and customs of all such segments to the end that the accounting principles based upon
this postulate shall produce financial accounting for the lawfully established economic rights and interests
that is fair to all segments.2
Patillo followed by making fairness the subject of a book and ranking it as a basic standard
to be used in the evaluation of other standards because it is the only standard that implies “ethical
considerations.”3 He states:
From these observations on the relation between accounting and the current social concepts and attitudes,
it is concluded that accounting is essentially social in nature and has significant responsibilities to society.
Furthermore, relating these ideas to the objective of financial accounting results in an emphasis on the
communication of economic interests of the economy segments. Finally, from contrasting the connotations
of justice, truth and fairness, the current social concept of fairness is selected as the basic standard by which
to measure the propriety of accounting principles and rules which purport to be means of attaining the
objective. Fairness to all parties, therefore, is formulated to be the single basic standard of accounting, that
criterion or test which all accounting propositions must reflect before being included into the accounting
The importance of fairness was also evident when Devine afforded the concept of
preserving equity among conflicting groups a central place among accounting concerns.5
Historically, fairness or the “fairness doctrine” evolved from the application of the concept
of conservatism. The evolution went from a concern with liquidity and credit granting, generally
associated with conservatism, to the idea that financial statements presentations should be fair to
all users.6 Fairness is then basically an extension of the user set from creditors to stockholders.
This attempt was doomed to fail. As stated by Chatfield: “But what was fair (or conservative) for
credit granters might not be for stockholders. The concept of conservatism in its corporate context
required specifying the financial statement audience, which the doctrine itself was not helpful in
Having failed at producing useful information, some accounting writers put more emphasis
on fairness in presentation. As explained by Skinner:
This test extends the concept of usefulness, since it is conceivable that a distorted presentation would be
more useful to some parties (using the word “useful” in a narrow, selfish sense) than would an unbiased
Fairness is generally associated with the measurement and reporting of information in an
objective and neutral way. Information is fair if it is objective and neutral. As stated by Lee: “It
must be based on firm, verifiable evidence (whenever possible) and it must not be such “It must
be based on firm, verifiable evidence (whenever possible) and it must not be such as to tend to
benefit a particular user (or group of users) to the relative detriment of others.”9
Fairness is much more achievable in managerial and cost accounting where any hint of
impartiality or bias may distort the decision-making processes that rely heavily on managerial
accounting data. Fairness becomes a necessary criterion of information in managerial accounting
to ensure the integrity and accuracy of decision making. As stated by Flegm:
In practice, managerial accountants continually strive to ‘call them as they see them’ since it is essential
that top management have faith that the comparative analyses of actual results with budget and forecast
data are as impartial and free from bias as is humanly possible. The reason for this objectivity seems obvious
since any other course would have the effect of influencing and perhaps misleading the decisions of
management. Of course, public accountants too are striving for this same objectivity.10
In spite of contentions that fairness is subjective, ambiguous and therefore cannot serve as
a basis for developing accounting theory, it has become one of the basic objectives of accounting.
A first evidence of this importance is the reference by the AICPA Committee on Auditing
Procedures to the criteria of fairness of presentation as conformity with generally accepted
accounting principles, disclosure, consistency and comparability. In an unqualified report, ‘present
fairly’ connotes compliance with generally accepted accounting principles and generally accepted
auditing standards.
Since then, the fairness concept has become an implicit ethical norm. In general, the
fairness concept implies that accounting statements have not been subject to undue influence or
bias. Fairness implies that the preparers of accounting information have acted in good faith and
employed ethical business practices and some accounting judgement in the presentation,
production and auditing of accounting results. The professional interpretation is now restricted to
fairness in presentation.
The perception and application of fairness in presentation as the production and
presentation of financial statements in conformity with generally accepted accounting principles
sometimes result in some unfortunate consequences.
1. A first consequence of fairness in presentation is the failure to rely on concepts of justice that dedicate
instead a fairness in distribution.
2. A second consequence is the failure to expand the scope of the disclosure in financial statements beyond
conventional financial accounting information toward a fairness in disclosure.
3. A third consequence is the flexibility created in the management of earnings and income smoothing.
4. A fourth consequence is the climate it creates for fraudulent practices.
“True and Fair” Doctrine
Financial statements of Australian and British companies are required by law to present a
true and fair view of the state of affairs, making it the ultimate foundation of financial reporting in
Australia and Great Britain.11 Section 297 of the Corporations Law (1991) requires that:
Financial statements and notes for a financial year must give a true and fair view of (part a) the financial
position and performance of the company, registered scheme or disclosing entity.
A history of the concept is provided by Chastney.12 It has been, however, a concept in
continuous search for comprehensive definition, along with a reasonable consensus that more than
a single presentation may satisfy the true and fair doctrine.13,14 The lack of clear explication is best
illustrated in the following quotation:
On the surface the true and fair view towers over British accounting but with the curious characteristics that
no-one knows what it means and very little academic analysis has been done on its role in accounting. As
regards its meaning it is a legal term in origin and yet the Companies Acts have never defined it, nor has
the Fourth Directive (of course) and there is little jurisprudence which bears upon it. There is no definition
of it in accounting standards, auditing standards, or other professional pronouncements. Most tellingly, a
television broadcast in 1992 included interviews with senior British accountants: when asked to define the
true and fair view, one (partner in Ernst and Young) laughed, another (senior partner of a major non-big 6
firm) would say nothing and a third, the finance director of an Anglo-American multinational, asked for
time to think about the question.15
Academic accountants were not successful either. Witness the following two attempts at
defining true and fair:
It is generally understood to mean a presentation of accounts, drawn up according to accepted accounting
principles, using accurate figures as far as possible and reasonable estimates otherwise; and arranging them
to show, within the limits of current accounting practice, as objective a picture as possible, free from willful
bias, distortion, manipulation, or concealment of material facts.16
True means that the accounting information contained in the financial statements has been
quantified and communicated in such a way as to correspond to the economic events, activities and
transactions it is intended to describe. . . Fair means that the accounting information has been measured and
disclosed in a manner which is objective and without prejudice to any particular sectional interests in the
The two definitions link “true and fair” basically to “accurate” and “free from bias.” This
noble attempt does not, however, detract from the professional and legal implied definitions of
“true and fair” as a technical term implying a compliance with sound accounting principles. The
problem was not solved even with the Fourth Directive, which required that all financial statements
of limited liability companies subject to European Economic Community company law should
present a “true and fair” view as follows:
1. The annual accounts shall comprise the balance sheet, the profit and loss account and the notes on the
accounts. These documents shall constitute a composite whole.
2. They shall be drawn up clearly and in accordance with the provisions of this Directive.
3. The annual accounts shall give a true and fair view of the company’s assets, liabilities, financial position
and profit or loss.
4. Where the application of the provisions of the Directive would not be sufficient to give a true and fair
view within the meaning of paragraph 3, additional information must be given.
Where in exceptional cases the application of a provision of this Directive is incompatible
with the obligation laid down in paragraph 5, that provision must be departed from in order to give
a true and fair view within the meaning of paragraph 5.
Any such departure must be disclosed in the notes on the accounts together with an
explanation of the reasons for it and a statement of its effects on the assets, liabilities, financial
position and profit or loss. The Member States may define the exceptional cases in question and
lay down the relevant special rules.18
No clear definition of the “true and fair” doctrine was provided, leading to different
interpretations by the members of the European Community and a tendency to interpret it in the
context of national culture, national accounting tradition and national generally accepted
accounting principles.19
In addition to the lack of a comprehensive definition, there is much confusion among
producers and users of accounting information on the exact meaning of “true and fair.”20,21,22,23
The interpretation of the words “true” and “fair” by the technical partners of the top twenty UK
audit firms provided for “true”: based on fact, undistorted facts, correct, complies with rules, not
in conflict with facts, objective, correct within material, adherence to events and factual accuracy;
and for “fair”: not misleading, substance over form, proper reflection, putting in right context,
consistent with underlying reality, ability to understand what has really gone on, in accordance
with rules in context, reasonable, give right impression and whether reader receives the right
Fairness judgments are taken for granted in accounting, although their clear meaning is not
well specified. Two generally accepted meanings concern the idea of neutrality in preparation and
presentation of financial reports and the idea of justice in outcome. While both notions play a
useful role in accounting, the expansion of the notion of fairness to deal with distribution
considerations links it to alternative philosophical concepts more compatible with moral concepts
of justice. Basically, fairness may be viewed as a moral concept of justice subject to three different
interpretations of the notions of distributive justice. Accordingly, this section expands the
accounting discussion of fairness by introducing the main philosophical concepts of distributive
justice in the accounting context. The end result is the possibility of viewing and comparing the
concept of fairness through different distributive justice frameworks.
Concerns with Distribution Questions
The problems of distribution have almost been ignored in the conventional view of fairness
as neutrality in presentation. The concern here was merely the final production and disclosure of
accounting results rather than their distribution. The view of fairness as neutrality in presentation
is not without its critics. Williams characterized it as an evaluation process with the following two
1. The evaluator is aware of the conditions that any consequences or his or her actions will be judged as
fair or unfair.
2. The evaluation attempts to adopt a perspective of impartiality.25
Williams presented two interesting arguments. The first is that decision usefulness, the
principle of organizing accounting research and practice, is incomplete, while accountability, at
least, possesses fairness as an inherent property. The second argument is that the concern of
accounting with efficiency makes accounting’s fairness judgement implicit, not absent. Explicit
concern with fairness is warranted:
If more explicit consideration of fairness is granted, certain implications emerge for the study and practice
of accounting. One of the most obvious is that accounting has a moral dimension. Consequences of
accounting activity have moral implications as well as ‘efficiency’ ones. For a profession, becoming more
scientific does not necessarily require abandoning moral decision making and the cultivation of modes for
doing so. The two most notable professions, law and medicine, accommodate schools concerned only with
legal or medical ethics. For unknown reasons, the ethics of accounting has virtually vanished as a subject
worthy or scholarly concern.26
William’s arguments were supported by Pallot,27 who agreed with the suggestion that
fairness in accountability and fairness in distribution stem from different ethical frameworks and
different, though complementary, assumptions about society. In addition, Pallot made some
preliminary suggestions as to how a community perspective might be added to the predominantly
individualistic one in accounting as a step toward developing new approaches to the issues of
accountability and distributive practice. The concept of ‘community assets’28 fits well within
Chen’s model of social and financial stewardship, where management’s performance is evaluated
in terms of both profit and social objectives.29 Pallot explains:
This sort of accountability framework is fundamentally different from those where the starting assumption
is one of private property and social responsibility accounting is seen as a matter of accounting for social
costs and benefits viewed as externalities. In a world where a commitment to shared values, rather than the
pursuit of self interest, was the norm, accountability might be seen as a voluntary obligation in the public
interest rather than a mechanism for constraining self seeking behavior and protecting rights.30
There are three other notable exceptions in the accounting literature that have shown
concern with distributive questions. The first exception emanates from the social accounting
concern with accounting for externalities and reporting some forms of a social report. At first
example includes Scott’s view of the social role of accounting in the revolution of conflicting
social interest:
The compromise of conflicting interests is a process of valuation. It accomplishes social organization and
results in a distribution of economic incomes. Value and distribution constitute a simple problem and
accounting theory is especially and peculiarly a treatment of that problem.31
A.C. Littleton also amplified the role of accounting in the reconciliation of social conflict.
