Accounting, Organizations and Society 34 (2009) 770–786

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Accounting, Organizations and Society

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Making imaginary worlds real: The case of expensing employee

stock options
Sue Ravenscroft a,*, Paul F. Williams b,1
a
Department of Accounting, Iowa State University, 2330 Gerdin Building, Ames, IA 50011-1350, United States
b
Department of Accounting, North Carolina State University, Box 8113, Raleigh, NC 27695-8113, United States

a b s t r a c t

West [West, B. (2003). Professionalism and accounting rules. London: Routledge] and Cham-
bers [Chambers, R. J. (1966). Accounting evaluation and economic behavior. Houston: Schol-
ars Book Company] have provocatively argued that financial reporting has reached a state
of near-total incoherence. In this paper, we argue that a source of this incoherence is the
transformation of the US accounting academy into a sub-discipline of financial economics,
a transformation in which accounting became a servant of the imaginary world of neoclas-
sical economics. After noting the unusually prominent role of rules within the accounting
profession, we describe the displacement of accounting’s centuries-old root metaphor of
accountability by the metaphor of information usefulness, and situate that displacement
within neoliberalism, a broader political movement that arose after World War II. Finally,
we use SFAS 123R, the recently issued stock option standard, as a case study of the inco-
herence that West and Chambers assert. Through various issues – such as reflexivity, the-
ory paradox, and unexplained questions of responsibility – we demonstrate the logical
inconsistencies involved in SFAS 123F. The incoherence of stock option reporting rules
raises serious questions about the information metaphor as a foundation for either individ-
ual rules or the standard setting process. The Financial Accounting Standards Board’s
(FASB) attempts to make the imaginary world of neoclassical economics real have resulted
in rules which are not defensible.
Ó 2008 Elsevier Ltd. All rights reserved.

sponse is the recent well-publicized battle over accounting

‘‘We may start with a simple observation: so far as
modern scientists know no one, not even the most adapt
(sic) fakirs and clairvoyants, have ever learned anything
from the future (all emphases in original)” Carl Thomas
Devine (1962, p. 13).
In his critique of current accounting theory, West ob-
served that accounting failures and public relations crises
tend to precipitate ‘‘calls for formally stated accounting
rules,” (2003, p. 106). A highly salient and contentious
example of the accounting profession’s rule-making re-
* Corresponding author. Tel.: +1 515 294 3574; fax: +1 515 294 3525.
E-mail addresses: sueraven@iastate.edu (S. Ravenscroft), paul_wil-
liams@ncsu.edu (P.F. Williams).
1
Tel.: +1 919 515 4436; fax: +1 919 515 4446.
for stock options in the US. The history of stock option
accounting is the history of an accounting problem never
solved. In the US the use of stock options was blamed as a
key feature of the irrational exuberance driving the stock
bubble of the late 1990s (Berenson, 2003; Walters & Young,
2008); when that bubble burst, the stock market declined
dramatically. As a way to restore the public’s confidence
in capital markets, legislators and public accounting rule-
makers seized upon changing the required accounting for
stock options, exhibiting a conventional faith that disclos-
ing the magnitude of such compensation to market partic-
ipants would lead to market solutions to the problem.
Instead of asking whether stock option abuses could be ad-
dressed more effectively by taxation or other regulations,
the accounting profession created yet another complicated
rule to provide greater ‘‘transparency.” If legislators and

0361-3682/$ - see front matter Ó 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.aos.2008.12.001
 S. Ravenscroft, P.F. Williams / Accounting, Organizations and Society 34 (2009) 770–786
rule-makers could create new rules to address the abuse of
stock options, then perhaps less attention would be paid to
deeper, more systemic problems underlying the practice
and structure of capital markets and of public accounting.
We use the FASB’s rules on stock option accounting
(Statement of Financial Accounting Standards 123R, hence-
forth SFAS 123R) as a case study illustrating the incoher-
ence of accounting that West (2003) describes. We look
first at the unusually prominent role of rules in public
accounting. We then describe the current root metaphor
(information) which provides the underlying rationale for
the form and content of accounting rules and explore the
earlier metaphor it explicitly replaced. We then look at
how the metaphor of information usefulness emerged in
the US and contributed to the formation of current stock
option reporting rules. We expose the internal contradic-
tions within stock option reporting rules, which arise be-
cause of theoretical weaknesses underlying the current
information usefulness metaphor. Finally, we briefly look
at what we believe the resulting incoherence within the
stock option reporting rules tells us about accounting the-
orizing and standard setting.
Accounting rules and the accounting profession
Before proceeding, we should note that we are using the
term ‘‘rules” in a fairly broad sense. We are not using the
term ‘‘rules” in contradistinction to the term ‘‘principles,”
a difference which researchers draw in some recent discus-
sions of the extent to which accounting standards should
provide detailed and explicit guidance or should instead
broadly prescribe underlying guidelines or norms. We con-
sider that distinction one without a substantive difference.
The arguments over the relative merits of rules versus
principles are a kettle of red herrings (Ravenscroft & Wil-
liams, 2005), serving only to distract critics and academics
from more substantive issues that could, if discussed pub-
licly, both expose some more thorough-going problems
facing public accounting and help accountants create a
stronger conceptual foundation for public accounting.
While the creation of rules in response to public outrage
can divert or deflect deeper criticisms and possible restruc-
turing, defensive or reactive rule-making has, according to
West (2003), done a fundamental disservice to the
accounting profession. Currently financial reporting that
complies with rules is defined as being reliable and credi-
ble, even as the rules become increasingly incoherent and,
thus, impossible to comply with.2 Yet we seem reluctant to
consider whether the rules themselves may be based on an
incoherent intellectual foundation, a question which be-
comes more urgent when the rules or laws are based on
internally inconsistent justifications.
2
Chambers (1999, p. 249) bluntly assessed the current state of financial
reporting: ‘‘Yet the vast bulk of the textbook material which is to guide
novices in the understanding of their art, most of the academic discourse
which is expected to lead to refinement of teaching and practice, and the
whole of the professional dicta and of the enforceable utterances of
accounting – standards authorities, proceed by edicts to the effect that
what cannot be done shall nevertheless be done.”
771
In reviewing the scholarship on professions, West found
the only generalization scholars of professions agree upon
is that ‘‘professions possess bodies of specialized knowl-
edge,” (2003, p. 34). However, the nature and content of
the specialized knowledge of accounting have not been
examined or queried sufficiently. West argues that the
accounting profession differs from other professions in
the extent of its reliance on rules and the absence of a
‘‘cognitive foundation” (2003, p. 39). Accounting as a pro-
fession did not arise with its key technological advance,
the double-entry approach to recording financial events
and commercial transactions, which occurred by the late
15th century (Geijsbeek, 1914). Instead, accounting
emerged as a profession centuries later through a complex,
competitive series of social processes involving social
stratification, use of political influence, and the exclusion
of and differentiation from less ‘‘desirable” members of
other related trades. West argues that accounting, unlike
other knowledge-based disciplines or professions, ‘‘did
not develop from a systematic body of knowledge that
linked technical accounting practices to a clear specifica-
tion of the function of financial reporting,” (ibid, p. 42).
Thus, lacking a conceptual underpinning, accounting is
subject to criticism from both within and without.
The professional stature and unique franchise chartered
or certified accountants currently claim – auditing reports
on corporate status and activities – have not developed log-
ically from a coherent framework (Power, 1997). Instead,
social rigidities and the power of incumbencies have en-
abled the accounting profession to successfully legislate
rules and procedures for financial reports and perpetuate
a mystique about the creation of those reports. The alleged
purpose of public accounting reports for corporations is
considered unproblematic; corporations receive an unqual-
ified audit opinion even though an auditor’s opinion asserts
only that, given reasonable parameters and reliance on pro-
fessional standards of sampling, the reports certified by the
auditor are prepared in a way that is consonant with rules
written by the accounting profession (Power, 1997; West,
2003). The arguments by Power and West lead to the con-
clusion that there is not an external referent by which the
validity – technical or ethical – of those rules can be judged
reliably and consistently. Theoretically and in principle, the
ostensible referent or overall function of financial account-
ing is that of providing useful financial information (FASB,
1978). However, because of the conceptual difficulties of
relying on the useful information notion, sound financial
reporting is in fact defined as that which complies and com-
ports with procedures and rules (West, 2003, p. 113).
Professions other than accounting have referents that
provide guidance beyond that of mere compliance with
the rules. A referent serves to define how good professional
practice is validated or how new practice is refined. In the
mid-20th century as auditing procedures were being for-
malized, a Canadian accounting association noted that
‘‘no other profession lays down rules as to the manner in
which work is normally to be performed by its members”
(West, 2003, p. 97). Furthermore, other professions have
referents that allow their members to practice without
codified rules: medicine has patient well-being, engineer-
ing has functional fitness (constrained by laws of physics),
772 S. Ravenscroft, P.F. Williams / Accounting, Organizations and Society 34 (2009) 770–786
and law has justice (ibid, p. 170). The referent of medicine,
for instance, serves not only to provide the underlying pur-
pose of the profession but also to provide an epistemic
framework. The medical profession relies on underlying
natural or social laws or processes (such as sterilization)
that are themselves constrained by reasonably well-under-
stood laws derived from related fields such as chemistry,
physiology, biology, and pharmaceutics (West, 2003, p.
161). In the US legal profession, the Constitution and com-
mon law enunciate the process by which law-making and
law enforcement are constrained.
When accounting rules are promulgated by rule-mak-
ing bodies unconstrained by a ‘‘unifying function” (West,
2003, p. 65), no underlying system mediates the process
to guarantee consistency, a necessary condition for coher-
ence. ‘‘The importance of consistency will be appreciated if
one realizes that a self-contradictory system is uninforma-
tive” (ibid, p. 169). Without a coherent referent or strong
cognitive foundation, the accounting profession prolifer-
ates rules to disguise ‘‘the imbalance between its elevated
occupational authority and discordant epistemic circum-
stances,” (ibid, p. 112). In this paper, we use the case of
SFAS 123R Statement of financial accounting standards No.
