accounting—truth, lies, or ''bullshit''?

Norman B. Macintosh, Queens University, professor emeritus.

The author is grateful to the Social Science and Humanities Research Council of Canada for its support of this research.

APIVolume Six

2006

COMMENTARYThe FASB and Accounting for Economic Reality

AccountingTruth, Lies, or Bullshit?A Philosophical Investigation

Norman B. Macintosh

INTRODUCTIONIn his provocative essay, Lee (2006) (hereafter, Lee) evaluates the Financial Accounting Stan-

dard Boards (FASB) proposal to produce principle-based accounting standards (PBAS). The ideabehind the FASB initiative is that PBAS would rest upon and be underwritten by the FASBsconceptual framework (CF), the latter conceived of as a body of coherently related objectivesand fundamentals that would serve as an unassailable, solid, and permanent foundation for itsformal generally accepted accounting principles (GAAP).1 With accounting relying on principlesrather than rules, as is currently the case, the FASB believe that the recent surge of accountingscandals could be arrested.2 Over the years, however, various attempts to establish such acomprehensive CF have not been particularly successful. Often these efforts have resulted indiscourses that simply articulated the conventional practices used by practitioners at the timeto prepare financial statements and so their prescriptive statements simply mirror current prac-tices. The result, as Hines (1991) and Clarke et al. (2003) observe, is a circular kind of reasoningwhereby the CF reflects conventional practices (CP) and the CP reflects the CF. So, efforts whichare intended to be prescriptive are mainly descriptive.

A major reason for this state of affairs, Lee argues, is that the standard setters of the FASBhave ignored (or misunderstood) the philosophical underpinnings of their institutionalized sharedcognitive domain including their conceptual framework (CF) initiatives and their promulgatedGAAP. Moreover, the profession-at-larges common sense understanding of the basic nature ofincome and capital assumes that an enterprise has some real economic substance to whichaccounting signs of income and capital do (or should) refer, a perspective that (perhaps only

1 To date, the FASB have issued seven official Conceptual Statements for the CF.2 Yet as Sterling (2003, 1) astutely observes, The current accounting scandals are quite similar, identical in some cases, to the

thousands that have preceded them. An important difference is terminology. Previously we were concerned about false profits,cooked books, inflated income, and the like, but now we are concerned about managed earnings. It is the same withdifferent names. In the 1960s and 1970s this was called income smoothing and many saw it as welcome since it dampenedshort-term fluctuations in reported income. Yet it would seem that accountants could just as easily manage earnings followingprinciples rather than rules.

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Accounting and the Public Interest Volume 6, 2006

implicitly) rests on the philosophical correspondence theory of truth in regards to the referentsof these accounting signs. Lee rejects this realist line of thinking.

A SOCIAL CONSTRUCTIONIST APPROACHLee argues instead, on the basis of Searles (1995, 1998) social construction of reality phi-

losophy, that income and capital accounts refer, not to any intrinsic, brute reality of economicsubstance, but rather to the socially constructed abstract notion of economic reality. He con-cludes, therefore, that until standard setters come to understand the ontological and episte-mological nature of these socially constructed objects, the FASBs initiative to develop principles-based standards as a supplement (or even a replacement in the longer term) to its presentrules-based accounting standards (GAAP) will amount to no more than a short-term palliativeto the long-term ills of the financial accounting world, and so the FASBs CF will remain chieflyas a means of legitimating standard setting activities (Lee 2006a). In order to remedy this, heproposes that standard setters adopt a social constructivist philosophy that incorporates somekind of epistemic measures of socially constructed realities, rather than continuing to rest theirprescriptions on a positivistic, scientific epistemological philosophy.

Lees position, importantly, problematizes the traditional common sense notion, underwrittenwith the philosophical correspondence theory, that accounting signs of income and capital reflectin a factual manner an underlying brute economic substance. Such a stance assumes that thereis an economic brute reality (a material thing-in-itself) existing independently of its capture andrepresentation in accounting reports and that it might be possible for accountants to objectivelyand transparently represent it by following the professions generally accepted accounting prin-ciples and rules. Lee dissents from this view but, along with other social constructivist accountingacademics,3 he thinks it is possible to represent and measure the socially constructed earningssurrogate, which stands in for a nonexistent brute economic reality. However, standard setters,Lee argues, do not recognize that economic income is a socially constructed thing with a func-tion, like a chair with a physical wooden part and its socially constructed function as a thing tosit on. What seems to be at stake, then, is whether the accounting profession can make theclaim that accounting reports can tell the truth, or some close enough approximation to it, aboutthe economic reality of the enterprises for which they account.

So for Lee, the matter is at base a philosophical issue that standard setters do not addressor of which they seem to be unaware. Lee concludes that until standard setters take into accountthese ontological and epistemological issues, neither rules nor principles nor some combinationwill make much difference except as a short-term, cover story (what Lee [2006b] calls a cun-ning plan) to bypass the issue again. In taking this stand, he implies that if the FASBs CF,GAAP, principles-based initiative, interpretation bulletins, etc., are built around the meta-narrativeof social constructionism, then the intellectual material of the accounting profession will cometo constitute a coherent body of concepts and practice. Such a hope is underpinned by thephilosophical coherence theory of truth. But perhaps a more basic issue is whether a corporationexists as a brute reality out there and if it does not, as with the bald King of France example(discussed below at some length), then it seems to me that any premises about accounting forits economic reality and the debate over rules versus principles become nonsequitors.

