Accounting, Economics, and Law

Nonsense and Worries in Citizens United and Its Aftermath

Kurt Strasser — Thu, 15 Dec 2011 08:56:54 PST

Do Corporations have a constitutional right to donate money to organizations that engage in electioneering? The US Supreme Court has recently decided that they do. Citizens United v. Federal Election Commission held that restrictions on a corporation’s expenditures for “electioneering communication” or other speech that advocates the election or defeat of a candidate were unconstitutional under the First Amendment of the US Constitution.

This case has generated an enormous commentary in the legal literature, much of it quite critical of the opinion. Most of the critical commentary has emphasized two bad results that are claimed to flow from the decision. First, these commentators have presumed that, as result of Citizens United, the floodgates will be opened, sending a torrent of corporate money gushing in and elections will come to be, in substance, more like auctions than democratic choices. Second, many have been quite concerned that the corporate origins of all this money make it much more destructive to the political process. Part 2 of this essay will discuss why these arguments are overblown and unpersuasive. The floodgates were already open, and the problem is large amounts of money coursing through the political process which has been subject to little effective control for some time. The money, not its corporate origin, is the real concern. (Many of the commentators have emphasized technical points of Constitutional Law and traditional ideas of good practice in constitutional interpretation, topics that are beyond the scope of this essay.)

Yet there are real worries that grow out of this case, and Part 3 will survey these. Citizens United is less of concern for what it actually commands in this opinion, but, if it is seen as a major step in a continuing journey, it is of much more concern for what it shows about where the journey is going.

Reuven Avi-Yonah's "Citizens United and the Corporate Form": A Comment

Lawrence E. Mitchell — Thu, 15 Dec 2011 08:56:53 PST

Avi-Yonah's article is to be commended for bringing corporate theoretical sophistication to bear on the opinions of a Court that is largely unfamiliar with the real world of corporate and business practice. But the essential question with which I leave Avi-Yonah’s work is: Why does it matter? The principal flaw in Avi-Yonah’s argument is that it consistently operates at the level of high theory while failing to contextualize the theoretical debate in a way that might elucidate for us theory’s importance. While he takes us through all of the standard cases, he disregards the purposes for which theory was used in each. For corporate theory in the context of constitutional law is about the power relationship between the corporation and the state, while corporate theory in the context of corporate law is about the relationship between directors and shareholders, and thus the distribution of power within the corporation. One set of theories is largely independent of the other, as clear as the contrast between the Progressive Era theoretical literature Avi-Yonah cites, and Berle and Means’s "The Modern Corporation and Private Property". What difference does it make? Constitutional law is about power within politics, writ both large and small. Corporate law is about power within business. The former goes to the question of the corporation’s power vis-a-vis the state and society. The latter goes to questions of the efficiency of the enterprise and the legitimacy of its organization.

Reuven Avi-Yonah's "Citizens United and the Corporate Form": Still Unuseful

William W. Bratton — Thu, 15 Dec 2011 08:56:51 PST

I welcome Avi-Yonah’s new deployments of descriptive theories of the corporation. But I traversed this territory years ago and came away with a skeptical view of the enterprise. Although Avi-Yonah’s interventions are compelling in the encounter, I remain unconvinced that the theories have important lessons to teach us.

The Enterprise Entity and the Constitution of the American Economic Republic

Yuri Biondi — Thu, 15 Dec 2011 08:56:50 PST

Both Citizens United and the recent debate on opinions provided by rating agencies amid the financial crisis face the problems raised by defining the corporation as a legal person and a legal subject. In contrast, the enterprise entity perspective considers the corporation as an intermediate collective body and a legal object, granted with instrumental legal personality in some circumstances. The legal person view has been historically important to articulate private and public orders, and protect the private domain from abuse of public power. At the same time, it was and still is important to impose some social control and social duties towards the community on enterprise entities, especially in a world where corporations are allowed to own and control other corporations, constituting corporate groups that are autonomous and opaque fields of private power. From this perspective, the definition and role of enterprise entities point to the constitution of legal-economic orders. Drawing upon Dewey’s suggestion, the corporation can be defined as a functional set of mutual relations that has social consequences, controlled and modified by being the bearing of rights and obligations, privileges and immunities. This understanding embeds the corporation in its social context fraught with immanent conflicts of interest and representation. In this context, the enterprise entity emerges as an overarching principle (and idea) that can foster the unfolding formation of transient social orders. Here the quest for legal-economic principles becomes unavoidable. Like the corporation, these principles acquire duties and rights. They have the right to be tentatively free, which implies two distinctive duties: they are responsible towards reality, because they are expected to guide human actions in situation; and they are responsible towards society, because they are expected to facilitate welfare and justice and liberty in ordering social activities.

