Handbook of Accounting, Accountability and Governance (Research Handbooks on Accounting series) 1800886535, 9781800886537

Table of contents :
Front Matter
Copyright
Contents
Figures
Tables
Contributors
Introduction to the Handbook of Accounting, Accountability and Governance
PART I Past and present perspectives on accounting, accountability and governance
1. The interplay of accounting, accountability and governance
2. Historical overview of governance and its relationship with accounting and accountability
3. Codes of governance
4. Boards of directors and governing bodies
PART II Mechanisms for accounting, accountability and governance
5. Accounting, accountability and governance: the roles of financial reporting
6. Mechanisms of accountability and governance: management accounting and control
7. Mechanisms of accountability and governance: audit, assurance, and internal control
8. Paradigm shift or shifting mirage? The rise of social and environmental accountability
PART III Accounting, accountability and governance in diverse contexts and sectors
9. Accounting, accountability and governance in junior stock markets
10. Accounting, accountability and governance in emerging economies: a development perspective
11. Higher education governance and accountability in developing economies: the case of Sierra Leone
12. Public-sector accountability: a journey from performance measurement to performance governance
13. Accounting, accountability and governance in non-governmental organizations
14. Accounting, accountability and governance in hybrid organizations
PART IV New perspectives on accounting, accountability and governance
15. Islamic accounting, accountability and governance
16. Counter accounts, accountability and governance
17. Spotlight Accounting in the context of accounting, accountability and governance
18. Accounting, governing, and the historical construction of the “governing subject”
PART V What lies ahead for accounting, accountability and governance?
19. Opportunities for deficient accountability through IFRS group accounting requirements
20. COVID-19 and accounting, accountability and governance
21. Prospects for accounting, accountability and governance
Index

Citation preview

HANDBOOK OF ACCOUNTING, ACCOUNTABILITY AND GOVERNANCE

RESEARCH HANDBOOKS ON ACCOUNTING This new and exciting series brings together authoritative and thought-provoking contributions on the most pressing topics and issues in accounting. Research Handbooks in the series feature specially commissioned chapters from eminent academics, and are each overseen by an editor internationally recognized as a leading name within the field. Chapters within the Research Handbooks feature comprehensive and cutting-edge research, and are written with a global readership in mind. Equally useful as reference tools or high-level introductions to specific topics, issues, methods and debates, these Research Handbooks will be an essential resource for academic researchers and postgraduate students. For a full list of Edward Elgar published titles, including the titles in this series, visit our website at www​.e​-elgar​.com​.

Handbook of Accounting, Accountability and Governance Edited by

Garry D. Carnegie Emeritus Professor, RMIT University, Melbourne, Australia

Christopher J. Napier Professor of Accounting, School of Business and Management, Royal Holloway, University of London, UK

RESEARCH HANDBOOKS ON ACCOUNTING

Cheltenham, UK • Northampton, MA, USA

© Garry D. Carnegie and Christopher J. Napier 2023

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2023941684 This book is available electronically in the Business subject collection http://dx.doi.org/10.4337/9781800886544

EE VS P

ISBN 978 1 80088 653 7 (cased) ISBN 978 1 80088 654 4 (eBook)

Contents

List of figuresviii List of tablesix List of contributorsx Introduction to the Handbook of Accounting, Accountability and Governance1 Garry D. Carnegie and Christopher J. Napier PART I

PAST AND PRESENT PERSPECTIVES ON ACCOUNTING, ACCOUNTABILITY AND GOVERNANCE

1

The interplay of accounting, accountability and governance Garry D. Carnegie and Christopher J. Napier

2

Historical overview of governance and its relationship with accounting and accountability Alessandro Lai, Giulia Leoni and Riccardo Stacchezzini

3

Codes of governance Francesca Cuomo and Alessandro Zattoni

49

4

Boards of directors and governing bodies Niamh M. Brennan and Collette E. Kirwan

71

PART II

14

25

MECHANISMS FOR ACCOUNTING, ACCOUNTABILITY AND GOVERNANCE

5

Accounting, accountability and governance: the roles of financial reporting Christoph Pelger

6

Mechanisms of accountability and governance: management accounting and control Maria Major, Ana Conceição and Stewart Clegg

119

7

Mechanisms of accountability and governance: audit, assurance, and internal control Nieves Carrera, Marco Trombetta, and Amanda Wilford

144

8

Paradigm shift or shifting mirage? The rise of social and environmental accountability168 Jill Atkins and Karen McBride

v

99

vi  Handbook of accounting, accountability and governance PART III ACCOUNTING, ACCOUNTABILITY AND GOVERNANCE IN DIVERSE CONTEXTS AND SECTORS 9

Accounting, accountability and governance in junior stock markets Neeta Shah

196

10

Accounting, accountability and governance in emerging economies: a development perspective Thankom Arun, Junaid Ashraf, Kelum Jayasinghe and Teerooven Soobaroyen

215

11

Higher education governance and accountability in developing economies: the case of Sierra Leone Lee Parker and Gabriel Kaifala

237

12

Public-sector accountability: a journey from performance measurement to performance governance Mariannunziata Liguori and Martin Kelly

258

13

Accounting, accountability and governance in non-governmental organizations 281 Andrew Goddard

14

Accounting, accountability and governance in hybrid organizations Enrico Bracci and Nadra Pencle

306

PART IV NEW PERSPECTIVES ON ACCOUNTING, ACCOUNTABILITY AND GOVERNANCE 15

Islamic accounting, accountability and governance Abdullah Almulhim, Mohammed Alomair and Christopher J. Napier

332

16

Counter accounts, accountability and governance Darlene Himick and Eija Vinnari

349

17

Spotlight Accounting in the context of accounting, accountability and governance369 Leopold Bayerlein and Stephanie Perkiss

18

Accounting, governing, and the historical construction of the “governing subject” Ann-Christine Frandsen and Keith Hoskin

PART V

398

WHAT LIES AHEAD FOR ACCOUNTING, ACCOUNTABILITY AND GOVERNANCE?

19

Opportunities for deficient accountability through IFRS group accounting requirements Matthew Egan, Kaiying Ji and Ronita Ram

20

COVID-19 and accounting, accountability and governance Meredith Tharapos, Brendan O’Connell, Nicola Beatson and Paul de Lange

424 448

Contents  vii 21

Prospects for accounting, accountability and governance Christopher J. Napier and Garry D. Carnegie

473

Index489

Figures

4.1

Direction, management and ownership of organizations – plcs (default model)

90

4.2

Direction, management and ownership of organizations – wholly owned subsidiaries, joint ventures, family businesses and state-owned entities

90

7.1

Conceptual hierarchy of audit and assurance services

147

7.2

Taxonomy for understanding assurance

158

8.1

The drivers and outcomes of corporate social and environmental accountability: a paradigm shift over time?

186

9.1

AIM business company model and governance

204

14.1

Accounting and accountability in hybrids: a conceptual view

308

14.2

Hybrid accountability: an input–output representation

318

14.3

Accounting and hybrid organizations: a dual relationship

322

15.1

Accountability relationships in Islam

337

17.1

Spotlight Accounting as a concept and a practice

377

17.2

Principles of Spotlight Accounting and traditional accounting

380

17.3

Influence of Spotlight Accounting on accounting, accountability and governance384

17.4

Spotlight Accounting as an external accounting process

18.1

Proto-cuneiform tablet with seal impressions (obverse only): administrative account of barley distribution with cylinder seal impression of a male figure, hunting dogs, and boars, c. 3100–2900 bce404

18.2

Schematic drawing of tablet and cylinder seal. Top: Schematic drawing of proto-cuneiform tablet obverse view depicted in Figure 18.1, rotated 90 degrees anti-clockwise. Bottom: Composite view of whole impression made by rolling cylinder seal in soft clay (drawn from impression on tablet reverse side, plus those on edges and obverse)

19.1

391

405

Overview of the accounting requirements for the illustrative H Ltd group427

viii

Tables

4.1

Definitions of corporate goverance (key words in italics)

73

4.2

Paradoxes of corporate governance

88

4.3

Research questions on the role of boards of directors in corporate and financial reporting

93

11A.1 Relevant legislation and key issues covered

256

11A.2 Public universities’ governance structure

257

13A.1 Table of empirical research in accounting, accountability and governance in NGOs since 2000

301

14.1

Hybrid organizations: examples of manifestation

309

14.2

Accounting’s role in hybrid organizations

321

18.1

Ration assignments for a feast for elite-level governing subjects

403

19.1

The 11 groups reviewed in phase one

431

19.2

Compliance with key group-related disclosure requirements

433

19.3

Key accountability issues identified

434

19A.1 Disclosure checklist

446

ix

Contributors

Abdullah Almulhim is Assistant Professor of Accounting at King Faisal University, Saudi Arabia. He graduated in 2014 with a PhD in Accounting and Corporate Governance from Royal Holloway, University of London, UK. Abdullah also holds a Master of Science in Accounting and Finance from the University of Southampton. His research interests include International Financial Reporting Standards and corporate governance. Abdullah holds a professional certificate in Value Added Tax from the Saudi Organization for Chartered and Professional Accountants. Mohammed Alomair is Assistant Professor of Accounting and Chairman of the Department of Accounting, King Faisal University, Saudi Arabia. He graduated in 2019 with a PhD in Accounting and Management from Royal Holloway, University of London, UK. Mohammed also holds a Master of Science in Accounting and Finance from the University of Southampton. His research interests include Islamic accounting, waqf governance and accountability, zakat and tax accounting. He has been involved in research and consulting with government organizations and private companies. Thankom Arun is Professor of Global Development and Accountability at Essex Business School, University of Essex, UK. His research examines the problems created by the uneven relationships between business, society and economy in an interdisciplinary framework. Thankom’s recent research interests are in the areas of fintech, financial inclusion, climate change and sustainability. His research has been published in journals such as World Development, Work, Employment and Society, Sociology, Journal of Development Studies and Corporate Governance: An International Review. Junaid Ashraf is Reader in Accounting at Essex Business School, University of Essex, UK. His research examines accounting, governance and control issues in communities and organizations within emerging economies. His research has been published in eminent management and accounting journals including Human Relations, Work, Employment and Society, Critical Perspectives on Accounting and Management Accounting Research. Jill Atkins is Professor of Accounting at Cardiff Business School, Cardiff University, UK. Jill researches corporate governance and accountability with a focus on responsible investment, social and environmental accounting and assurance and the historical roots of environmental accounting. She has initiated dialogue with colleagues from South Africa, China, South America and elsewhere on a new concept of extinction accounting, accountability and governance that aims to implement species protection through the financial markets. Leopold Bayerlein is Professor of Accounting at UNE Business School, University of New England, Australia. He is also Associate Dean, Teaching and Learning in the Faculty of Science, Agriculture, Business and Law. He has a PhD in Accounting and is a Chartered Accountant, a Certified Practicing Accounting and a Senior Fellow of the Higher Education Academy. His research focuses on the development of future-focused curricula in higher education and he is active in cross-disciplinary research. x

Contributors  xi Nicola Beatson is the New Zealand president of the Accounting and Finance Association of Australia and New Zealand, Senior Lecturer at the University of Otago, New Zealand and Research Leader for the Office of Student Success. Nicola has been awarded several teaching accolades, including “Overall Premier Lecturer” for Otago University in 2018 and a 2019 Otago Excellence in Teaching Award. Nicola is an associate editor for Accounting Education and is on the editorial review board for Journal of Accounting Education. Enrico Bracci is Professor of Accounting at the University of Ferrara, Italy, Vice-Director of the Department of Economics and Management and Vice-Director of the Public Value Research Centre. He holds editorial board membership of Accounting, Auditing & Accountability Journal, Journal of Accounting in Emerging Economies and Journal of Public Budgeting, Accounting and Financial Management. He is also Associate Editor of the Journal of Accounting & Organizational Change. Enrico is Executive Committee Member of the Public Service Accounting and Accountability Group and co-editor of the Emerald book series on Public Service Accounting and Accountability. Niamh M. Brennan is Michael MacCormac Professor of Management at University College Dublin (UCD), Ireland and Founder/Academic Director of the UCD Centre for Corporate Governance. A first-class honours UCD Science (Microbiology and Biochemistry) graduate, Niamh qualified as a chartered accountant with KPMG, holds a PhD from the University of Warwick and is a Chartered Director of the Institute of Directors (London). In 2020, Niamh was elected a member of the Royal Irish Academy, Ireland’s highest academic honour. Garry D. Carnegie is Emeritus Professor at RMIT University, Australia. His research interests are in accounting, accountability and governance in both contemporary and historical contexts. His publications appear in books and a wide array of international journals on accounting and in other fields. An associate editor of Accounting, Auditing & Accountability Journal, having served as an editorial board member since 1993, he was editor/joint editor of Accounting History for a continuous period of 25 years from 1995 to 2019 and consulting editor in 2020. Nieves Carrera is Associate Professor of Accounting and Management Control in the IE Business School, IE University, Spain. Before joining IE, she was a lecturer at the University of Manchester. She holds a degree in Economics from the University of Vigo and obtained her PhD degree at University Carlos III. Her research interest focuses on the area of auditing, with an emphasis on the audit market and the auditing profession, and accounting history. Stewart Clegg is Professor at the University of Sydney, Australia in the School of Project Management and the John Grill Institute and a Visiting Professor at the University of Stavanger Business School, Norway. He is a leading international researcher recognized in several fields in the social sciences for his work in organization studies, power and project management. Stewart is a prolific writer and contributor of over 300 articles to top-tier journals and is the author or editor of over 50 books. Ana Conceição is Assistant Professor of Accounting and Management Control at ISCTE-IUL, Portugal. She holds a PhD from ISCTE Business School. Ana was a practitioner until the beginning of 2021 when she started to fully dedicate herself to the academic world. She has published in Accounting, Auditing & Accountability Journal.

xii  Handbook of accounting, accountability and governance Francesca Cuomo is Associate Professor in Corporate Governance at Norwich Business School, University of East Anglia, UK. She is a member of the editorial board of Corporate Governance: An International Review. Her publications on corporate governance issues include empirical and review articles in leading international academic journals, book chapters and commissioned reports. Recently, she has been conducting research with other UK academics for the Financial Reporting Council on the Wates Corporate Governance Principles for Large Private Companies. Paul de Lange was until 2023 Professor of Accounting at the University of Tasmania, Australia. During 2013–18 he was Dean, Learning and Teaching, Curtin Business School, Curtin University, Australia. Previously he worked at RMIT and Monash universities. He has published over 60 academic journal articles and is a regular speaker at international and national academic events. During the last decade, he has been awarded over AU$850,000 in external research grants, including an Australian Research Council grant and two large Office of Learning and Teaching grants. Matthew Egan is Senior Lecturer in the Discipline of Accounting, Governance and Regulation at the University of Sydney Business School, Australia. His research interests comprise both financial accounting and sustainability. His recent research explores the role of the true and fair concept in financial reporting, supply chain sustainability impact analysis tools including life-cycle assessments and input–output analysis, extant approaches to water accounting and LGBTI+ diversity developments within the “Big 4” professional services firms. This research inspires Matthew’s teaching in financial and sustainability accounting. Ann-Christine Frandsen’s academic home is Birmingham Business School at the University of Birmingham, UK. Her research seeks to deepen our theoretical and practical understanding of accounting, and how accounting in its various forms shapes our ways of seeing and acting in everyday life within both diachronic and synchronic perspectives – as a “space-time-value dispositive”. Her research areas cover accounting practice, accounting education and the ways in which accounting shapes management and strategy across private and public sector settings. Andrew Goddard commenced his career in public and private sector accounting practice before undertaking a 30-year academic career. He became Professor of Accounting at the University of Southampton, UK and, in 2021, was made Emeritus Professor of Accounting. His research interests have concentrated on public sector accounting, accountability and auditing in non-governmental organizations, developing countries, local government, central government and health services. He has focused on qualitative research methodologies, particularly using grounded theory in accounting research, and on critical accounting methodologies. Darlene Himick is Associate Professor, Accounting at the Telfer School of Management, University of Ottawa, Canada. Darlene researches the impacts of neoliberalism on individuals in the workplace and society, and how risks are passed to those who are more vulnerable. She is interested in how people come together in social movements and communities to push for change, especially how they draw upon financial and accounting techniques in creative ways, including creating counter-accounts to make their arguments resonate. Keith Hoskin is Professor of Accounting at the University of Birmingham, UK. He undertakes historical-conceptual studies of accounting, understood as “naming-and-counting” practice, and the first “non-glottographic” written statement form. He studies ancient, medieval

Contributors  xiii and modern forms of accounting and their relations to managing, governing and strategizing. His work extends Foucault’s “critical history of thought” to analyse how our modes of thinking and acting are shaped by the modes of writing and pedagogy through which we “learn to learn” in any era. Kelum Jayasinghe is Professor in Accounting and Development Policy at the University of Sheffield, UK and a critical researcher in accounting in emerging countries. Kelum’s research interests are in climate change and sustainability, participatory governance and accountability in global reform programmes, development and poverty alleviation. His international visibility is evidenced in his extensive profile of over 40 publications published in key journals such as Accounting, Auditing & Accountability Journal, Critical Perspectives on Accounting, Accounting Forum and Financial Accountability & Management. Kaiying Ji is Lecturer in the Discipline of Accounting, Governance and Regulation at the University of Sydney Business School, Australia. Kaiying has a PhD in Accounting and is a member of CPA Australia and the CFA Institute. She has extensive experience in teaching accounting, work-integrated learning and business units. Her research areas include financial reporting, intangible assets, forecasting and scholarship in teaching and learning. Gabriel Kaifala is Lecturer in Accounting and Finance at the Adam Smith Business School (ASBS), University of Glasgow, UK. He holds a PhD in Accounting and Finance and has taught, supervised and examined undergraduate, postgraduate and professional students in accounting and finance. Gabriel is the ASBS academic lead for assurance of learning. He is a qualitative researcher with an interest in higher and professional accounting education, accounting professionalization, financial accounting and reporting, and post-colonial theory. Martin Kelly is Senior Lecturer in Accounting at Queen’s University Belfast, Northern Ireland, UK. He holds an MBA (Distinction) from the University of Warwick and a PhD from Queen’s University. He has published his work in leading journals in the field including Accounting, Auditing & Accountability Journal, Critical Perspectives on Accounting and Journal of Business Ethics. Collette E. Kirwan is Lecturer in Accounting at South East Technological University, Ireland. Collette qualified as a Chartered Accountant with PwC and holds a PhD from University College Dublin. She has served on the Board of the European Accounting Association (2016–22), the Education Training and Life-Long Learning Board at Chartered Accountants Ireland (2017–23) and the Ethics and Governance Committee at Chartered Accountants Ireland (2016–22), and as the Chair of the Irish Accounting & Finance Association (2020–22). Alessandro Lai is Professor of Accounting at the University of Verona, Italy, where he is responsible for teaching Financial Accounting (Bachelor’s degree), Corporate Governance (Master’s degree) and Qualitative Research Methods (PhD, universities of Udine and Verona). His recent research focuses on integrated and sustainability accounting and reporting, accountability, corporate governance and accounting history, adopting a critical/interpretative lens. He serves on the editorial boards of Accounting, Auditing & Accountability Journal, Meditari Accountancy Research and Accounting History, having acted also as guest editor. Giulia Leoni is Associate Professor of Accounting at the University of Genoa, Italy. Her research focuses on accounting and accountability in diverse settings, especially in the digital

xiv  Handbook of accounting, accountability and governance realm, and accounting history. She has published in Accounting, Auditing & Accountability Journal, British Accounting Review, Meditari Accounting Research, Accounting History, Journal of Management History and Critical Perspectives on Accounting. She serves as an editorial board member for Accounting, Auditing & Accountability Journal and Accounting History, having acted also as guest editor. Mariannunziata Liguori is Professor of Accounting at Durham University Business School, UK, where she moved after having worked at Queen’s University Belfast, Northern Ireland. She was awarded a PhD by Bocconi University, Italy where she previously worked. Mariannunziata is Chair of the British Accounting & Finance Association’s Public Services and Charities Special Interest Group and an editorial board member of Financial Accountability & Management and Journal of Public Budgeting, Accounting & Financial Management. She publishes in leading journals in the field. Maria Major is Professor of Management Accounting and Control at ISCTE-IUL, Portugal. She holds a PhD from the University of Manchester, UK. She has published in academic journals including Management Accounting Research, European Accounting Review, Accounting, Auditing & Accountability Journal, Accounting, Organizations and Society and Journal of Public Budgeting, Accounting & Financial Management. Maria is author or co-author of several books and international book chapters. She is on the editorial board of several leading accounting journals. Karen McBride is Reader in Accounting and Accountability at the University of Portsmouth, UK. She publishes on various areas of accounting history and more contemporaneous issues in financial reporting and corporate governance in various journals, including Accounting, Auditing & Accountability Journal, British Accounting Review and Accounting History. Karen believes that studying accounting in history provides insights into accounting’s impact and wide reach in the past, present and future. A Chartered Accountant, she remains engaged with wider areas of reporting, accountability and governance. Christopher J. Napier is Professor of Accounting at Royal Holloway, University of London, UK. His main research interests include accounting history, financial reporting theory and practice, Islamic accounting and governance. He qualified as a Chartered Accountant in 1978 and gained his PhD from the University of Southampton. He has served on various journal editorial boards, including Accounting, Auditing & Accountability Journal. He was awarded a Lifetime Achievement Award by the British Accounting & Finance Association in 2019. Brendan O’Connell is Honorary Professor of Accounting at RMIT University, Australia. He has worked extensively in banking and accounting roles and in various academic roles at universities, including at Monash University, Australia and the University of Richmond, USA. He is an active researcher and on the editorial boards of several major journals including Accounting, Auditing & Accountability Journal. He is also active within the accounting profession and chairs the CPA Australia Centre of Excellence for Ethics and Professional Standards. Lee Parker is Research Professor in Accounting at the University of Glasgow, UK. His more than 250 publications have over 21,000 Google Scholar citations. He is joint founding editor of Accounting, Auditing & Accountability Journal and holds membership of over 20 journal editorial boards. Lee is a qualitative, interdisciplinary researcher in public and third sector

Contributors  xv accountability, strategic management, corporate governance, accounting and management history, social and environmental accountability, accountability and control in office design, and qualitative research methodology. Christoph Pelger is Professor of Accounting and Auditing at the University of Passau, Germany and Adjunct Professor at the Department of Accounting, Auditing and Law at the NHH (Norwegian School of Economics) in Bergen. His main research interests are in financial reporting, particularly concerning the adoption, development, application and enforcement of International Financial Reporting Standards. His research is published in several international academic accounting journals, including Accounting, Organizations and Society, Contemporary Accounting Research, Critical Perspectives on Accounting and European Accounting Review. Nadra Pencle is Assistant Professor of Accounting at Ball State University, USA and earned her doctoral degree from the Kenneth G. Dixon School of Accounting at the University of Central Florida. Her research interests lie at the intersection of managerial accounting and corporate social responsibility. In her research, Nadra adopts behavioural experiments, interviews, content analysis and survey methodologies. Theoretically, she is interested in cognitive aspects of judgement and decision making, using this category of theories to study decision making. Stephanie Perkiss is Associate Professor at the University of Wollongong, Australia and is a member of CPA Australia. Her research interests are sustainability and accountability with particular attention on corporate social responsibility and disclosure, the Sustainable Development Goals, sociological theory and scholarship of teaching and learning in accounting/business higher education. She has published in Accounting, Auditing & Accountability Journal and Critical Perspectives on Accounting and is on the editorial boards of Social and Environmental Accountability Journal and Accounting Forum. Ronita Ram is Associate Professor in Accounting at Henley Business School, University of Reading, UK. Ronita has a PhD in Accounting from the University of Sydney, Australia and is a member of CAANZ Australia. Ronita has over 15 years’ teaching experience at tertiary level. Her research interests include international financial reporting, International Financial Reporting Standards, accounting for small and medium-sized entities, compliance issues and sustainability. Ronita is also a reviewer for several international accounting journals. Neeta Shah is Senior Lecturer in Accounting and Finance at the University of Westminster, UK. She is a Fellow of the Association of Chartered Certified Accountants and has an MBA from the University of Warwick. She completed her PhD in Corporate Governance at Royal Holloway, University of London. Neeta’s article (with Christopher J. Napier) “Governors and Directors” won the 2019 Robert W. Gibson Manuscript Award. Her research interests include accounting education, corporate governance, financial accounting, financialization and pensions. Teerooven Soobaroyen is Professor in Accounting at Essex Business School, University of Essex, UK. His research examines the interplay between accounting, accountability and governance, mainly in the context of emerging economies. His research has been published in various internationally recognized journals such as Critical Perspectives on

xvi  Handbook of accounting, accountability and governance Accounting, Accounting, Organizations and Society, Accounting Forum, Accounting, Auditing & Accountability Journal and Corporate Governance: An International Review. Riccardo Stacchezzini is Professor of Accounting at the University of Verona, Italy, where he coordinates the Master’s degree in Corporate Governance and Business Administration. His research adopts a critical/interpretative lens to explore accounting, accountability and governance practices in both contemporary and historical settings. He is a member of the editorial board of Accounting, Auditing & Accountability Journal, Accounting History and Meditari Accountancy Research, having acted also as guest editor. He holds membership of the Stakeholder Reporting Committee of the European Accounting Association. Meredith Tharapos is Deputy Head of Accounting at RMIT University, Australia. Meredith’s research is broadly concerned with behavioural issues within the field of accounting, including educational, cultural and accountability aspects. Meredith is an active member of the accounting education community. She convenes the annual RMIT Accounting Educators’ Conference and is a committee member of the Accounting and Finance Association of Australia and New Zealand, Accounting Education Special Interest Group. She holds editorial roles on several international accounting education journals. Marco Trombetta is Professor of Accounting and Management Control at the Business School of IE University, Spain. He holds a DPhil in Economics from the University of Oxford, UK and a “Laurea” degree magna cum laude in Economic and Social Sciences from Bocconi University, Italy. His main research interests are the theory and empirical analysis of disclosure, auditing and financial inclusion. He has also worked as a consultant for Whirlpool Europe, Accenture, PricewaterhouseCoopers, CEIM and EY. Eija Vinnari is Professor of Public Financial Management at Tampere University, Finland. A cross-cutting theme in much of her recent research is non-human animals as a marginalized constituency. She has published, for instance, on counter-accounts produced by animal rights activists and the inclusion of animals in the definition of sustainability. Other publications address a broad range of issues, including critical dialogic accounting and accountability, inter-generational equity and legitimacy in the context of water services, environmental conflicts, risk management and research methodology. Amanda Wilford is Visiting Professor of Accounting at IE Business School, Spain and has worked as an Assistant Professor at Southern Utah University, USA. Amanda holds a PhD in Business Administration from the University of Maryland, an MBA from Purdue University and a Bachelor’s degree (magna cum laude) from Southern Utah University. Her research interests are in internal control with a focus on the impact of weak internal control on firm performance and cybersecurity. Alessandro Zattoni is Professor of Strategy and Governance and Head of the Department of Business and Management at LUISS University, Italy. He has been co-editor-in-chief of Corporate Governance: An International Review, is currently a consulting editor of Journal of World Business and is an editorial board member of Journal of Management Studies. Alessandro is the President of the International Corporate Governance Society and of the European Academy of Management. He has published more than 100 works on corporate governance.