123R: Share based pay (FASB, 2004, hence SFAS 123R) to
demonstrate that accounting’s current referent – ‘‘informa-
tion usefulness” – results in rules which are not internally
consistent and therefore lack coherence. The current stan-
dard on reporting employee stock option compensation is
archetypal of the discrepancy between the profession’s
need for rules and the value of the rules themselves. Before
looking at the confusion caused by the rule, we examine
the metaphors underlying the rule’s creation.
Accounting’s root metaphors
Accounting is a linguistic practice, a type of ‘‘codified
discourse” (Llewellyn & Milne, 2007) whose terminology
purports to describe and explain business practices. The
language of accounting consists of ‘‘. . .metaphors and other
linguistic tropes used in a discipline (that) coalesce into a
more-or-less coherent knowledge structure that shapes
how its members and those they influence construe real-
ity,” (Ferraro, Pfeffer, & Sutton, 2005, p. 15). Root metaphors
are particularly significant to any discipline, because such
metaphors delimit the implicit assumptions of what is real,
what is significant, how things relate, what can be known,
and how it can be known. The root metaphor thus informs
and reflects both the implicit epistemology and metaphys-
ics of a discipline. Further, root metaphors
. . .characteristically exist below the level of conscious
awareness. . . .Second, root metaphors are comprehen-
sive. Thus, unlike models or ordinary speech, root meta-
phors are the implicit metamodels in terms of which
narrower range models or discourses are couched. We
might say that root metaphors describe worlds, whereas
models describe the contents of those worlds (Brown,
1989, p. 85).
In summary, root metaphors generate and allow differ-
ent solution rationales and policy recommendations to
emerge (Walters & Young, 2008).
Accountability as a root metaphor
Historically the notion of accountability or stewardship,
i.e., the responsibility or obligation owed to someone who
has entrusted another with possessions to manage on their
behalf, was the root metaphor and the dominant purpose
of accounting (Beaver, 1981; O’Connell, 2007). From
accounting’s earliest origins during the emergence of an
exclusively agricultural way of life, accountability has been
the central organizing concept of the activity of keeping an
account. Accounting began as a regulatory function within
systems of civic administration, and originated with the
necessity to administer a hierarchic society that collected
and redistributed communal resources. Schmandt-Bess-
erat claims that the archeological evidence indicates trade
was not essential to the development of accounting (which
led eventually to character writing). Instead, the evidence
is more consistent with accountability of civic administra-
tors as the principal motivation, i.e.,
The most obvious function of writing was, therefore,
keeping account of the resources generated by the palace
and the temple and their redistribution. The second and
more important function of writing was one of control
(emphasis added). The tablets recording offerings, for
instance, were official receipts of commodities delivered
by individuals or guilds. ...... Now, it seems well estab-
lished that the so-called gifts for the gods, listed on the
tablets were in fact mandatory. . . .the written receipts
made the administrator accountable (emphasis added)
for the goods received (Schmandt-Besserat, 1992, p. 172).
As West observes, ‘‘Professions are relied upon to sup-
ply knowledge relevant to the conduct of human affairs
and which can be applied to mediate the administration
(emphasis added) of those affairs,” (2006, p. 113).
From its beginnings accounting embraced objects pos-
sessing the essential property of being countable, which
facilitated accountability within relationships of tribute
and/or obligation. For instance, Incan accountant/adminis-
trators used knotted strings (khipus) as an information
storage device to track the labor each citizen was required
to provide toward the construction of public works (Urton,
2005). Khipus ‘‘. . .were used both by high officials to issue
instructions and by lower officials to report what they had
done” (Wade, 2006, D3, emphasis added). Counting sys-
tems were developed to insure the consummation of
accountability relationships between citizens occupying
various tiers in hierarchic societies.
The current practice within organizations of accounting
as an information system requiring a record of every trans-
action and emphasizing documentation, authorization, and
realization, makes little sense unless one assumes account-
ability. The consummation of a stewardship relationship is
the root metaphor of accounting as a social practice (Ijiri,
1975). Ijiri claims that comprehensive recording of all
transactions makes sense only within a regime of account-
ability, i.e.,
. . . accountability has clearly been the social and organi-
zational backbone of accounting for centuries. Account-
ing, therefore, starts with the recording and reporting of
 S. Ravenscroft, P.F. Williams / Accounting, Organizations and Society 34 (2009) 770–786 773

activities and their consequences and ends with the dis- accounting. Economists such as Sidney Alexander (1973)
charging of accountability. This basically describes argued that subjectivity was essential to economic income
accounting, at least if we attempt to interpret the exist- representation and asserted that because the traditional
ing practice rationally. We may, therefore, say that historical cost model of accounting income failed to incor-
accountability is what distinguishes accounting from porate this inherent subjectivity the accounting model was
other information systems in an organization or in soci- deficient. In opposition, accounting theorists Edwards and
ety (Ijiri, 1975, p. 32). Bell, Sterling and Chambers, all of whom developed alter-
natives to historical cost models, rejected the notion of in-
Prior to the mid-19th century the accountability for
come as inherently subjective. They all argued that
business conduct was largely a private issue. But the Indus-
accounting data are valuable because they aid learning
trial Revolution led to the increased importance of public
by presenting ‘‘facts” and emphatically rejected the idea
joint stock companies and financial capitalism (Previts &
that accounting representations of income could be any-
Merino, 1979). Financial crises resulting from this change
thing other than inherently objective (Chambers, 1966; Ed-
in the conduct of economic activity created an environ-
wards & Bell, 1961; Sterling, 1970). The actual metaphor
ment conducive to the growth of a ‘‘public” accounting
upon which all of these arguments are based is account-
profession which served to help make corporations
ability. Though these debates shifted what management
‘‘accountable” to the public. The accountability metaphor
might be accountable for (value creation rather than trans-
was implicitly re-examined as the nature and status of cor-
action-based profit) they still relied on facticity about out-
porations in the US and the organizational context of
comes of actions as a given. All arguments started with the
accounting experienced substantial changes.
traditional, historical cost systems as a given. All income
models were adjustments to and not replacements of the
The changing role of corporations
traditional, transaction-based accountability model.
Edwards and Bell (1961) argued that accounting data
During the 19th century, many state charters explicitly
provide feedback to users on actions others have taken
noted that corporations had only the powers granted them
and that, ‘‘The measurement of changes in market value
by the sovereign people and that corporations were obli-
can be accomplished, at least theoretically, on an objective
gated (under threat of termination) to serve the public
basis and is not dependent on the subjective estimates
good (Grossman, 1997). Rosenthal (2007) notes that until
management or its subordinates might choose to report”
the mid-19th century. . . ‘‘all corporations were formed by
(ibid, p. 44). Similarly, Sterling (1970) relied on the exam-
the dispensation of a special privilege by either the execu-
ple of an idealized wheat trader whose success is evaluated
tive or legislative branches of government” (2007, p. 2). As
by gathering evidence about the past and making projec-
late as the mid-20th century accounting practice was tac-
tions about the future. However, Sterling is careful to note
itly linked to responsibilities of corporate citizens.
that accounting is about only the first of these two pro-
For example, Paton and Littleton (1940) clearly recog-
cesses. Sterling recognizes the evaluative nature inherent
nized the challenges of corporate accountability. In this
in the concept of accountability. Accountants examine
classic work, they argued that corporations created unique
measurable outcomes of actions linked to responsibilities
opportunities and responsibilities for accounting practice
specified in a more-or-less well defined business plan.
because corporate owners were separated from managers
However, because expectations or projections into the fu-
and because of the economic power that the increasing
ture are subjective, they are of no interest to accountants,
size and freedom of public corporations engendered. Paton
‘‘The method used for projection is of no interest to us”
and Littleton believed that corporations were not simply
(ibid, p. 149).
private enterprises, but should be attuned also to the pub-
By assuming the principal role of accounting is to pro-
lic interest, i.e., ‘‘. . .the public aspects of corporations call
vide objective feedback about the results of actions taken
for recognition by corporate management of public
on one’s own or others’ behalf, Edwards and Bell, Sterling,
responsibilities; acceptance of such responsibilities
and Chambers all used accountability as a root metaphor.
(emphasis added) calls for the development and use of cor-
Accounting could not be about subjective values or expec-
poration accounting standards,” (ibid, p. 3). According to
tations, because accounting for consequences yet to occur
Paton and Littleton the primary role of accounting was to
is a job for ‘‘fakirs and clairvoyants,” (Devine, 1962, p.
furnish ‘‘guideposts to fair dealing (emphasis added) in
13). While accountability eschews subjective estimates,
the midst of flexible rules and techniques,” (1940, p. 2).
information usefulness does not, because even non-objec-
Accounting describes relationships among corporations
tive, subjective estimates can sometimes provide
and owners, employees, taxing authorities and other legal
information.4
authorities,3 clearly placing an emphasis on accountability
over the prediction of future income patterns.
4
Just as early discussions of the role of corporations were In Chambers’ (1966) contemporaneous accounting model economic
influenced by the notion of accountability, debates about decision making is seen as an adaptive process. Accounting’s role is to
access the actual state of affairs to facilitate adaptation. ‘‘The uncertainty of
the nature of income reflected diverging beliefs about the
the outcome of any action, and the consequent possibility that expectations
primacy of accountability as the underlying principle of may be disappointed, make the periodical assessment of position and
results a necessary part of the adaptive process” (ibid, p. 53). Being prudent
makes me accountable for my actions; being prudent on someone else’s
3
For instance, ‘‘The legal position in the UK clearly supports the behalf makes me more so, which requires I be informed about my actions’
stewardship view” (Myddleton, 2004, p. 29). consequences.