In emphasizing the role of the profit and loss statement in particular, Littleton states eloquently:
Reduced to its barest essentials, an income statement is a calculation (1) of the revenue produced by the
operations of an enterprise and (2) of the way that total has been divided among the claimants. Although
the dividing of revenue is usually controlled by statute or contract and although many claims are settled in
advance of determining gross revenue, it is still an economic fact that revenue is shared. It is also a fact that
a complex and unending struggle goes on with the change in the sharing as its object.32
A second example includes the various calls for the role of social accounting in some form
of the rectification of society’s ills.33 It is best stated by Schreuder and Ramanathan:
In the context of traditional economic analysis, the issue boils down to a distribution problem, namely the
apportionment in a society of the costs and benefits of economic activity. Economists have long recognized
that such distributional issues cannot be addressed without taking a normative position.34
Fairness in the social accounting literature becomes a matter of distribution of social
responsibility in general and social responsiveness as the capacity of corporations to respond to
social pressures. Thus corporate social responsiveness, as an expression of fairness, goes beyond
the moral and ethical connotation of social responsibility to the managerial process of response.
The response to be fair involves the identification, measurement and disclosure, where necessary,
of the social costs and benefits created by the economic activities of the firm, as well as the
adequate responses to these problems.
The second exception emanates from advocates of the political economy of accounting and
the critical and Marxist approach to accounting.35 They advocate a political economy approach
that recognizes power and conflict in society and the effects of accounting reports on the
distribution of income, wealth and power in society.
The third exception emanates from the positive theory of accounting view that accounting
can be used to optimally resolve conflicts over resource allocation to a limited set of participants.36
Fairness in this context is ultimately in the shareholder’s interest.37
For fairness to be perceived as a moral concept of justice, parallels must be made to the
main theories of distributive justice- those of J. A. Rawls, R. Nozick and A. Gerwith.
Rawls’ Contribution
1. Rawls’ theory of justice
The goal of Rawls’ theory of justice is to develop a theory about justice in the form of
principles to apply to the development of the basic structure of society, which presents a direct
challenge to utilitarianism.38 As an egalitarian theory, its main contention is the distribution of all
economic goods and services equally except where an unequal distribution would actually work
to everyone’s advantage, or at least would benefit the worst-off in society. Using what he calls the
“Kantian concept of equality”, Rawls starts by comparing life to a game of chance where nature
bestows on each individual a generation, culture, social system, family and set of personal
attributes that determines his or her happiness. Accepting this random allocation is viewed as
unjust; a set of just institutions is required. To establish just institutions, Rawls suggests that
individuals step behind a “veil of ignorance” that eliminates any knowledge about potential
positions and benefits under a given set of principles. Then, to reach a social contract, they must
choose from this original position principles of justice leading to the just society. From this original
position and under the veil of ignorance, individuals will choose two principles of justice:
First: each person is to have an equal right to the most extensive basic liberty compatible with a similar
liberty for others.
Second: social and economic inequalities are to be arranged so that they are both (a) reasonably expected
to be to everyone’s advantage and (b) attached to positions and offices open to all.39
Rawls maintains that the two principles are lexicographically ordered, the first one over
the second:
Now it is possible, at least theoretically, that by giving up some of their fundamental liberties men are
sufficiently compensated by the resulting social and economic gains. The general conception of justice
implies no restrictions on what sort of inequalities; it only requires that everyone’s position be
improved…Imagine…that men forgo certain political rights when the economic returns are significant and
their capacity to influence the course of policy by the exercise of these rights would be marginal in any
case. It is this kind of exchange which the two principles as stated rule out; being arranged in serial order
they do not permit exchanges between basic liberties and economic and social gains.40
The first principle shows the emphasis placed by Rawls on liberty and the precedence of
liberty over the second principle of justice. Liberty can be restricted only when it is formulated as
follows: the principles of justice are to be ranked in lexical order and therefore liberty can be
restricted only for the sake of liberty. There are two cases: (a) a less restrictive liberty shared by
all and (b) a less-than-equal liberty acceptable to those citizens with the lesser liberty.41
The second principle of justice, which Rawls labelled the difference principle, contains a
second lexicographic ordering of the welfare of the individuals from the lowest to the highest,
where the welfare of the worst-off individual is to be maximized first before proceeding to higher
levels. In its most general form, the difference principle states that:
In a basic structure with no relevant representatives, first maximize the welfare of the worst-off
representative, maximize the welfare of the second worst-off man and so on until the last case, which is for
equal welfare of all the preceding n-1 representatives, maximize the welfare of the best-off representative
man. We think of this as the lexical difference principle.42
These two principles who a democratic conception that eliminates those aspects of the
social world that seem arbitrary from a moral point of view. This does not necessarily eliminate
economic inequality. Rawls justifies some difference in income first: as incentives to attract people
into certain positions and motivate them to perform; and as a guarantee that certain public-interest
positions will be filled. To implement Rawls’ theory, the idea of “basic structure” may be
“a constitutional democracy”, which preserves equal basic liberties, with a government that
promotes equality of opportunity and guarantees a social minimum and a market-based economic
system. Rawls suggests that this social minimum be established before allowing the rest of the
total income to be settled by the price system. It is to be settled by special payments for sickness
and unemployment and monetary transfer systems such as negative income tax. Rawls, however,
gives little attention to the identification of the worst-off representative. He offers only two
1. To choose a particular social position, say that of the unskilled worker, and then to count as the least
advantaged all those with the average income of this group or less; or
2. To focus on the relative income and wealth with no reference to social position- that is all persons with
less than half of the median income and wealth may be taken as the least advantaged segment.43
With regard to redistribution, Rawls finds large inequalities to be permissible if lowering
them would make the working class even worse off. Basically, with the raising of expectations of
the more advantaged, the situation of the worst-off is continuously improved. Inequalities will tend
to be levelled down by the increasing availability of education and ever-widening expectations.
However, Rawls calls for the establishment of social minimums through various transfers and
redistributive mechanisms. But would Rawls’ difference principle assure an adequate level of the
necessary goods and services? There are a host of disagreements on this issue.44
Derek Phillips joins the opposing chorus:
The major reason for this concerns Rawls’ emphasis on incentives. With the difference principle…an
unequal distribution of wealth and income is justified if and only if it will maximize benefits to the least
advantaged segments within a society. But if, as Rawls assumes, these inequalities must be rather large,
then it seems likely that the actual benefits even if maximized will not be sufficient to provide an adequate
level for the least advantaged segment, they will fail to do so for those persons who require extra medical
care, protection and other basic goods. This is a consequence of the fact…that the difference principle
makes no allowances for the particular needs of especially disadvantaged individuals.45
While better criteria still need to be developed to resolve these issues, Gerwith asserts that
what is needed is a drastic redistribution of wealth and an effective exercise of the fundamental
rights to freedom and well-being.46 Basically, Rawls and Gerwith disagree on how the needs of
the disadvantaged are to be met. While Rawls is willing to accept an unequal distribution of
economic rewards, if it benefits the least advantaged, Gerwith maintains that the wealthy have an
obligation to assist the disadvantaged.
Fairness in Accounting According to Rawls
Rawls’ contract theory- a theory of just social insitutions- may be offered as a concept of
fairness in accounting. Applied to accounting, it suggests first the potential reliance on the veil of
ignorance in all the situations calling for an accounting choice eventually to yield solutions that
are neutral, fair and socially just. Second, it also suggests the expanded role of accounting in the
creation of just institutions and the definition of the social minimum advocated by Rawls. This
role, as also espoused by advocates of social accounting, will lead to the elimination of those
aspects of the social world in general and the accounting world in particular, that seem arbitrary
from a moral point of view. This view of fairness would be most welcome to advocates of social
accounting. As stated by Williams:
Rawlsian principles also may prove to be a useful set of premises for speculation about alternative
accounting systems. For example, on plausible reason for the slow theoretical development of social
accounting, at least in Australia and the United States, could then be constraining effect of conventional
accounting premises about character and legitimacy of institutions, both public and private. Accounting
scholars with interests in social accounting are certainly free to generate and test hypotheses about
measuring and reporting, in Rawlsian, or any other institutional setting.47
Nozick’s Theory of Justice
While Rawls is interested in the justice of one or another pattern of distribution, Nozick is
interested in the process through which distribution comes about.48 He first argued that Rawls’
theory of justice violates people’s rights and consequently cannot be morally justified; that it
ignores people’s entitlement and is, like most other theories of justice, patterned. Patterned theories
of justice imply that a distribution is to vary along some nature dimension, weighted sum of natural
dimensions, or lexicographic ordering of natural dimensions.49 Examples of such distributions
include those based on need, merit, or work. Nozick maintains:
To think that the task of a theory of justice is to fill in the blank in each according to his ___ is to be
predisposed to search for a pattern; and separate treatment from each according to his ___ treats production
and distribution as two separate and independent issues.50
Nozick argues that such theories of justice, based on the patterned and end-state principles,
violate people’s rights and exclude recognition of an entitlement principle of distributive justice,
whereby individuals are entitled to their possessions as long as they acquired them by legitimate
means, including voluntary transfers, exchanges and cooperative productive activity. Nozick’s
theory focuses on the importance of historical principles, in the sense that a distribution is just or
not depending on how it came about. He justifies his theory as follows:
1. A person who acquires a holding in accordance with the principle of justice in acquisition is entitled to
that holding.
2. A person who acquires a holding in accordance with the principle of justice in transfer, from someone
else entitled to that holding, is entitled to the holding.
3. No one is entitled to a holding except by (repeated) applications of 1 and 2.51
The principles involve, respectively, the question of original acquisition of holdings and
the rectification of injustices in holdings. Nozick introduced a proviso, however, to ensure that an
individual’s entitlement does not result in a net loss in what remains for other persons to use.
Nozick’s theory is, then, a theory of justice in holdings. It is a very special kind of theory of
distributive justice, as Nozick emphasizes:
The term “distributive justice” is not a neutral one. Hearing the term “distribution,” most people presume
that some thing or mechanism uses some principles or criterion to give out a supply of things… However,
we are not in the position of children who have been given portions of pie by someone who now makes
last-minute adjustments to rectify careless cutting. There is no central distribution, no person or group
entitled to control all the resources, jointly deciding how they are to be doled out. What each person gets,
he gets from others who give it to him in exchange for something, or as a gift. In a free society, diverse
persons control different resources and new holding arise out of the voluntary exchanges and actions of
persons. There is no more a distribution of shares then there is a distribution of mates in a society in which
persons choose whom they shall marry. The total result is the product of many individuals’ decisions which
the different individuals involved are entitled to make.52
Although some criteria remain to be used, Nozick’s theory has been criticized for its failure
to recognize the right to well-being. The question generally asked is: is it just to tie the
socioeconomic standing of other family members entirely to the moral acceptability of historical
process through which the breadwinner has acquired his or her holdings? Those answering “no”
argue that it is unjust and of concern that some family members reduce their standard of living
radically when in other cases correction is required because of someone else’s unjust acquisition,
and that there is something morally unsatisfactory about some people being very well off compared
with others.53
Fairness in Accounting According to Nozick
The use of “economic man” theory in accounting and the decision usefulness criterion used
in empirical accounting research link fairness and distributive justice to a free market mechanism.
