Accounting as simulacrum and hyperreality: perspectives on income and capital

Description
This paper draws on two independent strands of literatureÐBaudrillard's orders-of-simulacra theoretic and ®nancial
accounting theoryÐto investigate the ontological status of information in accounting reports. It draws on Baudrillard's
concepts of simulacra, hyperreality and implosion to trace the historical transformations of the accounting signs of
income and capital from Sumerian times to the present. It posits that accounting today no longer refers to any objec-
tive reality but instead circulates in a ``hyperreality'' of self-referential models. The paper then examines this conclusion
from the viewpoint of recent clean surplus model research and argues that the distinction between income and capital is
arbitrary and irrelevant provided the measurement process satis®es the clean surplus relation. Although accounting
is arbitrary and hyperreal, it does impart a sense of exogeniety and predictability, particularly through the income
calculation. Therefore, it can be relied on for decisions that do have real, material and social consequences.

Accounting as simulacrum and hyperreality:
perspectives on income and capital
Norman B. Macintosh*, Teri Shearer, Daniel B. Thornton, Michael Welker
School of Business, Queen's University, Kingston, Canada K7L 3N6
Le simulacre n'est jamais ce qui cache la veriteÂ
C'est la verite qui cache qu'il n'y en pas...Le
Simulacre est vrai (Baudrillard, 1981, p. 1)
Abstract
This paper draws on two independent strands of literature ÐBaudrillard's orders-of-simulacra theoretic and ®nancial
accounting theory Ðto investigate the ontological status of information in accounting reports. It draws on Baudrillard's
concepts of simulacra, hyperreality and implosion to trace the historical transformations of the accounting signs of
income and capital from Sumerian times to the present. It posits that accounting today no longer refers to any objec-
tive reality but instead circulates in a ``hyperreality'' of self-referential models. The paper then examines this conclusion
from the viewpoint of recent clean surplus model research and argues that the distinction between income and capital is
arbitrary and irrelevant provided the measurement process satis®es the clean surplus relation. Although accounting
is arbitrary and hyperreal, it does impart a sense of exogeniety and predictability, particularly through the income
calculation. Therefore, it can be relied on for decisions that do have real, material and social consequences. The paper
ends with some implications of Baudrillard's theoretic for accounting, re¯ections on accounting's implications for
Baudrillard's theoretic and suggestions for future research. #1999 Elsevier Science Ltd. All rights reserved.
Keywords: Income; Capital; Derivatives; Earnings forecasts; Clean surplus model; Radical semiotics; Simulacrum; Hyperreality;
Implosion; Orders of simulation
1. Introduction
This paper draws on two independent strands of
literatureÐBaudrillard's orders-of-simulacra the-
oretic and ®nancial accounting theoryÐto inves-
tigate the ontological status of information in
accounting reports. Speci®cally, it applies some
salient features of a theoretic of postmodernity
suggested by Baudrillard
1
and the ``clean surplus
model'' proposed by Ohlson and others.
2
We ®rst
describe accounting in ancient times (Mattessich,
1987, 1989, 1995) when people saw accounting
signs as unequivocal references to ``real'' physical or
social objects or events. We then use Baudrillard's
``orders of simulacra'' chronology and his con-
cepts of simulacra, hyperreality and implosion to
interpret historically documented changes in
accounting's sign-to-referent relationship and
some current accounting conundrums. Our major
thesis is that many accounting signs no longer
refer to real objects and events and accounting no
longer functions according to the logic of trans-
parent representation, stewardship or information
economics. Instead, accounting increasingly mod-
els only that which is itself a model.
0361-3682/99/$ - see front matter # 1999 Elsevier Science Ltd. All rights reserved.
PI I : S0361- 3682( 99) 00010- 0
Accounting, Organizations and Society 25 (2000) 13±50
www.elsevier.com/locate/aos
* Corresponding author.
1
See Baudrillard (1975, 1981, 1983a, 1983b, 1983c, 1983d,
1987, 1988a, 1988b, 1990a, 1990b, 1993, 1994a, 1994b).
2
See Ohlson (1990, 1991), Feltham and Ohison (1995) and
Peasnell (1982).
The paper brie¯y describes Baudrillard's chron-
ology of four ``eras'' of sign-referent relationships in
Western society. It then sketches our view of corre-
sponding changes in the ontological assumptions
that underlie the accounting signs of income and
capital. Next, it analyzes in Baudrillard's terms
three contemporary accounting issues: accounting
for executive stock options, earnings management,
and accounting for derivative ®nancial instruments.
It concludes that the controversies surrounding
these issues stem partly from changes over time in
the accounting sign-to-referent relationship.
We then drawon recent accounting research which
has examined clean surplus accounting systems. This
research is of interest to us because it, like our paper,
focuses speci®cally on understanding the nature of
the accounting signs income and capital. The paper
®nally considers the implications of the analysis for
users of ®nancial information and accounting stan-
dard-setters. It argues that, while the usefulness of
accounting information does not require that stan-
dard-setters appreciate the arbitrariness and self-
referentiality of accounting signs, such an apprecia-
tion may yield bene®ts in terms of increased speed
and eciency in the standard-setting process.
We selected some of Baudrillard's ideas to
explore why contemporary accounting issues have
become so controversial and dicult to resolve for
three reasons. First, his perspective is decidedly
postmodern and poststructuralist and we agree
that ``such a period... is the one we are living in''
(Eagleton, 1996, p. 20). Second, Baudrillard [as
opposed to, say, Foucault (1973), Derrida (1976),
Lyotard (1984), or Bataille (1991)] focuses on the
changes that have occurred in the past few decades
in areas that profoundly a?ect accounting, namely:
language, information technology, communica-
tion, and electronic media. Finally, Baudrillard
sets out a radical semiotic perspective of the pro-
duction and consumption of information. We
believe that this perspective has potential for
motivating new accounting insights beyond those
stemming from extant theory such as the informa-
tional perspective which (for all the insight it has
generated) seems to be at or nearing the mature
stage of its research cycle (Beaver, 1996, p. 118).
We conclude that much of today's accounting
information circulates in a Baudrillardian ``hyperre-
ality'' where time and space implode and accounting
signs no longer re¯ect the material, economic realm
but rather precede it or bear no relationship to it. We
note that recent advances in ®nancial accounting
theory imply that this shift in accounting's sign-to-
referent relationship does not compromise the utility
of accounting numbers for valuation purposes.
Finally we explore the implications of the changes in
the accounting sign-referent relationship for modern
day standard setters and for Baudrillard's theory.
The paper also uses the accounting analysis to
interrogate and evaluate Baudrillard's theoretic.
The analysis of the accounting signs of income and
capital suggests that Baudrillard's orders of simu-
lacra are less universally descriptive than he seems
to claim and that certain of his other ideas are
overblown. We conclude with a methodological
caveat and some possibilities for further research.
2. Orders of simulacra
Baudrillard uses his ideas about simulacrum,
implosion and hyperreality to propose a radical
description of postmodern society. Brie¯y, simula-
crum is a sign, image, model, pretence, or shadowy
likeness of something else. Implosion occurs whenthe
boundary between two or more entities, concepts, or
realms melts, dissolves or collapses inward and their
di?erences disappear. Hyperreality refers to the cur-
rent condition of postmodernity where simulacra are
no longer associated with any real referent and where
signs, images, and models circulate, detached from
any real material objects or romantic ideals. ``We are
now in a new era of simulation in which ... the orga-
nization of society according to simulations, codes
and models, replaces production as the organizing
principle of society'' (Baudrillard, 1994a, 118).
Baudrillard's well-known Disneyland example
illustrates these three notions.
3
Disneyland, he con-
3
Baudrillard (1994, pp. 12±13 and 1981, pp. 24±26) puts it this
way: ``Disneyland is a perfect model of all the entangled orders of
simulation...Disneyland is there to conceal the fact that it is the
`real' country, all of `real' America which is Disneyland...Disney-
land is presented as imaginary in order to make us believe that the
rest is real, when in fact all of Los Angeles and the America sur-
rounding it are no longer real, but of the order of the hyperreal
and of simulation.''
14 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
tends, is a simulation of ``real'' America while ``real''
America is actually much like Disneyland writ large.
So, in essence, they are one and the same as the dif-
ference between them is negligible or, as he puts it,
implodes. The postmodern world is dominated by a
shifting scene of imagined ®gures, mediated by
electronic communication devices and gadgetry,
which is the ``hyperreal'': a domain of self-referential,
circulating symbols and implosion of di?erences,
which now is real for the individual. Moreover, Dis-
neyland serves to obscure the fact that the ``real
adult'' world does not exist as such but is only in
many respects a childlike, comic book, fantasy order.
2.1. Ontology and epistemology
Ontologically, Baudrillard believes postmodern
society to be dominated by the linguistic and tex-
tual sphere, which is now more important than the
economic (material and production) realm that
held sway during the industrial era. In this he fol-
lows the ``literary turn'' or ``crisis in representa-
tion'' (Bertens, 1995) taken for some time now in
many of the social sciences and humanities. ``Lit-
erary turns'' means analyzing the phenomenon of
interest as a text, discourse, language game, or
discursive formation and understanding it for its
textual properties and semiotic content (what
Baudrillard calls ``semiurgic''). In this, he ``joined
in the semiological revolution which was interpret-
ing all aspects of life as a system of signs'' (Kellner,
1989, p. 21). Homo semioticus looms larger today
than homo economicus.
Given that language and discourse dominate the
nature of being in postmodernity, Baudrillard
draws on his radicalization of Saussure's semiotics
for his epistemology.
4
Saussure, concerned only
with the form of language, identi®ed four elements
in his theory of structural semiotics: signi®ers
(words written or spoken); signi®eds (the mind
image invoked by each word); signs (one-to-one
combinations of unique signi®ers with particular
signi®eds); and referents (the real objects or ideas
to which signs refer). Both the sign-to-referent and
the signi®er-to-signi®ed relationships, Saussure
(1959) revealed, are arbitrary, so a sign has no
meaning of its own. It has meaning only because it
di?ers from all other signs in its linguistic system.
2.2. Eras of the sign
Baudrillard also pays particular attention to the
sign-to-referent relationship but proposes four
successive phases or eras of the sign. (He refers to
the sign variously as simulacrum, image, and
model.) In the ®rst phase, the sign is a re¯ection of
a profound reality. It is a good appearance in the
sense that it is a faithful and transparent repre-
sentation. In the second phase, the sign masks and
denatures a profound reality. It is a bad appear-
anceÐa distorted or twisted imageÐwhich
deprives reality of its deep-seated quality.
5
In the
third phase, the sign masks the absence of any
profound reality. Akin to magic, it plays at
being an appearance of a reality. Finally, in the
fourth phase, the relationship is reversed: the
4
Baudrillard follows the genealogical epistemology. The gen-
ealogical method is, as Mahon (1992, p. 14) puts it ``a unique form
of critique which recognizes that the things, values, and events of
our present experience have been constituted historically, dis-
cursively, and practically...it reveals the historical, discursive and
practical conditions of existence of these things, values, and
events.'' The genealogist attempts to expose that constitution and
trace and its consequences. So genealogy is a historical inquiry
``into the events that have led us to constitute ourselves and to
recognize ourselves as subjects of what we are doing, thinking,
saying'' (p. 82). The critical gesture is to undermine the taken-for-
grantedness and legitimacy of the present in order to make it seem
just as strange and ephemeral as the past. Genealogy also tends
towards periodization. So the genealogist starts with the present,
goes back in time until a signi®cant di?erence in the discursive
landscape is located, and then proceeds forward, carefully
describing the transformation (eschewing cause±e?ect specula-
tions) and preserving the discontinuities and connections (Sarup,
1993). The end product is a historical account of the here and now.
5
Baudrillard describes in Simulacra et Simulations (1981, p.
17) the second phase of the image as ``...elle est une mauvaise
appearance Ð de l'ordre d'un male ®ce.'' The English transla-
tion reads ``In the second, it is an evil appearanceÐit is of the
order of male®cence' (Simulation, 1983, p. 6). We disagree with
the translation of ``mauvais'' as ``evil''. In French, the ®rst
de®nition of mauvais is oppose a bon: 1. Qui pre sente un
de fault, une imperfection essentielle; qui a une valver faible ou
nulle (dans le domaine utilitaire, esthe tique ou logique).
(Source: Micro Robert: Dictionnaire due Francais Primordial,
Garnier-Flammarion, Paris, 1973.) Thus, mauvais is the oppo-
site of bon or bonne. Baudrillard describes the ®rst phase of the
image as ``l'image est une bonne appearance'' (italics in original).
Thus, we read the image in the ®rst phase as a good appearance
and the image in the second phase as a bad appearance but not
necessarily an evil one.
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 15
sign precedes reality; it has neither rapport with
nor resemblance to any reality; it is pure
simulacrum.
Baudrillard (1983a, p. 83) extends his phases of
the image scheme into a grand account of successive
historical phases of more recent Western civiliza-
tion. In a typical postmodernist gesture, he also dis-
misses the modernistic idea that history is a linear
progression (albeit with setbacks along the way)
towards some utopia. Instead, each new era appears
and is only di?erent from, not necessarily better
than, its predecessors. These ``orders of simulacra,''
as he labels them, which followed the Feudal era are:
1. Counterfeit, the dominant scheme of the classical
period from the Renaissance to the Industrial
Revolution; 2. Production, the dominant scheme of
the Industrial era; and 3. Simulation, the reigning
scheme of the current phase.
By ``order'' Baudrillard seems to mean some-
thing like Marx's mode of production, Foucault's
(1973) order of things (archaeological sites), and
Bataille's (1991) modus operandi of the way a par-
ticular society consumes its surplus wealth. Each
of these share the idea that Western society's
de®ning sphere (order, mode, archaeological site,
or modus operandi) has experienced a series of
grand eruptions and reformulations of its social,
economic and political realms.
3. Accounting signs
Baudrillard's successive phases of the sign pro-
vide one framework for interpreting historically
documented changes in the meanings of account-
ing signs. Miller and Napier (1993, p. 631) observe
that, ``accounting changes in both content and
form over time; it is neither solid nor immutable.''
In its earliest manifestation, accounting gave clear,
transparent signs of a physical and social reality in
space±time. As the eras emerged, however,
momentous ruptures in accounting mirrored those
in society, radically altering the spatial and tem-
poral characteristics of accounting signs. Despite
these alterations, we argue, accounting practices
stroveÐand many contemporary, historical-cost
accounting standards still striveÐto sustain the
belief that accounting represents reality in much
the same way as it did when it ®rst emerged. We
then problematize this belief by focusing on the
rifts that occurred in the relationship between the
accounting sign and the reality that it allegedly
represents. We conclude by showing that, for many
of today's pressing accounting issues, there is no
underlying reality to which accounting signs refer.
The idea of accounting as a sign, a faithful
representation of physical and social realities in
space±time, is pervasive. Indeed, the assertion that
historical cost accounting keeps track of resources
(a physical reality) under the control of entities (a
social reality) is an axiom in virtually every text
following Paton and Littleton's (1940) in¯uential
work (Ijiri, 1980). But if Mattessich's (1987, 1989,
1995) interpretation of Schmandt-Bessarat's (1984)
recent Sumerian archeological evidence is correct,
the origin of accounting's role as a sign of a dual
social/physical reality is impressively ancient. We
argue that the same sign-function seems to under-
lie historical cost accounting practices, which
struggle to sustain the belief that contemporary
accounting represents reality in much the same
way as it did for the ancient Sumerians.
3.1. Pre-historic accountingÐre¯ecting a profound
reality
Mattessich (1987, 1989, 1995) argues that,
possibly, the ancient Sumerians had developed a
prehistoric form of accounting, complete with
debits and credits, to track physical ¯ows of goods
and social obligations to pay for them. By 3500
BC, before people knew how to read, write or
count, they were making kiln-®red tokens that
represented resources such as cows, goats and
wheat. Mattessich interpreted each token-shape as
an account. Suppose that Zurik, a landowner,
placed ®ve cows under the care of Kalem, a farmer.
The Kalem-farm was viewed as an accounting
entity. Five cow-tokens would be deposited in a
clay urn. Mattessich reasoned that the urn served
as a crude balance sheet. Just before the tokens
were dropped into the urn, they were pressed on
its soft, clay surface, leaving visible impressions
that were much like those that rings make on
sealing wax. Mattessich interpreted the impres-
sions and various other markings, showing the
16 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
identities of Zurik and Kalem, as an early example
of disclosure, since everyone observing the impres-
sions (signs) on the outside surface of the urn
could see that Kalem was operating a farm and
that it owed Zurik ®ve cows (referents).
The tokens inside the urn represented assets
under the Kalem-farm's controlÐprehistoric deb-
itsÐwhile the impressions on its outside surface
represented Zurik's equity in the businessÐcred-
its. This accounting system relied on a one-to-one
correspondence between the accounting sign and
the physical/social referent that it tracked. Such a
correspondence was necessary because counting, as
we now know it, had not been invented. Observers
of the urns would reason that ``there should be a
cow in Kalem's ®eld for each token in the urn,'' and
the impressions on the urn said, ``each is owed to
Zurik.''
6
In this way, anyone could track resources
under the control of entities by matching the
tokens, one for one, with resources.
Thus, in Sumerian urn-accounting, signs refer-
red unambiguously and transparently to real phy-
sical resources. This premise persists, mistakenly
we believe, in even the most sophisticated of
today's ®nancial accounting practices. Of course,
accounting now deals with more complex transac-
tions and uses money as a numeraire. But the idea
endures that every dollar on a balance sheet can be
traced to an actual resource or obligation of an
accounting entity, just as every token in an urn or
impression on an urn could be traced in ancient
times.