Introduction to the Handbook of Accounting, Accountability and Governance Garry D. Carnegie and Christopher J. Napier

OVERVIEW This Introduction to the Edward Elgar Handbook of Accounting, Accountability and Governance puts the collection of chapters making up the Handbook into context. The general philosophy of the Handbook is that accounting, accountability and governance go beyond being technical practices to be learned, adopted and repeated, and must be studied as social and moral practices. The chapters making up the five parts of the Handbook are outlined. Part I considers past and present perspectives on accounting, accountability and governance. Part II examines various mechanisms for accounting, accountability and governance, including audit, assurance and different forms of accounting. Part III considers accounting, accountability and governance in diverse contexts and sectors, including junior stock markets, emerging economies, higher education, the public sector, hybrid organizations and Islamic financial institutions. Part IV reviews some new perspectives on accounting, accountability and governance, including counter accounts and spotlight accounting, as well as the application of ideas of governmentality to accounting, accountability and governance. Part V considers some future directions and notes how the recent COVID-19 pandemic has reshaped accounting, accountability and governance relationships and mechanisms. The Introduction finishes with some indications of how the Handbook may be used in teaching and research.

INTRODUCTORY REMARKS Accounting, accountability and governance are inter-related. Our statement above seeks to provide an appreciation of the fit of these three major elements of human life. Which of these elements started first? This question resembles the often-posed question in everyday life: “What came first – the chicken or the egg?” The rooster, however, barely gets a mention. According to Pilcher and Gilchrist (2019, p. 1), in their volume on accounting, accountability and governance in the public sector, “accounting is where it begins”. We are not willing to make a claim of this kind. What is important for us in editing this volume for an international audience is to instigate, assemble and provide a range of examinations of how accounting, accountability and governance inter-relate as the three sides of a triangle. Fundamentally, accounting performs accountability, accountability nurtures governance, governance presumes accounting. To elaborate on our one-sentence summary above, accounting is not just concerned with accountability, but accountability contributes to an understanding of the need for accounting in organizations and societies. On the other hand, governance is more than accounting can deliver alone but is designed to draw on accounting for governance to be enabled and sus1

2  Handbook of accounting, accountability and governance tained. Accounting provides the tools for accountability and governance to be operationalized in practice in specific organizational and social contexts. Accountability provides a foundation to stimulate the nurturing of governance in organizations and societies. The term “accountable governance”, used in the public accountability literature, such as in The Oxford Handbook of Public Accountability (Bovens et al., 2014), however, seems to be linked to describing an ongoing, desirable process driven by good leadership and decision making. In our experience, this is not a widely deployed term in the accounting discipline; moreover, it has overtones of possessing public relations value. Effective or good governance are far more readily applied and understood terms in the accounting profession. We believe that there are at least two major interconnection points between accounting, accountability and governance. First, a need for accountability in organizations and societies shapes the design, implementation, operation and review of governance structures. Indeed, in the absence of a need to ensure accountability, there would be much less interest in governance. Second, accounting is called upon to play key roles within governance in seeking to ensure accountability and to promote and enhance performance. Accountability is both broad and complex. Further, there are many styles, forms and systems of accountability and, importantly, the literature on this element continues to address emerging or new issues (see, for instance, Roberts & Scapens, 1985; Roberts, 1991; Sinclair, 1995; Ahrens, 1996; Macintosh, 2002; Carnegie & West, 2005; Sargiacomo et al., 2012; Dillard & Vinnari, 2019; Vinnari & Vinnari, 2022). Over time, different conceptions of governance have emerged, one of the most important being corporate governance (see, for example, Napier, 1998; Shah & Napier, 2019). Supiot (2017) has proposed the idea of “governance by numbers”, which he sees as giving “immense power to those who construct the figures, because this is conceived as a technical exercise which need not be exposed to open debate” (p. 163). The carefully considered and well-articulated contributions in this Handbook are intended to provide understanding and clarify to readers the importance and interplay of accounting, accountability and governance. We are excited about this Handbook, and we are confident that it will be an important resource not just for researchers but also for educators and practitioners as well as for public policy makers and regulators in the accounting, accountability and governance arena. The Handbook’s unique feature is the way in which contributors have brought out links between accounting, accountability and governance, which helps to present a broader conception of accounting as a social and moral practice; it is not a mere neutral, benign technical practice (Carnegie et al., 2021a, 2021b, 2022a, 2022b). In the next section of this Introduction, we outline the rationale for the structure and contents of the Handbook. We then provide an overview of each of the following chapters. These summaries are intended to lead readers comfortably to their topics of interest and to provide a condensed understanding of what this volume holds in store for its intended audience. There follows an outline of the approach we adopted to enlisting authors as contributors and the results of an international search for the appropriate scholars who were available to make contributions to this volume. Finally, we make some suggestions for using the Handbook for teaching and research.

Introduction  3

RATIONALE FOR THE STRUCTURE OF THE HANDBOOK This Handbook is divided into five distinctive key parts, addressed in the following order: I. II. III. IV. V.

Past and present perspectives on accounting, accountability and governance. Mechanisms for accounting, accountability and governance. Accounting, accountability and governance in diverse contexts and sectors. New perspectives on accounting, accountability and governance. What lies ahead for accounting, accountability and governance?

On a continuum, the Handbook is concerned with the past, present and future of accounting, accountability and governance. The present is premised upon, and informed by, the past, as that is the site where these elements emerged to the present-day in their existing form. This is the focus of Part I of the Handbook. The future of the elements is premised on the state of play today, in contemporary times, concerning these elements and their inter-relationships. The future or what lies ahead, therefore, is cast by reference to the present (on writing in late 2021 up to early September 2022) and what we know and understand of the past – our historical understanding – where history has been active in shaping our contemporary phenomena from earlier beginnings and later iterations in different contexts. What may lie ahead is the concern of Part V. According to Carnegie and Napier (2012, p. 329), “the importance of historical understanding applies to accounting, as much as to other fields of human endeavour”, to which we may add accountability and governance (also see Carnegie & Napier, 1996, 2017). Part II of the Handbook presents key mechanisms of accounting, accountability and governance. Traditional mechanisms of accountability include boards of directors, corporate legislation, external financial reporting and disclosure, external audit and mainstream institutional investors. In more recent decades, formal governance codes and audit committees have become commonplace (Brennan & Solomon, 2008). Accounting, accountability and governance are universal; these elements pervade all settings in all countries and regions as addressed in Part III (Christopher, 2010; Lai & Samkin, 2017; Parker, 2018; Lai et al., 2019; Abhayawansa et al., 2021; Florio et al., 2021). Part IV concentrates on new perspectives on accounting, accountability and governance that have arisen in recent years and, collectively, are likely to take these inter-related elements into new territory. These perspectives and related developments in practice will have implications for organizational and social functioning and development as well as ramifications for our natural environment and the planet, which indeed sustain all of us. Finally, Part V examines what may lie ahead for accounting, accountability and governance. Our future will continue to be shaped by the ongoing impacts of the global COVID-19 pandemic, which, at the time of writing, is in its third year of persistence with implications for all realms of life.

THE CONTENTS OF THE HANDBOOK Part I: Past and Present Perspectives on Accounting, Accountability and Governance Chapter 1 explores the interplay of accounting, accountability and governance. Each is an essential element of human life and orderly societies. Collectively, these elements are concerned with the adequate, effective or proper conduct of the affairs of individuals and

4  Handbook of accounting, accountability and governance organizations in the pursuit of their aims and related endeavours. In short, these elements are intended to manifest in the creation and maintenance of orderly and sustainable relationships among individuals. A failure to create, maintain, review, improve and refine accounting, accountability and governance has the potential to result in disharmony, social disorder or even upheaval or disaster in society. The following three chapters in Part I respectively provide a historical overview of accounting, accountability and governance, address the importance of codes of governance, which have been developed during the past three decades, and examine the role and responsibilities of boards of directors and governing bodies, particularly concerning governance and accountability. Chapter 2 examines the history of governance and its relationship with accounting and accountability. The notion of governance dates to ancient times and has permeated various disciplines, beyond accounting, economics and finance. Taking the perspective of accounting as a moral practice (Carnegie et al., 2021a, 2021b, 2022a, 2022b; Francis, 1990), the chapter explores, in historical perspective, the interconnections between governance, accounting and accountability and proposes a future research agenda to evidence their mutual inter-relations. Codes of governance are issued to materially influence the development of effective governance practices. Since the advent of the UK Corporate Governance Code in 1992, the successor of the governance code that was proposed by the Cadbury Committee on the financial aspects of corporate governance, there has been a proliferation of corporate governance codes issued for adherence around the globe. This has led to studies on the adoption and content of codes of governance. Accordingly, Chapter 3 analyses the literature on codes of effective governance to provide a broad understanding of key findings and to identify scope for future research. Chapter 4 delineates the role of boards of directors and governing bodies in governance and accountability. Boards and councils play a significant leadership role in overseeing the effective governance of companies and of other forms of organizations in society. The chapter examines challenges among boards, shareholders, other external parties, managers and external auditors that may result in governance failure. Finally, the chapter evaluates the contradictions and complexities arising from governance paradoxes and challenges traditional perspectives on board roles in regulated corporate financial reporting. Part II: Mechanisms for Accounting, Accountability and Governance Mechanisms of accounting, accountability and governance are the prime ways in which each element is operationalized in practice. Four key mechanisms are examined in Chapters 5 to 8. Before briefly outlining each of these mechanisms, an overview of these mechanisms is presented. Accounting mechanisms are the key accounting processes and outputs for entities of any kind and in any sector, and include systems of external financial reporting and communication in the form of general-purpose financial reports, managerial or management accounting control systems and internal controls such an internal auditing, all of which are aimed at producing information for stakeholders for use in decision making in resource allocation and reallocation, for the discharge of accountability and in providing effective governance focused on the proper conduct of the affairs of organizations. Accountability mechanisms, for instance, are the mechanisms that will be required to implement appropriate accountability expectations or standards of anticipated behaviour of an acceptable nature. These mechanisms can also be referred to as an accountability framework

Introduction  5 for adoption. Like mechanisms, accountability frameworks are intended to provide a comprehensive means of, or approach to, accountability. Governance is the policies and procedures an organization implements to control and protect the interests of internal and external stakeholders. Governance is implemented and improved by deploying a range of mechanisms, procedures, checks and balances. As always in addressing governance, effective, periodically reviewed actions speak louder than words alone. Governance mechanisms are commonly applied as organizations, including corporations, grow in their size, scope and complexity and are mandatory for public sector entities and publicly held corporations, where expectations of entities operating in the public interest are at a high level. We now turn our attention to outlining the chapters comprising this part of the Handbook. The historical origins of financial accounting are linked strongly to accountability. A turn in recent decades has seen standard-setters move from accountability (with a focus on managers’ stewardship of the entity’s resources) to emphasize a decision usefulness orientation, where providing information to inform the decisions of capital providers has become the primary objective of financial reporting. Chapter 5 traces the development from accountability to valuation usefulness, which is more readily manifest in the conceptual frameworks for financial reporting issued by standard-setters in the United States and at the international level. An evaluation of the reluctance of such standard-setters to depict accountability as a separate objective of regulated financial reporting is also provided. The chapter refers to a gap between the views of the International Accounting Standards Board and the body of academic evidence on the role that stewardship should play. Chapter 6 addresses the vital role of management accounting and control in accountability and governance, which has traditionally been dominated by a traditional emphasis on financial disclosure. The chapter explores the growing importance of “management accounting and control systems” (MACS) and the relationships and interconnections of systems of this type to accountability and governance. It also examines the movement of MACS beyond traditional contexts, extending to new fields and new organizations, such as hybrid, public sector and social organizations, as well as embracing social and environmental concerns. Chapter 7 examines the mechanisms of accountability and governance in the specific forms of audit, assurance and internal control practices. It identifies the relationship between auditing, assurance and internal control while pointing to the complex system of overlaps and intersections that exists in practice. Empirical studies are used in portraying how these mechanisms contribute to accountability and governance. A taxonomy is used to organize and evaluate audit, assurance and internal control practices. Social and environmental accountability is portrayed in Chapter 8 as the core to a holistic governance framework concerned with discharging accountability to the broadest range of stakeholders, humans and non-humans alike. Social and environmental accountability embraces a growing necessary concern for the state of the natural environment, which sustains all of us, with implications for the health of the planet. Social and environmental accountability, in essence, commands organizations to periodically account for their impacts on, usage of and reliance on a wide and diverse range of resources, and to recognize and account for the risks arising from a wide array of social and environmental issues. However, the chapter raises the question of how far social and environmental accountability has been a genuine paradigm shift as opposed to a shifting mirage.

6  Handbook of accounting, accountability and governance Part III: Accounting, Accountability and Governance in Diverse Contexts and Sectors Accounting, accountability and governance operate in various contexts and sectors. The Handbook is not focused exclusively on these elements in Western democracies and securities markets. This part of the Handbook contains six chapters that examine a diversity of contexts and sectors: secondary markets, emerging economies, higher education in developing countries, the public sector, non-governmental organizations (NGOs) and the developing area of a diversity of multiplying numbers of hybrid organizations. Chapter 9 evaluates accounting, accountability and governance in the context of junior stock markets. The London Stock Exchange’s Alternative Investment Market (AIM) is examined for this purpose. Companies listed on these junior markets are typically small-sized growth companies that hope to eventually graduate to the main market. Next, Chapter 10 focuses on emerging economies and provides an analysis of the inter-relationships between accounting, accountability and governance in this context. Across the past 30–35 years or thereabouts, accounting has become more present and visible in many emerging economies, bringing an orientation towards market-based notions of accountability and the fostering of systems of effective governance, largely targeted at attracting private investment and implementing public sector reforms. Higher education (HE) institutions exist and operate in both the developed and developing world. Governance and accountability in HE in developing economies are specifically the focus of Chapter 11. In the developing world, governance systems and accountability processes may differ according to their varying regulatory, socio-cultural and politico-economic contexts. This chapter examines the HE governance and accountability processes in Sierra Leone, a former British colony on the west coast of Africa. Chapter 12 examines accountability developments in the public sector across the past four decades, which have been characterized by continuous change, particularly to accounting and accountability, and pressures to demonstrate increased accountability, including a strong tendency to focus on performance measurement and management. The chapter explores the relationship between the concepts of accountability, performance measurement and governance, highlighting the key achievements and providing proposals to address gaps in the literature and inform research and practice in future. Different approaches to accounting, accountability and governance in NGOs are considered in Chapter 13. One approach views accounting, accountability and governance in hierarchical terms, with an emphasis on procedures and processes. In this approach, accountability is seen as an objective phenomenon. Other approaches take a more subjective form and view accountability as a phenomenon that is perceived, and ascribed meaning to, by organizational participants. While hybrid organizations are not new, “demand has been generated for the founding of new hybrid organizations rather than the transformation of existing ones” (Kaiserfeld, 2013, p. 171). Chapter 14 explores the proliferation of organizations in recent decades that favour combining multiple institutional logics to address complex problems. These organizations are collectively classified as hybrids or hybrid organizations. In this chapter, a synthesis is provided of relevant research that has addressed the complex relations among accounting, accountability and governance in increasingly utilized hybrid organizations.

Introduction  7 Part IV: New Perspectives on Accounting, Accountability and Governance The four chapters in this part feature new or emerging perspectives on, or approaches to, accounting, accountability and governance. These developments emerge in global society’s quest for more or improved accountability from a diversity of entities in different contexts, including those affected by religion. This search for fresh or at least modified accountability is apace, especially in view of the array of “big questions” to be answered and “wicked problems” to be solved in specific countries and different regions and globally. The broad-scale harmful and damaging effects of climate change are just one example of a wicked problem facing all of us, humans and non-humans alike. Indeed, climate change on our planet is regarded as a “super-wicked problem” (Levin et al., 2012) and a “crisis multiplier” (United Nations, 2021). According to renowned naturalist David Attenborough, climate change is “the biggest threat to security that modern humans have ever faced” (United Nations, 2021). The proper conduct of trade, commerce and business is one of the matters addressed by the religion of Islam. The core tenets of governance, such as accountability, transparency and trustworthiness, which are addressed in Chapter 15, can be derived from Islamic doctrine. The chapter considers how the accountability of humans to God that permeates the Qur’an influences the approach to governance of Islamic financial institutions, broadly termed “Islamic finance”. Chapter 16 explores how counter accounts are implicated in shaping accountability and governance. These accounts, grounded in the notion of a multi-voiced, plural society and taking a diversity of forms, are prepared to provide a counter-narrative to powerful representations, such as accounting representations, in the form of reported figures, known as results, and narratives. This chapter explores the counter accounting research literature from the perspective of accountability and governance. Examined in Chapter 17, Spotlight Accounting is an emerging framework and practice that redistributes the existing locus of control over accounting and reporting processes through the application of crowd-sourcing principles. It allows stakeholders to make their context-specific information, communication and engagement needs visible, thus potentially enabling companies to provide more appropriate accountability to less powerful stakeholders who are often poorly served by traditional models of corporate accountability. The chapter addresses the principles of Spotlight Accounting and explores how Spotlight Accounting may be adopted in different accountability and governance contexts. Chapter 18 examines the relationship of accounting, accountability and governmentality and, in doing so, extends Foucault’s “bottom-up” method of studying governmentality and the state. It is concerned with tracing the forms of “governmental reason” and views accounting as always having a constitutive, rather than purely secondary, significance in the construction of forms of both accountability and governmental reason. In closing, the chapter reflectively considers how and how far accounting remains integral to forms of accountability and governmental reason. Part V: What Lies Ahead for Accounting, Accountability and Governance? In the final part of the Handbook, the focus moves to addressing the future of accounting, accountability and governance and the anticipated interconnection between these elements in the coming years for due reflection and action. The future is not designed by any one of

8  Handbook of accounting, accountability and governance us but collectively we can come together from any array of disciplines to neutralize forms of self-interest – stark or otherwise ­– to examine how accounting, accountability and governance, and the interconnections between these elements, can be better imagined, conceived, deployed and evaluated for the betterment of society, the natural environment and the health of all forms of life on the planet, humans and non-humans alike. There is no “Planet B”. Chapter 19 presents several investigative mechanisms and case scenarios to question the utility of “group” financial accounting, most adopted by means of the preparation and publication of consolidated financial statements, otherwise known as group accounts. Under existing International Financial Reporting Standards, consolidated financial reporting is argued to result in financial statements, for an artificial group, albeit subject to external audit, which provides little transparency into the workings or risks of individual legal entities within group conglomerations. The chapter concludes by questioning whether group accounting indeed provides effective accountability nowadays. Given the spread of the COVID-19 pandemic around the globe in early 2020, Chapter 20 addresses how traditional approaches to accounting, accountability and governance have been challenged by the rapid global spread and massive impacts of COVID-19 at the organizational, state or province, national and global levels. Further, the chapter reflects on the lessons learned, which surely will continue to be learned after the publication date of this Handbook, from the perspective of improving the preparedness of organizations and societies for future crises, whether predictable or not. This chapter highlights the necessity of questioning and evaluating our underlying accounting, accountability and governance approaches on a continuous basis as the present becomes the past. Finally, Chapter 21 draws together the various themes developed in the previous chapters to provide an overview of how accounting, accountability and governance, and the inter-relations between these, may develop in the future. The chapter sets out an agenda for possible future research directions, as well as considering practical and policy issues along with education issues.

ENLISTING CONTRIBUTORS FOR THE HANDBOOK To help inform the selection of authors of this volume, we aimed for a combination of gender diversity and geographical diversity, as well as, where possible, combining author teams of established and emerging scholars. In terms of gender diversity, there are 45 contributors in all to this Handbook, including us as the editors. Of the other 43 contributors, there are 22 men and 21 women. Women feature as authors in 14 of the 21 chapters which follow. Of these 14 chapters, four chapters were written solely by women, all of which were jointly authored, and 10 were prepared by a combination of men and women. The volume’s 21 chapters have been prepared, on average, by two authors per chapter. Indeed, 12 chapters (57 per cent) were contributed by two authors. Of the other nine chapters, three were contributed by sole authors, all of whom were men, four were prepared by three authors, and the two remaining chapters were contributed by teams of four authors. The 45 authors engaged in this project are based in a total of 15 countries: Australia (10 contributors), Canada (1), England (13), Finland (1), Germany (1), Ireland (2), Italy (5), New Zealand (1), Northern Ireland (1), Portugal (2), Saudi Arabia (2), Scotland (1), Spain (2), the United States (2) and Wales (1). Many of the contributors residing and working in England

Introduction  9 derive from other countries and reflect a greater cultural and language diversity than these numbers suggest on the surface. Twelve of the 21 chapters have been prepared by authors based in two countries: Australia and England (3 chapters), Australia and New Zealand (1), Australia and Scotland (1), Canada and Finland (1), England and Italy (1), England and Northern Ireland (1), England and Wales (1), Italy and the United States (1), Portugal and Australia (1), and Spain and the United States (1). In commissioning the 19 chapters not prepared by us, we endeavoured to connect sets of authors to potentially inform and inspire readers of this Handbook with a freshness of approach and new or divergent mindsets. On occasions, this involved combining established and emerging scholars, including some in the latter category who had not previously collaborated. In one case, for instance, the authors had not known each other before our suggestion of collaboration on a chapter was made. Each invitation issued to prepare a chapter for the Handbook included a statement that the invited contributor could approach potential collaborators if they so wished.

USING THE HANDBOOK IN TEACHING AND RESEARCH Our intention in compiling the Handbook has been to provide a comprehensive guide to the ways in which accounting, accountability and governance are interconnected. In the teaching of accounting, there is often an overemphasis by educators on technical procedures, and little attention is devoted to the importance and roles of accounting in the implementation and maintenance of effective systems of accountability and governance. This Handbook focuses on the nature, roles, uses and impacts of accounting in its organizational and social contexts where accountability should be discharged and where the governance of an organization is expected to be effective. The Handbook sets out to make it clear that accounting does not exist on an unpopulated, far-flung island or on another planet, tucked away from humans and non-humans and the natural environment. Accounting can only be understood in the organizational and social contexts in which it operates, and the proper discharge of accountability and the adoption of effective governance should not be presumed to be automatic or simply adequately regulated to automatically attain. Moreover, as outlined earlier, accounting is a multidimensional technical, social and moral practice and needs to be studied, undertaken and regulated in the organizational and social contexts in which it operates. The Handbook, therefore, could supplement the more technical aspects of an accounting module, and it could be used as a resource on more specialist modules focusing on governance and accountability. Many business and accounting degrees include either a compulsory or optional module on corporate governance, and accountability and governance are often considered as topics in business ethics or leadership and management modules. Various chapters could be selected to augment more general textbook readings, providing greater depth in areas covered by the module, or readers of the Handbook may prefer to adopt this volume as a form of textbook or reference book for others to explore, discuss and debate and to otherwise use in various ways, shapes and forms. Researchers in accounting, like accounting educators, are urged not to conceive accounting as technical practice alone. “Accounting is not a mere neutral, benign, technical practice” (Carnegie et al., 2021a, p. 72). According to these authors, “accounting is more influential

10  Handbook of accounting, accountability and governance than many people may think” and they “contend that accounting has yet to reach its full potential” (Carnegie et al., 2021a, p. 72). While these perspectives will be addressed further in Chapter 1, accounting researchers with an understanding of the carefully chosen contents of this Handbook, prepared by experts in their respective fields, will not only gain a broad understanding of the nature of accounting but also deepen their understanding of everyday accounting practice in wider socio-economic and political contexts and of how accounting underpins accountability and governance. Authors of individual chapters have extensively reviewed the research literature in their fields, so the Handbook provides a valuable point of reference for a wide range of researchers.