774 S. Ravenscroft, P.F. Williams / Accounting, Organizations and Society 34 (2009) 770–786
Information as a root metaphor
In 1981 Beaver announced that a shift in the founda-
tions of accounting had occurred. ‘‘In the late 1960s the
perspective shifted from economic income measurement
to an ‘‘informational” approach. This is reflected in finan-
cial accounting research in the areas of information eco-
nomics, security prices, and behavioral science,” (Beaver,
1981, p. 4, emphasis added). Curiously, Beaver neither ex-
plained nor justified this major conceptual shift, although
he noted the existence of an alternative basis of account-
ing. ‘‘The stewardship function of management was domi-
nant in early views of the purpose of financial statements,”
(Beaver, 1981, p. 2). Though the stewardship/accountabil-
ity function dominated for centuries (Ijiri, 1975; O’Connell,
2007), in just a decade the root metaphor of accountability
was replaced with ‘‘. . .the notion that the purpose of finan-
cial statement data is to provide information useful
(emphasis added) to investors, creditors, and others,” (Bea-
ver, 1981, p. 22). Furthermore, the revolution did not rep-
resent vox populi. Watts cites a 1975 FASB survey which
showed ‘‘only 37% of respondents agreed with the informa-
tion role being the basic objective of financial statements.
Those disagreeing took the position that ‘‘the basic func-
tion of financial statements was to report on manage-
ment’s stewardship of corporate assets” (2006, p. 54).”
Ijiri explicitly commented on the odd nature of this shift
in root metaphors, a shift by fiat rather than one driven by
technological or conceptual developments. ‘‘Though the
fundamental principles of accounting have not changed,
we are now interpreting the same principles from a more
user-oriented viewpoint. Thus, what has changed is our
interpretation of accounting methods and not the funda-
mental substance of accounting,” (1975, p. 31). While
accountability still serves as an appropriate metaphor for
what accountants actually do, accounting practice is being
explained (and elaborated upon and researched by aca-
demics) as if its basic purpose were quite different.
The concept of useful information (for hypothetical per-
fectly rational users) is not a well-understood, rule-con-
strained referent, because nothing precludes any datum
from being construed as ‘‘useful information.” While infor-
mation may be ‘‘bad” in that it is erroneous, economic dis-
course in Western culture generally provides positive
connotations to the concept of information. Our concern
arises because the phrase ‘‘useful information” does not of-
fer constraints on what information might contain. By con-
trast, accountability implies one party bears a
responsibility to a second party(ies) for something, which
the second party is obliged to affect. That ‘‘something” is
rooted in law, custom, or contract and is contestable by
the accountee (the second party) on terms of the justness
of the accountors’ demands.
According to West the proliferation of accounting rules
in recent decades reflects the incoherence which currently
besets accounting (2003, p. 1). We argue that the whole-
sale adoption of an information metaphor has thrust on
accountants the responsibility of making imaginary worlds
real. As accounting moves toward a greater use of informa-
tion relevant for an idealized model of decision making and
away from its former reliance on reliable information for
accountability, accounting reports become increasingly
unverifiable (Cunningham, 2005) and bear less correspon-
dence to the external world. As West notes, ‘‘There is no ro-
bust link between the posited need for accounting rules
and the rules themselves,” (2003, p. 101). If accounting
information proves to be useful beyond allowing people
to determine whether stewardship obligations have been
fulfilled, such usefulness is ancillary to accounting, and
not its primary purpose.5
Neoliberalism – Zeitgeist of the accounting revolution
In a remarkably brief period of time the information
metaphor supplanted the accountability metaphor that
had been the root of accounting practice for centuries.
Thus, an important question is from whence did the power
of the information metaphor come? How is it that accoun-
tants seemed suddenly awakened to a new understanding
of their profession that had apparently eluded them for so
long? Such revolutions may result from new and profound
scientific understandings, e.g., Einstein’s relativity theory
or Darwin’s theory of natural selection, or from new tech-
nologies, e.g., Gutenberg’s printing press or Watt’s steam
engine. Or, they may be the result of political movements
that develop effective rhetorics that exploit historical cir-
cumstances to establish their hegemony. The ascendance
of the information metaphor in accounting is the latter
kind of revolution. It was not driven by a scientific para-
digm shift or by technological change; instead it was pri-
marily social and political.
After World War II business finance was transformed
into a branch of neoclassical economics:
Because the study of business finance became domi-
nated by academic economists, especially economists
adhering to traditional neoclassical conceptions of eco-
nomic theory and analysis, the transformed field has
developed an intellectual organizational structure quite
similar to orthodox economics (Whitley, 1986, p. 180).
Accounting research similarly became dominated by
the neoclassical discourse of monetarist finance (Cunning-
ham, 2005; Fleming, Graci, & Thompson, 2000; Flesher,
1991; Rodgers & Williams, 1996; Williams & Rodgers,
1995; Zeff, 1966). Works by Fama and Laffer (1971), Jensen
and Meckling (1976), Radner (1968), and Stiglitz (1974)
provided the core justification for the shift of metaphors
(Beaver, 1981). The information ‘‘revolution” effectively
transforms accounting from an autonomous discipline into
a sub-discipline of neoclassical economics (Reiter, 1998;
Reiter & Williams, 2002). Cunningham describes the effects
as a movement towards a ‘‘forward-looking, less reliable,
fraud tempting emphasis on prognosis” (2005, p. 4). The
‘‘revolution” in accounting does not signify transforma-
tions of technique, principles, or knowledge, but rather a
5
Weathermen provide ‘‘information” but are certainly not responsible
for the weather. Managers provide ‘‘information” in the form of financial
statements but, unlike weathermen, they are responsible for the results
conveyed by the information. Weather reports are not about weathermen;
financial statements are about managers.
 S. Ravenscroft, P.F. Williams / Accounting, Organizations and Society 34 (2009) 770–786
conceptual shift in the focus, assumptions, and discursive
practices used to characterize, explain, and speak about
accounting practice.
The triumph of this particular version of neoclassical
discourse, originating at the University of Chicago, eventu-
ally led to a triumph of this discourse in the political cul-
ture of the US (the UK, and increasingly the world) – a
triumph whose force was not scientific, but ideological.
Neoclassical economic discourse in contemporary society
plays a theocratic and mythical role (Bigelow, 2005; Foley,
2006; Nelson, 1990, 2001). A speaker at the 1996 meeting
of the American Economic Association referred to the
‘‘theological vision” successful economists must have (Nel-
son, 2001, p. 117). The political ideology naturalized by
neoclassical economic ‘‘science” established its hegemony
in the US via the successful resurgence of classic liberalism,
reborn as ‘‘neoliberalism,” and personified by Ronald Rea-
gan. The same movement was led contemporaneously by
Margaret Thatcher in the UK.
Neoliberal economics – promulgated by corporations,
the traditional academy, and conservative, well-funded
think tanks – provided the intellectual foundation that per-
mitted the success of neoliberalism as a political move-
ment. Neoliberal discourse is the background for many (if
not most) policy discussions and as such reinforces its
use in the particular realm of accounting policy. In 1944
two influential books expressing very divergent views
were published. Frederich A. Hayek’s The Road to Serfdom
was strongly critical of government intervention, claiming
it would lead to both economic decline and eventually to
totalitarianism. Karl Polanyi’s The Great Transformation
provided a historical look at the benefits and the social
costs of a market-based society. Polanyi provided a more
skeptical view of markets as an efficacious and socially
beneficial basis for organizing every aspect of society; he
urged government intervention as a corrective to market
failures and social disruption. The two books received rad-
ically different responses. Hayek’s book was published by
the University of Chicago and immediately seized upon
by conservatives as an effective public relations tool. In
February, 1945, Look magazine printed a cartoon version.
The Reader’s Digest created a condensed version and of-
fered the book for a nickel as the April 1945 Book-of-the-
Month Club selection. During his book tours in the US Hay-
ek met businessmen and several University of Chicago fac-
ulty (including Milton Friedman and George Stigler) who
are the persons most identified with the Chicago School
of Economics (Hayek, 2007, p. 20). By contrast, Polanyi’s
book was published by a highly regarded but smaller pub-
lisher (Farrar and Rinehart), with no commercial boost
from popular magazines or book clubs (Polanyi, 2001).
Hayek took advantage of the connections he had made
during his US book tours to convene the Mont Pelerin Soci-
ety in 1947. The group’s purpose was to counter the ideo-
logical ‘‘crisis” posed to the West by Soviet communism
and the threat of domestic anti-neoliberalism. The Mont
Pelerin Society and its neoliberal agenda gained little
momentum in the US until the 1970s, although William
F. Buckley’s creation of The National Review and Barry Gold-
water’s presidential campaign were harbingers of the sea
change in US politics that was about to take place.
775
In 1971 Lewis F. Powell (later a US Supreme Court jus-
tice) wrote to the US Chamber of Commerce expressing
his alarm at what he perceived as attacks by the ‘‘New Left-
ists” who, in his opinion, were taking over the American
academy (Media Transparency, 2006; Powell, 1971). The
following year the heads of General Electric and Alcoa Alu-
minum ‘‘. . .spearheaded the formation of the Business
Roundtable, an organization made up exclusively of CEOs
from the top 200 financial, industrial, and service corpora-
tions,” (Nace, 2003, p. 142). The Roundtable was founded
as an advocacy group for business interests at the federal
level (ibid, p. 143) and since its formation numerous neo-
liberal think tanks, e.g., the Heritage Foundation, Cato
Institute, and Hoover Institute, have been created and
funded by corporate donors. These think tanks sponsor re-
search and have spokesmen who are excellent at generat-
ing media coverage with an academic veneer. Vast
amounts of money were invested to change political dis-
course in the US from corporate accountability to corporate
freedom to operate with less regulation. Backlash against
the civil rights movement and environmental laws (in
the US) and union power (in the UK) made it easier for
the prime public purveyors of neoliberal ideas, Ronald Rea-
gan and Margaret Thatcher, to gain power in the 1980s and
to demonize government institutions and glorify markets
as an alternative.