In sum, Lee addresses the accounting reality issue by drawing on social construction theory.He proposes that social reality exists, not as a brute physical reality, but as an objective linguistic

3 See, for instance, Shapiro (1997), Alexander and Archer (2003), Mattessich (2003), and Mouck (2004).

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thing, independently of the subjectivity of any one individual but intersubjectively since manyagents in the particular collectivity treat it as if it does exist. Along these lines, he argues thataccounting information does reflect an economic reality, but only a socially constructed one. Andso the issue for him is how to develop or find epistemic criteria for representing socially con-structed things (which are not amenable to the positivistic scientific method.) Until this getssorted out, he concludes, standard setting exercises are merely stop-gap (no pun intended)measures to legitimate to the world at large the professions standard setting activities, and,more crucially, its privileged status in society. So, Lee concludes, we need new philosophicalepistemic criteria for measuring and representing this socially constructed linguistic formation.

Some Philosophical Conundrums

But philosophically, the reality issue is not as straightforward as brute fact versus social fact,as Lee implies. Take the statement The King of France is bald. (This is the famous BertrandRussell problem.) Once having been said, then the statement exists in the form of a social fact.But that does not make the statement either true or false in the sense that it corresponds to anybrute reality. Nonetheless, the statement exists as a logical proposition and we can think aboutit, discuss it, and debate its truth status. For example, drawing on the correspondence theoryof philosophy, we can make the claim that the statement is false because France is a republicand does not have a monarch, and so the statement does not correspond to this fact. Yet,paradoxically, we can also say that the bald King of France exists in the same sense as we cansay Santa Claus comes on the night before Christmas day bringing presents for children. Bothstatements are socially constructed linguistic formations even though we know (or are prettysure by using common sense or rational scientific epistemology) that these socially constructedthings do not exist as brute reality physical things-in-themselves. Now what is interesting andstrange about this (and the same applies to the idea of economic income and capital as I willargue later) is that we can talk about and discuss these nonexisting objects even though we arepretty sure they do not physically exist. How can this be?

One answer is to simply state that we can be certain that some bald King of France doesnot exist. But there is something queer about such a sentence in that it refers to an object andthen we say that no such object exists. So someone can ask us, What is it that does not exist?And the answer, The bald King of France, seems to confer some sort of reality on a nonexistentthing. Now even though France is a republic, (thus it does not have a King) we readily understandthe sentenceit makes sense to us even though we know it is nonsense or not-sense. Yetsomeone unfamiliar with Frances constitution might believe it to be true. One response to thispuzzle (proposed by the logician Alexius Meinong) is that the fact that we can refer to a baldKing of France means that there is a way in which such an object is out therenot physicallybut in a metaphysical intersubjective realmexisting as a logical but false statement. This Kingsvery existence in the world of logic is what allows us to deny his existence and yet treat thestatement seriously.

Russell, however, was not satisfied with this response. He reasoned that we tend to thinkof the signifiers in descriptions like this as necessarily denoting some object in order to havemeaning. But signifiers do not always function to name things as the early Wittgensteins (1922)picture theory of language held. They also function to make statements that can be assessedlogically for their truth or falseness. So, the logical construction of the bald King of Francestatement, as Russell showed, hides its complex three premise logical structure: (1) There is a

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King of France, (2) There is only one King of France, and (3) This King of France is bald. Withthe logical structure thusly unmasked, it can readily be seen that the statement makes sensebut is false because the first premise, There is a King of France, is untrue, and thereforepremises (2) and (3) are nonsequitors.

But the Santa Claus issue goes further. If a child asks, What does Santa look like? wecan reply that he is short and pudgy, sports a large white beard, a cherry red nose, has a friendlysmile, and is prone to saying in a jolly way, Ho, ho, ho. This description makes logical senseand both children and adults understand it, but in different ways. So with Meinong, we can saythat there is a way that Santa Claus exists and this is logically but not necessarily as a realphysical, living, material person. We say not necessarily because unlike the case of the Kingof France, it would be logically incorrect to say, Santa Claus does not exist because this wouldbe claim that we know something to be true like The statement that Santa Claus exists is false,is to claim we know the truth about something we say is falsewhich is a logically inconsistentstatement. This is how a logical positivist philosopher might address the Santa Claus matter.

But, for say a poststructuralist philosopher, whether Santa Claus exists is not a verifiable orfalsifiable matter. It is simply a socially constructed logical statement. And so she sets it asidein order to focus on the real material consequences of such a social construction. (I will returnto this perspective later in an accounting context.) And we can say that even though the baldKing of France and Santa Claus may not exist except as logical statements which are easy tounderstand, and that while it is likely that they do not correspond to any brute reality, we cansay that they do have functions, just as a screwdriver exists as a brute reality made of woodand metal and functions for a practical social purpose (Searle 1995, 1112).4 In the Santa Clauscase, He functions, even if he only exists logically, for example, as a way to discipline anddominate young children (You better be nice, you better be good, or else ...), and as a way togive gifts to them and hide their real givers, and as a way to have some fun singing about SantaClaus. (Some sing sexy songs about Santa and others even make rude jokes about him, thusserving other social functions.) So it seems we can mobilize nonexistent things for real socialfunctions by simply by treating them as if they exist even though we are pretty sure they donotbut do not want to go quite that far. Surely it is the same with accounting reports of incomeand capital.

