New Zealand Journal of Social Sciences Online abstracts
“Off balance sheet law”: globalisation, accounting and democracy
Jonathan Barrett
School of Business
The Open Polytechnic of New Zealand
Private Bag 31914
Lower Hutt, New Zealand
Abstract National governments commonly facilitate neo-liberal
globalisation by permitting private bodies to apply global commercial
rules locally. The recent legislating of international financial
reporting standards (IFRSs) in New Zealand is an important example of
privatised lawmaking. IFRSs can be described as “off balance sheet law”
because they do not appear on the statute books, yet have legal
effects. This article draws on a broad conception of discursive
democracy to demonstrate the fundamentally anti-democratic nature of
privatised lawmaking that the legislating of IFRSs exemplifies. First,
an outline is given of the organisations and processes involved in the
legislation of IFRSs in New Zealand to demonstrate how privatised
lawmaking works. Second, the importance of IFRSs is considered in the
light of basic principles of discursive democracy. Finally,
alternatives to standardisation are considered.
Keywords accounting, democracy, globalisation
INTRODUCTION
Globalisation may be defined as “the intensification of
interconnections between societies, institutions, cultures, and
individuals on a worldwide basis” (Patman & Rudd 2005: 2). Certain
features of globalisation, such as the Internet and the worldwide
promotion of human rights, are generally regarded as uncontroversial
and universally beneficial. As Roth (2005: 74) observes the
globalisation of human rights “is embraced as an opportunity to play a
part in international affairs”. Controversy principally lies with the
“hotly disputed costs and benefits of trade liberalization and foreign
investment” (Roper 2005). More specifically, Touraine (2001: 14) argues
that “the main cause of the threats that hang over us is neither the
globalization of the economy nor the emergence of new industrial
countries, but capital’s freedom to move around the world”. This
neo-liberal form of globalisation requires implementation of particular
domestic policies, including financial liberalisation, privatisation
and deregulation, openness to foreign direct investment, a competitive
exchange rate, fiscal discipline and lower taxes (O’Connell 2006).
Capital mobility is also aided by common financial reporting standards
(FRSs) as these permit financial markets to “become more liquid and
competitive, resulting in less information risk and a lower cost of
capital for firms” (Brown & Tarca 2001: 275).
A theoretical tension exists between
national sovereignty and globalisation because the primacy of the state
“appears to be increasingly challenged by the fact that globalization
has helped to spawn a multi-centric world of transnational and
sub-state actors ranging from multinational corporations (MNCs) to
terrorist groups” (Patman & Rudd 2005: 3). While the potential for
the diminution of state sovereignty under the conditions of
globalisation, and hence the ability of nation states to make decisions
based on the democratic choices of their citizens, is real, there is
little agreement on the actual consequences for state sovereignty of
globalisation. Patman & Rudd (2005) identify three main schools of
thought on the effects of globalisation and national sovereignty.
First, the hyperglobalists, who appear to
assume that the notion of state sovereignty is static and the effects
of globalisation are uniform, argue that globalisation has reduced and
ultimately eliminated the space for states to govern. This perspective
is typified by Ohmae (1995: 141), who dismisses the nation state as “a
transitional form of organization for managing economic affairs” and
predicts its dissolution.
Opposing the hyperglobalist view, which
they consider politically naïve, sceptics argue that the impact of
globalisation on state sovereignty and hence governance choices is
greatly exaggerated. Rather than being the victim of globalisation, the
state is considered its architect. This view has particular resonance
in New Zealand, where successive governments have adopted an aggressive
approach to globalisation (Patman & Rudd 2005). As Wood (2005: 78)
observes, “whether New Zealand governments accept globalization as
unavoidable, there can be no argument that since the mid 1980s they
have accepted it as desirable”. Globalisation sceptics consider the
sovereign state to be the sole institution capable of establishing the
preconditions for economic activity—political stability, the rule of
law, education and training, infrastructure, and so forth. As the body
of international law necessary for globalisation has proliferated,
nation states have become increasingly important as “agencies that
create and abide by the law” (Hirst & Thompson 1996: 194).
Transformationalists argue that the state
is not automatically diminished by globalisation, nor unaffected by it;
rather, sovereignty is a dynamic concept that is undergoing a new phase
of evolution. Wood (2005: 91) observes, for example, that
“globalization has given legislatures new significance. Parliamentary
websites explain how citizens can make submissions to parliamentary
committees. National parliaments are a natural link between the grass
roots and the wider world, including international economic
institutions”. For Kostakopoulou (2002: 156), discussing state
sovereignty in terms of a dualism of loss or retention, “conceals the
floating character of sovereignty and constrains the capacity of the
state to mutate, adapt and respond”. In the transformationalist view,
countries may differ as to how they perceive problems and opportunities
produced by globalisation and it cannot be assumed that there will be a
convergence toward a common response. Crucially, “globalization of the
economy has not dissolved our capacity for political action” (Touraine
2001: 2).
Adopting elements of the sceptic and
transformationalist viewpoints, it may be argued that, in seeking to
promote globalisation, the state has voluntarily ceded elements of
sovereignty to private bodies. Neo-liberal measures necessary for
globalisation —deregulation, competition and privatisation—have led to
more rules, which have been effected, in part, through an “increased
delegation of governmental functions to the private sector” (Taggart
2005: 627). This voluntary cession of policymaking power jeopardises
democratic action. The recent legislating of international financial
reporting standards (IFRSs), which seek to harmonise FRSs around the
world, exemplifies this development that Sassen (2003: 8) identifies as
“the privatization of norm-making capacities and the enactment of these
norms in the public domain”.