Accounting is viewed as essential to the efficient running of an organization and the mere reaching
of efficiency is presumed to make everybody better off in possession of their just share.54 Fairness
to the positivists and the rationality theorists is linked to an efficient market that allows a just
transfer to shareholders.
It is essentially a libertarian theory of distribution according to Nozick, based on a principle
of justice in acquisition and in transfer. This concept of distributive justice with its reliance on a
free market mechanism does not allow for dealing adequately with fairness as a distributive
function, because it is assumed to fail in the discussion of the social obligations of humans to each
other, to perpetuate past violations of principles of acquisition and transition and to distort the
meaning of well-offness in a world of scarcity. The reliance on the market mechanism, the absence
of a moral language to discuss social obligations, as well as the absence of a concept of
redistributive justice are some of the cited failures of the libertarian theory of justice. In addition,
the growing importance of meritocracy in the context of a basically market system has created
problems for a Nozickean theory of justice. The conflicting rules of distribution are not well
accepted in contemporary culture. Most often, members of the organization demand to receive
what they justly deserve.
Under the tutoring of the school system and reinforced by other meritocratic organizations,
a person has been socialized to feel that he or she ought to get what has been earned and to be
protected from the vagaries and irrationalities of the market. Basically, stakeholders and other
shareholders may not be satisfied by the conventional reporting emphasis on returns to
shareholders. For example, labor may feel that the profit generated dictates a different distribution
than the one dictated by justice in holding and transfer and that a reporting system emphasizing
the “mere” just distribution is warranted.
A good evaluation of the Nozickean libertarian view of accounting is as follows:
In summary, a Libertarian interpretation of accounting’s deference to a market mechanism for making its
fairness judgments leaves accounting inadequately equipped to deal with the distributive aspects of the
accounting process. Without a moral language to discuss the social obligations of humans to each other, the
principles of justice in acquisition and transition have no substance. Without a concept of redistributive
justice, past violations of principles of acquisition and transition are perpetuated. And in a world of scarcity
well-offness acquires a meaning beyond the capabilities of the language of property rights to define.
Markets do distribute society’s prizes, but a Libertarian interpretation of that mechanism certainly provides
no assurance that is fair or even that fairness is a meditating process.55
Gerwith’s Theory of Justice
The goal of Gerwith’s theory of justice was to provide a rational justification for moral
principles to objectively distinguish morally right actions and institutions from morally wrong
ones.56 The necessary content of morality is in actions and their generic features. The actions are
distinguished in terms of two categorical features: voluntariness and purposiveness. Given the
importance of action as the necessary and universal matter of all moral and other practical precepts,
Gerwith presents his doctrine of the structure of actions in three main steps:
First, every agent implicitly makes evaluative judgments about the goodness of his purposes and hence
about the necessary goodness of the freedom and well-being that are necessary conditions of his acting to
achieve his purposes. Second, because of this necessary goodness, every agent implicitly makes a deontic
judgment in which he claims that he has no freedom and well-being. Third, every agent must claim these
rights for the sufficient reason that he has no freedom and well-being. Third, every agent must claim these
rights for the sufficient reason that he is a prospective agent who has purposes he wants to fulfill, so that he
logically must accept the generalization that all prospective agents have rights to freedom and well-being.57
The rights to freedom and well-being are seen as generic, fundamental and universal. As a
result, Gerwith asserts that every agent logically must acknowledge certain generic obligations:
Negatively, he ought to refrain from coercing and from banning his recipients; positively, he ought to assist
them to have freedom and well-being whenever they cannot otherwise have the necessary goods and he can
help them at no comparable loss to himself. The general principle of these obligations and rights may be
expressed as the following precepts addressed to every agent; act in accord with the generic rights of your
recipients as well as yourself. I call this the Principle of Generic Consistency (PGC) since it combines the
formal consideration of rights to generic features or goods of action.58
Gerwith calls the PGC the supreme moral principle, as it requires the agents not to interfere
with the freedom and well-being of others. It remains that the PGC has both direct and indirect
application. The direct application concerns the requirement for agents to act in accord with the
right to freedom and well-being of all other persons. The indirect application concerns the
requirement that institutional arrangements must express or serve the freedom and well-being of
all other persons.
The indirect application involves specifically social rules and arrangements to be
implemented in a static and dynamic phase. The static phase generates rules to protect an existing
equality of generic rights, while the dynamic phase calls for redistributive justice to eliminate
inequalities through a “supportive state.” The social rules between the two externalities are as
1. A certain libertarian extreme that would defend the existing distribution of wealth, arising presumably
from just acquisition; and
2. An egalitarian extreme that calls for a drastic redistribution to be guided solely by the aim of maximally
benefiting those who are the least advantaged.
Both extremes appear deficient.59
Fairness in Accounting According to Gerwith
Gerwith’s theory of justice may be offered as a concept of fairness in accounting. Applied
to accounting, it suggests the primacy of the concerns for the rights of freedom and well-being of
all persons affected by the activities of the firm and for the creation of institutional and accounting
arrangements to guarantee these rights. These arrangements call for some form of rectification
through the creation of a “supportive system” and specific social rules to be followed by
organizations and members within the organization. Accounting may be called on to facilitate a
drastic redistribution of wealth and effective exercise of the fundamental rights to freedom and
well-being of the stakeholders in organizations. Gerwithian principles may prove to be a useful set
of premises for speculation about the merit of value-added reporting. This supports the emphasis
in value-added reporting to report the total return of all members of the “production team:”
shareholders, bondholders, suppliers, labor, government, and society. Not one of these members
is relegated to the position of “disadvantaged” as in other concepts of distributive justice, as they
are all given a place of importance in the measurement, reporting and allocation of the total return
of the firm. Basically, the Gerwithian principles applied to fairness in accounting include a
recognition of the rights of all those affected by the activities of the organization,60 and as stated
by Gerwith himself:
It calls for action that is voluntary and purposive to affirm an egalitarian universalist moral principle. As
Marx’s “man makes its own history,” the role of action toward making moral judgments applied to
accounting making efficiency and distribution judgments that protect the generic rights of all the recipients
of accounting information. Accounting will create its own history of a moral agent in the marketplace, an
agent concerned with the rights of the recipients of accounting information. The merits of applying the
principle of generic consistency to the concept of fairness in accounting derives from its capacity of
presenting the accountant with rationally grounded answers to each of the three questions of moral
1. The distributive question of which persons’ interests ought to be favorably considered is answered by
calling for the respect of the generic rights of all recipients and for the equality of the rights of all
prospective agents.
2. The substantive question of which interests ought to be favorably considered is answered by focusing
on the primacy of freedom and well-being.
3. The authoritative question of why anyone should be moral in the sense of taking favorable account of
other people’s interests is justified by the reason of avoiding self-contradiction. Basically, an action
that violates the PGC principle cannot be rationally justified.61
The previous two sections examined the principle of fairness in presentation and the
principle of fairness in distribution. This section extends the discussion of improving the concept
of fairness by examining the principle of fairness in disclosure. Basically, as a result of the more
equitable concept of fairness in distribution, the principle of fairness in disclosure calls for an
expansion of the conventional accounting disclosures to accommodate all the other interest groups,
in addition to investors and creditors, that have a vested interest in the affairs of the firm.
Calls for Expanded Disclosures
The reliance on conventional fairness in presentation in conformity with generally accepted
accounting principles has created some limitations and unfairness in reporting and disclosure.
Three proposals for reducing and/or eliminating this unfairness in reporting and disclosure are
examined next.
Bedford’s Disclosure Proposals
Bedford proposed extensions in accounting disclosure to alleviate the problems created by
the fairness doctrine in accounting.62 Rather than merely relying on generally accepted accounting
principles as the only measurement method, Bedford called for the development of new tools to
provide management and decision-makers with useful information. These tools are described as
These new tools have been gathered together under diverse new disciplines, such as Administrative Science,
Management Science, Operations Research and Organizational Theory, competitors of traditional
accounting in the sense that the information which are typically interdisciplinary arrangements of traditional
disciplines. They are made up of parts of such basic disciplines as Economics, Sociology, Psychology,
Mathematics, Statistics, Political Science, Neurology, Servomechanism Engineering, Anthropology and
Advanced Computer Design.63
With the expansion of accounting measurements comes the expansion of accounting
disclosures for recovering wealth-structures to socioeconomic structures and from being limited
to the measurement and communication of economic data to the measurement and communication
of data revealing socioeconomic activities that use economic resources.64 The expansion of
accounting disclosures dictates the expansion of the following characteristics of disclosure:
1. The scope of users from shareholders, creditors, managers and the general public to public groups;
2. The scope of users from evaluating economic progress, enabling base assessments and aiding
investment decisions to providing for intercompany coordination, meeting specific user information
needs and developing public confidence in firm activities;
3. The type of information from transaction-based monetary valuations of internal activities of the firm to
internal and external data to reveal both internal activities and the environmental setting of the internal
activities of a socioeconomic nature;
4. Measurement techniques from arithmetic and the bookkeeping system to the total management science
5. The quality of disclosure from excellent in terms of past needs to improved relevance for specific
decisions; and
6. Disclosure devices from conventional financial statements to multimedia disclosures based on the
psychology of human communication.65
These expansions are influenced and motivated by a series of attitudes of “theorists”
influencing accounting. The following theories are representative:
1. The theory of the “right to know” identifies both the general public and the owners as having a “right”
to information which should concern accountants in the performance of the disclosure function.
2. The theory of “information overload” suggests limitations in human information processing of
expanded accounting disclosures and considerations for contracting the amount of information
disclosed and compressing the disclosed information itself.
3. The theory of “retrieved systems” leaves to the accountant the function of production and storage of
data and presenting the user with either an information self retrieval system or an information project
retrieval system.
4. The theory of “relevance” is used to determine the relevant disclosure requirements and supports the
disclosure of additional information having a high relevance evaluation, such as human asset, market
value and non-financial measures.