Neoliberalism’s impact on the accounting academy and
accounting practice
Changes in the political environment were reflected
within academia. Ball and Brown’s (1968) paper estab-
lished both a technology for correlating accounting mea-
surements with security prices and also a ‘‘natural”
function for accounting. Originally rejected because it
was not about accounting, the Ball and Brown paper is
the most cited article in accounting (Brown, 1996) and is
the seminal publication in mainstream accounting re-
search. The University of Chicago created the data tapes
(COMPUSTAT and CRSP), which generated a significant
stream of scholarly output – an efficient system for pro-
ducing academic success, creating, in turn, a generation
of academics steeped in neoclassical economic dogma
and neoliberal ideology.6 Neoclassical economics-based
theories were relied upon extensively to shift accounting re-
search to its current focus on capital market theory (mone-
tarist finance) and the efficient market hypothesis.7
6
Accountants have taken little note of the very problematic nature of
mathematized economics. ‘‘The physical world appears on the surface to be
qualitative, and yet underneath it obeys precise quantitative laws. That is
why mathematics works in physics. Conversely economics appears to be
mathematical on the surface, but underneath is really qualitative. That is
why attempts to create a successful mathematical economics have failed”
7
The ‘‘Nobel” laureate Amartya Sen (1988) notes the inadequacy of the
neoclassical engineering approach to economic affairs. Foley (2006) refers
to the fundamental rationale for markets as ‘‘Adam’s fallacy,” i.e., accepting
‘‘direct and concrete evil in order that indirect and abstract good may come
of it. The logical fallacy is that neither Smith nor any of his successors has
been able to demonstrate rigorously and robustly how private selfishness
turns into public altruism” (p. 3).
776 S. Ravenscroft, P.F. Williams / Accounting, Organizations and Society 34 (2009) 770–786
By 1971 the neoliberal influence of the academy was
evident in statements issued by an American Accounting
Association (AAA) committee proclaiming that ‘‘. . .we
could conceive of accounting as being the measurement-
communication function of the decision process,” (AAA,
1971, p. 60). Thus, accounting’s role was purportedly pro-
viding data facilitating prediction as input to various eco-
nomically rational decision models, rather than in
evaluating past actions and their consequences (i.e.,
accountability). Accounting’s function is transformed from
accountability to providing data for the following
decisions:
a. Predictions of future events or states (or probability
distributions of them).
b. Predictions of alternative courses of action.
c. Predictions of outcomes or payoffs that will occur
given the future event and the future action (AAA,
1971, p. 64).
Beaver (a member of the AAA Committee) narrowed the
focus, asserting that accounting data must be predictive of
security prices, because ‘‘...the behavior of security prices is
a necessary consideration in a complete system of account-
ing research into external information issues,” (Beaver,
1972, p. 408).
Neoclassical economics successfully rationalized the
‘‘scientific” foundations upon which inherently political
and value-laden neoliberal policy arguments are made. It
naturalized a particular world view, thus placing its essen-
tially moral nature beyond debate.8 The theoretical ratio-
nale of the neoliberal movement was provided by ‘‘. . .a
complex fusion of monetarism (Friedman), rational expecta-
tions (Robert Lucas), public choice theory (James Buchanan
and Gordon Tullock), and the less respectable but by no
means uninfluential ‘‘supply side” ideas of Arthur Laffer. . .”
(Harvey, 2005, p. 54). By the 1990s ‘‘. . .most economics
departments in the major research universities as well as
the business schools were dominated by neoliberal modes
of thought,” (Harvey, 2005, p. 54).
Mouck describes the emergence in 1976 of positive
accounting theory at the University of Rochester as both
an ‘‘offshoot of the Chicago School of Economics” (1992,
p. 39) and the victory of rhetoric over the accounting the-
orists such as Edwards and Bell who argued for account-
ability-based accounting.9 According to Mouck the victory
could occur because of the prevailing anti-governmental
ethos and the theory’s grounding within the Capital Asset
Pricing Model and the Efficient Market Hypothesis research
centered at University of Chicago. As was the case with other
offshoots of neoliberalism, positive accounting’s intellectual
standing was not vitiated by its lack of either predictive or
explanatory value and meager empirical results (Christen-
son, 1983; Mouck, 1992).
8
Just as it would be silly to debate the morality of gravity, neoclassical
economics has successfully made it silly to debate the morality of markets.
9 12
The University of Rochester, as well as Chicago, is a center of neoliberal
thought. Jensen and Meckling’s agency theory work is firmly rooted in
neoliberal presuppositions (Jensen & Meckling, 1978, 1983, 1994).
Scholars in several disciplines have exposed the failure
of neoclassical economics as either a predictive or explan-
atory science (see, e.g., Chick & Dow, 2001; Fullbrook,
2001; Fuller, 1988; Keen, 2001; King, 2004; Nelson,
1990; Ormerod, 1997; Rosenberg, 1992; Whitley,
1986).10 However, the ideological purpose of neoclassical
economics mandates it to be immune from empirical refuta-
tion. As long as it can provide post-facto explanation of any
economic event (and the tautological character of many of
its presuppositions, e.g., ‘‘revealed preferences” insures it
can) the political and moral assumptions that underlie it
are ‘‘scientifically” vindicated. The epistemological license
neoliberals claim is epitomized in their stance towards real-
ism of theoretical assumptions. According to Milton Fried-
man the truthfulness of assumptions is unnecessary and
adhering to realistic assumptions is too constraining. ‘‘To
be important, therefore, a hypothesis must be descriptively
false in its assumptions,” (Friedman, 1953; MacKenzie,
2006, p. 10). Models constructed on false assumptions create
an unreality that cannot provide the factual data needed for
accountability-based reporting.
The financial reporting revolution described by Beaver
(1981) was actually the revolution of neoliberalism. The
power the information usefulness metaphor has over
accounting owes its force to the intellectual influence of
the University of Chicago. The Accounting Review, the pri-
mary research outlet of the American Accounting Associa-
tion, shows a pronounced University of Chicago effect
(Fleming et al., 2000). It, along with the University of Chi-
cago’s Journal of Accounting Research and the University of
Rochester’s Journal of Accounting and Economics (both neo-
classical economics media) are the only US accounting
journals categorically recognized as ‘‘premier” (Bonner,
Hesford, Van Der Stede, & Young, 2006). It is not surprising
that the Black–Scholes option pricing model that SFAS
123R institutionalized was published by a University of
Chicago journal.11
Within accounting practice, the FASB institutionalized
information usefulness in its Concepts Statement 1. The
FASB asserted the first objective of financial reporting is
providing ‘‘. . .information that is useful to present and po-
tential investors and creditors and other users in making
rational (emphasis added) investment, credit, and similar
decisions,” (FASB, 1978, p. 16).12 The FASB’s idealized user
is not someone who might use information for irrational
decisions, i.e., the FASB assumes idealized economic actors
whose rationality is defined by their objective of maximizing
wealth. Rationality is presumed to be ‘‘economic rational-
ity,” the standard assumption of neoclassical economics.
Young (2006) argues that the ‘‘user” the FASB trumpets is
10
A rebellion of sorts is underway in economics, ironically now including
some of the principals of the naturalization of neoliberalism (Autisme-
Economie, 2000).
11
The publication history of the Black and Scholes option pricing paper
parallels that of the Ball and Brown study. After being initially rejected at
another journal, the Black Scholes paper was accepted when Fama and
Miller intervened; the paper was published in the ‘‘prestigious Journal of
Political Economy, which was edited in Chicago” (MacKenzie, 2006, p. 71).
The objectives statement was derived from the Trueblood Committee
report, which, in turn, depended on language taken from ASOBAT. Academic
discourses eventually shape those of practice.
 S. Ravenscroft, P.F. Williams / Accounting, Organizations and Society 34 (2009) 770–786
an imaginary one residing only in the neoclassical model of
the world. Among biologists, psychologists, and an increas-
ing number of behavioral economists, ‘‘rationality” is a
highly problematic construct. ‘‘The fiction of a rational
‘‘Homo economicus” relentlessly optimizing material utility
is giving way to ‘‘bounded rational” decision-makers gov-
erned by instincts and emotions,” (Nowak and Sigmund
(2000, p. 819) quoted in Hauser (2006, p. 79), and to an
alternative economic actor labeled ‘‘homo reciprocans” (Gin-
tis, 2000).
The FASB’s second objective of financial reporting is to:
‘‘provide information to help present and potential inves-
tors and creditors and other users in assessing the
amounts, timing, and uncertainty of prospective cash re-
ceipts from dividends or interest and the proceeds from
the sale, redemption, or maturity of securities and loans,”
(FASB, 1978, p. 17). Stewardship was clearly not among
the FASB’s primary objectives.
While the FASB specified objectives for financial report-
ing, it also imposed constraints that are neither necessary
nor sufficient for information to be useful, but are, instead,
artifacts of the displaced accountability metaphor. For
example, according to Concepts Statement 2 accounting data
should be reliable (FASB, 1980). But if data are useful for pre-
dicting the timing, amount, and uncertainty of cash flows,
they can provide ‘‘information” without being reliable. If
prediction is the objective then any datum that enables pre-
diction meets the criterion – whether it is reliable, or repre-
sentationally faithful, or neutral, or exhibits any other
quality considered desirable under the former accountabil-
ity regime. Under the metaphor of information, any datum
that serves investors’ or creditors’ interests is ‘‘accounting
information” and need not possess any other quality. Truth-
fulness or its accounting proxy of reliability is irrelevant.
