The International Journal of Accounting41 (2006) 437–447

Book reviews

Accounting standards: True or false?, R.A. Rayman. Routledge, (2006). 230 pages,£19.99, $35.82, ISBN: 0-415-37780-3

This interesting book considers whether the introduction of International FinancialReporting Standards (IFRSs) will close the expectation gap between what accounts arethought to represent and reality. However, the book considers issues much wider than thatand is certainly thought provoking.

The Foreword is written by the Head of International Financial Reporting in Ernst andYoung UK, Allister Wilson. His opening paragraph states that “close to 100 countriesworldwide, including the entire European Union, (EU) now require the use of IFRSs by atleast all listed companies” (p. 9). Further, he argues, a stark choice exists between IFRSs andU.S. GAAP. I am not necessarily convinced that the choice is so stark and certainly in theshort-run I expect a great deal more variety than this dichotomy. First, the EU requirement isfor IFRSs to be used in consolidated accounts only from 2005. Thus, each member state candecide whether to extend the use of IFRSs to individual accounts and to unlisted companies.For some states, local GAAP may be required in individual company accounts, especiallywhere the financial accounts form the basis for tax assessment. Second, the United States andthe EU are undertaking a convergence project to reduce diversity. This may lead the UnitedStates to move more towards principles-based standards than rules-based standards. It ispossible, however, for IFRSs to be interpreted differently in the United States than in the EU.Third, the introduction of IFRSs in different countries around the world is not uniformlyadopted, rather a variety of approaches is taken depending on a particular country or even ona particular standard. Thus, IFRSs have been adopted or adapted or a combination of both.

Back to the main body of the book. The author argues that “conventional accounting has amajor flaw that has to be corrected. Instead of being based on undisclosed assumptionsknown to be false, accounting information needs to be based on disclosed assumptionsbelieved to be true” (p. 9). The problem, he argues, is that accountants try to incorporateaspects of stewardship as well as efficiency and as such the book covers the concept ofincome and the theory of value and what the author believes to be the blind alley in whichaccounting-standards bodies are now trapped.

The author adopts a historical approach to the development of accounting to explain howwe have got to where we are now and the arguments are in the context of the UnitedKingdom environment. For example, chapter one explains the stewardship aspect ofaccounting and the following chapter covers business accounting to explain how theindustrial revolution led to the reporting of performance. So, for example, the author states(p. 19) that “the primary object [of accounting] was the detection and prevention of fraud and

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error. Financial accounting therefore developed as a branch of applied law rather than as abranch of applied economics.” For some countries, accounting did indeed develop as abranch of applied law but in others (for example, The Netherlands) accounting developed asa form of applied economics.

The problem that accounting faces is trying to assign measures of value to assets based onsome sort of code (principles) rather than the transaction approach required for stewardship.Principles may necessitate retrospective adjustment because the validity of asset valuationsoften depends on the outcome of future events and because they are drawn up on a monetaryunit that is unstable in terms of purchasing power. Of course, the latter criticism can also belevied against accounting for stewardship since currency is unstable over the normalarbitrary period of assessment of 12 months. The author argues that the blame for failures inthe system rests with those who employ nonstandard techniques that may be described as“creative” or on business uncertainty or economic instability.

Part II of the book considers the measurement of income and value. If accounts are insomeway tomeasure economic performance thenmeasurement of income is vital. However,the author believes that consideration of the nature of income is distinctly missing from thework of the Accounting Standards Board in the United Kingdom, the FASB and the IASB. Ifincome is to be the measure of economic performance then it must relate in some way toconsumption, consumption being the object of economic activity. Chapter 4 discussesincome and accounting profit and considers the contributions of Hicks (1939) and Fisher(1906). The chapter concludes by stating that the good news is that one of Hick's definitionsof income corresponds with the traditional definition of accounting profit “… namely, thechange in a firm's balance sheet value after allowing for contributions from and distributionsto its owners. The bad news is that conventional balance sheet values are normally based onhistorical cost” (p. 44). This avoids the reality that for many years the United Kingdomhas adopted a modified historical cost approach incorporating periodic revaluations of fixedassets.

The following chapter discusses the inflation-accounting debate although it is argued thatattempts were made to stifle debate (p. 52). Rayman (p. 50) argues that inflation accountingreceived a mixed reception: “academics, presented with an endless supply of calculations toset for their students, were ecstatic. Professionals, responsible for doing the calculationsthemselves, were less enthusiastic.” Frankly, I cannot remember the ecstasy I must have felt!The case against inflation accounting is summed up: “for stewardship reporting it is un-necessary; for performance reporting it is inadequate” (p. 51).

The discussion in chapter 6 is of historical cost and current cost and the concept ofdeprival value is that of Bonbright (1937), although the author correctly points out that thisidea is based on work of Austrians, particularly Menger (1871), Bohm-Bawer (1888), andWieser (1889). Given the concept of deprival value in terms of the relationship betweenNRV, PV, and RC, there are six possibilities for valuation and, therefore, the rules werearranged to accommodate these eventualities. However, what is pointed out by the author isthat “deprival value,” even if it can be measured accurately, has not been demonstrated to bean information requirement for financial reporting by any user group (see, for example,Whittington, 1983; Kay, 1977). This was a fundamental problem of the inflation-accountingdebate. Once revised figures had been calculated, what meaning could be attached to suchinformation? The contribution of Edwards and Bell (1961) is recognized as influencing the