Granted, this one-to-one correspondence is still
possible for simple transactions. Consider Fig. 1, a
stylized accounting matrix with debits in the rows
and credits in the columns. An oval in the matrix
means ``debit the account above, credit the
account to the left.'' Suppose that Firm 1 sells a
®xed asset to Firm 2 in exchange for an obligation
to pay for it. Firm 1 would debit Accounts Recei-
vable and credit Fixed Assets (entry No. 1; the ®rst
oval). Firm 2 would debit ®xed assets and credit
accounts payable (entry No. 2; the second oval).
The dual reality underlying the transaction is
conveyed by the two rectangles, labeled No. 3 and
No. 4. Rectangle No. 3 suggests that a ®xed asset
physically moves from Firm 1 to Firm 2. Rec-
tangle No. 4 suggests that a social obligation to pay
for the ®xed asset ¯ows from Firm 2 to Firm 1.
(Anyone who doubts that such an obligation is
``real'' should try telling his or her banker that his
or her mortgage obligation to the bank is ``not
real.'') Thus, in an important sense, the two
rectangles represent shadow journal entries in
Fig. 1. Duality in accounting.
6
A holdover from the one-to-one correspondence that was
required between signs and referents in ancient times is the
custom of using di?erent words to describe di?erent groups of
animals: a pride of lions, a gaggle of geese, a brace of phea-
sants, a herd of cattle, and so on (Mattessich, 1995).
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 17
determinant space±time, which track the two
aspects of realityÐphysical and socialÐthat were
a?ected by the transaction.
In this way, contemporary historic-cost
accounting can be seen as trying to emulate the
urns and tokens: it can track resources under the
control of entities, holding management accoun-
table for these resources. Underlying this role,
now known as accounting's stewardship function,
is the implicit belief that double-entry accounting
depicts changes in an underlying physical and
social reality in determinant space±time, in a
transparent manner.
The argument that today's accounting signs
depict the same duality as prehistoric ones sug-
gests continuity in the relation of the simulacrum
to the real. Yet for Baudrillard, as already men-
tioned, the relation between the sign and the real
has been unstable, punctuated by discontinuities
roughly corresponding with the Renaissance, the
Industrial Revolution and the advent of post-
modernity. Can accounting have sidestepped these
discontinuities? We think not.
Indeed, a brief genealogy of capital and income,
two key accounting signs, will show how the sign±
referent relationship that gives these two ideas
meaning underwent a series of historical dis-
continuities that can usefully be interpreted as
Baudrillardian stages in the relationship of the
sign to the real. These stages coincided with radi-
cal changes in the spatial and temporal dimensions
of the referents to which accounting signs purport
to point.
3.2. Caveats
Before turning to our genealogy of income and
capital, two caveats are in order. First, our genealo-
gical sketch is drawn from ``conventional'' account-
ing history.
7
In relying on conventional historical
accounts, we try to avoid (as far as possible) attri-
buting transformations in accounting practices to
the imperatives of economic change. Nonetheless,
we are conscious that these attributions are present
in our accountÐif for no other reason than that it is
a dicult linguistic feat to purge all connotations of
causality from a narrative that describes events that
occurred contemporaneously or contiguously in
space and time. By apparently acquiescing to
``conventional'' thought we do not intend to
sleight the contributions of accounting historians
who have exposed the shortcomings of the con-
ventional view and o?ered alternative interpreta-
tions that are frequently more satisfying (e.g.
Bryer, 1993; Hopper & Armstrong, 1991; Hop-
wood, 1987; Hoskin & Macve, 1986; Loft, 1986;
Miller & Napier, 1993; Miller & O'Leary, 1987).
We adopt the conventional view as an expedient;
our interest is in the location and form of the
transformations in two accounting signs, not the
purposes that would explain them.
Second, Baudrillard's historical periodization of
the sign-to-referent relationship requires, ironi-
cally, a foundational ``reality'' against which to
judge the ®delity of sign±referent relationships.
For Baudrillard, this foundational reality is the
referent to which Feudal-era signs refer; however,
one suspects that Baudrillard would be hard-pres-
sed to provide the epistemological justi®cation for
such a claim. Though cognizant of this diculty,
we too give a place of privilege to one particular
referent (i.e. determinant physical/social relation-
ships), and label this referent ``reality.'' We do so
fully recognizing that so anchoring the sign±refer-
ent relationship is problematic and cannot be
``grounded'' except by recourse to the very episte-
mological and ontological suppositions that we
eschewed at the outset. Some anchor is none-
theless needed to render visible subsequent shifts
in the referent to which accounting signs refer.
Moreover, as we shall argue later, contemporary
accounting practices seem still to presuppose the
possibility and desirability of representing an
underlying ``reality'' that is much like the deter-
minant physical/social relationships to which
accounting signs once referred. For these reasons,
anchoring ``reality'' in determinant physical and
social relationships is analytically usefulÐeven if
it must remain philosophically unjusti®ed.
7
As Miller and Napier (1993) note, conventional accounting
history tends to be evolutionary, tends to focus nearly exclu-
sively on double-entry bookkeeping, and tends to neglect the
constitutive and transformative potential of calculative prac-
tices. Thus, the conventional history is at best an incomplete
depiction of the historical signi®cance of accounting practice.
18 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
3.3. The Feudal era
As Baudrillard describes the Feudal era, the
relationship between signs and their referents was
®xed, clear, and transparent. Even social position
and status were obvious from appearances: ``In
this society of cast and rank, one is assigned a
place irrevocably, and so class mobility is non-
existent. An interdiction protects the signs and
assures them a total clarity; each sign then refers
unequivocally to a status...any confusion of signs
is punished as a grave infraction of the order of
things'' (Baudrillard, 1983a, p. 84). The king's
crown and castle, like the peasant's cap and hovel,
clearly signaled the social position at the top and
bottom, respectively, of a many-layered and
rigidly enforced social hierarchy (Virgoe, 1989).
Medieval accounting also evidenced the in¯u-
ence of the social order. In medieval England, for
example, relations of accountability were as indel-
ibly inscribed as those of the social hierarchy.
Ownership of assets was concentrated in the hands
of the nobility, while those lower in the social
order were responsible for maintaining and
deploying the assets in accordance with the wishes
of a king or lord. The social hierarchy was both
comprised of and dependent upon a network of
vertical relationships that made stewardship and
agency the overriding accounting issues of the
day.
On the agriculturally-based and largely self-
sucient manors, the predominant bookkeeping
mechanism was the charge and discharge state-
ment, a report prepared by manorial stewards to
attest to their own integrity and competence in the
discharge of their duties:
It often contained a money account, with
rents and other receipts subdivided by types,
and a corn and stock account, with separate
categories for grains, cattle, and various kinds
of produce. Beginning balances for each item
were shown, then the steward ``charged''
himself for manorial and foreign receipts and
natural increases in ¯ocks, and ``discharged''
himself by deducting cash payments, losses,
and other uses of these resources (Chat®eld,
1968, p. 35).
Much like an ancient Sumerian urn, the charge
and discharge account bore a direct and transpar-
ent relationship to an underlying physical and
social reality occurring contemporaneously in
space and time. The physical reality re¯ected in
the statement was the transference of assets to or
by the agents of the manor. The social reality was
the obligation of stewardship grounded in the
social hierarchy of the feudal order. So transpar-
ent was the correspondence between the account-
ing sign and the physical or social referent that
``cash values were sometimes combined with phy-
sical quantities of goods in statements of manorial
assets'' (Chat®eld, 1968, p. 35). Such aggregation
suggests the obligatory and transparent nature of
the accounting sign: cash values could be combined
with quantities without loss of meaning only
because the sign pointed unambiguously to tangible
assets and social obligations under the stewardship
of an identi®able individual.
Since the manor was largely self-sucient,
maintaining the distinction between income and
capital was neither meaningful nor straightfor-
ward. Moreover, as Napier (1991, p. 165)
observes, landowners viewed their estates pri-
marily as sources of economic, social, and political
powerÐnot as sources of income. Production and
consumption were nearly inseparable and changes
in land ownership were virtually non-existent
(Napier, 1991, p. 173). Although lords were advised
to hear the accounts annually, to ``quickly know
everything and understand the pro®t and loss''
(Hone, 1906, quoted in Vangermeersch, 1996), the
need to reckon an income for the estate ran, at
best, a distant second to that of monitoring and
controlling agency relationships (Chat®eld, 1968).
Accordingly, little in existing accounting practices
facilitated income computations. Charge-and-dis-
charge accounting, then, served to acknowledge and
discharge accountability; it was not a calculation of
net income (Littleton, 1968, p. 290).
Thus, accounting in medieval England re¯ected
the agency relationships inscribed in the feudal
social order. And charge-and-discharge account-
ing, like ancient urn-accounting, can be viewed as a
prototypical example of the sign/referent relation-
ship that Baudrillard describes as characteristic of
feudal or caste societies:
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 19
The signs are limited in number and are not
widely di?used, each one functions with its
full value as interdiction, each is a reciprocal
obligation between castes, clans or persons
(1983a, p. 84).
An accounting sign, with its formalization of the
social obligation existing between two individuals
of di?ering social strata, evidently played this role.
In England, for example, charge and discharge
®nancial statements were still used in the 19th cen-
tury for large estates where aristocrats delegated to
supervisory agents the management of these prop-
erties (Spring, 1963, cited in Napier, 1991). ``The
basic form of estate accounts as late as the nine-
teenth century had changed little from that devel-
oped in The Middle Ages for controlling and
reporting on the activities of manorial baili?s and
reeves...'' the ``charge and discharge method''
(Napier, 1991, p. 164). Summary statements of
pro®t and loss accounts and balance sheets were
little used as they did not provide better control
than charge and discharge statements.
Charge and discharge accounting is not, how-
ever, generally viewed as a direct antecedent of
today's ®nancial accounting because charge and
discharge accounting did not serve a commercial
purpose and was not a double-entry system (Lit-
tleton, 1968).
8
Rather, the roots of double-entry
are generally held to be in the bookkeeping prac-
tices of medieval Italy, where merchants of the
city-states practiced the most sophisticated
accounting of the medieval period and accounting
procedures evidenced a direct correspondence with
the physical and social activities that constituted
trade.
9
But even among Italian merchants, income
and capital were not strictly demarcated. Indeed,
even after double entry had provided the means,
interim calculations of income were rarely made.
Rather, the referent to which the accounting
income sign pointed was the ex post surplus of
liquidation proceeds over original cost, calculated
at the conclusion of a discrete trading endeavor.
In the earliest days of Italian trading, each trader
accompanied his own goods abroad, so most traders
did not need accounting records (Littleton, 1933).
But with the increase in trading activity that accom-
panied the Crusades, the ``commenda'' or silent
partnership quickly became the norm (de Roover,
1956; Irish, 1968; Littleton, 1933).
10
The investment
of capital by a non-active partner created a need for
agency accounting, similar to the accountability
reporting of feudal England just described. Sig-
ni®cantly, however, these early trading partnerships
were more like a series of discrete joint ventures than
a continuing business enterprise, with pro®t or loss
materializing on the distribution of goods and pro-
ceeds at the conclusion of each venture:
This was pro®t in the true sense of the word
rather than income. It was the result of liqui-
dation; it measured the net of a closed ven-
ture, not a periodic calculation from
continuing operations (Littleton, 1968, p. 290,
emphasis added).
Income, then, was not distinguished from inves-
ted capitalÐexcept to the extent that each part-
ner's share of the proceeds di?ered from his initial
cost. Accounting signs were transparent re¯ections
of the receipt and disposition of goods in agency;
even ``income'' was the obligatory re¯ection of the
liquidation-outcome of a concluded commercial
endeavor.
3.4. The order of the counterfeit
As the Feudal era gave way to the Renaissance
era, the ®rst order of simulacraÐthe counterfeit
8
The necessary features of double entry are variously
de®ned in the literature, but for our purposes here, we will
consider the integration of real and nominal accounts as the
critical characteristic. Littleton (1968) sees this as the ``unique
contribution'' of double-entry bookkeeping, though elsewhere
(1933) he de®nes it more rigorously.
9
Indeed, evidence exists of accruals and deferred charges as
early as 1300. de Roover (1956, p.119) notes the treatment of
prepaid rent as a deferred expense in the ledger of the Farol®
company in 1300; he notes an accrual for unpaid taxes in the
pro®t-and-loss statement of Francesco di Marco Datini in 1399
(de Roover, p. 144).
10
Additional factors contributing to the popularity of the
commenda were the personal risks associated with trade voya-
ges, a desire on the part of some nobles or clerics to engage in
trade without sullying their own name, and the church's prohi-
bition on the taking of interest on capital treated as a loan
(Littleton, 1933, pp. 36±37).
20 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
era made its appearance. In this new era, Bau-
drillard claims, the sign became a counterfeit of
the referent. The advent of stucco, for example,
led to imitations of natureÐarti®cial signs and
images of real referents (Baudrillard, 1983a, p. 88).
Stucco created simulacra of natural materials in
the construction of buildings, churches, and objects
of art, making possible the transubstantiation of
all nature into one medium. Such counterfeit signs
not only imitated real objects and ideas but also
began to distort them. A sign ``played'' at re¯ect-
ing the real, pretending to be an original and imi-
tating nature. Importantly, the sign could pretend
to refer to the referent since it was now arbitrary
and liberated from it. Simulacra, however, were
more than theatrical games played out with ima-
ges and counterfeits; they also suggested social
position and power arrangements.
The second order witnessed the appearance and
rise of a new social classÐthe bourgeoisie. The
many-tiered feudal order regrouped mainly into
three layers: nobility, bourgeoisie, and the rest.
Situated between the aristocrats and the lowest
segments of society, the bourgeoisie claimed that
``natural'' rights, embedded in nature's laws,
should be the referent for social arrangements
instead of the divine rights of monarchs and the
Church. The bourgeoisie also had an appetite for
simulacra-type goods such as ``Queen's Ware''
(Josiah Wedgewood's high quality imitation of
real china that he had made for the Queen of
England) that signi®ed their station in society. As
with stucco, clay could be made into ®ne china
(the sign) so that the bourgeoisie could ``play at''
being royalty and aristocrats (the referent).
Coincidentally, the idea of value underwent a
transmutation. Previously, Church ocials had
been able to construct ``just'' and ``fair'' cost-based
prices for local merchants. But, as trade with distant
foreign territories increased, local customers could
not ascertain foreign costs accurately by relying on
canonist principles (Tawney, 1984). Scholars there-
fore began to conceive prices in terms not of canon
law but of value-in-use or utility to the buyer, both
of which depended on the free individual's sub-
jective valuation.
11
Accounting practices also evolved with medieval
Italy's burgeoning trade. By the time Pacioli com-
mitted to paper the ``method of Venice,'' the rela-
tionship between the sign ``accounting income'' and
its underlying referent had already undergone a
major transformation. The temporal and spatial
coordinates of this transformation are the subjects of
a vast body of scholarly literature. It seems unlikely,
however, that these coordinates can be precisely
located. For our purposes, it is satisfactory to accept
the popular generalization that the articulation of
double-entry bookkeeping came with the Italian
Renaissance, when accounting experienced a trans-
mutation.
12
We can depict this as accounting's
rebirth into Baudrillard's simulacral order of the
counterfeit, accompanied by the introduction of per-
iodic income calculations and a concomitant change
in the relation of the accounting sign to the real.
Beginning in the 13th century, Italian mer-
chants' joint ventures began to take a more per-
manent form. The signi®cance of this event for
accounting is substantial because:
[t]he immediate result was to make the med-
ieval book-keeper conscious of the fact that
the ®rm is a unit in itself and that capital and
accumulated pro®ts represent the claim of the
owners. It thus became necessary to keep
track of changes in the owners' equity, either
through new investments or withdrawals, and
to devise a system permitting the determina-
tion of pro®t and loss, which was then dis-
tributed among the partners in accordance with
the provisions of the articles of association (de
Roover, 1956, p. 116).
Against this backdrop, double entry accounting
emerged as a systematic integration of real and
nominal accounts, the latter being closed into a
pro®t and loss account and then into capital
accounts (Littleton, 1968). For the ®rst time, Italian
11
Tinker (1985, especially Part III) gives a detailed history
of the evolution and revolution of theories of value and the
historical evolution during the Reformation age of theories of
price formulation and the growth of the money market.
12
We acknowledge that traces of this transformation appear
prior to the 13th century, which we take to be the approximate
beginning of the Renaissance; we do not imply that it occurred
as a single, momentous rupture in the history of Italian book-
keeping. More realistically, the transformation occurred piece-
meal, culminating in the publication of Pacioli's Summa de
Arithmetica at the end of the 15th century (see also Aho, 1985).
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 21
merchants could continuously observe the inter-
action between capital and income and make
interim calculations of income as desired (Little-
ton, pp. 290±291).
It is interesting to speculate on the origin of the
words ``real'' and ``nominal.'' These early merchants
probably recognized that any ``income'' that accu-
mulated in the nominal accounts would not be
``real'' until it was ultimately distributed in goods or
money. It was very likely in this era that such a dis-
tribution would be possible, since most of the refer-
ents of the accounting signs that comprised income
were easy to identify. Still, the merchants evidently
recognized that this income would not become
``true'' capital until it was ultimately distributed;
perhaps they labeled the pro®t and loss accounts as
``nominal'' to re¯ect this fact. It would be some time
before income, like stucco, began to assume the
quality of a sign that ``played'' at re¯ecting the real,
pretending to be an original and imitating nature.
Moreover, the merchants were slow to take
advantage of their new ability to compute periodic
income. Though the practice of closing the books
annually was ``customary... in the best known
places'' [Pacioli (1494) 1924, p. 90], ``the accounts
were seldom closed annually'' (Littleton, 1968, p.
