In the recent years, the role and uses of accounting have been controversial and debatable issues which caused favourable but also negative comments by many scholars (Bryer 2006).
While accounting discourses emphasise the importance of accounting, "modern scholars" although acknowledging its significance, state that accounting bears a considerable number of problems and weaknesses (Bryer 2006:552). According to McSweeney (1997:691), the ability of accounting to produce "unambiguous representations" has been disputed. This potential inability raised further questions regarding its objectivity and fairness in representing the world.
This paper will deal with the issue whether the way accounting represents the world can facilitate control within the organisation. The starting point in approaching the above issue is the explanation of the meaning of representation. Furthermore, the three characteristics of representation, remote control, displacement and abbreviation are explained respectively.
Secondly, the paper emphasises the meaning and main uses of accounting within the business world. Moreover, it analyses the role of accountants as communicators and the significance of their work in representing the operations of the organisation.
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Next, the paper highlights the role and the vital necessity of control in order for organisations to survive and prospect. Also, the various ways by which accounting helps control to be exercised are described. The paper emphasises that control is used to mitigate the agency problem both between superiors and subordinates, and between owners and managers.
Afterwards, the disadvantages of accounting are analysed in order to demonstrate that accounting as a practice and the way it represents the business world may have some important and unbearable flaws.
Lastly, the paper concludes that although the criticism against accounting is based on reasonable grounds, accounting was, is and will continue to be the best control system currently available.
A simple example to illustrate the meaning of representation is Rene Magritte's famous painting. The painting is depicting a pipe and under it states that "Ceci n'est pas une pipe"-"This is not a pipe". The painter wanted to demonstrate that the painting is an image, a representation of a pipe and not a pipe as it seemed and often stated by people.
According to MacKay (1969:161), representation may be understood as "any structure (pattern, picture, model) whether abstract or concrete, of which the features purport to symbolize or correspond in some sense with those of another structure". Furthermore, Foucault (cited in Lord 2006:5) suggests that representation is the gap between the real "things" and how we understand them. "In modernity, the gap between words and things cannot be closed, but can be bridged" (Lord 2006:5).
According to Lilley et al (2004:24), organisations are seen as "technologies" that process information. The most significant purpose of technologies is the reinforcement of control since they succeed to "make transparent what is opaque, to make present what is remote, and to manipulate what is resistant" (Cooper 1992:255). This is further supported by Lilley et al (2004:24), who view organisations as mechanisms for "intervention in the world" and one of their fundamental reasons for existence is the enabling of control.
However, representation is always a "substitution" for an event and will always be a partial presentation of that event and "never the event itself" (Cooper 1992:257).
Characteristics of Representation
According to Cooper (1992:257), "remote control, displacement and abbreviation" are the techniques by which representation conceives economy. Furthermore, Zuboff (cited in Lilley et al 2004:25) argues that these three features can be used to understand how representation can operate within organisations.
The first characteristic is remote control. According to Lowe and Bryan (2007:953) remote control simply means to "control at a distance". Cooper (1992:257) argues that remote control substitutes the "direct involvement of human body and its senses".
As Cooper (1992:257) explains, management works on representations of the organisational environment such as "models, maps, numbers and formulae". These representations enable managers to deal with multiple complicated issues and problems at a distance and in an effective way (Cooper 1992). Such remote issues and problems are brought near management but simultaneously are kept and dealt at a distance (Cooper 1992).
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The second characteristic is displacement. Representation rejects the concept of "fixed location" and places emphasis on mobility (Cooper 1992:257). Through displacement, the important features of an event can be substituted using symbols (Lilley et al 2004:26). In this way, symbols can be moved from one place to another where they can be studied and appropriate actions can be decided.
For example, certain performance symbols (profitability ratios, turnover growth) of each sub-unit of a large multidivisional company can be summarised on a table. This table can be presented to top management who may be located to the headquarters of the company and help them to make strategic decisions for each sub-unit (Lilley et al 2004).