This counter-intuitive result helps illustrate the incoher-
ence that has arisen in accounting discourse via the mixing
of accountability and information metaphors; a hodge–
podge of concepts and assumptions has resulted from stan-
dard-setters’ unreflective mixing of metaphors.
The influence of neoliberalism extended beyond acade-
mia. Ferraro et al. noted, ‘‘There is little doubt that eco-
nomics has won the battle for theoretical hegemony in
academia and society as a whole and that such dominance
becomes stronger every year,” (2005, p. 11).13 Theoretical
hegemony in the policy sciences has led to dominance in
the actual formation of social policy, e.g., the repeal of the
Glass-Steagal Act. The University of Chicago’s influence
eventually extended beyond academic researchers to option
traders and more broadly to direct intervention in economic
policy formation domestically and in developing economies,
such as Chile (MacKenzie, 2006, p. 16).
The rise of neoliberalism in both the academy and the
public policy arena, enabled by the apparent intellectual
solidity of neoclassical economics, has led to the elevation
of information as the root metaphor of accounting and,
subsequently, to shifts in actual accounting public policy.
However, as Ijiri and others note, the structure of account-
13
Skepticism is beginning to appear. Bennis and O’Toole (2005) and
Ghoshal (2005) have provided incisive critiques of how neoliberal eco-
nomic theories have degraded management education and practice.
777
ing information systems remains rooted in accountability;
substantial vestiges of this historical reliance on the logic
of accountability appear in the FASB’s Concept Statements.
The foundational contradictions surface within inconsis-
tent procedural standards, such as SFAS 123R. Issued dur-
ing a period of intense criticism of the accounting
industry, SFAS 123R is an archetype of the incoherence that
mixed metaphors can produce and is the accounting rule
to which we turn our attention.
The incoherence of FASB’s rules for expensing employee
stock options
Stock options grew substantially more popular as a form
of executive compensation during the inflationary 1990s
US stock market bubble. While Silicon Valley companies
made particular use of stock options as a form of non-cash
‘‘compensation,” options became a standard feature in
executive compensation packages in most publicly traded
companies. The theoretical rationale for executive stock op-
tions was provided by neoclassical economics arguments,
including agency theory (e.g., Jensen & Meckling, 1976; Jen-
sen & Murphy, 1983; MacKenzie, 2006). As the stock mar-
ket rose during the 1990s the magnitude of these awards
was rather astounding. For example, in 1998 Computer
Associates awarded its top three executives grants worth
$1.1 billion (Berenson, 2003, p. 188). In the US the practice
of stock option compensation contributed substantially to
the dramatic increase in the ratio of executive pay to an
average worker’s pay, which is substantially higher than
the ratio in other countries (Phillips, 2002).
Dramatic amounts of value granted to executives lar-
gely went unreported because the former accounting rules
for measuring and reporting such compensation (APB No.
25) resulted in zero compensation expense on the grant
date of the options. In the early 90s the FASB – for the sec-
ond time in a decade – raised the possibility of expensing
stock options. The opposition from the business commu-
nity and Congress led Arthur Levitt, then SEC Chairman,
to advise the FASB to withdraw or water down its original
proposal (Levitt, 2002). Walters and Young (2008) describe
the positive language used in the business press to picture
options as tools of growth and transformation, as magnets
for talent, and (most cynically) a way for all employees to
share in the market’s growth.
However, after Enron and other accounting scandals,
commentators blamed stock options for much of the cor-
porate malfeasance. Walters and Young note how the pub-
lic discourse on options reflected a dramatic shift.
Congressional hearings during 2003 and 2004 generated
descriptions of options as abusive, misused, or as cash ma-
chines for the undeserving (2008). FASB once again ad-
dressed the issue of stock option compensation so that
the financial reporting would better reflect the economic
consequences (apparently the only ones that matter) at
the time options are granted (FASB, 2004). This ruling also
served to help satisfy the public’s desire to have barriers to
future executive greed and corporate misconduct.
The FASB’s solution to the measuring and reporting of
stock option compensation is SFAS 123R, which in essence
778 S. Ravenscroft, P.F. Williams / Accounting, Organizations and Society 34 (2009) 770–786

requires firms to report the ‘‘fair value” of the options at
the grant date. Because most of these options are not
traded on a market, they have no market value. Companies
must instead estimate a ‘‘fair value” derived from either
the Black–Scholes or Lattice option pricing models, both
of which emerged from the imaginary world of neoclassi-
cal economics. Implementing these models requires
numerous assumptions, including implicit assumptions
within standard neoclassical economics about the func-
tioning of markets (e.g., Black & Scholes, 1973).
In the following sections we focus on the reasoning
underlying SFAS 123R and rely on the information useful-
ness metaphor to demonstrate several inconsistencies re-
lated to and revealed by SFAS 123R. We begin with the
issue of the reflexivity in option pricing, whereby the mod-
el used descriptively applies only because it has served a
prescriptive role in market trading. Next we look at the
tension between the BSOM’s use of an assumption that as-
pects of future stock price behavior can be predicted from
the past, though the model’s adoption is justified on the
basis that it provides new information that will change fu-
ture stock price behavior. Then we note that the rationale
provided for options as a form of compensation assumes
management makes a difference, but BSOM assumes that
all managers are fungible. Thus, the resulting report is nei-
ther an account of what management actually did, nor is it
a reliable forecast of what that particular management is
likely to do. The fourth inconsistency is based on the ten-
sion caused by replacing markets with models. Markets
are presumed to be important because they provide the
optimal mechanism for producing price signals for optimal
economic decision making. But 123R requires the use of a
mechanical model for determining what presumably only
markets can do well. Putatively the FASB suggests that
the technical expertise of valuation experts can be substi-
tuted for market mechanisms, which opens a Pandora’s
Box of issues about the feasibility and preference for more
planning and fewer markets in the economy.
Then we explore the internal consistency of SFAS 123R
under the assumption of the root metaphor of accountabil-
ity. We find that the rule for stock option expensing does
not satisfactorily comport with that metaphor either. We
explore three unanswered issues of accountability raised
by SFAS 123R. The corporate income statement has be-
come a repository for all manner of charges ostensibly
management’s responsibility, but for which shareholders
might be more accurately held responsible. Whether net
income represents anything attributable to the functioning
of the corporate entity itself is now very problematic. In
the case of 123R we argue no one can be fairly held
accountable since the outcome is not the result of an actual
causal chain attributable to someone, but the result of
applying a contextually unreliable mechanical prediction
model to every firm.
Reflexivity of option prices
When an actual market price is not available for the
type of option granted (which is usually the case with
executive compensation) the FASB specifies that fair value
. . .shall be estimated by using a valuation technique
that (a) is applied in a manner consistent with the fair
value measurement objective and the other require-
ments of this statement, (b) is based on established
principles of financial economic theory (emphasis added)
and generally applied in the field, and (c) reflects all
substantive characteristics of the instrument. . . (FASB,
2004, par. A8).
Because the FASB explicitly stipulates that the fair value
must be based on established principles of financial eco-
nomics, i.e., standard neoclassical assumptions, the FASB
mandates a circumstance from which the title of this paper
is derived.14 The imaginary world of financial economics is
being ‘‘reported” as ‘‘factual” (as an expense on an income
statement), although the ‘‘facts” are based on assumptions
of a theory that has little to no predictive value (see, e.g., Ab-
bott, 2001; Chick & Dow, 2001; Fleetwood, 2002; Flyvbjerg,
2001; Keen, 2001).
As we noted above, reliability of assumptions is not
considered relevant in economic theory. However, the reli-
ability of predictions must be considered essential.
Through SFAS 123R the FASB has become another agency
implementing neoclassical economic theories as public
policy under its declared belief that modern finance theory
is sound. It is not; ‘‘. . .for over a century economists have
shown that (neoclassical) economic theory is replete with
logical inconsistencies, specious assumptions, errant no-
tions, and predictions contrary to empirical data” (Keen,
2001, p. 4).15
The predictive weaknesses of the theory of option pric-
ing have been described by MacKenzie and Millo (2003),
who point out that when Black and Scholes tested their
model they admitted that it tended to misprice options
such that options on high (low) volatility stocks were
underpriced (overpriced). Eventually the Black–Scholes
option model (BSOM) became more descriptive of actual
prices due to two factors. First, some of the assumptions
of the model became more realistic as behavior changed.
Secondly and more importantly to our argument, people
began using the model as a way to price options. The the-
ory did not initially describe underlying values; instead it
was relied upon prescriptively and came to define prices.
Black–Scholes is an example of Barnesian performativity
(Barnes, 1988; MacKenzie, 2006), that is, the ‘‘(P)ractical
use of an aspect of economics makes economic processes
14
The violence done to one of the most fundamental principles of
accounting seems to go unnoticed. The transaction as the basis for
recognition is justified because only exchange values meet any possible
test of verifiability, i.e., factuality. However, SFAS 123R nullifies any
requirement for exchange transactions. There is no logical limit to the
extent preparers may now jettison recording transactions and substitute
much less costly ‘‘models” for preparing financial statements if the models
provide information ‘‘useful for decision making.” Of equal concern is that
persons could be held accountable to ‘‘models” of dubious scientific merit.
15
MacIntosh et al. paint a rather gloomy postmodern portrait of the
world of financial reporting ushered in by recent FASB pronouncements:
‘‘Accounting signs model market signs, which in turn model accounting
signs. Thus, in the hyperreal financial economy of simulation, the difference
between the sign and the referent implodes. The signs become images of
themselves in an imbroglio of ungrounded, self-referential simulation”
(MacIntosh, Shearer, Thornton, & Welker, 2000, p. 36).
 S. Ravenscroft, P.F. Williams / Accounting, Organizations and Society 34 (2009) 770–786
more like their depiction by economics” (MacKenzie, 2006,
p. 17).
