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AN HISTORICAL PERSPECTIVE OF THE ACCOUNTING ENVIRONMENT:
A GENERAL OUTLINE OF A WESTERN EUROPEAN AND NORTH AMERICAN
LINKAGE
Berith Bronger Siemers
Dongbei University of Finance & Economics
Dalian, PR China
Working Paper 05-22-2006
ABSTRACT
It is recognized that the usefulness of accounting information is contingent upon its (1)
neutrality, (2) relevancy, and (3) reliability. Given that all socio-economic systems are
comprised of participants and institutions, it would seem that the attainment of those three
qualities is conditioned by a proper determination of the institutional arrangement. The
relationship of the members of society to existing institutions emerges as the pivotal
consideration. Institutions are the creations of society, therefore, it seems fair to state that
they reflect the evolutionary process. The institutional arrangement has evolved over time,
and an understanding of the evolution is fundamental to achieving neutrality, relevancy,
and reliability of accounting information. The roles of the many and varied institutions as
intended upon their creation by society can provide the basis for establishing disclosure
requirements. Such requirements entail a proper balancing of many factors as constrained
by costs versus benefits in the information disseminating process. In this regard, historical
research can provide a tremendous insight into institutions and institutional roles as they
have evolved. Such insight can facilitate the complex balancing problem of financial
reporting.
INSTITUTIONAL ARRANGEMENTS AND ACCOUNTING THEORY
Acquaintance with realitys diversities is as important as understanding their connection
[Guer1ac 1977,7]. In order to understand (construct) the foundations of accounting theory,
it would appear that the development of the socio-economic system which accounting
serves be understood. To look at an existing highly developed system and from that to
attempt to construct the foundations of accounting theory may very well be folly and be
fraught with disastrous consequences for further analysis and policy recommendations. A
simple case in point follows. The Financial Accounting Standards Board (FASB), in
Statement of Financial Accounting Concepts No.2, has espoused relevancy and reliability
as primary qualities of accounting information; however, it considers neutrality as a
secondary qua1ity [FASB 1980]. This treatment of neutrality may be due to the failure to
give due cognizance to the evolution of internal and external financial reporting.
Relevancy and reliability are of much older vintage than neutrality, but that should not
diminish neutralitys rightful location in the hierarchy of accounting qualities. Relevancy
and reliability were primary qualities in the area of internal financial reporting when the
financier of the enterprise was also the manager of the enterprise. The emergence of new
institutions (capital markets, corporations, etc.) and new participants (shareholders,
professional managers, employee associations, etc),
characterizes the social evolutionary process which gave rise to external financial
reporting.
In order to serve the many and varied new users, the abstraction of the entity had to be a
true and fair representation of the facts consistent with monetary exchange. A complex
balancing among the interests of the many and varied users became paramount, and
neutrality emerged as the desired quality to achieve this complex balancing of interests.
The existing institutional arrangement evolved and did not exist in its present state,
however, the basic societal concern has not been altered by the variations emerging from
the continual modification or amplification of the institutional arrangement. To simply
abstract from rea1ity.without understanding the historical relevance of certain institutional
developments may allow reality to escape the analysis. Accounting theorists must avoid
falling victim to the same type of accusation launched against the classical economists:
The classical economists in their theoretical analysis did not do justice to the variety of
institutions, they built theories which could not justly account for the full range of
economic reality and its historical deve1opment [Eucken 1951,50].
The implications and consequences of the failure to understand institutional arrangements
and their historical evolution are of great importance and cannot be over-emphasized
[Finley 1973].
The requisite understanding of the accounting environment can be obtained from an
analysis of observed and observable phenomena. Apparently, the findings of such an
investigation should serve as the basis for the development of accounting theory.
With the foregoing in mind, this treatise shall: (1) focus on the socio-economic
system; (2) determine the participants; (3) examine their behavior; and (4) establish a basis
for the formulation of accounting theory. It must be stressed that human behavior
at times is irrational due to certain stimuli. When such irrationality does exist it must be
recognized as such and, therefore, not be incorporated into the formal theory. Government
action or inaction is the prime stimulus which can produce irrational behavior among
individuals.
The following caveat is highly illuminating: "What shines out amid darkness is often false
and deceptive. The natural order is often upset by special interests which are always
pursued in secret or disguised as the general welfare [Eucken 1951,321].
