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Fairness in Business

September 2018

Authors:

Ahmed Riahi-Belkaoui

University of Illinois at Chicago

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FAIRNESS IN BUSINESS

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 IN ACCOUNTING

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

structure.4

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

doing.”7

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

presentation.8

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

company.17

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

message.24

FAIRNESS IN DISTRIBUTION

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

attributes:

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

FAIRNESS AS A MORAL CONCEPT OF JUSTICE

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

alternatives:

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 CONTRIBUTION

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 CONTRIBUTION

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

follows:

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

philosophy:

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

FAIRNESS IN DISCLOSURE

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

follows:

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

area;

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

fairness.

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

THE JENKINS COMMITTEE FINDINGS

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

information:

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

follows:

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

business.

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

years.

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

conclusions:

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

disclosures.

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)

Where:

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

follows:

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

management.92

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

employees:

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

reporting.

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

principles.

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

expenditures:

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

managers.

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

follows:

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

statement:

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

answer.139

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

values.

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

estimates.146

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

immoral.148

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:

where

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:

Where:

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

Where:

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.

CONCLUSIONS

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.

NOTES

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.

12. Chastney, J.G., True and Fair View: History, Meaning and the Impact of the Fourth Directive,

Institute of Chartered Accountants in England and Wales Research Committee Occasional

Paper No. 6, London: Institute of Chartered Accountants in England and Wales, 1975.

13. Carpenter, David, “Some Approaches to a “True and Fair View: A Review,” Irish Accounting

Review, Spring, 1944, pp. 49-64.

14. Rutherford, B.A., “True and Fair View Doctrine: A Search for Explication,” Journal of

Business Finance Accounting, Winter, 1985, pp. 483-94.

15. Walton, P.J., “True and Fair View in British Accounting,” European Accounting Review, Vol.

2., No. 1, 1993, p. 49.

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.

19. Alexander, David. “A European True and Fair View?” European Accounting Review, Vol. 2,

No. 1, 1993, pp. 59-80.

20. Boys, P.G & Rutherford, B.A., “The Most Universal Quality: Some Nineteenth Century Audit

Reports,” Accounting History, September, 1982, p. 13.

21. Nobes, C.W. & Parker, R.H., “True and Fair: A Survey of UK Financial Directors,” Journal

of Business Finance and Accounting, April, 1981, pp. 359-76.

22. Houghton, K. A., “True and Fair View: An Empirical Study of Connotative Meaning,”

Accounting, Organizations, and Society, Vol. 12, NO. 2, 1987, pp. 143-52.

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.

248.

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.

207-32.

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,

1973.

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

Economic Review, March, 1980, p. 231.

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

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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.

33.

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.

97. Ramanathan, K.V., “Toward a Theory of Corporate Social Accounting,” The Accounting

Review, July, 1976, p. 518.

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.

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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.

41.

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,

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112. Objectives of Financial Statements, Report of the Study Group on the Objectives of Financial

Statements, New York: AICPA, 1973, p. 13.

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:

Commerce Clearing House, 1974, p. 169.

116. Sycamore, R. J., “Public Disclosure of Earnings Forecasts by Companies,” The Chartered

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117. Daily, R. A., “The Feasibility of Reporting forecasted Information,” The Accounting Review,

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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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126. Hawkins, D. & Campbell, W., Equity Valuation Models, Analysis and Implications, op. cit.,

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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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134. Govindarajan, W., “The Objectives of Financial Statements: An Empirical Study of the Use

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135. Jones, S., “An Evaluation of Users Ratings of Cash versus Accrual Based Financial Reports

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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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141. Likert, R. & Bowers, D.G., “Improving the Accuracy of P/L Reports by Estimating the

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142. Ibid., p. 17.

143. Glautier, N.W.E. & Underdown, B., “Problems and Prospects of Accounting for Human

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144. Flamholtz, E., Human-Resource Accounting, Los Angeles: Dickenson Publishing, 1974, p.

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145. Hekimian, J.S. & Jones, J.G., “Put People on Your Balance Sheet,” Harvard Business Review,

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146. Likert, R. & Bowers, D.G., “Organizational Theory and Human-Resource Accounting,”

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147. Hekimian, J.S. & Jones, J.G., “Put People on Your Balance Sheet,” op. cit., pp. 108-9.

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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Journal of Business Finance and Accounting, Spring, 1974, pp. 109-27.

___, “How Much Should We Tell Trade Unions?” Accounting Age, 22 February, 1974, pp. 340-6.

Miller, J., “Financial Information for Employees,” Accounting, 29 May, 1975, p. 690.

Ogden, S. & Bougen, P., “A Radical Perspective on the Disclosure of Information to Trade

Unions,” Accounting, Organizations, and Society, Vol. 10, NO. 2, 1985, pp. 211-24.

Owen, D.L. & Lloyd, A.J., “The Use of Financial Information by Trade Union Negotiators in Plant

Level Collective Bargaining,” Accounting, Organizations, and Society, Vol. 10, 1985, pp. 329-

550.

Plamer, J.R., The Use of Accounting Information in Labor Negotiations, New York: National

Association of Accountants, 1977.

Parker, L.D., “Financial Reporting to Corporate Employees: A Growing Practice in Australia,”

Chartered Accountant in Australia, March, 1977, pp. 5-9.

Pfeffer, J., “Power & Resource Allocation in Organizations,” in New Directions in Organizational

Behavior, B. Staw & G. Salancik, eds, Chicago: St Clair Press, 1977, pp. 12-52.

Social Accounting

Belkaoui, A., Socio-Economic Accounting, Westport, Ct.: Quorum Books, 1984.