The BSOM became a common language and widely ac-
cepted metric in a rather complex way. Because future vol-
atility (a key parameter in the option pricing model)
cannot be predicted, traders began to infer volatility from
option prices; thus, volatility became the focus and basis
of trades. Given the principle that ‘‘all options on the same
underlying asset with the same time-to-expiration but
with different striking prices should have the same implied
volatility” (MacKenzie & Millo, 2003, p. 126) one expects to
see a flat line on a graph of the relationship between strike
price and volatility. However, differences from that rela-
tionship existed and traders began to arbitrage the differ-
ences; thus the BSOM became more predictive of prices.
‘‘Gradually ‘‘reality” (prices paid) was performatively re-
shaped in conformance with the theory,” (ibid, p. 127).
The fragility of the relationship between the BSOM and
option prices became apparent after the October 1987
stock market collapse. After that precipitous drop in the
US market, traders became more averse to selling low
strike price puts and less likely to behave in strict accor-
dance with the BSOM. The ‘‘collective trauma” of October
1987 and the ‘‘moral obloquy” that attached to traders
who sold low strike price puts without hedging them
(MacKenzie & Millo, 2003, p. 135) caused the theoretical
flat line between strike price and implied volatility to be-
come more skewed. Since that time, the skew continues
and is far more pronounced in the US than in other coun-
tries. Thus, the empirical evidence for the BSOM shows
that it began as a theory with weak predictability, became
fairly descriptive – due to performativity – from 1976 to
1987, but became less accurate after the 1987 stock market
crisis. Despite this well-known weakness in the BSOM, the
FASB has mandated that either the BSOM or a Lattice mod-
el must be used to record stock options because either ap-
proach will provide useful information.
The paradox of the historical assumption
The FASB’s information metaphor justifies expensing
options on the premise that hypothetical investors would
behave differently were they informed of the cost of stock
option compensation. Within a regime of decision useful-
ness, information is by definition that which affects behav-
ior, so in order for the cost of options to be ‘‘information”
the data must make a difference in investors’ decisions. If
reporting such a number makes no difference in investor
decisions, then the FASB’s requirement fails to meet the
definition of information, and it also fails to meet the over-
riding cost/benefit constraint.
However, implementing the option pricing models re-
quires financial statement preparers to make six assump-
tions, as indicated by the FASB. A critical assumption
based on estimates is the ‘‘. . .expected volatility of the
price of the underlying share for the expected term of the
option,” (FASB, 2004, par. A18). The FASB suggests that his-
torical experience is the starting point for such estimates of
future price volatility, and that modifications be made if
current conditions suggest the future might differ from
the past. Of course one of the conditions that will differ
779
is the disclosure of the new information required by SFAS
123R.
Prior to SFAS 123R financial statement users did not
have information about the cost of stock option compensa-
tion plans, so the historical volatility of the underlying
stock occurred in a trading environment lacking such
information. Thus, current stock prices are the result of
past decisions made in the absence of the information
requirements of SFAS 123R. The change wrought by SFAS
123R creates a real dilemma in the initial application of
the standard. We cannot simply assume the future will
be like the past, because the future includes option expens-
ing, which the FASB must believe will change behavior and
therefore change the future. If no behavioral change were
expected, the information-related justification for the
new standard falters. But if we cannot assume the future
will be like the past, accountants have little – if any – basis
for predicting future volatility, a key parameter in the
BSOM.
The assumption that future volatility will mirror past
volatility is the practical but theoretically unjustified step
made in both the Black–Scholes and Lattice models. How-
ever, if the future price performance is assumed to be the
same as in the past, then whatever information has been
provided in the past is sufficient to predict volatility. Since
the probability distribution of future prices around the cur-
rent price will not be altered by the new information, i.e.,
the probability that the stock goes up or down by, say,
20% is the same, then arguments that SFAS 123R provides
more information become problematic.16
On the other hand, if we assume the disclosure about
option compensation will be informative to investors, then
the question of how future volatility will be altered by the
new behavior induced by the new information must be ad-
dressed. The estimate of future volatility depends on the
current stock price, which is dependent on decisions made
by investors with information prior to SFAS 123R. We do
not have any theory that enables us ex ante to relate any
disclosure to future price effects.
We resort to the assumption that the future will be like
the past as if it were an obvious, common-sense maneuver.
Such a maneuver has intuitive appeal because of our
unjustified and tacit conflation of scientific laws with
reflexive social practices such as economics or accounting.
The strength of gravity did not change with the October
1987 stock market plunge, but the predictive ability of
the Black–Scholes option model did. We fail to observe
the significant ontological differences between scientific
and social constructions. Because of the reflexivity of op-
tion pricing models, we cannot even measure the extent
of our misestimation as its magnitude will depend on the
behavior the new data induce in traders.
16
There is also the issue of management disclosing what they believe the
options are worth. Rational expectations theory would suggest that the
competitors of a firm disclosing the value of their options could potentially
discern the firm’s intended strategy. Because each strategy implies future
stock values, which implies different option values, estimated option values
might imply management strategic intentions. Conceivably stock option
expensing is not neutral but forces disclosure of proprietary information.
780 S. Ravenscroft, P.F. Williams / Accounting, Organizations and Society 34 (2009) 770–786
Every new accounting standard is an experiment with
unknown effects that become known only after the stan-
dard is issued. It is quite possible that the current stock
price from which we begin the estimate would be different
were the standard already providing the information. The
problem is that we have no way of knowing what the dif-
ference would be. Without a predictive model of the causal
connections between information and behavior, we cannot
coherently assert that FASB can meaningfully develop
‘‘reliable information” for someone when the information
is dependent on the person’s prior behavior (Williams,
1983, 1989).
The first two problems we have noted (reflexivity and
the paradox of the initial application) are exacerbated by
the findings of behavioral finance. Belief in so-called effi-
cient capital markets has been substantially shaken by cap-
ital markets research informed by the very early work of
Kahneman and Tversky (1973). Shiller (2001) provides a
summary of this work, concluding that capital markets
are subject to ‘‘irrational” influences and that security
prices do not necessarily reflect at any point in time the
‘‘true” value of a stock. The stock market is an irrational
place (e.g., Ball, 2004; Keen, 2001; Orrell, 2007; Taleb,
2004) or, as some insiders are claiming (Bogle, 2006), a cor-
rupt place. But the methods required by the FASB implic-
itly assume markets are efficient. For if stock prices and
their volatility are the result of ‘‘irrational” forces then
information dependent on these forces cannot be pre-
sumed to produce further information that will induce
‘‘rational” behavior, i.e., will make capital markets more
efficient.
The irrelevance of management
The theoretical rationale for stock option compensation
from principal/agent theory is that managers will work to
the benefit of shareholders if their incentives are aligned
with outcomes that benefit shareholders. According to
standard contracting theory ‘‘. . .compensation policy that
ties the CEO’s welfare to shareholder wealth helps align
the private and social costs and benefits of alternative ac-
tions and thus provides incentives for CEOs to take appro-
priate actions,” (Jensen & Murphy, 1983, p. 225). Further,
‘‘It is appropriate, however, to pay CEOs on the basis of
shareholder wealth since that is the objective of sharehold-
ers,” (ibid). Baker et al. (1988) reiterate this contracting
theory, ‘‘... incentives generated by cash compensation
are trivial compared to incentives generated by stock op-
tions and stock ownership, and stock related compensation
is directly related to absolute returns and not relative re-
turns,” (1988, p. 610).17
If one accepts the rationale that option compensation
induces managers to work harder and more creatively on
17
We consider it ironic that the FASB requires reporting consistent with
the same ‘‘principles of financial economics” to solve the problem that was
created by these very same principles. The reason for the pressure to report
stock option compensation is the awareness that something has gone
horribly wrong with the sanguine predictions of principal/agent theory. The
ideological appeal of such principles is far more compelling than their
scientific or technical value (Tinker, Merino, & Neimark, 1982).
behalf of shareholders, then one must presume that man-
agement has the capabilities to make a difference. In other
words, management matters. The only, rational economic
reason shareholders could have for compensating a partic-
ular person millions of dollars per year is the belief that
particular person will produce results superior to those
other individuals would produce. The selection of top man-
agement is a targeted choice and not a random one. Share-
holders are rational to compensate particular managers so
munificently only if those particular managers are more
skilled, more creative, more entrepreneurial, etc. than
other managers who were not employed and given such
incentives. Management is expected to create value so that
future share prices will be higher on average than in the
past. Management must alter the distribution of expected
share prices by actions it takes; otherwise, it is irrational
to compensate them with options and irrational for them
to accept options rather than salary (assuming risk aver-
sion for compensation).
If stock prices are related to expectations about real
economic outcomes for firms (an open system) and not
simply traders’ expectations about traders’ expectations
(a closed system), then management could potentially al-
ter the future distribution of the firm’s stock prices. If stock
prices increase because of general economic conditions,
then management does not deserve to be compensated be-
cause the increased stock prices do not result from specific
actions by management. It is only the future firm-specific
outcomes that are not contained in the past behavior of a
firm’s stock prices that represent the outcomes for which
management deserves compensation.
However, the measurement of stock option compensa-
tions mandated by SFAS 123R is based on nothing that
management actually does. The assumptions upon which
the models are based implicitly assume that management
is fungible. Volatility assumptions that are crucial to
implementing the option models are based on either his-
torical experience or an average for firms in the industry.
The identity of management is not a variable. The compen-
sation reported under SFAS 123R is indicative of the value
management is adding only if one assumes that manage-
ment is generic and makes no difference.18 Thus, financial
statements become reports by a particular management
about the performance of no management in particular.19
18
Of course one rationale for SFAS 123R is the belief that security markets
actually discipline managers. Perhaps more direct legal solutions would be
more efficient and effective. Disclosure to traders may not be the most
effective solution for every problem the multi-national corporation poses
for society.
