Accounting representation

Critically assess whether examination of the themes of representation, control and accountability (particularly with respect to accounting) assist in explanation of the recent failures of financial institutions.

Analysis of from the accounting view Representation


The notion of representation is brought into social theory by Latour and Woolgar's with their book Laboratory Life in 1979 and since then, representation has become pervasiveness in contemporary social life (Ezzamel et al., 2004).

While comes to accounting which is a social practice with artefactual device (Knorr Cetina, 1999; Latour, 1987, 1999, Ezzamel et al., 2004), the role of representation is emphasized as a core to craft accounting (Bloomfield et al., 1992; Robson, 1994, Preston, 1986). The financial performance and position of an organization can be presented in a simplified numerical form with accounting representation (Bloomfield and Vurdubakis, 1997, Briers and Chua, 2001).

As a quantified representation, accounting representation can be seen as owing prominent superiority---- impersonality. The symbol of accounting representation is objective number, which deletes the ambiguous debate of subjective thoughts and gives the judgment directly (Mies, 1990, Porter, 1995, Rose, 1991). It is also stated by Porter as (1995) “Quantification is a way of making decisions without seeming to decide.” So, from these points of view, accounting representation can show fairness in the figure.

However, on the other hand, accounting representation provides reorganized figures, in order to fitting related regulations, some information which could be essential from other perspectives may be ignored (Porter, 1995, Ross, 1968). Foucault (1980) noted that truth is based on the “multiple forms of constraint”, which produces effective power. The represented truth can never be the whole part. While highlighting the certain parts of a subject, there are always some parts in the dark intentionally or unintentionally. But how much can it be changed? As an applied science, accounting can never be expected as the same strict as pure science in representation. Further more, in some circumstances, those representations are biased deliberately to achieve some special purposes (Mattessich, 2003).

While the purpose-oriented bias of accounting numbers exists, accountants are facing a tough question, what's the difference between conceptual representation and the represented reality? And another question is while facing the accounting report, could we discriminate representation and misrepresentation?

About the Creative accounting

As an instrumental uses of representation, creative accounting is always a topic need to be discussed. Especially in the past decade, accounting scandals of large companies and banking sectors are exposed from time to time all over the world. Enron, WorldCom, BCCI, Imarbank et al., all those big names collapsed by virtue of creative accounting. So, while analysing the bankruptcy of Bear Stearns Companies, Inc. which as one of the major victim of the financial crisis from 2007 to 2009 ( ). It's necessary to discuss creative accounting.

IASC defines the objective of financial statements in 1989 as:

“The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.”

Financial statements should provide useful information for different types of users to make decisions.

However, there are situations that accountants intentionally manipulate the figures when constructing the accounting report of an organization, which can be regarded as creative accounting (Amat et al., 1999). Barnea et al., (1976) defined it as “…the deliberate dampening of fluctuations about some level of earning considered to be normal for the firm”.

Creative accounting exits at both the micro level and the macro level. While micro manipulation leads to bias of representation of an entity, manipulation at macro level embodies in several aspects. First, the deviation of accounting rules can be aroused if accounting regulators are persuaded by some preparers of financial statements to set up rules in favor of their interest. Second, it's possible that public sector use some “cosmetic measures” to maintain the budget deficits within a certain standard (Dafflon and Rossi, 1999, Gowthorpe and Amat, 2005).

About the derivatives transactions



Marris & Mueller (1980) defined the corporation as a “Self-Organizing System, a system that can and does modify its own structure and programming in the course of and as a result of its own operation”, which laid stress on the effectiveness of autonomy of the operation. Adversely, when Hurst (1970) pointed out that a corporation must take responsibility for its purpose and performance, notably, he emphasized the criteria should be set by independent and external institution. The common ground here is that the growth of corporations is always accompanied with the increasing in responsibility. Power is always equal to accountability (CED, 1971).

How the systems of accountability work is demonstrated by Roberts and Scapens (1985). The process of operating the systems of accountability is achieved by drawing on and remodeling three structures, including signification, domination and legitimation. The signification structure is embodied by the particular language of the system. Rights and duties are defined under the systems as legitimation structure, which can also be considered as moral order. The power of the two structures are combined together by Giddens (1979, 1984) and reflect domination structures. On the base of system of accountability, an organization can be operated and expanded.

However, there is a problem lies in the nature of agency operation. Agency theory illustrates that in the agency relationship, the agent stands for the principals to make decisions as a delegated authority (Jensen and Smith, 2000). However, the contracting parties are self-interested individuals. The agent pursues the maximum interest with minimizing the agency cost and the principals require self-interest as well. Because of that, the function of management is more like a coordination of conflicting accountabilities between shareholders and the regulators. It is pointed out that those who have the responsibility as well as the power, upon most occasions, bias the system of accountability for their own advantage (Roberts and Scapens, 1985, Giddens, 1979, 1984).

Besides the internal conflicting accountability, extending to the outside world, the defect of accounting representation leads to the degradation of corporate accountability and as a derivative thereof, its moral concern. First, the accounting reports describe an objective world without emotion. War brings productive records and peace present scarce endeavor. Second, to flourish the market, stimulating consumption becomes the ultimate life style. Third, job creation and innovation in practice as a moral accountability of a company is silenced in annual reports (Chwastiak and Young, 2003).