Some Accounting Implications

Conventional accounting thinking about income and capital seems to parallel this way ofthinking about the bald King of France and Santa Claus. For example, FASB Concepts Statement2, Representational faithfulness is correspondence or agreement between a measure or de-scription and the phenomenon it purports to represent. In accounting, the phenomena to berepresented are economic resources and obligations and the transactions and events thatchange those resources and obligations (para. 63). And Schipper and Vincent (2003, 98) write,We define earnings quality as the extent to which reported earnings faithfully represent Hicksianincome, where representational faithfulness (emphasis added) means correspondence or agree-ment between a measure and the phenomenon it purports to represent. They go on to saythat while, Hicksian income is not observable ... there are better or worse approximations, and

4 Collectively most people take a screwdriver to be a useful thing for turning screws; yet it can be taken to be used for otherpurposes such as opening paint cans, mixing paint, and stabbing persons.

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we argue that higher quality earnings are closer to Hicksian income. And later in the article,Both comprehensive income and earnings measure Hicksian income imperfectly, but clearlycomprehensive income is the higher quality (more representationally faithful) number (Schipperand Vincent 2003, 107).5 In the same issue, Hodge (2003, 41) writes, I define earnings qualityas the extent to which net income reported on the income statement differs from true earnings.While Nelson et al. (2003, 17) write, Earnings management occurs when managers use judgmentin financial reporting and in structuring transactions to alter financial reports to either misleadsome stakeholders about the underlying economic performance of the company or to influencecontractual outcomes that depend on reported accounting numbers. And Storey and Storey(1998, 152) observe, The concepts statements describe but do not define earnings and incomebecause they cannot be defined. Both result from applying generally accepted accounting prin-ciples and are determined by what is done in practice at a particular time.

So here we have from the conventional scholarly academic viewpoint concepts such astrue earnings, underlying economic performance, and more representationally faithful toHicksian income. Now if real earnings and underlying true economic wealth cannot be definedor observed, then it is hard to support the claim that they exist as things-in-themselves inde-pendently of human minds before being captured in accounting reports. As with our bald Kingof France and Santa Claus examples, however, people can and do treat accounting informationand reports as if they refer to some brute economic reality existing out-there before theirrepresentations in accounting signs. And they can mobilize them for real social functions andpurposes such as: issuing stock options, executing contracts such as ownership claims, payingdividends, bonus arrangements, union contracts regarding pay rates, laying off numbers of em-ployees, etc. Now by adopting this stance it does not matter whether an economic reality existsas a thing-in-itself and so we can set aside discussing the mattersimply bracket it off as anonsequitor.

With this in mind and returning briefly to our Santa Claus example, we can see how suchsocial constructions of reality play a real role in the power structure of the family and its pro-duction and distribution of its real material wealth. Similarly, socially constructed accountingrepresentations play a vital role in societys power arrangements (socially constructed) and thearrangements for the production and distribution of real economic wealth. And it is these mattersthat I think accounting academics should be addressing. Lee, however, takes a more neutralstance. He proposes that standard setters and conceptual framework designers need to under-stand the socially constructed ontological nature of accounting representations and its relatedepistemological issue of how to measure a socially constructed object before progress can bemade in improving corporate financial reporting. Lee seems to imply here that a CF is neededand that it is possible to erect or find one that is epistemologically suitable to the task. I willreturn to this issue later, but before doing so there is another closely related aspect of the CFproject that I wish to address.

Lees central thesis holds that a principles-based accounting standards approach (as op-posed to the current rule-based approach) would be only a short-term palliative because as

5 I must admit that I am somewhat bemused by this line of reasoning. How can accounting comprehensive income be morerepresentationally faithful to something that cannot be observed than are other representations? Perhaps, the authors simplymeant that the definition of comprehensive income (a socially constructed artifact) corresponds more closely to the definitionof Hicksian income (also a socially constructed artifact) than do earnings or net income (also socially constructed artifacts).

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things now stand, a solid conceptual framework upon which to build accounting principles re-mains an incomplete project. I agree with this claim but I would like to push on it further. Myargument is that the very idea of developing (or discovering) a conceptual framework as a logicalfoundation for financial reporting rests on a very structuralist line of thinking. Such a framework,the argument holds, would consist of a set of permanent, universal, untouchable, transcendentallinguistic building blocks that do not change (or that change only slowly) with time and cir-cumstance. Each building block would stand on its own feet and also be logically interrelatedto, commensurable with, and not inconsistent with the rest of the building blocks. Such a frame-work would be both internally consistent (i.e., coherent) and externally valid (i.e., correspondingwith reality). The hope is that a conceptual framework would emerge upon which all accountingpractices, knowledge, rules, and principles could rest, thus guaranteeing that accounting state-ments would present fairly (or provide a true and fair view of) the enterprises economic financialtransactions and related events. A brief historical account of the professions efforts in this di-rection will act as a backdrop for some poststructuralist positions that problematize this line ofthinking.

