Your Honours, An Appeal: Re-litigating ‘Accounting on Trial’

A Response to Moore’s (1991) “Accounting on Trial: The Critical Legal Studies Movement and its Lessons for Radical Accounting”.

David Carter
Assistant Lecturer and PhD Candidate
School of Accounting and Commercial Law
Victoria University of Wellington
PO Box 600
Wellington
NEW ZEALAND

+64 4 463-5233 extn 7009


“Your Honours, An Appeal: Re-litigating ‘Accounting on Trial’”

I  Foreword

In 1991, Accounting, Organizations and Society published a paper by David Chioni Moore entitled “Accounting on Trial: The Critical Legal Studies Movement and its Lessons for Radical Accounting”.[1] This exploratory paper sought to identify various lessons for critical or radical accounting from the Critical Legal Studies movement [CLS hereafter]. In particular, Moore identifies some tentative theoretical links between the two disciplines, which is possible, given the relatively similar historical roots.[2] From this, Moore develops the thesis that in relation to CLS the critical accounting movement,[3] at the time of writing, was undertaking a ‘realist’ examination of accounting.[4] One of the prime reasons for writing a response to the Moore article is that there has been no substantive engagement or response with the paper. In my mind this is concerning, and in that capacity, I am moved to respond.[5] It is not that the essential thesis is problematic in respect of critical accounting, but rather that the mode of comparison between law and accounting, and thus, between CLS and critical accounting is incomplete and concerning.

In terms of the interface of law and accounting from a critical perspective, there is limited research,[6] although there is a body of work that considers the boundaries of the interface.[7] At about the same time as the publication of the Moore article, Bromwich and Hopwood published an edited collection of essays entitled Accounting and the Law.[8] This essay collection provides some guidance for considering the scope of the interaction between accounting and law. The book is largely an exploratory work and has more of a pragmatic focus. Little work is done on identifying any interconnecting or explanatory theory between the disciplines. Furthermore, although interdisciplinary in nature, with work by both legal and accounting academics, there is no criticism of the interaction or relationship between the two disciplines. The chapter by Napier and Noke considers,[9] historically, the relationship between accounting and the law, tracing historical factors in the growth of the professions. Although Napier and Noke comment that the two professions seem to be compatible and have a history of a close and good ‘working’ relationship,[10] the authors note that there is apparent conflict between the two professions, as “the role of accounting in [the] relationship has been an essentially subordinate one” and “the respective claims of the accountants and lawyers to professional expertise have been expanding, bring the professions into increasing commercial rivalry”.[11] The chapter by Bromwich and Hopwood is much more about the intertwining of the two professions, but takes a strongly pragmatic focus.[12] It is largely concerned with presenting an overview of the contents of the collection of chapters, but it looks closely at the regulation of accounting by law.[13]

This paper seeks to add to the debate, and accepting that critical accounting can learn from CLS, this paper will focus on two questions in particular:

1)  What lessons can CLS teach critical accounting? It will be argued that critical accounting needs to be careful in drawing lessons from CLS, in that, there are sufficient subtle, but important, differences between the two disciplines of law and accounting, that it is not merely a case of translating CLS to critical accounting.

2)  What is the interrelationship between law and accounting? The relationship is two-way: law tends to shape accounting, and increasingly accounting relies on law to provide the space for the practice of accounting, but equally, accounting plays a vital societal role, defining expectations, interaction, and power relations, through the provision of information. For example, law is increasingly reliant on accounting for the provision of a wealth of information that the law requires in order to function.

II  The Appeal: Introduction

The predominant issue concerning this re-examination of Moore’s 1991 paper is the interrelationship between law and accounting, and in particular, the lessons that critical accounting can draw from Critical Legal Studies. Moore’s conclusion in the paper is that there are series of lessons that CLS can teach critical accounting. While this paper accepts the basic premise, the aim of this paper is to consider that subtleties and limits of both disciplines in drawing out these lessons. In other words, careful attention must be paid to the differences between law and accounting.