CONCLUDING COMMENTS As addressed in the opening remarks of this Introduction, we put the question: “What came first – the chicken or the egg?” This Handbook has not been premised on any inclination to try to answer this question. We prefer this statement to be part one of a three-part “take-home” by readers of this Handbook. Part two of this take-home is for readers to understand and inculcate the perspective that accounting, accountability and governance are all necessary essentials for contributing to the effective and proper conduct of the affairs of organizations of all kinds and for taking care of, and supporting, all humans and non-humans alike in the world, including the natural environment which sustains all of us, as well as the planet on which we are born, live and pass on to our children, grandchildren and so on. Part three – the final part of the take-home – relates to the importance of aspiring towards shaping a better world from tomorrow. For parts one and two to be met, accounting needs to be defined in multidimensional terms and understood and deployed as technical, social and moral practice to contribute to meeting its full potential, as introduced earlier and as further articulated in Chapter 1 and by other contributors to the Handbook. This will align accounting with the fundamentally moral nature of accountability and ensure that accounting’s place in processes of accountability and systems of governance transcends a passive role of recording and measurement of allegedly objective phenomena to become an instrument that helps humanity to work actively towards shaping a better world.

ACKNOWLEDGEMENTS We would like to acknowledge the encouragement and support provided by the publishers, Edward Elgar, during the development, writing and publication of the Handbook. We particularly appreciate the support of Daniel Mather, Stephanie Mills, Christine Gowen, as well as Sally Evans-Darby, Emma Wiggin and Linda Haylock. A Handbook of this nature relies on the contributions of the authors, and we were delighted with the willingness of leading researchers to share their extensive knowledge and experience of accounting, accountability and governance through their chapters. Every chapter was independently peer-reviewed by distinguished academics, and we are glad to acknowledge their significant input to enhancing the quality of the chapters.

Introduction  11

REFERENCES Abhayawansa, S., Adams, C.A. and Neesham, C. (2021), “Accountability and governance in pursuit of sustainable development goals: conceptualising how governments create value”, Accounting, Auditing & Accountability Journal, Vol. 34 No. 4, pp. 923–945. Ahrens, T. (1996), “Styles of accountability”, Accounting, Organizations and Society, Vol. 21 No. 2/3, pp. 139–173. Bovens, M., Goodin, R. and Schillemans, T. (eds) (2014), The Oxford Handbook of Public Accountability. Oxford University Press, Oxford. Brennan, N. and Solomon, J. (2008), “Corporate governance, accountability and mechanisms of accountability: an overview”, Accounting, Auditing & Accountability Journal, Vol. 21 No. 7, pp. 885–906. Carnegie, G.D. and Napier, C.J. (1996), “Critical and interpretive histories: insights into accounting’s present and future through its past”, Accounting, Auditing & Accountability Journal, Vol. 9 No. 3, pp. 7–39. Carnegie, G.D. and Napier, C.J. (2012), “Accounting’s past, present and future: the unifying power of history”, Accounting, Auditing & Accountability Journal, Vol. 25 No. 2, pp. 328–369. Carnegie, G.D. and Napier, C.J. (2017), “Historiography in accounting research”. Hoque, Z., Parker, L.D., Covaleski, M.A. and Haynes, K. (eds), The Routledge Companion to Qualitative Accounting Research Methods. Routledge, London, pp. 71–90. Carnegie, G.D. and West, B.P. (2005), “Making accounting accountable in the public sector”, Critical Perspectives on Accounting, Vol. 17 No. 7, pp. 905–928. Carnegie, G., Parker, L. and Tsahuridu, E. (2021a), “It’s 2020: what is accounting today?”, Australian Accounting Review, Vol. 31 No. 1, pp. 65–73. Carnegie, G., Parker, L. and Tsahuridu, E. (2021b), “Redefining accounting for tomorrow”, Knowledge Gateway, International Federation of Accountants (IFAC), New York, 6 April, available at: www​ .ifac​.org/​knowledge​-gateway/​preparing​-future​-ready​-professionals/​discussion/​redefining​-accounting​ -tomorrow (last accessed 6 July 2023). Carnegie, G.D., Ferri, P., Parker, L.D., Sidaway, S.I.L. and Tsahuridu, E.E. (2022a), “Accounting as technical, social and moral practice: the monetary valuation of public cultural, heritage and scientific collections in financial reports”, Australian Accounting Review, Vol. 32 No. 4, pp. 460–472. Carnegie, G., Parker, L. and Tsahuridu, E. (2022b), “SOS accounting educators: developing accounting and accountants for a better future”, Knowledge Gateway, International Federation of Accountants (IFAC), New York, 19 April, available at: www​.ifac​.org/​knowledge​-gateway/​preparing​-future​-ready​ -professionals/​discussion/​sos​-accounting​-educators​-developing​-accounting​-and​-accountants​-better​ -world (last accessed 6 July 2023). Christopher, J. (2010), “Corporate governance: a multi-theoretical approach to recognizing the wider influencing forces impacting on organizations”, Critical Perspectives on Accounting, Vol. 21 No. 8, pp. 683–695. Dillard, J. and Vinnari, E. (2019), “Critical dialogical accountability: from accounting-based accountability to accountability-based accounting”, Critical Perspectives on Accounting, Vol. 62, pp. 16–38. Florio, G., Gotti, G. and Stacchezzini, R. (2021), “New challenges in reporting on corporate governance”, Journal of Management and Governance, Vol. 25 No. 1, pp. 1–5. Francis, J.R. (1990), “After virtue? Accounting as a moral and discursive practice”, Accounting, Auditing & Accountability Journal, Vol. 3 No. 3, pp. 5–17. Kaiserfeld, T. (2013), “Why new hybrid organizations are formed: historical perspectives on epistemic and academic drift”, Minerva, Vol. 51 No. 2, pp. 171–194. Lai, A. and Samkin, G. (2017), “Accounting history in diverse settings: an introduction”, Accounting History, Vol. 22 No. 3, pp. 265–273. Lai, A., Leoni, G. and Stacchezzini, R. (2019), “Accounting and governance in diverse settings – an introduction”, Accounting History, Vol. 24 No. 3, pp. 325–337. Levin, K., Cashore, B., Bernstein, S. and Auld, G. (2012), “Overcoming the tragedy of super wicked problems: constraining our future selves to ameliorate global climate change”, Policy Sciences, Vol. 45 No. 2, pp. 123–152. Macintosh, N.B. (2002), Accounting, Accountants and Accountability. Routledge, London.

12  Handbook of accounting, accountability and governance Napier, C.J. (1998), “Intersections of law and accountancy: unlimited auditor liability in the United Kingdom”, Accounting, Organizations and Society, Vol. 23 No. 1, pp. 105–128. Parker, L.D. (2018), “Corporate governance”. Roslender, R. (ed.), The Routledge Companion to Critical Accounting. Routledge, London, pp. 283–300. Pilcher, R. and Gilchrist, D. (eds) (2019), Public Sector Accounting, Accountability and Governance: Globalising the Experiences of Australia and New Zealand. Routledge, London. Roberts, J. (1991), “The possibilities of accountability”, Accounting, Organizations and Society, Vol. 16 No. 4, pp. 355–368. Roberts, J. and Scapens, R. (1985), “Accounting systems and systems of accountability: understanding accounting practices in their organisational contexts”, Accounting, Organizations and Society, Vol. 10 No. 4, pp. 443–456. Sargiacomo, M., Servalli, S. and Carnegie, G.D. (2012), “Accounting for killing: accountability for death”, Accounting History, Vol. 17 No. 3/4, pp. 393–413. Shah, N. and Napier, C.J. (2019), “Governors and directors: competing models of corporate governance”, Accounting History, Vol. 24 No. 3, pp. 338–355. Sinclair, A. (1995), “The chameleon of accounting: forms and discourses”, Accounting, Organizations and Society, Vol. 20 No. 2/3, pp. 219–237. Supiot, A. (2017), Governance by Numbers: The Making of a Legal Model of Allegiance. Hart Publishing, Oxford. United Nations (2021), “Climate change ‘biggest threat modern humans have ever faced’, world-renowned naturalist tells Security Council, calls for greater global cooperation”, Security Council, Press Release, 23 February, available at: https://​press​.un​.org/​en/​2021/​sc14445​.doc​.htm (last accessed 6 July 2023). Vinnari, E. and Vinnari, M. (2022), “Making the invisibles visible: including animals in sustainability (and) accounting”, Critical Perspectives on Accounting, Vol. 82, article 102324.

PART I PAST AND PRESENT PERSPECTIVES ON ACCOUNTING, ACCOUNTABILITY AND GOVERNANCE

1. The interplay of accounting, accountability and governance Garry D. Carnegie and Christopher J. Napier

OVERVIEW This chapter addresses the interplay of accounting, governance and accountability. After an introduction, the chapter reviews relevant prior literature that examines how accounting, accountability and governance inter-relate both generally and in specific contexts. The key concepts of the Handbook (accounting, accountability and governance) are introduced and the key interconnection points between these elements are considered. Understanding the interaction between these elements in the organizational and social contexts in which they operate is essential for the success of organizations, people and nature, as well as global stability and sustainability. Accounting, accountability and governance are not merely abstract values. Given the interplay of these elements, they shape and change the contexts in which we live, work and play and, moreover, impact human behaviour, organizational and world culture, as well as organizational and social functioning and development.

INTRODUCTION This Edward Elgar Handbook presents an important opportunity to engage with readers in other disciplines, as well as the accounting discipline, to extend the reach and influence of key scholarly accounting, accountability and governance contributions and to identify proposed future directions and reforms. The Handbook’s distinctive feature is that it focuses on the interconnections between accounting, accountability and governance, all of which are key phenomena in creating and maintaining civil and ordered societies. Within a framework of ethical and responsible management, all of these are essential to the establishment of effective behaviour in organizations of all types around the globe. The health of organizations, both financial and moral, and the success and stability of capital and other markets is premised on relevant and reliable accounting information, proper accountability and effective governance. Understanding accounting, accountability and governance and the interplay between these elements in the contexts in which they operate, particularly international settings, is essential for personal and organizational success, as well as global stability and sustainability. During the past two decades, the notion of “public accountability”, according to the editors of The Oxford Handbook of Public Accountability, “has become an icon in political, managerial, and administrative discourse and the object of much scholarly analysis across a broad range of social and administrative sciences” (Bovens et al., 2014).1 This Oxford Handbook features 43 chapters, two of which mention “accounting” in the title, one of which is on “Accounting and Auditing” by Hayne and Salterio (2014).2 Hayne and Salterio (2014) state that their chapter 14

The interplay of accounting, accountability and governance  15 “outlines the sources of public accountability in financial accounting practices and how public accounting (that is, auditing) attempts to ensure financial accounts are trustworthy”.3 In this Edward Elgar Handbook, the concept of accountability in the context of studying the notions of accounting, accountability and governance and their interplay is indeed a form of public accountability. This notion of publicness has always been implicit in the literature forming the basis for the preparation of this Handbook. In accounting, the notion of “accountability to whom” concerns the “accountor” (agent) who has a duty to provide an account; that is, to be accountable to the “accountee” (principal). This publication is most purposely a Handbook of accounting, accountability and governance and the interconnections between accounting, accountability and governance. Why is this necessary or at least desirable? The short answer is that the interplay between accounting, accountability and governance is not often systematically addressed on an integrated basis in the scholarly literature. Our aim is to bring together in one place a range of examinations of how accounting, accountability and governance inter-relate as a “three-sided triangle”. The publishers initially suggested a Handbook of accounting and governance, but we suspected that the links between accounting and governance were frequently mediated by a concern with accountability. Before we proposed our book title to the publisher in December 2020, we searched the internet to identify previous studies linking accounting, accountability and governance. We found that book and journal titles often included two out of the three key themes, with several items linking accounting and accountability, and other items linking accountability and governance. Accountability is the common theme in both bodies of literature.4 This supports our initial intuition that accountability may be the “linking element” of the threesome. After extensive searching, we found only one publication whose main title included all three words: Public Sector Accounting, Accountability and Governance: Globalising the Experiences of Australia and New Zealand, edited by Pitcher and Gilchrist (2019).5

OVERVIEW OF RELEVANT PRIOR LITERATURE Our search revealed that accounting and accountability were linked in a book title as early as 1971, in the textbook Accountability and Accounting: An Introduction to the Study of Accountancy by C.A. Munkman. This book, which went through seven editions until 1996, was published in both English and French.6 Macdonald and Rutherford (1989) edited a posthumous Festschrift for Peter Bird of the University of Kent, entitled Accounts, Accounting and Accountability. This Festschrift reflects the late professor’s “interests and the range of his contributions to accountancy literature”.7 The order of words in the latter title suggests that accounts need to be prepared to carry out accounting, which is undertaken, at least in part, to achieve or discharge accountability. From the late 1980s, accounting and accountability became increasingly coupled together, particularly in more critical or radical writings about accounting. An early example was Corporate Social Reporting: Accounting and Accountability by Gray, Owen and Maunders (1987), which emphasized the need for companies to be accountable not just to shareholders for their financial performance but also to wider stakeholders for their social and environmental performance. A “complete revision” of this book was retitled Accounting and Accountability: Changes and Challenges in Corporate Social and Environmental Reporting, now by Gray,

16  Handbook of accounting, accountability and governance Owen and Adams (1996, Preface, p. ix).8 Accounting and accountability are now put first, and more prominently, in the book title, emphasizing the authors’ interest in problematizing the notion of accountability. A collection of published articles by Macintosh (2002), Accounting, Accountants and Accountability: Poststructuralist Positions, does not include governance in the title, but brings the human factor into the title by referring to accountants. The next two works also emphasize accounting and accountability in their titles. Edited by Laine, Tregidga and Unerman (2021), the third edition of Sustainability Accounting and Accountability9 elaborates their orientation towards the sustainability of our environment, which “is fundamental in the pursuit of low-carbon and less unsustainable societies”.10 Similarly, through using “society” in the main title, Accounting, Accountability and Society: Trends and Perspectives in Reporting, Management and Governance for Sustainability, Del Baldo, Dillard, Baldarelli and Ciambotti (2020), as editors, incorporate social and community concerns, ramifications and implications as the third key element in their trinity of study. By mentioning governance for sustainability in the subtitle, the editors imply that effective governance is a consequence of the adoption of adequate accounting and accountability practices and forms of reporting that properly acknowledges the obligations of enterprises to society in general, not just to the providers of capital. Linking accounting and accountability is no longer the domain of specialist books. Deegan (2020) in An Introduction to Accounting: Accountability in Organisations and Society aims to show how accounting is a social as well as a technical practice in this introductory textbook prepared for accounting students in higher education. The inclusion of a reference to accountability in the subtitle is intended to emphasize that organizations are accountable for their impacts on society and the environment. Accounting is not an end in itself; rather, it is a key means for making organizations responsible for acting sustainably.11 Turning to the main titles including governance, the following books were identified. Demirag (1998) emphasizes accountability and corporate governance in the title Corporate Governance, Accountability, and Pressures to Perform: An International Study. This is a comparative review of how governance systems in different countries counteract, or more likely reinforce, short-term pressures on management to achieve high, though possibly unsustainable, financial returns. A textbook by Solomon (2020), first published in 2004 and now in its fifth edition,12 is entitled Corporate Governance and Accountability. This book presents governance systems as ways of making organizations accountable to different stakeholders. Global Governance in Accounting: Rebalancing Public Power and Private Commitment, written by Zimmerman, Werner and Volmer (2008), compares accounting regulation in Germany, the UK and the United States, being concerned with how accounting as an economic and social activity is governed through rules and markets. A different take, however, is captured by Brennan (2008), editor of Corporate Governance and Financial Reporting, published in three volumes. Financial reporting is the disclosure of structured information about the financial position and performance of organizations and is based on the branch of accounting known as financial accounting. Financial reporting is heavily regulated through national corporate law and the issue and application of national or international accounting (financial reporting) standards.13 Brennan (2008), therefore, focuses on external financial reporting or regulated financial reporting, specifically in the form of general-purpose financial reports, which are used in discharging accountability to stakeholders and for decision making in allocating resources to facilitate effective governance.

The interplay of accounting, accountability and governance  17 More recently, Supiot (2017) has authored Governance by Numbers: The Making of a Legal Model of Allegiance (which was translated into English by Saskia Brown). While governance is stated in the title, accounting is represented in our view by reference to numbers, such as key performance indicators (KPIs) or metrics. Supiot argues that globalization relies on governance by numbers or, more specifically, the typical outcomes of a diversity of accounting measurement processes, otherwise known as accounting information systems, both financial and non-financial in orientation. Even more recently, Supiot (2022) pointed out in an address presented in Paris on 3 September 2019, attended by the editors and published in Accounting History, that “governance by numbers treats the human being as an intelligent machine”. This occurs, in the author’s view, when: Work ceased to be conceived as an energy source one owned and could hire out to someone in return for subordination; it was no longer an object or a thing separable from the contracting subject. Rather, governance decrees a new type of subject, the programmed subject, capable of self-objectification. (Supiot, 2022, p. 198)

Supiot (2022) completed his address by deferring to Tribus (1992), stating: I will leave the last word of this presentation to Myron Tribus (1992, p. 1459): “If you try to improve the performance of a system of people, machines, and procedures by setting numerical goals for the improvement of its individual elements, the system will defeat your efforts and you will be picking up the pieces where you least expect it.” (Supiot, 2022, p. 198)

At the time of finalizing this manuscript for publication, Public Sector Accounting, Financial Accountability and Viability in Times of Crisis, edited by Dabbicco, Bisogno, Caruana and Christiaens (2022), was published. This volume is concerned with public sector accounting and financial accountability and viability during the COVID-19 crisis. It highlights the central role played by governments in navigating the global pandemic, providing holistic perspective of government initiatives, including budgeting and financial reporting, and provides reflections on future challenges. Unlike Pitcher and Gilchrist (2019), these editors did not emphasize governance in the book’s title; rather, a narrower concern is depicted for public sector viability during the pandemic period to the time of completion for publication.

INTRODUCING THE ELEMENTS OF ACCOUNTING, ACCOUNTABILITY AND GOVERNANCE Our review of this literature led to deliberations on the fit of the elements of accounting, accountability and governance in this initial chapter and, more generally, within this volume. To start this process of addressing and articulating the interconnections between the three elements, we turned our attention to what is “governance” or, more specifically, corporate governance. Importantly, it is essential to acknowledge that there are many definitions of corporate governance; some are more formal than others. In 1992, the Cadbury Committee defined corporate governance in broad, over-arching terms as “the system by which companies are directed and controlled” (Cadbury, 1992, para. 2.5). The later definition provided by the Organisation for Economic Co-operation

18  Handbook of accounting, accountability and governance and Development (OECD), first promulgated in 1999, and now issued as the G20/OECD Principles of Corporate Governance, states: Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. (OECD, 2015, p. 9)

This definition delineates governance as dependent upon an assemblage of relationships between those parties who, by means of meaningful collaborative relationships, ensure that companies are effectively governed, across both time and space, in the interests of all stakeholders within a framework of ethical and responsible management. The G20/OECD Principles of Corporate Governance further state that effective or “good corporate governance will reassure shareholders and other stakeholders that their rights are protected and make it possible for corporations to decrease the cost of capital and to facilitate their access to the capital market” (OECD, 2015, p. 10). Given this high-level authoritative outline of corporate governance, and the need for governance to be effective, another prominent definition was accessed for establishing the interconnections between accounting, accountability and governance. The latest edition of Solomon (2020, p. 6) provides the following definition: Corporate governance is the system of checks and balances, both internal and external to companies, which ensures that companies discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activity.

Within this definition, the outcome of effective corporate governance is specifically identified as a key means for companies to “discharge their accountability” to a diversity of stakeholders. The definition acknowledges the wider appreciation and understanding of the stakeholder-orientated approach to corporate governance, recognized in the literature as essential in global, regional, national and local economy and society. This approach has begun to displace the previous disposition to view the corporation and its affairs as being conducted primarily in the interests of shareholders. The “business case” approach to corporate governance is premised on the notion that shareholders’ interests cannot be fully satisfied without a commitment by companies to be adequately accountable to a multiplicity of key stakeholders. In the long run, this orientation to corporate governance is necessary for the prosperity and/or preservation of all stakeholders. According to Solomon (2020, p. 6), the definition rendered of corporate governance “rests on the perception that companies can maximize value creation over the long term, by discharging accountability to all of their stakeholders and by optimizing their system of corporate governance”. Therefore, a component of corporate governance is to ensure adequate accountability to stakeholders. This is not the only form of accountability prevalent in organizations. Accountability or stewardship is a long-accepted concept. What do we understand is the purpose of accountability? Accountability can be simply defined, such as by Gray et al. (1996, p. 38), as: “The duty to provide an account (but by no means necessarily a financial account) or reckoning of those actions for which one is held responsible”. These authors make it clear that “accountability involves two responsibilities or duties: the responsibility to undertake certain actions (or

The interplay of accounting, accountability and governance  19 forbear from taking actions) and the responsibility to provide an account of those actions” (Gray et al., 1996, p. 38). There is also a diversity of modes or “styles of accountability” (Sinclair, 1995), including novels forms such as the notion of collective internal horizontal accountability (Fox, 2008) as applied by Sargiacomo et al. (2012) in their contribution “Accounting for Killing: Accountability for Death”. The notion of accountability involves the rendering of accounts to others, which is facilitated by the adoption and management of accounting practices, whether regulated by means of the application of accounting standards and other accounting rules or unregulated. Accounting practices are undertaken within accounting or management information systems, specifically systems comprising internal managerial controls within organizations and external reporting and disclosure to stakeholders outside these organizations, both of which constitute means of accountability. Like accounting in this calculative era of “governance by numbers” (Supiot, 2017), accountability is pervasive. Following Solomon (2020), accountability is a necessary pre-condition for effective or good corporate governance to be operationalized. Therefore, accountability is embedded in effective corporate governance. Under this notion, the elements of accountability and governance tend to overlap but they are not the same, nor is one a subset of the other. There are different models of corporate governance, such as the governors and directors, respectively, identified as “computing models of corporate governance” (Shah & Napier, 2019, p. 338, who examine the emergence of governance, drawing upon Napier, 1998). Notwithstanding the use of different models, effective corporate governance, in relatively simple terms, is dependent upon the practices of accounting, whether regulated or not, and requires a diversity of means of rendering accounts where accountability relationships exist between an accountor and an accountee. Internal and external accountability relies on issuing financial and/or non-financial reports and making other disclosures in the interests of being accountable, leading to assessments of the effectiveness of organizational governance. Accounting, on the other hand, is premised on the keeping of proper sets of accounts, maintaining adequate systems of internal control and the assurance provided through external audit or assurance. Accounting is a key device for the discharge of accountability, both within and outside organizations. But what is accounting today? Underpinning most key definitions of accounting is that provided (originally in 1941) by the American Institute of Accountants (now the American Institute of Certified Public Accountants – AICPA): The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof. (AIA, 1953, p. 9)

Another long-standing definition of accounting by the American Accounting Association (1966, p. 1) is founded on the notion of “decision-usefulness” of the accounting process and information produced and published: “Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of information”. Such definitions, however, need to recognize and reflect more proactively the multi-faceted conception of accounting as not only a technical but also a social and moral practice (see, for example, Tsahuridu & Carnegie, 2018; Carnegie & Tsahuridu, 2019).

20  Handbook of accounting, accountability and governance Carnegie et al. (2021a, p. 69; also see Carnegie et al., 2021b, 2022a, 2022b; Carnegie & Parker, 2023) propose a potential definition of accounting for consideration, discussion and debate: Accounting is a technical, social and moral practice concerned with the sustainable utilisation of resources and proper accountability to stakeholders to enable the flourishing of organisations, people and nature.

These authors argue that “accounting is not a mere neutral, benign, technical practice” (Carnegie et al., 2021a, p. 72). Adopting a new definition of accounting is argued by these authors to be important, for both accountants and non-accountants, in “understanding more fully the nature, roles, uses and impacts of accounting” and, as a result, should help to shape a better world (Carnegie et al., 2021a, p. 72). This definition is used to evaluate proposals to regulate the monetary valuations of the public collections of not-for-profit cultural or arts institutions around the globe (Carnegie et al., 2022a).14 Importantly, accounting, including the preparation and use of KPIs for performance measurement purposes, is a prime stimulator of human behaviour, impacting on organizational culture and actions of all forms around the globe. Carnegie (2022a), for instance, provides an evaluation of global university rankings under what is described as a “micro-measurement” approach to public university management in contrast to a “macro-contributions” approach, described as “the macro-micro contradiction in public university management” (also see Carnegie, 2022b). Meeting, or failing to meet, KPIs that are set as targets is increasingly associated with both formal and informal assessments of personal and group accountability in organizations and society. Recently, Robson and Ezzamel (2023) turned attention to social spaces around institutional fields, situated beyond corporations, regulatory agencies and professional organizations, addressing their importance in accounting innovation and development. Such spaces or agencies include university business schools, ratings and rankings agencies, think tanks, consultancies and other cultural fields impacting on accounting emergence and change. Robson and Ezzamel (2023, p. 1) focus on “these social spaces by developing the concept of the cultural fields of accounting practices as an institutional field level analysis that has so far been relatively neglected in the accounting literature”. In developing this concept, the authors define and characterize cultural fields of the genre, “emphasizing their cultural-cognitive character, their lack of formal governance, their dispersion and the varying social space they can inhabit” (Robson & Ezzamel, 2023, p. 1). This seems to constitute an emerging dimension in research relating to the interplay of accounting, accountability and governance.

INTERCONNECTION POINTS BETWEEN ACCOUNTING, ACCOUNTABILITY AND GOVERNANCE We believe that there are at least two major interconnection points. First, a need for accountability shapes the design, implementation, operation and review of governance structures. Indeed, if it were not for this need to ensure accountability, there would be much less interest in governance. Second, accounting is called upon to play key roles within governance in seeking to ensure and enable accountability and promote and enhance performance.