Belkaoui, A. & Karpik, P., “Determinants of the Corporate Decision to Disclose Social

Information,” Accounting, Auditing and Accountability Journal, Vol. 2, 1989, pp. 36-41.

Boal, K.B. & Peery, N., “The Cognitive Structure of Corporate Social Responsibility,” Journal of

Management, Vol 11, No. 5, 1985, pp. 71-82.

Bruyn, S.T., The Field of Social Investment, Cambridge: Cambridge University Press, 1987.

Carroll, A.B., “A Three-Dimensional Conceptual Model of Corporate Social Performance,”

Academy of Management Review, Vol. 4, 1979, pp. 479-505.

Davis, K., “The Case For and Against Business Assumptions of Social Responsibilities,” Academy

of Management Journal, Vol. 16, 1975, pp. 512-22.

Post, J.E., Corporate Behavior and Social Change, Reston, Va.: Reston Publishing, 1978.

Preston, C.E. & Post, I.E., Private Management and Public Policy: The Principle of Public

Responsibility, Englewood Cliffs, N.J.: Prentice-Hall, 1975.

Riahi-Belkaoui, Ahmed, Corporate Social Awareness and Empirical Outcomes, Westport, Ct.:

Greenwood Publishing, 1999.

Public Reporting of Corporate Financial Forecasts

Abdel-Khalik, A.R. & Thompson, R., “Research on Earnings Forecasts: The State of the Art,”

Accounting Journal, Winter, 1977-8, pp. 180-217.

Abdelsamad, M.H. & Gilbreath, G.H., “Publication of Earnings Forecasts: A Report of Financial

Executives Opinions,” Managerial Planning, January-February, 1978, pp. 26-50.

American Institute of Certified Public Accountants, Presentation and Disclosure of Financial

Forecasts, New York: AICPA, 1975.

Asebrook, R. & Carmichael, D., “Reporting on Forecasts: A Survey of Attitudes,” Journal of

Accounting, August, 1975, pp. 38-48.

Backer, A., “Reporting Profit Expectations,” Management Accounting, February, 1972, pp. 55-7.

Barefield, R.M. & Comiskey, E., “The Accuracy of Analysts’ Forecasts of Earnings Per Share,”

Journal of Business Research, July, 1975, pp. 241-52.

Barnes, A., Sadan, S. & Schiff, M., “Afraid of Publishing Forecasts,” Financial Executive,

November, 1977, pp. 52-8.

Cash Flow Accounting

American Accounting Association, Committee on External Reporting, “An Evaluation of External

Reporting Practices,” a report of the 1966-1968 Committee on External Reporting, The

Accounting Review, supplement, 1969, pp. 79-125.

Ashton, R.H., “Cash-Flow Accounting: A Review and a Critique,” Journal of Business Finance

and Accounting, Winter, 1976, pp. 63-81.

Barlev, B. & Levy, H., “On the Variability of Accounting Income Numbers,” Journal of

Accounting Research, Autumn, 1979, pp. 505-15.

Belkaoui, A., “Accrual Accounting and Cash Accounting: Relative Merits of Derived Accounting

Indicator Numbers,” Accounting and Business Research, Summer, 1985, pp. 299-512.

Climo, T., “Cash-Flow Statements for Investors,” Journal of Business Finance and Accounting,

Autumn, 1976, pp. 5-16.

ResearchGate has not been able to resolve any citations for this publication.

Some Approaches to a ‘True and Fair View’: A Review

Article

Full-text available

Dec 1994

David Carpenter

After an initial introduction indicating the apparent centrality of the true and fair view concept to UK accounting and auditing practice this paper explores, initially, some mainstream approaches to the meaning of the statutory phrase ‘true and fair view’. This is undertaken by analysis under the following headings: • The Statute •Company Law Committees • Case Law • Some Views from Academia • The Institutional View (Auditing Standards and Guidelines) • The View ofSome Practitioners • The Industrialists’ View. This analysis reveals some points of similarity between the points of view expressed by some mainstream commentators. It also reveals some conflicts. The similarities and conflicts are reviewed in Conclusions.

REPORTING CASH FLOWS AND NET REALIZABLE VALUES*

Article

Full-text available

Feb 1981

T. A. Lee

Private Management and Public Policy: The Principle of Public Responsibility

Book

Jan 2012

Value-added taxation: The roots run deep into colonial and early America

Article

Sep 1982

Robert P. Crum

This article indicates that even the most recent forms of taxation find their roots firmly planted in Colonial America. The author shows that the concepts: ad valorem, transaction basis, indirect levy, multi-step collection, and taxation of net product were present during this early period. Through the use of these con-cepts the historical justifications for the income and sales tax system are provided and indicate a trend toward combining these concepts into one tax. The value-added tax is such a tax. The author concludes that adoption of this tax would complete a trend in American taxation which "took root" in colonial times.

Human Resource Accounting

Book

Jan 1999

Eric Flamholtz

Management science and the development of human resource accounting

Article

Sep 1978

A common misconception about human resource accounting (HRA) is that it focuses narrowly upon financial accounting, that its purpose is to reflect the asset value of people on financial statements. The major purpose of HRA is to provide concepts and measurements to facilitate the effective and efficient management of human resources. It, therefore, represents a management accounting development. Management science has played an important role in facilitating the development of human resource accounting as a managerial tool. The theories underlying HRA are derived from and consistent with the concepts and philosophy of management science developed after WW II. The rationality and multidisciplinary problem solving approaches which characterize management science were applied to HRA and together with other economic and social factors of the 1960's produced human resource accounting.*

Accounting Information Disclosure and Collective Bargaining

Book