Volume 1, Issue 2

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.

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.

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 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.

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.

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.

“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.