International harmonisation of FRSs has not
caused capital to be mobile but nor has it followed as a natural
consequence of globalisation. The relationship between IFRSs and
capital mobility can be seen as imbricative, overlapping and worthy of
interrogation. This article seeks to illuminate the relationship
between globalisation and accounting to show how this impacts on
democracy. First, an outline is given of the organisations and
processes involved in the legislation of IFRSs in New Zealand to
demonstrate how privatised lawmaking works. Second, the importance of
FRSs in a democratic society is explained. Third, the process of
implementing IFRSs is considered in the light of basic principles of
discursive democracy. Finally, alternatives to standardisation are
considered.
LEGISLATING INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs)
IFRSs
Financial statements are an organisation’s formal records of its
financial activities over a year (Owen & Law 2005). Accounting
information is based on four standard elements—a balance sheet, a
profit and loss account (or income statement), a cash flow statement,
and accompanying disclosure notes (Crouzet & Véron 2004).
IRFSs, which represent an attempt to harmonise the standards and
interpretations of financial statements internationally, are commonly
described as “the new global financial reporting language” (Embling et
al. 2006: 1), the lingua franca of mobile capital. As Sir David
Tweedle, Chairman of the International Accounting Standards Board
(IASB) has observed in this regard: “A common financial language,
applied consistently, will enable investors to compare the financial
results of companies in different jurisdictions more easily and provide
more opportunity for investment and diversification” (cited by
Alfredson et al. 2007: 7). But, while the metaphor of language is
useful, FRSs are not a language, rather they are a normative system,
albeit one with its own technical vocabulary. By way of analogy, IFRSs
may be described as “off balance sheet law” as they create legal
obligations but do not appear on the statute books. French (1991)
identifies off balance sheet financing as the use by an accounting
entity of a source of finance that creates a liability but is not
reported in the entity’s balance sheet.
Development of IFRSs
The accounting profession first proposed uniform reporting standards
during the 1950s in response to the post-war growth in international
trade, foreign direct investment and MNCs, and the elimination of trade
barriers and the formation of international trading blocks (Camfferman
& Zeff 2007). In 1973, the accounting profession founded the
International Accounting Standards Committee (IASC) as a
privately-funded organisation. The IASC gradually defined a set of
standards and forged collaborative relations with different
participants in the financial sector, notably professional accounting
organisations and national financial market regulators. In 2001, the
International Accounting Standards Committee Foundation (IASCF) was set
up, along with its subsidiary, the IASB, to replace the IASC (Crouzet
& Véron 2004).
A crucial role in achieving harmonisation
has been played by organisations interested in the orderly
globalisation of capital—the World Bank, the International Monetary
Fund (IMF), the International Organization of Securities Commissions
(IOSCO), the Organisation of Economic Co-operation and Development
(OECD) and G7 finance ministers (Alfredson et al. 2007). New Zealand
was represented in the G4+1 group of accounting standard-setters
(Australia, Canada, the United Kingdom and the United States, plus the
IASC when allowed to attend meetings) (Camfferman & Zeff 2007).
This group sought to promote reporting harmonisation amongst its
members prior to the creation of the IASB’s standards. New Zealand has
also long been committed to aligning its accounting standards with
those of Australia and the IASC. The 1988 Memorandum of
Understanding on Business Law Harmonisation required joint examination
of “the scope for harmonisation of business laws and regulatory
practices including the removal of any impediment” pursuant to the
Australia New Zealand Closer Economic Relations Trade Agreement 1982
(DFAT 1997: 18).
Despite the movement towards harmonisation
of financial reporting around the world, the United States’ Financial
Accounting Standards Board (FASB) has not been prepared to surrender
the right to set domestic standards. The relationship between the IASB
and the FASB is currently considered to be one of “imitation and
rivalry” (Crouzet & Véron 2004: 11). Crouzet &
Véron (2004) predict that the FASB will cooperate and converge
United States standards but will not formally adopt IFRSs.
IFRSs in New Zealand
Since 1 January 2007, large companies in New Zealand are required to
prepare their financial statements in accordance with the domestic
equivalents to IFRSs. IFRSs and their New Zealand equivalents are
substantially similar, and profit-making entities that comply with the
domestic equivalents can claim compliance with IRFSs (van Zijl &
Bradbury 2005). Failure to comply with approved FRSs is a crime and
directors of recalcitrant companies may face significant fines
(Financial Reporting Act 1993: section 36).
Various organisations have been
instrumental in legislating IFRSs in New Zealand. While the actual
“legislator” was the Accounting Standards Review Board (ASRB), a crown
entity, other bodies have influenced the ASRB’s decision. These were:
the IASCF and its subsidiary; the IASB; and the Financial Standards
Review Board (FSRB), a committee of the New Zealand Institute of
Chartered Accountants (NZICA). NZICA is the brand name of the Institute
of Chartered Accountants of New Zealand (ICANZ). In broad terms, the
FSRB adopted and adapted the standards constructed by the IASB, and
recommended these to the ASRB. The ASRB used its power of approval
to make IFRSs legally binding in New Zealand.
The IASCF is a not for profit foundation
incorporated in the state of Delaware (IASCF, undated a). It is an
independent body that receives more than 60 percent of its funding from
corporate donors, notably accounting firms (IASCF, undated b). The
IASCF has 22 trustees, whose appointment is recommended by an advisory
board (IASCF 2005a), which includes representatives of the IOSCO;
regional development banks; the IMF; the European Central Bank and the
World Bank (IASCF, undated c). A former chairman of the United States
Federal Reserve is also a trustee. The IASCF is the parent organisation
of the IASB, which identifies itself as an independent,
privately-funded accounting standard-setter (IASB, undated). The
governing board of the IASB comprises experienced accountants,
financial officers of MNCs and academics from various developed
countries. The IASB constructs IFRSs.