290; see also Pollard, 1968; Yamey, 1994). English
merchants, too, were slow to adopt the new
bookkeeping techniques. The recommended prac-
tice in England was: ``When your principall great
Boke or lidger, shalbe full written, then you must
balance up all the acomptis not clearid, and carri the
net restis therof into another great Boke'' (Wed-
dington, Bre?e Instruction, 1657: quoted in Yamey,
Edey, & Thompson, 1963). In part, this was because
the knowledge of double-entry mechanics spread
only slowly abroad; the ®rst bookkeeping text to
appear in English was probably Oldcastle's transla-
tion of Pacioli's treatise, published in 1543 [Fogo
(1905) 1968, p. 126]. As well, at the end of the feudal
period, England had little need to integrate capital
and income because commercial ventures had not
yet acquired the continuity that double entry is
uniquely suited to portray.
Industrial and trading towns gradually replaced
the agrarian manors, but English enterprise was
not business as we know it today (Littleton, 1933,
p. 207). Production and trade were not continuous
undertakings but a series of separate ventures that
earned pro®t or loss (Chat®eld, 1974; Littleton).
Even in joint stock companies, the proceeds from
each completed undertaking were divided and new
stock was solicited for subsequent endeavors, so
income was not distinguished from invested capi-
tal (Chat®eld; Littleton). Rather, each investor
inferred his income by deducting initial investment
from proceeds. Thus, as in early Italian trading
partnerships, income was the transparent and
obligatory sign of a realized referent that was co-
determinate with the sign itself.
In 1613, the East India Company made an initial
(if tentative) move toward replacing terminable
with permanent stock. In that year, it issued four-
year subscribed stock, the subscriber paying one-
fourth of the purchase price in each year and the
receipts being used to fund that year's voyages
(Littleton, 1933, p. 210). The issuance of four-year
stock marked ``a de®nite step in the direction of
passing from the `share-in-the-goods' idea of mem-
bership in a joint stock company toward the idea of
capital as an invested sum consisting of transferable
units'' (Littleton, p. 210). But only in 1657, when it
received its new charter, did the company's stock
become permanently invested capital.
The divisions that had constitutedthe returnto the
company's terminable stock were a liquidation of
capital as well as a distribution of ``income.'' Clearly,
such divisions are inconsistent with the principle of
permanently invested capital. Accordingly, the gov-
ernor of the company in 1661 announced that future
distributions would consist of the pro®ts earned
rather than the divisions of the past (Littleton, 1933,
p. 211). With this decision the company had to dis-
tinguish income from capital; ``Italian double-entry
bookkeeping, already well developed and in a sense
awaiting its destiny, a?orded the organic mechanism
for accomplishing [this]'' (Littleton, p. 211).
13
13
Non-terminable stock was used by a limited number of
British businesses prior to its introduction by the East India
Company in 1613 (Littleton, 1933, p. 212). Its use was not
widespread, however, and often it was a natural consequence of
the nature of the business' activities (Littleton, p. 212). By
contrast, the East India Company's decision to replace its ter-
minable by non-terminable stock illustrates a shift in the means
of obtaining capital that would, by the end of the 17th century,
virtually eliminate the use of terminable stock in England.
22 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
The shift to permanent investment, in turn,
radically changed the understanding of business
activity through time, leading to an appreciation
of the business entity as a going concern:
Continuity of operations radically changed
accounting technique. Whereas bookkeeping
for a completed venture was entirely histor-
ical, for a going concern it became a problem
of viewing segments in a stream of continuous
activity. Not only were results much more
tentative, but the whole emphasis of record
keeping shifted toward the future (Chat®eld,
1996b, p. 457).
Accounting had entered the simulacral order of
the counterfeit.
Though the accounting sign ``income'' lost its
correspondence to ``pro®t'' in the sense of liqui-
dation-proceeds, it remained grounded in a con-
ception of income as the realized pro®ts of a
liquidated venture. Therefore, it was not until the
20th century that Chat®eld's ``shift toward the
future'' was truly borne out. On the one hand, the
introduction of accruals, deferrals, and other
means of apportioning the ongoing activities of
a business unit into periodic segments served to
recreate in nominal accountsÐin counterfeitÐthe
natural conclusion of a completed venture, much
as stucco produced counterfeit signs of nature. On
the other hand, the widespread use of a balance-
sheet approach to the calculation of income served
to imitate the ``distributions'' that were character-
istic of the terminal stock partnerships.
14
Such an approach to income determination was
well suited to the needs of a proprietorship or
partnership, where undistributed pro®ts were
transferred to the owners' capital accounts on an
annual basis. It was less suited to joint stock
companies or corporations where undistributed
pro®ts do not merge with contributed capital
(Littleton, 1933, pp. 217±218). Irish (1968, p. 61)
suggests that this incongruity evidenced the per-
sistent in¯uence of a prototypical proprietor's role
on developing accounting practice, even as the
introduction of the joint stock company made the
separation of income and capital necessary.
15
In contrast to the ``business entity'' principle,
the proprietorship principle viewed capital as
the personalized contribution of the proprietor
instead of an anonymous aggregation consisting
of all of the property that is active in a business
(Irish, 1968, p. 69). Even as late as the mid-19th
century, when the corporate form was facilitating
the separation of ownership from control, it was
thought that ``the shareholder occupied the role of
proprietor; [that] it was his pro®t which was
earned and his capital to be preserved'' (Irish,
p. 68). The sign ``accounting capital,'' in short,
sought to imitate a natural correspondence
between the business activity and the entre-
preneur's invested wealth, which had been lost in
the transition to depersonalized corporations that
``had no soul'' (Irish, p. 69).
The proprietorship principle spawned a pre-
occupation with balance-sheet valuation, income
being conceived as the periodic change in net asset
values.
16
Since capital and pro®t were viewed as
belonging to the shareholder-as-counterfeit-pro-
prietor, little attention was initially paid to the
means of valuation: cost, market and liquidation
values were variously used. The accounting sign
of income, therefore, served as an analogy of
the Feudal era's liquidation-proceeds (Irish, 1968,
p. 69). But rather than serving as the obligatory
and transparent re¯ection of this pro®t, as it had
in the Feudal order, ``income'' had entered the order
of imitation. The accounting sign ``income'' could
henceforth only play at being real as the rationale
began to fade for why double entry accounting
had originally relegated the components of
income to ``nominal'' accounts. This problematic
14
``[T]he use of a balance-sheet to calculate the `net revenue'
or `net pro®t'...indicates a conception of pro®t which is asso-
ciated with the ®nal liquidation and winding-up of a company:
the pro®t consisting of whatever property was left after using
the assets to discharge the liabilities and reimburse the
shareholders for their capital contributions'' (Littleton, 1933,
p. 216).
15
Littleton (1933, p. 216) speculated that the balance sheet
approach to income determination ``may well be associated
with the proprietorship theory of accounting...'' but he did not
pursue this inquiry.
16
English companies law did not require a statement of pro®t
and loss until the Act of 1929. Even then, no details (except the
disclosure of directors' fees) were prescribed (Irish, 1968, p. 69).
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 23
relationship was to change dramatically with the
appearance of the industrial era in late 18th-cen-
tury England.
3.5. The order of production
The Industrial Revolution ushered in Bau-
drillard's second order of simulacrum. Its major
de®ning feature, he observes, was the appearance
of serial, mass production technology. One vital
aspect of this was the transmutation of the sign-to-
referent relationship. Recall that in Feudal times
the sign referred in a direct and transparent man-
ner to its object, while in the counterfeit order
the sign ``played'' at being the referent and was
a distortion of it. In the order of production,
however, the sign came to ``absorb'' the object.
17
Baudrillard explains this by reference to serial
production with its code of political economy.
Serial production made it possible to produce
identical objects ad in®nitum. These commodities,
as the economists called them, were no longer
re¯ections, counterfeits or analogues of any origi-
nal goods as in previous eras. Rather, they were
simply images of the other objects manufactured
by their particular serial production process. As
such, they were simultaneously both sign and
referent, or what Baudrillard labels ``sign-objects'':
The Industrial Revolution gave rise to a whole
new generation of signs and objects. These
were signs with no caste tradition, which had
never known the restrictions of status, and
which would not have to be counterfeited
because they were being produced on such a
gigantic scale... The sign and referent had
coalesced into a relation of equivalence, of
indi?erence (Baudrillard, 1988a, p. 137).
Henry Ford's black model ``T'' automobile serves
as an exemplar.
Crucially, the social order too came under the
sway of technical rationality with its ``rules'' of
serial manufacturing. Just as material goods were
produced ad in®nitum, now both workers and
bourgeois owners were serially produced, that is to
say, commodi®ed. This meant the decline of the
natural rights of man and the code of the coun-
terfeit, and the appearance of the new code of
political economy whose rules and laws were
instantiated in the social realm.
18
In consequence,
the individual was no longer in the image of God,
a counterfeit of the aristocracy or a natural senti-
ent being. The individual was merely an image of
other workers or bourgeois persons. Serial pro-
duction simultaneously generated the producing±
consuming individual as well as the commodity.
The advent of serial production and the code of
political economy also brought a transmutation in
the nature and laws of pricing and exchange. In
previous eras, prices were struck according to the
code of canon law, labor exchange or value in use.
Now, however, since every sign±object referred
only to other commodities in its particular serially
produced manufacturing chain, pricing came
under the code of the political economy, which
called for ``exchange'' value. The laws of supply
and demand ruled the sign±object.
In general terms, serial production came to
dominate the social realm just as it dominated the
material, economic domain. The industrial
machine, Baudrillard concludes, now corres-
ponded to the rational, functional, historical con-
sciousness of society. Accounting followed a
similar path.
The advent of the Industrial Revolution saw the
proliferation of long-lived assets used for the mass
production of identical goods. This exacerbated
the accounting problem inherited from the classi-
cal era: the growth of the corporate form and
severance of ownership from control made
accounting's traditional proprietorship focus less
and less appropriate. Over the next century,
accounting would experience another momentous
17
Baudrillard o?ers modern art as an example. An abstract
painting is pure form that does not refer to any real or ima-
gined object. Its materialsÐpaints, canvas, and frameÐare
absorbed by the form (see also Cooper & Puxty, 1992).
18
This usage of code resembles the logic (rules and laws)
governing, say, the game of chess which includes a social hier-
archyÐKing, Queen, Rook, Bishop, Knight and PawnÐand
the rules for moving them around the board. The social body, it
seems, contains a code for its regulation just as DNA contains
the codes for the biological development and maintenance of a
living organism.
24 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
ruptureÐthis time, into Baudrillard's order of
serial production.
Accounting's transformation from the order of
the counterfeit to the order of serial production
entailed a signi®cant trans®guration of the signs of
income and capital. Whereas ``income'' in the
preceding order had served as an analogy for a
proprietor's liquidation proceeds or pro®ts,
income in the order of production was reconceived
as the serialized, periodic return to depersonalized
capital. This seemingly subtle distinction masks a
profound transformation in the relationship
between the sign and the real: capital and income
relinquished their grounding in the productive
endeavors of an entrepreneur. The logic and code
of the market now governed them instead. Com-
parability and reproducibility became the end and
the measure of the system.
The balance sheet approach discussed above
was poorly suited to reckoning the periodic pro®t
of an ongoing business concern. When applied
to a corporate entity, the balance sheet did not
adequately distinguish between operating income
and increments to capital (Littleton, 1933, pp.
216±217). This was true not only because of the
diculties that stemmed from estimating current
or liquidation values for the assets of a going
concern but also because of the ambiguity of
whether prior years' undistributed earnings were
income or capital.
This radical transformation of the signs of capi-
tal and income after the Industrial Revolution is
extensively documented.
19
The development, of
course, did not occur overnight. Until the early
19th century, British industrial ®rms continued to
treat capital as ``an auxiliary to entrepreneurship
instead of the central motive force behind the
®rm'' (Pollard, 1968, p. 119). Their ®nancial state-
ments also continued to betray the confusion of
capital and income that stems from a balance sheet
approach to income determination (Pollard).
20
Indeed, British ®rms viewed pro®t as a reward for
entrepreneurship instead of a return to capital,
expected rates of return being invariant with risk:
Capital is adequately rewarded by interest at
the current rate, at which, incidentally, the
supply is clearly assumed to be highly elastic
and limited by personal and speci®c shortages
rather than by price. Pro®ts are distinct and
are rewards of entrepreneurship, per se,
depending on skill, the concrete business
situation or sheer luck, the entrepreneur using
capital merely as a tool for which he pays the
market rate (Pollard, 1968, p. 122).
21
Thus, accounting's ``capital'' was very di?erent
from today's market-based conception, in which
the price of a ®nancial claim depends crucially on
risk and investors expect the value of their con-
tributions to increase with time as management
invests in operations that generate positive net
present value.
Pollard (1968) provides evidence in support of
this. Well into the ®rst half of the 19th century, the
19
For example, ``It has generally been agreed that there has
been a slow transformation from early `personal' and `speci®c'
capital, mainly in its ®nancial and commercial (circulating)
forms, to capital as found in the advanced stages of `high
capitalism', by which time it had become typically general and
anonymous, and included much ®xed capital in industrial and
public utility ventures. In this development, the Industrial
Revolution in Britain is generally held to have formed a major
step, and to have given rise to the ®rst consistent theories of
capital, as well as introducing the notion of ®xed capital into
accounting'' (Pollard, 1968, p. 113) (see also Chat®eld, 1974,
Chapter 8).
20
This is confusion only in retrospect, because the distinc-
tion was not needed until the corporate form gave substance to
the idea of a going concern and e?ected the separation of
ownership from control.
21
Interestingly, this notion of pro®t corresponds to today's
idea of ``economic value added'' (EVA) which will occupy our
attention in a later section of the paper. Brie¯y, if r represents
the risk adjusted market rate of return, BV
t
represents the book
value of owners' equity at time tÐthe accounting measure of
capitalÐand E
t
represents accounting earnings or net income
at time t, then EVA at time t is de®ned as
EVA
t
? E
t
ÀrBV
tÀ1
:
We will have much more to say about the role of this impor-
tant measure in today's accounting theory of clean surplus. For
now, we simply point out that even in the order of production
accountants evidently realized that if residual pro®ts were
always zeroÐif the entrepreneur could not do better than earn
the market rate of return on invested capitalÐthen EVA would
be zero. But if residual pro®ts were consistently positive, the
EVA would also be positive. Ironically, only the nominal
accounts could indicate this. Importantly, in this era, the EVA
accrued to the entrepreneur, not to the capital provider.
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 25
accounting signs of income and capital continued
as counterfeits of the proprietor's true liquidation
proceeds. But, as the in¯uences of the Industrial
Revolution spread, changes in the nature of pro-
duction and organizational forms prompted a
rethinking of accounting income and capital. This
rethinking, in turn, precipitated further slippage
between these signs and their original referents.
The introduction of mechanized, mass produc-
tion permanently decoupled production from
sales, replacing lot-production with continuous
manufacture. Thus:
...the nexus between acquisition and use and
between production and market was broken.
The manufacturer produced for an unknown
customer, in advance of demand, and there-
fore, could not associate the eventual selling
price with production (Most, 1977, pp. 41±42).
With the continuity of production, the ®nancial
reporting period became increasingly arbitrary
and arti®cial; allocations with little import (Tho-
mas, 1974) became crucial for computing income;
and the sign of accounting income slipped another
notch away from its original referent. Eventually,
the income sign came to repudiate its claim to be
the analogical equivalent of termination proceeds,
and became instead a standardized, serialized
production commodity in its own right whose
principal value was to facilitate the market
exchange of depersonalized capital.
Even more signi®cant than the change in the
nature of production was the change in organiza-
tional forms. The growth of large corporations
e?ected an abrupt trans®guration of the notion of
the ®rm, especially with respect to its temporal
characteristics. Berle and Means, in a book that
was to be in¯uential in motivating the creation of
the US Securities and Exchange Commission,
describe the trans®guration as follows:
The nature of capital has changed. To an
increasing extent, it is composed not of tan-
gible goods, but of organizations built in the
past and available to function in the future.
Even the value of tangible goods tends to
become increasingly dependent upon their
organized relationship to other tangible goods
comprising the property of these great units
[Berle & Means (1932) 1968, pp. 45±46].
This suggests what was, perhaps, the most sig-
ni®cant impact of the corporate form on account-
ing: a transmutation of the source of the value of
corporate assets. As the import of the corpor-
ation's quality as a going concern came to be
appreciated, sodid the viewthat ``real'' balance sheet
values do not depend on cost, liquidation, or market
values. They depend on the ®rm's future earning
capacity, which is re¯ected in its current pro®ts
(Irish, 1968, p. 71).
22
The nominal accounts were
seen to be at least as important as, and certainly no
less ``real'' than, the real accounts.
Several accounting principles and conventions
quickly followed the acceptance of this future-
oriented view of asset valuation. The belief that
``in any large company the real value of assets is
collective and depends mainly on the ®rm's earn-
ing power'' (Chat®eld, 1996c, p. 493) provided the
justi®cation for the realization principle in income
measurement (Chat®eld, p. 493).
23
Under the rea-
lization principle, income was no longer the dif-
ference between the ®rm's net worth at two
successive balance sheet dates. Rather, it was the
pro®t realized at the point of sale, whose mea-
surement required the matching of costs with
associated revenues (Chat®eld, p. 493).
By the 1940s, income computations relied on ``a
series of interlocking assumptions that included
historical cost, continuity, conservatism, and
periodicity, as well as matching and realization''
22
Paton (1922) argued that the value of a corporation's
assets is not directly related to their physical existence, their
acquisition costs, or their current market prices. Rather, their
value re¯ects the future service bene®ts to be received by the
®rm.
