moral-point-of-view (what he calls âsubstantive rationality,â Kalberg, 1980). ..... non-financial measures-- for example the balanced scorecard (Kaplan and .... Investors Responsibility Research Center (IRRC), an independent research firm in ...
"ESCAPING THE MATERIALISTIC-INDIVIDUALISTIC IRON CAGE: A WEBERIAN AGENDA FOR ALTERNATIVE, RADICAL ACCOUNTING"
Nancy Christie Seattle Pacific University Bruno Dyck University of Manitoba Janet Morrill University of Manitoba Ross Stewart Seattle Pacific University
Accepted for Presentation at the Fourth Asia Pacific Interdisciplinary Research in Accounting Conference 4 to 6 July 2004 Singapore
"ESCAPING THE MATERIALISTIC-INDIVIDUALISTIC IRON CAGE: A WEBERIAN AGENDA FOR ALTERNATIVE, RADICAL ACCOUNTING"
ABSRACT This paper re-visits Weber’s landmark study The Protestant Ethic and the Spirit of Capitalism (1958, original 1904) as it celebrates its 100 year anniversary and reconsiders its implications for contemporary accounting theory and practice. Weber, who is still considered to be the leading management moral philosopher (Clegg, 1996), argues that the conventional management paradigm places primary emphasis on individualism and materialism. We use Dyck’s (forthcoming) four Weberian moral points-of-view framework to critique the “iron cage” of conventional materialistic-individualistic accounting theory and practice. Furthermore, we use the framework to point toward an alternative accounting theory and practice that de-emphasizes individualism and materialism. We suggest that the growing interest in non-financial measures of performance and alternative accountings invoking an enlarged understanding of accountability (e.g. triple bottom line accounting) provide examples that may achieve these characteristics.
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"ESCAPING THE MATERIALISTIC-INDIVIDUALISTIC IRON CAGE: A WEBERIAN AGENDA FOR ALTERNATIVE, RADICAL ACCOUNTING" It is timely to re-visit Weber’s landmark study The Protestant Ethic and the Spirit of Capitalism (1958, original 1904) as it celebrates its 100 year anniversary, and to reconsider its implications for contemporary accounting theory and practice. Weber’s work has been used to explain the rise of conventional accounting. For example, Weber has been used in the accounting literature to historically articulate accounting’s role in the rise of capitalism by situating accounting as part of the rationalizing form of calculation necessary to organize and give meaning to economic action. He stated “…a rationalistic enterprise is one with capital accounting, that is, an establishment which determines its income-yielding power by calculation according to the methods of modern bookkeeping and striking of a balance” (1961, 207). Miller and Napier (1993, 635) note that Weber identified double-entry bookkeeping as the most highly developed form of profitability accounting. They suggest that the brief passages in Weber’s writings on double-entry bookkeeping have had “far reaching consequences for the writing of accounting history.” Specifically, Miller and Napier refer to Weber’s colleague Werner Sombart and what has come to be known as the Sombart Thesis which states that there was a causal link between double-entry bookkeeping and the rise of capitalism. They then review Yamey’s work of rebutting the thesis and conclude that accounting is reduced to being “equivalent to double-entry bookkeeping” and “decoupled from calculation” (637-638). Miller and Napier suggest that Weber “helped indirectly to delimit accounting history, by focusing his concern with calculation almost exclusively on double-entry bookkeeping and by according it fundamental significance for the operation of capitalist enterprise’ (635). Of particular relevance to this paper, Weber has also been used more generally to provide a framework for the socio-historical analysis of the relations between accounting and organizations and society (Colignon and Covaleski, 1991). In many ways our study represents an elaboration and extension of Colignon and Covaleski. Especially relevant for our argument is their discussion of how Weber’s notions of “formal rationality” and “substantive rationality” serve to problematize accounting. We also suggest that “formal rationality” in accounting does not mean “accounting calculation may be considered neutral in its execution” (155). We further illustrate our argument by examining how assumptions underlying current generally accepted accounting principles reflect a particular, predominant “substantive rationality”, that of the conventional moral point of view, and how alternative assumptions could be adopted that would reflect a different substantive rationality. Weber describes in the Protestant Ethic how the moral-point-of-view that underlies contemporary management theory and practices is based on theological beliefs which have longsince been secularized. We argue that this perspective and Weber’s framework for analysis provides insights into accounting practices and rehabilitates accounting from a narrow focus around viewing accounting as a neutral set of techniques. Weber’s argument suggests that in order to properly understand accounting theory and practice, we must understand its underlying moral-point-of-view (what he calls “substantive rationality,” Kalberg, 1980). Even though scholars affirm Weber’s general argument, they seldom put it into practice. “As Weber pointed out, the value-laden nature of assumptions can never be eliminated. Yet if a theory is to be used or tested, the theorist’s implicit assumptions which form the boundaries of the theory must be