The ASRB was established by the Financial
Reporting Act 1993 to review and, if it thinks fit, approve FRSs
submitted to it for approval. It is now an independent crown entity in
terms of the Crown Entities Act 2004 and so, by definition, is
generally independent of government policy; its board members are only
accountable to the relevant Minister to perform their board duties. The
ASRB comprises seven members: three chartered accountants; a lawyer; a
professor of accounting; a company director; and the Chairman [sic] of
the Financial Reporting Council of Australia. The Governor-General
appoints members of the ASRB on the recommendation of the Minister of
Commerce. The ASRB “has no premises or staff, and administrative
support services have been provided at discounted rates by all of the
‘Big Four’ accounting firms at one time or another” (MED 2005). The
ASRB is a “supporter” of the IASCF (IASCF 2005b) and has asserted its
strong commitment “to the international convergence and international
harmonisation of financial reporting standards” (ASRB 2004).
NZICA was originally founded in 1894 as the
Incorporated Institute of Accountants of New Zealand (Emery et al.
2002) but the current entity was established under the New Zealand
Society of Accountants Act 1958 as a body corporate with full legal
powers. Although a self-governing body, certain of NZICA’s rules and
its code of ethics are subject to parliamentary review. Baskerville
& Pont Newby (2002) record that accounting standard-setting in NZ
started in 1946 when the New Zealand Society of Accountants (NZSA)
issued “Recommendations on Accounting Principles”, although these
followed United Kingdom precedents. In 1961, a board of research
comprising academics and practitioners was established and, in 1973, a
Professional Standards Committee was established to issue Statements of
Standard Accounting Practice. In 1974, the NZSA became an associate
member of the IASC. This is significant since, while local
standards still took precedence, any differences from IASC requirements
were specifically acknowledged. In 1980, the NZSA established an
Accounting Research and Standards Board, later replaced by a
Professional Practices Board and the FSRB, which was established to
publish FRSs, and interpretations and technical guidance as necessary.
“The New Zealand standards-setting process
crucially relies on the willingness of the accountancy profession to
make the major contribution” (MED 2005), and the FRSB is the committee
of NZICA that provides the key technical information to the
ASRB. Theoretically, any organisation could submit standards to
the ASRB for approval but only NZICA does in practice. While the ASRB
may reject a recommendation and some liaison between the FRSB and the
ASRB may be necessary to achieve agreement, in practice, the FRSB, an
internal committee of the accountancy profession, is the effective
standard setting body in New Zealand. Van Zijl & Bradbury (2005: 5)
observe, “the arrangement essentially reduces to the FSRB being the
producer of FRSs but the ASRB, via the approval process, having control
over the form and content of the standards”. The ASRB has approved
virtually all standards applicable to both the public and private
sectors presented to it by the FSRB (Baskerville & Pont Newby
2002). In fact, although the FSRB recommends standards, and thereby
effectively sets them, it has adopted the standards of the IASB, albeit
with modifications necessary for local circumstances. With three
members of the ASRB past or current members of the FSRB, and the ASRB a
supporter of the IASCF, it was inevitable that IFRSs would be adopted mutatis
mutandis in New Zealand. The content of approved FRSs was not
published in the New Zealand Gazette. The author of the
legislative text is NZICA, not the New Zealand government and so, while
this may be of symbolic relevance only, the Crown does not appear to
hold the copyright in these laws it has made (see ICANZ 2005).
Sector neutral reporting
Democratically controlled local authorities are also affected by the
adoption of IFRSs, as they must comply with generally accepted
accounting practice (GAAP). GAAP is similar to approved FRSs but is
modified for application to public benefit entities (Bradbury & van
Zijl 2005). The Local Government Act 2002 imposes additional accounting
requirements on local authorities. “From the outset, accounting and
financial management have formed an integral part of the neo-liberal
reforms of the public sector” (Pallot 2001: 645). These new public
management reforms were underpinned by choice theory, agency theory,
transaction-cost and managerialism (Boston et al. 1996). Public choice,
agency and transaction cost theories have a common focus on
self-interest in decision-making, which has been construed to require
policies on institutional structure as well as new governance
arrangements more like those of the private sector to establish
performance outcomes (Hooper et al. 2005). “The commercialisation
strategy required the re-conceptualisation of all government activities
as the production of outputs, the adoption of accrual [rather than
cash] accounting, the introduction of costs intended to replicate
private-sector costs and thus create a competitive environment, and
full costing of all outputs” (Newberry 2003: 30). During the 1980s, a
separate set of reporting standards was drawn up for the public sector
but, in 1990, the decision was made to withdraw the special public
sector developments, with the Financial Reporting Act 1993 mandating
sector neutral accounting (Bradbury & van Zijl 2005).
IFRSs are designed to be entity neutral
inasmuch as they are expected to be used by all profit-oriented
entities (Embling et al. 2006). But, while non-profit and government
entities “may find them appropriate”, the IASB did not design IFRSs to
be sector-neutral (Alfredson et al. 2007). Indeed, jurisdictions are
generally limiting the application of IFRSs to listed companies;
Australia and New Zealand alone have opted to converge national GAAP
with IFRSs (MED 2005). In response to concerns, such as those of the
Controller and Auditor-General, that standards could be issued that
contained “inappropriate requirements for public sector entities”
(Brady 2004: 33), New Zealand public organisations, such as local
authorities, must provide more information than profit-oriented
enterprises but must nevertheless first comply with requirements
constructed for profit-oriented enterprises (Simpkins 2006). The
managerialist rationality, which informs sector neutrality, “assumes an
unproblematic stance to the particular nature and circumstances” of
public organisations, such as museums and their holdings (Hooper et al.