Citizens United and the Corporate Form

Reuven S. Avi-Yonah — Thu, 15 Dec 2011 08:56:48 PST

In Citizens United vs. FEC, the Supreme Court struck down a Federal statute banning direct corporate expenditures on political campaigns. The decision has been widely criticized and praised as a matter of First Amendment law. But it is also interesting as another step in the evolution of our legal views of the corporation. This article argues that by viewing Citizens United through the prism of theories about the corporate form, it is possible to see that the majority and the dissent departed from previous Supreme Court jurisprudence on the First Amendment rights of corporations. It is also possible to then predict what arguments can be expected next.

Trust in Freedom or in Equality? A Comment on Bernard E. Harcourt’s The Illusion of Free Markets

Marion Brivot — Thu, 10 Nov 2011 13:38:40 PST

“At the end of the day, the notion of a ‘free market’ is a fiction. There is simply no such thing as a non-regulated market—a market that operates without legal, social and professional regulation. Those forms of regulation, including the criminal sanction, are precisely what distributes wealth and resources, what makes it possible for the Chicago Board of Trade to exclude non-members from the trading floor, for the Big Four accounting firms to effectively control accounting standards and for large commercial banks to essentially coordinate lending practices” (p. 242).

This erudite and forcefully written book’s chief endeavour is to propose a genealogy of the reason why, in the United States and, by extension, in most western neoliberal societies, proclaimed state abstention in the economic sphere combined with actual state intervention in the criminal sphere have come to be perceived as perfectly “natural” and fail to trigger much social contestation, despite the devastating social consequences that this seemingly paradoxical juxtaposition of practices has had over time.

The Imagined Dichotomy of Accounting versus Economic Income Concepts

Yoshitaka Fukui — Thu, 27 Oct 2011 12:04:07 PDT

Human beings tend to see the world through the lens of dichotomous thinking. Accounting researchers are no exception and are particularly partial to the accounting versus economic income dichotomy. Although the authors of the main paper are more nuanced than usual, their arguments are centered around it nonetheless.

In this companion paper, I would like to show that masters of neoclassical economics in the twentieth century, Irving Fisher and John Hicks in particular, had quite different ideas on income from what recent accounting “reformers” advocate. Accordingly, what economic monists and fair value advocates assert is not tenable even if we take neoclassical economics as a given framework. I am confining myself to the neoclassical equilibrium world throughout because the conventional dichotomy would become all the more questionable if it were shown to be untenable even under a neoclassical framework.

However, my adopted approach is wanting in exploring a two-way interaction between accounting and economics, to which the main article has made a noteworthy contribution.

It is time to abandon a curious obsession with the dichotomy and explore a fascinating link between accounting and economics through the now half-forgotten Austrians and other Continental Europeans, whether you embrace neoclassical economics or not.

The Case for Economic and Accounting Dualism: Towards Reconciling the Japanese Accounting System with the Global Trend of Fair Value Accounting

Noriyuki Tsunogaya et al. — Thu, 27 Oct 2011 11:49:27 PDT

Over the last thirty years in particular, a number of papers have examined various issues concerning the Japanese accounting system. However, previous research has largely ignored the importance of Japanese contextual factors. As such, the objective of this paper is to develop a holistic theoretical contextual framework for examining the Japanized process of convergence, which aims at integrating the Japanese-specific accounting system with the Anglo-American model, thereby achieving de facto (actual) convergence. This framework includes three heterogeneous genealogies, namely, Accounting Monism, Economic Monism, and Economic and Accounting Dualism, and four contextual dimensions, including legal, historical, political, and economic environments. The results show that because Japan has both globalized large-scale capital markets and well-organized related infrastructures, which include financial systems, governance structures, related laws, auditing standards, and standards-setting bodies, it would be futile to adopt International Financial Reporting Standards (IFRS) without reforming these and related facilities and resources. The findings also show that Economic and Accounting Dualism aims at reconciling heterogeneous concepts in accounting practices, such as future and past measurement attributes, asset-liability and revenue-expense based income, ex ante and ex post income calculation, and information providing role and reconciliation role of financial reporting. Excessive emphasis on Economic Monism and fair value disregards the fact that Japan is undergoing a prolonged, complex, and controversial process for aligning its entire accounting system with IFRS. Importantly, the partial suspension of fair value measurement and the swing-back towards historical cost measurement caused by the recent global financial crisis revealed that fair value is not unconditionally fair. We suggest that social, historical, political, and economic factors cannot be ignored in this rush towards global convergence of financial reporting. We further argue that accounting research can be enhanced by examining the contextual factors in which the uniqueness of accounting system is embedded.