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understood. Unfortunately, theorists rarely state their assumptions” (Bacharach, 1989, p. 498; emphasis added here; see also Calas and Smircich, 1999). Weber would surely be critical of the accounting profession’s general failure to articulate the moral-point-of-view that underpins its theorizing, because this results in fruitless debates among scholars (Bacharach, 1989), hides organizational stakeholders’ interests (Calas and Smircich, 1999; Perrow, 1985), and stifles opportunities for practitioners and scholars to give voice to non-utilitarian “moral impulses” (ten Bos and Willmott, 2001). In this light, Weber’s greatest disappointment might be that his research has not spurred scholars to develop unconventional moral-points-of-view to permit escaping what he called the “iron cage” that characterizes the status quo. He was especially interested in developing moral-points-of-view of management and accounting that de-emphasize the materialism and individualism which characterize the conventional paradigm. The goal of this paper is to re-consider Weber’s (1958) analysis and its implications for accounting theory and practice, and to introduce alternative understandings of accounting. Implications for how an alternative moral-point-of-view can serve to guide future development in accounting theory and practice will be discussed. This paper is relevant to several literatures. First, it makes a contribution to stakeholder theory and other contemporary research by questioning the “entity” accountants’ measure. Do current accounting practices provide decision-making inputs that encourage the value maximization of the individual firm, or should accounting theory and practice be developed which address the needs of other stakeholders as well? Stakeholder theory explicitly attends to the normative dimension of theory-building in order to critique the “morally untenable” status quo (e.g., Donaldson and Preston, 1995, p. 88). Second, our paper makes a contribution to the growing interest in non-financial measures of firm performance. The Weberian conceptual framework permits differentiating between financial performance indicators that emphasize serving the materialistic interests of the firm, versus non-financial indicators that emphasize both alternative (occasionally non-materialistic) measures of performance, and in some cases, serving the interests of the larger community. This is currently seen in environmental/sustainability accounting around techniques such as triple bottom line reporting. Our paper is divided into two parts. In the first part we describe the Weberian conceptual framework that will permit us to differentiate Conventional accounting from non-conventional, radical accounting. Secondly we discuss the implications of our Weberian moral-point-of-view conceptual framework, including an examination of the assumptions that form the foundation of current generally accepted accounting principles and other contemporary accounting issues. I. ACCOUNTING AT THE AXIS OF TWO RATIONALITIES Colignon and Covaleski (1991) present an analysis of how accounting can be viewed within a Weberian framework. Weber saw accounting as a central concept used to explain the rise of capitalism in the West. Colignon and Covaleski quote Weber’s definition of the modern corporation as “the profit-making enterprise which is rationally oriented to capital accounting with the goal of increasing the monetary resources at the command of the enterprise” (144). Colignon and Covaleski use Weber’s notions of “formal rationality” and “substantive rationality” and how they serve to problematize accounting.
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In simplest terms, formal rationality describes the “means” used to achieve the “ends” that are consistent with a specific substantive rationality. Substantive rationality, on the other hand, is an evaluative concept referring to the extent to which an economic system provides for the needs, ends or values of a specific social group. Therefore, there may be multiple substantive rationalities as they may differ from one social group to the next, and even within social groups to the extent that group members may have different values. Colignon and Covaleski argue that accounting theory and practice must face the fact that formal rationality—as exemplified in rational accounting practices—may be at odds with various substantive rationalities (i.e. the values held by different groups). For example, rational accounting practices may be consistent with the values and interests of the elite but undermine the interests and beliefs of the working class. Colignon and Covaleski argue that we need to take these problems seriously. We concur with these arguments whole-heartedly, and seek to build on them in our paper. Our study, however, also provides an alternative explanation of one key aspect of the framework Colignon and Covaleski present, namely the contention that “formal rationality is value neutral … with universal application (p 145).” Rather, we follow arguments in Kalberg (1980) and Dyck (1997) and suggest that it is more helpful to understand formal rationality as the means associated with a specific, what we call a “conventional” value-based substantive rationality. In the next section, we will discuss two alternate versions of substantive rationality, or moral points-of-view that stem from Weber’s discussion in the Protestant Ethic. Thus, building on Weber’s discussion in the Protestant Ethic, formal rationality is the means to manifest a substantive rationality that places primary emphasis on materialism and individualism. To fully understand our interpretation of Weber, it is helpful to recall that he actually had at least four different types of rationality. Along with “formal rationality” and “substantive rationality,” Weber also had “practical rationality” (which Dyck, 1997, calls “self-interested rationality”), and “theoretical rationality” (for a much richer description of these, see Kalberg, 1980). We concur with Colignon and Covaleski that formal rationality—which Dyck (1997) calls efficiency rationality—is exemplified in conventional rational accounting. We also concur that substantive rationality—which Dyck (1997) calls value-based rationality or could be called a “moral-pointof-view”—represents a constellation of values that define ultimate goals. In terms of “practical rationality”—although this is not the purpose of our present paper—we believe that Colignon and Covaleski’s framework could be improved by its explicit incorporation, which would help avoid the problems that arise when they collapse self-interests into substantive rationality. II. VERSIONS OF SUBSTANTIVE RATIONALITY: TWO WEBERIAN TYPES Max Weber, who is still considered to be the leading management moral philosopher (Clegg, 1996), argues that the conventional management paradigm places primary emphasis on individualism and materialism.1 First, in terms of individualism, the contemporary secular idea of individualism can be traced back to the notion of calling introduced during the Reformation. According to this view, not only does God call individuals to work hard in their jobs, but 1
This discussion of the emphasis on individualism and materialism, and the resulting four Weberian moral-points-of-view framework, draws heavily from a paper by Bruno Dyck, “Management, Theology, and Moral points of view”, Journal of Management Studies, forthcoming.