The interplay of accounting, accountability and governance  21 The notions of accounting, accountability and governance are not fixed in time and continue to evolve and change with implications for organizational and social functioning and development. Accountability continues to broaden out, contributing to new forms of governance. New forms of accounting arise particularly, in recent times, with a long-awaited focus emerging on the importance of producing and communicating “non-financial information” to stakeholders (see, for instance, Lai & Stacchezzini, 2021 and other contributions in a special issue of Meditari Accountancy Research on the theme “New Challenges in Sustainability Reporting”). By way of illustration, the Stakeholder Reporting Committee (SRC) of the European Accounting Association is focusing on non-financial reporting or sustainability reporting. The SRC’s mission “is to actively participate in the debate about how organizations can, and should, inform their wide range of stakeholders about their activities, including their impact on society”.15 The Global Reporting Initiative – the international organization that developed Global Reporting Initiative Standards – has published its standards in English and 11 other languages.16 Why is this Handbook important? In our view, understanding accounting, accountability and governance and appreciating the interplay between these elements in the contexts in which they operate in combination, whether these be local, national, regional or global settings, is essential for personal, organizational and environmental wellbeing, including for global stability and the sustainability of the planet and its humans and non-humans. In our view, this is not an overstatement, by any means, of the importance of the chapters of this volume for all citizens in all countries and regions, not just for professional accountants and auditors, both current and future generations alike. Overall, our approach to the Handbook was expressly intended to be as open as possible. We consider such an approach to be necessary in producing a truly international volume by respected scholars on accounting, accountability and governance from different parts of the globe, who are committed to viewing not only accounting, but also accountability and governance, as social and moral practices. As stated in our Introduction to this Handbook: “accounting performs accountability, accountability nurtures governance, governance presumes accounting”. Accounting, therefore, is perceived as a key facilitator of accountability and governance. This means that accounting, accountability and governance are to be studied, adopted, regulated and evaluated within the contexts in which they operate, rather than as merely abstract values.

NOTES 1. From the online abstract to Bovens et al. (2014), available at: https://​academic​.oup​.com/​edited​ -volume/​28191 (last accessed 6 July 2023). 2. The other chapter, entitled “Accounting for Crises” (Kuipers and ‘t Hart, 2014), uses the word “accounting” in the sense of “giving an explanation” rather than the narrower sense implied by Hayne and Salterio (2014) in their “Accounting and Auditing” chapter. 3. From the online abstract to Hayne and Salterio (2014), available at: https://​academic​.oup​.com/​ edited​-volume/​28191/​chapter​-abstract/​213127095 (last accessed 6 July 2023). 4. Accountability may also be more narrowly described as “financial accountability”, such as in the subtitle of Soll (2015, p. xi), who “looks back seven hundred years into the history of financial accountability”, and in Dabbicco et al. (2022). 5. An earlier public sector-focused text of the genre is Public Sector Accounting and Accountability in Australia by Funnell and Cooper (1998), the second edition of which, with no change in title, was

22  Handbook of accounting, accountability and governance written by Funnell, Cooper and Lee (2012). Neither edition, however, contains governance in the title, unlike Pitcher and Gilchrist (2019). 6. For more information, see www​.worldcat​.org/​title/​12883312 (last accessed 6 July 2023). 7. For more information, see www​ .amazon​ .co​ .uk/​ Accounts​ -Accounting​ -Accountability​ -G​ -Macdonald/​dp/​0747600368 (last accessed 6 July 2023). 8. Gray also contributed to a pioneering sustainability book, entitled Accounting for the Environment, appearing in two editions (Gray, Bebbington & Walters, 1993; Gray & Bebbington, 2001). 9. The first and second editions of this book with the same title were edited by Bebbington, Unerman and O’Dwyer (2007, 2014). Sadly, Jeffrey Unerman passed away in November 2020. 10. As stated in the Routledge “Book Description”; see www​.routledge​.com/​Sustainability​-Accounting​ -and​-Accountability/​Laine​-Tregidga​-Unerman/​p/​book/​9781032023106 (last accessed 6 July 2023). 11. During 2010–17, one the editors (Carnegie) worked with Deegan as professors of accounting at RMIT University when the first-named was Head of School, Accounting. 12. The first edition of Corporate Governance and Accountability was authored by Solomon and Solomon (2004). 13. For background, Napier (1995), Edwards (1989, 2019) and Ó hÓgartaigh (2020), for instance, provide historical accounts of the development of financial accounting and reporting in the UK. Refer to Previts and Merino (1998) for a historical account of the development of accounting in the United States, Murphy (1993) for a history of accounting thought and practice in Canada and Gibson (1971) for a foundation study on corporate disclosure in Australia. 14. Exposure Draft (ED) 78 “Property, Plant and Equipment” of the International Public Sector Accounting Standards Board (IPSASB), available at: www​.ipsasb​.org/​publications/​exposure​-draft​ -ed​-78​-property​-plant​-and​-equipment (last accessed 6 July 2023). 15. Refer to the SRC on the EAA website: https://​eaa​-online​.org/​stakeholder​-reporting​-committee (last accessed 6 July 2023). 16. Refer to the Global Reporting Initiative Standards website: www​.globalreporting​.org/​standards (last accessed 6 July 2023). The English language iteration is the only authorized language of Global Reporting Initiative Standards.

REFERENCES American Accounting Association (AAA) (1966), A Statement of Basic Accounting Theory. Committee to Prepare a Statement of Accounting Theory, AAA, Evanston, IL. American Institute of Accountants (AIA) (1953), Review and Résumé. Accounting Terminology Bulletins, Number 1. Committee on Terminology, AIA, New York. Bebbington, J., Unerman, J. and O’Dwyer, B. (eds) (2007), Sustainability Accounting and Accountability. Routledge, London. Bebbington, J., Unerman, J. and O’Dwyer, B. (eds) (2014), Sustainability Accounting and Accountability. 2nd ed., Routledge, London. Bovens, M., Goodin, R. and Schillemans, T. (eds) (2014), The Oxford Handbook of Public Accountability. Oxford University Press, Oxford. Brennan, N. (ed.) (2008), Corporate Governance and Financial Reporting. Three volumes, SAGE Library of Accounting and Finance, SAGE Publishing, London. Cadbury, A. (1992), Report of the Committee on the Financial Aspects of Corporate Governance. Gee & Co. Ltd., London. Carnegie, G.D. (2022a), “Global university rankings: the macro-micro contradiction in public university management”, Accounting and Management Review, Vol. 26 No. 1, pp. 77–109. Carnegie, G.D. (2022b), “Accounting 101: redefining accounting for tomorrow”, Accounting Education, Vol. 31 No. 6, pp. 615–628. Carnegie, G. and Parker, L. (2023), “Accounting and broad scope engagement: leveraging interdisciplinary and multidisciplinary approaches”, Knowledge Gateway, International Federation of Accountants (IFAC), New York, 27 April, available at: www​.ifac​.org/​knowledge​-gateway/​preparing​-future​-ready​

The interplay of accounting, accountability and governance  23 -professionals/​discussion/​accounting​-and​-broad​-scope​-engagement​-leveraging​-interdisciplinary​-and​ -multidisciplinary​-approaches (last accessed 6 July 2023). Carnegie, G.D. and Tsahuridu, E. (2019), “Key performance indicators and organizational culture: a new proposition”, Knowledge Gateway, International Federation of Accountants (IFAC), New York, 30 July. Carnegie, G., Parker, L. and Tsahuridu, E. (2021a), “It’s 2020: what is accounting today?”, Australian Accounting Review, Vol. 31 No. 1, pp. 65–73. Carnegie, G., Parker, L. and Tsahuridu, E. (2021b), “Redefining accounting for tomorrow”, Knowledge Gateway, International Federation of Accountants (IFAC), New York, 6 April, available at: www​ .ifac​.org/​knowledge​-gateway/​preparing​-future​-ready​-professionals/​discussion/​redefining​-accounting​ -tomorrow (last accessed 6 July 2023). Carnegie, G.D., Ferri, P., Parker, L.D., Sidaway, S.I.L. and Tsahuridu, E.E. (2022a), “Accounting as technical, social and moral practice: the monetary valuation of public cultural, heritage and scientific collections in financial reports”, Australian Accounting Review, Vol. 32 No. 4, pp. 460–472. Carnegie, G., Parker, L. and Tsahuridu, E. (2022b), “SOS accounting educators: developing accounting and accountants for a better world”, Knowledge Gateway, International Federation of Accountants (IFAC), New York, 19 April, available at: www​.ifac​.org/​knowledge​-gateway/​preparing​-future​-ready​ -professionals/​discussion/​sos​-accounting​-educators​-developing​-accounting​-and​-accountants​-better​ -world (last accessed 6 July 2023). Dabbicco, G., Bisogno, M., Caruana, J. and Christiaens, J. (eds) (2022), Public Sector Accounting, Financial Accountability and Viability in Times of Crisis. Palgrave Macmillan, Cham. Deegan, C. (2020), An Introduction to Accounting: Accountability in Organisations and Society. Cengage Learning, Sydney. Del Baldo, M., Dillard, J., Baldarelli, M. and Ciambotti, M. (eds) (2020), Accounting, Accountability and Society: Trends and Perspectives in Reporting, Management and Governance for Sustainability. Springer, Cham. Demirag, I.S. (ed.) (1998), Corporate Governance, Accountability, and Pressures to Perform: An International Study. Studies in Managerial and Financial Accounting, Vol. 8, JAI Press, Stamford, CT. Edwards, J.R. (1989), A History of Financial Accounting. Routledge, London. Edwards, J.R. (2019), A History of Corporate Financial Reporting in Britain. Routledge Studies in Accounting, Taylor and Francis, London. Fox, J.A. (2008), Accountability Politics: Power and Voice in Rural Mexico. Oxford University Press, Oxford. Funnell, W. and Cooper, C. (1998), Public Sector Accounting and Accountability in Australia. UNSW Press, Sydney. Funnell, W., Cooper, C. and Lee, J. (2012), Public Sector Accounting and Accountability in Australia. 2nd ed., UNSW Press, Sydney. Gibson, R.W. (1971), Disclosure by Australian Companies. Melbourne University Press, Melbourne. Gray, R. and Bebbington, J. (2001), Accounting for the Environment. 2nd ed., SAGE Publications, London. Gray, R., Bebbington, J. and Walters, D. (1993), Accounting for the Environment. SAGE Publications, London. Gray, R., Owen, D. and Adams, C. (1996), Accounting and Accountability: Changes and Challenges in Corporate Social and Environmental Reporting. Prentice-Hall, London. Gray, R., Owen, D. and Maunders, C. (1987), Corporate Social Reporting: Accounting and Accountability. Prentice-Hall International, London. Hayne, C. and Salterio, S.E. (2014), “Accounting and auditing”. Bovens, M., Goodin, R. and Schillemans, T. (eds), The Oxford Handbook of Public Accountability. Oxford University Press, Oxford, pp. 421–440. Kuipers, S. and ‘t Hart, P. (2014), “Accounting for crises”. Bovens, M., Goodin, R. and Schillemans, T. (eds), The Oxford Handbook of Public Accountability. Oxford University Press, Oxford, pp. 589–602. Lai, A. and Stacchezzini, R. (2021), “Organisational and professional challenges amid the evolution of sustainability reporting: a theoretical framework and an agenda for future research”, Meditari Accountancy Research, Vol. 29 No. 3, pp. 405–429.

24  Handbook of accounting, accountability and governance Laine, N., Tregidga, H. and Unerman, J. (eds) (2021), Sustainability Accounting and Accountability. 3rd ed., Routledge, London. Macdonald, G. and Rutherford, B.A. (eds) (1989), Accounts, Accounting and Accountability. Hutchinson, London. Macintosh, N.B. (2002), Accounting, Accountants and Accountability: Poststructuralist Positions. Routledge Studies in Accounting, Taylor and Francis, London. Munkman, C.A. (1971), Accountability and Accounting: An Introduction to the Study of Accountancy. Cengage Learning, London. Murphy, G.J. (ed.) (1993), A History of Canadian Accounting Thought and Practice. Garland Publishing, New York. Napier, C.J. (1995), “The history of financial reporting in the UK”. Walton, P. (ed.), European Financial Reporting: A History. Academic Press, London, pp. 259–283. Napier, C.J. (1998), “Intersections of law and accountancy: unlimited auditor liability in the United Kingdom”, Accounting, Organizations and Society, Vol. 23 No. 1, pp. 105–128. Ó hÓgartaigh, C. (2020), “Financial accounting practice”. Edwards, J.R. and Walker, S.P. (eds), The Routledge Companion to Accounting History. 2nd ed., Routledge, London, pp. 185–213. Organisation for Economic Co-operation and Development (OECD) (2015), G20/OECD Principles of Corporate Governance. OECD Publishing, Paris. Pitcher, R. and Gilchrist, D. (eds) (2019), Public Sector Accounting, Accountability and Governance: Globalising the Experiences of Australia and New Zealand. Routledge Studies in Accounting, Taylor and Francis, London. Previts, G.J. and Merino, B.D. (1998), A History of Accountancy in the United States: The Cultural Significance of Accounting. Ohio State University Press, Columbus, OH. Robson, K. and Ezzamel, M. (2023), “The cultural fields of accounting practices: institutionalization and accounting changes beyond the organization”, Accounting, Organizations and Society, Vol. 104, article 101379. Sargiacomo, M., Servalli, S. and Carnegie, G.D. (2012), “Accounting for killing: accountability for death”, Accounting History, Vol. 17 No. 3/4, pp. 393–413. Shah, N. and Napier, C.J. (2019), “Governors and directors: competing models of corporate governance”, Accounting History, Vol. 24 No. 3, pp. 338–355. Sinclair, A. (1995), “The chameleon of accounting: forms and discourses”, Accounting, Organizations and Society, Vol. 20 No. 2/3, pp. 219–237. Soll, J. (2015), The Reckoning: Financial Accountability and the Rise and Fall of Nations. Basic Books, New York. Solomon, J. (2020), Corporate Governance and Accountability. 5th ed., John Wiley & Sons, Chichester. Solomon, J. and Solomon, A. (2004), Corporate Governance and Accountability. John Wiley & Sons, Chichester. Supiot, A. (2017), Governance by Numbers: The Making of a Legal Model of Allegiance. Hart Publishing, Oxford (translated into English by Saskia Brown). Supiot, A. (2022), “From subordination to programming: the deadlocks of labour governance by numbers – keynote address at the Tenth Accounting History International Conference”, Accounting History, Vol. 27 No. 2, pp. 194–199. Tribus, M. (1992), Quality First: Selected Papers on Quality and Productivity Improvement. 4th ed., National Society of Professional Engineers, Washington, DC. Tsahuridu, E. and Carnegie, G. (2018), “Accounting as a social and moral practice”, Knowledge Gateway, International Federation of Accountants (IFAC), New York, 30 July, available at: www​ .ifac​.org/​knowledge​-gateway/​building​-trust​-ethics/​discussion/​accounting​-social​-and​-moral​-practice. Zimmerman, J., Werner, J.R. and Volmer, P.B. (2008), Global Governance in Accounting: Rebalancing Public Power and Private Commitment. Palgrave Macmillan, Basingstoke.

2. Historical overview of governance and its relationship with accounting and accountability Alessandro Lai, Giulia Leoni and Riccardo Stacchezzini

OVERVIEW This chapter adopts a historical perspective to explore how governance intimately interconnects with both accounting and accountability. While governance issues have recently gained increasing attention, governance is a concept that has permeated various disciplines beyond economics and finance. Because of the versatility and multifaceted nature of governance, nowadays its study concerns a large variety of aspects and perspectives, especially in social and political sciences. Accounting scholars have developed a wide interest in (corporate) governance issues. These analyses largely converge on the accountability involved in governance choices, which may vary according to the role of governance actors in different organizations. Drawing on the concept of social and moral practice, this chapter offers a short history of governance, extended to social sciences; detects the interconnections among governance, accounting and accountability; and proposes a future research agenda to disclose their mutual interrelations.

INTRODUCTION The purpose of this chapter is to outline the historical development of governance in various social sciences, paying attention to its intertwining with accounting and accountability, and to provide a brief review of historical research dealing with the matter. The theoretical underpinning of the analysis relies on the ideas expressed in Chapter 1 of this Handbook by Carnegie and Napier, who remark how a need for accountability shapes the design, implementation, operation and review of governance structures. This need feeds the current increasing interest in governance. Correspondingly, accounting plays a key role in seeking to promote accountability and enhance performance. Given these interconnections, the three elements, by implication, constitute technical, social and moral practice (see Chapter 1). The analysis focuses – in the first section – on the origins of governance in different settings, as a political and social practice; on its main features; and on the link with accountability. In the second section, the advent of corporate governance is considered, together with the needs to be satisfied by this practice, such as the accountability of management towards owners, the definition of the board’s structure and operation and the protection of shareholders’ rights and subsequently stakeholders’ rights. The increasing relevance of governance in social sciences – as depicted in the third section – enables the reader to understand the huge interest gained by the matter in both the accounting and management sciences and the political sciences, or public sector studies, where governance appears as conveying a wide spectrum of meanings overcoming the term government. In 25

26  Handbook of accounting, accountability and governance the fourth section, the historical intertwining of accounting, accountability and governance is examined by considering multifaceted streams of research (quantitative and qualitative, positivistic, and critical or interpretative), the relevance of the historical settings to investigate the matter and the more recent historical research on the theme. Finally, conclusions offer insights into possible future research.

GOVERNANCE IN HISTORICAL PERSPECTIVES AS A POLITICAL AND SOCIAL PRACTICE Governance has become increasingly relevant in the last decades within the academic debate among accounting practitioners and professional bodies, as well as in everyday life (Solomon, 2007, p. xiii). The term “governance”, however, originated from far-removed and different converging paths, and embraces a wide range of issues concerning corporate entities (Clarke & Branson, 2012) and other organizations, including entities in the public sector (Bevir, 2011b). Some initial insights on the origin of the term governance, its use in ancient times as well as in current debates and its diffusion to corporate settings have been offered in the literature with a focus on the British context (Shah & Napier, 2019), thereby contributing to more reflections on the topic. From a historical point of view, “governance” has undergone meaning changes across time and space, from referring to “the office, function, or power of governing” to the “conduct of life or business”, and is nowadays defined as “controlling, directing, or regulating influence; control, mastery”, as articulated in the Oxford English Dictionary (2022). For instance, the use of “governance” – which has shifted greatly with time – can be related to ancient debates about how an entire country was to be governed, as revealed by examination of the Google Books corpus of the English language (Shah & Napier, 2019). Indeed, research has shown that “governance” appeared most often in the 1580s, in the 1640s and 1650s (during the English Civil War and Commonwealth periods), in the 1680s (during the “Glorious Revolution”), and in the 1710s and 1740s (during the Jacobite threat to Hanoverian rule). All these periods were characterized by a perceived challenge to the role of the monarch in government. In the 19th century, “governance” was used in Anthony Trollope’s novels (1855, 1857) with reference to the governing of hospitals and similar establishments, thereby showing that discourses of governance were associated with charitable and other not-for-profit institutions. This political use of governance continued in the 1970s when, notably, the retired British Prime Minister Harold Wilson published a book entitled The Governance of Britain (1976), in which he discussed how Britain was governed and how government should be carried out. Shah and Napier (2019, p. 340) show how this term must be considered unusual, even pretentious or “pompous”, and refer to a comment on Wilson’s book by Stansky (1977, p. 1260), who noted that “‘governance’ is meant in the most limited and exact sense, and we are given a rather detailed account of the role of the prime minister in the British system”. The trend changed during the 1990s when it became apparent that “there has been a notable increase in the frequency with which the previous obsolete term ‘governance’ is used, either as a synonym or substitute for ‘government’” (Shore, 2011, p. 288; see also Pagden, 2008, pp. 6–8; Shil, 2008, p. 24). As a result, the term “governance” became broadly accepted and diffused, and in the month of May 1997, the following statement was made (Shore, 2011, p. 288):

Historical overview of governance  27 [The] New Labour party set out a new vision for Britain that entailed a sea change in the way the country would be governed, its aspiration being to bring about a shift from government to “governance”.

Indeed, the previous negative perceptions about the use of “governance” dissipated (Shah & Napier, 2019, p. 340), and another British prime minister (Gordon Brown) used “governance” to discuss the government’s vision and proposal for constitutional renewal about four main subjects: (1) limiting the power of the executive, (2) making the executive more accountable, (3) re-invigorating democracy and (4) discussing the relationship between the citizen and the state (United Kingdom Government, 2007, pp. 6–8). The need for an increased level of accountability in British governance compelled the government to identify detailed actions “to ensure that it is answerable to Parliament and the people” (United Kingdom Government, 2007, p. 7). In the same decade, the European Union (EU) published a white paper on “European Governance” (European Commission, 2001), pointing out that “the principles of governance refer to the way in which the Union uses the powers conferred on it by its citizens”. In this document, the term “European governance” refers “to the rules, processes and behaviours that affect the way in which powers are exercised at European level, particularly as regards openness, participation, accountability, effectiveness and coherence” (European Commission, 2001, p. 5). Governance is not only defined by but also explicitly linked to “accountability” as pivotal for the EU to respond to the challenge of opening up its “policymaking to make it more inclusive and accountable”, with the final aim to “connect the EU more closely to its citizens” (European Commission, 2001, p. 6). The linkage between governance and accountability is further underlined by the following statement from the EU: The roles in the legislative and executive processes need to be clearer. Each of the EU institutions must explain and take responsibility for what it does in Europe. But there is also a need for greater clarity and responsibility from Member States and all those involved in developing and implementing EU policy at whatever level. (European Commission, 2001, p. 8)

The concept of governance is characterized by two distinct features (Joerges, 2001). First, governance is a broader concept than “government” as it involves a wide range of institutions and actors in the production of policy outcomes (Painter, 2017), real actions, developments and different behaviours. Second, governance refers to the nature of the relationship between organizations as a particular form of coordination, in contrast to the top-down control through hierarchy (Sellers, 2011) and the individualized coordination through markets (Esmark, 2011): “governance involves coordination through networks and partnerships”, referring to “the self-organisation of inter-organisational relations or to self-organising, interorganisational networks” (Shore, 2011, p. 294). Accordingly, governance appears in contrast to the old idea of monolithic and formalized states (Bevir, 2011a, p. 1), while it draws attention to the processes and interactions among various actors to combine all social interests and produce policies that are inclusive of all interests. Needless to state, this is also the consequence of how the relationship between the state government and society significantly changed in the late 20th century (Sellers, 2011, p. 124; Blomgren Bingham, 2011, p. 386). Indeed, political actors are increasingly constrained and pressured by various social actors, including private firms and non-governmental and not-for-profit organizations. Thus, this renovated concept depicted by governance focuses on

28  Handbook of accounting, accountability and governance establishing societal goals, and mobilizing the resources necessary to reach such goals (Peters, 2011, p. 78), while being more inclusive (Koikkalainen, 2011, p. 454) by creating more consistent and coordinated policies. Consequently, there are three main features that generally characterize governance in the political field (Bevir, 2011a, p. 2). First, governance practices are often hybrid, combining administrative practice systems with market mechanisms and non-profit organizations. Second, governance is multijurisdictional, as it combines people and institutions across different policy sectors and different levels of government. Third, it connects an increasing range and plurality of stakeholders involved in the governance processes: the main question is not “who governs but how governments and various actors involved in governance process operate” (Le Galès, 2011, p. 142). This short overview of the concept of governance in the political field is in tune with the idea that governance “was originally a term used in the context of how nations are (were) governed, and its ambit became extended to local government and to ‘public interest’ entities such as alms-houses, schools and hospitals” (Shah & Napier, 2019, p. 340). As a result, it is not surprising that “at a more local level, the reform of public and private institutions, including schools, hospitals, universities … was also re-cast in terms of managerialist notions of ‘governance and accountability’” (Shore, 2011, p. 288).