Finally, the third characteristic is abbreviation. Cooper (1992) believes that remote control and displacement are not reasonable without abbreviation.
Abbreviation makes something difficult and complex to be presented as simpler and converts the "big into small" (Lowe and Koh 2007:956). The reality is "reduced" into a representation and is "condensed" to as much and as little so as to be understood and to act upon it (Lowe and Koh 2007:956). Abbreviation enables representation to become "compact, versatile and calculable" (Lowe and Koh 2007:956).
Accounting and Accounting Representation
Lowe and Koh (2007:954) view accounting as a "representational device".
According to Daft and Wiginton (cited in Roberts and Scapens 1985:448) accounting is viewed as a "language". Accountants are seen to be "communicators" of the accounting language (Elliott and Elliott 2011:3). The most common mean of communication is the accounting reports which are "communicating the results of corporate activities to interested parties" (Young 2006:582).
Furthermore, the Financial Accounting Standards Board (1978:9), states that the aims of financial reporting are to "provide information that is useful in making business and economic decisions-for making reasoned choices among alternative uses of scarce resources in the conduct of business and economic activities".
"Management, credit grantors, stockholders, government agencies, and the general public" have high interest in the financial statements since "they provide a basis for the formulation of many business decisions" (Finney and Millers 1951:134).
Accounting representation provides useful and relevant information to the organisation's interested users which helps them to "make sense of what happened, anticipate the future, and plan and assess action" (Roberts and Scapens 1985:448).
According to Lowe and Koh (2007:955) accountants' work includes mainly the construction and reconstruction of inscriptions and the provision of "representations" of the activities of their organisations.
In the accounting language, inscriptions relate to the written representations, such as tables, lists and accounts that make up the financial reports (Robson 1992:685). Latour (1994:45) states that "inscriptions are mobile, flat reproducible, still and of varying scales, they can be reshuffled and recombined". Inscriptions on paper are used to "abbreviate and represent or translate" the production process of an organisation (Lowe and Koh (2007:957).
By representing the operations of an organisation into simpler symbols and representations management can compare the performance of each division, sub-unit and employee and take appropriate action (Lilley et al 2004:25). By studying this simpler representation of the operations of the organisation management can make decisions regarding the most efficient and effective allocation of resources.
Contemporary Organisations and the importance of Control
According to Otley (1995), organisations are considered to be complex entities that are engaged in many different activities. Furthermore, organisations have various groups of stakeholders such as employees, shareholders, customers, suppliers and finance providers that have different expectations from the company.
In order for an organisation to survive and prospect in its environment and meet stakeholders' expectations, management has to introduce "control mechanisms" (Otley 1995:46). This will ensure management that the resources of the organisation are used in an efficient and effective way for meeting the objectives of the organisation (Anthony 1965).
Large organisations employ a high number of staff. According to the degree of power and control of each staff, organisations are structured in various reporting levels of authority. Management's aim is to make sure that employees act in accordance with the instructions given, that they abide to the code of conduct of the organisation and that they are working in the most efficient way possible. But this is a very complicated and difficult task to achieve.
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Bryer (2006:556) states that the "superior manager" (the "principal") demands an account from the "subordinate manager" (the "agent") to make sure that the agent is acting in the best interest of the principal.
If the agent is acting in its self-interest, then there is an agency problem. In order to minimise and prevent such problem, principles use management control tools to hold agents accountable by asking them to provide an account, to explain, clarify and reason their actions and decisions (Bryer 2006).
Cammann (1976:301) states that "budgets, financial reports and other feedback-based control systems" are examples of key management control tools which are used to direct the behaviour of subordinates. Furthermore, Miller and O'Leary (1987:241) added that "standard costing and budgeting" are tools that enable the visibility of employees' "inefficiencies". Also, these tools express in financial terms the "contribution" of each employee to the total "efficiency" of the whole organisation (Miller and O'Leary 1987:243).
As suggested by Cammann (1972) four ways of accounting control systems can be used by principals, or management, to influence the conduct of agents, or subordinates. Control systems can be used for "goal setting", "evaluation", "contingent reward allocation" and for "problem solving" Cammann (1976:302).