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moreover the “only way of living acceptably to God was … through the fulfillment of the obligations imposed on the individual by his [sic] position in the world” (Weber, 158, p. 80; emphasis added here). Because an individual’s achievement of eternal salvation could not be ensured by others, Weber argues that the Protestant Ethic gave rise to “a feeling of unprecedented inner loneliness of the single individual.” Indeed, Weber regards individualism as a defining characteristic of the Protestant Ethic moral-point-of-view and “the absolutely decisive difference” from Catholicism (Weber, 1958; pp. 104 and 105; see also pages 80-81, 160). The publication of Adam Smith’s (1776) Wealth of Nations further reinforced and legitimated individualism, transforming it from being “roundly condemned in the Bible and unheard of in most ancient societies” into a virtue of the highest order: “As Smith imaginatively put it, ‘an invisible hand’ would guide apparently chaotic individualism to collective good” (Solomon and Hanson, 1983, p. 37). A high emphasis on materialism is Weber’s second defining feature of the Conventional moralpoint-of-view. Weber quotes the preacher John Wesley (1703-1792), who describes how the Protestant Ethic gives rise to materialism: “religion must necessarily produce both industry and frugality, and these cannot help but produce riches” (Weber, 1958; p. 175; emphasis added here). Put in contemporary terms, the fundamental goals of Conventional management include maximizing productivity (“industry”) and efficiency (“frugality”) in order to maximize profitability (“riches”). Weber’s dislike for the materialism that characterizes this Conventional moral-point-of-view is evident in his famous metaphor of the “iron cage:” “the care for external goods should only lie on the shoulders of the ‘saint like a light cloak, which can be thrown aside at any moment.’ But fate has decreed that the cloak should become an iron cage. … material goods have gained an increasing and finally inexorable power the lives of men [sic] as at no previous period in history” (Weber, 1958: 181; emphasis added here). Solomon and Hanson (1983) echo Weber when they suggest that: “The idea that making a profit is a legitimate activity would have horrified most people until very recently.” They concur that materialism was legitimized in part by protestant preachers like John Calvin (1509-1564), who taught that material wealth was a sign of a person’s eventual salvation. By crossing the two dimensions of individualism and materialism, Weber’s analysis gives rise to four “ideal-types” of management, where the Conventional ideal-type is characterized by high individualism and high materialism. As is obvious in his descriptions of the iron cage, Weber does not use the ideal-type language to endorse the Conventional type. Rather, he uses the term ideal-type at an abstract conceptual level to denote a proto-typical managerial style or organizational form. As depicted in Figure 1, Weber’s analysis can also give rise to a total of four “ideal types” of accounting, and he especially encouraged research into the three nonConventional types. In our paper we will limit our analysis to developing and comparing the Radical, alternative ideal-type and the Conventional type. In contrast to the Conventional type, the Radical type is characterized by low materialism and low individualism. [Insert Figure 1 about here]
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III. SECULARIZATION AND MORAL NEUTRALIZATION OF THE CONVENTIONAL MORAL-POINT-OF-VIEW While Weber recognized that the theology associated with the Reformation was an important factor in giving rise to the moral-point-of-view characterizing Conventional management philosophy, he was also quick to add that a subsequent secularization process had caused the “religious roots” of Conventional thinking to have “died out slowly, giving way to utilitarian worldliness” (Weber, 1958, p. 176). This secularization is evident, for example, in how “time” went from being seen as “infinitely valuable because every hour lost is lost to labour for the Glory of God” to Benjamin Franklin’s secular accounting-friendly maxim that “time is money” (Weber, 1958, p. 158). This secularization process has been so thorough that the “capitalist system ... no longer needs the support of any religious forces, and [instead] feels the attempts of religion to influence economic life, in so far as they can still be felt at all, to be as much an unjustified interference as is regulation by the State” (Weber, 1958, p. 72)! Moreover, not only has this Conventional moral-point-of-view been secularized, via a long-term process of a social construction of reality (Berger and Luckman, 1967), what had initially been a novel socially-disruptive moral-point-of-view has today become embedded as a taken-forgranted objective “reality” (e.g., Roberts, 2002, p. 305). Indeed, present-day heretics who dare to challenge Conventional secular moral-points-of-view evince strong reactions, ranging from being ignored to admiration, because challenging traditional “American values and ideals” like individualism and profit-maximization may be judged as “perverse,” irresponsible,” and “downright subversive” (Hardy and Clegg, 1999, p. 381; Van Maanen, 1995, p. 692). In Garfinkel’s (1964, p. 225) language, the everyday rules associated with Conventional moralpoints-of-view are today wrongly perceived as “natural facts of life,” because we have forgotten that the mundane emphases on materialism and individualism are in fact “through and through moral facts of life.” Building on Weber’s iron cage metaphor, Roberts (2002, p. 179) likens the Conventional moral-point-of-view to “a garment that fits so closely that we may fail to notice its existence;” it has become an integral part of our identity, and any attempt to remove it is akin to being “skinned