19
The US tax treatment of option compensation is instructive. Few would
consider a taxation system fair if it held someone accountable for taxes
based on an arbitrary assessment of future consequences of acts not yet
performed. The IRS recognizes stock option compensation when the
individual manager actually exercises the options (where ‘‘actually exer-
cises” is defined by legally contestable rules propagated by law). Such a
treatment would inform investors on the extraordinarily high executive
compensation as effectively as SFAS 123R has done. Indeed the pressure to
promulgate the standard came from the existing knowledge that such
compensation was enormous; it was hardly a secret. If corporations are
merely a nexus of private contracts then nothing precludes shareholders
from requiring as a condition of employment that tax returns of employees
be provided to the board of directors. If employees may be subjected to
drug testing, then why not to income testing, too?
 S. Ravenscroft, P.F. Williams / Accounting, Organizations and Society 34 (2009) 770–786
Are options compensation?
Given the performativity of option prices and the inabil-
ity to trace stock prices to a particular management, the
assumption of SFAS 123R that everything managers receive
from the corporation in the way of options is compensa-
tion for services (an assumption driven in part by tax con-
siderations) becomes suspect. The assumption is derived
from ‘‘principles of financial economics” but does not cap-
ture the complexity of the economic world accounting is
charged with faithfully representing.20 Service is something
of value consumed during a period of time; compensation is
the value paid for services received during that period of
time. A wage earner is compensated according to the going
wage rate for the number of hours of that labor the firm re-
ceived for a period of time. The wage rate is determined by
the value of the skill the laborer provides.
However, management’s (the agent) services are much
more problematic in that managerial skill includes entre-
preneurship. Managers provide the entrepreneurial talent
to a firm that shareholders, as absentee owners, do not.
There is no skill test or professional entrance exam for
entrepreneurship, as there is for professionals like lawyers,
accountants, or pipe fitters. A manager provides her skills
to the firm, including her entrepreneurial skills, in ex-
change for the prospect of becoming an owner, i.e., captur-
ing the value that her entrepreneurship creates, when
options are included in the compensation package
Stock issued by a corporation is compensation only if
one assumes that the only way to acquire ownership inter-
est is by purchasing shares on a public exchange. This bias
is built into the principal/agent model, which assigns man-
agement only the role of agent (an untrustworthy servant)
and assigns external shareholders only the role of principal
(the morally superior property owner). Reliance on such
simplistic models of the world does not necessarily lead
to coherent public policy (Young & Williams, 2007)21 be-
cause the managerial role is a complex dualism involving
being both principal and agent.
If someone contributes land or a building to a corpora-
tion in exchange for shares, the corporation treats this as a
transaction with an owner, not an employee. But if a man-
ager contributes permanent value to the firm through her
entrepreneurship, in exchange for shares in the firm
(now making her a shareholder, too), why is this transac-
tion simple-mindedly treated as if it were an exchange be-
tween the corporation and a salaried employee? If
managerial expertise is as valuable as recent stock com-
20
There is an implicit privileging of shareholders or traders (principals)
who provide no managerial capital to the firms they allegedly own. For
publicly traded firms in the US these investors do not provide any real
capital either since the net new investment provided by Wall Street is
negligible to negative (Kelly, 2001). The privileging of shareholders is
predicated on the belief that shareholder interests are the best proxy for the
interest of the firm; such a belief is questionable (Greenfield, 2006).
21
We do not intend to valorize management. The enormous amounts of
wealth that have gone to corporate managers in recent years are alarming,
but not necessarily because of the alleged injustice done to traders
(shareholders). Citizens of democracies have concerns about thecreation of
a managerial aristocracy that are far more significant than a concern for
stock traders’ ephemeral interests in corporate affairs.
781
pensation amounts indicate, some of that value, consistent
with the theoretical rationale for offering options, must
certainly be going-concern value. That value represents
an equity stake in the firm and is not merely compensation
provided to an employee. It is the issuance of an ownership
interest by the corporation for the investment of the long-
term benefits of entrepreneurial skill.22
Markets versus mechanical models
The last issue we wish to discuss is what McCloskey
(1990) terms ‘‘economic snake oil.” The fundamental prin-
ciple supporting market economies over planned econo-
mies is putative inability of any planner to know enough
to compensate for the knowledge of everyone in a market.
Supposedly market prices are the most efficient steering
mechanism because they are market prices! This is the Mont
Pelerin Society’s central thesis and the essence of rational
expectations theory, a foundation of financial economics.
Efficient market theory is rooted in this same principle.
Markets are allegedly superior institutions for determining
the social value (or at least the money price) of everything
since they bring the knowledge and preferences of large
numbers of persons to bear on the problem. Thus, market
values are socially objective indicators of the relative val-
ues of commodities and, as more things become commod-
ities, eventually the value of everything.
A corollary of faith in market-derived values is skepti-
cism regarding the possibility of a superior mechanism
for establishing relative values upon which persons should
make decisions. Because price is the best indicator of rela-
tive value, prices serve as an efficient steering mechanism
for people’s decisions. Thus, belief in market economies is
also the belief that any obstacle that interferes with market
competitiveness reduces the value of price as a legitimate
indicator of relative social value. This belief is clearly en-
grained as one of the key principles of neoliberalism. Thus,
the best (some would say only reasonable) way to estab-
lish the value of a stock option is to exchange it in a com-
petitive market. Unless there is a market in which
something may be traded it has no ‘‘market price” and thus
has no ‘‘economic value,” except a subjective one that is
unobservable and different for each individual who hap-
pens to hold ESOs.
The purpose of SFAS 123R is to provide a valuation of
employee stock options in the absence of a competitive
market for such options. Options markets exist presumably
as a device for ‘‘properly” valuing options because markets
are the superior device for doing so. But the FASB assumes
in SFAS 123R that options can be valued without the costly
mechanism of an organized market. FASB presumes there
is a non-market mechanism that suffices as well as a mar-
ket. Ironically, reliance on the BSOM presumes what the
assumptions underlying the Black–Scholes model say can-
not be.
The paradox of SFAS 123R is that its justification is pro-
viding needed information to market participants so those
22
One possible interpretation, supported by a number of prominent
economists and business professors is employee stock options are gain-
sharing agreements and not an expense (Hagopian, 2006).
782 S. Ravenscroft, P.F. Williams / Accounting, Organizations and Society 34 (2009) 770–786
participants’ decisions will make markets even more effi-
cient. But the BSOM does not produce a market value,
but rather the result of applying a mechanical model. If this
mechanical model works for stock options then we do not
need an options market; we have ‘‘valuation experts” who
will provide at much lower cost the information required
to produce appropriate prices for steering economic deci-
sions.23 Substituting mechanical methods for markets is
the foundation of a planned economy in which all of the
non-value added activity (accountants, analysts, brokers,
shareholders, bankers, etc.) could be eliminated.
Using SFAS 123R as our archetype case, we have pro-
vided demonstrations of some direct incoherencies that
the information metaphor creates in the standard setting
process. In the next section, we examine whether SFAS
123R is coherent if one assumes an accountability frame-
work and find that further conundrums arise.
Unanswered questions of accountability: who, what and how?
The first conundrum relates to the question of who is
responsible, i.e., accountable when stock option compensa-
tion is expensed. Financial statements are presumably re-
ports to investors and creditors about the performance of
the corporation, a performance for which management is
explicitly accountable. As agents of the shareholders, top
managers (to whom most stock option compensation is
awarded) are the persons putatively responsible for these
outcomes. However, these managers are not legally agents
of the shareholders, but are instead agents of the corpora-
tion, an entity legally separate from the shareholders. Top
management is ‘‘hired” by the board of directors, the
agents elected by the shareholders to oversee the manage-
ment function. Managers are allegedly responsible for
decisions pertaining to what the corporation will produce
and how it will produce it, what and how many assets
the corporation will hold, and how the corporate activities
will be financed. Allegedly the board monitors manage-
ment to assure that shareholders’ interests are being
served.24
Who is responsible for the amount top management is
given in compensation? Certainly it is not management’s
decision. Management may decide what consulting firm
to hire and how to pay the consultant, but management
does not, in theory, decide its own compensation; instead
ESO’s are approved by Boards of Directors. Though share-
holders cannot observe all managerial actions, leading to
the contracting problems of principal/agent theory, share-
holders’ agents certainly are empowered to set manage-
23
We also now have valuation experts who are capable of valuing entire
firms, so the potential surely exists to eliminate stock markets as well.
24
We are being ironic here. Many readers of this paper have accused us of
naïveté because everyone knows that is not the way the world really works.
Shareholders exercise no effective control over management since man-
agement controls the boards that allegedly oversee them. That is why US
taxpayers, whether they are shareholders or not, pay for the enormous
regulatory apparatus to protect investors from their own actions. The
ineffectiveness of shareholders at controlling the affairs of the corporations
they ‘‘own” makes the belief that accounting disclosures to the market will
actually discipline management an even more naïve view. Perhaps we are
expecting accounting to accomplish more than it can conceivably deliver.
ment compensation. The board hires the CEO and
negotiates with her to set her compensation. The compen-
sation contract for top management is made between the
shareholders and the managers. Top management’s com-
pensation contract is – among all the arrangements com-
prising the corporation’s nexus of contracts – the sole
instance where management is the contractee and not
the contractor acting on behalf of the firm.
If the firm experiences higher than expected raw mate-
rial costs, all other things being equal, that will be reported
by the accounting system as a ‘‘charge” against the perfor-
mance of management, because management bears the
responsibility for decisions about what and from whom
to acquire raw materials. However, if overall markets rise
rapidly as they did during the speculative bubble period
of the late 1990s, and the stock price soars such that man-
agers exercise their highly valued stock options to receive
millions of dollars in ‘‘compensation”, who is accountable
for that? Surely not management, because they do not de-
cide their own compensation; they did not issue the op-
tions to themselves.25 Shareholders, via the board, are the
persons who transacted for the cost so it rightfully is
chargeable to them. Does the FASB’s mandated disclosure
indicate that shareholders are demonstrably inept at deter-
mining the value of the compensation they are awarding?
