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ACCOUNTING
THEORY
THE CRITIQUE OF
ACCOUNTING THEORY
University of Dhaka
Department of Accounting & Information Systems
Course Name: Accounting Theory (4201)
An assignment on Critique of Accounting Theory
Submitted to:
Dr. Yousuf Kamal
Associate Professor
Department of Accounting & Information Systems
University of Dhaka
Submitted by:
Tarek Mahmud
18th Batch, Section: B, ID: 18147
Department of Accounting & Information Systems
University of Dhaka
QUALITATIVE RESEARCH
Process oriented
Claims data is valid and rich
Is nongeneralisable
Assumes a dynamic reality
Assumes an insider perspective
Ontology
Epistemology
Methodology
Subjectivist View
constructionist
anti-positivist
intended to provide specific
non-generalisable descriptions
School) Critical theory has hugely influenced social theory, largely as a result of
the work of Habermas. It is complex so any summary here is highly simplified.
Some essential characteristics of critical theory are its rejection of positivism as the
sole arbiter and generator of knowledge largely because of its lack of selfreflection which leads it to reduce epistemology to a crudely mechanical
methodology.
Accounting Theory as Interpretation: Accounting in the 19th century is different
from accounting today. Our understanding is dependent on how we interpret our
changed experiences. Such interpretation does not exist in isolation but depends on
societal norms, social demands, language and other considerations. There is a
range of research and theory approaches that concentrate on interpretation. These
approaches, like critical theory, are necessarily interdisciplinary. For example, it is
important to understand the political, social, legal, economic, linguistic, cultural
and historical context of interpretation. There are many variations of these
interpretive approaches to knowledge some dating back to the just before and after
the turn of the 20th century as in the work of Max Weber (a major classical
sociologist) and Edmund Husserl (founder of the movement known as modern
phenomenology).
Accounting Theory as Structure: The name structuralism refers to the
methodological and theoretical approaches to culture and social analysis which
assumes societies can be studied in manner similar to a Saussurian structural
analysis of language. The accounting professions search for GAAP and then a
conceptual framework can be viewed as a structuralist approach however, this
has never been consciously considered. Nevertheless, the search for the essential
logical elements that bind accounting systems and result in financial reports being
prepared is very similar the structuralist approaches taken in other disciplines
(notably anthropology).
Accounting Theory as Language: The clich, accounting is the language of
business has been around for many years. Knowledge can only exist through
communication and language is the most common media of communication.
Therefore to understand how knowledge of accounting is established it is useful to
study language.
Accounting Theory as Rhetoric: Rhetoric is an old discipline dating back to the
fourth century BC. Its contemporary meaning is the art of persuasive
communications and eloquence. Some time ago Arrington and Francis pointed out
that Every author attempts to persuade (or perhaps seduce) readers into accepting
his or her text as believable.
The fall
Of
Enron
The fall of Enron: Enron started its business on 1990s.From the beginning to1998,
Enron's stock rose by 311 percent. It increased by 56 percent in 1999 and a further
87 percent in 2000, compared to a 20 percent increase and a 10 percent decline for
the index during the same years. By December 31, 2000, Enron's stock was priced
at $83.13, and its market capitalization exceeded $60 billion, 70 times earnings and
six times book value, an indication of the stock market's high expectations about its
future prospects.
Enron was rated the most innovative large company in America in Fortune
magazine's survey of most Admired Companies. Yet within a year, Enron's image
was in tatters and its stock price had plummeted nearly to zero.
Timeline of critical events:
Date
Event
November 8, 2001 Enron restated its financials for the prior four years to
consolidate partnership arrangements retroactively. Earnings
from 1997 to 2000 declined by $591 million, and debt for
2000 increased by $658 million.
November 9, 2001 Enron entered merger agreement with Dynegy
November
2001
December 2, 2001
The "gas bank" would act just as a financial banking institution, except that it
would intermediate between suppliers and buyers of natural gas. Enron began
offering utilities long-term fixed price contracts for natural gas, typically at prices
that assumed long-term declines in spot prices. It also began using off-balance
sheet financing vehicles, known as Special Purpose Entities, to finance many of
these transactions.
By 1992 Enron's net income was, with earnings before interest and taxes of $122
million. Enron Online had enabled transactions per commercial person to grow to
3,084 from 672 in 1999. The company began divesting "heavy" assets and pursuing
an "asset light" strategy. As a result, by late 2000, Enron owned 5,000 fewer miles
of natural gas pipeline than when the company was founded in 1985, but its gas
financial transactions represented 20 times its pipeline capacity.
Financial Reporting: Because of Enron's complex business model it took full
advantage of accounting limitations in managing its earnings and balance sheet to
Portray a rosy picture of its performance. Two issues are proved problematic:
First, its trading business involved complex long-term contracts. The approach,
known as mark-to-market accounting, was central to Enron's income recognition
and resulted in its management making forecasts of energy prices and interest rates
well into the future.
Second, Enron relied on structured finance transactions that involved setting up
special purpose entities. These transactions shared ownership of specific cash
flows and risks with outside investors and lenders.
In late 2001 it was recognized that several new businesses were not performing as
well as expected. In October 2001, the company announced a series of asset writedowns, including after tax charges of $287 million for Azurix, the water business
acquired in 1998, $180 million for broadband investments and $544 million for
other investments. In total, these charges represented 22 percent of Enron's capital
expenditures for the three years 1998 to 2000. In addition, on October 5, 2001,
Enron agreed to sell Portland General Corp., the electric power plant it had
acquired in 1997, for $1.9 billion, at a loss of $1.1 billion over the acquisition
price.
taxes,
political costs,
of these forms of
The first four factors increase managerial wealth by increasing the cash flows and,
hence, share price. The last factor can increase managerial wealth by altering the
terms of the incentive compensation.