alive.” To re-cap, Weber also saw accounting as being problematized as it is situated on an axis between formal rationality and substantive rationality. We now turn to the question of whether formal rationality is value neutral, and thus independent of substantive rationality, which is inherently a value-laden concept. Colgnon and Covaleski’s portrayed formal accounting as “value neutral”, which suggests that we cannot escape it regardless of our substantive rationality or moral-point-of-view. However, we propose an alternate interpretation suggesting that formal accounting arises out of a specific (materialistic-individualistic) moral point-of-view and that starting from a different moral-pointof-view may give rise to a very different, yet still rational way of doing accounting. Of particular importance for our argument is the notion of “theoretical rationality” which essentially describes something that could be rational but is not necessarily acted upon (for example, within a base-ten number system, it is theoretically rational to say that 7 + 7 = 14; within a base-eight number system it would be theoretically rational to say that 7 + 7 = 12). Put
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in these terms, formally rational accounting is the specific theoretically rational “means” to meet the “ends” defined by the conventional materialistic-individualistic substantive rationality. Because of the pervasiveness of this particular ideal-type of theoretical rationality (and its underpinning conventional substantive rationality), and because of its importance to Weber’s overall analyses, he has chosen to name it as “formal rationality.” However, he does so knowing full well that there are also other theoretically rational means of meeting non-conventional substantively rational ends. Indeed, Weber calls for the development and introduction of theoretically rational (but formally non-rational) means to meet non-conventional substantive rationalities. Thus, for us “formal rationality” is merely one (albeit the most-pervasive one in our current epoch in capitalist economies) of many possible theoretically rational ways to underpin theories and practices of accounting and organizing more generally. In particular, for us formal rationality is one manifestation of a materialistic-individualistic moral-point-of-view. We agree with Colignon and Covaleski that it is important to disentangle formal rationality from substantive rationality and not to collapse them into one as associated with Parsons’ work (p 153). By teasing them apart, we can examine how substantive rationality may differ from formal rationality. However, we also add that any suggestion that formal rationality is value-neutral and therefore not to amenable to challenge by an alternative theoretically rational way of accounting, may be an example of misinterpreting Weber. The implication of our interpretation is, from a Weberian perspective, profound. As Colignon and Covaleski remind us, in the most famous of all sociological metaphors Weber suggests that our current emphasis on formal rationality leads us to be imprisoned in an iron cage. Moreover, he suggests that escaping this iron cage demands developing, embracing and fleshing-out a new moral-point-of-view that is less materialistic and less individualistic. Insofar as accounting researchers accept that the time has come to question whether accounting could or should transcend the conventional emphases on materialism and individualism, the challenge is to think “outside the cage” and develop new ways to doing accounting that are consistent with and reflect such non-conventional, alternative moral-points-of-view. We believe that this is a significant challenge that arises from Weber’s analysis, and one that we seek to begin to address in this paper. IV. THE APPLICATION OF WEBER’S FRAMEWORK TO ACCOUNTING Just as Weber’s framework clearly has implications for developing management archetypes, we believe that it also has implications for accounting theory and practice. Our argument has four self-reinforcing iterative components: (1) our moral-points-of-view affects how we socially construct reality; (2) which determines how we view the substance and outcome of economic transactions and events; (3) which influences how we define accounting and establish the content of the accounting principles that we develop and use; (4) which informs subsequent organizational behaviour. First, our review of Weber’s (1958) work demonstrates the relationship between moral-points-of-view and the process of the social construction of reality (Berger and Luckman, 1967). Second, representational faithfulness is considered to be one of the hallmarks characteristics of
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accounting information, where representational faithfulness means that transactions and events affecting an entity are presented in financial statements in a manner that is in agreement with the actual underlying transactions and events (e.g., see Section 1000 of CICA Handbook). What is left unsaid, of course, is that the definition of the “actual” transaction and events are sociallyconstructed and based upon moral-points-of-view (see Hines, 1991). For example, outlays for philanthropic activities are treated as an expense, rather than an asset, under current generally accepted accounting principles because those expenditures do not result in “economic resources controlled by an entity as a result of past transactions or events from which future economic benefits may be obtained” (CICA Handbook, Section 1000). Third, the effect of this social construction of economonic events on accounting is illustrated simply by noting that a typical definition of accounting describes it as the recognition, measurement, and disclosure of financial information about economic entities to interested persons (Kieso et al, 1998, p4; emphasis added here). While