THE ADVENT OF CORPORATE GOVERNANCE The political use of governance has a longer course than its use in the world of corporations (corporate world), which is a more recent creation (Gomez, 2003; Ocasio & Joseph, 2005; Cheffins, 2012; Shah & Napier, 2019; Lund & Pollman, 2021; Lambert, 2021). However, governance within the corporate world has been “with us” since the possibility of conflicts between investors and managers arose (Wells, 2010, p. 1251). This can be dated back to the 16th and 17th centuries with the formation of the East India Company, the Hudson’s Bay Company, the Levant Company and other major chartered companies, as presented in Spraakman (1999, 2006) and Spraakman and Wilkie (2000). The composite term “corporate governance” came into vogue in the early 1970s, mainly in the US, 25 years before it became a worldwide subject of debate by academics, regulators, managers and investors (Cheffins, 2012, 2013, 2015). The early developments – from the 1970s to the 1990s – have relevance only to the US given that corporate governance acquired a strong international dimension only in the 1990s (Clarke, 2011; Hilt, 2014; Wright, 2014; Cheffins, 2015). In particular, a connection has been observed between the term “corporate governance” and the rise of the shareholder primacy movement (Sneirson, 2019), which has become the dominant paradigm across time and space (Lund & Pollman, 2021, p. 2569). Indeed, it is pertinent to focus on the process through which debates about managerial accountability, board structure and shareholders’ rights became challenged through corporate governance (Cheffins, 2012). Beyond its academic origins, corporate governance appeared in the New York Times in 1972 (Pargendler, 2016, p. 373); thereafter, the US Securities and Exchange Commission (SEC) considered it relevant in the reform agenda in the mid-1970s (Cheffins, 2012, p. 2). In addition, in 1976, corporate governance appeared in the Federal Register (Ocasio & Joseph, 2005, p. 167), the official journal of the Federal Government, as the SEC began to treat man-

Historical overview of governance  29 agerial accountability as a part of its federal regulatory remit: corporate governance in the US was a means for evolutionary process towards a higher federalization (Steinberg, 2018). Many stories of bankruptcy, bribery or fraud were linked to governance issues, as reported in Cheffins (2012) and Lund and Pollman (2021, p. 2570): for years, the business pages of American newspapers carried a continuing story of business misconduct (Cheffins, 2018) with its origins in problems of, and weaknesses in, corporate governance. Stemming from the analogy between governing a state and governing a corporation, the notion of corporate governance expressed the limitations on corporate power and the risks of misconduct arising because of internal constraints. According to Lamoreaux (2009, p. 9), from a historical reading of the main corporate governance issues, one learns that shareholders in a corporation face two types of problem: first, those relating to expropriation by controlling shareholders or by managers, and second, those referring to expropriation by greedy rulers or – more generally – by the state. Paradoxically, the more successful investors are those who are more capable of protecting their capital from the state, while the least capable are those who need to ask the state to protect their capital from controlling shareholders or aggressive managers. As a result, the better the investors are at obtaining restraints on insiders, the more likely they are to become vulnerable to the expropriation and control of the state. While this trade-off has been changing over time, both types of threats continue informing corporate governance debates. Academics from various disciplines have sought to explain the increasing diffusion of corporate governance in the Anglo-American world, with many contributions coming from business schools, economics departments and law faculties and with marked influence on the whole world (Buck & Tull, 2000). This literature has been mostly ahistorical in nature (Maclean, 1999, p. 109; O’Sullivan, 2001, p. 295). However, from the end of the 20th century, historical viewpoints began to be considered (Maclean, 1999, pp. 105–109) and many contributions began to be published by scholars of history or of business history (see, for instance, Coffee, 1999, 2001; Farrar, 1999; Cheffins, 2001; Toms & Wright, 2002; Morck & Steier, 2005). These authors pointed out the corporate governance characteristics and issues in different countries (Morck & Steier, 2005), as well as the links between such corporate governance characteristics and various models of capitalism. The UK was the first major industrial nation to undertake this journey, followed by other countries in Europe (Cheffins, 2001, p. 87). By the 1930s, publicly held corporations managed by professional managers and owned by dispersed shareholders were playing a role in the US economy. In the following decades, the British system of ownership and control moved along similar lines, while other countries were slower to advance in this way as the models and systems of capitalism were different (Albert, 1992). Indeed, the UK and US represented and led the so-called Anglo-American capitalism (or market-orientated or outsider system), while countries such as Germany and Japan were aligned to the so-called Rhenish capitalism (or network-orientated or insider system) and others including Italy, France and Spain appertained to a Latin capital model (typical of southern Europe and based on a concentrated ownership and high levels of family business capitalism). These deep differences among forms of capitalism in different countries (Cheffins, 2008, pp. 4–8; von Rosen, 2007; Hilt, 2008; van Ees et al., 2008; Chung et al., 2012; Colli, 2013) had implications for corporate governance practices, as well as for the growing academic research in the field, even though the globalization and general standardization of regulation (including that pertaining to corporate governance) had fostered a progressive convergence

30  Handbook of accounting, accountability and governance towards similar governance models and structures, even in historically and culturally different countries (Morck & Steier, 2005; Lambert, 2021). Historical research on the origins of “corporate governance” shows that in early chartered companies, the most senior individual was usually known as the governor, who was supported by assistants and had considerable power (Shah & Napier, 2019, p. 351). However, in the 19th century, the “collectivity model” of corporate governance, deriving from 17th- and 18th-century practices, became common (Napier, 1998), and corporate board members of listed companies became known as “directors” and not governors (Shah & Napier, 2019, p. 351), and are now commonly regarded as non-executive directors. Despite these premises, corporate governance rather than “corporate direction” was used to underline the political nature of running companies, similar to the shift from “government” to “governance” about the states, as previously addressed. The use of “governance” is consistent with the notion that the direction and management of companies is “a political process as much as, if not more than, a process of rational organisation, and hence should be considered through the originally ‘political’ notion of governance” (Shah & Napier, 2019, p. 351). We can conclude that the historical origin of governance is linked to the idea of a political and consequently a social practice. Both in public entities and in corporate entities, these needs favoured the introduction of governance, substituting the earlier needs. This is much more than saying that it originated from the need in economics (concerning corporate governance) and political science (pertaining to state governance) for an all-embracing concept capable of conveying diverse meanings not covered by the traditional use of government (Rhodes, 1996; European Commission, 2001). Further, the political and social nature of the concept of governance inevitably connects it to a need for accountability about the results of the decisional processes of people having power within the organizations. Rached (2016, p. 320) remarks: Accountability directs itself to the phenomenon of power. It hinges upon the divide between power-holders and subjects to power. It established a peculiar and contingent sort of relationship between both sides (by converting the latter into an “account-holder”).

This is aimed at providing an account of how such practice (that is, the governance itself) has been designed and carried out in practical terms in each organization as the specific context in which governance operates. Tracing the historical roots of governance can enhance our understanding of its interrelations with accounting and accountability, and further stretch the frontiers of corporate governance research (Brennan & Solomon, 2008; Ahrens et al., 2011). Accounting, accountability and governance must be strictly interconnected (Brennan & Solomon, 2008; Rached, 2016; Dillard & Vinnari, 2019; Carnegie & Napier, 2012), and they are not limited to a mere technical practice but also importantly constitute social practice, as well as moral practice (Carnegie et al., 2021; Francis, 1990): a moral agent has to discharge the accountability for their actions (Rached, 2016, p. 319) to a “significant other”, and “the ‘other’ is only ‘significant’ as far as she has a credible claim on the power-holder, that is the ability of demanding the latter to furnish an account for her conduct” (Rached, 2016, p. 323). Even within the definition of corporate governance of the Organisation for Economic Co-operation and Development (OECD), the social and moral considerations are depicted as necessary parts of what is commonly known as good (or effective) corporate governance, thereby confirming the different dimensions of governance (OECD, 2022a, 2022b): every state

Historical overview of governance  31 needs to promote a framework for good corporate governance, able to enhance the division of responsibilities among different supervisory, regulatory and enforcement authorities, and to disentangle the complexity among different responsibilities in properly conducting an entity. This attitude is strongly based on a moral need, associating corporate governance with the protection and wardship of the interests of the many subjects involved. First are the shareholders as “the corporate governance framework should protect and facilitate the exercise of shareholders’ rights” (OECD, 2022a, emphasis added). Besides, the OECD suggests that “the corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises”. To reach these purposes, according to the OECD, a good “corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company” (OECD, 2022a, emphasis added); about this requirement, it has been noticed that “a strong disclosure that promotes real transparency is a pivotal feature of market based monitoring of companies and is central to shareholders’ ability to exercise their ownership rights on an informed basis” (Mehrpouya & Salles-Djelic, 2019, p. 20). Furthermore, the OECD states that “the corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders” (OECD, 2022a, emphasis added). The reference to “timely and accurate disclosure” (the words are exactly those used by the OECD, 2022a) leads the reader to expect valuable reporting (even about governance itself) supported by the accounting system. This means the delivery of accurate information about crucial aspects of the financial situation; corporate performance; the structure of the ownership; and how relationships among powers are defined and regulated at the corporate level – that is, as governance practices. Besides, accountability referring to any aspects of the actions and related disclosure has been considered by the OECD as essential to the development of widespread good governance. As Mehrpouya and Salles-Djelic (2019, p. 20) remark: Improving the accountability of corporations to investors with the objective of economic efficiency lay at the heart of the corporate governance program, and the OECD Principles rapidly became an international benchmark and blueprint.

THE INCREASING RELEVANCE OF GOVERNANCE IN THE SOCIAL SCIENCES From the end of the 20th century, studies of governance focused mainly on corporations (Cheffins, 2013) and the economic and managerial problems related to the ideas forwarded by agency theory: aligning the interests of the ownership (principal) and the management (agent), as well as reducing the opportunistic behaviour of managers, was the purpose of this new discipline (Jensen & Meckling, 1976). This explains why this stream of research has a long and successful tradition in economics. It is related to the conceptualization of the modern corporation (Berle & Means, 1932), and the interest in management reflects how their behaviour affects the value and growth of corporations (Baumol, 1959). It also deals with the consequences of the agency relationship occurring when the principals (owners or shareholders) are unable to exert direct control over the agents (management) (Jensen & Meckling, 1976). It follows the

32  Handbook of accounting, accountability and governance perceived need to study governance solutions that may be able to reduce the agency loss for the principal (Eisenhardt, 1989). The main instruments proposed to achieve this purpose are the board composition and regulation (Hermalin & Weisbach, 1991), the role of independent directors (Byrd & Hickman, 1992) and board committees (Klein, 2002), and management compensation plans (Core et al., 1999). Before the early 1990s, studies in corporate governance, as a direct consequence of the “narrow” perspective coming from agency cost theory, focused on the tensions between shareholders and the management, and on how to reduce these. Afterwards, these studies progressively extended their spectrum to include stakeholders and their relations with the corporation, in line with the greater relevance and impact that stakeholder theory (Freeman et al., 2010; Wagner Mainardes et al., 2012; Ayuso et al., 2014) was having in economics and financial studies, as well as in accounting (Miles, 2019) and management studies (Bosse & Sutton, 2019), which called for the consideration of stakeholders’ interests by the company’s management as a key factor for long-term profitability. Corporate governance mechanisms and procedures began to be considered relevant matters to respond to stakeholder interests as well, in tune with a world no longer regulated only by financial interests. The need for transparency and accountability towards significant actors (Rached, 2016; Mehrpouya & Salles-Djelic, 2019) was not only an answer to a growing need for compliance (Stacchezzini et al., 2020) with best governance practices, but also related to continued expected enhancement of corporate performance: this is the final aim of the practice(s) we have spoken about (Carnegie & Napier, 2012). In the research domain, the inclusion of stakeholders in governance studies can be considered a challenge compared with more traditional approaches, as well as an opportunity to extend research to different types of organization, such as non-profit, charities and public settings, whose objectives differ from the traditional financial advantage and where shareholders are less important or even absent. Nevertheless, for these organizations, a reasonable expectation of new governance patterns is also an improvement of their results, accounted through models and devices different from financial ones. A further extension of governance studies is linked to the increasing attention given to governance issues in political sciences and in public sector studies (Levi-Faur, 2012; Peters, 2012), which goes far beyond the agency theory view limited to public and proprietary companies and their shareholders. Such studies expand the subjects that are interested in, and affected by, governance, including citizens and society as a whole. In these new areas, governance is a broad concept conveying a wide spectrum of meanings overcoming the term “government” (Rhodes, 1996). The latter is strictly related to “a body” that has the responsibility to drive an organization, private or public, or even a state or a union of states. The former includes not only “a body” but also a variety of procedures and mechanisms steering individuals, groups and organizations, as in not-for-profit or public organizations. This broader concept – “governance” rather than “government” – can be easily applied to the different types of organization (Bevir, 2011b, pp. 1–16) demanding a multifaceted approach to how they are governed (Lynn, 2012; Richardson, 2012). As it is not always easy to distinguish public, private and voluntary sectors (Rhodes, 1997, 2007), governance (not government) is more suitable to explain how these organizations are regulated. This is the reason why governance has been widely used in studies on networks, especially within the so-called Anglo-governance “School of Political Science” (Bevir & Rhodes, 2011, pp. 205–206). Even if many authors do not agree with these new concepts of decision-making

Historical overview of governance  33 in political science (Marinetto, 2003), the shift from “government to governance” provides a wider framework to be applied to the different types of organization expressing a composite mix of bureaucracy, markets and networks, and going beyond this mix (Esmark, 2011, p. 95). Along these paths, it is reasonable to wonder about what the limit of the state’s authority is, what role the voluntary sector plays and how governance occurs in areas where the state lacks effective control or there is no state and many practices can be involved in this change (Lynn, 2011; Cohen & Eimicke, 2011; Smith, 2011; Slaughter & Hale, 2011). This explains why some scholars see governance as a result or a cause of the decline of the state or an adaptation of the state to increasing societal complexity. A historical reading of governance cases in the public sector suggests that complex and hybrid organizations with many stakeholders rarely exhibit the real chains of command of hierarchic bureaucracies (Bevir, 2011a, p. 11). Policymakers and their agents have historically struggled to find effective ways of acting, and the fragmentation of governing can appear to make control, steering and coordination more and more elusive. This may increase the various dilemmas that – in public sector settings – affect governance as theory and social practice. These dilemmas can be summarized as follows: the level of legitimacy the governance system is able to gain, how to engage collaborative governance, how to improve participation at any level of the governance machine, how to stimulate leadership, how to arrange management in networks, how to promote social inclusion, how to build capacity, how to achieve a satisfying level of decentralization, how to improve regulation and how to promote sustainable development. These dilemmas represent interesting paths for future research.

THE HISTORICAL INTERTWINING OF ACCOUNTING, ACCOUNTABILITY AND GOVERNANCE Accounting, accountability and governance have been considered strongly intertwined. Accounting research has referred to this link from various perspectives (Turnbull, 1997, p. 180; Sloan, 2001, p. 336; Parker, 2018, p. 294, Carnegie & Napier, 2012). Indeed, there is a constitutive reason explaining this intertwining: “accounting is a technical, social and moral practice concerned with the sustainable utilisation of resources and proper accountability to stakeholders to enable the flourishing of organisations, people and nature” (Carnegie et al., 2021, p. 69). Accounting is useful for several purposes (Hopwood, 1983), being an irreplaceable and unavoidable tool for steering the directions of the actors involved in a social setting and for an organization as a whole. Accountability is strictly linked to accounting, not only for the root of the word: “accountability is limited by what is disclosed and what we disclose is limited by the extant accounting system” (Dillard & Vinnari, 2019, p. 16). However, according to a different perspective, the accounting system could be designed to address specific requirements of alternative systems (Dillard & Vinnari, 2019, p. 16). If we consider this feature along a diachronic perspective, we realize that the intertwining has been shaped differently over time in order to facilitate a more pluralistic and democratically governed society whose requirements were and are continuously changing. As a social practice, accounting requires and determines interactions among the various actors who are involved in an accounting process and stimulates fruitful interactions able to condition the results accounted for. At the same time, governance cannot be conceived as an

34  Handbook of accounting, accountability and governance action to be performed by a single subject or body, as it is in the case of governments, but as a structure of rules and a process of steering (“governance” comes from the ancient Latin guberno, which means to steer) (Clarke, 2017), involving necessarily and indisputably a social setting. Governance can be observed and experienced, but it does not have a correspondent transitive verb associated with it. Instead, government can be executed by governing as there is a transitive verb connected to it (that is, to govern) (Offe, 2009). This is why the idea of a dialogical accountability – as a way to conceptualize accountability systems in a pluralistic society characterized by multiple and often conflicting interests (Dillard & Vinnari, 2019) – can fit particularly the relationship between accounting and accountability if a governance perspective is considered. This should be emphasized in cross-disciplinary accounting research as it has been noted that “there is a preponderance of cross-disciplinary research in accounting that has for several decades addressed accountability issues in social and environmental accounting” (Dellaportas et al., 2022, p. 3, citing Tweedy & Hazelton, 2019). These ideas are relevant in perceiving how accountability, accounting and governance interact in different streams of research. The Debate in Different Accounting Streams of Research Governance is a native social conception, in tune with the view of accounting and accountability within critical and interpretative accounting scholarship. However, it is not exogenous to quantitative scholarship if one considers the variety of relations and proxies used to find interconnections among variables in the positive accounting research field. In the quantitative stream, accounting research has the main purpose to investigate the differential effects of alternative choices in governance, thereby “treating the organisation and/or the board as a virtual black box that contains some mystical processes into which key inputs are fed and from which outcomes emerge” (Parker, 2018, p. 284). Passing through many of these papers, one realizes a common characteristic of this type of study: the effort shared by researchers to proxy with numerical values the structural profile and the activities of corporate boards. Many of the investigations rely on the number of non-executive directors compared with the total board, on the number of independent directors compared with the non-executives or total board, on the metrics of gender diversity inside the board, on a range of diversities among directors, synthetically on many board characteristics, or on the use of certain governance procedures (such as the development of updated risk management processes, or new and performant internal auditing processes, or increasing compliance models processes). This kind of research seems to produce – to some extent – limited governance suggestions, especially in the long run (Parker, 2018, p. 285), for many reasons. First, the main purpose of the quantitative studies has been, for many years, connecting governance variables to financial results: in tune with agency theory, these results were linked to the shareholders’ return, disregarding many of the more complex expectations of a broader spectrum of stakeholders regarding results different from only financial ones. Second, the need to leverage on selected items often limits the range of the observations to an insufficient number of variables unable to capture the complexity of current board characteristics, especially in listed companies. Third, little attention is given to boardroom processes where scholars have necessarily to limit themselves to simplistic proxies. Finally, this type of research lacks full direct engagement with the main actors in the field (Parker, 2018, pp. 284–285), where on the contrary governance implies social relations as it is typical of a social practice.

Historical overview of governance  35 Since the beginning of the diffusion of governance studies, some authors have denied that results of this type of analysis are able to identify relevant relationships between the board’s composition and the firm’s performance, perhaps with the only limited exception of the proportion of non-executive directors on the board (Nicholson & Kiel, 2003). Further, studies about the relationship between the numbers of directors on a board and corporate performance appear inconclusive (Leblanc, 2004; Christopher, 2010). Another issue has been summarized as follows: The principal-agent relationship that dominates the more traditional view where the resources provider acts as the account holder is incompatible with a participatory perspective where those who are affected are the account holder. The different perspectives represent fundamental contested issues associated with governance, property rights, human rights and ethics. (Dillard & Vinnari, 2019, p. 26)

Conversely, qualitative accounting involves a more comprehensive approach to governance analysis, considering clearly the intertwined relationship of accounting and governance and not limited to exploring their respective causality or links through regressions. Qualitative studies generally have wide purposes and allow exploration and discovery of the nature, focus and impact of (corporate) governance. Qualitative research has been revealed to be particularly suitable to allow researchers to enter the “black box” of directors’ rooms (Parker, 2018). This enables detection of their intimate connections, majority or minority discourses supporting the board’s decisions, the role of non-executive and independent directors, the relevance of gender diversity – as well as any other kind of diversity (such as professional, experience, digital experience and international experience) – inside the boardroom, the ideas supporting directors’ and managers’ compensation (compensation package), the recurring board self-assessments and the complex processes useful to assess the eligibility of new directors and the appointing of a new board. Qualitative studies are useful in investigating governance issues regarding corporate control systems. This is where the link between accounting, accountability and governance is particularly deep as control tools are widely based on accounting devices, and their use largely involves the accountability of the managers towards the directors, and that of the directors towards all the shareholders, as well as – in a larger and even more diffuse perspective – all the stakeholders. Consequently, studies attempt to capture perceptions, attitudes, discourses and decision processes that action strategies, control and accountability (Parker, 2018). The absence or limited presence of governance in qualitative research, although with some exceptions (McNulty et al., 2013), has been noted (Gendron, 2018) and partially explained (Leblanc & Schwartz, 2007): “researchers also have a role to play in the marginalized status of qualitative research in the corporate governance literature” (Gendron, 2018, p. 5). The focus of many studies converged on the accountability involved in director or top management choices, which may vary according to the role of these actors in different organizations (Brennan & Solomon, 2008). To be accountable meant leveraging on the capability of directors and managers both to act in a responsible way and to disclose these responsible actions to a spectrum of stakeholders, sometimes restricted to shareholders. We are referring to the ancient attitude of accounting and finance scholars – mainly quantitative – which focused on the variety of corporate governance mechanisms, considering their effects only on shareholders (Brennan & Solomon, 2008), in accordance with the agency view of corporate governance. These concepts had important consequences as financial researchers focused on internal company mechanisms relating to board and board performance, such as: the impact of board

36  Handbook of accounting, accountability and governance effectiveness on corporate profitability and shareholder value; the role of sub-committees of the board as mechanisms for improving board effectiveness (in particular, remuneration committees and nomination committees); managerial turnover, the proportion of non-executive directors, CEO duality and existence/composition of board sub-committees as crude proxies for board effectiveness; the relationship between executive remuneration and financial performance; the role of institutional investors as monitors of corporate governance; mechanisms of transparency (in the form of accounting, financial reporting and voluntary disclosure) as mechanisms for aligning shareholder and management interests; and companies’ system of internal control, with abundant research that has examined mechanisms of risk identification, assessment, management and disclosure. This amount of research referring (in the past) to agency theory probably led to the identification of governance studies as a realm completely closed to critical and interdisciplinary scholars, who preferred to focus on the accountability issues rather than the governance themes, especially because the “accountability” stream – on the contrary – has been chosen as preferential by leading journals in the critical and interpretative domain, allowing scholars to expand their research with more comfortable tools and methods of research. This discloses a significant opportunity in the future as studying governance from an accountability perspective can open new streams of research on how action and disclosure about governance can follow accountable paths or not, taking into consideration the increased attention to governance. This gap coming from the past between the relevance of governance and its attractiveness in critical and interpretative research can be filled rapidly if we consider that critical and interpretative researchers, accustomed to using a wider array of methodological approaches and theoretical perspectives, can deeply investigate and grasp the nature of governance processes, boardroom relations and strategizing, as well as crucial control processes (Parker, 2018) and their related risks (Bhimani, 2009). The discussion and debate regarding accounting, accountability and governance has been carried out by many accounting scholars using various theories, methodologies and objects of analysis, this last being alternatively corporations or other organizational settings. This helps explain the significant level of diversity this relationship can deal with, fostering more critical and interdisciplinary research in accounting, accountability and governance studies. Coherently with this idea, one of the highest-ranked international journals of corporate governance – Corporate Governance: An International Review – provided the following explanation in its aims and scope section: Because of this broad conceptualization [of governance], a wide variety of academic disciplines can contribute to our understanding, and we do not limit our perspective to any one theory or methodological paradigm, looking at cutting-edge research on the phenomena of comparative corporate governance throughout the global economy. (https://​onlinelibrary​.wiley​.com/​page/​journal/​14678683/​ homepage/​productinformation​.html, last accessed 16 March 2022)

This claim for a more interdisciplinary approach can be found in other disciplines such as political science, geography, sociology and organizational studies, as reflected by The SAGE Handbook of Governance (Bevir, 2011b), which positions itself as a resource for scholars studying governance in contexts other than corporations.