5. The theory of “preciseness” dictates a rigor of analysis and unambiguous concepts.66
The clear implication of Bedford’s proposals is an expanded disclosure-based notion of
Lev’s Theory of Equitable and Efficient Accounting Policy
Lev proposed a theory of equitable and efficient accounting policy,67 arguing that progress
in addressing the fundamental accounting policy issue can be achieved by including the explicit
concern of policy makers- equity of the capital markets. This equity is defined as equality of
opportunity or symmetric information when all investors would be equally endowed with
information and risk-adjusted expected returns would be identical across investors. This is
important since both theoretical analysis and empirical evidence show that the existing increased
information asymmetry, or inequity, is associated with a lower number of investors, higher
transaction costs, lower liquidity of securities, thinner volumes of trade and, in general, decreased
social gains from trade. The equity concept would eliminate the major source of inequity, which
is the informational advantage held by informed investors, lessen the generally harmful effects of
the defensive measures that are naturally taken by the uninformed and as a result improve overall
welfare. The standard for the equity concept is stated as follows: “The interests of the less informed
investors should, in general, be favored over the more informed investors.”68 This standard entails
the systematic decrease of information asymmetries and offers accounting policy makers
operational and rather simple “public interest” criterion for disclosure choices. It is in fact based
on a well-known principle in public policy:
It is possible in our society to argue for a government program to the poor. But, the argument is not that the
poor, being part of the winning coalition, should benefit at the expense of others. The argument is that by
helping the poor we can make everyone better off, that helping the poor is not merely a means to make the
poor happier but a means to reduce crime, make us all feel less guilty, make the cities livable, etc. What
may, from the standpoint of wealth, be (small) redistribution is defended as, from the standpoint of utility,
a Pareto improvement.69
Gaa’s User Primacy
Corporate financial reporting policy faces collective device problems that affect the
allocation of resources to the production and consumption of information.70 The following
dilemma faces any standard-setting body set to resolve the allocation problems:
Every policy choice represents a trade-off among different individual preferences and possibly among
alternative consequences, regardless of whether the policy makers see it that way or not. In this sense,
accounting policy choice can never be neutral. There is someone who is granted his preference and someone
who is not. The ethical question is what morality should guide the policy-making process.71
Two alternatives are available. The first is that the interests of all individuals are connected
equally by the standard-setter. It is a principle of neutrality that dictates the selection of standards
that maximize social welfare. A second alternative is that the interests of one group of users are
given preferential treatment. One such group is the user group. This second alternative is therefore
the user primacy guide to accounting reporting policy. Two versions of the user primacy principle
have been advocated in the literature. The version known as the basic user primacy principle
focuses on needs of users with limited abilities. As stated in SAC 2 “Objectives of General Purpose
Financial Reporting:”
General purpose financial reports focuses on providing information to meet the common information needs
of users who are unable to command the preparation of reports tailored to their particular information needs.
These users must rely on the information communicated to them by the entity.72
Another version, known as extended user primacy, focuses on the information needs of
sophisticated users. While not directly advocated by Australian standard-setters, the conceptual
framework of the US Financial Accounting Standards Board makes some reference to the priority
needs of specialized user groups:
Financial reporting should provide information that is useful to present and potential investors and creditors
and other users in making rational investment, credit and similar decisions. The information should be
comprehensible to those who have a reasonable understanding of business and economic activities and are
willing to study the information with reasonable diligence.73
Gaa investigated the logical formulations of the user primacy principle, based on
contemporary work in ethics and social and political philosophy, in which humans are regarded as
decision-makers and in which principles governing individual and group behavior are the result of
rational decisions.
A standard setter would be established to enforce user primacy, thereby redressing an imbalance between
investors (users) and managers. By acting in accordance with this principle, the standard setter aids all
securities market agents in exploiting the potential trading gains provided by such a market. At the same
time, investors are protected from possible losses arising from the basic relationship between them and
managers of widely held corporations.74
In order to improve external reporting, the AICPA established in 1991 the Special
Committee on Financial Reporting, or Jenkins Committee (Edmond L. Jenkins was the chairman).
The committee was charged with the determination of (a) the nature and extent of information that
should be made available to others by management, and (b) the extent to which the auditors should
report on the various elements of that information. After two years of research into the needs of
external reporting users (investors, creditors and their advisers) the committee issued in November
1995 its report titled “The Information Needs of Investors and Creditors.” The report identified
the following areas in financial statements that should be enhanced to meet users’ need for
1. Improve disclosure of business segment information.
2. Address the disclosures and accounting for innovative financial instruments.
3. Improve disclosures about the identity, opportunities and risks of off-balance-sheet financing
arrangements and reconsider the accounting for those arrangements.
4. Report separately the effects of core and non-core activities and events and measure affair value non-
core assets and liabilities.
5. Improve disclosures about the uncertainty of measurements of certain assets and liabilities.
6. Improve quarterly reporting by reporting in the fourth quarter separately and including business
segment data.
The report also proposed a comprehensive model including ten elements within five broad
categories of information that are designed to fit the decision process users employ to make
projections, value companies, or assess the prospect of loan repayment. These elements are as
1. Financial and non-financial data:
a. Financial statements and related disclosures.
b. High-level operating data and performance measurements that management uses to manage the
2. Management’s analysis of the financial and non-financial data: reasons for changes in the financial,
operating and performance related data and the identity and past effect of key trends.
3. Forward-looking information:
a. Opportunities and risks, including those resulting from key trends;
b. Management’s plans, including critical success factors;
c. Comparison of actual business performance to previously disclosed opportunities, risks and
management’s plans.
4. Information about management and shareholders: directors, management, compensation, major
shareholders, and transactions and relationships among related parties.
5. Background about the company:
a. Broad objectives and strategies;
b. Scope and description of business and properties;
c. Impact of industry structure on the company.75
Expanded Accounting Disclosures
The principle of fairness in presentation restricts recognition and disclosures to the
situations governed by existing generally accepted accounting principles. The distinction between
recognition and disclosure is emphasized by the FASB. Consistent with the Australian position,
FASB Concepts Statement No. 5, “Recognition and Measurement in Financial Statements of
Business Enterprises,” states:
Recognition is the process of formally recording or incorporating an item into the financial statements of
an entity as an asset, liability, revenue, expense, or the like. Recognition includes depiction of an item in
both words and numbers, with the amount included in the totals of the financial statements.76
The same statement states that:
Since recognition means depiction of an item in both words and numbers, with the amount included in the
totals of the financial statements, disclosure by other means is not recognition. Disclosure of information
about the items in financial statements and their measures that may be provided by notes or parenthetically
on the face of financial statements, by supplementary information, or by other means of financial reporting
is not a substitute for recognition in financial statements for items that meet recognition criteria.77
The purposes of disclosures were stated as follows:
1. To describe recognized items and to provide relevant measures of those times other than the measures
in the financial statements.
2. To describe unrecognized items and to provide a useful measure of those items.
3. To provide information to help investors and creditors assess risks and potentials of both recognized
and unrecognized items.
4. To provide important information that allows financial statement users to compare within and between
5. To provide information in future cash inflows or outflows.
6. To help investors assess return on their investment.78,79
Examples are provided in Exhibit 4.1.
An analysis of required financial statement disclosures led to the following five
1. The most frequently required disclosures relate to amounts recognized in the financial statements,
particularly to disaggregating them and providing relevant measures other than the measure in the
financial statements- disaggregation of recognized amounts represents 26 per cent of all required
2. Six subjects- stockholders’ equity leases, pensions, income taxes, other post-retirement employee
benefits and commitments and contingencies- account for 45 per cent of all required disclosures; five
standards- SFAS nos 15, 87, 88, 106 and 109- account for 28 per cent.
3. Few disclosures explicitly provide information on future cash inflows or outflows.
4. Few provide measures of unrecognized items.
5. Disclosure requirements have increased over time; few have been eliminated.80
All the previous calls for expanded disclosures are motivated by the principle of fairness
in disclosure. The principle would advocate expanding the scope of accounting information
beyond conventional accounting information. Examples of new accounting disclosures under this
principle of fairness in disclosure include:
1. Value-added reporting
2. Employee reporting
3. Human resource accounting
4. Social accounting and reporting
5. Budgetary information disclosures
6. Cash flow accounting and reporting.
These are examined next.
Value-added Reporting
Conventional reporting in most countries does not include value-added reporting. Instead,
it measures and discloses the financial position (through the balance sheet), the financial
performance of the firm (through the profit and loss statement) and the financial conduct of the
firm (through the statement of changes in the financial position). Although the usefulness of these
statements has been established by their sheer use over time, they fail to give important information
on the total productivity of the firm and the share of each team of members involved in the
management of resources- shareholders, bondholders, employees and the government. The value-
added statement can fill the crucial role. Value added is the increase in wealth generated by the
productive use of the firm’s resources before its allocation among shareholders, bondholders,
workers and the government. It can be easily computed by a modification of the profit and loss
statement as follows:
Step 1: The profit and loss statement computes retained earnings as a difference between
sales revenue, on one hand and costs, taxes and dividends, on the other:
R = S B DP W I DD T (1)
R = retained earnings
S = sales revenue
B = bought-in materials and services
DP = depreciation
W = wages
I = interest
DD = dividends
T = taxes
Step 2: The value-added equation can be obtained by rearranging the profit equation as:
S B = R + DP + W + I + DD + T (2)
S B DP = R + W + I + DD + T (3)
Equation 2 expresses the gross value-added method. Equation 3 expresses the net value-
added method. In both cases, the left part of the equation shows the value added among the groups
involved in the managerial production team, the workers, the shareholders, the bondholders and
the government). The right-hand side is also known as the additive method and the left-hand side
the subtractive method.
Exhibit 4.2 shows that the value-added statement can be derived from a regular profit and
loss statement. The company in this example deducted bought-in materials, services and
depreciation from sales, to arrive at a value added of $2,240,000. The $2,240,000 was divided
among the team of workers ($800,000), shareholders ($200,000), bondholders and creditors
($240,000) and the government ($600,000), leaving $400,000 for retained earnings.
The value-added statement can be presented in either the gross or the net format. The value-
added statement has some very good benefits:
1. With the disclosure of value added, employees get the satisfaction of knowing the value of their
contribution to the total wealth of the firm.
2. Value added represents a better base for the computation of worker bonuses.
3. Value added information has been proved to be a good predictor of economic events and market
reaction.81, 82, 83, 84
4. Value added is a better measurement of size than sales.
5. Value added may be useful to employee groups because it can affect the aspirations and thoughts of its
negotiating representatives.
6. Value added may be extremely useful in financial analysis by relating various crucial events to value-
added variables. A summary of the empirical research is shown in three tables in Exhibit 4.3.
Employee Reporting
With the emergence of employees and unions as potential users of accounting information,
it also appears, and for a good many reasons, that the annual report to shareholders is an all-
inclusive document suitable for all unions. The solution lies in the production of a special report
to employees and unions. This solution has been accepted in many country members of the
Organization of Economic Cooperation and Development, including the United States, West
Germany, Canada, France, Denmark, Norway, Sweden and the United Kingdom. The idea has
been accepted not only operationally but conceptually. For example, in the United Kingdom, the
Corporate Report identifies employees as a user group of published company annual reports.85
Because different factors apply for employees and unions, each will be reviewed
separately. In fact, a sample employment report, included as an appendix to the Corporate Report,
showed quantitative data under the following headings:
1. Number employed (analyzed in various ways)
2. Location of employment
3. Age distribution of permanent work force
4. Hours worked during the year (analyzed)
5. Employee costs
6. Pension information
7. Education and Training (including costs)
8. Recognized trade unions
9. Additional information (race relations, health and safety statistics, etc.)
10. Employment ratios.86
Similarly, in Canada, the Canadian Institute of Chartered Accountants published a research
study in June 1980 entitled “Corporate Reporting: Its Future Evolution” (the Stamp Report).87 The
report explicitly identified employees (past, present and future) as users of corporate reports.