Control is a widely used word in the filed of corporation management. When control is associated with management, on a broad scale, it refers to the methods managers take to realize good performances of the organizations, which is described as management control system. Though the definitions of control vary, there are still some elements in common and reveal the progress of management, which includes

(1) defining objectives,

(2) making decisions on strategies proposed to realize the objectives,

(3) implementing these strategies, meanwhile,

(4) insuring the minimization of problems (Gould and Quinn, 1993, Simons, 1995, Merchant and Van der Stede, 2007).

While control is treated as a major function of management, it has extensively involved in other fields and one is cybernetics. A complicated cybernetic model which has a feedback loops system can predict the results before the final outcomes. Hence, as Wildavsky (1975) demonstrated “Planning is future control.” since that planning contains an attempt to bring about a better future than the future without it.

Control has the interaction with accountability which emerges evidently in agency theory, who mainly concentrates on the schedule of control. Principals are concerns about whether the agency complies the contract devotedly to achieve the original goal, on which control is applied. (Baiman, 1990, Bergen et al., 2001, Laffont & Martimort, 2002).

Internal control has been regarded is a more practical one. Auditors achieve internal control by recording operational status and avoiding errors, especially in accounting representation. In recent years, how to accomplish internal control are explored. As a landmark, Sarbanes-Oxley Act of 2002 strengthens the adequacy and importance of internal control, especially in accounting reports (Bush, 2005).

Risk management,

The interdependence of control, representation and accountability are performed in the progress of the operating.

  • Financial institution failure
  • the financial institution
  • the emerge of the theme in the collapse of Bear Stearns

1. case study of Financial institution failure

1. background

2. the review

Founded as an equity trading house in 1923 by Joseph Bear, Robert Stearns, and Harold Mayer with the capital of $500,000, becoming “a leading global investment bank, securities trading and brokerage” [[1]] as displayed on its official website before 2007. Bear Stearns Companies, Inc. was the fifth largest invest banks in the one of the largest underwriters of mortgage bonds in United States.

However, ironically, “This bear may hibernate a little early.”[[2]] commented by yahoo finance. The company who was a pioneer in the capital markets before 2006 moved toward the end of bankruptcy.

In December 2007, bear declared that the company lost about $854 million, or $6.9 per share, for the fourth quarter.

In March 2008, with the coordination, Federal Reserve Bank of New York agreed to provide a $30 billion non-recourse loan to help JP Morgan Chase & Co. merger Bear Stearns Companies, Inc. JP Morgan acquired Bear Stearns at the price of $10 a share in stock.

In 29 May 2008, Bear Stearns shareholders make an agreement of the merger.

When we looking back to the progress of Bear Stearns' demise, it could be divided into two main period.

The first period emerged at the subprime mortgage crisis in 2007 when Bear Stearns encountered huge invest losses in the mortgage-backed securities and derivative market. Bear Stearns was the seventh-largest securities firm.


in the survey of “America's Most Admired Companies” launched by Fortune's from 2005 to 2007, Bear Stearns was entitled twice as the “Most Admired” securities firm (Fortune, 2007). This prestigious annual survey considered “employee talent, quality of risk management and business innovation.” However, it seems ironic at present.

In July 2007, Bear Stearns bailed out two subprime hedge funds, The Bear Stearns High-Grade Structured Credit and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund. Under the rapid decline of the value of subprime mortgages, the majority value of the funds is declined, which unavoidably lead to $1.6 billion loss of the investors.

After the bankruptcy of the two hedge funds, the question was raised that whether the managers of the funds had concealed the real financial performance and misled investors allegedly. On 19 June 2008, two managers were accused of securities fraud by US prosecutors. On 10 Nov. 2009, their acquittal, which maybe a disappointing outcome for the investors, could be a signal to a series of following charges against Wall Street executives for responsibility for the financial crisis.

The agency problem is pointed out again that can a corporation put shareholders' interest first? When the power of management is controlled by the managers, can they not take advantage of it to benefit for themselves? Accountability of financial institutions is always associated with capital operation. Facing the possibility of profit maximization, the managers of Bear Stearns lose the principles of honesty and integrity. As pointed out by Cohan (2009), the reason why senior management at Bear Stearns didn't implement their responsibility is they only pay attention to maximize their own fortune.

Though there are reports indicated that investors complained that the actual investment production is different from the described investment strategies (Chung, 2009), the outcome of the trial

2. Silo mentality promoted a lack of teamwork and allowed ‘people without principle' to advance as long as they generated profits.

3. As people progressed and careers grew, senior management openly promoted individuals to ‘have at it' in order to move forward. managers are accused but 无罪释放


fair value accounting 导致 大量的 write-downs


the last straw breaks the camel's back

other elements:

human----greed or ignorance



Please be aware that the free essay that you were just reading was not written by us. This essay, and all of the others available to view on the website, were provided to us by students in exchange for services that we offer. This relationship helps our students to get an even better deal while also contributing to the biggest free essay resource in the UK!