Firstly, the future level of performance expected from employees can be communicated by using "control system measures" (Cammann 1976:302). Furthermore, Cammann argues that as long as the goals set by management are motivating to employees, their future behaviour can be influenced in a positive way.
Secondly, control systems can be used as an evaluation tool for employees' performance (Cammann 1976). Generally, employees want to achieve high performance levels and receive good feedback by their superiors (Cammann 1976). As a result, the performance assessment will be an important influencing factor of their behaviour (Cammann 1976).
Furthermore, control systems can be used as a tool for rewarding employees based on their evaluation results (Cammann 1976). However, in order for employees to try for a better performance, they must be convinced that the reward allocation is a fair and unbiased process and must value the rewards (Cammann 1976:302)
Lastly, the information sought by the "control system" can be used to provide employees with constructive "work-based feedback" which can help and motivate them for better performance levels (Cammann 1976:302).
The agency relationship and problem described above between superiors and subordinates also exists between owners and managers of an organisation.
The increased size of most contemporary organisations has led to the separation of ownership and control. In other words, the group of people that own a company ("the principles") has appointed a different group ("the agents") to control and manage the resources of the company on behalf of the principles (Arnold 2004:753).
The agency problems begin when managers pursue their own "self-interest" objectives in the loss of the best interest of shareholders (Arnold 2004:753). Managers (agents) are working on a daily basis on the operations of the organisation and have access to all relevant information (Arnold 2004). On the other hand, shareholders do not have access to the same level of information, as their agents, since they are not involved to the day-to-day activities of their company.
To respond to this "information asymmetry" and the "potential conflict" of interests between principles and agents, shareholders use financial reporting information to control management's actions and decisions (Arnold 2004:753).
In both versions of the agency relationship, (between management and subordinate and between shareholders and management) principals use accounting measures to control their agents. The future actions and behaviour of the agents are defined by the fact that the principal will evaluate their performance and accordingly set "punishments" or "rewards" (Bryer 2006: 557). In this way, the principals control their agents and are able to hold them accountable for their actions (Bryer 2006: 557).
Criticism of Accounting
As analysed above, accounting is undoubtedly a key mechanism of control (Otley 1995:46). However, modern scholars believe that "its role and status are problematic" (Bryer 2006:551).
Otley (1995:46) argues that even though accounting has a central role in the control structure of organisations, it should be combined with other means of control. This statement seems reasonable since there are activities that cannot be measure precisely and in quantitative accounting terms (Otley 1995:48).
For example, "market share and competitive position, employee commitment and morale, and the progress of research and development work" are very important issues of the organisation but cannot be represented in numbers (Otley 1995:48).
According to Bryer (2006:554), "critical accountants" argued that accounting has no "technical" meaning and that it does not deal with "an objective reality". According to Roberts and Scapens (1985:448), accounting methods used by management to classify expenses, income, profit and to compute financial ratios may include an element of ambiguity.
Another example demonstrating that control may not be achieved by accounting systems is the budgeting process. Budgets can be a dominant and useful motivating tool if subordinate managers and employees participate in the setting of the accounting objectives. According to Lyne (1995:250), greater degree of participation leads to increased acceptance of the budget and as a result, employees will be more motivated to achieve the budget.
On the other hand, subordinates may be motivated to manipulate budgets and even worse, to manipulate the results presented to managers. Furthermore, if budgets are seen as impossible to achieve by subordinates, then this will discourage employees (Bryer 2006).
According to McSweeney (1997), accounting does not provide a faithful and complete representation of organisations' activities and results. Accounting information is incomplete as certain aspects are not included because they are not "material" enough or because it is "too costly" to included them (McSweeney 1997: 696).
As FASB states "financial reporting" includes "approximations", "estimates" and "judgements" (cited in McSweeney 1997:696). This is another illustration of how accounting fails to faithfully represent organisations. However, as FASB states an "estimate" may be considered to be enough when the exact measurement is not material and relevant for the accounting report (cited in McSweeney 1997:696).