this definition is usually seen to depict accounting as a morally neutral technique of reporting economic events, reference to Weber’s ideal-types illustrates how it is clearly steeped in a Conventional moral-point-of-view, where accounting is seen emphasize materialism (e.g., emphasis on financial information) and individualism (e.g., providing information about individual firms for individual investors). Of course, this is not a new insight, critical theory has long recognized the value-ladenness of conventional definitions of accounting and the implications of such definitions. For example, Neu (2000) preferred to define accounting as the “numerical, monetarized calculations and techniques which mediate the relations between individuals, groups, and institutions as well as the accountability relationships that results from these social relations.” Thus, this definition of accounting recognizes more clearly that accounting is socially-constructed based on an (often unstated) moral-point-of-view. Thus, there is a bi-directional relationship between accounting and performance. If a particular aspect of performance is important, then it should be measured (or “accounted for”) (Kaplan and Norton, 1992). Moreover, whether performance is considered to be positive or negative depends on how the economic substance of the transaction is perceived, which in turn determines the accounting treatment of that transaction. Thus, performance affects accounting by determining what is measured, and how. However, accounting also affects performance: Kaplan and Norton (1992) stated this succinctly by the phrase “What you measure is what you get.” To further illustrate this fourth argument, we note there is ample research to suggest that how we define accounting, and what accountants measure, has a significant impact on everyday organizational behaviour. Accounting mediates social relations by determining what is measured, and what is rewarded. For example, Riahi-Belkaoui (2000) describes how permanent organizational change depends on accounting systems that identify the incentives that are incorporated into the performance evaluation system. Similarly, Tinker (1980) points to the distributive role played by accounting techniques in that these techniques mediate relations by measuring and rationalizing power relationships. Power (1995) recognizes the constitutive role auditing has in society. Many areas of accounting research specifically examine these mutually reinforcing relationships between accounting measures, performance, and organizational behaviour. For example,
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management accounting research includes extensive studies on how the design of management accounting systems (including, for example, budget systems, incentive systems, and cost allocation mechanisms) affects managerial behaviour and performance (e.g, Baiman and Demski, 1980; Baiman, 1990; Chenhall and Langfield-Smith, 1998; Chong 1996). As another example, Positive Accounting Theory (Watts and Zimmerman, 1986) has documented how the economic consequences arising from accounting results affect many dimensions of managerial behaviour and performance, such as choices of accounting policy and accruals, timing of accounting standard adoption, liquidation of LIFO layers, pension plan terminations (Sweeney, 1994), and asset divestment decisions (Bartov, 1993). Current North American generally accepted accounting principles are predominantly consistent with the Conventional moral-point-of-view, which places high value on individualism and materialism. Weber’s analysis points out that it is problematic if accounting principles reflect a moral-point-of-view of which we are unaware. This becomes even more problematic if the results of acting according to the unstated moral-point-of-view are ill-serving for society. How might accounting principles and theory be affected if a non-conventional, Radical moral-pointof-view were to be employed rather than the Conventional moral-point-of-view? Moreover, if an alternative, non-conventional moral-point-of-view is more congruent with society’s needs and wishes, then accounting principles would need to be adapted to properly capture, measure, and reward management performance that is consistent with that view. V. IMPLICATIONS To recap, we have followed Weber (1958) and argued that accounting scholars should explicitly articulate the moral-point-of-view that undergirds their theorizing. In particular, we have built upon Weber’s observation that the moral-point-of-view that undergirds Conventional accounting theory and practice places a high emphasis on individualism and materialism. In the remainder of this paper we discuss the implications in three general areas. First, our analysis provides a philosophical framework to facilitate the further development of accounting theory and practice that is consistent with a Radical moral-point-of-view. While fully developing such a theory is beyond the scope of this paper, we begin to link it to related literatures and point to two key dimensions, namely, the entity assumption (related to individualism) and the financial measurement dimension (related to materialism). Second, we refer to studies which suggest that the Conventional moral-point-of-view may not be as widelyheld as has been assumed, and that the Radical, alternative moral-point-of-view may be becoming evermore relevant and timely. Moreover, although one moral-point-of-view cannot be judged to be superior to another, we are able to choose among them based on the actual and expected outcomes associated with each. And finally, we conclude by re-emphasizing the core Weberian argument, namely, that it is important for accounting scholars to articulate their moralpoints-of-view. We neglect our nature as moral beings if we refuse to articulate and follow our own moral-point-of-view, and if we do not allow others to do the same.