Historical overview of governance  37 The Relevance of the Historical Settings The relationship among accounting, accountability and governance has enhanced various streams of research because of the versatility of “governance” as a concept and its capability to be applied to different settings. Recent studies (Shah & Napier, 2019) are to some extent the opposite of historical as they are located in the past few decades (Clarke & Branson, 2012; Clarke, 2017), but are still historical if the rapid evolution of governance systems and models is taken into consideration. In addition, we can enumerate studies that applied the (not so modern) concept of governance (see, for example, Rodrigues et al., 2009). We are aware that using contemporary concepts in research works related to the past may be perceived as anachronistic (Miller & Napier, 1993) to some extent as one can meet the incumbent risk of a trivial and inconsistent historical examination, especially if and when the concepts are not used properly in the specific setting under investigation (Rodrigues et al., 2009, p. 405). However, all the streams of research around accounting history, and more broadly the whole historical research, showed how contemporary phenomena can be studied according to a historical perspective: modern concepts may be used to discover the past, even if not formally recognized at the time to which the settings are related (Parker, 2018). History research is able to provide long-standing yet hidden insights, valuable for the present and the future (Carnegie, 2014). As a result, investigations around governance from a historical perspective have valuable potential, especially in revealing its mutual relationship with accounting and accountability, not only for accounting history but also for governance research. This can be explained according to various paths. First, recent research has revealed the opportunity to consider and discover a new dimension, that of the setting of “time” (Lai & Samkin, 2017, p. 267), in accounting, accountability and governance research, even if this dimension provides research opportunities that are rarely covered by traditional accounting research, which is sometimes functionalist in nature (Lai & Samkin, 2017, p. 268). However, we acknowledge that by drawing on theoretical underpinnings typical of other disciplines, accounting history research can offer new interpretations of phenomena, grounded on experiences of the past (Baskerville et al., 2017). Second, research on accounting, accountability and governance in the past may enlarge the already prolific stream of studies informed by the “accounting and power” framework (Foucault, 1991), which is closely related to that of governance, as recent studies clearly show (Shah & Napier, 2019; Cordery, 2019). Third, the dimension of “time” emphasizes the “diversity of settings” as organizations, institutions, people and society change across time. Different “settings” give a further boost to the understanding of the roles of accounting in organizations and society (Burchell et al., 1980), and the relationships of accounting, accountability and governance in the past. Fourth, historical studies on governance – such as those presented at the ninth Accounting History international conference held in Verona in 2017 on the theme “Accounting and Governance in Diverse Settings” (Lai et al., 2019) – offer the opportunity to clarify the fundamental basic ideas, the ideologies and the social processes characterizing the art of governing, as well as their evolution across time (Walker, 2016), thereby extending our knowledge of different forms of governance, besides those referred to in contemporary organizations. Finally, the relevant issue that can be clarified through this kind of analysis is the detection of how and why governance rules, processes and structures have changed across time, together with the underlying cultural and social foundations explaining their development and applica-

38  Handbook of accounting, accountability and governance tion, as well as the impacts of such emergence and developments. Accounting, accountability and governance examination from a historical perspective may enhance our knowledge of the present by understanding the roots underlying current debates (Carnegie & Napier, 1996), linked to the unifying power of history (Carnegie & Napier, 2012). Therefore, there is mutual benefit in facing the themes of accounting, accountability and governance – in times before the emergence of “governance” as a word and concept in the current era – for both researchers in accounting, accountability and governance and accounting historians, among others. Thus, it is not surprising that the relationship among accounting, accountability and governance has been gaining attention among accounting historians. We have to underline the significant contributions offered in the new series of Accounting History from 1996 as this journal is recognized as being particularly committed along these paths of research, through various converging initiatives: (1) The journal has published several contributions linking the theme at various times. Even if the word “governance” does not often appear in the titles or keywords of the articles, we cannot deny their content deals undoubtedly with “governance” (e.g. Riccaboni et al., 2006; Lai et al., 2012; Bátiz-Lazo & Noguchi, 2013; Dattin, 2014, 2016, 2017). (2) Some of these contributions were collected into an Editors’ Choice of Accounting History on “Accounting and Governance in Diverse Settings”, prepared in 2016 by the journal’s editors Garry Carnegie and Brian West at that time, recently updated (Cordery et al., 2022), who presented their selection by recognizing the following: Accounting and auditing are key means by which governance in organizations is adopted and maintained. Many accounting history contributions deal indirectly with the development of systems of governance, but do so without necessarily identifying the specific connections between accounting and organizational governance. However, accounting history researchers are increasingly focussing on accounting as a means to an end, rather than an as end in its own right. In addition, more recent scholarship in the field has viewed accounting as social practice and technical practice, rather than as mere technical practice. This points the way to more detailed historical examinations of the nexus between accounting and governance in a broad range of institutions and locations. This collection serves to illuminate a number of recently-published articles where governance was a key consideration in examining accounting’s past. The availability of this collection may contribute to stimulating additional contributions of the theme in an array of settings around the globe. (https://​ journals​.sagepub​.com/​page/​ach/​collections/​editors​-choice/​accounting​-governance​-diverse​-settings, last accessed 17 March 2022)

Further, the international conference organized by Accounting History and held in 2017 in Verona (Lai, 2017; Lai et al., 2019) gave evidence of the link between accounting, accountability and governance from a historical perspective: if we put aside papers more willing to investigate the theoretical underpinnings of that relationship, most of the works refers to diverse times, places and “theoretical frameworks”, encompassing a wide array of situations that, like pieces of a puzzle, compose a new mosaic – indefinite and potentially infinite – enlarging the literature on the theme. Recent Research in Accounting History on the Governance Theme We have selected some recent published works, published mainly in journals dealing with accounting history, to check the current research proposing governance as the main theme of reflection. In some of these works, governance is considered per se, while in others it is viewed

Historical overview of governance  39 as its interconnections with accounting, useful to establish or reinforce a system of power and control. It is surprising what emerges from attention to the last five or six centuries, going back to the 15th or 16th century. We have already pointed out that use of the term “governance” referring to periods when this concept was not yet explicit must be managed with care by scholars in order to not be trivial (see previous section and Miller & Napier, 1993; Rodrigues et al., 2009), but we can easily perceive that in many situations – examined through a historical lens – the main issue explaining the behaviour and the relationships among social actors had a governance content. From a reading of the more ancient settings among those proposed to investigate the link among governance, accounting and accountability, we realize how accounting could sustain and legitimize a governance system (Sokolov et al., 2019), even when the prime accounting method was based on single-entry bookkeeping: although rudimental and cash based, the system could be modelled to support the governance and control of activities across the territory. Moreover, we have confirmation that – also in the past – considering the interconnections between the accounting system and the governance structure (Lusiani et al., 2019), we can deduce how the success of accounting can derive from a strong governance system capable of supporting the interests of multiple stakeholders. Finally, accounting served to achieve governance and managerial control over distant branches of a company (Baker & Quéré, 2019): governance and accounting practices were interrelated and, thereby, a key factor in the success of traders to become a leader of commercial practices in Europe in the late 15th and early 16th centuries. Sometimes, historical papers about accounting and governance deal with longitudinal analysis, such as when a subject investigated over time reveals a long-lasting concern able to cause negative effects on the organizations observed. Diachronic research helps in understanding the effect of governance on accounting mechanisms (as in Coffee, 2006), or the lack of effectivity of the audit (Carnegie & O’Connell, 2012), or the emergence of new actors in the governance scene, who have received little attention so far, as the proxy advisors (Lambert, 2021). Sometimes, longitudinal analysis is used to interpret the evolution of a system of powers inside relevant professions, as in academia (Lai et al., 2012; Quagli et al., 2019) or in the accounting and audit professions (Staubus, 2003; Bunn et al., 2018; Nevalainen, 2018; Bensadon, 2021; Jones & Melis, 2021). If we consider the different dimension of “space” (or places, as above), we immediately realize that the accounting history research, being free to deal with accounting and governance issues without considering a definite regulatory system or already settled governance codes – not related to companies or the state or public sector – can offer deep insights about the underlying problems of accounting and governance relationships, with a greater freedom than research constrained by a certain regulatory system. Thus, it is not strange that the Free Africans in Brazil, observed between 1818 and 1864 (Rodrigues Silva et al., 2019) according to a critical or interpretative path of research, can reveal how accounting was used to legitimize governmental policies and practices under the support of an ideology: the information generated by accounting was many times ignored, and even altered, to serve the interests of a dominant class or group who tried to govern an underprivileged class. In a quite different setting, that of the British Royal Navy between 1731 and 1808 (McBride, 2019), it is not surprising that accounting was used as a control device to maintain power over people and became an instrument that legitimized the actions of individuals or groups who needed to gain trust within an organization. Finally, also in the accounting history stream of research, compar-

40  Handbook of accounting, accountability and governance ative analysis about accounting and governance is diffused and able to explain the difference in regulation and the effects of this difference on governance as a social practice: this type of research usually goes to the root of ownership in different countries (Fear & Kobrak, 2006), sometimes dealing with particular industries (Fear & Kobrak, 2010), being able to offer paths that appear opposite to governance aiming at generalizing behaviours and rules. About the theoretical frameworks, no limits have been placed on the accounting history research on accounting and governance. However, among those that are agreed to better interpret the multifaceted nature of the accounting and governance relationship, the theory of governmentality (Foucault, 1988, 1991) has proved to be valuable in many studies. Indeed, it has informed many historical investigations on the role of accounting as a disciplinary tool to make individuals, groups and organizations visible, and thereby governable (Miller & Rose, 1990; Miller & O’Leary, 1993; Gomes et al., 2014). In recent research (Cordery, 2019), the governmentality lens has been used to study the evolution of charity regulation in England from the early 16th century to the present and to understand how accounting practices have been used to govern and control charities and religious organizations. In the name of the common good, state governments set regulation and disciplinary interventions on various organizations, religious ones included. However, the state–church relationship has changed over the centuries, and the governmentality devices, including accounting, have also witnessed changes, such as in the roles of accounting (Monsma & Soper, 2009).

CONCLUSIONS The evidence provided in this chapter with a historical approach allowed consideration of governance as a social practice, involving various types of actors and the relationships among them, so emphasizing the political nature of the concept itself. Governance matches the needs of many settings, at both public and corporate levels, and contrasts with the idea of a monolithic guidance of organizations. It is naturally linked to a network of institutions and subjects in the production of the policy outcomes and to the possibility of having multiple jurisdictions and a plurality of stakeholders involved, the main question being not “who governs” but “how various actors operate in the governance process”. Therefore, it can be considered a broader category than government, with government being one component of governance among many. In the corporate world, the widespread diffusion of governance was linked to the need to take into account the relationship between the owners and the managers, and to regulate these connections, aligning the interests of the parts and reducing the costs of control of the proprietor and the costs of assurance of management. Much attention, even in the past, has been given by both researchers and practitioners to the technical aspects of governance, mainly focusing on the variety of governance mechanisms in order to evaluate their effects on shareholders, consistent with agency theory. In addition, governance has often been interpreted as an exercise in compliance with codes of conduct (Busco et al., 2005): this could extend even to a “rejection” of governance issues by managers, which could be considered a derivation from compliance programmes, and now it stimulates the consideration of different perspectives (Stacchezzini et al., 2020). These approaches, which are confirmed by the valuable literature developed in the last 30 years and which largely exist even today, are now overcome by the fruitful idea that the technical dimension of governance is inextricably linked to the social and moral ones (Carnegie

Historical overview of governance  41 & Napier, 2012). Moreover, governance is closely linked to accountability and accounting as these three elements have the same connotations of social and moral practices, other than technical, following the new definition of accounting proposed in Carnegie et al. (2021). The new perspectives coming both from the recognized interconnections between the three concepts and from the inclusion of the moral dimension, together with the technical and social ones, are able to feed a fruitful readdress of the work of practitioners and researchers on governance. This readdress can match other relevant changes that this chapter pointed out, having a historical base. It has been proved that an increasing need for accountability shaped the design, implementation and working of governance structures, thereby modelling accounting to provide relevant information about these aspects, feeding a coherent and larger disclosure. Correspondingly, in the research domain, an authoritative and influential call for a progressive merge of the research agenda of governance and accountability – together with that of accounting – arose in the interpretative and interdisciplinary streams (Brennan & Solomon, 2008; Parker, 2018), and corporate governance is perceived today as inspiring critical accounting research (Gendron, 2018). In addition to these ideas, consideration should be given to the moral significance of giving account and being accountable about governance. This adds to the responsibility of planning new structures as it makes explicit the ethical implications of each choice (Carnegie et al., 2021). Further, redirection of the research on governance in the near future may be inspired by the moral implications of choices. These fascinating directions are fostered by a call for more research on accounting, accountability and governance in new fields (Gendron, 2018), such as that of sustainability with cross-disciplinary perspectives (Dellaportas et al., 2022), where new reporting standards (such as those promoted by the European Financial Reporting Advisory Group (EFRAG, 2022) – in particular ESRS G1 and G2 draft) require further accounting and accountability efforts in governance structure and composition. Notably, they require more companies to collect and report information reserved in the past to large companies and feed the debate about the challenges related to the new need for governing sustainability (Dillard & Vinnari, 2019, p. 35; Lai & Stacchezzini, 2021). These new perspectives can help implement even the inclusion of animals in sustainability (Vinnari & Vinnari, 2022). Besides, historical research, on a diversity of settings, is useful for examining behaviours and gathering coherent solutions: researchers can test how the notions of accounting, accountability and governance originated, developed and changed, thereby strengthening our understanding of contemporary debates, issues and concerns. These notions are not fixed in time and continue to evolve and change with implications for organizational and social functioning and development (Carnegie & Napier, 2012). Future studies may investigate the relationship among accounting, accountability and governance in other non-capitalistic organizations; for instance, in communist states, friendly societies and humanitarian organizations. More opportunities for future research may also come from political and management studies and the possibility to interpret governance, accounting systems and accountability of the past with other theoretical lenses, such as policy networks, meta-governance and others (Bevir, 2011b). Finally, future studies of the past may also reveal circumstances where the accounting, accountability and governance relationship failed to augment knowledge and understanding of the risks and consequences of instances of bad governance or bad accounting, or indeed both. It is trusted that these suggestions will motivate researchers to extend their studies into unusual settings, set in the past, and to apply various methodological and theoretical

42  Handbook of accounting, accountability and governance approaches to ensure accounting, accountability and governance are increasingly studied as interrelated social and moral practices.

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Historical overview of governance  47 Rodrigues Silva, A., Rodrigues, L.L. and Sangster, A. (2019), “Accounting as a tool of governance at a distance: the tutelage system of ‘Free Africans’ in Brazil between 1818 and 1864”, Accounting History, Vol. 24 No. 3, pp. 383–401. Sellers, J.M. (2011), “State–society relations”. Bevir, M. (ed.), The SAGE Handbook of Governance. SAGE, London, pp. 124–141. Shah, N. and Napier, C. (2019), “Governors and directors: competing models of corporate governance”. Accounting History, Vol. 24 No. 3, pp. 338–355. Shil, N.C. (2008), “Accounting for good corporate governance”, Journal of Administration and Governance, Vol. 3 No. 1, pp. 22–31. Shore, C. (2011), “‘European governance’ or governmentality? The European Commission and the future of democratic government”, European Law Journal, Vol. 17 No. 3, pp. 287–303. Slaughter, A.-M. and Hale, T.N. (2011), “Transgovernmental networks”. Bevir, M. (ed.), The SAGE Handbook of Governance. SAGE, London, pp. 342–351. Sloan, R.G. (2001), “Financial accounting and corporate governance: a discussion”, Journal of Accounting and Economics, Vol. 32 No. 1–3, pp. 335–347. Smith, A. (2011), “Multijurisdictional regulation”. Bevir, M. (ed.), The SAGE Handbook of Governance. SAGE, London, pp. 300–312. Sneirson, J.F. (2019), “The history of shareholder primacy, from Adam Smith through the rise of financialism”. Sjåfjell, B. and Bruner, C.M. (eds), Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability. Cambridge University Press, Cambridge, pp. 57–70. Sokolov, V., Karleskaia, S. and Zuga, E. (2019), “Accounting in state-owned companies operated for the production and sale of alcohol in Russia in the fifteenth–seventeenth centuries”, Accounting History, Vol. 24 No. 3, pp. 425–443. Solomon, J. (2007), Corporate Governance and Accountability. 2nd ed., Wiley, New York. Spraakman, G.P. (1999), “Management accounting at the historical Hudson’s Bay Company: a comparison to 20th century practices”, Accounting Historians Journal, Vol. 26 No. 2, pp. 1–30. Spraakman, G. (2006), “The impact of institutions on management accounting changes at the Hudson’s Bay Company, 1670 to 2005”, Journal of Accounting & Organizational Change, Vol. 2 No. 2, pp. 101–122. Spraakman, G. and Wilkie, A. (2000), “The development of management accounting at the Hudson’s Bay Company, 1670–1820”, Accounting History, Vol. 5 No. 1, pp. 60–84. Stacchezzini, R., Rossignoli, F. and Corbella, S. (2020), “Corporate governance in practice: the role of practitioners’ understanding in implementing compliance programs”, Accounting Auditing & Accountability Journal, Vol. 33 No. 4, pp. 887–911. Stansky, P. (1977), “The Governance of Britain by Harold Wilson” (book review), The American Historical Review, Vol. 82 No. 5, p. 1260. Staubus, G.J. (2003), Accounting, Accountability, Auditing and Financial Scandals over the Centuries. University of California Press, Berkeley, CA. Steinberg, M.I. (2018), The Federalisation of Corporate Governance. Oxford University Press, Oxford. Toms, S. and Wright, M. (2002), “Corporate governance, strategy and structure in British business history, 1995–2000”, British History, Vol. 44 No. 3, pp. 91–124. Trollope, A. (1855), The Warden. Longman, Brown, Green and Longmans. London, reprinted by the Folio Society in conjunction with the Trollope Society, 1995. Trollope, A. (1857), Barchester Towers. Longman, Brown, Green, Longmans & Roberts, London, reprinted by the Folio Society in conjunction with the Trollope Society, 1995. Turnbull, S. (1997) “Corporate governance: its scope, concerns and theories”, Corporate Governance: An International Review, Vol. 5 No. 4, pp. 180–205. Tweedy, D. and Hazelton, J. (2019), “Economic inequality: problems and perspectives for interdisciplinary accounting research”, Accounting, Auditing & Accountability Journal, Vol. 26 No. 3, pp. 234–266. United Kingdom Government (2007), The Governance of Britain. Her Majesty’s Stationery Office, London. van Ees, H., van der Laan, G. and Postma, T.J.B.M. (2008), “Effective board behavior in The Netherlands”, European Management Journal, Vol. 26 No. 2, pp. 84–93.

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3. Codes of governance Francesca Cuomo and Alessandro Zattoni

OVERVIEW Consistent with the diffusion of governance codes globally, and the call for research on their antecedents and consequences, there has been a proliferation of studies on this topic. In this chapter, we present and discuss the concept of corporate governance codes and give a brief historical account of the key factors leading to their emergence and diffusion. We describe the codes of good governance that had a fundamental influence on the development of governance practices globally and identify the leading countries and issuers that have influenced the development of codes in other countries. Moreover, we review the literature investigating the adoption of corporate governance codes at country level and firm level. Finally, we conclude by providing recommendations for future research and policy by underlining some open issues mainly concerning both the formal or substantial impact of good governance codes on firms’ governance practices and the fit or misfit between universal best practices and firm-level contingencies.

INTRODUCTION: ACCOUNTABILITY AND CODES OF GOVERNANCE Boards of directors are appointed by shareholders to be responsible for the governance of their companies. They have significant corporate power and, as a consequence, they are accountable for their actions to shareholders and other stakeholders (for an overview, see Keay, 2015a; Keay & Loughrey, 2015). To perform their role effectively, boards should perform monitoring and service roles, which include “setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship” (Cadbury Committee, 1992, p. 15). Early studies on boards of US companies (for example, Lorsch & MacIver, 1989; Mace, 1971) and various waves of corporate scandals highlighted that boards of directors may fail to perform their duties. This happens when they are captured by insiders and operate under the dominant influence of either the CEO or a large shareholder (Zattoni, 2020). This lack of accountability by board members, and its related negative consequences for shareholders and other stakeholders, raised societal concerns and urged political interest. To strengthen directors’ accountability and to restore investors’ trust in companies, countries followed two different, but partly complementary, approaches: corporate law (or hard law) and governance codes (or soft law). The first option (for example, the Sarbanes-Oxley Act issued in 2002 in the US) broadens directors’ legal responsibilities and increases penalties and sanctions in case of their breach. The second option (for example, the Cadbury Code issued in 1992 in the UK and its successors) involves, instead, the issue of non-binding recommendations on how to design effective boards of directors. 49

50  Handbook of accounting, accountability and governance In this chapter we present how governance codes may improve board transparency and accountability (Aguilera & Cuervo-Cazurra, 2009; Cuomo et al., 2016). Although the principles and recommendations of good governance codes vary slightly across countries, codes aim at improving board effectiveness and increasing corporate accountability to shareholders and other stakeholders (Aguilera & Cuervo-Cazurra, 2004). To this purpose, codes of governance propose a rebalancing of powers within the board by separating chair and CEO roles, increasing the number of non-executive independent directors, creating board committees and so on (Zattoni & Cuomo, 2008, 2010). Codes of governance can be designed at three main hierarchical levels: transnational, national and firm level. Transnational codes are issued by transnational institutions (such as the Organisation for Economic Co-operation and Development (OECD) and the International Corporate Governance Network (ICGN)). National codes are issued by some influential actors (for example, the stock exchange, the government or associations of investors, managers or directors) in almost all industrialized and emerging countries (Aguilera & Cuervo-Cazurra, 2004). The stock exchanges have generally taken the lead in developing the first national code, while both the stock exchanges and the investors’ associations have shown great interest in continuing to develop governance codes. Other types of issuers – such as governments or associations of managers, professionals and directors – have generated considerably fewer codes. Most governance codes are issued by more than one of these institutions. For example, the Financial Reporting Council (FRC), the London Stock Exchange (LSE) and the accountancy profession established the Committee that issued the first corporate governance code (the Cadbury Report) in the UK in 1992. Finally, there are also codes of governance issued at firm level, but they do not fall within the scope of this chapter. Regarding their scope, most governance codes are aimed at improving the corporate governance practices of all listed companies. More recently, there has also been an increasing proliferation of governance codes aimed at improving the governance of specific types of companies (such as family-owned, state-owned, private or small and medium companies), of financial institutions (such as institutional investors and commercial banks) and of non-profit and charitable organizations (Cuomo et al., 2016; Mallin, 2019). The first code of good governance had been developed by the end of the 1970s in the US in the midst of great corporate ferment after the publication of Directors: Myth and Reality by Myles Mace in 1971. The book presented a discouraging image of US corporate governance by showing up deficiencies in board composition and functioning, just after the contemporaneous failure of some large companies. As a result of these events, investors started to require governance reforms aimed at increasing the directors’ duties and improving the effectiveness of boards of directors (Aguilera & Cuervo-Cazurra, 2004). The report issued by the Business Roundtable in January 1978, entitled “The Role and Composition of the Board of Directors in the Large Publicly Owned Corporations”, represents the first guidelines for improving American corporate governance (Aguilera & Cuervo-Cazurra, 2004). It defines directors’ main duties and reaffirms that boards of directors are important check-and-balance mechanisms (Lorsch & MacIver, 1989). Since then, the Securities and Exchange Commission (SEC), the New York Stock Exchange (NYSE) and the Business Roundtable (BR) have continued to issue codes and proposals to reform governance practices in the US context. The development of corporate governance codes in Europe dates to the early 1990s in the UK, when the Cadbury Report was issued in 1992. The terms of reference of the Cadbury Report were limited to reviewing those aspects of corporate governance specifically related

Codes of governance  51 to financial reporting and accountability. The main goal of the Report was to address the lack of investor confidence in the honesty and accountability of UK listed companies by strengthening board oversight. Coherently, it has been argued that the Cadbury Report assumed that accountability to shareholders was the primary objective of corporate governance (Ezzamel & Watson, 1997; Keay & Loughrey, 2015). The application of the Cadbury Report was based on the “comply or explain” and the “freedom with accountability” principles (Aguilera & Cuervo-Cazurra, 2009; Mallin, 2019). This means that companies have the option either to comply with the corporate governance code’s principles or to explain why they are unwilling or unable to do so. Overall, the main rationale behind the “comply or explain” approach is to allow firms some flexibility, while guaranteeing transparency to the market. The corporate governance system operating in the UK after the issuance of the Cadbury Report encouraged “accountability through disclosure”, as (good) disclosure plays an important role in guaranteeing the effectiveness of the “comply or explain” approach (Ezzamel & Watson, 1997). In particular, the Cadbury Report’s objective to increase accountability relied on several good corporate governance practices such as the clear division of responsibilities at the top of the company, primarily the separation between the chairperson and the CEO; the importance of non-executive directors, who should make up the majority of the board and the remuneration committee; the importance of the audit committee, which should be composed of at least three non-executive directors; and the importance of independent directors, who should be the majority of non-executive directors on the board and the majority of the audit committee members. The dominant emphasis – not only in the Cadbury Report but also in its successor (that is, the Greenbury Report issued in 1995 in response to public anger over executive pay) – was on accountability. As a consequence, those codes were accused of obscuring other issues (such as business prosperity) and favouring companies’ adoption of a “box-ticking” approach. The extensive debate on how to address these concerns led to the issuance of the Hampel Report in 1998, which reviewed the implementation of the Cadbury and Greenbury Reports. Since the issuance of the Combined Code, UK codes of governance have been focused on principles rather than on detailed recommendations, and they have had a more balanced emphasis on both accountability and business prosperity (for an overview, see Keasey et al., 2005). The diffusion of national codes outside the UK started slowly. From 1992 through to 1998, only four European Union countries (Belgium, France, Spain and the Netherlands) and three emerging countries (South Africa, India and Thailand) had issued their first national corporate governance codes. However, diffusion accelerated after the issuance of influential codes originating in the UK (such as the Combined Code in 1998 and its successors) and transnational codes (such as the OECD principles issued for the first time in 1999). Further, the occurrence of corporate scandals and frauds (such as Enron, WorldCom and Tyco in the US) and large global crises (such as the financial crisis in 2007–08) accelerated the development of codes. Therefore, the first 14 years of the 21st century witnessed the proliferation of codes around the world (for an overview, see Zattoni & Cuomo, 2009; Cuomo et al., 2016). Since the issuance of the Cadbury Report, most governance codes issued globally operate on a “comply or explain” basis (Keay, 2015b). However, there are also governance codes (such as the King I Report in South Africa) using an “apply or explain” approach, namely companies should apply the principles of the corporate governance code or explain why they have not done so. In addition, there are codes (such as the King IV Report issued in South

52  Handbook of accounting, accountability and governance Africa in 2016) that use an “apply and explain” approach, namely companies should apply the principles of the corporate governance code and explain how they have applied them.1 From 2017, Malaysia’s code proposes an “apply or explain an alternative” approach in contrast to a “comply or explain” approach used in all previous versions. While the main aim of all these approaches is to allow for some flexibility in compliance with the principles set out in the codes of governance and/or their application, there are some differences. First, the “apply or explain” approach carries with it more than an expectation that companies will apply the principles, and this decreases the incidences of “explain” compared to the other approaches. Second, codes that use an “apply and explain” approach are considered more flexible compared to the other approaches as usually companies are not expected to provide explanations for non-compliance or non-application of these principles. There is a lively debate on the effectiveness of these different approaches. Overall, some scholars cast doubts on the effectiveness of codes (Wymeersch, 2013), especially if codes of governance operate on a “comply or explain” basis (see, for example, Pietrancosta, 2011; ICAEW, 2013). This might explain why the approach chosen by the issuer of the governance codes may differ across countries or why the approach used by some governance codes evolves also in the same countries over time (such as in Malaysia and South Africa). In addition, the disclosure of either the compliance with national corporate governance codes, or of their application, differs among countries. More precisely, the disclosure on the adoption/application and/or explanation can be mandatory (that is, voluntary adoption/ application and mandatory disclosure) or voluntary (that is, voluntary adoption/application and voluntary disclosure). The mandatory disclosure can be required by a listing authority or by the law, but the effectiveness of governance codes increases when the disclosure of governance practices is mandatory as the market disciplinary mechanism cannot work well without informative disclosure on adoption/application and/or explanation (for an overview, see Cuomo et al., 2016). To sum up, codes of governance are non-binding and voluntary in nature, issued by committees including several actors, flexible in their application, disciplined by the market mechanism and evolutionary in their recommendations (Haxhi & Aguilera, 2012). Codes of governance cannot work well without both (good-quality) explanations for deviations from or for (non-)application of their principles or recommendations, and active institutional investors that penalize companies for unexplained deviations from codes’ principles (Cuomo et al., 2016). Nowadays, governance codes are diffused globally (Cuomo et al., 2016). By the end of October 2021, transnational codes of governance had been issued by more than 14 transnational institutions (for example, pan-European institutions, the Commonwealth, the OECD and the ICGN), while national codes of governance had been issued by about 100 (industrialized and emerging) countries around the world. In this respect, there has been a marked global spread of codes concerning institutional investors since the mid-2010s. The increasing share ownership held by institutional investors led to discussions about the role they should play as owners of the equity of large, listed companies. The issuance of governance codes targeting institutional investors is aimed at increasing their activism and engagement with investee companies. These governance codes were issued by both national committees (for example, the FRC UK Stewardship Code, first released in 2010) and transnational ones (such as the European Fund and Asset Management Association – EFAMA – Code for External Governance in 2011). (For

Codes of governance  53 a review of the history of governance codes, see, for example, Aguilera & Cuervo-Cazurra, 2009; Cuomo et al., 2016; Mallin, 2019.)