Chwastiak and Young (2003:533) in their paper, examine how organisations "silence" in their annual reports the negative effects of their actions and operations on the environment, consumers, workers and the society at large. As Loft (1995:35) states, accounting is a "disciplinary technology" which facilitates the prioritisation and emphasis of "financial" at the expense of all other issues. In other words, "in making certain things visible, other things become invisible" (Loft 1995:35).
Another example, which demonstrates that accounting failed to represent the reality of an organisation and hence failed to enable control, is the widely known accounting scandal of Enron (Dyson 2004:263). Enron was an American company which managed to become one of the biggest "energy trading" corporations of the world (Dyson 2004:263). "Not many companies come bigger than Enron, and none bigger has ever filed for bankruptcy as Enron did" (Sloman 2008:238).
The accounting rules that Enron used enabled the company to manipulate the accounting report and hide from the market the tremendous losses and the extremely high salaries of the executives (Dyson 2004:263). Fraud and "questionable accounting practices" used by Enron have led it to its collapse (Dyson 2004:263).
The Enron scandal highlights the problems of the agency theory. The managers of Enron decided to pursue their own interests and ambitions which clearly were different from shareholders' interests. The conflict of interests and the absence of goal congruence made the agency relationship fail. Principals had limited and false financial information available which led to shareholders' inability to place adequate controls upon management (Arnold and De Lange 2004:752).
The Enron case was described as a "market catastrophe" by Arnold and De Lange (2004:763). It caused major problems to the US economy and severely damaged the credibility of the accounting profession and the reliability of "financial reporting" (Arnold and De Lange 2004:752).
The statement that the way accounting represents the world enables control within an organisation, cannot be completely accepted nor rejected. It does not have an absolute yes or no answer.
As analysed above, accounting's main function is to provide useful financial information to the organisation's internal and external stakeholders. Accounting is seen as a "representational device" and is used for communicating the activities and results of the organisation to its users (Lowe and Koh 2007:954).
Accounting represents the operations of the organisation and provides "objective" and relevant financial and non-financial information to shareholders and management (Bryer 2006:552). In this view, "accounting is the most important control system" which managers and investors have (Bryer 2006:552).
At the same time, there are a lot of examples and scandals that unfortunately have brought into light that accounting bears significant disadvantages. These have harmed its perceived quality and credibility. The most important and memorable example is the Enron scandal which severely harmed the credibility of the accounting profession and accounting's quality.
According to Ezzamel and Hart (1987:107), "the role of accounting in organisational control is little understood". If the role of accounting is not communicated, understood and valued throughout the members of the organisation, then it becomes very difficult, even impossible, to be achieved.
Also another barrier in using accounting as a control function is the fact that many superiors do not understand what their subordinates are doing (Armstrong 2002:285). Thus, superiors are not in the position to control their subordinates' processes since they do not know what they are reviewing (Armstrong 2002:285).
Accounting has important advantages but at the same time bears disadvantages. It has been accused that the way it represents the world is not complete and objective. It must be noted however, that any representation of an event will always be "partial" as it is just a substitution and never the actual event itself (Cooper 1992:257). So, perhaps accounting as a function, does represents the world at the best possible way, subject to the constraints attached to the representation process.
Loft (1995:35) argues that "the accounting system "re-creates" the activity of the organisation in financial terms, enabling its control". There is "no other financial principle" than accounting that "better serves" and objectively assists management (Sloan 1964:140). Accounting is, perhaps, the best alternative we have at the moment.
Maybe accounting is misinterpreted by users that do not have the basic financial accounting knowledge. A possible suggestion would be to inform and "warn" users of accounting's flaws and enhance their knowledge, so as to correctly interpret financial reports and not to be misled.
Maybe instead of accusing and emphasising the problems and negative effects of accounting, a better solution would be to think and implement ways to improve its quality, and enhance its credibility and fairness in users' minds.