Firms do have a continuous communications process with employees through various
media including plant-level discussions, quality circles, audiovisual presentations and in house
journals and notices. The purpose of the formal employees’ annual report is to provide an
integrative and exhaustive report rather than a piecemeal approach. The same point is argued as
It must be a report capable of satisfying additional information needs of employees, rather than simply
supply information already provided through alternative internal channels, or providing unwanted
information. Unless the preparers of an annual report to employees can identify a genuine information void
left by other internal communication media and can justifiably believe that such a report can fill this void,
then the report has no real justification.88
The literature has identified various aims and reasons for reporting to employees. A survey
of the literature on financial reporting to employees between 1919 and 1979 identified the
following reasons: (a) heralding changes, (b) presenting management propaganda, (c) promoting
interest in understanding of company affairs and performance, (d) explaining management
decisions, (e) explaining the relationship between employees, management and shareholders, (f)
explaining the objectives of the company, (g) facilitating greater employee participation, (h)
responding to legislative or union pressure, (i) building company image, (j) meeting information
requirements peculiar to employees, (k) responding to management fear or wage demands, strikes
and competitive disadvantages and (l) promoting a higher degree of employee interest.89 The same
survey shows that the level of interest in reporting to employees reached a higher level when the
following four socioeconomic factors were also present: (a) the use of new technology in the
workplace, (b) increased mergers in the corporate sector, (c) the emergence of anti-union
sentiment, and (d) fears of economic recessions.90 It seems that management may have increased
the level of employee reporting in reaction to the potential consequence of each of these factors or
a combination of these factors. Lews et al., the authors of the survey, speculated that management
may have hoped to:
1. Allay fears of lost rank, skill or employment through technological advances;
2. Counter fears of “bigness”, monopoly power, employee relocation and loss of identity through
corporate mergers;
3. Take advantage of community anti-union sentiments by bypassing union communication channels,
reporting directly to employees, emphasizing management prerogatives and the need to control wages
and associated costs and generally weakening the unions’ potential to disrupt operations;
4. Prepare employees for hard times, confirm or dispel rumors of imminent company failure, allay fears
of unemployment and urge employees to greater efforts in difficult economic times.91
Taylor, Webb and McGinely identified the following personal benefits that management
might attempt to seek for itself by providing an annual report to employees in addition to using the
conventional management-employee communication media:
1. Building a favorable employee impression of the management group;
2. Reducing the resistance of employees to changes initiated by management; and
3. Providing a useful response to union pressure for more corporate financial information from
They also identified the following personal benefits that might accrue to employees with
employee reporting:
1. Having the basis for deciding whether to continue employment with the company or an organization
section of the company;
2. Having the basis for assisting the relative position of the employees within the corporate structure,
particularly in terms of getting a “fair go”; and
3. Understanding the image of the company, as a basis for deciding at a personal level whether to identify
with this image.93
Finally, Foley and Maunders identified arguments supporting disclosure direct to
1. Feedback of information to employees will improve job performance via learning effects and also serve
to increase motivation.
2. The role of employee reporting is crucial to effective worker participation, which will contribute to the
efficiency of the company.
3. The fundamental change in the nature of the firm and its “social responsibility” legitimizes employee
4. Employee reporting may be seen by some employers as a possible way of resurrecting the concept of
joint consultation as a means of avoiding unionization.
5. The socialist tradition, with its ultimate objective of changing the basis of ownership and the control of
resources, sees employee reporting as a step towards increasing “workers’ control” and developing
“workers’ self-confidence.”94
The case for employee reporting using the socialist argument rests on two fundamental
1. It is a technique that helps employees establish greater democratization of decision making in industry.
2. It may usefully act as a check on those aspects of the market system that result in adverse external
effects in the form of pollution and environmental degradation.
Social Accounting and Reporting
The measurement of social performance falls in the general area of social accounting.95
Under this area are four various activities that may be delineated: social responsibility accounting,
SRA, total impact accounting, TIA, socioeconomic accounting (SEA) and social indicators
accounting (SIA).96 Exhibit 4.4 shows the characteristics of the various component parts of social
accounting. One can see that the general concepts and disclosure of social performance are
products of SRA and TIA and social accounting is appropriately defined as:
…the process of selecting firm-level social performance variables, measures and measurements procedures;
systematically developing information useful for evaluating the firm’s social performance and
communication of such information to concerned social groups, both within and outside the firm.97
This is a good conceptual framework for social accounting, proposed by Ramanathan and
comprises three objectives and six concepts. This framework applies equally to SRA and TIA.
A question arises about who is “pushing” for corporate social reporting. Are they to the
right or to the left of the political spectrum? Gray, Owen and Maunders presented corporate
social reporting (CSR) as a dialectic between four positions:
(1) The extreme left-wing of politics (“left-wing radicals”);
(2) The acceptance of the status quo;
(3) The pursuit of subject/intellectual property rights;
(4) The extreme right-wing of politics, the “pristine capitalists” or “right-wing radicals.”98
The second group appears to represent those true advocates of corporate social reporting.
They are represented by people:
1. Who assume that the purpose of CSR is to enhance the corporate image and hold the (usually
implicit) assumption that corporate behavior is fundamentally benign;
2. Who assume that the purpose of CSR is to discharge an organization’s accountability under the
assumption that a social contract exists between the organization and society. The existence of this
social contract demands the discharge of social accountability.
3. Who appear to assume that CSR is effectively an extension of traditional financial reporting and that
its purpose is to inform investors.99
Various arguments are used for the measurement and disclosure of social performance.
1. The first argument is that of social contract. Implicitly, it is assumed that organization ought to act in
a manner that maximizes social welfare, as if a social contract exists between the organization and
society. By doing so, organizations gain a kind or organizational legitimacy vis-à-vis society. While
the social contract may be assumed to be implicit, various societal laws may render certain covenants
of the contract more explicit. These laws that constitute the rules of the game in which organizations
choose to play become terms of the social contract.100 Through these implicit and explicit laws,
society defines the rules of accountability for organizations.
The state however, plays a primary role in the formulation of these laws and the
specification of the rules of the game. In the US context, these laws and the general concern with
social performance created a need for tracking environmental risk. With the 1989 SEC
requirement that companies disclose any potential environmental clean-up liabilities they may
face under the federal Superfund law, the 1990 annual reports of companies started the
disclosure process. The 10, disclosures, added to the host of required filings with state and
federal environment agencies, led to the creation of data banks that provided information on
companies specializing in the tracking of environmental risk. Examples of these companies
include Ersite, based in Denver; Environmental Audits, in Lyonville, Pennsylvania; the
Environmental Risk Information Center in Alexandria, Virginia; the Petroleum Information
Corporation, Littleton, Colorado; Toxicheck, in Birmingham, Michigan; Vista Environmental
Information in San Diego; and Environmental Data Resources in Southport, Connecticut.101 This
new industry gives a glimpse of a future characterized by concerned shareholders regarding the
social performance of firms and more accurate and reliable information on the environmental
risks of US corporations.
2. Rawls’ theory of justice, as presented in his book A Theory of Justice,102 Nozick’s “entitlement
theory” as presented in his book Anarchy, State and Utopia,103 and Gerwith’s theory of justice as
presented in Reason and Morality,104 contain principles for evaluating laws and institutions from a
moral standpoint. Both Rawls’ and Gerwith’s models argue for a concept of fairness favorable to
social accounting.
3. The third argument is that of users’ needs. Basically, users of financial statements need social
information for their revenue allocation decisions. An argument may be made by some that
shareholders are conservative and care only about dividends. In fact, according to a recent survey of
shareholders, they want corporations to direct resources toward cleaning up plants, stopping
environmental pollution and making safer products.105 As a result, Marc Epstein advises corporations
to do the following in order to manage expenditures on social concerns:
Integrate corporate awareness of social, ethical and environmental issues into corporate decision at all levels
and make sure such concerns have representation on the board of directors.
Develop methods to evaluate and report on the social and environmental impacts of corporate activities.
Modify the corporate structure to set up a mechanism to deal with social, environmental and ethical crisis.
Then a company can be a crisis-prepared organization rather than a crisis-prone organization. Companies
that do not prepare themselves for crises simply flounder.
Create incentives for ethical, environmental and socially responsible behavior on the part of employees and
integrate those incentives into the performance evaluation system and corporate culture. Unless this is
institutionalized it never enters the corporate culture and significant, permanent change cannot occur.
Recognize that if the environment is to be cleaned up, business must take a leadership role in the reduction
of pollutants and the wise use of natural resources.106
There is however, a lack of normative and/or descriptive models on the users’ needs in
terms of social information.
4. The fourth argument is that of social investment. Basically, it is assumed that an ethical investor group
is now relying on social information provided in annual reports for making investment decisions. The
disclosure of social information becomes essential, therefore, if investors are going to consider properly
the negative effects of social awareness expenditures on earnings per share, along with any
compensating positive effects that reduce risk or create greater interest from a particular investment
clientele. Some argue that the risk-reducing effects will more than compensate for social awareness
Between firms competing in the capital markets those perceived to have the highest expected future earnings in
combination with the lowest expected risk from environmental and other factors will be most successful at
attracting long term funds.107
Others believe that “ethical investors” form a clientele that responds to demonstrations of
corporate social concern.108 Investors of this type would like to avoid particular investments
entirely for ethical reasons and would prefer to favor socially responsible corporations in their
portfolios.109 A survey by Rockness and Williams identifies an emerging consensus on the primary
characteristics of social performance among fund managers.110 The performance factors include
environmental protection, treatment of employees, business relations with repressive regimes,
product quality and innovation and defense criteria considered investment criteria by most of the
An emerging theory of social investment is provided by Bruyn, who suggests that social
and economic values can be maximized together and this creative synergism is the practical
direction taken by the social investor today.111 Bruyn’s investor is assumed to contribute to the
development of social economy designed to promote human values and institutions, as well as
self-interests. The social investor bases investment decisions not only on economic and financial
considerations, but also on sociologically grounded considerations. Both “social inventions” and
technological inventions based on investors, while concerned with the management of profits and
scarce resources, are also interested in the corporations’ accountability to other stakeholders in the
environment besides stockholders.
Budgetary Information Disclosures
Faced with the challenge from diverse users to develop more relevant financial reporting
techniques, accountants and non-accountants alike have recommended that forecasted information
can be incorporated into financial statements. Proposals vary from the suggestion that budgetary
data be disclosed to the suggestion that public companies provide earnings forecasts in their annual
or interim reports and prospectuses. One objective of financial reporting set forth in the Trueblood
Report supports this type of disclosure: “An objective of financial statements is to provide
information useful for the predictive process. Financial forecasts should be provided when they
will enhance the reliability of users’ prediction.