2005: 412). Newberry (2003: 32) describes this as “the sham promoted in
both New Zealand and Australia that the accounting profession’s
conceptual framework and accounting standards are sector-neutral”.
International Public Sector Accounting
Standards (IPSASs) have been specifically constructed for the public
sector, but the International Federation of Accountants (IFAC), which
is the body responsible for constructing IPSASs, intends to base IPSASs
on IFRSs (Walker 1997), with an eye to a future merger (Simpkins 2000).
Commenting on the principle of sector neutrality, the chair of IFAC has
observed, “I can’t see why the accounts of government, which is no more
than a huge business, should differ from the accounts of companies”
(NZSA 1993: 37).
IMPORTANCE OF FRSs
The principal aim of this article is to illuminate the processes
that legislating IFRSs exemplifies; nevertheless FRSs are themselves
socially important. New or amended accounting standards have “the
potential for wealth transfers from some people to others” (Brown &
Tarca 2001: 271). FRSs “imply choices that influence a broad spectrum
of behaviour (for example, the granting of stock options), sometimes
with macroeconomic consequences” (Crouzet & Véron 2004: 14).
While FRSs have general distributive and economic effects on society,
three specific aspects of the accounting profession’s capacity to
construct FRSs are of acute relevance currently and will be considered
in more detail below.
First, FRSs are the normative outputs of a
powerful profession and it is self-evident that society should be alert
to the consequences of professional power. Second, FRSs impact on
broader society. Whatever their underpinning principles or specific
content, they are privately constructed rules with public consequences:
they are not akin to the by-laws of a private club or the rules that
govern the behaviour of members of a profession. Third, IFRSs are
implicated with the particular neo-liberal form of globalisation that
social democrats, including Jesson (1999), Kelsey (1999), and Gould
(2006), claim has had a deleterious impact on society. As noted, in New
Zealand, the doctrines of neo-liberalism are normalised, in particular,
by the principle of sector-neutral financial reporting.
Power of the accountancy profession
The accountancy profession as a whole wields significant power in
society and has not always used this power for the general good. For
example, in the United States, the profession succeeded in the last two
decades of the twentieth century to ward off regulation by sponsoring
and lobbying lawmakers (Stiglitz 2006). Mirroring “the corporate merger
wave of the 1980s” (Zeff 2003: 271), large accountancy firms began to
merge and develop into MNCs. Zeff (2003: 280) characterises their
transformation from “professional firms that happened to be businesses
into businesses that happened to render professional services” so that
an “audit mentality at the top management of the firms was replaced by
a consulting mentality, including a headlong drive for growth,
profitability and global reach—business, not professional values”. The
most dramatic consequence of this transformation was the demise of
Arthur Andersen as a result of its involvement in the Enron scandal,
leaving just a “big four” of accounting firms. While there was no
suggestion of impropriety, and the IASB can be considered more
independent from corporate interference than the FASB, its United
States counterpart (Crouzet &Véron 2004: 15), the socially
undesirable closeness of accountancy to business was indicated by the
IASB’s soliciting large donations from Enron before its public disgrace
(Rosenfeld 2002). Accountancy is not a monolithic profession but, as
the only globalised profession, it is dominated by four multi-national
firms who share the interests of other transnational businesses. Such
reach and concentration of power has social implications. As Coffee
(2003: 41) observes: “in a market this concentrated, implicit collusion
develops easily” and “it is less likely that one competitor will seek
to stand out and distinguish itself through its greater reputation for
integrity”.
Social effects
Various groups and organisations, such as professions, universities
and companies, are able to make internally binding rules that may have
public consequences, but the accounting profession is distinguished by
its capacity for making rules that bind organisations throughout
society, including democratically controlled bodies, such as local
authorities. Financial reporting standards provide the meta-information
for the ways in which information about organisations and their
histories must be produced. In turn, because an “organization is not a
concrete thing but a set of interrelationships, and if it is to exist,
then it must be somehow bounded or defined”, that information
influences how organisations are imagined, structured and managed
(Hines 1988: 258). Furthermore, in the dematerialised world of finance,
by deciding what must be reported, accounting plays an important role
in determining what “exists”. As Hines (1988: 258) observes,
“accounting practices, as well as communicating reality, also play a
part in creating, sustaining and changing social reality”. The
construction of FRSs is, then, a cultural activity that has broad
social effects (Davey 2001). The more that organisations produce their
narratives in standardised ways, the more that those organisations are
likely to become homogenised, superficially at least. Of course, the
principal purpose of IFRSs is to homogenise, so that investors can make
rational investment decisions, whether the organisation under scrutiny
is in, say, London or Auckland. But efforts to homogenise for the
benefit of wealth-maximising investors is highly problematic for other
institutions, such as public benefit entities that have no investors
or, say, a Māori incorporation that is informed by a different Weltanshauung
from that which informs a joint stock company.
Neo-liberal influence
Accounting is not an abstract exercise in measurement and recording,
it is also a communication discipline (Pallot 2001). Furthermore, the
accounting profession determines with whom and how its members will
communicate. Akin to the image of the economically rational,
wealth-maximising shareholder of dominant company theory, accounting
constructs the user of financial reports as a rational economic
decision-maker in the neo-liberal mould. Once the user has been
imagined, information must be presented accordingly. Because of the
principle of sector neutrality, this imagined user also informs
reporting by public benefit entities.