There are a series of primary concerns in relation to the Moore paper. These include, Moore’s conception of the CLS movement; Moore’s rationale behind how critical accounting can learn from CLS, and finally, the lessons that critical accounting can learn from CLS. As stated earlier, I am not disputing Moore’s essential thesis that in relation to CLS the critical accounting movement[14] was undertaking a ‘realist’ examination of accounting.[15] Rather, the aim of this paper is to draw out some of the lessons that critical accounting should take from CLS that Moore fails to acknowledge, and that in drawing these lessons, we must be mindful of the differences between the two disciplines.[16] Thus, this paper is organised around two sections, following the introductory comments:

1)  Differences between law and accounting, and consequently between CLA and critical accounting that Moore does not acknowledge.

2)  Further lessons that critical accounting should draw from CLS that Moore fails to acknowledge.

III  Background to the Appeal

A The Interface between Law and Accounting

Let us begin with a brief outline of the background to the appeal, including an outline of the 1991 “Accounting on Trial” article. The starting point for this discussion is that accounting and law are intertwined social institutions. Thus, the critical accounts of law and accounting should equally be intertwined and should prove illuminating.

Napier and Noke acknowledge that at the interface of law and accounting, “[l]aw provides a framework for accounting while accounting produces information for the processes of law”.[17] Progressively, accounting relies on the law in at least two distinct ways:[18] first, in terms of the day-to-day practice of accounting; and second, through the law’s influence over the scope and shape of the discipline.[19] In terms of practice, the law often affects accounting in that legal parameters define the operation of accounting.[20] In New Zealand, for example, Parliament, by law, designated the Accounting Standards Review Board (ASRB) as the appropriate authority to determine the delegated legislation of Financial Reporting Standards,[21] which provide legal guidance in the preparation of financial reports.[22] Not only are the general range of transactions and events that accountants deal in and with governed by law, but much of the work of accountants is conducted “within particular legal structures”.[23] Financial reporting, tax, audit, trusteeship, and insolvency, to name a few, require a thorough knowledge of the law surrounding the area. Law also, seemingly, plays a vital role in shaping accounting as a discipline. These links between law and accounting are reinforced through education. For example, in order to qualify for chartered accountancy in New Zealand, it is necessary for the accounting student to undertake a series of commercial law subjects alongside the mainstream accounting requirements.[24]

In increasingly more areas of the law, the law “consumes” accounting information,[25] and as a consequence the interrelationship between the two disciplines is increasingly significant. Thus, as the uses of accounting information vary widely, it is difficult to draw the boundaries of the use of accounting information in the legal process. There are two trends: 1) Areas of law and accounting draw closer together to the point where they intersect or perhaps overlap (this category includes areas such as tax, industrial relations, auditor’s liability, and perhaps intellectual property);[26] and 2) An increasingly broader range of legal processes require an increasingly broad range of accounting processes and information flows (while there is no direct overlap or intersection between the two disciplines, the interface arises as these areas require accounting information, such as the law of contract, conveyance, banking law, company law, insurance law, and torts to name a few). Although the interface between law and accounting is incredibly vast, and it continues to grow, what is most interesting about the interface is that the law very rarely passes direct judgment upon accounting, the accounting process, or the accounting number. Hadden and Boyd comment that irrespective of the apparent simple marriage of the two disciplines, there is considerable conflict between them.[27]

In relation to the use of accounting information in legal processes, accounting information (both financial and non-financial) plays important and useful roles in the law of trusts, partnerships, company law, criminal prosecutions (especially in fraud), negligence (and torts in general), insurance law, competition law, consumer law, insolvency law, banking law, matrimonial property, contracts, property valuation, and even in public law (such as commercial State Owned Enterprises and the use of the public funds).[28] Furthermore, recent legislative changes in New Zealand resulted in the scope for increased information disclosure (including accounting information) in collective bargaining in employment law.[29] Thus, legal processes, be they judicial, legislative or other, are increasingly requiring accounting information.

