Ideology and reality in accounting : a Marxist history

This paper and a previous paper (Part 1) argue that the US accounting theory debate from the late 19 century to the FASB’s conceptual framework did not lead to ‘generally accepted accounting principles’ because it was between irreconcilable theories of value; between an inchoate labour theory of value (LTV) and the marginalist theory of value. Driving it was a growing contradiction between the demand from investors that management report ‘economic reality’ and their need for a theory of accounting that denied (a) that the origin of profit is exploited labour, and (b) that there is any contradiction between the social production of wealth and its private appropriation by relatively few individuals. Part 1 examined the debate from the late 19th century when very large, widely held corporations appeared in the USA, to the stock market crash in 1929, when they were dominant. This paper (Part 2) examines the debate from the Securities Acts 1933 and 1934 to the FASB’s conceptual framework. It considers and rejects the contracting explanation of conservatism in US accounting (Watts and Zimmerman, 1979, Watts, 2003) as incoherent, but argues that Basu’s (1997) measure of conservatism (extended back to 1927 by Holthausen and Watts, 2001) provides a useful but limited index of conservatism we can explain by the changing rate of exploitation in a changing historical context. Section A examines the institutionalisation of conservative accounting in the context of the ‘New Deal’ for labour from the mid -1930s and the growth of union and shop floor militancy. After the 1929 crash and evidence of accounting manipulations, investors demanded that management be accountable through disclosure and that accountants spell out their ‘generally accepted accounting principles’. Paton and Littleton’s (1940) response, accounting without an explicit theory of value, supported by May (1943) and others, was a partial victory for the inchoate LTV of practical accountants, but their failure to produce an articulated theory left intractable problems for regulators that mounted in the 1960s, and left the accountants’ ‘principles’ defenceless against criticisms from academics that mounted as the rate of exploitation increased in the 1960s and 1970s. The paper argues these criticisms, derived from neo-classical economic theory, were ideologically motivated because they (a) denied the exploitative origin of profit by suppressing the idea that cost + profit = price, and (b) denied the contradiction between the social production and individual appropriation of profit by arguing that accounting should provide ‘decision-relevant’ information to help individual investors make ‘rational economic decisions’. In the context of a rapidly increasing rate of exploitation, the result was the FASB’s conceptual framework that, despite a massive ‘educational’ effort is still not generally accepted. The paper concludes that because capitalism’s contradictions create the need for ideology rather than reality in accounting theory, and for reality rather than ideology in accounting practice, so long as capitalism survives, accountants will never have ‘generally accepted accounting principles’.