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1. TOWARDS DEVELOPING ACCOUNTING THEORY BASED ON A NONCONVENTIONAL, RADICAL MORAL-POINT-OF-VIEW The fundamental differences between the Conventional and Radical moral-points-of-view are due to their differential emphasis on materialism and individualism. In particular, the nonConventional perspective draws attention to the value-laden nature of two basic assumptions characterizing generally accepted accounting principles: the economic entity assumption, and the monetary unit assumption. We will deal with each of these in turn. Economic Entity Assumption. The economic entity assumption means that “economic activity can be identified with a particular unit of accountability” (Kieso et al, 2002, pg 33). While the economic entity assumption is often used to justify the separation of a company’s business activity from its owners (Kieso et al, 2002), it also separates a company’s business activity from the larger community. Shearer (2002) argues that the current construction of the accountable entity as a business unit is such that the unit is obligated to pursue only its own good. Her argument in turn follows from Schweiker (1993, p. 231) who argues that “If it is impossible to render economic forces morally accountable, then human beings have become slaves to their own financial and corporate creations, and the world is subjected to unending exploitation under the aegis of ‘efficiency.’” The economic entity assumption results in a company representing its financial position as the difference between its own assets2 and its own liabilities. Therefore, if performance is defined as improvements in financial position, than any activity that increases the entity’s assets or decreases its liabilities is “good”, even if this activity imposes large externalities on the external environment. Thus, the definition of the accountable entity as the business itself ignores a multitude of other potentially accountable relationships to which the business entity is a party. For example, social contract theory holds that a social contract exists between organizations and society, through a series of explicit and implicit laws that confer a kind of organizational legitimacy vis-à-vis society. Thus, organizations should act in a manner that maximizes social welfare (RiahiBelkaoui, 2000), rather than maximizing its own financial position. That is, the emphasis must be shifted from the enhancement of the individual firm to the enhancement of the collective community. By adopting at least supplemental measures of the enhancement of community wellbeing, and blurring the boundaries between the entity and its context (Leduc, 2001), it is possible to measure performance in different, more Radical ways that recognize and reward behaviours that enhances community welfare even if it fails to maximize corporate profits. Leduc (2001) calls for such a holistic, more Radical, view of a corporation that allows for the possibility that creation of value in one part of the system can either help or harm the larger system. By enlarging the entity, positive aspects of performance can be recognized, such as, enhancing spiritual and environmental well-being, and redistributing wealth from the business entity itself 2
Another assumption implicit in this accounting treatment is that assets can “belong” to an entity. Under Islam, for example, and indeed under many Christian interpretations, all assets belong to God (Hamid, Craig and Clarke, 1993). Therefore, entities only have stewardship over these assets, rather than ownership.
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to members of the community. Schweiker further states “any theory of corporate behavior as atomistic and purely profit driven is …counterfactual, since in its very act of giving the account of that behavior the theory instantiates the social identity of corporate forces. In this respect social responsibility is unavoidable inasmuch as a corporation seeks to give an account of itself to others” (246). Monetary Unit Assumption. A second assumption that characterizes current generally accepted accounting principles is the monetary unit assumption, which states that money is the common denominator of economic activity and provides the only appropriate basis for accounting measurement and analysis (Kieso, 2002). For example, Neu (2000) asserted that this monetarization (emphasis added) was instrumental to the objectives of colonialization and encouraged the appropriation of wealth by the colonials and the genocide of Canada’s First Nations. That is, the assignment of a monetary value to a non-monetary phenomena may entail certain consequences (Morgan, 1988). Along these lines, the impact of an ethical dilemma on various stakeholders tends to be understated when financial surrogate measures are adopted for items that are not measurable directly (Brooks, 2000). For example, if the value of loss of health is measured as the loss of income plus the cost of medical treatment, it will not capture the pain and suffering involved as a result of the loss of health. One possible remedy to this dilemma is to avoid the use, or at least the exclusive use, of monetary units to define value. Indeed, the use of non-financial performance measures is becoming increasingly prevalent ( see FASB, 2004). This growth in popularity is attributable to several factors. Firstly, profits can be seen as a “lag indicator” in that it measures after the fact the success of actions that have been taken (Leduc, 2001). By focusing on nonfinancial measures, the need for corrective action can be identified sooner. Thus, merits of nonfinancial performance measures are evident even within a Conventional paradigm. Second, the use of non-financial measures also provides a means of capturing the nonmaterialistic objective inherent in the Radical moral-point-of-view accounting. While the use of non-financial measures-- for example the balanced scorecard (Kaplan and Norton, 1992; Smith (1998) is often motivated by the desire to improve financial performance-- Svendsen et al (2001) note that the development of non-financial performance measurement systems can measure the quality of stakeholder relationships, among other things. There has been a continuous development of social responsibility accounting, socio-economic accounting, and social indicators accounting, that all incorporate non-financial measurements of various social performance variables (Riahi-Belkaoui, 2000). The de-emphasis of materialistic goals is especially evident in the huge growth of the socially responsible investment (SRI) sector. SRI calls for the consideration of how companies manage their environmental, ethical, and social reputations, in addition to their financial performance (Friedman and Miles, 2001; Ruf et al, 2001) In sum, the Conventional moral-point-of-view, characterized by high materialism and high individualism, is reflected by the economic entity and monetary assumptions embedded in the conventional framework. The Radical moral-point-of-view, characterized by low materialism and individualism, would be reflected by i) a broader entity concept which removes the boundaries between the corporate entity and its social context, and ii) the use of non-financial