The Shareholder Era and the Changing Nature of the Corporation. A Comment on “Managed by the Markets: How Finance Re-Shaped America” by G. Davis (OUP, 2009)

Nihel Chabrak — Wed, 03 Aug 2011 09:14:34 PDT

The book under review presents a valuable, timely and gripping analysis by Gerald F. Davis. The author purports that finance has shaped the transition from industrial to post-industrial society in the United States [U.S.] over the past three decades. He claims that the U.S. society that orbited around large corporations is increasingly shaped today by financial markets. Due to a Copernican revolution, finance became the new American religion with many adherents willing to accept it on faith. The author quotes Shakespeare who wrote: “all the world’s a stage, and all the men and women merely players.” He explains that the world today seems like a stock market, and all people are merely day traders, buying and selling various species of “capital” and hoping for the big score (p. vii). Davis’s book should be required reading for anyone, whether academic, practitioner, or policy maker, who needs to think critically about finance which, rather than a mechanistic set of transactions, is presented in the book as a social phenomenon that is invading our lives.

Review of Money and Calculation: Economic and Sociological Perspectives

Geoffrey K. Ingham — Fri, 29 Jul 2011 13:46:13 PDT

There has been a considerable revival of academic interest in questions about the fundamental nature of money and its role in modern capitalist economies during the past decade. This has been evident mainly in the social sciences outside the mainstream of academic economics, but even here there has been some attempt to resolve the paradox that formal economic theory—particularly equilibrium theory—has been unable to explain money’s existence and to assign it an essential role in its models. These questions have become increasingly important and unavoidable in the face of the enormous expansion of evermore complex calculations of risk and value in financial and money markets. This collection of essays is the result of a workshop held at Bocconi University in May 2008 to explore these issues from a diversity of perspectives—phenomenology, economics, sociology and some contributions that defy such conventional classification.

Economists and Accountants

A. Charles Littleton — Fri, 17 Jun 2011 16:43:02 PDT

Economists and accountants work within differing disciplines. And ideas suitable to one probably will seldom be directly suitable to the other without change in connotation. Nevertheless, debate about concepts of income, as one example, is a healthy development since discussion can lead to better mutual understanding between fields that are inescapably in constant contact.

The Economic Consequences of Fair Value Accounting

Mingzhe Yuan et al. — Wed, 27 Apr 2011 11:43:15 PDT

Two fatal intrinsic flaws of fair-value accounting are found and mathematically proved by this paper. One flaw concerns its non-complete existence, that is, the required fair value may not exist under certain conditions. One direct consequence of the flaw is that a huge fair value trap may be created by fair-value accounting when the fair value does not exist. Another flaw of fair-value accounting is its self-expansion, that is, the fair-value accounting acts as a share price bubble maker based upon the normal net incomes from the operations of listed firms. The bubble may then expand much larger than the original incomes.

For a single firm, it is possible to sell out its assets at their “fair value,” but it is usually impossible for all firms to sell out their assets at the same market price within a short period of time. From the standpoint of the whole market, fair-value accounting acts then like a numbers game, while its book values lose any connections with cash flows.

All these flaws of fair-value accounting can bring risks to investors in financial markets, and finally provoke financial crises.

A Comment on "The Legal Structure of the Firm"

Kurt Strasser — Mon, 31 Jan 2011 11:50:33 PST

“The Legal Structure of the Firm” presents two core points. First, it argues that economic reality of the modern business enterprise, what it calls the “firm”, is different from and much broader than the legal entity or entities into which it is organized. My comment will argue that this first point is correct, well presented here, and a real contribution to our understanding. Second, “The Legal Structure of the Firm” argues that this separation between the legal entity and the business reality is a good thing, enabling positive asset partitioning and other positive attributes of capital formation which should be preserved. My comment will argue that this point is at best incompletely supported and most likely misdirected.

Avoid Automatic Piercing: A Comment on Blumberg and Strasser

Nicholas L. Georgakopoulos — Mon, 31 Jan 2011 11:50:31 PST

This comment argues against piercing by default, a regime that the arguments of the main piece do not justify. Piercing of subsidiaries’ veil in contract law is justified but under exceptional circumstances and presumed piercing would not cover all of them. Legislatures, courts, and agencies have moved to validate rather than undermine limited liability. Moreover, automatic piercing would erode the socially desirable incentive for business creation that limited liability provides, reduce or eliminate the markets for venture capital, buyouts and corporate control, and preclude the flexible financing that limited liability makes possible.

Disagreement-Based Trading and Speculation: Implications for Financial Regulation and Economic Theory

Yuri Biondi — Mon, 31 Jan 2011 11:50:30 PST

Lynn Stout’s paper develops an insightful legal-economic analysis of speculative trading. From one hand, the paper discusses the legal-economic framework of speculation and its recent transformation, making reference to the case of derivatives markets crash (and related financial crisis) of 2007. From another hand, the paper foreshadows a thought-provoking economic model of trade (and speculation) based on disagreement, advocating further developments that take into account market manipulation and conflict of interest, whilst relaxing alleged assumptions (and beliefs) on universal fundamental value and perfect forecasting.