23
Realization occurs when income has become de®nite and
measurable. Usually, this is at the time of sale, when the earn-
ing process is almost complete, current assets and working
capital increase, title passes, and there has been an objective,
veri®able transaction with an outside party (Chat®eld, 1996a).
The ®rst recommendation for using the realization principle
seems to have been made by the American Institute of
Accountants' Special Committee on Cooperation with Stock
Exchanges and the Committee on Stock List of the New York
Stock Exchange.
26 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
(Chat®eld, 1996c, p. 493) and the income statement
deposed the balance sheet as the main focus of
accounting. Indeed, the Committee on Accounting
Procedure's Research Bulletin No. 1 described the
balance sheet as merely a ``connecting link between
two successive income statements'' (Irish, 1968, p.
70).
This shift in the relative importance of the two
statements is congruous with the reconceptualiza-
tion of capital that occurred with the rise of the
large corporation. Limited liability and the
separation of ownership from control changed the
meaning of capital from a personalized, proprie-
tary investment to a depersonalized, aggregated
concept, encompassing all of the property used in a
business [Paton (1922) 1962]. Pro®t, the distribu-
tion of which remained discretionary, stemmed not
from the e?orts of a proprietor but from the
deployment of capital:
...the salary of the corporation executive is
recognized as a cost not because it re¯ects
managerial services performed, but because
the service involved is disassociated from the
ownership function of furnishing capital, tak-
ing risk and assuming ultimate responsibility
(Paton & Littleton, 1940, p. 36).
These shifts mark a transition in accounting from
the proprietary view toward the entity view of
accounting that persists today.
In sum, with the adoption of the entity theory,
income measurement assumed a more economic
form (Chat®eld, 1996c, p. 231). Abandoning any
pretence of bearing an analogical relationship to
liquidation proceeds, the sign of accounting
income absorbed the referent (the pro®t of a spe-
ci®c venture) and the sign itself became an
exchangeable commodity, serially produced and
used to facilitate the allocation of capital in an
exchange market. In this role, its most important
attributes became those that guarantee its repro-
ducibility: objectivity, veri®ability, reliability, con-
sistency and comparability. The serial production
of income fed the market's valuation of capital
according to the code of political economy that
governed value in the production era. No longer
partaking of a ``nostalgia for a natural order''
(Kellner, 1989, p. 79), income sought not to imi-
tate the natural conclusion of a business endeavor
but to dominate it. The imperatives of market
exchange dislodged recourse to nature as the
legitimating social principle.
3.6. The order of simulation
The continual transmogri®cation of the sign±
referent relationship reached its present phase in
today's order of simulation. The sign no longer
refers directly to any referent as it did in the Fue-
dal era. The sign, however, is not just a counterfeit
of a referent that observers readily distinguish
from itÐlike nominal and real accountsÐas it was
in the counterfeit age. The sign, moreover, does not
merely absorb the referent and dominate it, blur-
ring the distinction between real and nominal in
everyday use as it did in the production era. No
longer an abstraction of anything in the simula-
tion era, the sign is now its own pure simulation.
The di?erence between the sign and referent
implodes.
24
Abetted by the explosion of information-tech-
nology devices,
25
these non-referential images lit-
erally bombard the individual with a surplus of
idealized models, images and simulations of all
aspects of lifeÐwork, exercise, hobbies, sports,
sex, diet, even accounting.
26
The same signs
pour in wherever the individual is located. The
``real'' person (made in the image of God, aristo-
crat, nature or commodity) disappears and the
``de-centered'' individual becomes an image of
these signs.
As distance melts and time is compressed,
attachments to place no longer matter. Local
24
``Elle est sans rapport a quelque re alite que ce soit: elle est
son propre simulacre pur...elle n'est plus de tout l'ordre de
l'appearance, mais de la simulation'' (Baudrillard, 1981, p. 17).
The image/simulacrum is without rapport to any reality that
exists: it is its own pure simulation...it is no longer at all in the
order of an appearance, but in the order of simulation.
25
These include television with hundreds of stations, e-mail,
voice-answering telephones, billboards, the internet, fax, and
junkmail, as well as radio, newspapers and magazines.
26
``...interior design manuals, exercise video-cassettes, child-
care books, sex manuals, cookbooks and magazines, newspapers
and broadcast media all provide models that structure various
activities within everyday life'' (Baudrillard, 1983a, p. 88).
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 27
values, childhood and schoolmate friendships,
sentiments for institutions and aesthetic feelings
for things that were important in previous eras are
readily discarded. What were ``goods'' a few dec-
ades ago (meat, potatoes, fur coats, church doc-
trines, etc.) are ``noxients'' today. Lacking a point
of perspective, a clear boundary to space, a ®xed
center or emotional anchor, the individual is at
once everywhere and, paradoxically, no where.
And just as we no longer bother to ®x a broken
appliance but throw it out and replace it with the
latest model, we now discard the past. As the
postmodern maxim declares, it is ``the end of
history.''
The future collapses into the present as cor-
porations, individuals and governments use new
techniques to parry potential shocks. Many cor-
porations, for example, use ®nancial-engineering
technology (implemented with options, futures
and other derivative securities) to hedge or sell o?
uncertainty. Clearinghouses pass on the risk to
individuals or to di?erent companies that will buy
itÐfor a price. The buyers then ``reinsure,'' selling
smaller chunks of the risk to additional investors.
Other corporations discount the future by secur-
itizing their accounts receivable or other expected
future receipts, bundling them together as syn-
thetic securities and selling them to ®nancial insti-
tutions without recourse for a negotiated ``present
value.'' Individuals participate in innovative
insurance contracts, welfare programs, marriage
contracts, funeral packages, cryogenic preserva-
tion and sperm banks to ``presentiate'' things once
and for all. The future is discounted; it does not
count anymore. Past and future implode into the
present (Sarup, 1993, p. 166).
Communication also undergoes a momentous
transformation. The order of simulation features
the mass consumption of signs and images that
contain ``senseless'' meaning. In a television
advertisement for Nike shoes, for instance, a
¯ying image of Michael Jordan performs
incredible basketball feats that are magically
replicated by a small boy wearing Air Jordan
sneakers. Far from being outraged by this lie or
believing that they only need to buy the snea-
kers to be professional basketball players, the
masses react by simply absorbing such images,
much as a black hole absorbs cosmic light
waves and particles.
27
With this transformation of communication
came a sea change in politics and power relations.
In electing a president or prime minister, people
see the candidate's image as being more important
than his or her substance. ``Political campaigns
become increasingly dependent on media advisors,
public relations `experts' and pollsters who have
transformed politics into image contests or sign
struggles'' (Best & Kellner, 1991, p. 199). Simi-
larly, documentaries and live television coverage
of events such as the Gulf War, the con¯agration
of Northern Ireland and the O.J. Simpson trial
become entertainment as much as hard facts and
politics. And sporting events like the Olympic
Games or international hockey and football
become politics. Advertising, documentaries, poli-
tics and sport implode into ``infotainment in
which boundaries between information and enter-
tainment collapse'' (Best & Kellner, p. 20). Con-
temporary culture features ``the incessant
production of images with no attempt to ground
them in reality'' (Connor, 1992, p. 56).
The masses are consequently neutralized and de-
politicized. They passively absorb the non-refer-
ential simulations then demand more, being de-
contextualized, de-historicized, de-politicized and
de-sensitized to such power relations. As a result
of this massi®cation of society, claims Baudrillard,
the di?erence between the proletariat and the
bourgeoisie classes imploded so the ``social'' is no
more. With this development comes the ``death'' of
modernistic sociological theories and thus sociology
itself. Smith's invisible hand, Marx's dialectic
materialism, Weber's bureaucratic iron cage, Fou-
cault's panoptic carceral society,
28
Gramsci's hege-
monic elite, Habermas' ideal speech situation, Le vi-
Strauss' incest taboo and Saussure's semiologyÐall
27
Baudrillard (1983b, p. 1) de®nes the masses this way:
``The whole chaotic constellation of the social revolve around
that spongy referent, that opaque but equally translucent
reality, that nothingness: the masses.'' See Connor (1989),
Docker (1994), Norris (1992), Wake®eld (1990) and Sokal and
Bricmont (1998) for reviews and critiques of Baudrillard's
positions.
28
See Baudrillard (1987) for his critique of Foucault's
depiction of society as carceral.
28 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
the grand theories of modernityÐare obsolete.
``[T]his is the end of the metaphysics, it is the era
of hyperreality that begins'' (Baudrillard, 1983a,
p. 149).
4. Simulation era accounting
If Baudrillard's description of the simulation era
holds, one would expect the advent of the simula-
tion era to have heralded momentous changes in
the referential properties of ``income'' and ``capi-
tal.'' Neither mainline accounting texts nor
GAAP, however, have instantiated such muta-
tions.
29
Instead, the accepted vocabulary of
income and capital remains grounded in beliefs
and assumptions that formed during the produc-
tion era, while accounting practice clings to double
entry techniques that emerged nearly ®ve centuries
ago in the counterfeit era. Next, we o?er support
for this conclusion and draw out some implica-
tions for users of accounting information and for
accounting standard-setters by also drawing on
recent advances in ®nancial accounting theory.
4.1. Transparency lost
Much of extant accounting theory and practice
sees accounting signs as being related to some
``real'' economic activity or production process,
which occasions costs (e?orts) and revenues
(accomplishments) and gives meaning to basic
notions like ``costs attach'' and ``realization'' (Ijiri,
1980; Paton & Littleton, 1940). As previous
authors put it, economic activity ``consists of
uniting material, labor and various services to
form new combinations having new utilities.'' So
``it is a basic concept of accounting that costs can
be marshaled into new groups that possess real
signi®cance'' and the purpose of marshaling costs
is ``to trace the e?orts made to give materials and
other components additional utility'' (Ijiri, p. 13).
Paton and Littleton's treatise assumes, of
course, that the signs ``costs'' and ``revenues'' suc-
cessfully portray their referents, the incoming and
outgoing ¯ows of goods and services, so ``income''
is the realized di?erence between a period's reven-
ues and the costs that were associated with them.
It also begs the question ``How would we judge
whether any portrayal was successful''? Paton and
Littleton seem to take for granted that the repre-
sentation of costs and revenues was a straightfor-
ward issue. Readers of ®nancial statements will
readily see through the numbers and apprehend the
resources they portray. Only measuring income is
problematic.
The criterion for income recognition is simply
this: a ®rm can realize revenue when the outputs
survive the salto mortale (deadly leap) into the
market and therefore net income, the di?erence
between the realized revenues and the costs that
the ®rm had incurred to produce the revenues, is
distributable (Ijiri, 1980). Each period net income
augments retained earnings, a component of capi-
tal. A ®rm can distribute retained earnings to
shareholders as dividends. Dividends, however, are
a return of, not on, capital so paying a dividend
does not reduce periodic income.
Like Paton and Littleton, accounting regulators
today know they cannot ignore the depiction of the
more fundamental things that go into any com-
putation of income and capital. But their approach
to addressing the issueЮnancial statements should
re¯ect underlying events and transactions in a
transparent mannerÐseems inconsistent with the
nature of accounting signs in the simulation era.
In 1998, for example, the chairman of the Secu-
rities and Exchange Commission called for ``tech-
nical rule changes by the regulators and standard
setters to improve the transparency of ®nancial
statements'' (Levitt, 1998) and stated that
``[c]orporate management and Wall Street need to
undergo a wholesale cultural change, rewarding
those who practice greater transparency and pun-
ishing those who don't'' (Levitt, 1998). Previously,
a Financial Accounting Standards Board (FASB)
exposure draft on accounting for ®nancial instru-
ments and hedging activities identi®ed ``lack of
transparency'' as one of four ¯aws in accounting
for ®nancial instruments that the proposed
29
Lukka (1990) shows that an ontology of realism dom-
inates accounting theory and practice. This beliefÐthat there is
an underlying, objective reality to which accounting concepts
correspondÐis argued to have dysfunctional consequences for
the development and evaluation of accounting theory and
practice.
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 29
accounting rules for derivatives would seek to
overcome (FASB, 1996d, p. 42). In fact, the words
``transparent'' and ``transparency'' appear seven
times in that important exposure draft. Thus, con-
temporary conventional accounting thought still
seems implicitly wedded to the proposition that
there is an underlying objective reality to which
accounting signs should correspond and against
which the faithfulness of the sign may be judged.
In their continued quest for transparency, then,
the SEC and FASB divulge their realist ontology
and the attendant conviction that accounting signs
should correspond to some underlying, objective
and independent reality that would be the stan-
dard for judging the ®delity of the signs. The rea-
list ontology, as Lukka (1990) argues, still
dominates accounting theory and practice and
shows little danger of waning. In contrast, Bau-
drillard's radical semiotic theory suggests that
accounting signs such as ``income'' and ``capital,''
like other signs in the simulation era, have already
slipped free of their putative referents. They now
circulate in the realm of hyperreality where self-
referential models engage each other without
ground. In the hyperreal economy, ``serial produc-
tion yields to generation of models'' (Baudrillard,
1983a, p. 103). Signs, including accounting signs,
no longer refer to any referent, nor do they absorb
the objectÐthey are their own pure simulacrum.
We next investigate this radical conclusion by
considering topics which are currently the object
of much debate and controversy: accounting for
executive stock options, earnings management and
accounting for ®nancial instruments. The issues that
stem from these topics illustrate the persistence of
production era thought on accounting theory and
suggest that the accounting signs income and
capital are continuing their transformation.
4.2. Executive stock options
The FASB recently proposed that the value of
any newly granted stock options should be an
expense of the period. Current practice requires
companies to value newly granted stock options at
their ``intrinsic value'': the di?erence (if positive)
between the market value of the stock at the grant
date and the strike-price (``the strike''). Even
before Black and Scholes' (1973) seminal paper,
however, it had been well known that this so-called
intrinsic value grossly underestimates the true
value of any option. In fact, executives nearly
always get options that are either at-the-money
(since the stock price at the grant date equals the
strike) or out-of-the-money (since the strike
exceeds the grant-date stock price). Yet, they are
more than willing to forgo salary and other com-
pensation bene®ts in return for these options
because they know how valuable they really are.
Even deeply-out-of-the-money options are valu-
able if there is any probability that the stock price
will exceed the strike before they expire. More-
over, boards of directors readily grant at-the- or
out-of-the-money options. Such options induce
managers to think like owners and strive to
enhance the probability that the stock price will
exceed the strike before the options expire. But
companies do not recognize any expense because
the options' intrinsic value at the grant-date is
either zero or negative.
Under the FASB proposal, the amount of the
expense relating to newly granted options would
be equal to the fair market value of the options
granted, computed according to an accepted
option-pricing model (e.g. Black & Scholes,
1973).
30
Implementation is de®nitely not an issue.
Already every SEC registrant must make such a
computation and disclose the result, outside the
®nancial statements, in a proxy statement ®led
with the Commission. In 1997, for instance, Kel-
logg's reported that the value of the unexpired
options held by its chief executive ocer, most of
which were out-of-the-money, was $15,312,599.
Kellogg's computed this value according to the
Black±Scholes model, using conservative estimates
of the volatility of the underlying stock returns and
risk-free interest rates. Other SEC registrants made
similar disclosures. None of this amount, however,
appeared on Kellogg's ®nancial statements.
The logic implicit in the FASB's proposal to
remedy this omission is a straightforward extension
of ideas from the production era. A corporation's
30
In principle, it could be reported as an ``accounting-call''
(Thornton, 1992).
30 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
income is the periodic return to capital and a por-
tent of future returns to capital. So income falls
because executives have a right (but not an obli-
gation) to buy shares for an amount that could be
below future market prices.
31
From this view-
point, the Black±Scholes model gives accountants
a feasible remedy to what is putatively a measure-
ment problem, a practical shortfall from the theo-
retical ideal. With this modi®cation to practice,
the sign ``income'' could better re¯ect the ``real''
referent to which it supposedly points.
For reasons that extant theory is hard pressed to
explain, however, neither users nor producers of
accounting reports sawthe issue this way. Of the 348
comment letters (meeting certain sample selection
criteria) that the FASB received in response to its
exposure draft, only one favored recognizing com-
pensationexpense inthe income statement (Dechow,
Hutton & Sloan, 1996). Of course, this virtually
unanimous opposition sank the proposal.
More importantly, however, the episode left the
lingering question: what was the basis for all the con-
troversy and opposition when the relevant account-
ing theory guiding recognition and measurement
was so elementary? We think the question is just a
symptom of a more fundamental concern raised
by Kinney (1996, p. 183): ``Why do ocial earn-
ings matter?''
4.3. Earnings management
The informational perspective (Beaver, 1996)
does not explain why people care about formally
recognizing the e?ects of events and transactions
like the granting of stock options in the income
statement. The information conveyed by data dis-
closed in ®nancial statement notes, proxy state-
ments or elsewhere should be the same as that of
data reported in the income statement since read-
ers could readily adjust income to re¯ect the dis-
closures if they wanted to. But if, in this hyperreal
®nancial economy, accounting signs have indeed
lost their association with ``real'' referents, then the
informational perspective's presupposition that
investors can ``see through'' accounting numbers to
discern true market value is no longer sustainable.
There is nothing to see through to.
From Baudrillard's perspective, however, ``o-
cial earnings'' do matter. Fox (1997, p. 77) cap-
tured the idea: ``[T]he simplest, most visible, most
merciless measure of corporate success in the
1990s has become this one: Did you make your
earnings last quarter?'' The presence of this yard-
stick [a simulacrum] demands the practice of
``managing earnings'' in order to report ocial
earnings [another simulacrum] that pretty much
match analysts' forecasts, presumably in the hopes
of simulating value in the eyes of investors and so
bolstering the company's stock price.