The Problematic Nature of FASBs Conceptual Framework

The search for an unassailable foundational conceptual framework to underpin rules or prin-ciples based standards began on very shaky ground and, I will argue, has remained there eversince. In the early 1930s, the Special Committee on Co-operation with Stock Exchanges of theAmerican Institute of Accountants (the counterpart of todays American Institute of CertifiedPublic Accountants) recommended that an authoritative statement of broad based accountingprinciples ... be formulated [but] did not define principles of accounting (Storey and Storey,1998, 45). The Committee debated whether to use rules, conventions, postulates, prin-ciples, or laws. The Committee rightfully so rejected rules since it implied some rule-settingbody, which did not exist. The Committee decided that principles was the more lofty term andwould resonate better than rules, conventions, postulates, etc. especially with those parties whoregularly relied on financial reports, and the general public at large and who looked to the ac-counting profession for special expertise and authority. In support of this choice, after a longsearch, the Committee found just the definition it wantedthe seventh and last definition ofprinciple in the Oxford English Dictionary (OED) A general law or rule adopted or professedas a guide to action; a settled ground or basis of conduct or practice.6

But, as Storey and Storey (1998, 6) observe, The special committees use of the wordprinciple set the stage not only for the Institutes (AICPA) efforts to identify accepted principlesof accounting but also for future confusion and controversy over what accountants meant whenthey use the word principle. The Committee provided five examples of principles, but thesewere much less fundamental, timeless, and comprehensive than what most people perceive tobe principles. They had little or nothing in them that made them more basic or less concretethan conventional rules (Storey and Storey 1998, 6). In fact, the Institute called them rules inpromulgating them to their members and the Committee referred to them as rules. And, as May(1936, 335) observed, The half dozen basic principles the committee laid down were rules rather

6 See May (1943, 3738) and Storey and Storey (1998, 321) for a detailed historical review of the debates on the rules versusprinciples controversies and the selection of the term principles.

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than principles, and were, moreover, admittedly subject to exception. So the current rules versusprinciples debate, given that rules and principles concepts are indistinguishable, seems like anonstarter. In poststructuralist terms, the boundary between a rule and a principle implodes.

Nevertheless, the Committees definition stuck. It was later incorporated verbatim in Ac-counting Research Bulletin No. 7 (1940). In 1953 it was attributed only to the New EnglishDictionary in Accounting Terminology Bulletin No. 2, Review and Resume. And it has been in-corporated in various pronouncements since then without reference to the original OED source.As well, the Securities and Exchange Commission (SEC) as early as 1937 was pressuring theprofession to come up with a set of generally accepted accounting principles (GAAP), threateningthat if it did not the SEC would take on the task. (Of course, if the SEC did take it on it wouldbe in the same pickle as the private sector standard setters in addressing all these issues andconundrums.) Ever since these former times several attempts have been initiated to develop anunshakable permanent conceptual framework including a core of fundamental concepts whichdo not depend on transitory pragmatic consensus. Yet, as Storey and Storey (1998) observed,and it seems to be the same today, the framework remains very much unfinished and there areno signs of it being completed in the near future, if ever. The CF project, then, looks more likea constantly changing and never ending venture than some kind of a solid foundation. Withoutit, and this is the point to underscore, a principles approach will flounder on the same rocks ashas the current rules-based situation.

But there is an even more vital issue to be addressed. In the larger scheme of things, theidea of establishing a foundational framework runs aground at the outset since accounting rulesand practices have economic, social, and political consequences. A foundational building blockbased on rational, economic thinking (e.g., the value of financial accounting lies in its ability toreasonably represent, within acceptable limits, an enterprises true and fair financial position andits income and cash flows) might easily contradict a foundation based on the broader socialwelfare rule of an equitable distribution of the enterprises and societys wealth. Furthermore,any tradeoffs between economic and social foundations would have to be settled by politicalprocess where power relations (not rational economic or idealistic thinking) come to the fore.This means that any conceptual framework would not constitute some solid, permanent, un-changing foundation but instead would be a constantly moving, shaking, agonistic, and con-tested undercarriage, teetering between economic, social, and political pillars. Little wonder thatthe accounting profession at large has been unable to discover, construct, or complete thisproject.

Regardless of the lack of success in developing an unimpeachable CF, the ongoing attempthas served a very valuable purpose for the profession. It underwrites the idea that with a properset of principles and rules, resting on its solid CF foundation, that accounting reports whichfaithfully follow them will transparently represent and reflect the enterprises real, economicwealth (income and capital). This gives the impression, albeit perhaps only implicitly, that thereis such an objectsome real, intrinsic thing-in-itself out-there, as with atoms and mountainsbefore its capture in an accounting report and that the accounting report should correspond withthe underlying economic events and transactions. As Lee (2006, 14) observes, The FASBs useof terms such as reliability, faithful representation, and economic substance (emphasis added) issufficient to infer at least an unconscious realist approach to accounting. The continuation ofthe CF effort, underpinned, if only implicitly, by the correspondence theory of philosophy, legit-imates this line of thought to the general public.

In light of the above arguments, perhaps the profession would be better off to face up tothe distinct possibility that accounting may never rest on a rock-solid foundation of fundamental

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concepts and set aside the search. They could just admit that what exists today as accountingknowledge is a labyrinth of one-off, separate, often incommensurable and frequently contra-dictory, axiomatic statements which get espoused as universal rules and principles for account-ing problems and practices. As FASB chairman Herz (2005, 4) recently observed, The fact isthat what we call U.S. GAAP is comprised of over 2,000 individual pronouncements by variousbodies and organizations in a variety of forms. He goes on to describe this vast corpus ofaccounting principles, rules, concepts, regulations, interpretations, implementation guides, etc.as disjointed, frequently in conflict, extraordinarily detailed, and complicated, so much so, thatonly a rapidly decreasing number of CFOs and professional accountants can fully comprehendall the rules and how to apply them (Herz 2005, 4). He also notes that a diverse array of publicand private bodies, institutions, and committees contribute to this vast body of official pro-nouncements.7 The result, Herz (2005) believes, is a body of official accounting literature thatis hard to understand and difficult to use. In one word, nuts! (Herz 2005, 5). But rather thanleave it at that, I want to expand on this speculation drawing on a few poststructuralist notions.