Administering Systemic Risk vs. Administering Justice: What Can We Do Now that We Have Agreed to Pay Differences?

Pierre-Charles M. Pradier — Mon, 31 Jan 2011 11:50:28 PST

Professor Stout's brilliant concept of disagreement-based speculation calls for further developments and studies concerning implications for stability and resilience of the financial system over time. Moreover, it also suggests rediscovering and situating the socio-economic function of finance (and financing) in the economy and society. To complement this approach, we recall the European acceptance of “paying differences” since late nineteenth century. Derivative assets were traded in Europe, but the underlying assets (stocks and bonds) on which derivatives are built were authorized beforehand. Marteau and Morand (2010) recently appealed for reintroducing an a priori authorization procedure before new derivative assets can be marketed: this view thus inherits a century-long tradition. Eventually, it seems that a priori authorization allows for administration of systemic risk while common law-inherited rejection of disagreement-based speculation is a strong foundation for both supervisory and legal (a posteriori) decisions.

Cost Basis: Accounting’s “Samson’s Tresses”

William A. Terrill — Mon, 31 Jan 2011 11:50:27 PST

A weakening of the usefulness of accounting for financial purposes of both management and external interests—and perhaps for the internal performance appraisal activities of company management—is seen by the present author if, through the intermingling of different types of economic data, it should be shorn of the objectivity, reliability, and communicability of historical cost. The viewpoint taken is not that accounting should be restricted in its services, but that it should meet them as a comprehensible and consistent methodology.

Imagined Worlds of Accounting

Shyam Sunder — Mon, 31 Jan 2011 11:50:26 PST

Science, engineering, and all other learned disciplines, as well as our socio-political-economic organizations are artifacts—results of our imagination and ingenuity. Modern corporation—a marvel of organizational engineering—would not be possible without imagination. To run organizations, in the face of the centrifugal forces of divergent self-interest and inherently dispersed information, we need accounting. Accounting, too, is an artifact that arose from human imagination, as a precursor of, or contemporaneously with, mathematics, writing and the civilization itself. We explore the case for imagination in our discipline with respect to its environment, scholarship and instruction. Specifically, accounting scholarship includes examination not only of the way things were and are, but also of how they can be. Why should we imagine alternate scenarios, instead of simply waiting for changes to occur, or being forced upon us? We must do so, because imagination is necessary to bring about innovation in practice and in institutions, so our children might live in a better world.

The Pure Logic of Accounting: A Critique of the Fair Value Revolution

Yuri Biondi — Mon, 31 Jan 2011 11:50:24 PST

When international accounting standards were renamed to become international financial reporting standards, this seemed to imply that accounting no longer needed to exist, but rather had to be reconsidered as a part of financial communication and advertising. Does traditional accountability no longer matter? Betrayed investors and globalized stakeholders would dissent. A difference of nature continues to exist between fair values disclosed by managers and certified by auditors, and the actual performance generated by the enterprise entity through time, space, and interaction. In a world shaped by complex organizations facing unfolding changes, hazard and limited knowledge, the quest for fundamental principles of accounting is not academic. Accounting principles constitute a primary way that the creation and allocation of business incomes is governed; that is, fairly managed and regulated in the public interest, having respect to “other people interests.” This article adopts a dualistic posture that opposes the accounting conceptual frameworks based on fair value (market basis) and historical cost and revenue (process basis). The fundamental premises about the underlying economics of the enterprise entity are discussed, including the representation of the business and the concepts of asset and liability. References are made to the case of accounting for intangibles, and to the distinction between equities and liabilities. The cost and revenue accounting perspective is then defended in terms of accountability, but also from the informational viewpoint: historical accounting information plays a special role as a lighthouse in the dynamic and strategic setting of the Share Exchange. In particular, two refinements of the historical cost (and revenue) accounting model are suggested. The first one regards the treatment of earned revenues from continuing operations, and the second, the recognition of shareholders’ equity interest computed on the actual funds provided in the past, coupled with the distinction between shareholders’ equity and entity equity.

Taxation as Regulation: Carbon Tax, Health Care Tax, Bank Tax and Other Regulatory Taxes

Reuven S. Avi-Yonah — Mon, 31 Jan 2011 11:50:23 PST

This paper addresses three questions: 1. Is regulation a legitimate goal for taxation? 2. Which tax is best suited for regulation? 3. Would it be better to allocate just one goal per tax among the major taxes (individual and corporate income tax and VAT)? It then analyzes the proposed bank tax and the enacted health care tax as regulatory taxes, and concludes that the first is desirable (as is a carbon tax) but the second is not.