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(and hence non-monetary) performance measures. Furthermore, by adopting accounting principles that reflect these alternate assumptions, society could incite corporate behaviour more consistent with the Radical type. For example, if we socially construct a reality that reports only financial information pertaining to the individual firm level of analysis, then we can expect people to be encouraged to behave in ways that maximize profitability at the firm level (i.e., Conventional ideal type). If, on the other hand, accounting theory and practice places as much or greater emphasis on the non-financial performance measures (e.g., effect on natural environment, effect on quality of work life) and on the community or global level on analysis (e.g., effect of national and international wage disparities between the rich and the poor), then we can expect people to be encouraged to act in ways that maximize social and environmental welfare (i.e., Radical ideal type). 2. THE NEED FOR NON-CONVENTIONAL ACCOUNTING THEORY It might be argued that there is good reason that no one has taken up Weber’s challenge to develop Radical approaches to management or accounting theory. Such an argument might begin by noting that even its greatest critics acknowledge that the status quo optimizes organizational productivity (e.g., Perrow, 1985). Indeed, it would be inefficient to continually restate the [self-evident] superiority of the moral-point-of-view associated with the status quo. Moreover, champions of the status quo could argue that, since previous attempts to challenge Conventional norms have not been well-received, this demonstrates the lack of interest and need for non-Conventional paradigms (e.g., recall Hardy and Clegg, 1999, p. 381; Van Maanen, 1995, p. 692). Despite these arguments against questioning the status quo, there is nevertheless still an ongoing and persistent stream of research that points to the merit in doing non-Conventional research. For example, there is a respectable heritage of literature within the burgeoning stakeholder literature that suggests that practicing managers consider it unethical to focus solely on the interests of shareowners (Donaldson and Preston, 1995, p. 75; Baumhart, 1968) and to ignore implications for the natural environment (e.g, Dunlap and Van Liere, 1978). Stakeholder theory appears to be a manifestation of the broader corporate social responsibility theory, which in turn is an outgrowth of sustainability development theory. The World Commission on Economic development (1987) defined corporate sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” At least two theoretical models explaining the relationship of corporate sustainability and corporate social responsibility have been presented in the academic literature. The Wempe and Kaptein (2202) model views corporate sustainability as ultimate goal with corporate social responsibility as an intermediate step between corporate social responsibility and triple bottom line reporting. They view corporate social responsibility as concerns for profit, people, and planet. The Linnanen and Panapanaan (2002) model presents corporate social responsibility as a subset of corporate sustainability. In this model, corporate responsibility encompasses the familiar economic, environmental, and social responsibility aspects. Drawing on these two models, Marrewijk (2003) sees corporate sustainability and corporate social responsibility as “two sides of a coin” (p.102). On the one side, corporate sustainability relates to “value creation, environmental management, environmental friendly
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production systems, and human capital management” and corporate social responsibility is concerned with transparency, stakeholder dialogue and sustainability reporting. Advocates of corporate social responsibility believe that a business is obliged to pursue courses of action that would be in line with society’s values and objectives Bowen (1953). Stakeholder theory provides an analysis of groups for whom corporations may address as recipients of CSR actions. While at least two branches of stakeholder theory have been identified (Deegan, 2000), we would be more interested in the ethical (or normative) branch. The ethical branch of stakeholder theory focuses on the responsibilities of business to its stakeholders and prescribes how a business should treat its stakeholders (Hasnas, 1998; Donaldson and Preston, 1995; Freeman and Reed, 1983). The other or managerial branch concentrates on the need to manage power stakeholder groups to achieve corporate goals. We are interested in the normative version because of the imperative to establish a broader context for accounting in the move toward a non-conventional, radical point-of-view that emphasizes non-material, non-individualistic accountings. Although the managerial view promotes accountings that perpetuate the status quo by placating the stakeholders (perhaps accounting practices such as triple bottom line reporting could be used that way), triple bottom line reporting is also an alternative accounting proposal responding to the call for corporate social responsibility. Clarke (2001) explains the motivations for triple bottom line reporting lies in the need for non-traditional accounting performance measures. He sees human capital as the most important asset of a company and the environmental impact of company decisions as critical to their future sustainability. DiPiazza and Eccles (2002) indicate there is increasing demand and pressure for accountability and transparency in business reporting. Brown (2000) suggests that stakeholders are demanding businesses provide information other than financial performance data. It would seem that use of triple bottom line reporting is a response to those demands. Triple bottom line reporting is a special case of corporate social reporting. Gray et al (1987) defined corporate social reporting as : “…the process of communicating the social and environmental effects of organisations’ economic actions to particular interest groups within society and to society at large. As such, it involved extending the accountability of organizations (particularly companies, beyond the traditional role of providing a financial account to the owners of capital, in particular, shareholders. Such an extension is predicted upon the assumption that companies do have wider responsibility than simple to make money for their shareholders.” (p. ix). Environmental author John Elkington claims to have coined the term triple bottom line in Cannibals With Forks: the Triple Bottom Line of 21st Century Business. Elkington and a United Kingdom team called SustainAbility Ltd. Used the TBL approach to advise companies how to attain sustainability by combining economic prosperity, social equity, and environmental protection in to the heart of their operations (Whittaker, 1999). The management Think Tank AccountAbility may actually have been the initiators of the term (Trust Us: The Global Reporters 2002 Survey of Corporate Sustainability Reporting, 2003). Over the last decade, use