Such regulatory intervention must shake one’s faith in the
mythology of market participants’ omniscience and in the
efficiency with which resources are allocated.26
The second unanswered question of accountability is
evident when one considers what is the FASB accountable
for. The FASB has been afforded the power to determine
how corporations will report the results of their opera-
tions. An information metaphor founded on financial eco-
nomics has led the FASB to mandate reporting
procedures that are putatively useful for creating informa-
tion for the benefit of traders, i.e., investors. As decision-
makers, traders need data that facilitate prediction; the
FASB has obliged by requiring more forecasted information
in the financial statements. SFAS 123R is the ultimate
example of this phenomenon. The forecasts from the rec-
ommended models are not based on the subjective judg-
ments of knowledgeable people. Instead, they are derived
from the mechanical application of an idealized model
whose forecast accuracy in specific cases may be very poor
(MacKenzie & Millo, 2003; Noreen & Wolfson, 1981).
However, when the FASB issues a standard it is not sim-
ply mandating how to narrate economic reality, it is also
writing law. The very structure of accounting – its dou-
ble-entry nature – creates accountability relationships
25
There could be some interesting conundrums for managers in deciding
how much effort to expend to maximize their compensation. If bonuses are
available based on earnings and stock option compensation is chargeable
against earnings the task of being opportunistic becomes computationally
much more difficult for managers. Success is failure.
26
This is one of the many contradictions of neoliberal theory. Liberty is
strictly understood as maximal economic liberty yet, without institutions
in place to redistribute wealth, maximal economic liberty eventually
produces concentrated economic power, which eventually leads to either
fascism or the proliferation of rules and regulations to curb economic
power. Paradoxically an anti-regulatory philosophy when implemented
begets ever more regulation.
 S. Ravenscroft, P.F. Williams / Accounting, Organizations and Society 34 (2009) 770–786
any time it presumes to provide information. Because of
the structure of accounting, with its historic roots in
accountability, ‘‘information” cannot be provided without
simultaneously creating a responsibility for someone. A
double-entry system designed to establish responsibility
relationships cannot merely provide added bits of forecast
information. Someone is automatically made responsible
for that bit of information whether he or she has any ability
to affect an outcome about which the new information
pertains.
Wall Street holds management accountable for the re-
sults of operations of the corporations they run; yet it is
at least in part the application of the ‘‘laws” the FASB
writes that determine what the results will be. Whenever
the FASB issues a standard it mandates a reported result
for which someone will be held accountable (Cunningham,
2005). Ijiri (2005) warns about the increased litigation risk
due to including more forecast data in financial state-
ments. ‘‘Of course, if one could make forecasts so that they
always accurately match with the actual outcome, there
would be no chance to mislead investors but such foresight
is not available to accountants or to any human being,”
(Ijiri, 2005, p. 268). He says that as we move increasingly
to forecast type information each number on the financial
statements, ‘‘which should be as solid as a brick (is) soft as
tofu,” (2005, p. 261). Of course, if one could make forecasts
that always matched the actual outcome, we would not
need investors so the problem of them being misled could
not arise.
The third issue of accountability arises because SFAS
123R does not specify how management can be held
responsible for the future. The legislative nature of FASB’s
standard setting and FASB’s ability to create responsibili-
ties for future outcomes beyond current management’s
capacities raises the issue of legitimacy. Despite Black–
Scholes or Lattice models, the economic future is unknown
and unknowable. There is a genuine danger in asserting in
financial statements that the unknowable future is already
a fait accompli. In the case of SFAS 123R managers are
‘‘charged” with an expense today that will depend on what
they and others do in the distant future. They are held
accountable today for future outcomes they have had no
opportunity to affect. In spite of financial economics prin-
ciples, the options granted to executives that are exercis-
able only years hence have no reliable and verifiable
value now because there is no market in which the value
of such options may be revealed for the use of accountants.
Someday they will have a value; someday there will be, in
Ijiri’s terms, an ‘‘actual outcome.” Requiring that forecasts
be included in financial statements intermingled with data
that meet the more stringent, traditional recognition crite-
ria make financial statements good for neither ‘‘informa-
tion” nor ‘‘accountability.”27
SFAS 123R is the product of a rather insular rule maker
mandating the imaginary world of neoliberal ideology. The
enormous multinational corporations, which are human
inventions (social, not natural facts a la Searle, 1995) are
27
SFAS 123R is reminiscent of the futuristic world depicted in the movie
Minority Report, where crime detection had reached the point where people
were arrested for crimes before they actually committed them.
783
directed by FASB’s rules to follow courses which benefit
only one segment of society, i.e., traders. Financial eco-
nomic principles are not merely (even mostly) scientific,
but are political and ethical ( Brockway, 2001; Nelson,
2001; Rosenberg, 1992; Sen, 1988). If they were only scien-
tific then FASB would not and in fact could not mandate
them. They are ‘‘norms” and Ijiri is correct that acceptable
norms are not mandated by a committee of ‘‘authorities,”
but only via a process that is legitimate (see Habermas,
1996 for a well-elaborated theory of how democracies
should construct legitimate law).28
Though more modest in what it can deliver, an account-
ability framework limits the domain of accounting to activ-
ities for which accounting professionals might have
genuine, though perhaps limited, expertise.29 Clearly
accountants used to prefer exchange values at time of acqui-
sition (historical cost) because these values were the most
objective or ‘‘hard” measures (Ijiri, 1975). Such a framework
allows the evaluation of alternative measurements using cri-
teria such as those recommended by Ijiri which result in
information that is more likely to limit dispute by relying
on verifiable ‘‘facts”, with well-specified and reproducible
measurements, and a restricted number of rules (1975, pp.
35–36). No system for ‘‘scoring” performance could be de-
fended that requires the ‘‘score” include hypothetical perfor-
mances yet to occur.30
Summary and conclusions
We claim the increasing incoherence of accounting dis-
course documented by West (2003) has occurred at least
partly because an information metaphor now substitutes
for the suppressed notion of accountability, which was
the root metaphor for most of accounting history. We ad-
dressed the consequences of this substitution by using
SFAS 123R as an archetype case of the incoherence created
by the information metaphor, which has resulted in rules
requiring the impossible and the unauditable. Ijiri noted
that ‘‘accounting theories always seem to be tied to poli-
cies. Controversies among accounting theorists primarily
center on whether accounting practices should be one
way or another – an issue that clearly belongs to account-
ing policy,” (1975, p. 10).
Protected by the pseudo-scientific cloak of neoliberal-
ism, the information metaphor transformed the US
accounting academy into an autonomous discipline with
neoclassical economics at its core. The neoliberal ideology
28
The FASB’s latest venture in making real imaginary worlds is the
standard on fair value accounting. Glover, Ijiri, Levine, and Liang (2005)
raise the same alarms about impossible mandates and propose an
alternative accounting model based on separating fact from fiction.
29
The idea of an audit depends upon confirming with evidence. Only
causal chains extending from the past to the present can provide such
evidence (see Devine quote under title). Information about the future
cannot be audited. The information metaphor also raises the issue of
jurisdiction (Abbott, 1988). Given information (including forecast informa-
tion) is the goal of financial reporting, there is no necessary reason for that
activity to stay within the province of accounting. If accounting procedures
are transformed into those of empirical finance research, financial reporting
does not need to be the province of accountants.
30
This is perhaps why even the very subjective scoring of figure skating is
at least deferred until after the skaters finish their programs.
784 S. Ravenscroft, P.F. Williams / Accounting, Organizations and Society 34 (2009) 770–786
of the Chicago school of economists, circa the Friedman
era, is what now largely informs the FASB of its role and
what accounting statements are intended to accomplish.
Financial statements are now a hodge–podge of rules and
valuations justified on the dubious argument that the
resulting statements are useful because they are being pro-
duced in accordance with principles of financial econom-
ics. Accounting practice developed over centuries with
accountability as its organizing principle. It is still the ex-
plicit principle of accounting as practiced on a daily basis,
but not of financial reporting. However, the FASB has over-
laid the information metaphor, spawned by neoclassical
economics, the naturalizing instrument for neoliberalism,
on financial reporting. The two incompatible metaphors
have resulted in incoherent and indefensible rationales
for accounting standards.
Returning to a root metaphor of accountability and
accounting as law is recommended. Currently, the FASB
has united with the International Accounting Standards
Board (IASB) to work towards convergence of financial
reporting. In its Framework for Financial Reporting the IASB
similarly explicitly excludes stewardship as an objective
because ‘‘stewardship is subsumed under the information
usefulness objective (IASB, 2006, p. 18).” These positions
have been criticized on the basis that stewardship is a sep-
arate and distinct objective of reporting focused on ‘‘the
accountability of the directors” and ‘‘is at the heart of the
financial reporting process in many jurisdictions” (IASB,
2006, p. 42). The dissenting members of the IASB empha-
size that financial reports prepared on a stewardship basis
help readers make decisions concerning not only on man-
agement’s competence but also on its integrity. We are
encouraged that moves to diminish stewardship’s role
have evoked additional negative responses (AAA, 2007;
O’Connell, 2007), because as accountants we do not know
more about the future and we cannot better predict the fu-
ture than other professionals can. It is ethically question-
able to presume to impose an imaginary world on
people. Traders cannot be protected from all risks, particu-
larly the risks inherent in the future. That is the risk they
must bear to justify their existence.
Acknowledgement
We would like to acknowledge the excellent and
thoughtful comments provided by the two anonymous
reviewers.
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