Although the objective does not constitute a strong recommendation for corporate financial
forecasts, steps have been taken to ensure that forecasts are included in accounting reports. In the
United Kingdom, the revised version of the City Code on Takeovers and Mergers requires profit
forecasts to be included in takeover-bid circulars and prospectuses.113 In the UK case, the interest
of the accounting profession was created by the requirement that not only must “the assumptions,
including the commercial assumptions,” be stated but the “accounting bases and calculations must
be examined and reported on by the auditors or consultant accountants.”114 In the United States, in
February 1975, the SEC first announced its intention to require companies disclosing the forecasts
to conform with certain rules to be laid down by the Commission. In April 1976, in reaction to
public criticism, the SEC called for voluntary filings of forecasts. The SEC’s amended position
presents some problems in terms of:
1. The definition of earnings forecasts;
2. Whether disclosure should be mandatory or optional; and
3. The possible advantage of such disclosures.
The first problem concerns determining which forecasted items are to be disclosed. The
two possible solutions are disclosing budgets or disclosing probable results (forecast). This
distinction may be made because budgets are prepared for internal use and, for motivational
reasons, may be stated in a way that differs from expected results. Ijiri makes the distinction as
Forecasts are estimates of what the corporation considers to be the most likely to occur, whereas budgets
may be inflated from what the corporation considers to be most likely to occur in order to take advantage
of the motivational function of the budget.115
From the point of view of the user, therefore, the disclosure of forecasts, rather than
budgets, may be more relevant to his or her decision-making needs. In fact, the trend seems to be
in favor of the disclosure of forecasts of specific accounts in general and earnings in particular.
The second problem is whether the disclosure of earnings forecasts should be mandatory
or optional. Each position may be easily justified. The principal argument in favor of mandatory
disclosure is that it creates a similar and uniform situation for all companies. However, mandatory
disclosure could create an unnecessary burden in terms of competitive advantage and certain firms
would have to be viewed as exceptions (for example, private companies, companies in volatile
industries, companies in the process of major changes and companies in developmental stages).116
Another argument against mandatory disclosure is that some firms lack adequate technology,
experience and competence to disclose forecasts adequately and that the outlays to correct this
situation may create an unnecessary burden on these firms. Such a firm may doubt the benefits of
a forecasts-disclosure procedure that justifies the cost of installing a new reporting system.
The third problem concerns the desirability of forecast publication. Several arguments have
been advanced against the reporting of corporate financial forecasts. One argument is that both
companies and analysts have been unsuccessful in accurately forecasting earnings. Daily points
out that budgeted “information must be reasonably accurate to be relevant; otherwise the investors
will have no confidence in the information and consequently not utilize it.”117 Both Daily’s study
and McDonald’s study118 support the contention that, on average, management earnings forecasts
are likely to be materially inaccurate. A number of factors may affect the accuracy of forecasts-
for example, the length of time covered by the forecast, the nature of the industry in which the
company operates, the external environment and the degree of sophistication and experience of
the company making the forecast. Ijiri classifies the primary issues involved in corporate financial
forecasts as:
1. Reliability
2. Responsibility
3. Reticency.119
Reliability is related to the relative accuracy of the forecasts; responsibility, to the possible
large liabilities of firms making forecasts and accountants auditing these forecasts; and reticency,
to the degree of silence and inaction of firms that are at a competitive disadvantage due to forecast
disclosure. Similarly, Mautz suggests that three kinds of differences must be considered in
evaluating the overall usefulness of published forecasts:
Differences in the forecasting abilities of publicly owned firms;
Differences in the attitudes with which managements in publicly owned companies might be expected
to approach the forecasting task;
Differences in the capacities of investors to use forecasts.120
Finally, given the difficulties associated with identifying and estimating forecasts, to what
is an accountant expected to attest? Mautz suggests the following range of possibilities:
Arithmetic accuracy;
Internal integrity of the forecast data;
Consistency in the application of accounting principles;
Adequacy of disclosure;
Reasonableness of assumptions; and
Reasonableness of projections.121
Cash Flow Accounting and Reporting
A dominant characteristic in early views of the purpose of financial statements is the
stewardship function. According to this view, management is entrusted with control of the
financial resources provided by capital suppliers. Accordingly, the purpose of financial statements
is to report to concerned parties to facilitate the evaluation of management’s stewardship. To
accomplish this objective, the reporting system favored and deemed essential and superior to
others is the accrual system. Simply stated, the accrual basis of accounting refers to a form of
keeping those records not only of transactions that result from the receipt and disbursement of cash
but also of the amounts that the entity owes others and that others owe the entity.122 At the core of
this system is the matching of revenues and expenses. Interest in the accrual method has generated
a search for the “best” accrual method in general and the “ideal income” in particular. For a long
time, this accounting paradigm governed the evaluation of accounting alternatives and the asset
valuation and income-determination proposals. However, this approach was constantly challenged
by proponents of cash flow accounting. The cash flow basis of accounting has been correctly
defined as the recording not only of cash receipts and disbursements of the period (the cash basis
of accounting) but also of the future cash flows owed to or by the firm as a result of selling and
transferring the title to certain goods (the accrual basis of accounting).123 The advocacy of cash
flow accounting is more evident in a questioning of the importance and efficacy of accrual
accounting and a shift toward the cash flow approach in security analysis.124
The question of the superiority of accrual accounting over cash flow accounting is central
to the determination of the objectives and the nature of financial reporting. Accrual accounting
facilitates the evaluation of management’s stewardship and is essential to the matching of revenues
and expenses, which is required to properly align efforts and accomplishments. The efficiency of
the accrual system has been questioned, however. Thomas states that all allocations are arbitrary
and incorrigible and recommends the minimization of such allocations.125 Hawkins and Campbell
report a shift in security analysis from earnings-oriented valuation approaches to cash flow-
oriented valuation approaches.126 Many decision-usefulness theorists advocate a cash flow
accounting system based on the investor’s desires to predict cash flows.127,128 Most advocates of
cash flow accounting feel that the problems of asset valuation and income determination are so
formidable that they warranted the derivation of a separate accounting system and propose the
inclusion of a comprehensive cash flow statement in company reports. For instance, Lee describe
how cash flow accounting and net realizable value accounting can be combined in a series of
articulating statements that provide more relevant information about cash and cash management
than either system can provide individually.129
Cash flow accounting is viewed by supporters as superior to conventional accrual
accounting for the following reasons:
1. A system of cash flow accounting might provide an analytic framework for linking past, present and
future financial performance.130
2. From the perspective of investors, the projected cash flow would reflect both the company’s ability to
pay its way in the future and its planned financial policy.131
3. A price-discounted flow ratio would be a more reliable investment indicator than the present price-
earnings ratio, due to the numerous arbitrary allocations used to compare earnings per share.132
4. Cash flow accounting may be used to correct the gap in practice between the way in which an
investment is made (generally based on cash flows) and the way in which the results are evaluated
(generally based on earnings).133
The important question remaining is whether or not cash flow accounting will be restored
to its predominant position as an important and relevant source of financial information. All trends
seem to indicate that the answer is in the affirmative. Witness the following eloquent and optimistic
Of all the available systems of financial reporting, cash flow accounting is one of the most objective and
understandable. It attempts to state facts in financial-accounting terms, without the accountant having to
become involved in making subjective judgments as to which period the data relate. And it is expressed in
terms that should be familiar to all non-accountants. Cash resources and flows are things that anyone in a
developed economy has to administer from day to day. Thus, cash flow reports are potentially
comprehensible, a matter that is of increasing concern to accountants as the number of report users and
groups increases year by year.134
These concerns and others appear to have influenced the AASB and the AARF in Australia.
Australia currently has one of the most comprehensive cash flow standards in the world. AASB
1026 “Statement of Cash Flows” was issued in 1992 and replaced existing standards requiring
preparation of a funds flow statement. The standard requires, among other things, preparation of a
cash flow statement consistent with the direct or “gross” method of reporting- the direct method
produces a refined measure of operating cash flow and more detailed disclosure of cash inflows
and outflows. Other countries, such as the United States and the United Kingdom, currently allow
a choice between the direct and indirect methods.
How would users react to cash flow information? Evidence in Australia indicates that
bankers, financial analysts and other users use cash flow information as much as they use earnings
figures in financial decision making.135
Human-Resource Accounting
The usefulness of human resources
The objective of financial accounting is to provide information that is relevant to the
decisions that users (investors) must make, including adequate information about one “neglected”
asset of a firm- the human asset. More specifically, investors may greatly benefit from knowledge
of the extent to which the human assets of an organization have increased or decreased during a
given period. The conventional accounting treatment of human-resource outlays consists of
expensing all human-capital formation expenditures and capitalizing similar outlays on physical
capital. A more valid treatment would be to capitalize human-resource expenditures to yield future
benefits and to reveal when such benefits can be measured. In fact, this treatment has created a
new concern with the measurement of the cost or value of human resources to an organization and
has led to the development of a new field of inquiry in accounting, known as human-resource
accounting. A broad definition of human-resource accounting is:
The process of identifying and measuring data about human resources and communicating this information
to interested parties.136
This definition implies that there are three major objectives of human-resource accounting:
1. Identification of “human-resource value”;
2. Measurement of the cost and value of people to organizations; and
3. Investigation of the cognitive and behavioral impact of such information.
Human-resource accounting has led to a few applications, including those of the R.G. Barry
Corporation, Touche Ross & Company and a midwest branch of a mutual insurance company.137
Despite the lack of enthusiasm of many firms for disclosing the value of their human assets, most
empirical studies investigating the cognitive and behavioral impact show a favorable
predisposition of users to human-resource accounting information.138 We may wonder, in fact,
why the R.G. Barry Corporation, a small shoe manufacturing company listed on the American
Stock Exchange, would develop a human-resource accounting system. As one of its officers
rhetorically observed:
Why in the world is a little company with good- but unspectacular- growth, good but unromantic products,
good but unsophisticated technology, good but undramatic profitability interested in the development of a
system of accounting for the human resources of the business? This is a fair question and deserves an
To answer this question- and any similar questions asked by other corporations- we may
cite three facts:
1. Capitalizing human-resource costs is conceptually more valid than the expensing approach
2. The information concerning “human assets” is likely to be relevant to a great variety of
decisions made by external or internal users, or both.
3. Accounting for human assets constitutes an explicit recognition of the premise that people are
valuable organizational resources and an integral part of a mix of resources.
Human-Resource Value Theory
The concept of human value may be derived from the general economic value theory.
Values may be attributed to individuals or groups like physical assets, based on their ability to
render future economic services. In line with the economic thinking that associates the value of an
object with its ability to render benefits, the individual or group value is usually defined as the
present worth of the services rendered to the organization throughout the individual’s or the
group’s expected service life.
How do we determine the value of a human asset? To measure and disclose human-
resource value, we must devise a theoretical framework, or human-resource value theory, to
explicate the nature and determinants of the value of people to an organization. Basically, two
models of the nature and determinants of human-resource value exist- one advanced by Flamholtz
and one advanced by Likert and Bowers.140 We will discuss each of these models here.
1. Determinants of individual value
In Flamholtz’s model, the measure of a person’s worth is his or her expected realizable value.