Some Poststructuralist Perspectives

For poststructuralists, the desire for some kind of a final, fundamental conceptual frameworkis part of the long-standing impulse in Western society (given a large boost by the Enlightenmentproject) to bring some permanent, final meaning, some logos into our presence. This word-of-words would be the axis around which all other accounting rules, principles, etc., would orbitin its solid gravitational legitimating grip. This logocentric impulse reflects the general dispositionand the longing for a transcendental discourse of some kind that would directly relate to, cor-respond with, and secure a stable set of permanent truths and wisdoms that would withstandthe contingencies of time, history, and language. This impulse is reflected in the accounting worldby its institutionalized desire for a totalizing accounting conceptual framework upon which acoherent and cohesive set of accounting rules and practices would rest.

Social philosophers with poststructuralist leanings, however, are highly suspicious of anysuch totalizing impulses. They see the desire for such a transcendental discourse as a hopelesscause. They would also be skeptical about the argument that accounting theory and principlesare progressing on some kind of a linear historical trajectory toward an accounting utopia wherethe profession and its practices will finally be able to deliver a true and fair view of the economicessence of commercial enterprises in an impartial, objective, consistent, timely, transparent, rel-evant, and verifiable manner (in all material respects) with its principles and pronouncementsbuilt at last on a rock-solid conceptual framework. And some would even see it heading toward,or already arrived at, a dystopia of nonsensical, contradictory, and often self-reflecting, axioms,discourses, and utterances circulating in an endless regress. How, for example, can one objec-tively verify the legitimacy of a future stream of cash flows without producing another subjectivediscourse about its veracityand so on in an endless regress?

7 These include: the FASB and its predecessors, the Accounting Principles Board, the FASBs Committee on Accounting Pro-cedures, the FASB Emerging Issues Task Force (EITF), and the Accounting Standards Executive Committee of the AmericanInstitute of Certified Public Accountants. The Securities and Exchange Commission (SEC) alone has a vast number of corerules, including Regulations S-X and S-K, more than 100 specific Staff Accounting Bulletins, nearly 50 Financial ReportingReleases, and hundreds of Accounting Series Releases. Herz points out that the SEC also proclaims their latest views onparticular reporting and disclosure matters through speeches and comments at EITF and other professional meetings, which,while not official, effectively carry the same weight for anyone trying to comply with all the rules (Herz 2005, 45).

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A poststructuralist accounting scholar might also see the recent scholarly debates regardingdrawing on Searles (1995, 1998) notions of subjective and objective ontology and epistemologyas a misguided venture.8 From the poststructuralist position, the border between the conceptsof ontology (brute reality versus social reality) and epistemology (scientific objectivism versussubjective feelings, intuitions, and physical senses) is not only fuzzy but also indistinguishable.The idea of identifying some brute ontological reality is by definition epistemology (a way ofknowing this thing) while the idea of knowing something is ontology in the sense that to knowis to be. On this view, the difference between ontology and epistemology implodes which meansthat the differences in Lees (2006, 14, Figure 1) scheme collapse. Yet the question remains,What should we, as academics, do or not do? As it turns out, there is rather a lot to be done.

In the first instance, we should not see poststructuralist approaches as falling into the abyssof nihilism such as believing that accounting, and also the life of an accounting academic, ismeaningless and the feeling of extreme skepticism regarding the usefulness of researching ac-counting. Instead, we can try, as Rorty (1989) urges us, to develop new final vocabularies anddiscourses for researching and understanding the state of accounting in contemporary society.A starting point is to realize that truth is not found but made. As well, we need to recognizethat religion, science, and philosophy are not unlike novels, poems, plays, paintings, and evenarchitecture. Scientists, for example, do not discover truth, rather they invent and create narrativedescriptions of the physical world which are, nonetheless, useful for predicting, controlling (andeven destroying) the natural world. Importantly, however, this is not to say by any means thatthe real world only exists in our heads and in our senses. Most of us are pretty sure that thingsare out there (stones, mountains, atoms, animals, etc.) that are not just a creation of humanminds and language and that they do exist as things-in-themselves, as Nietzsche calls them.We believe that when a tree falls in the forest it does make a physical sound in the scientificsense even if no one is within earshot.

The vital point is that the physical world is out there but the truth or falseness about it, itsessential meaning, is not. For a statement to be true about the meaning of such things, vo-cabularies and languages would also have to be out there waiting for us to discover and use.As Rorty (1989, 5) neatly makes the point, To say that the truth is not out there is simply to saywhere there are no sentences there is no truth. Sentences and languages are human creationsand so truth cannot be out there because descriptions of the world are not out there. Thisis what Derridas (1976, 158) much misunderstood, taken out of context, and maligned sentence,Il ny a pas de hors-texte, was meant to convey.9 More simply put, the referent of a word isabsent in any text. And, just as there is no intrinsic, true nature of physical objects, no brute realessence of man to be found and known, there is no true brute, intrinsic essence of accountingincome or capital out there before their representations in accounting reports.

8 See Alexander and Archer (2003), Archer (1998), Mattessich (2003), Mouck (2004), and Shapiro (1997, 1998) who support aSearlean ontological /epistemological distinction.