Young (2006: 593–594) observes that:
“Accounting standards are not a mirror for some users’ reality (even if
this were possible) but instead they contribute to constructing a
particular viewpoint about what financial statement users should be
like”. But this narrowly imagined user—the wealth-maximising
investor—“was not a ‘natural’ and inevitable progression in the
development of accounting practice and thought” (Young 2006: 597). Thus
French accounting standards “have long reflected public concerns … at
least as much as the interests of private investors” (Crouzet &
Véron 2004: 9).
Linked to the issue of the imagined user is
the problem of comprehensibility of financial reports. Embling et al.
(2006: 25) observe that the information produced about commercial
enterprises in compliance with IFRSs “tends to be of a technical nature
and can be difficult to understand” and conclude that users “might find
it difficult to understand the disclosures to the account which can
become too complex for shareholders”. The constituencies for financial
information relating to local authorities are far broader and
heterogeneous than those of private enterprises (Barrett & Scott in
press). Yet, if IFRSs-compliant information is not easily understood by
shareholders who, in general, may be presumed to be financially
literate, it must be a significantly greater obstacle for ordinary
citizens to understand the financial narratives of local authorities,
which must include information additional to the IFRSs private sector
requirements. Too much complex information is likely to obfuscate,
making comprehension and rational decision-making more difficult for
local politicians and ratepayers. As Pallot (2001: 658) argues, public
sector accounting systems must “contain information which politicians,
service recipients, and other actors can and want to talk about and
use” if they are to strengthen processes of democratic governance.
DEMOCRACY
Globalisation and democracy
It has been argued here that the construction of FRSs is an
important cultural activity that has broad social effects. Furthermore,
the principle of sector neutrality has led to democratically controlled
local authorities becoming subject to IFRSs. It is now considered why
this is undesirable for democracy.
Coterminous with globalisation, a crisis of
confidence in democracy has developed in the mature Western democracies
(OECD 2001). It would be overly simplistic to identify globalisation as
the cause of this disillusionment nevertheless, state-citizen relations
are necessarily strained when government discounts consensus and
privatises lawmaking. In New Zealand, the “unbridled power” (Palmer
1987) wielded by the dominant parliamentary party as a consequence of
the combination of a unitary state, a unicameral Parliament and a first
past the post electoral system, permitted successive governments to
embrace neo-liberalism and globalisation unhindered but “that embrace
did not appeal to many of their citizens” (Wood 2005: 78). Indeed, Wood
(2005) argues that governments’ responses to globalisation
significantly affected the New Zealand public’s support for measures to
improve participation in democracy through the introduction of a mixed
member proportional representation electoral system (MMP) (Electoral
Act 1993) and non-binding referenda (Citizens Initiated Referenda Act
1993). By promoting citizen participation, these reforms brought the
New Zealand system closer to a discursive form of democracy.
Discursive democracy
Discursive democracy “is ultimately about involving the
stake-holders, i.e., those concerned by a particular social rule, in a
deliberative process of mutual persuasion about the normative validity
of a particular rule” (Risse 2004: 310). The basic legitimacy of a
discursive political community is founded on its members’ general
rights to equal liberties, along with membership rights and guaranteed
legal remedies (Habermas 1986). Norms governing members of a particular
political community must be justified by a discourse that includes all
those affected so that a legitimate political community fundamentally
constitutes itself “on the basis of a discursively achieved argument”
(Habermas 1996: 125). Ideally, empathetic, competent speakers will
resolve social issues through rational argumentation, which informs the
construction of community norms (Habermas 1984; 1987; 1990).
Adopting an untheorised version of
discursive democracy, the OECD (2001) recommends three principal ways
for governments to engage in discourse with their citizens on
policymaking. At a basic level, government disseminates information on
policymaking on its own initiative or in response to citizens’
requests. Consultation, whereby a government asks for and receives
citizens’ feedback on policymaking, is a more advanced level of citizen
engagement. The final level is achieved when citizens actively
participate in decision-making and policymaking. This represents “an
advanced two-way relation between government and citizens based on
the principle of partnership” (OECD 2001: 18). Countering citizen
scepticism toward democracy, these measures are expected to lead to
better public policy, greater trust in government and stronger
democracy. Even if laws are not legitimated by an absolute norm, at
least the public might “own” the laws by which they are governed
(Burton 2006: 171). Participation rights are crucial to a healthy
democracy. Even if individual citizens do not actually participate in
democratic processes, they still value the right to be able to
participate, and the consequent feelings of control, self-determination
and influence on the political sphere (Frey & Stutzer 2001).
New Zealand is formally a discursive
democracy. Citizens have the right to elect representatives in the
House of Representatives, local authorities and various other bodies,
such as district health boards. Notwithstanding the introduction of
MMP, New Zealand’s Westminster-style political system is based on
representation, not agency or trusteeship (Dicey 1915). But there is no
contradiction between political representation and discursive
democracy. As the OECD (2001: 19) notes, a government’s “efforts to
inform, consult and engage citizens in policy-making cannot replace
representative democracy and is not intend to do so”. Both the courts
and Parliament uphold the rule of law. The lawmaking process generally
involves some public deliberation. While government has no legal duty
to consult the major interests that will or may be affected by primary
legislation, if it does engage in consultation, the Cabinet Office
Manual encourages genuine consultation. There is a far
greater expectation of consultation with regard to delegated
legislation; nevertheless, the legal duty to consult is dependent on
the relevant enabling legislation (Joseph 2001). At a local level,
residents have significant opportunities to shape their communities
through the consultation mechanisms of the Local Government Act 2002.