Flamholtz’s model suggests that such a measure of individual value results from the interaction of
two variables: (a) the individual’s expected conditional value, and (b) the probability that the
individual will maintain membership in the organization.
The individual’s conditional value is the amount the organization would potentially realize
from that person’s services. Conditional value is a multi-dimensional variable comprised of three
factors: productivity, transferability and promotability. The elements of conditional value are
perceived to be the products of certain attributes of the person and certain dimensions of the
organization. Two important individual determinants are identified as the person’s skills and
activation level. Similarly, the organizational determinants that interact with the individual values
are identified as the organizational role of the individual values are identified as the organizational
role of the individual and the rewards that people expect from the different aspects of their
membership in a firm.
The probability of maintaining organizational membership is considered to be related to a
person’s degree of job satisfaction.
2. Determinants of group value
Flamholtz’s model examines the determinants of an individual’s value to an organization;
the Likert-Bowers model examines the determinants of group value. Intended to represent the
“productive capability of the human organization of any enterprise or unit within it,”141 the model
identifies three variables that influence the effectiveness of a firm’s “human organization”:
1. The causal variables are independent variables that can be directly or purposely altered or changed by
the organization and its management and that in turn determine the course of developments within an
organization. These causal variables include only those that are controllable by the organization and its
management. General business conditions, for example, although an independent variable, are not
viewed as causal variables include the structure of the organization and management’s policies,
decisions, business and leadership strategies, skills and behavior.
2. The intervening variables reflect the internal state, health and performance capabilities of the
organization; that is, the loyalties, attitudes, motivations, performance goals and perceptions of all
members and their collective capability for effective action.
3. The end-result variables are the dependent variables that reflect the results achieved by that
organization, such as its productivity, costs, scrap loss, growth, share of the market and earnings.142
The Likert-Bowers model states that certain causal variables induce certain levels of
intervening variables, which yield certain levels of end-result variables. The causal variables are
managerial behavior, organizational structure and subordinate peer behavior. The intervening
variables are such organizational processes as perception, communication, motivation, decision-
making, control and coordination. The end-result variables are health, satisfaction, productivity
and financial performance.
Measures of Human Assets
Monetary measures of human assets are historical cost, acquisition cost, replacement cost,
opportunity cost, the compensation model and adjusted discounted future wages. The principal
non-monetary measure is the “survey of organizations” model.
1. The historical-cost (acquisition-cost) method
The historical-cost, or acquisition-cost, method consists of capitalizing all of the costs
associated with recruiting, selecting, hiring, training, placing and developing an employee (a
human asset) and then amortizing these costs over the expected useful life of the asset, recognizing
losses in case of liquidation of the asset or increasing the value of the asset to offset any additional
cost that is expected to increase the benefit potential of the asset. Similar to the conventional
accounting treatments for other assets, this treatment is practical and objective in the sense that the
data are verifiable.143
However, the use of these measurements is limited in several ways. First, the economic
value of a human asset does not necessarily correspond to its historical cost. Second, any
appreciation or amortization may be subjective and have no relationship to any increase or decrease
in the productivity of the human assets. Third, because the costs associated with recruiting,
selecting, hiring, training, placing and developing an employee may differ from one individual to
another within a firm, the historical-cost method does not result in comparable human-resource
2. The replacement-cost method
The replacement-cost method consists of estimating the costs of replacing a firm’s existing
human resources. Such costs include all of the costs of recruiting, selecting, hiring, training,
placing and developing new employees until they reach the level of competence of existing
employees. The principal advantage of the replacement-cost method is that it is a good surrogate
for the economic value of the asset in the sense that market considerations are essential in reaching
a final figure. Such a final figure is also generally intended to be conceptually equivalent to a
concept of an individual’s economic value.144
However, the use of the replacement-cost method is also limited in several ways. First, the
value of a particular employee may be perceived by the firm to be greater than the relevant
replacement cost. Second, there may be no equivalent replacement for a given human asset.145
Third, as noted by Likert and Bowers, managers may have difficulty estimating the cost of
completely replacing their human organization and different managers may arrive at quite different
3. The opportunity-cost method
Hekimian and Jones propose the opportunity-cost method to overcome the limitations of
the replacement-cost method.147 They suggest that human-resource values be established through
a competitive bidding process within the firm, based on the concept of “opportunity” cost. More
specifically, investment-center managers are to bid for the scarce employees they need to recruit.
These “scarce” employees include only those employees within the firm who are the subject of a
recruitment request by an investment center manager. In other words, employees who are not
considered “scarce” are not included in the human-asset base of the organization.
Obviously, the opportunity-cost method has several limitations. First, the inclusion of only
“scarce” employees in the asset base may be interpreted as “discriminatory” by other employees.
Second, less profitable divisions may be penalized by their inability to outbid more profitable
divisions to acquire better employees. Third, the method may be perceived as artificial and even
4. The compensation model
Given the uncertainty and the difficulty associated with determining the value of human
capital, Lev and Schwartz suggest the use of an individual employee’s future compensation as a
surrogate of his or her value. Accordingly, the “value of human capital embodied in a person of
age T is the present value of his or her remaining future earnings from employment.”149 This
valuation model is expressed:
V = the human-capital value of an individual years
I (t) = the individual’s annual earnings up to retirement
= a discount rate specific to the individual
T = retirement age
Because V is an ex-post value, given that I(t) is obtained only after retirement and V
ignores the possibility of death before retirement age, Lev and Schwartz have refined the valuation
model as follows:
I*1 = future annual earnings
E(V*T) = the expected value of an individual’s human capital
P(t) = the probability of an individual dying at age t.
The principal limitation of the compensation model is the subjectivity associated with the
determination of the level of future salary, the length of expected employment within the firm and
the discount rate.
5. The adjusted discounted-future-wages method
Hermanson proposes using an adjusted compensation value to approximate the value of an
individual to a firm.150 Discounted future wages are adjusted by an efficiency factor intended to
measure the relative effectiveness of the human capital of a given firm. This efficiency factor,
which is a ratio of the return on investment of the given firm to all other firms in the economy for
a given period, is computed
RFi = the rate of accounting income on owned assets for the firm for the year i
REi = the rate of accounting income on owned assets for all firms in the economy for the year i
i = years (0 to 4).
The justification of this ratio rests on the thesis that differences in profitability are primarily
due to differences in human-asset performance. Thus, it is necessary to adjust the compensation
value by the efficiency factor.
6. Non-monetary measures
Many non-monetary measures of human assets may be used, such as a simple inventory of
the skills and capabilities of individuals, the assignment of ratings or rankings to individual
performances and the measurement of attitudes. The most frequently used non-monetary measure
of human value is derived from the Likert-Bowers model of the variables that determine “the
effectiveness of a firm’s human organization.” A questionnaire based on the theoretical model
called “survey of organizations” is designed to measure the “organizational climate.”151 The results
of such a questionnaire may serve as a non-monetary measure of human assets in terms of
employee perceptions of the working atmosphere in the firm.
This chapter examined the nature and consequences of the concepts of fairness as fairness
in presentation, fairness in distribution and fairness in disclosure to motivate the urgent calls for
expanded disclosures and accounting innovations. The innovations that may be viewed as future
trends in accounting include:
1. Value-added reporting;
2. Employee reporting;
3. Social accounting and reporting;
4. Budgetary information disclosures;
5. Cash flow accounting and reporting; and
6. Human-resource accounting.
1. Scott, D. R., “The Basis of Accounting Principles,” The Accounting Review, December, 1941,
p. 341.
2. Arthur Anderson & Co., The Postulate of Accounting, New York, 1960, p. 31.
3. Patillo, James W., The Foundation of Financial Accounting, Baton Rouge, La.: Louisiana State
University Press, 1965, pp. 60-61.
4. Ibid.
5. Devine, C. T., “Research Methodology and Accounting Theory Formation,” The Accounting
Review, July, 1960, pp. 387-99.
6. Devine, Carl T., “The Rules of Conservatism Reexamined,” Journal of Accounting Research,
Autumn, 1963, p. 129-30.
7. Chatfield, Michael, A History of Accounting Thought, Hinsdale, NJ: The Dryden Press, 1974,
p. 275.
8. Skinner, R.M., Accounting Principles: A Canadian Viewpoint, Toronto: The Canadian
Institute of Chartered Accountants, 1972, p. 33.
9. Lee, T.A., Company Financial Reporting: Issues and Analysis, London: Nelson, 1976, p. 61.
10. Flegm, E.H., Accounting: How to Meet the Challenges of Relevance and Regulation, New
York: John Wiley & Sons, 1984, p. 47.
11. Leach, R., “The Birth of British Accounting Standards,” in R. Leach & E. Stamp, eds, British
Accounting Standards: The First Ten Years. Cambridge: Woodhead-Faulkener, 1981, p. 7.
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Institute of Chartered Accountants in England and Wales Research Committee Occasional
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13. Carpenter, David, “Some Approaches to a “True and Fair View: A Review,” Irish Accounting
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14. Rutherford, B.A., “True and Fair View Doctrine: A Search for Explication,” Journal of
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16. Lee, T.A., Modern Financial Accounting, 3rd edn, Walton-on-Thames, Surrey: Nelson, 1981,
p. 270.
17. Lee, T.A., Company Auditing, 2nd edn, Wokingham, Berkshire: Van Nostrand Reinhold for the
Institute of Chartered Accountants of Scotland, 1981, p. 50.
18. European Community Commission, Fourth Directive, ECC: Brussels, 1978.
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22. Houghton, K. A., “True and Fair View: An Empirical Study of Connotative Meaning,”
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23. Nobes, C. W. & Parker, R.H., “True and Fair: UK Auditors’ Views,” op. cit., pp. 349-62.
24. Ibid.
25. Williams, Paul F., “The Legitimate Concern with Fairness,” Accounting, Organizations, and
Society, Vol. 12, 1987, pp. 169-92.
26. Ibid., p. 185.
27. Pallot, June, “The Legitimate Concern with Fairness: A Comment,” Accounting,
Organizations, and Society, Vol. 16, 1991, pp. 201-8.
28. Pallot, June, “The Nature of Public Assets: A Response to Rawls,” Accounting Horizons, June,
1990, pp. 79-85.
29. Chen, R., “Social and Financial Stewardship,” The Accounting Review, July, 1975, pp. 533-4.
30. Pallot, “The Legitimate Concern with Fairness,” op. cit., p. 206.
31. Scott, D.R., “The Basic Accounting Principles,” The Accounting Review, December, 1941, p.
32. Littleton, A.C., Structure of Accounting Theory, American Accounting Association, Michigan,
1953, p. 32.
33. Belkaoui, Ahmed, Socio-Economic Accounting, Westport, Ct.: Greenwood Press, 1973.
34. Schrueder, H. & Ramanathan, K. V., “Accounting and Corporative Accountability: An
Extended Comment,” Accounting, Organizations, and Society, Fall, 1984, p. 407.