While the practice of earnings management is
certainly not new, the extent and nature of the
practice appears to be evolving. As SEC chair
Arthur Levitt recently observed ``this process
[earnings management] has evolved into what
can best be characterized as a game among
market participants'' (Levitt, 1998). He describes
the self-referential process surrounding the pro-
duction and consumption of earnings numbers as
follows:
This is the pattern earnings management cre-
ates: companies try to meet or beat Wall
Street earnings projections in order to grow
market capitalization and increase the value
of stock options. Their ability to do this
depends on achieving the earnings expecta-
tions of analysts. And analysts seek constant
guidance from companies to frame those
expectations. Auditors, who want to retain
their clients, are under pressure not to stand
in the way (Levitt, 1998).
31
As Warren Bu?ett, Chair of Berkshire Hathaway and the
contributor of the sole letter in favor of the FASB proposal to
modify the accounting for stock options put it: (Some argue)
``that options should not be viewed as a cost because they
`aren't dollars out of a company's co?ers'. I see this line of
reasoning as o?ering exciting possibilities to American cor-
porations for instantly improving their reported pro®ts. For
example, they could eliminate the cost of insurance by paying
for it with options. So if you're a CEO and subscribe to this `no
cash±no cost' theory of accounting, I'll make you an o?er you
can't refuse: Give us a call at Berkshire and we will happily sell
you insurance in exchange for a bundle of long-term options on
your company's stock. Shareholders should understand that
companies incur costs when they deliver something of value to
another party and not just when cash changes hands'' (Letter to
Shareholders, Berkshire Hathaway 1992 annual report).
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 31
Microsoft, for example, recently reported an
income ®gure that met or slightly exceeded ana-
lysts' expectations for the 41st time in the 42
quarters since the company went public. One ana-
lyst said, ``Microsoft does a better job of lever-
aging accountingÐI would say it's almost a
competitive weaponÐthan anybody else in the
industry'' (Fox, 1997, p. 79). For some time, Bos-
ton Chicken's record of meeting or beating fore-
casts was perfect:
Not only is Boston Chicken able to report
earnings every quarter, but those earnings
have so far never failed to meet or surpass
analysts' expectationsÐeven though those
analysts all know that the earnings in no sig-
ni®cant way re¯ect how the company is doing
[emphasis added]... ``It's a very smart strat-
egy,'' says Michael Moe, a growth strategist at
Montgomerey securities. ``It has made enor-
mous amounts of capital available to them at
an attractive price that most companies can
only dream of'' (Fox, 1997, p. 79).
Though the company's reported earnings mirrored
analysts' forecasts perfectly, the latter were well
aware that these signs did not refer to ``real''
earnings.
4.3.1. The map begets the territory
The case of General Electric Company (GE) is
even more striking. Due to its large size, wide
spectrum of technologies and its global diversity,
GE enjoys ``a very large amount of ¯exibility to...
deliver strong, consistent earnings growth in a
myriad of global economic conditions'' and is thus
recognized as one of the world's leading, ``aggres-
sive practitioners of earnings management''
(Managing Pro®ts, 1994). Indeed, GE often devel-
ops a model of how an acquisition, a divestment
or the restructuring of a division would a?ect
ocial earnings before going ahead. So, in e?ect,
unlike the traditional thinking where strategy is
implemented and accounting later reports the
results, in GE's case the accounting model (the
map) precedes the implementation of the strategy
(the territory). As Baudrillard describes the
hyperreality of the simulation era, ``The territory
no longer precedes the map...[rather] the map
engenders the territory'' (Baudrillard, 1983a, p.
167). So instead of accounting re¯ecting the real
outcomes of GE's strategic decisions, the ex-ante
accounting model (itself a simulation of analysts'
expectations as explained above) precedes and
engenders the strategy which in turn recirculates
into reported earnings. Similarly, motion picture
companies like Walt Disney forecast reported earn-
ings when deciding when to release videocassettes of
hits like Snow White. By carefully timing videocas-
sette releases, they can maintain the smooth trend in
earnings that analysts can easily forecast. Analysts'
earnings forecasts, in turn, sustain value. Fig. 2
depicts the potential simultaneity introduced by the
earnings management ``game''.
In sum, as Fig. 2 and the quotes from SEC chair
Levitt suggest, analysts look for clues about a
company's future earnings in its current ®nancial
statements and investment decisions. But man-
agement simultaneously takes analysts' earnings
forecasts as yearly targets and selects investments
that are likely to produce reported income equal to
or exceeding those forecasts. In turn, the market
capitalizes analysts' earnings forecasts into stock
prices. The company's investment decision model,
the analyst's forecasting model and the investor's
valuation model circulate simultaneously (to use
Baudrillard's syntax). They refer to each other but,
for investors, they lack any relation to a real referent
such as cash ¯ow or ``true'' income. Granted, the
company's investments would not generate any
earnings if they didn't also generate cash ¯ows. But
neither analysts nor investors know how earnings
relate to cash ¯ows and hence to value. Rather, they
produce and consume accounting earnings which,
when coupled with a ``price/earnings multiple,'' can
be used to simulate value.
So Baudrillard might address Kinney's question,
``Why do ocial earnings matter?'' as follows.
Extant accounting theories are poorly equipped to
address the question since they are based on anti-
quated presuppositions about the relation between
accounting signs and underlying referents. In the
order of simulation, the surplus of non-referential
signs such as earnings has exploded, especially in the
®nancial economy that McGoun (1997) aptly
describes as ``hyperreal.'' Amid ongoing discussions
32 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
of ``meltdowns'' and ``irrational exuberance'' in
®nancial markets, the SEC chair called accounting
``a reality checkÐin many cases, the only reality
checkÐbefore important economic and invest-
ment decisions are made'' (Levitt, 1996). But this
is surely not the kind of ``reality'' the ancient
Sumerians knew. Instead, earnings create a simu-
lated reality of their own because investors'
valuation models still treat earnings as if they have
the underlying referents of bygone eras.
This decoupling of income from its underlying
referents does not, however, suggest a diminished
importance for earnings. Indeed, as the ®nancial
economy becomes increasingly volatile, it becomes
more important to maintain the predictability of
the income calculation. Equally important is the
appearance that the calculation of income, seen as
a crucial ``reality check'' in sustaining the ®nancial
economy, is exogenous to that economy. Formal
earnings matter because to ``recognize'' a transac-
tion or event in the income statement is to
``hyperrealize'' Ðproviding that transaction or
event with an aura of ``reality'' in the realm of self-
referential models that constitutes the ®nancial
economy.
4.4. Financial instruments
The debate and controversy surrounding the
FASB's ®nancial instruments project provide an
even more striking example of the problematic
nature of accounting signs in the simulation era.
The project has been on FASB's agenda for
more than a decade and is seen as ``one of the
most important ®nancial reporting issues to be
addressed over the next ®ve years'' (Beaver,
1996, p. 114). It has consumed vast amounts of
time and energy and has all but dominated
recent standard setting activities worldwide
(FASB, 1990, 1991a,b,c, 1994a,b,c,d, 1995,
1996a,b,c,d,e, 1997a,b, 1998). (Table 1 summarizes
key events and FASB accounting pronouncements
related to ®nancial instruments.) Although the
FASB ®nally issued Statement No. 133, Account-
ing for derivative instruments and hedging activities
(FASB, 1998), several basic issues remain unre-
solved. Nevertheless, some of the proposed solu-
tions are consistent with the simulation era shift in
the sign-to-referent relationships characterizing
the accounting signs income and capital. We will
return to this conclusion later.
Fig. 2. Why earnings matter.
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 33
Table 1
Chronology of events a?ecting accounting for ®nancial instruments
Dates Events
1971 President Nixon closes the gold window, ending the system of ®xed exchange rates put in place by the
Bretton Woods Agreements of 1944. The ensuing ``¯oating'' exchange rate became extremely volatile
1973 Black±Scholes option-pricing model published
Chicago Board Options Exchange opened
1979 Federal Reserve moves away from a policy centered on controlling interest rates, resulting in increases in
interest rate volatility
1980s Foreign exchange and interest rate volatility increase dramatically, as does trading in so-called
derivative instruments. Savings and Loan Associations, poorly equipped to deal with this volatile
environment, experience eroding ®nancial position leading to the S&L crisis (See Young, 1995, for a
detailed exposition of the events surrounding the S&L crisis)
1986 Financial Accounting Standards Board adds the Financial Instruments project to its technical agenda
1988±1990 Regulatory concern over Bank and S&L ®nancial position deepens; regulatory focus changes to
accounting
March 1990 Financial Accounting Standards Board releases SFAS No. 105 Disclosures of information about ®nancial
instruments with o?-balance sheet risk and ®nancial instruments with concentrations of credit risk. This is
the ®rst Financial Accounting Standards Board standard from the ®nancial instruments project, with a
``stop-gap'' focus on disclosure issues
June 1991 US Financial Accounting Standards Board adds the marketable securities portion of the ®nancial
instruments project leading to SFAS No. 115 to its technical agenda. For a detailed list of the external
pressures that led to this agenda decision, see Appendix 1 of Johnson and Swieringa (1996)
September±December 1991 Financial Accounting Standards Board releases research report Hedge accounting: an exploratory study
of the underlying issues; Recognition and measurement of ®nancial instruments, discussion memorandum
and SFAS No. 107 Disclosures about fair value of ®nancial instruments
June 1992±June 1996 Financial Accounting Standards Board holds 100 public meetings to discuss derivatives and hedging
issues. Johnson and Swieringa (1996) report in Appendix B that about half of the Financial Accounting
Standards Board meeting time devoted to major projects between 1991 and 1994 was devoted to the
Financial Instruments project
June 1993 Financial Accounting Standards Board releases SFAS No. 114 Accounting by creditors for impairment of
a loan and SFAS No. 115 Accounting for certain investments in debt and equity securities
1994 Derivative related losses shock the ®nancial community, leading one observer to note that ``A derivative
is anything that made a loss in 1994.'' SEC undertakes a review of derivative disclosures in
approximately 500 annual reports
October 1994 SFAS No. 118 Accounting by creditors for impairment of a loanÐincome recognition and disclosuresÐ
an amendment of SFAS No. 114 and SFAS No. 119 Disclosures about derivative ®nancial instruments
and fair value of ®nancial instruments released
November 1995 SFAS No. 124 Accounting for certain investments held by not-for-pro®t organizations released
(continued on next page)
34 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
The chief issue, which continues to engender
debate, is when and how to formally recognize
and measure the value of ®nancial instruments in
a company's ®nancial statements. Standard setters
have forged a consensus around the ``mark to
market'' rule, which states that the balance sheet
should carry most ®nancial instruments at fair
value, normally current market value. ``Fair value
is the most relevant measure for ®nancial instru-
ments and the only relevant measure for derivative
instruments'' (FASB, 1998, p. 1). In drawing this
conclusion, the Board evinces an unwavering faith
in markets, appealing again to the rationale that
appeared previously in Statement No. 107:
Fair values of ®nancial instruments depict the
market's assessment of the present value of
net future cash ¯ows directly or indirectly
embodied in them, discounted to re¯ect both
current interest rates and the market's assess-
ment of the risk that the cash ¯ows will not
occur (FASB, 1996d, p. 45).
Ironically, however, just as accounting standard
setters are embracing the use of market values on
company balance sheets, analysts and others use
®nancial statement data to gauge whether the
market value of the company's stock has strayed
from its fundamental or ``intrinsic value.'' For
example, Lee, Myers, and Swaminathan (1999)
constructed a measure of the Dow Jones Indus-
trial Average based on accounting numbers, and a
trading strategy based on deviations of stock prices
from their intrinsic values so computed. They
concluded that, ``the frequency and magnitude of
the negative expected returns seems to raise
doubts about market eciency'' (Lee et al., p. 26).
Baudrillard would presumably see the account-
ing for ®nancial instruments as both an extreme
example of hyperreality in ®nancial markets and a
paradox of self-reference. As Fig. 3 shows, on one
level, derivative instruments are subject to the
ultimate market discipline because their values can
be unambiguously derived, through ``no-arbitrage
arguments,'' from ``the underlyings''Ðthe prices
of assets on which the derivatives have claims.
32
At this level, expectations and probabilities are
irrelevant because a hedge portfolio, consisting of
Table 1 (continued)
Dates Events
June 1996 SFAS No. 125 Accounting for transfers and servicing of ®nancial assets and extinguishments of
liabilities and Exposure Drafts Accounting for derivative and similar ®nancial instruments and for
hedging activities and Reporting comprehensive income released
December 1996 SFAS No. 126 Exemption from certain required disclosures about FI for certain non-public entitiesÐ
an amendment to SFAS No. 107 and SFAS No. 127 Deferral of e?ective date of certain provisions of
SFAS No. 125Ðan amendment to SFAS No. 125 released
January 1997 SEC issues new disclosure rules focusing on derivative instruments, including quantitative market
risk disclosures based on risk management models used in practice (sensitivity analysis, value at risk
and duration analysis) [SEC 1997]
January±June 1997 Financial Accounting Standards Board continues deliberations on the 1996 Exposure Draft Accounting
for derivative and similar ®nancial instruments and for hedging activities
June 1997 SFAS No. 130, Reporting comprehensive income is released
June 1998 SFAS No. 133, Accounting for derivative instuments and hedging activities released
32
Financial Accounting Standards Board (1998) Statement
No. 133says anunderlyingis ``aspeci®edinterest rate, securityprice,
commodity price, foreign exchange rate, index of prices or rates,
or other variable. An underlying may be a price or rate of an
asset or liability but is not the asset or liability itself'' (p. 245).
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 35
fundamental ®nancial instruments, can always be
constructed to replicate a derivative's payo?s in
every eventuality. It cannot sell for anything but
the price an investor would pay for the hedge
portfolio (Jarrow & Turnbull, 1996, Chapter 6).
But what detemines the prices of the under-
lyings? We argued in the previous section that the
market uses accounting earnings, along with other
information, to value companies' stock and other
securities. The prices of these securities then
become the underlyings that sustain the deriva-
tives' prices and the self-referential sequence is
complete. Companies' earnings determine security
prices, which determine derivative prices, which
determine companies' earnings.
33
In short, neither
the accounting sign nor the ®nancial market sign
appear to be grounded in any external reality.
Instead, each model appeals to the other model for
the only ``reality check'' available. Accounting
signs model market signs, which in turn model
accounting signs. Thus, in the hyperreal ®nancial
economy of simulation, the di?erence between the
sign and the referent implodes. The signs become
images of themselves in animbroglioof ungrounded,
self-referential simulation, as shown in Fig. 3.
4.4.1. Other comprehensive income
The FASB's valuation rules are only one aspect
of the hyperreality of accounting for ®nancial
instruments. The FASB also recommends that the
traditional notion of ``retained earnings'' (RE) be
augmented by a construct called ``accumulated
other comprehensive income'' (AOCI) (FASB,
1997a). The total carrying value of owners' equity
for accounting purposes then consists of the sum of
these two amounts, RE+AOCI, plus the historical
value of contributed capital. As for the income
Fig. 3. Hyperreality in accounting for ®nancial instruments.
33
Some links between derivative values and reported earn-
ings are more direct than are others. The value of a simple call
option whose underlying is the ®rm's own share price depends
directly on that ®rm's reported earnings, to the extent that
reported earnings in¯uence share prices. But even the value of a
derivative whose underlying is not the ®rm's own share price is
in¯uenced by the earnings that ®rms report at the level of the
economy as a whole. Quarterly earnings ®gures are one indi-
cator of macroeconomic conditions. Trends in corporate earn-
ings a?ect expectations for future prosperity, which in¯uence
consumer spending and saving and corporate investment, which
in turn cause movements in interest rates, commodity prices
and foreign exchange rates, all of which serve as underlying
prices or rates for derivatives.
36 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
statement, ``comprehensive income'' (CI) is ``[t]he
change in equity of a business enterprise during a
period from transactions and other events and cir-
cumstances from nonowner sources'' (FASB, 1998,
p. 243). Thus, CI is the sum of net income (NI),
which increases retained earnings and other
comprehensive income (OCI), which, of course,
increases accumulated other comprehensive income
(AOCI).
Fig. 4 traces the possible changes in the value of
these accounts when a company uses derivatives to
hedge its transactions. When changes occur in the
fair value of some hedging derivatives, the result-
ing gains and losses are to be shunted through
OCI and thus into AOCI, where they will be held
in abeyance. The thick arrow near the bottom of
the ®gure depicts this shunt. If the hedge loses its
negative correlation with the risk exposure it is
intended to hedge, it is said to be ``ine?ective.''
Then, the gain or loss to date is immediately
recycled through the income statement (reversing
the OCI it has caused) and thus into retained
earnings. The dark, L-shaped arrows portray this
recycling. If the hedge is e?ective, the company
waits until the hedged transaction in the under-
lying item occurs. Then, the cumulative loss or
gain on the derivative is again recycled through
the income statement, but this time it is matched
with income or loss on the underlying transaction.
The upshot is that the change in the value of the
derivative will not a?ect total shareholders' equity
at that later time. Rather, it will be transferred
from AOCI to retained earnings. Thus, the timing
of income recognition and total capital accretion
will no longer be linked. Moreover, the OCI and
AOCI signs are ambiguous. OCI and AOCI can be
treated as part of either income or capital, neither,
or both. In Baudrillardian terms, the di?erence
between income and capital implodes.
Perhaps the most surprising result of this proce-
dure occurs when a company hedges the purchase
of a depreciable asset. Suppose an American
company is going to buy a building in France next
month. To hedge the purchase price, it buys a
forward currency contract for Euros. During the
month, the value of the contract increases by $1
Fig. 4. FASB 130 and 133 nomenclature.
