The title of the book seems to suggest some sort of all-embracing theory of how accounting ideas evolve. But the study is actually much more modest and restricted in its scope and attempts no such "grand design".
Man Chand Maloo is interested mainly in examining how ideas for change in GAAP ("generally accepted accounting practices") are initiated and by whom; how these are" fought over by diverse interest groups such as managers, auditors, bankers, investors and government including regulatory commissions; and finally accepted or rejected as GAAP. To what extent are such proposals for change and the attitudes to change influenced by the economic climate and other environmental factors? Is the final decision shaped mainly by the arguments and discussions (the process) or by the relative strength of the pressure groups or authorities?
The author limits his study almost totally to developments in U.S.A. Even here although he briefly surveys early developments, the focus is on a few selected changes (in GAPP) proposed in this century.
No "grand design" theorist, the author is modest in his aims and cautious in his conclusions. His research seems to have been mainly library research i.e. restricted to published material mostly on U.S.A. The book is prepared with quotations from other authors, ranging from Lewis Carroll to Hegel (I preferred the former.)
The author himself concedes disarmingly "The coverage is not exhaustive, and problems have been covered only by assertions".
Perhaps he is being too modest. For within these limitations Maloo has done an excellent job. For practitioners, who are unlikely to find time to read the hundreds of books and articles mentioned in his footnotes, this is an interesting, readable survey of some important accounting controversies, in particular on
On each issue, the author describes the proponents, the opponents, how their interests were affected, the ebb and flow of battle, the arguments, the modifications and who won.
* * *
"We use speech" said Voltaire "merely to conceal our ideas".
Some managers use Accounts to conceal their financial position and performance.
But even the best managers (let us face it) or the best Board are unlikely to let out the full truth to a mass of unpredictable outsiders, be they bankers, investors, financial analysts, government or the Press. But these days investors and bankers are unlikely to come up with massive quantities of money unless there is at least a plausible appearance of "full" disclosure with no hidden catches or holes. (How full and fair will no doubt vary from company to company and from good year to bad year.)
"The "outside" auditor is expected to ensure that the accounts are "true and fair" and in line with GAAP. In the U.S.A. the Securities and Exchange Commision (SEC) has broad authority to initiate accounting changes to protect the investor and the public. But-
Maloo illustrates how this process led to "messy compromises" in the accounting of long-term leases and R&D costs. (But can "library research" give us a deep insight into the sub terranean currents which really determine such matters while the solemn discussion on principles goes on?)
He deals also with the evolution of thinking (in USA) on such fundamental issues as "uniformity vs. flexibility" and "how much disclosure" (including segmental accounting). He shows that the pressure for more disclosure comes in waves: "It decreases in prosperity and increases in depression", fluctuating like women's fashions rather than making steady progress in one direction.
"All women's dresses" said Lin Yutang "are merely variations on the eternal struggle between the admitted desire to dress and the unadmitted desire to undress". Clothes are ostensibly meant to cover, and so they do; but some judicious uncovering is part of the game and the final result is a delicate compromise (collective and individual).
It's the opposite in Accounting. Accounts aim ostensibly at "full disclosure of all that is relevant and material but in practice, the managerial team of insiders is likely to shy at disclosing everything to hordes of outsiders. There are things to the dressed up, smoothed over, covered; bad news to be hidden from investors and lenders, good news from the taxman and the trade union; commercial secrets from competitors; and the ubiquitous "slush fund" (or "Account No. 2") from everyone. And of course the auditor knows all that.
So are we to assume that the appearance of openness and "full" disclosure is often like the stage magician turning out his pockets while hiding something up his sleeves? And that the man who steps out from the audience to inspect the contraption on the stage is, so to say, (sometimes? often?) his brother-in-law?
And what exactly are the games played behind the scenes by the Chairmen and members of the SEC, often subject to severe political pressures from the highest levels? There are also the APC, APB, FASB etc etc, all sitting on high principles but often (as the author shows) tied up in advance to a particular interest with hidden strings.
Thus behind the solemn deliberations and bland doublespeak, move undercurrents of the comic and sordid; and perhaps a dose of irony would have served our author well in dealing with these goings on.
But irony is the last thing on Man Chand Maloo's mind. His tone is dead-serious and he moves methodically about his task. The material is well-organised. After the opening chapter's broad survey of the "environment" (business conditions, public opinion, law, lawsuits etc), the second chapter deals with "macro and micro aspects" of the evolution in accounting ideas and fashions. "Initially, it relates to the discussion of input-output analysis on a macro-level. Next, the descriptive model of accounting change process consisting of institutional arrangements, orientations, authority structures and roles is developed. Finally, a set of hypotheses generated from the foregoing interrelationships and research methodology consisting of the Hegelian Dialectical process is presented."
Don't let this put you off! It is true Hegel is quoted once, and then Sidney Hook on Hegel, and thereafter Carl Devine on the relevance of Dialectics and Sidney Hook to accounts (ending with a very pertinent question!) but there, mercifully, the author leaves Hegel. No doubt, the battle between thesis and antithesis is joined in the subsequent pages but the result is not an upward spiral but fluctuating fashions. And we are spared further Hegelian jargon.
As we have seen, the style of writing is American Academic, but rather lighter than the standard model. A few samples:
Luckily for most of us, it is not such heavy going all the way and the author sometimes calls a spade a spade as in "changes are initiated to suit a group's convenience or make its report cards look good'. This happens fairly often.
And in any case, the subject he has chosen is important and interesting and the detailed studies of selected "issues" are fascinating (even for practitioners with little time for theory). The central problem tackled by him is, to put it crudely: is the final outcome decided by pressures of interest groups and "environment" and the solemn institutional discussions mostly a ritual? (The author words it much more professorially.)
He shows that most accounting changes are initiated by low-authority institutions i.e. not by SEC or Internal Revenue but by individual managers, responding to specific problems. The proposed change favors some interest groups and handicaps others and they (in general) take, their positions accordingly. (When the wind changes, they may sing a different song altogether. For instance, during the prosperous 1920's there was a move to write-up fixed assets to reflect the fall in the dollar's value and offset the higher profit by higher depreciation. When the depression squeezed profits, managers realized the dangers (low ROI and others) associated with higher investment bases caused by write-ups. Since low ROI meant poor managerial performances, write downs become more frequent).
All this is of course not a surprising or original discovery. But it is surprising to find that the SEC which holds the strongest cards and is a major influence on the final outcome, was seldom an initiator of change. Maloo concludes that there is "an inverse relationship between the amount of authority an institution possesses and the frequency with which it initiates proposals for change in accounting principles". In short, the big guns speak last.
Some other conclusions (briefly).
These conclusions are of course advanced by the author only with reference to the six major accounting issues listed earlier for the period covered (upto the late 70's).
The model, says Maloo, has predictive as well as descriptive validity. And he shows how.
Who says Accounting is a dull subject?
M. Premkumar, India