35. Cooper, D.J. & Sherer, M.J., “The Value of Corporate Accounting Reports: Arguments for a
Political Economy of Accounting,” Accounting Organizations, and Society, Fall, 1984, pp.
36. Jensen, N.C. & Meckling, W.H., “Theory of the Firm: Managerial and Ownership Structure,”
Journal of Financial Economics, October, 1976, pp. 305-62.
37. Watts, A. L. & Zimmerman, J.L., “Towards a Positive Theory of the Determination of
Accounting Standards,” The Accounting Review, 1978, pp. 112-34.
38. Rawls, J.A., A Theory of Justice, Cambridge, Ma.: Harvard University Press, 1971.
39. Ibid., p. 67.
40. Ibid., pp. 62-3.
41. Ibid., p. 250.
42. Ibid., p. 83.
43. Ibid., p. 64.
44. Barry, Brian, The Liberal Theory of Justice, Oxford: Oxford University Press, 1973.
45. Phillips, Derek L., Toward a Just Social Order, Princeton, NJ: Princeton University Press,
1986, p. 354.
46. Gerwith, A., Reason and Morality, Chicago: University of Chicago Press, 1978, p. 313.
47. Williams, Paul F., “The Legitimate Concern with Fairness,” op. cit., p. 184.
48. Nozick, R., Anarchy, State and Utopia, New York: Basic Books, 1974.
49. Ibid., p. 156.
50. Ibid., p. 159-60.
51. Ibid., p. 160.
52. Ibid., pp. 149-50.
53. Phillips, Derek L., Toward a Just Social Order, op. cit., p. 348.
54. Williams, Paul F., The Legitimate Concern with Fairness, op. cit., p. 184.
55. Ibid., p. 181.
56. Gerwith, A., Reason and Morality, op. cit.
57. Ibid., p. 48.
58. Ibid., p. 153.
59. Ibid., pp. 313-14.
60. Ibid., pp. 137-48.
61. Ibid., p. 150.
62. Bedford, N.M., Extensions in Accounting Disclosure, Englewood Cliffs, NJ: Prentice-Hall,
63. Ibid., p. 19.
64. Ibid., p. 40.
65. Ibid., p. 23.
66. Ibid., p. 144.
67. Lev, Baruch, “Toward a Theory of Equitable and Efficient Accounting Policy,” The
Accounting Review, January, 1988, pp. 1-22.
68. Ibid., p. 13.
69. Friedman, D., “Many, Few, One: Social Harmony and the Shrunken Choice Set,” American
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70. Gaa, James C., “User Primacy in Corporate Financial Reporting: A Social Contract Approach,”
The Accounting Review, July, 1986, p. 435.
71. American Accounting Association, Report of the Committee on the Social Consequences of
Accounting Information, Sarasota, Fl.: AAA, 1977, p. 248.
72. Australian Accounting Research Founds, Objectives of General Purpose Financial Reports,
Melbourne, 1990, paragraph 7.
73. Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 1:
Objectives of Financial Reporting of Business Enterprises, Stamford, Ct.: FASB, 1978, vii.
74. Gaa, James C., “User Primacy in Corporate Financial Reporting,” op. cit, p. 435.
75. AICPA, Special Committee on Financial Reporting, Improving Business Reporting- A
Customer Focus, New York: AICPA, 1994, p. 9.
76. Financial Accounting Standards Board Concepts Statement No. 5, Recognition and
Measurement in Financial Statements of Business Enterprises, Stamford, Ct.: FASB,
paragraph 9.
77. Ibid., paragraph 9.
78. Johnson, L. Todd, “Research on Disclosure,” Accounting Horizons, March, 1992, p. 102.
79. Barth, Mary E. & Murphy, C. M., “Required Financial Statement Disclosures: Purposes,
Subject, Number and Trends,” Accounting Horizons, December, 1994, p. 4.
80. Ibid., p. 1.
81. Riahi-Belkaoui, Ahmed, “Earnings-Returns Relation Versus Net Value Added-Returns
Relation: The Case for non-linear Specification,” Advances in Quantitative Analysis of
Finance and Accounting, in press.
82. Riahi-Belkaoui, Ahmed & Fekrat, Ali, “The Magic in Value Added: Merits of Derived
Accounting Indicator Numbers,” Managerial Finance 20, no. 9, 1994, pp. 16-26.
83. Riahi-Belkaoui, Ahmed & Picur, Ronald D., “Explaining Market Relations Earnings Versus
Value Added Data,” Managerial Finance, Vol. 20, No. 9, 1994, pp. 44-55.
84. Riahi-Belkaoui, Ahmed, “The Information Content of Value-Added, Earnings and Cash
Flows: US Evidence,” The International Journal of Accounting, Vol. 28, No. 1, 1993, pp. 140-
85. Accounting Standards Steering Committee, The Corporate Report, London: Accounting
Standards Steering Committee, 1975, p. 200.
86. Ibid., pp. 88-91.
87. Stamp, Edward, Corporate Reporting: Its Future Evolution, Toronto: Canadian Institute of
Chartered Accountants, 1980.
88. Taylor, Dennis, Webb, Laurie & McGinely, Les, “Annual Reports to Employees: The
Challenge to the Corporate Accountant,” Chartered Accountant in Australia, May, 1979, p.
89. Lewis, N.R., Parker, L.D. & Sutcliffe, P., “Financial Reporting to Employees: The Pattern of
Development 1919 to 1979,” Accounting, Organizations, and Society, June 1984, p. 278.
90. Ibid., p. 281.
91. Ibid.
92. Taylor, Webb & McGinley, “Annual Reports to Employees: The Challenge to the Corporate
Accountant,” op. cit. p. 55.
93. Ibid., p. 36.
94. Foley, B. I. & Maunders, K.T., Accounting Information Disclosure and Collective Bargaining,
London: Macmillan, 1977, pp. 27-34.
95. See Belkaoui, Ahmed. A Socio-Economic Accounting, Westport, Ct.: Quorum Books, 1984.
96. Mathews, M. R., “A Suggested Classification for Social Accounting Research,” Journal of
Accounting and Public Policy, Vol. 3, 1984, pp. 199-222.
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98. Gray, R., Owen, D. & Maunders, K., “Corporate Social Reporting: Emerging Trends in
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99. Ibid., p. 5.
100. Ibid., p. 13.
101. See Henriques, D. B., “Tracking Environmental Risk,” New York Times, April 28, 1991, p.
102. Rawls, I.A., A Theory of Justice, Cambridge, Mass.: Harvard University Press, 1971.
103. Nozick, R., Anarchy, State and Utopia, New York: Basic Books, 1974.
104. Gerwitch, A., Reason and Morality, Chicago: University of Chicago Press, 1978.
105. Epstein, Marc, “What Shareholders Really Want,” New York Times, April 28, 1991, p. 11.
106. Ibid.
107. “Pollution Price Tag: 71 Billion Dollars,” US News and World Report, August 17, 1970, p.
108. American Accounting Association, “Report of the Committee on External Reporting,” The
Accounting Review, Vol. 44, supplement, 1969, p. 41.
109. American Accounting Association, “Report of the Committee on Environmental Effects of
Organization Behavior,” The Accounting Review, Vol. 44, supplement, 1969, p. 88.
110. Rockness, J. & Williams, P.F., “A Descriptive Study of Social Responsibility Mutual Funds,”
Accounting, Organizations and Society, 1988, pp. 397-411.
111. Bruyn, S. T., The Field of Social Investment, Cambridge: Cambridge University Press, 1987,
p. 12.
112. Objectives of Financial Statements, Report of the Study Group on the Objectives of Financial
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113. The City Code on Takeovers and Mergers, Great Britain, revised February, 1972.
114. Ibid., Rule 16.
115. Ijiri, Yuji, “Improving Reliability of Publicly Reported Corporate Financial Forecasts,” in
Public Reporting of Corporate Financial Forecasts, ed. P. Prakash & A. Rappaport, Chicago:
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116. Sycamore, R. J., “Public Disclosure of Earnings Forecasts by Companies,” The Chartered
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118. McDonald, Daniel L., “An Empirical Examination of the Reliability of Published Predictions
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119. Ijiri, Yuji, “Improving Reliability of Publicly Reported Corporate Financial Forecasts,” op.
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120. Mautz, Robert K., “A View from the Public Accounting Profession,” in Public Reporting of
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121. Ibid., p. 110.
122. Gross, M., Financial and Accounting Guide for Non-profit Organizations, New York: The
Ronald Press, 1972.
123. Hicks, B. E., The Cash-Flow Basis of Accounting, Working Paper No. 13, Sudbury, Ontario:
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124. Hawkins, D. & Campbell, W., Equity Valuation: Models, Analysis and Implications, New
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125. Thomas, A. L., The Allocation Problem in Financial Accounting Theory, Accounting
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127. Staubus, g. I., A Theory of Accounting to Investors, Berkeley, Calif.: University of California
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128. Revsine, L., Replacement-Cost Accounting, Englewood Cliffs, N.I.: Prentice-Hall, 1973.
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130. Lawson, G. H., “Cash-Flow Accounting I & II,” The Accountant, 28 October-4 November,
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131. Lee, T.A., “A Case for Cash-Flow Accounting,” Journal of Business Finance, Issue 3, 1972,
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132. Ashton, R. H., “Cash-Flow Accounting: A Review and a Critique,” Journal of Business
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133. Lee, T.A., “Cash-Flow Accounting and Reporting,” in Developments in Financial Reporting,
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136. “Report of the Committee on Human-Resource Accounting,” Committee Report, The
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137. Woodruff, R.L., “Human-Resource Accounting,” The Canadian Chartered Accountant
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138. Elias, M.S., “The Effects of Human-Asset Statements on the Investment Decision: An
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139. Woodruff, R. L., “Human-Resource Accounting,” op. cit., p. 2.
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142. Ibid., p. 17.
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146. Likert, R. & Bowers, D.G., “Organizational Theory and Human-Resource Accounting,”
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148. Elovitz, D., “From the Thoughtful Businessman,” Harvard Business Review, May/June, 1967,
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149. Lev, B. & Schwartz, A., “On the Use of the Economic Concept of Human Capital in Financial
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150. Hermanson, R.H., “Accounting for Human Assets,” Occasional Paper No. 14, East Lansing,
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151. Taylor, J.C. & Bowers, D.G., The Survey of Organizations, Ann Arbor, Mi.: Institute for
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Fairness in Accounting
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Value Added Reporting
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Riahi-Belkaoui, Ahmed, Handbook of Management Control Systems, Westport, Ct.: Greenwood
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Human Resource Accounting
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Employee Reporting
Bougen, P. & Odgen, S., “Power in Organizations: Some Implications for the Use of Accounting
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1975, pp. 359-60.
Gospel, H., “The Disclosure of Information to Trade Unions: Approaches and Problems,”
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Jack, H.H., “The Accountant’s Role in Labor Relations,” Management Accounting, October, 1973,
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Jackson-Cox, J., Thirkell, J.E. & McQueeney, J., “The Disclosure of Company Information to
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Social Accounting
Belkaoui, A., Socio-Economic Accounting, Westport, Ct.: Quorum Books, 1984.
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