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 37
million, which of course goes to AOCI. When the
purchase is consummated, what happens to this $1
million? If the useful life of the building is 50
years, 1/50 of the $1 million will be matched each
year with depreciation expense (the ``realization
event'') and go through net income to retained
earnings. In e?ect, AOCI (a sign) will act as a kind
of holding tank for formal earnings (another sign)
in the future.
4.4.2. Credit ratings
The commodi®cation of credit ratings provides
another lucid example of hyperreal accounting in
which ®nancial instruments and accounting signs
circulate without real referents. Credit rating
models appeal to accounting for signs of a com-
pany's ability to pay its ®xed debt obligations
(Altman, 1968). But with the onset of creative
®nancial instruments, one company's credit rating
becomes a sign that it can ``rent'' to other compa-
nies with lower ratings, by selling transferable put
options.
34
Moreover, when it marks its ®nancial instru-
ments to market values a company does not need
a good credit rating to produce extra ``income.''
Paradoxically, it can generate income from a poor
rating by following the International Accounting
Standards Committee's (IASC, 1997) discussion
paper, Accounting for ®nancial assets and liabil-
ities. The IASC proposes that companies record
their debt at fair value, recognizing in income even
those changes in fair value occasioned by changes
in their own credit ratings. So a lower rating
would reduce the value of the company's debt,
thus ``producing'' income. This treatment con-
forms with the logic of contemporary accounting
in attempting to measure and report increments to
shareholder value using double-entry recording. In
substance, however, this accounting again takes
on a ghostly quality, chasing unreal constructs
while forging a reality of its own through a process
that might be regarded as ``hyperrealization.''
Recognizing the counterintuitive implication of
the idea that a decline in a company's credit wor-
thiness spawns income for shareholders, the recent
FASB Statement No. 133 (unlike the IASC docu-
ment) says companies should distinguish changes
in the fair value of debt occasioned by broad
market movements and those that result from
changes in credit risk. For example, a company's
credit rating would tumble if it suddenly faced
major litigation. This would cause the fair value of
its debt to decline, creating a gain for share-
holders. Simultaneously interest rates might fall in
response to central bank policies. This would
cause the fair value of its debt to rise, creating a
loss for shareholders. In theory, only the loss
resulting from the change in overall market rates
would be recognized. The gain resulting from the
lawsuit would be ignored. In practice, however,
can investors distinguish the two?
4.5. Summary
Income and capital signs appear to be para-
digmatic examples of Baudrillard's notions of
simulacra, hyperreality, and implosion. In the
order of simulation, the distinction between an
accounting sign and some underlying reality has
imploded. The accounting sign now precedes (and
even creates through its ``sign value'') the referent
that it once purported to represent. It is no longer
an abstraction or an appearance of any ``real''
thing. It is its own pure simulation, making cir-
cular references to other models which themselves
make circular references to accounting signs. Just
as postmodern individuals become images of
models that precede them and the di?erence
between the real person and the image implodes,
the accounting sign becomes an image of a model
of the accounting sign itself.
In more general terms, accounting is one among
many models that precede and subsequently create a
hyperreal ®nancial economy (McGoun, 1997) that is
characterized by ``fundamental changes in global
®nancial markets,'' which have ``transformed the
®nancial activities of all entities'' (Johnson &
Swieringa, 1996, p. 165). These transformations
have unmoored the ®nancial economy from the
real economy of labor and production so that the
former increasingly bears no temporal or spatial
relationship to the latter (McGoun). For example,
the so-called stock market crash of October 1987
had few noticeable consequences outside the
34
By 1986, it was estimated that $437 billion of private
guarantees were in e?ect in the United States.
38 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
®nancial economy. Contemporary accounting
and ®nance seem to circulate on their own plane,
parallel to but insulated from the material econ-
omy of labor and production.
Against this backdrop, the most recent shift in
the sign-to-referent relationship for the accounting
signs income and capital is occurring. As argued
above, the accounting income sign has entered the
simulation era as an important image in creating
and sustaining the ®nancial economy. The predict-
ability and apparent exogeneity of the income sign
play crucial roles in sustaining ®nancial markets,
by providing a ``reality check'' of sorts.
However, recent turbulence in ®nancial markets,
in particular several well-publicized derivatives-
related disasters in the past few years (particularly
1994), has, in our view, created a tension in the
relationship between the accounting signs income
and capital that cannot be easily resolved within
the traditional accounting model. Huge deriva-
tives losses during the 1990s exposed the ephem-
eral nature of capital in an increasingly volatile
®nancial economy. We argued earlier that in the
production era capital was viewed as central to the
®rm, something that endures and encompasses all
the property used in the business. Events such as
the almost overnight elimination of the capital of
a 200 year old ®nancial institution, Barings Bank,
pointed out that the ``historical cost'' notion of
permanent capital was no longer sustainable and
must be modi®ed. Accounting's sign ``capital''
needed to be reconceived as representing some-
thing more consistent with what capital repre-
sented in volatile ®nancial markets.
The International Accounting Standards Com-
mittee (IASC) March 1997 discussion paper
Accounting for ®nancial assets and ®nancial liabil-
ities points out that treating gains and losses on all
®nancial instruments as income is consistent with
a market-based conception of capital and capital
maintenance. Mark-to-market accounting is con-
sistent with a de®nition of capital ``in terms of
capacity to earn the current market rate of return''
(IASC, 1997, p. 128). If capital is to be recon-
ceived in market-based terms, then it must repre-
sent an amount that can be invested in ®nancial
markets and that can earn market rates of return.
Hence, the IASC document concludes that all
gains and losses from ®nancial instrumentsÐwhe-
ther assets or liabilities, primary or derivative
instrumentsÐmust be re¯ected in income given
clean-surplus accounting and this de®nition of
capital.
35
The simulation era market-based capital, which
must represent and be endogenous with capital in
®nancial markets, and the simulation era income,
with its perceived exogeneity and predictability,
are clearly at odds within the traditional account-
ing model. Promulgating standards that re¯ect
these two notions of capital and income is not
possible in a clean surplus accounting model. The
introduction of other comprehensive income (and
the balance sheet counterpart, accumulated other
comprehensive income) provides a solution to the
problem by decoupling the traditional income
statement from the total capital of the ®rm.
36
Also, as we discuss later, the comprehensive
income construct permits two di?erent clean sur-
plus relations to exist simultaneously, and so
allows for the contemporaneous existence of
otherwise irreconcilable notions of income and
capital. The dilemma is resolved by re¯ecting the
changes in the fair value of all ®nancial instruments
in ``capital'' without including those changes in the
traditional income statement.
5. Recapitulation and implications
At this point we want to recap our major ®nd-
ings and then discuss their implications. There
seems to be sucient evidence to support the idea
that the accounting signs income and capital have
experienced a series of ruptures in their nature
which, to an important extent, match the radical
changes in the sign to referent relationships pos-
tulated by Baudrillard in his phases of the image
and orders of simulacra ideas.
35
In a clean surplus accounting model, book value can be
changed only by (a) income or loss or (b) dividends net of
capital contributions.
36
We are aware that ``dirty surplus'' items have resulted in a
decoupling of income and capital for some time. The advent of
other comprehensive income is signi®cant in that it con-
ceptually addresses this decoupling through the creation of
another accounting sign.
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 39
In the Feudal era the income sign was a good
(faithful) image of the real material referent pro®t.
Inthe next phase it became a counterfeit of pro®t
and subsequently, no longer the analogical equiv-
alent of termination proceeds. Income then shifted
to a standardized, serially produced commodity
that facilitated the exchange of depersonalized
capital, and, indeed, became itself an exchangeable
commodity. Finally, in the simulation era it slip-
ped free from any putative referent to circulate
simultaneously with other non-referential models
of itself.
The accounting sign of capital also experienced
a series of ruptures and radical changes. In
Sumerian times, the contents of the farmer's clay
urn bore a one-to-one relationship with the capital
invested in the farm. In early Feudal times, capital
was not distinguished from realized pro®tÐboth
were encompassed in liquidation proceeds and
later the value of terminal stock upon its liquida-
tion. As permanent stock companies replaced sole
ventures and terminal stock companies, capital
became a counterfeit of liquidation proceeds.
Next, as the production era witnessed the separa-
tion of ownership and control and the appearance
of private sector limited liability corporations,
capital came to be seen no longer as a re¯ection of
liquidation value nor as the cost or current acqui-
sition prices of assets and liabilities but rather as
an image of the ®rm's future earning capacity
which was re¯ected in its current (nominal) net
income. Finally, in the simulation era the account-
ing sign of capital refers to ``the capacity to earn the
current market rate of return'' (IACS, 1997, p. 128)
and so is no longer attached to the traditional
income sign in either time or space. Rather, it is a
free-¯oating sign circulating in the hyperreal
®nancial economy.
Thus, much of accounting today seems to be
symptomatic of the postmodern era in general.
Both the income and capital signs have gained
their autonomy from any referential ``real'' realm
and from each other. As Baudrillard (1988a, p.
125) states, this ``is simulation in the sense that
from now on signs will exchange among themselves
exclusively, without interacting with the real
...[they are] at last free for a structural or combina-
tory play that succeeds the previous role of deter-
minate equivalence.'' It is the ®nal emancipation of
the sign from any referent.
So a Baudrillardian perspective might lead to
the conclusion that accounting in the simulation
era has lost its bet, so to speak, on the reality
principle and the rule of transparency on which it
has traditionally been grounded. As Baudrillard
might put it, the struggles standard setters are
having with the above issues look like a hopeless
e?ort ``...in order to save at all costs the truth
principle, and to escape the spectre raised by simu-
lation: namely that truth, reference and objective
causes have ceased to exist'' (Baudrillard, 1988a,
p. 168).
This, however, would be conceding Baudrillard
too much. While accounting signs might no longer
refer transparently to real objects, they clearly are
capable of in¯uencing the day-to-day course of
events in the material world. The question that
this raises for us is why is it that accounting
information is used extensively in economic and
social relations when, according to our Baudril-
lardian analysis, it does not refer to any real
objective realm, and has had changing referents
over time? Recent developments in ®nancial
accounting theory demonstrate that accounting
signs such as income and capital may be combined
and related to modern valuation theory without
specifying a rigid de®nition of either income or
capital, as long as the two articulate in a clean sur-
plus model. We present a brief review of this body
of theory and then speculate on how it relates to the
®ndings of our Baudrillardian analysis.
5.1. Arbitrariness of income and capitalÐthe clean
surplus model
The clean surplus model shows that the market
value (MV) of a stock can be represented in either
of two ways (Feltham & Ohlson, 1995; Ohlson,
1990, 1991; Peasnell, 1982; Preinreich, 1938): (1)
the present value of future dividends; or (2) the
book value of shareholders' equity (BV) plus the
present value of future ``abnormal earnings.'' Each
year, ``abnormal earnings'' is de®ned as the excess
of reported earnings in that year (E) over the
market-determined cost of capital (``r'') times the
opening balance of BV. Thus:
40 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
MV
0
?
X
1
t?1
D
t
?1 ?r?
t
BV
0
?
X
1
t?1
E
t
ÀrBV
tÀ1
?1 ?r?
t
The only condition needed to establish this
equivalence is the relation that gives the model its
name, the clean surplus relation:
BV
t
? BV
tÀ1
?E
t
ÀD
t
where D
t
represents dividends net of owners'
capital contributions in year t. Indeed, the only
manipulation needed to get from the dividend
summation to the abnormal earnings summation
is to substitute D
t
? BV
tÀ1
? E
t
À BV
t
in the divi-
dend summation. No additional assumptions are
needed.
Thus, as long as book value can be augmented
or decreased only by earnings and dividends (net
of capital contributions), respectively, the two
ways of computing value give identical results.
In a sense, this equivalence is trivial because the
present value of dividends is the value to be
distributed while the book value plus the present
value of future abnormal earnings is the value
invested in and subsequently created by a busi-
ness. This is why consulting ®rm Stern Stewart
(1994) called the series of year-t abnormal earn-
ings, ?E
t
À rBV
tÀ1
?=?1 ? r?
t
, ``economic value
added.''
A corollary to this fact is that changing the
measurement of income and capital has no e?ect
on the valuation calculation provided the change
satis®es the clean surplus relation. It merely shifts
the representation of ®rm value between book
value and the present value of future abnormal
earnings. A detailed explanation of the algebra
underpinning this result in the clean surplus model
is presented in Appendix A.
As far as valuation is concerned, then, the clean
surplus model reveals that income and capital can
be de®ned however we like provided the account-
ing system satis®es the clean surplus relation. The
relative contribution of capital versus income to
the valuation model certainly varies as the de®ni-
tions of income and capital change, but the con-
ceptual validity of the combination of income and
capital as a representation of value is not a?ected.
The important consequence of this is that the
income and capital signs can be used as instru-
ments for accomplishing various objectives with-
out destroying their value-relevance. This brings
us back to our earlier question: why are the
accounting signs income and capital useful for
social interaction even if there is no objective
referent for these signs?
5.2. Uses of income and capital
From a Baudrillardian perspective, the refer-
entiality of the sign to some objective domain is
irrelevant for social relations in the order of simu-
lacra since signs are precious not for their ``truth''
value nor for their exchange or use value, but
for their ``sign value''. Thus accounting state-
ments about income and capital attested to by a
public accounting ®rm are highly valued just as
are paintings signed by the acknowledged ``great
masters.'' As corporations expand further
globally, these certi®ed accounting signs are
highly valuable as they impart a sense of exo-
geneity and reliability to society at large. Simi-
larly, recent advances in ®nancial accounting
theory suggest that accounting signs income and
capital can be used to represent ®rm value, as long
as they are related through a clean surplus
accounting system. Both perspectives suggest
that accounting signs such as income and capital,
even if ungrounded, may be useful for social
interaction.
Even in a hyperreal economy, people must
interact with each other. It has long been recog-
nized that institutions like an accounting profes-
sion provide arbitrary but exogenous anchors that
facilitate complex social and commercial interac-
tions. ``Institutional information'' consists of
standardized data and ``rules of thumb,'' such as
``go on green; stop on red,'' which people volun-
tarily accept though they know they are arbitrary.
Accountants, among others, produce institutional
information that expedites social and commercial
interactions (Thornton, 1979).
For example, corporate law generally states that
a company cannot pay dividends unless there is a
positive balance in its ``retained earnings''
account. Loan covenants often require companies
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 41
to keep their ``debt/equity ratio'' below and their
``interest coverage ratio'' above some speci®ed
amounts. And management compensation is often
a contractual percentage of ``residual income''
[earnings minus a normal return on invested capi-
tal, akin to ``abnormal earnings'' in the clean sur-
plus model (Healy, 1985)]. Accounting numbers
are generally employed to compute the numbers
needed to enforce these constraints and contracts.
The parties to such agreements know that
accounting numbers are imperfect representations
of the constructs they want to measure. They
accept them, however, because any contract, to be
enforceable, must be based on observable phe-
nomena whose occurrence can be conceived when
the contract is struck.
Accounting numbers, imperfect though they are,
are observable and veri®able ex post. This is a
necessary condition for their usefulness in con-
tracting. A sucient condition is that people can
conceive and predictÐwithin limitsÐthe account-
ing numbers that will be reported given certain
events and transactions. Such predictions were
straightforward in the early days of urn account-
ing, so people would readily use the number of
tokens in an urn as a basis for dividing the fruits
of any endeavor among the participants. Today
the connections between accounting numbers and
the underlying events and transactions are much
more complex, but people still need to use the
numbers as bases for enforcing contracts and
dividing the spoils of a ®rm's operations. The
properties of accounting numbers that make them
serviceable for this task, observability, veri®ability
and predictability, are achieved at the cost of
arbitrariness. Ideally, people then take this arbi-
trarinessÐsuch as ``stop on red''Ðinto account in
forging social and commercial agreements.
Obviously, a key bene®t of such information is its
apparent exogeneity and stability. But instead of
purporting to re¯ect a profound reality, institu-
tional information such as earnings or a debt/
equity ratio is part of reality. People who under-
stand this see institutional information as an arbi-
trary but essential feature of a hyperreal world.
Without it, everything would seem to depend on
everything else and interaction would be problematic
if not impossible.
5.3. Hyperreal standard setting
The exogeneity and stability of accounting
information could be achieved in either of two
ways that we label ``myopia'' and ``full ration-
ality.'' In either case, standard setters might
appear to act as if there were an underlying reality.
5.3.1. Case 1: myopia
Standard setters would be oblivious to the
paradoxes of hyperreality but they would be con-
sistent. A hyper-regulator with perfect knowledge
of Baudrillard's arguments regarding the order of
simulation might appoint myopic standards setters
who truly believed they could apply outmoded
notions of capital and income even in the era of
simulation. Users, however, would know stan-
dards setters were myopic. They could then take
the standard-setting process and the resulting
accounting numbers to be exogenous and use
them as instruments for commercial and social
intercourse, whatever their real referents. They
could also use them as inputs to the clean surplus
model to value ®rms, because market value would
always be equal to book value (capital) plus the
present value of future abnormal earnings (adjusted
income), however book values and earnings were
de®ned.
This method of obtaining exogeneity and stabi-
lity would perhaps re¯ect badly on the intellectual
capacity of the standard setters but it would not
diminish the usefulness of what they did for one
fundamental reason: If accounting numbers are
merely instruments or anchors for contracting and
performance evaluation, it does not matter where
the anchor is sunk as long as it is stable. That is,
users' expectations of what standard setters do are
as important as what they actually do. In a sense,
users would have the best of two worlds: a pre-
dictable (though myopic) standard-setting process
and serviceable data for valuation.
5.3.2. Case 2: full rationality
Standard setters would grasp the signi®cance of
their role as fully as the hyper-regulator. They
would view their role as setting consistent but
arbitrary standards on behalf of users who may
not be able to see through them. That is, the clean
42 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
surplus model suggests that standard setters can-
not ``hurt'' users' valuation models by changing
the depiction of income and capital. But they can
choose standards that are more useful than others
for some purposes. For instance, cash accounting
can be as good as historic cost accounting for
valuation purposes but inferior when it comes to
forging management compensation agreements
based on earnings.