9 Derridas (1976) point is that since the meaning of any text is not out-there, somewhere beyond the text waiting to be found,then a careful critical reading (as opposed to a reading that merely doubles or paraphrases the original text) cannot legitimatelytransgress the text toward something other than it, toward, say, a referent, a reality that is metaphysical, historical, psycho-biographical, etc. (Derrida 1976, 158), or toward a signified outside the text. A reading that imports any such referents togive the text its true meaning cannot be called a critical reading since this would risk developing in any direction at all andauthorize itself to say almost anything. But this indispensable guardrail has always only protected, it has never opened thetext (Derrida 1976, 158). In contrast, a deconstructive reading opens up the text, identifies its privileged metaphysical hier-archy, temporarily reverses the hierarchy, reveals the texts ultimate undecidability, and exposes its politics.

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What we do know, however, is that these key accounting signifiers are sentences and ut-terances that humans using language invent, create, and describe. This position negates thecommon sense notion that language and numbers are a transparent medium providing a windowon reality. But crucially, that to say that the truth is not out there waiting to be discovered is notto say that we have discovered that there is no truth. Rather, the way the world is, is true inthe sense that it truly exists. So we invent linguistic entitiesnarratives, discourses, discursiveformations, regimes of truth, etc.to give meaning to them and to speak about the world. Suchlinguistic formations are not found, we make them, we invent them using language.10 They arehistorically, linguistically, and socially constructed. This signals that their truth properties, themeanings we give them, are a function of the particular narrative we construct or select. Theeconomic world of an enterprise, even if it does exist, does not speakwe speak for it.

In the accounting context, then, and following Lyotards (1984) language game ideas, wecan depict each formal GAAP as an independent micro-narrative, one that is not orbiting withinthe gravitational pull of any grand conceptual framework serving as a controlling meta-narrative.Instead we have a labyrinth of mainly incommensurate, free-floating accounting micro-narratives,which we call GAAP. The meaning we give to each account on a financial statement dependson the particular GAAP put into play and the accountants interpretation of it. This also signalsthat each account reported in a financial statement is a stand-alone mini-regime of truth basedon a particular GAAP, which has its own agonistic historical background. This historical strugglegets ignored by, or is lost on, most of the readers of an accounting report.

An enterprises inventory, as a simple example, gets reported quite differently depending onwhich micro narrativeFIFO, LIFO, or NIFOis appropriated for that purpose. And for some,the most meaningful micro-narrative depicts the physical inventory as a container of future cashflowsnot one depicting it as the historical cost of acquiring it. FASB Concepts Statement 6(para. 25) supports the latter view, Assets are probable future economic benefits obtained orcontrolled by a particular entity as a result of past transactions. While some accountants mightadopt this view, others might reject it as did Schuetze and Wolnizer (2004, 52) quoted in Lee,(2006a). In reacting vociferously to this definition they commented,

Egad, that is mind boggling stuff. Most accountants do not understand it. Ordinarypeople are mystified by it ... the current definition (as above) is an abstraction. Underthat definition, the asset I call a truck is not the FASBs asset. The FASBs asset is thepresent value of the net cash flows the truck will produce by hauling coal or lumber orsteel, viz. The probable future benefit. I call it a truck.

The truck account, as with inventory, is a problematic and contested linguistic terrain.In sum, the micro-narrative (the specific GAAP) for almost every account reported is the

result of a human struggle engaged by the handpicked (not democratically elected) standardsetters, by lobbyists, by academics who contribute to the debate, and by various players in the

10 They are, in the later Wittgensteins (1958a, 1958b) terms, language games.

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capital market. Almost every formal GAAP has an agonistic historical trajectory.11 Yet, the ac-countants relying on them tend to forget, or ignore, this important fact and just draw on themto prepare financial statements. So instead of seeing each account as the present embodimentof a historical struggle, they are taken for granted to be the accepted way to do the accounts.They get naturalized and doxified.

The Accountants Agency

The above discussion, however, is tilted heavily toward a structuralist perspective and somarginalizes the accountants agency in terms of his or her attitude to the truth when preparingthe accounts. In the last section of this essay I want to push some of the above philosophicalissues in another direction by speculating how practicing accountants might respond to thephilosophical issue of accounting truth. This seems especially important in light of the wide-spread concerns about the recent plethora of headline-making, so-called earnings manipulationscandals.

What I propose in this respect is that the accountants agency can be thought about interms of three attitudes to accounting truth. For convenience I will categorize these as thetruthteller, the liar, and the spinner and I will distinguish them on the basis of their philo-sophical attitude toward the truth in accounting reports.12 The truthteller accountant conformsto the common sense view of accounting and the accountants agency, the perspective advo-cated by professional accounting bodies and many academics alike. These are the accountantswho dutifully, and to the best of their ability, try to comply with both the form and the substanceof promulgated GAAP. And they believe that the financial statements they produce do indeedrepresent a true and fair view of (or present in a fair manner) the actual economic affairs of theenterprise. This realist perspective assumes that such a reality exists as an independent objectand that its truth can be captured in accounting reports. The truthteller accountant believes thisand faithfully pursues it when doing the accounts.