However, discursive democracy requires the state to uphold citizens’
rights through parliamentary or judicial oversight and for citizen
participation to be genuine in both form and substance.
Formal oversight
A determination by the ASRB of a financial standard is deemed to be
a regulation (a form of subordinate legislation made by a delegate of
Parliament). Consequently, the House of Representatives has the power,
under the Regulations (Disallowance) Act 1989, to repeal such a
determination by way of a resolution. However, no regulation has been
disallowed under this Act since it came into force (Joseph 2001). Since
a regulation constitutes an enactment, it is exempt from judicial
review under the Bill of Rights (Rishworth et al. 2003), even if any
rights were relevant. FRSs may, however, be reviewed by the courts on
the general grounds of ultra vires (beyond the powers of the
delegate) and, specifically, for repugnancy, uncertainty or
unreasonableness (Joseph 2001). However, it is implausible to suggest
this might happen. Rules of this nature are “not viewed presently
within the framework of delegated legislation or even administrative
law in the traditional sense” (Taggart 2005: 627). Neither the
legislature nor judiciary seems to recognise them as laws. Like off
balance sheet financing, they have real effects but do not appear to
exist.
Due process
Instead of parliamentary or judicial oversight of the privatised
accounting standards setting, legitimisation of FRSs is thought to be
derived from “due process”. According to van Zijl & Bradbury (2005:
5), delegated legislation of this nature is satisfactory only if the
relevant “body engages in appropriate (procedural) due process”. The
principal method of ensuring due process is the publication of exposure
drafts of proposed FRSs (Rahman 1991), which permits “interested
parties to indicate their acceptance of the proposals” (Baskerville
& Pont Newby 2002: 5). (Although section 26 of the Financial
Reporting Act requires the ASRB to engage in consultation, the validity
of approval of a standard is not affected by non-compliance.) Before
the adoption of IFRSs, each draft financial reporting standard produced
by NZICA was published on the institute’s website along with a
discussion paper for comment (Bradbury & van Zijl 2005). Following
a review of the comments the exposure draft elicited, the proposed
standards were submitted to the ASRB for approval. At this stage, time
was allowed for public comment, with the drafts being published on the
Ministry of Economic Development’s website.
Despite its ostensible reasonableness, due
process is flawed in practice. Pressure groups are able to exert a
major impact on standard-setting: “the regulator responds positively to
the group with the most political clout” (Brown & Tarca 2001: 269).
In particular, the large accounting firms tend to have a
disproportionate influence on the process. Thus, Rahman et al. (1994:
114), applying public choice theory, conclude that “from both the
demand and supply perspectives, the Big–8 accounting firms [as there
were then] followed by preparers seem to have greater participation
capacity in the standard-setting process; and the suppliers, the
standard setters, harmonize their rules with the changing demand
patterns”. Various investigations have shown instances where due
process has not been sufficient (for example, Ryan et al. 1999;
Baskerville & Pont Newby 2002; Miller 2002). Crucially, van Zijl
& Bradbury (2005: 18) conclude that “the actual method of
converting international standards to New Zealand standards did not go
through sufficient due process”. It is self-evident that the legitimacy
of due process is compromised by non-participation (Tandy & Wilburn
1992). Given the controversial nature of sector neutrality, it is
pertinent to note in this regard that Baskerville & Pont Newby
(2002: 21) found that public sector constituents “have shown both a
lack of participation in due process, and possibly a lack of
sophistication in debating the issues within their sector to a point
where they can lobby effectively on significant proposals”.
In New Zealand, “dominance by the FSRB has
resulted in a heightened significance for the efficacy of due process”
(Baskerville & Pont Newby 2002: 4) and yet due process is evidently
ineffective. Furthermore, van Zijl & Bradbury (2005: 12) observe
that “adoption of IFRSs effectively removes from the ASRB the
discretion to reject or substantively amend any particular IFRSs for
application in New Zealand irrespective of its own assessment of the
net benefits of a standard or a constituent’s objections to any part of
a standard”. In sum, there is no practical state oversight of the
private legislation process; the due process adopted by the
standard-setter may be ineffective; and the standard-setter itself has
voluntarily restricted its power to regulate.
Participation
The narrow focus of due process exemplifies a reliance on and
privileging of expertise that excuses it from democratic participation.
Certain important public institutions, notably the courts and
universities, are not subject to democratic oversight, but
institutional autonomy of this nature enhances democracy by promoting
accountability, the rule of law and freedom of thought. The
independence of these institutions is a constitutional choice that is
likely to be affirmed in the long-term by ideologically diverse
governments. Even institutional autonomy motivated by ideology may
benefit democracy. For example, the Reserve Bank was put beyond
democratic control to thwart the prospect of a reversion to Keynesian
economic policy (McKinnon 2003). Nevertheless, an independent central
bank, by pursuing economic stability without fear of political
intervention, may promote democracy. Indeed, the strongly social
democratic constitution of South Africa also guarantees the
independence of that country’s central bank (Constitution of the
Republic of South Africa Act 1996: section 224(2)). While these
institutions are repositories of expert knowledge, their independence
is not founded on a principle that experts should make decisions for
non-experts in the way of Platonic guardians; rather they are not
subject to democratic oversight because their independence supports
democracy.