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FASB's Conceptual Framework Project towards a balance-sheet approach to recognitionrather than performance. But the nature of income in terms of value change is dependent onmeasurement. Given that any definition of the economic concept of income relies onsubjective assessments, the alternative provided by Edwards and Bell has some appeal.However, since value depends on the subjectivity of future dividend streams the correctnessof estimations depends on the market and performance is measured by changes in marketvalue. As a result, the IASB and the FASB have increasingly been interested in fair-valuereporting. The author believes that fair-value accounting is a blind alley and illustrates this inthe context of financial instruments. He is not intrinsically opposed to the use of fair valuesbut rather that changes in fair values should be regarded as gains or losses. I have somesympathy with this. Given volatility in commodity and futures markets, how useful is it tomeasure them at a point in time at the balance-sheet date and then determine gains and lossesand report them as such? Is the change in value between purchase and/or the signing of afutures contract an appropriate measure of gain? Is a company better or worse off as a resultof the measurement of hypothetical transactions which do not in any way represent theeconomic significance of the realized transaction? For successful measurement, actualresults should be close to expected results (Kaldor, 1955) and asset valuations based onfuture events makes the usefulness of accounts dependent on the future. An ancilliaryproblem is that with subjective valuations it becomes difficult to be consistent and may leadto auditor-opinion shopping.

Rayman attacks investment theory for its reliance on unrealistic assumptions such asperfect markets and argues that there cannot be a single cost of capital that embraces theinvestment opportunities, tax position, and dividend expectations of a multitude of share-holders. Given the many different economic outcomes, accounting standards must havegreat difficulty in establishing balance-sheet values. Even if these were possible, then theproblem of measuring the return on capital employed is insurmountable. As such, he argues,“the system” needs to change so that the backward-looking measures of stewardship areclearly separated from the forward-looking measures of performance reporting. Thisrequires a distinction between funds and value. And, further, that monetary figures in theaccounts are symbols of volume and not measures of performance or value (p. 153). “Fundsaccounting remains the basis of the segregated system of record keeping and resourceaccounting for reporting on stewardship. The major innovation is the introduction ofseparate value accounts for reporting on performance” (p. 158). Rayman argues that thesegregated system he advocates will close the expectation gap between what accountsactually mean and what the public believes them to mean. In addition, managers of publiccompanies will be more accountable through the market than through additional regulation.This can be achieved through public disclosure of the rate of return managers are planning toachieve.

Segregation will lead to a transactions-based system based on historical costs whosepurpose is to report on stewardship and whose transactions can be verified by auditors toassist the process of minimizing fraud and error. The balance sheet would show assets andliabilities at historical costs based on facts and alongside those values should be showncurrent values, either exit or entry, that are considered relevant for understanding.

In summary, it is my view that this book is worthy of reading since it is well-written,thought-provoking and timely, given moves to adopt and adapt IFRSs. The author not only

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provides a critique of extant literatures but also advances possible solutions based on thedistinction between funds and value.

References

Bohm-Bawer, E. von (1888). The Positive Theory of Capital, translator W. Smart (1891), reprinted (1930), NewYork: Stechert.

Bonbright, J. C. (1937). The valuation of property. New York: McGraw-Hill.Edwards, E. O., & Bell, P. W. (1961). The theory and measurement of business income. Berkeley and Los Angeles,

CA: University of California Press.Fisher, I. (1906). The nature of capital and income. New York: Macmillan.Hicks, J. R. (1939). Value and capital. London: Oxford University Press.Kaldor, N. (1955). An expenditure tax. London: George Allen and Unwin.Kay, J. A. (1977, June). Inflation accounting—a review article. Economic Journal, 87, 300−311.Menger, C. (1871). Principles of Economics, translators J. Dingwall & B. F. Hoselitz (1981), New York: New York

University Press.Whittington, G. (1983). Inflation accounting: An introduction to the debate.Cambridge: Cambridge University Press.Wieser, F. von (1889). Natural Value, translator C.A.Malloch (1893), reprinted (1971), New York: Kelley.

Terry CookeUniversity of Exeter, United Kingdom

doi:10.1016/j.intacc.2006.09.003

Accounting ethics, Ronald F. Duska, Brenda Duska,. Blackwell Publishing, Malden,

Massachusetts, USA(2003), li + 277 pages, £21.99, $34.95 (pbk), ISBN: 0-631-21651-0

This book is a volume in Blackwell's Foundations of Business Ethics series. Books in thisseries, are authored by business ethicists and are intended to provide text materials forcourses in business. Because of its major focus on official ethics pronouncements ofregulatory and professional bodies, it would appear that this book is aimed at courses inaccounting (rather than in, say, business ethics). Volumes in this series are designed to beused by themselves or in combination with readings and case studies. Because the authorsare not accounting academics (one is a prominent business ethicist and the other is apracticing accountant), it is understandable that the book contains few references to theaccounting ethics literature, and to that extent fails to engage the subject as it has developedover the last couple of decades. Nevertheless, this book is a welcome and valuable additionto the literature on accounting ethics, as it provides a fresh perspective on this important areaof accounting. Since the field of accounting ethics is still at an early stage of development,book-length treatments, which are intended to provide wide-ranging examinations of thefield, are welcome.

This book consists of two introductory chronologies of events relating to the Enron andWorldCom scandals, 10 text chapters, and five appendices containing various professionalstandards governing the practice of accounting in the United States. The chapters may beusefully divided into six groups, based on their usefulness in teaching accounting courses, asfollows.