In relation to this information-provision role, McBarnett and Whelan argue that the greatest challenge, amongst many challenges, facing legal regulation is ‘creative accounting’.[30] Although they define creative accounting broadly, they include specific examples such as uncommon acts of direct fraud or flagrant breaches of accounting standards. However, McBarnet and Whelan point to more subtle attempts to ‘subvert’ the regulatory process, the passive resistance evidenced by regulated entities ‘playing the system’. Tactics employed in ‘playing the system’ include calling the bluff of the regulator through challenge, or by being aware of litigation budgets of regulators (which are usually grossly under funded). In respect of ‘creative accounting’, it is often incredibly difficult to recognise, and if one is able to uncover that which appears to be ‘creative’, the next difficulty is pinning it down. The legal process is inherently subjective, and rhetoric is a vital component – ‘creativity can still be perfectly legal’ – loopholes exist. McBarnet and Whelan argue that in seven years of investigations by the United Kingdom’s Financial Reporting Review Panel (from 1989-1996), no case went to court. The ‘might of the law’ is perhaps not so mighty.[31] In this light, certain of the historical literature concerning the interface of law and accounting may be useful, including, but not limited to work by Napier and Walker.[32] This problem facing the legal process perhaps sheds more light on Napier and Noke’s comment that there is apparent conflict between the two professions.[33]

Fact plays an important role in law. In considering the representation of accounting information within law, the day-to-day practice of law (legal positivism) seemingly treats accounting as a ‘fact’.[34] The label ‘facts’ holds considerable power for the processes of law.[35] By equally, our conception of ‘fact’ is a complicated concept:[36]

‘Facts’ are no longer facts when alternative interpretations are possible; nor do they have the same ‘factual’ quality when what is being measured or described is not susceptible to precision. ‘Facts’, so regarded, become the pabulum of discussion, of argument, or of negotiation. Communication of ‘facts’ is no longer merely a process, but the imperfect representation of a situation, an essay in persuasion or an act of outright propaganda. The scope for complete objectivity is rare; the name of the game, successfully played … it will convince some but not others, or depending on circumstances, convince nobody. Much depends on trust, much on shared knowledge or values …

Undoubtedly, such a charge is not unique to accounting, and the representations of accounting within law. However, the fundamental question revolves around the descriptive noun of ‘fact’. To label as ‘fact’ invokes certain notions of truth, of objectivity, of general acceptance, and of correctness – vital in a realist-based ontology. The consideration of ‘fact’ within accounting raises some fundamental considerations. It is clear that one set of financial information could lead to a variety of accounting answers due to the ability to manipulate and vary accounts due to the indeterminacy of language in general,[37] and the particular skills of accountants.[38] Accounting, in this sense, “… has been created and developed to accomplish various desired objectives and, therefore, it is not based on fundamental laws or absolute precepts”.[39]

Morgan depicts accounting professionals and the accounting process as active “constructers of reality”.[40] That is, the skills and tools of accounting enable certain ‘pictures’ to be created representing a particular accounting conception. Broadbent puts it in a slightly different light, in relation to ‘our desire’ for accountability:[41]

In order to make ourselves accountable and ensure due governance, we seek (or are forced) to render our actions transparent. The use of accounting in both its programmatic and its technological sense is associated with this; alongside this is the extensive use of auditing. The deep irony is that the tools that are used are themselves not necessarily open and transparent.

What is intriguing, given the relatively elevated positions of both the professions of law and accounting, is that these professions are not in a vacuum.[42] That is, these professions do not exist independent of their surrounding society, but in fact, incorporate, rely upon, use, adopt, and co-depend as an entity amongst and as an aspect of society. In reading the annals of jurisprudential theory, there are numerous discussions of the contrasting roles of law within society. From Plato to Aristotle, Marx to Weber to Durkheim, Foucault to Habermas to Derrida, many of the great philosophers have debated the extent and shape of the societal role for law and the legal system.[43] While certain philosophers consider law to be an ‘evil’ force to the detriment of society, the vast majority of philosophers consider law “to be one of the great civilising forces in society”.[44] Few such philosophers, though, have considered the position of accounting. Apart from Althusser’s conception of accounting as the language of capitalism, there is little philosophical treatment of the societal influences of accounting. Perhaps, this is due to the more recent, historically speaking, development of an accounting profession, almost entirely documented in the Twentieth Century.