It is pertinent to consider whether a
community of independent experts should set accounting standards. There
is no “natural” answer to this query in the way that an independent
judiciary is “natural”. The United Kingdom’s Accounting Standards Board
(ASB) is a privately-funded body and subsidiary of the Financial
Reporting Council—a private organisation of professional accountants
and representatives of the business community and government. The ASB
is recognised as the official standard-setter by the United Kingdom’s
Department of Trade and Industry and operates independently, being able
to issue standards on it own authority without securing government
approval of individual standards. Conversely, in France, accounting
rules have traditionally been viewed as a subject of public interest
and, therefore, the preserve of the state (Crouzet & Véron
2004).
Laïdi (2007: 12) argues that, under
the conditions of globalisation, “the state now needs to have recourse
to non-state expertise to legitimate its own action … states are,
almost, by virtue of their construction as formally independent but
substantially interdependent states, required to base themselves on the
communities of experts”. But ceding decision-making power to
communities of experts is problematic because it implies scepticism
about the ability of ordinary citizens to make the decisions that bind
them and exacerbates and formalises the practical inequality that
expertise engenders. In a technologically complex society, specialists
necessarily play a significant role in the policymaking process, but
such reliance “on the skills of others has the effect of reducing the
common area of shared experience and knowledge, and increases social
distance” (Johnson 1979: 219).
Certainly few outside professional and
academic accounting are able to debate the technicalities of
constructing FRSs but, generally, if they are provided with appropriate
information by experts, lay people should be able to decide, for
example, whether public benefit entities should be treated in the same
way for financial reporting purposes as profit making organisations.
Van Zijl & Bradbury (2005: 5) argue that “standard setting is
highly technical in nature and therefore cannot, in any realistic
sense, be conducted in the conventional arena of any government”. But,
given the important social consequences of FRSs, “production of
accounting standards is too momentous an enterprise to be entrusted to
accounting specialists alone” (Crouzet & Véron 2004: 16). An
appropriate democratic response to expertise is not a fatalistic
abdication to technocracy rather it is to require those specialists to
better communicate their knowledge so that non-specialists can
participate in relevant discourses.
ALTERNATIVES
The contemporary context appears to be one “where the dominant
discourse proclaims that there is no alternative to the current
neo-liberal form of globalization and that we should accept its
dictats” (Mouffe 2005: 70). Government in New Zealand considers
globalisation to be inherently good (see, for example, Goff 2007), and
may have economic grounds for that view (Richardson 2005). In Gould’s
(2006: 38) view, people have been persuaded that “neo-liberal economics
is not only inevitable but is also natural, desirable, generally
beneficial and to be admired”. Yet any such acceptance is not the
result of open, rational discourse. Consequently, when the effects of
globalisation become understood by those affected and brought into the
public forum, results can be dramatic. For example, Kelsey (1999: 353)
recounts how negotiations for the proposed OECD Multilateral Agreement
on Investment “met concerted opposition from such diverse quarters as
Maori, Grey Power, radio talkback callers, the Alliance, city councils
and Local Government New Zealand”. In consequence, “government was
forced to release an unprecedented amount of information and eventually
to endorse a moratorium before negotiations on the agreement broke down
completely”. But this is a dubious victory for democracy. Formal
channels failed. Indeed, the victory is attributable in large measure
to a reactionary, emotional outpouring. This implies defeat for a
rationalist model of democracy, with its “need to mobilize passion
through democratic channels” and an “emphasis on dialogue and rational
deliberation” (Mouffe 2005: 70). When the formal processes of democracy
have failed, future resistance becomes dependant on harnessing
haphazard emotional reactions to specific events or developments.
Conversely, government loses the opportunity to persuade citizens of
the benefits of global economic integration and how it can be made to
work better for more people than it has (Wolf 2004). When emotional
arguments fail, resentment results, not an acceptance of outcomes. In
contrast, when unpopular outcomes are derived through rational
argumentation, they should be accepted by participants because they
have had the opportunity to exercise reason in a rational process (Frey
& Stutzer 2001). Ultimately, rational democracy becomes vulnerable
in a context where the dominant discourse allows for no alternative to
the current form of globalisation (Mouffe 2005: 70), and government
assumes a role of facilitating the ostensibly inevitable.
There is no compelling reason why IFRSs
should be mandatory in New Zealand. Companies should be free whether or
not to adopt them. Indeed, there is “a trend for multinational
corporations from many jurisdictions to voluntarily adopt IRFS”
(Dunstan 2002). To protect investors, a private body, such as the New
Zealand Stock Exchange, could, in response to market demand, make
compliance with IFRSs a condition of listing. FRSs have only had legal
backing in New Zealand since 1993 (Bradbury & van Zijl 2005) and so
there is no long tradition that makes criminalisation of non-compliance
seem natural. Government has, in effect, outsourced its power to
criminalise in order to promote a particular form of globalisation.
Yet, if IFRSs meet the needs of globalised capital, it should not be
necessary to make them binding law. The need for legal compulsion to
comply implies a lack of confidence in the ability of market mechanisms
to deliver desired outcomes for investors. Indeed, as Brown & Tarca
(2001: 269) note: “The involvement of government in setting accounting
standards results from a form of market failure”. Certainly, IFRSs
should not be mandatory for the public sector, particularly democratic
controlled institutions.
“The United States and the United
Kingdom dominate in producing “new legalities—i.e. items derived from
Anglo-American commercial law and accounting standards—and are hence
imposing these on other states through the interdependencies at the
heart of the current phase of globalization” (Sassen 2003: 14).
Non-Anglophone countries with civilian legal systems and distinctive
cultures, such as France, face barriers to participation. Conversely,
they are better placed to resist globalisation in its current form.
(Although this capacity is less likely to be exercised by the Sarkozy
administration.) In contrast, Australia and New Zealand appear to have
followed the Anglo-American hegemony as if its objectives were axioms.