The truthtellers opposite number is the liar accountant. Ironically, this type believes in andcares just as much about the truth as does the former. They, however, want to lead those whorely on financial statements, the ubiquitous users, away from what they believe to be the realeconomic truth about the enterprise. They deliberately falsify the financial statements in order tofool stock market players (and other so-called stakeholders) in order to manipulate the stockprices, often for personal gain. They want to deliberately fool users.13 The accounting liar typifies

11 SFAS # 130, Reporting Comprehensive Income (June) (FASB 1997), is not untypical. Two members of the Board dissentedstrongly arguing that, The Boards conceptual framework does not define earnings or net income, nor does it provide criteriafor distinguishing the characteristics of items that should be included in comprehensive income but not in net income. Thequalitative characteristics of the items currently classified as items of other comprehensive income have not been consistentlydistinguished from those items included in net income. (FASB 1997, 11). Consequently, items of other comprehensive income(OCI) can be as significant to measurement of an enterprises economic and financial performance as those items of othercomprehensive income that are currently included in measuring net income (FASB 1997, 11). They concluded, therefore, TheStatement should have required that items of other comprehensive income be reported in a statement of financial performance,preferably in a single statement in which net income is reported as a component of comprehensive income. (FASB 1997,12). Thus, the dissenters concluded, the aim of clearly distinguishing net income from comprehensive income is seriouslycompromised.

12 The inspiration for these types came from Frankfurts (2005) short (67 pages) book, On Bullshit, which to his surprise becamea best seller. Frankfurt is a distinguished moral philosopher and Professor Emeritus at Princeton University.

13 They do this not just for the delight of deception, as is the case for the classic pathological con man, although some ac-countants might be of this ilk.

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individuals that the popular press, and most academic accountants, see as the financial officersin the Enrons and the WorldComs of the world who are generally thought to have perpetratedaccounting scandals.14 Paradoxically, both the truth teller and the liar are seriously concernedwith and have a stake in knowing the truth. They believe that there is an accounting truth thatcould be reported.

But it is the third type of accountant, the bullshitter, who should be the most worrisomefor all concerned.15 They are indifferent to the truth of the object they are representing in theirnarratives. Ironically, then, they are not burdened with either the weight of the scruples that arecarried by the truthteller, or with the liars fear of being exposed. The stereotype of the used carsalesman is the archetypical spinner. He has a story he uses to sell the car. He tells potentialbuyers that the car is in great shape, that the mileage is very low for a car of this vintage, andthat it was driven by an old professor who only took it out on Sundays and who faithfully followedthe dealers maintenance program. Crucially, he would tell this story regardless of whether heknew it to be true or false. The philosophical issue that arises with the car salesman is thathe is not at all concerned with the truth, but is indifferent to the truth.

The bullshitter accountant is similar. She takes the books of accounts, draws on the officialGAAP, interprets some of the key principles/rules (e.g., revenue recognition, matching, cost al-location, materiality, and the like), keeps in mind the official conceptual framework, and createsan accounting narrative about the enterprise in question. In doing so, she is indifferent to whetherthe financial statements tell the truth. She is only concerned to construct financial statementsthat accord with GAAP and which will satisfy the market for accounting informationthe in-vestment analysts, the shareholders, the bankers, the top executives, the SEC, the tax authori-ties, and other related partiesthe so-called stakeholders. While the used car salesmans goalis to sell the car regardless of its true condition, the accounting spinners goal is to satisfy theseparties regardless of what may or my not be the true economic condition of the company. Theendstelling a good storydominate the meansthe technical skills and experiences. Truthand lies are matters to be left for trained philosophers to investigate. (Ironically, following thisline of reasoning, it can be said that for the most part, the accountants at Enron were notnecessarily liars but simply bullshitters. In contrast, the accountants at WorldCom were liars.They deliberately and knowingly violated GAAP by treating expenses as capital expenditures.They wanted to lead users away from what they believed was the truth.)

A thoughtful accounting bullshitter, however, might question the very existence of some suchtrue economic reality. In which case he might come to the conclusion that the financial state-ments are indeed what Black (1985) calls humbug and what Frankfurt (2005) calls bullshit.And he might, having read some of Friedrich Nietzsches thoughts on the origin of morals, cometo believe that there are no factual accounts of income and capital, only interpretations, and thatthe accounting truth is not out there to be discovered, rather it is manufactured using thelinguistic, semiotic accounting material at handGAAPs, CFs, interpretation guides, etc. And,if he followed the later Wittgenstein (1958a, 1958b), he might also come to believe that the

14 A list of recent such scandals includes Enron, WorldCom, Tyco, AOL Time Warner, Adelphi Communications, Bristol-MyersSquibb, Global Crossing, Kmart, Xerox, Merck, Mirant, Nicor Energy, Pereque Systems, and sundry energy trading companieslike Dynergy, El Paso, and Reliant Energy, to mention only some. It is likely that a similar list could be compiled for companiesin Europe and Asia.

15 Frankfurt (2005) calls his type the bullshitter but he does not mean it in the usual pejorative sense. Perhaps the real scandalis that such practices are the order-of-the-day and so cries of scandal serve to dissimulate this. See Baudrillard (1988, 171174) for a discussion of this scandal effect.

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accounting principles, fundamental concepts, conceptual statement documents, etc., are simplythe tools in the accountants tool box that accountants use in the accounting language gamecalled financial reporting. He might conclude, therefore, that accounting truth rather is made, notdiscovered or revealed by accountants. (Some would even label him a poststructuralist account-ant). Either way, he is not lumbered with the philosophical burden of seeking and understandingtruth. After all, the enterprises year-end is long gone and the deadline for finalizing the financialstatements is fast approaching (or the quarterly reporting date is looming). Regardless of theirtruth status, the financial statements must be released on time.