THE EVOLUTIONARY PROCESS AND DYNAMIC CONDITIONS
The theory of accounting must be viewed in light of its evolution through successive
and coincident socio-economic systems:
(1) Empires with public economies
(a) Chaldean-Babylonian
(b) Grecian and Roman
(2) European Feudalism
(3) Private economies coexistent with public economies:
(a) Individual Capitalism (1200-1850)
(b) Security Capitalism (1851-1900)
(c) Corporate Capitalism (1901- )
[Baran and Sweezy 1966,28-46]
Society has experienced the following phases in the capital formation process:
adaptability, tractability, mobility, and shiftability. The more complex the system became,
from the simple manorial accounting system to the complex enterprise accounting system,
the more sophisticated (scientific) the underlying infrastructure. The complex system
emerging with the Roman Empire was halted, giving way to a primitive and simple system
during the "Dark Ages" [Cunningham 1910,70,77,78,98,99; Deanesley 1956,126-140].
Then, in the fifteenth century the transmission of the more sophisticated accounting system
from Italy to Britain and other parts of Europe was experienced.
ADAPTBILITY
Human beings have adapted themselves to changing circumstances (tyranny,
population growth, etc.). The early socio-economic systems (Chaldean, Grecian, Roman)
shared a mercantilist philosophy. Accounting was invented as a first step in the
administration of the affairs of society [Lambert 1960,1-26]; in order for the state to
manage its affairs, control over its resources had to be established. Under European
feudalism, essentially the same purpose was made of accounting by the lords (nobility).
Then came the period of "individual capitalism" in the early stages of industrialism
[Ashton 1948; Heaton 1972,89]. The contours of the industrialized society are familiar in
such features as urbanization, mechanized manufacture, or the dominance of industry over
agriculture. It is more important to recognize its fundamental economic characteristic: its
dependence upon substantial investment in fixed capital, embodying technical devices
which raise productivity to levels far higher than anything obtainable in
the absence of that investment. It is because this human achievement made its first massive
appearance in manufacturing industry that we have come to think and speak of the sort of
society built upon achievement--whatever its political form or moral base--
as industrialized. It does not mean that societies which preceded it had no capital, or that
they were devoid of capitalism. Nor does it mean that they were all the same. But it does
imply that capital investment of this peculiar type was normally absent in the industrial
activity of pre-industrialized economies. [Coleman 1975,11-12]. The socio-economic
system experienced technological changes that were accompanied by the adaptation of a
new financial institution to accommodate this strain on individualism; private merchant
bankers, emerged on the scene to aid the individual entrepreneur [Ashton 1948,71;
Edwards 1938,9]. The rise of the merchant banker and the extension of industrialization
intensified the need for and sophistication of accounting. However, further extension of
industrialization necessitated a more fundamental institutional innovation, the joint stock
company (the corporation):
From very early times, several owners might combine to fit out a ship and buy a cargo,
when none of them was able, separately, to risk a very large sum in ventures by sea; and
this practice received a new application when a permanent joint-stock company, like the
East India Company, was formed, such could not be permanently maintained by
individuals singly, and the risk of trading were minimized for each, when the shareholders
acted together as one body. By this means the owner of a comparatively small sum of
money can club with others, so as to share great risks, and, if he is
successful, earn large profits.
It seems, indeed that unless this form of conducting business had been generally
understood, the gigantic undertaking of the present day. Could not have been
accomplished; there would have been no capital available [Cunningham and McArthur
1896,119].
The development of corporate organization may best be considered as a result rather than a
cause of the economic changes of the period. The increasing demand for capital made
necessary an improvement in the form of business organization, as the demand for capital
became so great that it could no longer be supplied from resources mobilized by the forms
of business organization under individual capitalism, namely, the singly
ownership or partnership. It was therefore essential to develop the corporate form in order
to provide cooperative capital tapped from innumerable private sources [Edwards 1938,14;
Rogers 1892,140-141].
TRACTABILITY
Capital is essential to growth. However, it was the ability to trace the flow of capital,
which enables the growth of cities and states through the expansion of existing and the
introduction of new industries. Whilst it was the growth of urban centers that undermined
the whole philosophy of mercantilism [Moffit 1925,p.xv], the corporation represented
collective ownership of resources through traceable units of capital--shares.
MOBILITY
The capital markets came into being to facilitate the movement of capital from areas