Ideally everyone, including standard setters
would understand that accounting representations
are arbitrary and hyperreal. People would then
voluntarily accept and use the arbitrary numbers
that stem from the standards, but not because they
re¯ected any profound reality. They would accept
and use them because they were part of realityÐ
the only reality they have for interacting with each
other in a complex world.
In a sense, full rationality would make the stan-
dards setters' job easier because they would know
that often, how an event or transaction should
a?ect income or capital is just a decision that
makes the numbers useful, not a de®nitive answer
to a question of what is real. Their deliberations
would conceivably proceed more smoothly and
their standards would be more readily accepted as
institutional information because they did not
need to argue about reality. Some examples of
such decisions readily come to mind.
5.3.3. Examples of rational standard-setting
decisions
We ®rst return to Fig. 4, which depicts a seemingly
convoluted concept, OCI (other comprehensive
income). When viewed as institutional information,
AOCI (accumulated OCI) allows readers of ®nan-
cial statements to conceive of capital ``in terms of
capacity to earn the current market rate of return''
(IASC, 1997, p. 128), at least as far as the ®rm's
®nancial instruments are concerned. The inputs
to the clean surplus model (ignoring contributed
capital) would then be BV
t
? RE
t
? AOCI
t
and
E
t
? NI
t
? OCI
t
. Alternatively, readers can ignore
OCI and use the more familiar inputs, BV
t
? RE
t
and E
t
? NI
t
. With perfect information about the
future, the two versions of the clean surplus model
would produce the same value, MV
0
for the ®rm's
equity because eventually, all transactions a?ect net
income. So readers can choose between these
representations in their valuation models, without
having to forego using the conventionally com-
puted measure of earnings, NI
t
, whose veri®ability
still makes it a desirable instrument for contracting
and performance evaluation.
Deferred taxes represent a case in point. They were
at various times seen as part of equity (capital),
debt (future tax liabilities) and in between (deferred
taxes). Neither accounting theory nor an external
referent can support any of the three interpreta-
tions unequivocally.
37
``Future tax liabilities'' are
now called liabilities, although governments do
not have accounts receivable from their putative
debtors. Again, standard setters had to do some-
thing with deferred taxes. As long as readers
understand how they are computed, they can use
the numbers they engender as inputs to the clean
surplus model and use or ignore them for various
decisions.
Paragraph 39 of SFAS No. 130, Reporting com-
prehensive income, provides an extensive list of
eight di?erent adjustments that past reporting
practices have suggested be included as a compo-
nent of equity without (or prior to) inclusion in
the income statement. This list reveals several
points of tension between income and capital that
have been developing in recent years. It includes
foreign currency adjustments, pension adjust-
ments, futures contracts qualifying as hedges, and
unrealized holding gains on certain securities. The
growing tension between the conventional con-
cepts of income and capital has increasingly
spawned accounting standards that do not adhere
to clean surplus accounting. The new comprehen-
sive income standard, however, will permit stan-
dards that re¯ect both income and capital in the
simulation era, and conform to clean surplus
accounting.
All of these decisions impart a sense of stability
and exogeneity to net income and book value,
even though they remain arbitrary. As a result of
such decisions, users can accept accounting num-
37
Brown, Collins and Thornton (1993) called ``deferred
taxes'' the platypi of the accounting kingdom because, for a
time, they were called mammals although they laid eggs.
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 43
bers as arbitrary but stable bases for contracting and
performance evaluation, while adjusting income
and capital, if they want to, for the purpose of
representing the value of the ®rm in the clean sur-
plus model.
6. Re¯ections on Baudrillard
The previous sections of the paper erect a
platform for critically engaging Baudrillard from
an accounting perspective.
38
One immediately
apparent problem concerns his assertion that
simulacra in the contemporary world lack rapport
with reality. Many accounting signs today still
have, as for Sumerian urn-accounting, a one-to-
one correspondence with real objects. These
include balance sheet accounts for physical objects
like land, buildings, plant and equipment and
inventory (in most instances). Moreover, accounts
receivable or payable, long term debt and sales
retain a reasonable measure of transparency with
underlying events, transactions and social obli-
gations. Thus, Baudrillard's contention that in
the order of simulation signs no longer refer to,
and often precede, reality comes across as an
overly dramatized, totalizing vision (Bertens,
1995, p. 147) that exaggerates ``the extent to which
postmodern simulation and hyperreality constitute
the contemporary society'' (Best & Kellner, 1991,
p. 143].
Another concern involves Baudrillard's conten-
tion that information gets absorbed, de-politi-
cized, and neutralized by the masses ``who
function as a gigantic black hole'' (Baudrillard,
1983c, p. 9). The existence of a robust investment
community (including pension and mutual fund
managers, investment analysts and advisors,
bankers and insurance company loan ocers)
transacting daily on the basis of accounting infor-
mation such as earnings forecasts and reported
earnings clearly contradicts this claim. Nor are the
``masses'' totally neutralized. Political parties and
politicians do respond to accounting signs as they
regularly call on governments to subsidize loss
making companies deemed vital to the national
interest (e.g. Chrysler Motors and Savings and
Loan Associations). They also attack (perhaps
misunderstanding accounting signs) companies
that seem never to pay their future tax liabilities.
Giddens (1984) might put it this way: existential
agents acting by virtue of their discursive con-
sciousness do respond to accounting signs for
both ®nancial and political gain. So Baudrillard's
black hole assertion reads in part like an under-
theorized, highly abstract generalization lacking a
contextual base (Best & Kellner, 1991) and his use
of quasi-scienti®c metaphors has been criticized by
highly regarded physicists as manifestly incorrect
(Sokal & Bricmont, 1998).
It also appears that assigning shifts in the
accounting signs of income and capital to Bau-
drillardian periods or eras presents an overly
rigid picture. His depiction of absolute breaks
between erasÐfeudalism, counterfeit, production
and simulationÐdoes not sit well with some
historical facts of accounting practice. Today,
for example, accounting signs function in many
di?erent ways. They signify real, material objects
(as argued above). They serve as an analogy
(counterfeit) for realized pro®t. They are charge-
and-discharge signs for private sector absentee
owners and fund accounting in public sector
organizations. And they serve as instruments for
rewarding executives and holding managers
responsible and accountable for operating budgets
and standard costs. Accounting simulacra in the
contemporary world operate in each of these ways
as well as circulating as self-referential signs as in
Figs. 2 and 3. Furthermore, even in the produc-
tion era accounting signs performed multiple
roles. Stewardship accounting was common and
some accounting signs, as in prior and subsequent
eras, referred unambiguously to tangible assets
and liabilities. So the history of accounting sug-
gests that Baudrillard o?ers only an under-theo-
rized description of the ruptures between eras
which he presents as a faits accomplis unsup-
ported by careful historical research and doc-
umentation (Best & Kellner, 1991).
A ®nal concern is Baudrillard's obsession with
the sign world and his consequent marginalizing
38
We are indebted to an anonymous reviewer for encoura-
ging us to engage theoretically with Baudrillard from an
accounting standpoint.
44 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
of relations of power.
39
Accounting practices have
important material and political consequences.
For example, executives at companies' head-
quarters routinely respond to accounting signs of
income and capital by executing plant closures or
layo?s and by restructuring divisions (euphemisti-
cally called ``right-sizing''). Governments respond
to such signs by providing tax relief and ®nancial
aid to certain private sector ®rms; labor unions
refer to accounting signs to support demands for
wage increases (Amernic, 1985; Amernic &
Aranya, 1990). Finally, accounting signs facilitate
more nefarious activities like money laundering
(Mitchell, Sikka & Willmott, 1998) and tax avoid-
ance through international transfer pricing trans-
actions (Armstrong, 1998). So Eagleton (1996)
rightly criticizes Baudrillard's theoretic (andthat of
other postmodern theorists) as an apolitical admix-
ture of radical and conservative elements. It fur-
nishes little or no leverage on the role of accounting
in relations of power.
7. Possibilities and a caveat
We have sketched a poststructuralist depiction
of accounting in the simulation era. If, as our
genealogical history of accounting suggests, the
accounting signs of income and capital have slip-
ped free from their putative referents and now
circulate in hyperreality, then a signi®cant mod-
i®cation of our understanding of accounting
reports and information is overdue. It no longer
makes any sense to talk about some objective
realm or reality that exists independently of some
neutral objective accounting representation of it
(Hines, 1988). Indeed, the clean surplus model
suggests that we can make sense of ``income'' and
``capital'' without adopting that untenable posi-
tion. So accounting interprets the world of purpo-
sive enterprises and facilitates interaction by
providing arbitrary but exogenous instruments for
contracting and performance evaluation. It is not
a means of re¯ecting how things were, are or
should be in some uninterpreted realm of objects
and events.
From a Baudrillardian viewpoint, many ques-
tions that have traditionally concerned standard
setters and accounting scholars are no longer of
much interest: Has the market impounded the
information conveyed by particular accounting
signals into the price of the company's stock? Is a
particular accounting treatment or GAAP coher-
ent with the rest of the extant accounting treat-
ments or GAAPs? Instead, we are concerned with
describing the nature of accounting signs, with
unearthing how they came to be produced and
with why they subsequently come to be taken for
granted as a reality of their own. This also leads to
questions such as: If accounting narratives no
longer refer to the real realm of material produc-
tion and economic activity in the classical sense,
what does this mean for accounting and accoun-
tants? What are the implications of this in post-
modern economies, where jobs in the real realm are
rapidly dwindling (Esposito, Aronowitz, Chancer,
DiFazio & Yard, 1998), where the gap between rich
and poor continues to widen (DiFazio, 1998) but
fortunes can be made in minutes by exploiting how
accounting signs circulate in hyperreality?
Addressing these types of questions is beyond
the scope of this essay. Our aims are more modest.
We hope, while recognizing that such a proposal is
controversial (Cooper, 1997; Montagna, 1997;
Young, 1996), that the paper will show the poten-
tial of adopting poststructuralist perspectives and
exploring their coherence with contemporary
accounting theories such as the clean surplus
model. Much more in Baudrillard's corpus of lit-
erature could be tapped to further our under-
standing of accounting and the issues facing
standard setters. Concepts such as: ``hypertalia''
(what happens when something surpasses its func-
tion or objective); ``ecstatic'' proliferation of simu-
lacra; the ``exstasy'' of too much meaning as
informationandcommunicationengorges the world;
``cool'' media; and the consumption of accounting
reports for their ``sign value'' (Baudrillard, 1988b,
1990a, 1993, 1994b).
39
This is one of the most frequently cited criticisms of Bau-
drillard's later works. See Kellner (1989), Best and Kellner
(1991), Norris (1992, 1993), Bertens (1995), Eagleton (1996)
and Sim (1998). Baudrillard seems mainly concerned with
describing the simulation era and so glosses over the historical
events preceding it.
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 45
Finally we should issue a caveat. In con-
templating our attempt to apply Baudrillard's
theoretic to accounting, we became conscious of
the same fundamental, methodological paradox
that Hawking (1988) noted in his treatise on space
and time. If our interpretation of Baudrillard pro-
vided a complete explanation of the phenomenon
of accounting, presumably the theory would also
determine the actions of accounting researchers,
ours included. That is, ``the theory itself would
determine the outcome of our search for it! And
why should (the theory) determine that we come
to the right conclusions from the evidence?''
(Hawking, p. 12). Why should we, as four think-
ing beings, be free to observe accounting as we
want and draw logical deductions from what we
see when many users and producers of accounting
reports cannot ``see out'' of the Baudrillardian
maze of self-referential models?
We believe that much more can be done in
drawing out the implications of Baudrillard's theor-
ies for accounting. But his view (like any view) has
its limits. In this we are conscious of the dilemma
posed by Godel's undecidability theorems, which
state that any formally logical system contains
questions that cannot be proved or disproved on
the basis of the axioms within the system.
40
Moreover, other new perspectives will probably be
equally important in advancing our understanding
of accounting.
Acknowledgements
The authors are grateful to the Social Science and
Humanities Research Council of Canada for two
separate research grants which helped support this
research. An earlier version of this paper, entitled
``A Baudrillardian Perspective on Accounting''
appeared in the proceedings of the conference,
Accounting, Time and Space sponsored by
Accounting, Organizations and Society in Septem-
ber 1997, held in Copenhagen, Denmark. It was
also presented at the annual conference of the
Canadian Academic Accounting Association in
June 1998. The authors thank Michael Stein,
Robert Scapens, David Cooper, Tom Scott, Tom
Linsmeier and two anonymous AOS reviewers for
their constructive comments on previous drafts.
Appendix A: The clean surplus model
To see how the clean surplus model accom-
modates shifts in the representation of ®rm value
between book value and the present value of future
abnormal earnings, take the ®rst discounted abnor-
mal earnings term outside the summation sign:
MV
0
? BV
0
?
E
1
ÀrBV
0
?1 ?r?
?
X
1
t?2
E
t
ÀrBV
tÀ1
?1 ?r?
t
Now suppose that we adjusted the accounting
measures of capital and income by making an
arbitrarily large charge to opening capital, , leav-
ing a balance of BV
0
À . This amount, , might be
called ``extra depreciation.'' Obviously, then, the
book value to be depreciated in the future would
decrease by this amount and the sum of all future
earnings would increase by the same amount. Not
so obviously, the discounted present value of all
future abnormal earnings would also increase by
this amount. We will illustrate this by supposing
that all of the ``extra depreciation'' is reversed in
year 1, so the revised value of E
1
is E
1
? . But a
rigorous proof can be constructed to show that it
does not matter when the reversal takes place in
the future or how it is spread across the remaining
years: the discounted present value of future
abnormal earnings still increases by the amount .
Proof of the result over two years is straightfor-
ward. Under the new de®nitions of capital and
income, today's book value is equal to BV
0
À and
next year's earnings is equal to E
1
? . The revised
40
As Macintosh and Scapens (1990), following Ryan (1982),
put it, ``Axiomatic systems in general...must inherently either
contain at least one inconsistency or be incomplete.'' More-
over, ``[f]or the formal system to be complete, to have no out-
side, it must assume the possibility of a transcendental position
that is not simply one item of the formal logic; it must assume
an outside to the series that acts as a paradigm. Otherwise, the
axiomatic system or the master principle will be simply part of
the world being formally described'' (Ryan, 1982, pp. 16±17).
46 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
market value of the ®rm's equity, MV
0
0
, is then as
follows.
MV
0
0
? BV
0
À ?
?E
1
?? Àr?BV
0
À?
?1 ?r?
?
X
1
t?2
E
t
ÀrBV
tÀ1
?1 ?r?
t
? BV
0
À ?
E
1
ÀrBV
0
??1 ?r?
?1 ?r?
?
X
1
t?2
E
t
ÀrBV
tÀ1
?1 ?r?
t
? BV
0
À ? ?
E
1
ÀrBV
0
?1 ?r?
?
X
1
t?2
E
t
ÀrBV
tÀ1
?1 ?r?
t
? BV
0
?
X
1
t?1
E
t
ÀrBV
tÀ1
?1 ?r?
t
? MV
0
Remarkably, in the last line today's extra
depreciation charge cancels with the present value
of the enhanced abnormal income in the future
and the market value is unchanged: MV
0
0
? MV
0
.
Thus, the accounting rules for distinguishing
income from capital are irrelevant to valuation.
Any de®nition will do as long as the accounting
numbers satisfy the clean surplus relation.
A1. Alternate measures of income and capital in
the clean surplus model
One extreme approach in measuring income and
capital is to mark everything to market, forcing
book value to equal market value: BV
0
= MV
0
.
Then earnings in any year t are equal to rBV
tÀ1
and abnormal earnings are always equal to zero.
This is the approach favored by the International
Accounting Standards Committee for valuing
®nancial instruments:
The concept of capital maintenance that applies
to reporting gains and losses arising in the fair
value of ®nancial instruments is one that de®nes
capital in terms of capacity to earn the current
market rate of return (IASC, 1997, p. 128).
A second extreme approach is not to re¯ect any
capital value on the ®rm's ®nancial statements,
setting BV
0
? 0. Then the ®rm's value comes
solely from the present value of future abnormal
earnings. If BV
t
is always equal to zero, the ®rm is
depicted as using ``cash accounting'' and its value
is simply the present value of future cash ¯ows.
A third approach, which re¯ects current practice,
is to record BV
0
at historic cost, or some mixture of
historic costs and fair values. Then, measure year-t
earnings, E
t
, using a mixture of realization/match-
ing rules and mark-to-market rules. If accounting
numbers are to have any meaning beyond a redun-
dant representation of the present value of future
dividends or cash ¯ows, this must be the approach
chosen by standard setters.
References
Aho, J. (1985). Rhetoric and the invention of double entry
bookkeeping. Rhetorica, 21±43.
Altman, E. (1968). Financial ratios, discriminant analysis and
prediction of corporate bankruptcy. Journal of Finance, 589±
610.
Amernic, J. (1985). The roles of accounting in collective bar-
gaining. Accounting, Organizations and Society, 227±253.
Amernic, J., & Aranya, N. (1990). Accounting information and
the outcome of collective bargaining. Behavioral Research in
Accounting, 2, 1±31.
Armstrong, M. (1998). The political economy of international
transfer pricing: 1945±1994: state, capital and the decomposi-
tion of class. Critical Perspectives on Accounting, 391±432.
Bataille, G. (1991). The accursed share (Vol. 1). New York:
Zone Books.
Baudrillard, J. (1975). The mirror of production (France Mark
Poster). St. Louis, MO: Telos Press.