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of the term triple bottom line (3BL) has garnered increasing interest, if only through lip service. KPMG’s International Survey of Corporate Sustainability Reporting 2002 found that 45% of the Fortune Global Top 250 Companies now issue environmental, social, or sustainability reports. Triple bottom Line Reporting has been mainly found in Europe, Australia, and New Zealand. For example, all companies listed on the Paris Stock Exchange must include reports about their social and environmental performance within their financial reports. In the U.K., accounting for pension funds must disclose the degree to which social and environmental criteria influence investment decisions. There does seem to be an increasing interest by U.S. companies. The Investors Responsibility Research Center (IRRC), an independent research firm in Washington, D.C. reports a dramatic increase in shareholder resolutions in 2003. Resolutions include those asking companies to address global warming and key social proposals relating to fair employment practices. CorporateRegister.com cites 138 U.S. companies publishing sustainability reports. Social Investment Forum lists mutual funds comprised of socially responsible firms. Fortune magazine yearly reports on Americas Most Admired Companies and includes a social responsibility criterion. Key exemplars within the mainstream strategy literature suggest that managers make strategic choices that value other considerations more highly than maximizing financial performance (Child, 1972, p. 11), and that they rely on an “emotional balance of forces” to temper rational cut-throat survival-of-the-fittest competition (Henderson, 1979, p. 24). Etzioni (2001) reviews a number of studies that suggest that Westerners in general, including managers, are increasingly making personal decisions that reflect an emphasis on “voluntary simplicity” (Etzioni, 2001). In sum, there is evidence to suggests that people are acting according to a more radical, nonconventional moral-point-of-view than theorizing generally recognizes. Furthermore, when we examine the actual and expected outcomes associated with Conventional moral-point-of-view, we see that Weber’s observation about the “iron cage” is not without merit. Even though the champions of the Conventional moral-point-of-view (e.g., from John Wesley to Adam Smith to Milton Friedman) had the best interests of humankind at heart, and recognizing that the Conventional paradigm has made important contributions to the development of humankind, we must recognize that its unprecedented emphasis on individualism and materialism has come with significant costs. For example, “anthropologists have been aware that in gaining our materially rich 20th century Western civilization, we have lost many important aspects of our social and emotional life. We are far less rich than are the nomadic foragers in emotionbased ‘things of the spirit’ generally and in related areas: family life, friendship, relations between the sexes, mental health, community ties, and so on. … Our complex technological civilization is but a very recent, very short, and so far not very successful adaptation in terms of the history of humankind” (Power, 1995, pp. 671 and 673).
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At some level we all know that the status quo is unsustainable. For example, if the whole world were ever as “developed” as the world’s leading economies, we would require three planets to handle the pollution (Rees, 2002). The need for non-conventional approaches is also evident in the anti-conventional globalization movement, and in observations that globalization has contributed to a widening gap between the rich and poor, and with a decreasing improvements in quality of life especially for the poorest nations (e.g., Weisbrot, Baker, Kraev and Chen, 2001). In sum, the time seems ripe for us to learn how to meet our nonmaterial needs in nonmaterial ways, and for accounting scholars to take up the challenge to focus on “what is worth pursuing” rather than develop theory that simply emphasizes efficiency and “what works” (Gladwin et al, 1995, p. 898). “Or must theorists confine their thinking to what was practicable under turn-ofthe-century capitalism?” (Trevino and Weaver, 1999, p. 624). We hope that Weber’s framework will provide a helpful point of departure for others seeking alternatives to the status quo. VI. SCHOLARS AS PERSONS WITH A MORAL-POINT-OF-VIEW We hope that our analysis of Weber and the conceptual framework developed out of his work, facilitates and challenges readers to (re)examine more closely their own traditions and moralpoints-of-view. By refusing to spell out our moral-point-of-view, and unthinkingly accept a status quo moral-point-of-view by default, we are denying our fundamental nature as moral persons and thus rendering a disservice to those around us (Naughton and Bausch, 1994; Weber, 1958). Moreover, by imposing our moral-point-of-view on others, we deny their fundamental nature as moral persons and thus render a fundamental disservice to the institution of accounting. Insofar as our paper makes it easier for others to explicitly examine, articulate and (re)consider their own moral-point-of-view—and especially if it yields outcomes like more meaningful work and a healthier environment—then Weber’s viewpoint is worth considering. More importantly accounting theories and practices will emerge that are contextualized within organizations and global society that take into consideration alternative moral points-of-view. Proposals such as TBL have the possibility of prioritizing the community and the environment pointing the way to de-emphasizing individualism and materialism.
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FIGURE 1: Four Weberian “ideal types” of accounting
Low INDIVIDUALISM High
| Radical | Accounting ---------------------------------------Conventional | Accounting | High
Low
MATERIALISM
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