At the end of the day, then, these accountants pose the biggest challenge for the financialworld at large. Since they are not concerned with the truth status of the financial statementsthey prepare, they cannot be regarded as presenting statements that do not represent the trueeconomic realities of the enterprisethey do not presume to know the truth. So they can onlybe faulted, if fault them we must, for not trying to tell the truth, for not trying to get things right,for not seeking the truth. Philosophically, it is their indifference to the truth that is of majorconcern. Yet, this seems more like a quibble. If income (in its various forms including Hicksianincome, comprehensive income, net income, earnings) cannot be defined, only described, andif income is only a socially constructed linguistic object, their indifference seems both practicaland reasonable, and so justifiable. They cannot be justly accused of deliberately promulgatingfinancial statements that they presume to be false. Their financial statements are grounded nei-ther in a belief that they are true, nor, as a lie must be, in a belief that they are not true. Theirlack of connection to a concern with the truth, and this is the big message, means that they aresimply spinning tales, what Frankfurt (2005) calls bullshit.

Frankfurt (2005) also distinguishes bullshit from Blacks (1985) notion of humbug. Hum-bug refers to deceptive, pretentious linguistic misrepresentations that nevertheless are short oflying in that they are distinct from what the humbugger has in mind. A case in point is aFourth of July orator who goes on bombastically about our great and blessed country, whosefounding fathers created a new beginning for mankind. This is surely humbug. As Black (1985)argues, the orator is not lying. His intention is not to convince the audience about these matters,nor does he care about what his audience thinks about these matters, nor does he care abouthis own beliefs about them, which may not be the same. He only wants to have the audiencethink of him as a great patriot, Someone who has deep thoughts and feelings about the originsand mission of our history, whose pride in that history is combined with humility before God,and so on (Frankfurt 2005, 18). Since he does not deliberately utter something that differs fromwhat he himself believes about these matters, his oration is short of lying. In this sense, Frankfurt(2005) concludes, bullshit is similar to humbug in that both discourses are unconnected to aconcern for truth. But the two also differ in one important respect.

The bullshitters discourse, in contrast to the humbuggers, is very carefully crafted. It paysmeticulous attention to details, it requires great discipline and objectivity, and it eschews anyself-indulgent impulses. It is wrought with the greatest care even though it is not germane todescribing the way things really are. And, It is this lack of connection to a concern with thetruththis indifference to how things really arethat I regard as the essence of bullshit (Frank-furt 2005, 34). Frankfurt (2005) sees contemporary society as saturated with bullshit. The realmsof advertising and of public relations, and the nowadays closely related realm of politics arereplete with instances of bullshit so unmitigated that they can serve among the most indisputableand classic paradigms of the concept (Frankfurt 2005, 22). The creators of such tales are, like

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the accountant, highly sophisticated craftsmen, greatly dedicated to getting every word, phrase,and image precisely right.

Paradoxically, this does not mean that accountants tales are not for real. The topic oftheir discourse has to do with vital aspects of financial, social, and political life. And they taketheir task seriously. They want the users to perceive a high level of candor in their presentations.This is evidenced by the ostensible factualness in appearance of annual reports including thefinancial statements. Todays annual reports of most enterprises of some size run to nearly 100pages and include highly technical notes explaining how the various accounts were prepared.They give the impression of being for real and that the accountant is sincere in preparing them.So while bullshitter accountants do not want to deceive, they may inadvertently misrepresentthe nature of the narratives they prepare. What they want to do is to convey a sense of sincerityto the telling of the tale rather than being concerned with some underlying economic truth ofthe financial statements they prepare.16

In this regard, accounting is well suited. It has the trappings of professional designations, amultitude of official pronouncements, and its auditors opinion which attests that the statementspresent a true and fair view of (or present fairly) the financial position, the results of its operations,and the cash flows of the reporting entity, in accordance with generally accepted financial ac-counting principles. And, given the amount of latitude in the GAAPs themselves, and the amountof professional and technical judgment necessary in interpreting and putting them into practiceinvolved, it is not surprising that earnings management is the order of the day. If there is nobottom line, no final word about the enterprises economic capital and income to be reported,then philosophically it makes no sense to accuse the spinner of violating representationalfaithfulness.

CONCLUSIONSo earnings management would seem not to be the major issue. The bigger concern should

be that the reports of income and capital in financial reports are bullshit in the above sense,and that nevertheless a large part of the world today relies on and takes vital decisions basedon the accounting spinners financial statements. That is the big message, the one that shouldset the financial world capital markets back on its heels. Surely this is the crucial concern thatacademic accountants of all persuasions should be addressing today.

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fair override. Accounting and Business Research 33 (1): 317.Archer, S. 1998. Mattessichs critique of accounting: A review article. Accounting and Business Research

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Melbourne, Australia: Cambridge University Press.Derrida, J. 1974/1976. Of Grammatology. Baltimore, MD: The John Hopkins University Press.

16 This philosophical position, ironically, is consistent with that proposed by Macintosh et al. (2000). (See also Macintosh [2002,chapter 4].) They argued that accounting signs of income and capital in todays order of simulacra no longer refer to anyobjective reality (brute, social, or otherwise) but circulate in a hyperreal sign world of self referential models, images, maps,and signs constructed by sundry players in the capital markets (corporate accountants, investment analysts, and investors).

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accounting—truth, lies, or ''bullshit''?

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