INFLUENTIAL CODES OF GOVERNANCE While it is contentious to try to identify which codes of governance have had the most influence on the development of corporate governance practices around the world, some codes have undoubtedly had a key impact. On the one hand, historically the UK has been an exporter of corporate governance legal norms and soft principles, except during the British Empire colonial period (see, for example, Cheffins, 2000; Mallin, 2019). Among the most influential UK codes are the Cadbury Report (1992) and the UK Stewardship Code (2010). On the other hand, codes issued by transnational institutions (such as the OECD, the ICGN and the EFAMA) also had an impact on the development of corporate governance codes around the world (Cuomo et al., 2016; Mallin, 2019; Siems & Alvarez-Macotela, 2017; Katelouzou & Siems, 2020). For example, the OECD issued its Principles of Corporate Governance in 1999 and later reviewed them two times in 2004 and in 2015. In 2015, the updated Principles of Corporate Governance were endorsed by the OECD Council and the G20 Leaders’ Summit. For conciseness, this chapter details only two of the main national codes of governance: the Cadbury Report (1992) and the UK Stewardship Codes (2010, 2012, 2019). We will discuss the influence of codes issued by transnational institutions in our review of the literature on codes of governance, as some articles analysed their consequences. Cadbury Report (1992) The Committee on the Financial Aspects of Corporate Governance, also known as the Cadbury Committee, was established in May 1991 to restore investor confidence in the honesty and accountability of listed companies registered in the UK after the financial collapse of two companies with apparently healthy published accounts: the wallpaper group Coloroll and Asil Nadir’s Polly Peck consortium. After the creation of the Cadbury Committee, two further scandals shocked the British financial community: the collapse of both the Bank of Credit and Commerce International (BCCI) and the Maxwell Group. The shockwaves from these two incidents only heightened the sense of urgency behind the work of the Cadbury Committee, which issued the Cadbury Report in December 1992 to help the directors of listed companies registered in the UK to improve their governance practices. Overall, the main recommendations of the Cadbury Report – and of its successors – had a fundamental impact both on the development of corporate governance practices in the UK and on the content of codes issued globally (not only by former British colonial countries). Its influence is also visible in codes issued by transnational institutions such as the OECD (for an overview of the content and influence of the Cadbury Report, see, for example, Jordan, 2013; Keay, 2015b; Mallin, 2019; Shah & Napier, 2017).2 UK Stewardship Codes The first Stewardship Code around the world was issued in the UK by the FRC in June 2010 under the conviction that institutional investors should have an active and effective

54  Handbook of accounting, accountability and governance engagement with their investee companies (Mallin, 2019). The Stewardship Code was largely based on the Code on the Responsibilities of Institutional Investors issued by the Institutional Shareholders’ Committee (ISC) in 2009, as the consultation process promoted by the FRC produced only a few minor amendments to that code. The first UK Stewardship Code comprised a set of six Principles that operated on a “comply or explain” basis. It applied to asset managers, asset owners and service providers. A revised UK Stewardship Code was published by the FRC in September 2012. This was a set of seven Principles with a few changes that included clarification of the respective responsibilities of asset managers and asset owners for stewardship, clearer explanations of conflicts of interest and a call for greater assurance of stewardship activities. Overall, the UK Stewardship Code, mainly the 2012 version, has generally been well received and emulated by several other countries around the world, confirming the leading role of the UK as a corporate governance rules exporter. In October 2019, a substantially revised and strengthened UK Stewardship Code was published by the FRC with effect from 1 January 2020. After this substantial revision, the UK Stewardship Code includes a set of 12 “apply and explain” Principles for asset managers and asset owners and a separate set of six Principles for service providers. The new content of the UK Stewardship Code deviates from other current codes (including transnational Stewardship Codes) and this might lead to a second round of exportation of the UK Stewardship Code in other countries.3

LITERATURE REVIEW Method A review is presented of previous studies on corporate governance codes around the world up to the end of October 2021. Following a previous review by Cuomo et al. (2016), we used the main databases (Business Source Complete, Scopus, Science Direct and JSTOR) provided by EBSCOhost to search for all publications in English containing the terms “Governance Code*” or “Governance Guideline*” in their Title/Abstract or Subject terms. We considered only peer-reviewed articles in all journals included in the above databases. Our initial search resulted in 2,090 articles. We follow Cuomo et al. (2016) to specifically exclude duplicates and papers not relevant to this review (such as papers on other types of codes, book reviews, case studies, letters from the editors, papers published by university journals, student papers and papers focused on different topics or on related topics that are not relevant to this review). After a detailed reading of the abstracts, and sometimes also of the content of papers, we identified our final sample of 271 articles published from 1993 to the end of October 2021. Among these, 149 articles in our final sample were published from 1993 to early November 2014 (Cuomo et al., 2016) and the remaining 122 articles from mid-November 2014 to the end of October 2021. Following previous reviews on codes of governance (for example, Aguilera & Cuervo-Cazurra, 2009; Cuomo et al., 2016), we divided all previous studies on codes into two groups: country- and firm-level studies. Then, we undertook a content analysis of the selected articles to identify the main contributions and findings of studies belonging to these two groups.

Codes of governance  55 Review of Country-Level Studies on Codes of Governance A first stream of research consists of country-level studies investigating several related topics, that is: (i) the mechanisms for the implementation of codes, (ii) the reasons behind the adoption of codes, (iii) the content of a specific national code, (iv) the comparisons of the content of national codes at international level, (v) the internationalization or the convergence/divergence of governance codes and (vi) the consequences of codes issued by transnational institutions. Overall, our review shows that country-level studies are mostly focused on the mechanisms for code implementation, the contents of a national code and the internationalization or the convergence/divergence of corporate governance principles. (i) Mechanisms for implementation of codes First, our review shows that there are many articles focused on the mechanisms used to address agency problems and to promote the implementation of codes (for example, hard versus soft law approaches). A common view of early studies is that the lack of monitoring and the poor enforcement reduce the effectiveness of the soft law approach, and that this happens especially in weak institutional environments such as transition and emerging economies. To solve the deficiencies of the soft law approach, some scholars suggest different ways of using market mechanisms (see, for example, Cuervo, 2002; Dewing & Russell, 2004). Other scholars call, instead, for the use of a hard law approach (that is, directives and mandatory rules) and for the improvement of institutional enforcement mechanisms (Osemeke & Adegbite, 2016; Wanyama et al., 2009). In their opinion, the soft law approach is useful but not sufficient to improve governance practices in weak institutional environments as, for example, “the mere emergence of detailed governance codes in developing countries does not necessarily mean that de facto practices will improve” (Wanyama et al., 2009, p. 159). The effectiveness of the soft law approach in emerging economies, for example, is weakened by the “duplication” of codes as: These new reforms have been challenged, not on sufficiency grounds but rather by the proliferation of codes which has created implementation and monitoring bottlenecks for both the adhering firms and the enforcement agencies alike … the key agencies (i.e. the Nigeria SEC, CBN, NAICOM and National Pension Commission) are locked in a jurisdiction battle which has left most companies rather confused on which of the codes takes more precedent over the other. (Bello, 2016, p. 482)

Overall, recent articles tend to underline the limits of the soft law approach (Veldman & Willmott, 2016) and of the principle of “comply or explain”, as they can decrease the effectiveness of the code as a form of soft law. On the one hand, “a voluntary code operating on a ‘comply-or-explain’ basis can ensure sufficient adherence only if certain factors are present in the jurisdiction where it is applied” as its “use may generate different results for example depending upon the ownership structures of companies” in the countries where it is applied (Varottil, 2020, p. 471). On the other hand, more recently, Roberts et al. (2020, p. 602) suggest that the “visible compliance with the (UK) Code cannot itself be taken as a reliable proxy for board effectiveness” because of the ambiguity and confusion surrounding the principle of “comply or explain”, even in the UK context characterized by diffused ownership structures and a strong institutional environment. This latter view has been reinvigorated by the recent issuance of codes that do not rely on the “comply or explain” approach. Recent codes of governance – such as the UK Stewardship

56  Handbook of accounting, accountability and governance Code (2020) and The Wates Corporate Governance Principles (2018) in the UK, or the King IV (2016) in South Africa – are based on an “apply and explain” approach in contrast with the traditional main approaches used traditionally (that is, “comply or explain” in the UK and “apply or explain” in South Africa). Moreover, some scholars push for the introduction of a regulatory body and some sanctions (Keay, 2014). Those sanctions should be applied in cases of non-compliance or failure to adequately explain the reasons for non-compliance, as well as in cases of a lack of or weak explanations for non-compliance (Keay, 2014). Finally, some recent studies argue for (or against) complementary “market” governance mechanisms (hard and soft law mechanisms) to improve corporate governance practices (for example, Chiu, 2012) by focusing, for example, on the active role of institutional investors (that is, shareholder empowerment). It is worth mentioning that this view has been reinvigorated by the issuance of the Stewardship Codes as discussed earlier in this chapter. (ii) Adoption, development or diffusion of codes Second, our review shows several articles on the reasons behind the adoption, development or diffusion of codes. Early studies have been published only after the publication of one influential article on codes of governance (Aguilera & Cuervo-Cazurra, 2004) that opened the debate on this topic. These studies build on a variety of theoretical perspectives that include both the efficiency and the institutional views (for example, Aguilera & Cuervo-Cazurra, 2004; Zattoni & Cuomo, 2008) and the cultural and political ones (for example, Haxhi & van Ees, 2010; Haxhi et al., 2013). For example, Zattoni and Cuomo (2008), using a comparative content analysis of governance codes, find that both legitimation and efficiency reasons explain the adoption of good governance codes around the world. Overall, the findings of these studies suggest that there are significant differences between codes issued by common law and civil law countries as regards their diffusion and their content (that is, scope, coverage and strictness of their recommendations). Among other studies, Haxhi and van Ees (2010) analyse the impact of informal institutions (that is, cultural variables) on the issuance of codes and on the types of issuers in different countries. More recently, Haxhi and Aguilera (2017), using an institutional configurational approach and a qualitative comparative analysis, show that a combination of different institutional domains is needed to explain differences in cross-national corporate governance codes adopted in the 32 OECD countries between 1978 and 2015. Specific national codes (iii) Third, our review shows that there are many articles focused on the analysis of a specific national code. Early articles focus on the content of the first national code issued in a single country, mainly in western European countries (for example, Germany, the UK and Spain). In more recent years, studies focus also on the content of emerging countries’ codes (for example, Nigeria, Hungary, Indonesia and Malaysia). Furthermore, the proliferation of governance codes and the availability of consultation documents at country level led to a new avenue of research on the evolution of the content of national codes in several institutional settings (for example, for the UK: Nordberg, 2017; Veldman & Willmott, 2016; Price et al., 2018; Stewart & McNulty, 2015; for Nigeria: Osemeke & Adegbite, 2016). Among the studies on the evolution of the content of codes in single countries, it is worth mentioning a recent study by Price et al. (2018) that provides evidence on how systemic challenges on the development of codes in the UK context are dissipated over a period of two

Codes of governance  57 decades. Price et al. (2018) show that the development of UK codes – from the issue of the Cadbury Report in 1992 to the publication of the Kay Report in 2012 – is subject to “institutional stasis” as the content of the several revised versions of the UK codes has changed little over this period. By applying a critical discourse analysis, they explain that this institutional stasis “is the product of discourse capture and control by elite corporate actors aided by political allies who inhabit the same elite habitus” (Price et al., 2018, p. 1542), confirming and extending the findings of a previous study by Haxhi et al. (2013) on the role of the national business elites behind and around the issuance of codes in the UK. Finally, our review shows at least two main research trends. First, the lively debate about gender diversity on boards and the hard versus soft law approach used to increase the presence of women on boards led to a new avenue of research on national codes and gender diversity (see, for example, Klettner et al., 2016). Second, the issuance of the Stewardship Codes led to a new avenue of research on the role of institutional shareholders (for example, Chiu, 2012) and on the development (and evolution) of the content of the Stewardship Codes (see, for example, Reisberg, 2015). (iv) Cross-national comparisons of codes Fourth, our review shows that while studies focused on the comparisons of the content of different national codes diffused only in recent years, their number is increasing over time. Early articles are limited and usually compare the codes’ principles on established corporate governance practices issued by a small number of EU countries (for example, Collier & Zaman, 2005 for the audit committee). Studies using a large sample and comparing the recommendations of several codes are very uncommon and published only after 2007 (for example, Zattoni & Cuomo, 2010 using a large international sample; Cicon et al., 2012 using a large sample of EU countries). Among them, Zattoni and Cuomo (2008) find that the strictness of the content of six main codes’ recommendations about boards of directors differs across 60 countries around the world and that the country-origin legal system contributes to explaining these differences (common law countries issue codes with more stringent and rigid recommendations on these six items than civil law countries). Cicon et al. (2012) find that the differences across 23 European countries are explained by both the strength of the legal protection and the type of issuer. Coherently, Zattoni and Cuomo (2010) find that the country-origin legal system only partially explains differences in the recommendations about the independence, the competencies and the incentives of non‐executive directors across 44 codes issued by international countries. This review has depicted two recent trends. Firstly, the strong debate about gender diversity on boards and the approach used to increase the presence of women on boards led to a new avenue of research on the comparisons of the content of national codes on this topic (see, for example, Terjesen et al., 2015). Secondly, the issuance of the Stewardship Codes led to a new avenue of research on the comparisons of the content of Stewardship Codes globally. For example, Klettner (2021), by analysing the content of all national Stewardship Codes published in English and in force in 2019, presents a typology of Stewardship Codes as a framework for understanding cross-country variation in investor stewardship policy. Goto (2018) explores the logic and the limits of Stewardship Codes in Japan and the UK by analysing both the text of their principles and guidance and the contexts in which they are adopted. Among other recent studies on Stewardship Codes, an article by Nakagawa (2017) argues that the “imperfect coverage” of Japan’s Stewardship Code might limit the expected

58  Handbook of accounting, accountability and governance effect in achieving stronger “engagement” by investors as it does not fit with one of the unique elements of the corporate governance model in Japan (that is, cross-shareholdings among keiretsu companies and between banks and companies). The main argument of Nakagawa (2017) is that: The attitudes of banks (and insurance companies) as cross-shareholders are different from when they function as institutional investors. While fund managers fundamentally seek investment returns, the priority of cross-shareholders is often to maintain relations with their counterparts. (Nakagawa, 2017, p. 346).

The Japanese Stewardship Code covers the behaviours of “outsiders” but neglects that of “insiders” (that is, national banks and insurance companies as cross-shareholders). (v) Convergence and divergence of codes Fifth, our review shows that recently (that is, after 2004), scholars have also explored the internationalization and the convergence/divergence of corporate governance principles towards or away from the Anglo-American corporate governance model. Despite the strong pressure for convergence on this corporate governance model and the influence of the UK as a corporate governance rules exporter, several studies show that some aspects are converging, but divergence prevails around the world. In particular, these studies underline that the content of traditional governance codes (for example, Collier & Zaman, 2005; Zattoni & Cuomo, 2008, 2010; Nizaeva & Uyar, 2017) and Stewardship Codes (Klettner, 2021) in EU and emerging countries is not converging on the Anglo-American corporate governance model. Recent studies are also looking at convergence on an alternative model (that is, the European corporate governance model). For example, Japan’s company law, both hard and soft, contains a mixture of elements adopted from Germany and the US or the UK corporate governance model. A recent study by Yamanaka (2018) shows that some aspects are converging on while others are diverging away from the European corporate governance model. Overall, these studies contribute to the literature on the limited convergence of the different corporate governance systems (see Aguilera & Jackson, 2010 for a review). (vi) Consequences of transnational codes Sixth, and finally, our review shows that there are also studies on the consequences of codes issued by transnational institutions. This area has been under-researched for several years, but an increasing number of articles on this topic have been published recently. Overall, several transnational codes have undoubtedly had a key influence on the development of national corporate governance codes around the world (Aguilera & Cuervo-Cazurra, 2009; Mallin, 2019; Reid, 2003). On the one hand, a small number of recent studies codify the content of codes issued by European countries to investigate the impact of EU company law directives and EU soft law. Among them, a study by Böhm et al. (2013), aimed at investigating the impact of EU hard law directives on the content of governance codes in continental Europe, shows substantial cross-national differences in the scope of responsibilities to be addressed by audit committees, in the competences required by committee members and in the proportion of independent committee members. Coherently, Soltani and Maupetit (2015) find that differences exist in the European corporate governance codes issued in five major European countries regarding the importance given to ethical values, integrity of management and accountability mechanisms.

Codes of governance  59 Moreover, an early study by Hermes et al. (2006) on the impact of EU soft law (that is, the 2003 EU Action Plan) shows that the majority of the 22 codes of the EU countries issued by 2008 are “not in full accordance with the priorities of the European Commission” (p. 280). In contrast, a more recent quantitative analysis by Ferrero Ferrero and Ackrill (2016), using a large sample of 95 codes issued by EU countries over an extended period (1992–2010), shows the positive influence of the 2003 EU Action Plan on European national codes, even if “the degree of national policy alignment depends on when the corporate governance code was issued, where, and by whom” (p. 878). On the other hand, there are only a few recent studies aimed at investigating the effects of codes issued by other transnational institutions (such as the OECD Principles and the Corporate Governance guide of United Nations) on the development and content of national governance codes (for example, Bosáková et al., 2019; Qurashi, 2018). Overall, these studies show that national codes are adopting some principles of these transnational codes, while some deviations remain. For example, a recent study by Bosáková et al. (2019), which analyses the content of the national codes issued by 11 developing and emerging countries after the issuance of the 2015 OECD Principles of Corporate, shows that the “basic Provisions” of the 2015 OECD Principles of Corporate Governance “are overall well covered in the national codes issued in the succeeding years, although some deviations remain” (p. 263). Review of Firm-Level Studies on Codes of Governance A second stream of research consists of firm-level studies investigating: (i) the compliance statements at national level, (ii) the compliance statements at international level, (iii) the explanations for deviations from a corporate governance code and its principles and (iv) the relationship between code compliance and firm performance. Overall, our review shows that country-level studies are mostly focused on the compliance statements at national level and the relationship between code compliance and firm performance. (i) Compliance statements at national level First, surveys of compliance statements at national level are very common in the literature on codes of governance. Our review shows that the diffusion of codes affected the publication of studies on this topic both in terms of research setting and year of publication. On the one hand, these studies show the positive effects of governance codes on firms’ governance practices as companies tend to comply with code’s recommendations and their governance practices usually improve after implementing governance codes (for example, Stiles & Taylor, 1993 for the UK; von Werder et al., 2005 for Germany; Wahab et al., 2007 for Malaysia), with some exceptions (for example, Krambia-Kapardis & Psaros, 2006 for Cyprus; Florou & Galarniotis, 2007 and Nerantzidis, 2015 for Greece; Tsamenyi et al., 2007 for Ghana). On the other hand, these studies show that the rate of compliance varies across codes’ recommendations (see, for example, Akkermans et al., 2007 for the Netherlands; Mahadeo & Soobaroyen, 2016 for Mauritius) and that both firms’ and countries’ characteristics affect the implementation of governance codes’ recommendations. First, previous studies show that there are certain firm characteristics that influence the rate of compliance: for example, it is higher in large firms (for example, Akkermans et al., 2007 for the Netherlands; Conyon & Mallin, 1997 for the UK; von Werder et al., 2005 for Germany) and lower in firms with concentrated ownership structure (for example, Andres & Theissen, 2008 for Germany), especially if they

60  Handbook of accounting, accountability and governance are family-owned firms (for example, Arcot et al., 2010 for the UK; Zeidan, 2014 for Brazil). More recently, Rejchrt and Higgs (2015) find lower levels of compliance with key principles of the UK Corporate Governance Code by non-domestic companies listed on the LSE, and underline that this is more prominent for non-domestic companies from countries with high cultural distance (that is, high power distance in the Hofstede cultural value framework). Furthermore, early works were mainly cross-sectional and descriptive studies using binary and unweighted scores to measure the level of compliance, but recent studies are using longitudinal data and more sophisticated scores and/or methods (for example, Arcot et al., 2010 for the UK; Mahadeo & Soobaroyen, 2016 for Mauritius). For example, Mahadeo and Soobaroyen (2016) – by using a scoring system that combines trichotomous weighting of each governance component and a trichotomous rating of implementation of each component in a longitudinal sample from 2004 to 2007 – investigate the effects of the implementation of Mauritius’s code enacted in 2004 on a “comply or explain” basis. Their results show a significant implementation of the code initially, but then it begins to level off well below maximum assignable scores by 2007. Finally, the presence of multiple corporate governance codes and of potential conflicts among their recommendations can allow firms to comply with a limited and strategically selected number of items (see, for example, Osemeke & Adegbite, 2016 for Nigeria). (ii) Compliance statements at international level Second, our review shows that surveys of compliance statements at international level investigating if, and how, there are significant differences in the codes’ compliance of firms located in different countries are not very common in the literature. Among them, Nowland (2008), analysing data for several East Asian countries, shows that the level of compliance of firms with larger size and more dispersed ownership is higher than the level of compliance of small and family-owned firms, confirming the findings of surveys of compliance statements at national level. In addition, a few studies aimed at comparing the governance practices of Greek firms with the UK Combined Code as a benchmark (for example, Florou & Galarniotis, 2007; Nerantzidis et al., 2015) show that the average rating of compliance is very low. Moreover, our review shows that the findings of these early comparative studies underline that the level of compliance with national codes still differs across countries and that the lack of fit of the codes’ recommendations with firms’ characteristics and countries’ corporate governance system decreases the level of firms’ compliance. This is especially evident if code recommendations drawing on Anglo-American corporate governance principles are issued by countries with weak institutions. Recently, a study by Kabbach de Castro et al. (2017) argues and empirically demonstrates that the relationship between family ownership and firms’ non-compliance with corporate governance codes is not linear. Using the socioemotional wealth perspective and a cross-sectional sample of listed firms from the UK, Germany and Spain, they find an inverted U-shaped effect of family ownership on non-compliance. In addition, they highlight that the family influence and control dimension leads to high levels of non-compliance, and that the socio-worthiness stemming from the image and reputation dimension lessens non-compliance. Lastly, they show that the severity of the potential principal–principal agency problems moderates this relationship as the control dimension prevails over reputation where there are several potential agency problems (that is, high free-cash flow without investment opportunities), even in countries with strong governance.

Codes of governance  61 (iii) Explanations for deviation from codes Third, our review shows that studies on the explanations for deviations from, or application of, a corporate governance code and its principles are limited but increasing over time. Overall, we find that there are limited studies that explore the quality and type of explanations for non-compliance and whether some firms’ characteristics contribute to explain their choice to provide more or less informative explanations. In addition, the findings of these early studies indicate that firms’ compliance with codes’ recommendations is symbolic rather than substantive. Moreover, our review shows that these studies focus on a single country and refer mostly to a limited number of European economies (that is, Germany, the Netherlands and the UK). In particular, they find that non-compliance is common, and companies tend to provide standard or similar explanations for non-compliance (for example, Hooghiemstra & van Ees, 2011 for the Netherlands; Seidl et al., 2013 for Germany and the UK; Arcot et al., 2010 for the UK). Additionally, firm characteristics seem to affect the explanations for deviations from a corporate governance code and its principles. For example, Arcot et al. (2010) find that standard explanations for deviations from compliance are used by both widely held and family-owned non-financial UK companies. However, Hooghiemstra (2012) finds that with a concentrated ownership structure, a larger number of analysts follow them, and stronger boards may encourage Dutch firms to provide more informative explanations for deviations from the Dutch code and its principles. Furthermore, Shrives and Brennan (2015), by developing a taxonomy to assess the quality of explanations for non-compliance provided by UK companies, find that the quality of explanations remains very low and there are only marginal improvements over time, even if there are some differences between non-compliance explanations for FTSE100 and FTSE250 companies. More recently, an increasing number of studies are starting to investigate the explanations for deviations from a corporate governance code and its principles in other countries, including the emerging economies, using the “comply and explain” approach. Overall, they find that the quality of explanations is usually very low (for example, Nerantzidis, 2015 for Greece; Lepore et al., 2018 for Italy) as they are uninformative (see Manzanares & Leal, 2021 for Brazil) and companies tend to imitate each other (see Thanasas et al., 2018 for Greece). This is particularly true for companies with concentrated ownership (Lepore et al., 2018 for Italy; Manzanares & Leal, 2021 for Brazil – but state-owned companies displayed greater quality of explanations) and small companies (for example, Manzanares & Leal, 2021 for Brazil; Thanasas et al., 2018 for Greece). Finally, a recent interesting study by Shrives and Brennan (2017) develops a typology to analyse the explanations for non-compliance provided by UK companies in order to investigate the use of rhetorical strategies to persuade audiences of the need to explain rather than comply. Using a meaning-orientated content analysis approach, they find that the use of rhetorical strategies in non-compliance explanations provided by UK companies increased over time. Their findings are important as the use of rhetorical strategies decreases the effectiveness of the “comply or explain” approach. In particular, Shrives and Brennan (2017, p. 31) underline that “key rhetorical strategies identified in non-compliance explanations include ‘minimization of negative feelings’ (the damage is not too serious), the use of ‘weasel words’ which disguise non-compliance and ‘transcendence’ (ends justify means)”.