Baudrillard, J. (1981). Simulacra et simulation. Paris: e ditions
galilee.
Baudrillard, J. (1983a). Simulations. New York: Semiotext(e).
Baudrillard, J. (1983b). Seductions. New York: Semiotext(e).
Baudrillard, J. (1983c). In the shadow of the silent majorities.
New York: Semiotext(e).
Baudrillard, J. (1983d). Is pop art an art of consumption? Ten-
sion, 33±35.
Baudrillard, J. (1987). Forget Foucault. NewYork: Semiotext(e).
Baudrillard, J. (1988a). Jean Baudrillard: Selected writings (M.
Poster, Ed.). Stanford, CA: Stanford University Press.
Baudrillard, J. (1988b). The ecstasy of communication. New
York: Semiotext(e).
Baudrillard, J. (1990a). Cool memories I. London: Verso.
Baudrillard, J. (1990b). Fatal strategies. New York: Semiotext(e).
Baudrillard, J. (1993). Symbolic exchange and death. London:
Sage Publications.
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 47
Baudrillard, J. (1994a). Simulacra and simulation. Ann Arbour,
MI: University of Michigan Press.
Baudrillard, J. (1994b). The illusion of the end. Cambridge:
Polity Press.
Beaver, W. (1996). Directions in accounting research: NEAR
and FAR. Accounting Horizons, 113±124.
Berle, A., & Means, G. ([1932], 1968). The modern corporation
and private property. New York: Harcourt, Brace, and World,
Inc.
Bertens, H. (1995). The idea of the postmodern: A history. Lon-
don: Routledge.
Best, S., & Kellner, D. (1991). Postmodern theory: Critical
interrogations. New York: Guilford Press.
Black, F., & Scholes, M. (1973). The pricing of options and
corporate liabilities. Journal of Political Economy, 81, 637±
659.
Brown, J., Collins, R., & Thornton, D. (1993). Professional
judgment and accounting standards. Accounting, Organiza-
tions and Society, 18(4/May), 275±289.
Bryer, R. (1993). The late nineteenth-century revolution in
®nancial reporting: accounting for the rise of investor or
managerial capitalism? Accounting, Organizations and
Society, 18(7/8), 649±690.
Chat®eld, M. (1968). English medieval bookkeeping: exchequer
and manor. In M. Chat®eld, Contemporary studies in the
evolution of accounting thought (pp. 30±38). Belmont, CA:
Dickenson Publishing Company.
Chat®eld, M. (1974). A history of accounting thought. Hinsdale,
IL: The Dryden Press.
Chat®eld, M. (1996a). Entity theory. In M. Chat®eld, & R.
Vangermeersch, The history of accounting: An international
encyclopedia (pp. 230±231). New York: Garland Publishing,
Inc.
Chat®eld, M. (1996b). Periodicity. In M. Chat®eld, & R. Van-
germeersch, The history of accounting: An international ency-
clopedia (pp. 456±459). New York: Garland Publishing, Inc.
Chat®eld, M. (1996c). Realization. In M. Chat®eld, & R. Van-
germeersch, The history of accounting: An international ency-
clopedia (pp. 491±494). New York: Garland Publishing, Inc.
Connor, S. (1992). Postmodernist culture: An introduction to
theories of the contemporary. Oxford: Basil Blackwell.
Cooper, C. (1997). Against postmodernism: class oriented
questions for critical accounting. Critical Perspectives on
Accounting, 15±41.
Cooper, C., & Puxty, T. (1992). The silence of the sheep: erasing
the other in accounting regulation. Paper presented at the
EIASM Workshop on the Relationship between Accounting
Research and Accounting Practice, Manchester, 10±12 June
1992.
de Roover, R. (1956). The development of accounting prior to
Luca Pacioli according to the account-books of medieval
merchants. In A. C. Littleton, & B. S. Yamey, Studies in the
history of accounting (pp. 114±174). Homewood, IL: Richard
D. Irwin, Inc.
Dechow, P., Hutton, A., & Sloan, R. (1996). Economic con-
sequences of accounting for stock-based compensation.
Journal of Accounting Research, (Suppl.), 1±20.
Derrida, J. (1976). Of grammatology. Baltimore, MD: John
Hopkins University Press.
DiFazio, W. (1998). Poverty, the postmodern and the jobless
future. Critical Perspectives on Accounting, 57±74.
Docker, J. (1994). Postmodemism and popular culture: A cul-
tural history. Cambridge, UK: Cambridge University Press.
Eagleton, T. (1996). The illusions of postmodernism. Oxford:
Basil Blackwell.
Esposito, D., Aronowitz, S., Chancer, L., DiFazio, W., &
Yard, M. (1998). The (in)spective returns! Global capitalism
and the future of work. Critical Perspectives on Accounting,
7±54.
Feltham, G., & Ohlson, J. (1995). Valuation and clean surplus
accounting for operating and ®nancial activities. Con-
temporary Accounting Research (Spring), 689±731.
Financial Accounting Standards Board (1990). SFAS No. 105:
Disclosures of information about ®nancial instruments with o?-
balance sheet risk and ®nancial instruments with concentra-
tions of credit risk. Norwalk, CT: Financial Accounting
Standards Board.
Financial Accounting Standards Board (1991a). Recognition and
measurement of ®nancial instruments, discussion memorandum.
Norwalk, CT: Financial Accounting Standards Board.
Financial Accounting Standards Board (1991b). Hedge
accounting: An exploratory study of the underlying issues,
research report. Norwalk, CT: Financial Accounting Stan-
dards Board.
Financial Accounting Standards Board (1991c). SFAS No. 107:
Disclosures about fair value of ®nancial instruments. Nor-
walk, CT: Financial Accounting Standards Board.
Financial Accounting Standards Board (1994a). SFAS No. 119:
Disclosures about derivative ®nancial instruments and fair
value of ®nancial instruments. Norwalk, CT: Financial
Accounting Standards Board.
Financial Accounting Standards Board (1994b). SFAS No.
118: Accounting by creditors for impairment of a loanÐ
income recognition and disclosuresÐan amendment to SFAS
No. 114. Norwalk, CT: Financial Accounting Standards
Board.
Financial Accounting Standards Board (1994c). SFAS No. 115:
Accounting for certain investments in debt and equity secu-
rities. Norwalk, CT: Financial Accounting Standards Board.
Financial Accounting Standards Board (1994d). SFAS No.
114: Accounting by creditors for impairment of a loan. Nor-
walk, CT: Financial Accounting Standards Board.
Financial Accounting Standards Board (1995). SFAS No. 124:
Accounting for certain investments held by not-for-pro®t
organizations. Norwalk, CT: Financial Accounting Stan-
dards Board.
Financial Accounting Standards Board (1996a). SFAS No. 127:
Deferral of e?ective date of certain provisions of SFAS No.
125. Norwalk, CT: Financial Accounting Standards Board.
Financial Accounting Standards Board (1996b). SFAS No.
126: Exemption from certain required disclosures about ®nan-
cial instruments for certain non-public entitiesÐan amendment
to SFAS No. 107. Norwalk, CT: Financial Accounting Stan-
dards Board.
48 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50
Financial Accounting Standards Board (1996c). SFAS No. 125:
Accounting for transfers and servicing of ®nancial assets and
extinguishments of liabilities. Norwalk, CT: Financial
Accounting Standards Board.
Financial Accounting Standards Board (1996d). Accounting for
derivative and similar ®nancial instruments and for hedging
activities, exposure draft. Norwalk, CT: Financial Account-
ing Standards Board.
Financial Accounting Standards Board (1996e). Reporting
comprehensive income, exposure draft. Norwalk, CT: Finan-
cial Accounting Standards Board.
Financial Accounting Standards Board (1997a). SFAS No. 130:
Reporting comprehensive income. Norwalk, CT: Financial
Accounting Standards Board.
Financial Accounting Standards Board (1997b). Accounting for
derivatives and hedging, summary of board decisions made at
the January 8±June 4 1997 board meetings. Norwalk, CT:
Financial Accounting Standards Board.
Financial Accounting Standards Board (1998). Accounting for
derivative instruments and hedging activities. Norwalk, CT:
Financial Accounting Standards Board.
Fogo, J. ([1905], 1968). History of bookkeeping. In R. Brown,
History of accounting and accountants (pp. 93±170). New
York: Frank Cass and Company, Ltd.
Foucault, M. (1973). The order of things: An archaeology of
the human sciences. New York: Vintage Books (published
in French 1966 as Les mots et les choses, e ditions galli-
mard).
Fox, J. (1997). Learn to play the earnings game (and Wall
Street will love you). Fortune, 31 March, pp. 76±80.
Giddens, A. (1984). The constiution of society. Cambridge:
Polity Press.
Hawking, S. (1988). A brief history of time: From the big bang
to black holes. New York: Bantam Books.
Healy, P. (1985). The impact of accounting bonus schemes on
the selection of accounting principles. Journal of Accounting
and Economics, 85±107.
Hines, R. (1988). Popper's methodology of falsi®cation and
accounting research. The Accounting Review, 313±331.
Hopper, T. & Armstrong, P. (1991). Cost accounting, control-
ling labor and the rise of conglomerates. Accounting, Orga-
nizations and Society, 405±438.
Hopwood, A. (1987). The archaeology of accounting systems.
Accounting, Organizations and Society, 207±234.
Hoskin, K. & Macve, R. (1986). Accounting and the examina-
tion: a genealogy of disciplinary power. Accounting, Organi-
zations and Society, 105±136.
Ijiri, Y. (1980). An introduction to corporate accounting stan-
dards: a review article. Accounting Review, 620±630.
International Accounting Standards Committee (1997).
Accounting for ®nancial assets and ®nancial liabilities, discus-
sion paper. London: International Accounting Standards
Committee.
Irish, R. (1968). The evolution of corporate accounting. In M.
Chat®eld, Contemporary studies in the evolution of accounting
thought (pp. 57±85). Belmont, CA: Dickenson Publishing
Company.
Jarrow, R., & Turnbull, S. (1996). Derivative securities. Cin-
cinnati, OH: South-Western Publishing Company.
Johnson, L., & Swieringa, R. (1996). Anatomy of an agenda
decision: statement no. 115. Accounting Horizons, 149±179.
Kellner, D. (1989). Jean Baudrillard: From Marxism to post-
modernism and beyond. Stanford, CA: Stanford University
Press.
Kinney, W. (1996). What can be learned from the FASB's
process for SFAS no. 115? Accounting Horizons, 180±184.
Lee, C., Myers, J., & Swaminathan, B. (1999). What is the
intrinsic value of the DOW? Journal of Finance (forth-
coming).
Levitt, A. (1996). The accountant's critical eye. Text of remarks
delivered at the 24th Annual Conference on Current SEC
Developments, AICPA, Washington, DC, 10 December
1996.
Levitt, A. (1998). The numbers game. Text of remarks delivered
at the NYU Center for Law and Business, New York, 28
September 1998.
Littleton, A. (1933). Accounting evolution to 1900. New York:
Russell and Russell.
Littleton, A. (1968). The antecedents of double-entry book-
keeping. In M. Chat®eld, Contemporary studies in the evolu-
tion of accounting thought (pp. 21±29). Belmont, CA:
Dickenson Publishing Company.
Loft, A. (1986). Towards a critical understanding of account-
ing: the case of cost accounting in the U.K., 1914±1925.
Accounting, Organizations and Society, 137±170.
Lukka, K. (1990). Ontology and accounting: the concept of
pro®t. Critical Perspectives on Accounting, 239±261.
Lyotard, J. (1984). The postmodern condition: A report on knowl-
edge. Minneapolis, MN: University of Minnesota Press.
Macintosh, N., & Scapens, R. (1990). Structuration theory in
management accounting. Accounting, Organizations and
Society, 455±477.
Mahon, M. (1992). Foucault's Nietzschean geneaology: Truth,
power and the subject. Albany, NY: State University of New
York Press.
Managing pro®ts: How General Electric damps ¯uctuations in
the annual earnings. (1994). Wall Street Journal.
Mattessich, R. (1987). Prehistoric accounting and the problems
of representation: an archeological evidence of the Middle
East from 8000 BC to 3000 BC. Accounting Historians Jour-
nal, 71±91.
Mattessich, R. (1989). Accounting and the input±output prin-
ciple in the prehistoric and ancient world. Abacus, 74±84.
Mattessich, R. (1995). Critique of accounting: Examination of
the foundations and normative structure of an applied dis-
cipline. Westport, CT and London: Quorum Books.
McGoun, E. (1997). Hyperreal ®nance. Critical Perspectives on
Accounting, 97±122.
Miller, P., & O'Leary, T. (1987). Accounting and the construc-
tion of the governable person. Accounting, Organizations and
Society, 235±265.
Miller, P., & Napier, C. (1993). Genealogies of calculation.
Accounting, Organizations and Society, 18(7/8), 631±647.
Mitchell, P., Sikka, P., & Willmott, H. (1998). Sweeping it
N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50 49
under the carpet: the role of accountancy in money-
laundering. Accounting, Organizations and Society, 589±608.
Montagna, P. (1997). Modernism vs. postmodernism in man-
agement accounting. Critical Perspectives on Accounting,
125±145.
Most, K. (1977). Accounting theory. Columbus, OH: Grid,
Incorporated.
Napier, C. (1991). Aristocratic accounting: the Bute estate in
Glamorgan 1814±1880. Accounting and Business Research,
21(82), 163±174.
Norris, C. (1992). Uncritical theory: Postmodernism, intellec-
tuals and the Gulf War. Boston, MA: University of Massa-
chusetts Press.
Norris, C. (1993). The truth about postmodernism. Oxford: Basil
Blackwell.
Ohlson, J. (1990). A syntheses of security theory and the role of
dividends, cash ¯ows, and earnings. Contemporary Account-
ing Research, Spring, 648±676.
Ohlson, J. (1991). The theory of value and earnings, and an
introduction to the Ball±Brown analysis. Contemporary
Accounting Research, Fall, 1±19.
Paciolli, L. (1924). Treatise in double entry book-keeping. Lon-
don: Harper & Brothers (P. Crivelli, Trans.).
Paton, W. (1962). Accounting Theory: With Special Reference
to the Corporate Enterprise. Chicago: Accounting Studies
Press (1922) (reprint).
Paton, W., & Littleton, A. (1940). An introduction to corporate
accounting standards. American Accounting Association
Monograph No. 3.
Peasnell, K. (1982). Some formal connections between eco-
nomic values and yields and accounting numbers. Journal of
Business Finance and Accounting, October, 361±381.
Pollard, S. (1968). Capital accounting in the industrial revolu-
tion. In M. Chat®eld, Contemporary studies in the evolution
of accounting thought (pp. 113±134). Belmont, CA: Dick-
enson Publishing Company.
Preinrich, G. (1938). Annual survey of economic theory: the
theory of depreciation. Econometrica, January, 219±231.
Ryan, M. (1982). Marxism and deconstructionism: A critical
articulation. Baltimore, MD: Johns Hopkins University
Press.
Sarup, M. (1993). An introductory guide to post-structuralism
and postmodernism (2nd ed.). Athens, GA: University of
Georgia Press.
Saussure, F. (1959). Courses in general linguistics. New York:
McGraw±Hill.
Schmandt-Bessarat, D. (1984). The emergence of recording.
American Anthropologist, 84, 871±878.
SEC (1997). Securities and exchange commission disclosure of
accounting policies for derivative ®nancial instruments and
derivative commodity instruments and disclosure of quanti-
tative and qualitative information about market risk inherent
in derivative ®nancial instruments, other ®nancial instru-
ments, and derivative commodity instruments (amendment
to section 210.4-08 of regulation S-X and to item 310 of
regulation S-K).
Sim, S. (Ed.). (1998). The Icon dictionary of postmodern thought.
Cambridge, UK: Icon Books.
Sokal, A., & Bricmont, J. (1998). Intellectual impostures. Lon-
don: Pro®le Books.
Stewart, G. (1994). EVA
TM
: fact and fantasy. Journal of
Applied Corporate Finance, 7, 71±84.
Tawney, R. (1984). Religion and the rise of capitalism. New
York: Penguin±Peregrine Books.
Thomas, A. (1974). The allocation problem: part two. Studies
in Accounting Research No. 9. Sarasota, FL: American
Accounting Association.
Thornton, D. (1979). Information and institutions in the capi-
tal market. Accounting, Organizations and Society, Septem-
ber, 211±233.
Thornton, D. (1992). Accounting options: a proposal and a
®eld study, Accounting Enquiries, 215±232.
Tinker, T. (1985). Paper prophets: A social critique of account-
ing. New York: Praeger.
Vangermeersch, R. (1996). Manorial accounting. In M. Chat-
®eld, & R. Vangermeersch, The history of accounting: An
international encyclopedia (p. 399). New York: Garland
Publishing.
Virgoe, R. (1989). Private life in the ®fteenth century. New
York: Weidenfeld & Nicholson.
Wake®eld, N. (1990). Postmodernism: The twilight of the real.
London: Pluto Press.
Yamey, B. (1994). Balancing and closing the ledger: Italian
practice, 1300±1600. In R. Parker, & B. Yamey, Accounting
history: Some British contributions. Oxford: Clarendon Press.
Yamey, B., Edey, H., & Thomson, H. (1963). Accounting in Eng-
land and Scotland: 1543±1800. London: Sweet and Maxwell.
Young, J. (1995). Getting the accounting `right': accounting
and the savings and loan crisis. Accounting, Organizations
and Society, 55±80.
Young, J. (1996). Institutional thinking: the case of ®nancial
instruments. Accounting, Organizations and Society, 487±512.
50 N.B. Macintosh et al. / Accounting, Organizations and Society 25 (2000) 13±50

doc_825586772.pdf