But the processes and forms of contemporary globalisation “are neither
inevitable nor by any means fully secure” (Held & McGrew 2002:
130). Plausible alternatives to the neo-liberal version of
globalisation do exist. For example, Held & McGrew (2002: 131)
propose a “cosmopolitan social democracy” that “seeks to nurture some
of the most important values of social democracy—the rule of law,
political equality, democratic politics, social justice, social
solidarity, and economic effectiveness—while applying them to the new
global constellation of economics and politics”. Furthermore, a
plausible degree of local decision-making can be retained or even
reclaimed.
A notable feature of New Zealand government
post–1999 has been its attempt to reverse neo-liberal doctrines in
certain areas (for example, health, local government and tertiary
education) combined with its apparent acceptance of others, such as
sector neutrality in financial reporting. Indeed, the Labour-led
government has actively supported the adoption of IFRSs and, more
significantly, their application to public benefit entities (see, for
example, Dalziel 2007). This paradox can, in part, be explained by the
persistency of the “tripod of Treasury’s political goals” that McKinnon
(2003: 427) identifies as the Reserve Bank of New Zealand Act 1989
(monetary policy put beyond government control); the Fiscal
Responsibility Act 1994 (mandating of balanced budgeting); and
microeconomic reform (promotion of free trade). This tripod was crucial
for the actualisation of the neo-liberal project in New Zealand and
continues to inform governance.
The devolution of some national
decision-making could represent an important enhancement of democracy
and local decision-making. Thus the Local Government Act 2002
establishes the purpose of local government as enabling “democratic
local decision-making and action by, and on behalf of, communities” and
promoting “the social, economic, environmental, and cultural well-being
of communities, in the present and for the future”. Similarly, the New
Zealand Public Health and Disability Act 2000 aims to “remove the
competitive model and address the distancing of communities from
decision-making”. But these social democratic developments are fettered
by the neo-liberal legacy. Local bodies remain subject to the financial
reporting and controls introduced by the 1989 reforms. Informed by the
doctrines of new public management, these reforms were “reinforced
through radical changes in the accounting and reporting regime which …
had been on a cash accounting basis with an accountability for funds
rather than resource management” (Pallot 2001: 648). These “distorted
accounting rules, which project a superficial appearance of
private-sector practices have been embedded in New Zealand through the
accountancy profession’s similarly distorted, but purported
“sector-neutral”, conceptual framework and accounting standard-setting
activities” (Newberry 2003: 33). Neo-liberal reforms of the public
sector stressed accountability but only in a partial way. And so, while
“transparency in policy making and accountability for the use of
taxpayers funds are fundamental principles of democratic government”
(Pallot 2001: 657), it also seems “logical to require democratic
decision-making for accounting standard-setting, in the same manner as
for other major economic policy issues” (Crouzet & Véron
2004: 14). Barton (2003) argues that the reality of public-sector
operations should be recognised:
… by developing management reforms and accounting information
systems which are tailored to the specific needs of the public sector.
This mainly requires the removal of the ideologically based reforms and
the fashioning of accounting standards to satisfy the requirements of
providing relevant, reliable and understandable information which
facilitates efficient and effective management of operations, and
accountability for them to parliament and the public. Barton (2003: 40)
Developments that manage to run against the
flow of neo-liberal globalisation can be seen as “ways of decolonizing
the mind” (Ngugi wa Thiongo cited by Said 1994: 305) and represent an
expression of identity appropriate for New Zealand’s public
institutions. The formal recognition of a distinct Māori Weltanshauung
represents a bulwark against neo-liberal colonisation, principally but
not exclusively, for indigenous peoples. Smith (1999: 109) identifies
“key cultural concepts such as tino rangitiratangi (sovereignty),
whanau, hapu, iwi (extended family, sub-tribal groupings and
tribe) te reo (Maori language) and tikanga Maori (Maori
cultural customs)” as key elements of the cultural revitalisation that,
along with political protest, has led to a formal recognition of this
distinct Māori Weltanshauung. This, in turn, has led to laws
being enacted and institutions founded that are substantially different
from an Anglo-American template (see, for example, Te Ture Whenua Maori
Act 1993/Maori Land Act 1993.) Another significant development is the
establishment of a domestic supreme court to recognise New Zealand as
“an independent nation with its own history and traditions” so that
important legal issues can “be resolved with an understanding of New
Zealand conditions, history, and traditions” (Supreme Court Act 2003:
section 3). If the law “is primarily a great reservoir of emotionally
important social symbols” (Thurman Arnold cited by Schiff 1976: 298),
the patriation of the highest appellate court to New Zealand represents
an especially potent symbol for decision-making within the nation.
CONCLUSION
Globalisation is not an inherent threat to national sovereignty and
democratic decision-making. Cooperative technology, notably the
Internet, permits parliaments to become portals of democracy and the
globalisation of human rights helps to make human equality, the basis
of democracy, a universal value. However, the neo-liberal version of
globalisation that privileges the interests of capital is a significant
threat to democratic decision-making and measures that promote or are
implicated with capital mobility deserve especial public interrogation.
Analysis shows that the adoption of IRFSs as law in New Zealand
represents some of the most disturbing aspects of neo-liberal
globalisation. The norms of a private international body have been made
legally binding on domestic organisations, including democratically
controlled bodies, without real oversight by government, due process or
public participation. In this way, globalisation and accounting have a
deleterious impact on democracy. And yet there is the space for
local-decision making. But this needs public bodies to be disassociated
from the private sector and it also requires experts to accept that
their proper role in democratic decision-making is to facilitate
citizen participation, not usurp it.
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