62  Handbook of accounting, accountability and governance (iv) Code compliance and firm performance Fourth, and finally, there are studies on the relationship between code compliance and firm performance. Our review shows that a limited number of studies have explored this topic over time. Moreover, they focus mainly on a single country and there are only a few comparative studies (Nowland, 2008; Renders et al., 2010). Early studies refer mostly to companies in the UK (Weir et al., 2002) or in other developed countries (Fernández-Rodríguez et al., 2004 for Spain; Goncharov et al., 2006 for Germany), but there are also studies that aim at investigating the relationship between code compliance and firm performance in other countries (for example, Luo & Salterio, 2014 for Canada), including emerging countries (for example, Machuga & Teitel, 2007 for Mexico; Owusu & Weir, 2016 for Ghana; Nyakurukwa, 2021 for Zimbabwe). Overall, the findings of these studies are mixed and inconclusive. In particular, some studies find a positive relationship between code compliance and firm performance (for example, Del Brio et al., 2006 and Fernández-Rodríguez et al., 2004 for Spain; Luo & Salterio, 2014 for Canada; Machuga & Teitel, 2007 for Mexico; Nowland, 2008 for seven East Asian countries; Owusu & Weir, 2016 for Ghana; Renders et al., 2010 for 14 European countries; Rose, 2016 for Denmark; Shaukat & Trojanowski, 2018 for the UK) or that the stock markets appreciate firm compliance (for example, Goncharov et al., 2006 and Chavez & Silva, 2009 for Germany and Brazil, respectively). Other studies find, instead, no association (for example, Haniffa & Hudaib, 2006 for Malaysia; Nyakurukwa, 2021 for Zimbabwe; Price et al., 2011 for Mexico) or mixed results (for example, McKnight & Weir, 2009 and Weir et al., 2002 for the UK) on the relationship between code compliance and firm performance.

CONCLUSIONS Corporate governance scandals and collapses in different countries around the world, the global financial crisis and public concerns over the lack of board accountability, the passive role of institutional investors, the debate on the purpose of the corporation, and the recent COVID-19 pandemic reinvigorated the discussion on how to design and implement good governance practices (Zattoni & Pugliese, 2021). Since the issuance of the Cadbury Report in 1992, the debate on good governance practices has stimulated the proliferation of governance codes (that is, the issuance of new codes or the revision of existing codes globally). As a result, the number of studies on codes of governance has increased over time following the same path. Studies have become more and more sophisticated in terms of research questions, theoretical perspectives and research methods. Despite this, there are still many interesting research opportunities to analyse codes of governance at country level and firm level. On the one hand, our analysis of studies on governance codes shows that some of the gaps highlighted by previous reviews (for example, Aguilera & Cuervo-Cazurra, 2009; Cuomo et al., 2016) have been appropriately, or at least partly, addressed. On the other hand, new gaps have emerged because of the issuance of new codes, the revision of existing governance codes both by national and transnational institutions and the emergence of new corporate governance phenomena. The academic debate on codes of governance is also likely to continue to be lively in the coming years. Several events – for example, the debate on the purpose of the corporation, the impact of the COVID-19 pandemic, the 30th anniversary of the Cadbury Code and the public concerns over the role of institutional investors – are likely to give further impetus to the

Codes of governance  63 debate on good governance practices. In addition, they may also promote the issuance of new codes or the revision of existing codes. For instance, the OECD (2021, p. 3) states that “the OECD’s Corporate Governance Committee has initiated a process of reviewing and updating the G20/OECD Principles of Corporate Governance” and has highlighted that “good corporate governance and well-functioning capital markets are always important, but perhaps even more critical now, both to support the recovery from the COVID-19 crisis and to further strengthen resilience to possible future shocks”. We conclude this chapter by providing a synthesis of what we have learned and which are the open issues related to the impact of good governance codes on corporate governance practices and board accountability. We analysed the literature distinguishing between country-level and firm-level studies, as they are characterized by different research questions, theories and methods. Our results show that country-level studies have highlighted that governance codes have become a key element of national corporate governance systems in a number of countries, and have promoted the diffusion and partial convergence of good governance practices globally. At the same time, they indicate that firm-level studies have underlined that companies tend to largely comply with codes’ recommendations, while it is still open to doubt if compliance leads to higher financial performance. From the perspective of better understanding the link between governance codes and board accountability, these results left unaddressed some open issues concerning: (i) the formal versus the substantive impact of good governance codes, (ii) the development of universal or specific best practices, (iii) the attention on visible (for example, demographics) or invisible (for example, processes) board attributes and (iv) the interplay between firm-level governance practices and country-level institutional context. First, our review shows that both the diffusion of good governance codes across countries and their implementation at firm level may be driven by both efficiency and institutional reasons. On the one hand, countries issue governance codes both to improve the efficiency of the national corporate governance system and to increase the legitimacy of the national stock exchange. On the other hand, companies tend to comply with the code both to improve the efficiency of their practices and to be perceived as a legitimate and safe investment. In sum, scholars are still debating if codes had a formal or also a substantive impact on governance practices. This is an important open issue as the formal compliance with codes does not necessarily lead to higher board accountability and better firm performance. To address this research question, scholars may investigate if different approaches to implementing codes (for example, “comply or explain” versus “comply and explain”) may affect formal versus substantive compliance. Moreover, they can further investigate if the presence and activities of engaged institutional investors are necessary to increase good governance and to force companies to adhere to the substance of the codes. From this perspective, the proliferation of the Stewardship Codes and the institutional investors’ compliance with their principles may contribute to increased substantive compliance. Future studies may also investigate if the adoption of Stewardship Codes will activate institutional investors and will have beneficial effects on listed companies’ substantive adoption of best practices. Second, another area of debate concerns if board accountability may be better created by developing and implementing either universal best practices (like good governance codes) that are valid for all companies or contingency models that guide the design of governance practices based on companies’ specific characteristics (Zattoni, 2020). If the first view is true, we expect that governance codes will become more similar across countries and company

64  Handbook of accounting, accountability and governance compliance will be strengthened to improve board accountability and positively affect firm performance. If the second view is true, we expect that governance codes will continue to differ across countries and will allow companies flexible compliance with their recommendations, as board accountability can be better guaranteed by implementing practices designed for a specific company. This is a second important open issue as the two options lead to different ways to guarantee board accountability. To address this research question, scholars may explore both the convergence or divergence of governance codes across countries and the reasons companies use to explain their deviations from governance principles. Moreover, they can investigate if there are common principles or significant differences in codes aimed at improving the governance of specific types of companies (such as family-owned, state-owned, private, small and medium companies) and of non-profit and charitable organizations. They can also explore if the adoption of more specific recommendations – instead of more generic and universal ones – can help companies to increase their board accountability and produce beneficial effects on firm performance. Third, governance codes are traditionally focused on developing recommendations on board composition (for example, the number of non-executive and independent directors, board diversity) and structure (for example, separation between chair and CEO, creation of committees). This is due to both academic research looking for the presence/absence of the “usual suspects” (that is, some board attributes – like CEO duality or few independent directors – considered to be symptoms of poor accountability) and the need for code issuers and investors to check formal compliance from a distance (Zattoni, 2020). However, recent studies have underlined that a proper board configuration in terms of composition and structure does not automatically lead to higher board accountability and superior financial performance. Less visible internal processes play an equally important role in favouring directors’ accountability: think, for example, of board processes promoting directors’ commitment to perform their duties, to discuss open issues from different viewpoints and to leverage directors’ competencies and experiences (Zattoni et al., 2015). To address this third important open issue, scholars may explore the role of process-based recommendations (for example, the number of meetings, induction programmes) in affecting board accountability and firm performance. In addition, the recent emphasis of the UK FRC on the board’s role in developing and assessing the company culture may open access to new information on intangible elements of internal corporate governance. Fourth and finally, an open issue in governance research centres on the interplay between firm-level governance practices and the country-level institutional context (Kumar & Zattoni, 2013). In other words, it is unclear if national corporate governance context is more important than firm-level governance practices in guaranteeing board accountability. In addition, scholars should still deepen their understanding of the substitutive or complementary nature of the interactions between national-level institutions and firm-level governance practices (Zattoni et al., 2020). This is an important open issue that concerns most studies generally on corporate governance and specifically also studies on codes of good governance. So, for example, scholars may further explore the interplay between corporate law and good governance codes in affecting companies’ governance practices and board accountability. An interesting research question is whether the US hard law approach is more or less effective than the UK soft law approach in increasing board accountability (Anderson, 2008). Moreover, it would be interesting to further analyse how hard law and soft law interplay within the same country; for example, if and how good governance codes may influence the evolution of corporate law (and

Codes of governance  65 vice versa), or if and how good governance principles may affect judges’ decisions on proper or improper board behaviours (Zattoni & Cuomo, 2008).

NOTES 1. For a short overview of the progress in governance application approaches over the years in South Africa, see, for example, Mallin (2019) and Natesan (2020). 2. For more information about the Cadbury Report, it may be useful and informative to access the Cadbury Archive at Cambridge Judge Business School, available at: http://​cadbury​.cjbs​.archios​ .info (last accessed 8 July 2023); for the history of the Cadbury Committee, see Spira and Slinn (2013); for an overview of the Cadbury Report and its influence on the development of UK codes, see Shah and Napier (2017) and Keasey et al. (2005), respectively. 3. For more details about the history of the UK Stewardship Code, see www​.frc​.org​.uk/​investors/​uk​ -stewardship​-code/​origins​-of​-the​-uk​-stewardship​-code; for a summary of the Stewardship Code initiative in the UK and the “Stewardship Code’s Achilles’ Heel”, see, for example, Cheffins (2010); for an overview of the global diffusion of Stewardship Codes and of the influence of the UK Stewardship Codes, see, for example, Katelouzou and Siems (2020).

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Codes of governance  69 Shah, N. and Napier, C.J. (2017), “The Cadbury Report 1992: shared vision and beyond”, available at https://​scholar​.google​.co​.uk/​citations. Shaukat, A. and Trojanowski, G. (2018), “Board governance and corporate performance”, Journal of Business Finance & Accounting, Vol. 45 No. 1–2, pp. 184–208. Shrives, P.J. and Brennan, N.M. (2015), “A typology for exploring the quality of explanations for non-compliance with UK corporate governance regulations”, British Accounting Review, Vol. 47 No. 1, pp. 85–99. Shrives, P.J. and Brennan, N.M. (2017), “Explanations for corporate governance non-compliance: a rhetorical analysis”, Critical Perspectives on Accounting, Vol. 49, pp. 31–56. Siems, M. and Alvarez-Macotela, O.S. (2017), “The G20/OECD Principles of Corporate Governance 2015: a critical assessment of their operation and impact”, Journal of Business Law, Vol. 4, pp. 310–328. Soltani, B. and Maupetit, C. (2015), “Importance of core values of ethics, integrity and accountability in the European corporate governance codes”, Journal of Management and Governance, Vol. 19 No. 2, pp. 259–284. Spira, L.F and Slinn, J. (2013), The Cadbury Committee: A History. Oxford University Press, Oxford. Stewart, A. and McNulty, T. (2015), “Convergence around concepts of actual board effectiveness in hard and soft law”, Law and Financial Markets Review, Vol. 9 No. 1, pp. 29–39. Stiles, P. and Taylor, B. (1993), “Benchmarking corporate governance: the impact of the Cadbury Code”, Long Range Planning, Vol. 26 No. 5, pp. 61–71. Terjesen, S., Aguilera, R.V. and Lorenz, R. (2015), “Legislating a woman’s seat on the board: institutional factors driving gender quotas for boards of directors”, Journal of Business Ethics, Vol. 128 No. 2, pp. 233–251. Thanasas, G.L., Kontogeorga, G. and Drogalas, G.A. (2018), “Does the ‘capstone’ of the ‘comply or explain’ system work in practice? Evidence from Athens Stock Exchange”, Corporate Governance: The International Journal of Business in Society, Vol. 18 No. 5, pp. 911–930. Tsamenyi, M., Enninful-Adu, E. and Onumah, J. (2007), “Disclosure and corporate governance in developing countries: evidence from Ghana”, Managerial Auditing Journal, Vol. 22, pp. 319–334. Varottil, U. (2020), “Proliferation of corporate governance codes in the backdrop of divergent ownership structures”, Competition & Change, Vol. 24 No. 5, pp. 471–492. Veldman, J. and Willmott, H. (2016), “The cultural grammar of governance: the UK Code of Corporate Governance, reflexivity, and the limits of ‘soft’ regulation”, Human Relations, Vol. 69 No. 3, pp. 581–603. von Werder, A., Talaulicar, T. and Kolat, G. (2005), “Compliance with the German corporate governance code: an empirical analysis of the compliance statements by German listed companies”, Corporate Governance: An International Review, Vol. 13 No. 2, pp. 178–187. Wahab, F.A.A., How, J.C.Y. and Verhoeven, P. (2007), “The impact of the Malaysian Code on Corporate Governance: compliance, institutional investors and stock performance”, Journal of Contemporary Accounting & Economics, Vol. 3 No. 2, pp. 106–129. Wanyama, S., Burton, B. and Helliar, C. (2009), “Frameworks underpinning corporate governance: evidence on Ugandan perceptions”, Corporate Governance: An International Review, Vol. 17 No. 2, pp. 159–175. Weir, C.M., Laing, D. and McKnight, P.J. (2002), “Internal and external governance mechanisms: their impact on the performance of large UK public companies”, Journal of Business Finance and Accounting, Vol. 29 No. 5–6, pp. 579–611. Wymeersch, E. (2013), “European corporate governance codes and their effectiveness”. Belcredi, M. and Ferrarini, G. (eds), Boards and Shareholders in European Listed Companies: Facts, Context and Post-Crisis Reforms. Cambridge University Press, Cambridge. Yamanaka, T. (2018), “Corporate boards in Europe and Japan: convergence and divergence in transition”, European Business Organization Law Review, Vol. 19 No. 3, pp. 503–525. Zattoni, A. (2020), Corporate Governance: How to Design Good Companies. Bocconi University Press, Milan. Zattoni, A. and Cuomo, F. (2008), “Why adopt codes of good governance? A comparison of institutional and efficiency perspectives”, Corporate Governance: An International Review, Vol. 16 No. 1, pp. 1–16.

70  Handbook of accounting, accountability and governance Zattoni, A. and Cuomo, F. (2009), “The role, diffusion and effectiveness of good governance codes”. Young, S. (ed.), Contemporary Issues in International Corporate Governance. Tilde University Press, Melbourne (pp. 95–111). Zattoni, A. and Cuomo, F. (2010), “How independent, competent and incentivized should non-executive directors be? An empirical investigation of good governance codes”, British Journal of Management, Vol. 21 No. 1, pp. 63–79. Zattoni, A. and Pugliese, A. (2021), “Corporate governance research in the wake of a systemic crisis: lessons and opportunities from the COVID-19 pandemic”, Journal of Management Studies, Vol. 58 No. 5, pp. 1405–1410. Zattoni, A., Gnan, L. and Huse, M. (2015), “Does family involvement influence firm performance? Exploring the mediating effects of board processes and tasks”, Journal of Management, Vol. 41 No. 4, pp. 1214–1243. Zattoni, A., Dedoulis, E., Leventis, S. and van Ees, H. (2020), “Corporate governance and institutions: a review and research agenda”, Corporate Governance: An International Review, Vol. 28 No. 6, pp. 465–487. Zeidan, R. (2014), “Voluntary corporate governance with an empirical application”, Applied Financial Economics, Vol. 24 No. 12, pp. 837–851.

4. Boards of directors and governing bodies Niamh M. Brennan and Collette E. Kirwan

OVERVIEW This chapter examines the board of directors’ governance and accountability role. Corporate reporting is traditionally viewed as a corporate governance mechanism, providing transparency on organizations’ performance to shareholders, stakeholders and civil society. We commence by considering contrasting perspectives on the purpose of corporate reporting. The chapter differentiates management responsibilities for the accounting function from the board of directors’ governance responsibilities for controlling, monitoring and overseeing corporate reporting. The chapter examines the processes boards of directors adopt to assure themselves of the integrity of corporate reports and assesses the use and limitations of corporate reporting as an accountability tool. The chapter views corporate governance as a human endeavour and considers relational challenges between boards, shareholders, other external parties and managers that may lead, on occasion, to governance failure. We evaluate the contradictions and complexities arising from governance paradoxes and the challenges of traditional perspectives on board roles in corporate reporting.

1. INTRODUCTION This chapter addresses boards of directors’1 role and responsibility for accounting, accountability and governance in organizations. We consider the extent to which the responsibility of directors for accounting (including corporate and financial reporting) is effective in establishing good governance and meaningful accountability. We focus on the interconnections between accounting, accountability and boards of directors. Within a framework of ethical and responsible management, these are essential to establishing effective behaviour in organizations. The health of organizations, both financial and moral, and the success and stability of capital and other markets are premised on disclosure of relevant and reliable accounting information, adoption of proper accountability and effective governance. Understanding accounting, accountability and governance and the interplay between these elements in the contexts in which they operate is essential for personal and organizational success, and global stability and sustainability. Given our nationality, we acknowledge that our chapter adopts a primarily Anglo-American perspective. For instance, we assume unitary boards with a single board of directors as opposed to two-tier boards more common in continental European countries, comprising management boards and supervisory boards. Although we reference regulation, codes of best practice and norms common in Anglo-American settings, we aim to address the broader and fundamental issues regarding directors’ role and responsibility for accounting, accountability and governance in organizations.

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2. GOVERNANCE The Greek word kubernetes is the root word for the Latin word gubernare, from which the word “governance” derives, meaning to steer as in steering a ship, suggesting that governance involves giving direction. The late Sir Adrian Cadbury (2002, p. 1) illustrates usage of the term as follows: “He [sic] that governs sits quietly at the stern and scarce is seen to stir”, quoting Cicero’s De Senectute (“si qui gubernatorem in navigando nihil agere … quietus sedeat in puppi”). Sir Adrian observes that the quote suggests that governance need not be, and should not be, heavy-handed. Nautical metaphors are therefore commonly used in corporate governance. For example, distinguishing governance and management is described as steering (governance), not rowing (management). The term “corporate governance” was first coined by the American Law Institute (ALI, 1982), Michael Earl (1983) and Bob Tricker (1984). The report of the UK Cadbury Committee (1992) gave it impetus, as did subsequent reviews of corporate governance best practice. The report’s title comes from its chairman, Sir Adrian Cadbury, then of the Cadbury chocolate family business. Carnegie and Napier (Introduction of this Handbook, p. 1) state that “accounting performs accountability, accountability nurtures governance, governance presumes accounting”. This suggests that the starting point is to understand the concept of “governance”. Definitions of corporate governance are varied. Traditionally, scholars have interpreted the phrase “corporate governance” narrowly, as the relation between firms (top managers as mediated by the board of directors) and the providers of capital. Bradley et al. (1999) question this traditional and narrow view of governance. For Carnegie and Napier (Chapter 1 of this Handbook, p. 16), good governance “properly acknowledges the obligations of enterprises to society in general, not just to the providers of capital”. Broader definitions consider the relationships among various groups (in addition to capital providers) in determining the direction and performance of corporations (Markarian et al., 2007). Table 4.1 includes eight definitions of corporate governance. We select these definitions from a range of academic and regulatory sources to illuminate their variability. These multiple corporate governance definitions demonstrate that corporate governance is interpreted widely and is the product of business, societal, sociological, cultural and political considerations. Sensitivity to different perspectives on corporate governance is important to develop an appreciation of this prominent concept, as each perspective manifests in different approaches to the execution of corporate governance in practice. We highlight key phrases differentiating the definitions. The UK Cadbury Committee (1992, paragraph 2.5) corporate governance Definition ① is simple and often quoted, and uses the term “system” which is highly relevant to corporate governance. Shleifer and Vishny’s (1997) Definition ② uses the word “processes” and is typical of the finance literature by focussing solely on shareholders and debtholders (“suppliers of finance”). In Definition ③, Denis (2001) and Denis and McConnell (2003) expand on earlier definitions, referring to “mechanisms of governance”. Their term “controllers” comes from agency theory’s conceptualization of the separation of ownership and control; that is, principals and agents, or shareholders and managers. Denis and McConnell (2003) do not explicitly identify the controllers, who may be management and/or the board of directors. Some authors position non-executive directors as quasi-shareholders rather than managers. For example, Orts (1998) describes directors as “quasi-principals”, sometimes acting as principals, sometimes acting as agents, depending on the circumstances. Arguably, the term “man-

Boards of directors and governing bodies  73 agement” should not include non-executive directors; managers manage, while the board, especially through its non-executive directors, governs. It is important to distinguish between management and governance (see Section 5.1). In Definition ④, Johnson et al. (2000) add “effectiveness” as a criterion relevant to good governance. In their Definition ⑤, Keasey and Wright (1993) include “accountability” as a subset of governance. Tricker’s (2019) Definition ⑥ captures another aspect, that of the exercise of power. Table 4.1 ① ② ③

Definitions of corporate goverance (key words in italics) “System by which companies are directed and controlled” (Cadbury Committee, 1992, paragraph 2.5) the process that “deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment” (Shleifer & Vishny, 1997, p. 737) “Corporate governance encompasses the set of institutional and market mechanisms that induce self-interested managers (the controllers) to maximize the value of the residual cash flows of the firm on behalf of its shareholders (the owners)” (Denis, 2001, p. 192) “the set of mechanisms – both institutional and market-based – that induce the self-interested controllers of a company (those that make decisions on how the company will be operated) to make decisions that

④ ⑤

maximize the value of the company to its owners (the suppliers of capital)” (Denis & McConnell, 2003, p. 2) “the effectiveness of mechanisms that minimize agency conflicts involving managers” (Johnson et al., 2000, p. 142) “Corporate governance concerns the structures and processes associated with production, decision-making, control and so on within an organisation. Accountability, which is a sub-set of governance, involves the monitoring, evaluation and control of organisational agents to ensure that they behave in the interests of

⑥ ⑦

shareholders and other stakeholders” (Keasey & Wright, 1993, p. 291) “the way power is exercised over corporate entities” (Tricker, 2019, p. 4) “Corporate governance is the governing structure and processes [procedural governance] in an organisation that exist to oversee the means by which limited resources are effectively directed to competing purposes for the use of the organisation and its stakeholders; including the maintenance of the organisation and its long-run sustainability [behavioural governance], set and measured against a framework of ethics [structural

⑧

governance] and backed by regulation and laws [systemic governance]” (Bloomfield, 2013, p. 19) “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined” (G20/OECD, 2015, p. 9)

Bloomfield (2013, p. 392) is critical of corporate governance definitions that focus on structures. Tinkering with corporate governance structures does not address behavioural issues “in the great dance of governance”. He argues that the “geography” of corporate landscapes is recognized, but processes – the “geology” which lies underneath the formation of the corporate landscape – are not accounted for adequately. What Bloomfield means by his geography/geology metaphor is that the geography of governance is structures, such as board composition, board committees, risk management processes and so on. He considers that this addresses governance only at a surface level. On the other hand, geology is processes and procedures that gets under organizations, at a more granular and even organizational culture level. Bloomfield believes that the UK Cadbury Report’s original definition does not capture Sir Adrian Cadbury’s view of the true purpose of corporate governance, which Cadbury expressed as follows:

74  Handbook of accounting, accountability and governance Corporate governance is involved in holding the balance between economic and social goals and between individual and communal goals … The aim is to align as nearly as possible the interests of individuals, of corporations, and of society. (Cadbury, 2003, Foreword)

Following this, Bloomfield (2013) introduces his definition (Definition ⑦). Reflecting the multi-dimensional nature of corporate governance, Bloomfield (2013) annotates his definition with concepts/dimensions, including procedural, behavioural and structural components within the firm; systemic components linking the firm externally; and operational and temporal/longitudinal components that reinforce these. Examples of his annotations are shown in Definition ⑦ in square brackets. Similarly, the G20/Organisation for Economic Co-operation and Development (OECD) (2015) in Definition ⑧ connects corporate governance to the structures it provides, but it also elevates the “relationships” between management, boards of directors, shareholders and stakeholders. Carnegie and Napier (Chapter 1 of this Handbook, p. 18) also suggest that the OECD definition explains governance as being “dependent upon an assemblage of relationships between those parties who, by means of meaningful collaborative relationships, ensure that companies are effectively governed”. Corporate governance is a human/social activity. When governance fails, the failures are almost always put down to human/behavioural issues. Therefore, well-functioning and robust human relationships are key to good governance.

3.

THE PURPOSE OF CORPORATIONS AND BOARDS OF DIRECTORS’ RESPONSIBILITIES

The UK Corporate Governance Code (Financial Reporting Council (FRC), 2018, p.1) states that “boards of directors are responsible for the governance of their companies”. In fulfilling this role, the governance literature reflects divergent views on the roles performed by boards of directors. For example, boards of directors comprising independent non-executive directors are generally considered most effective at exercising agency theory’s control and monitoring roles (Brennan & McDermott, 2004). Under stewardship theory and resource dependence theory, boards of directors are an important source of advice and counsel for senior management, especially the CEO who holds a lonely role. Taking a singular theoretical perspective suggests that boards of directors fulfil either a monitoring or advisory role. However, scholars generally acknowledge that the role of boards of directors is multi-dimensional, incorporating both monitoring and advising (Hooghiemstra & van Manen, 2004; Nicholson & Kiel, 2004; Roberts et al., 2005). While the question of “what boards do” is important, we must also consider to whom directors are accountable. The dominant and often taken-for-granted assumption is that directors owe their duties to shareholders. More recently, greater attention has been drawn to the wider group of stakeholders that directors should consider (for example, Adams et al., 2011). However, before we can address the question to whom are directors accountable, we must first consider the purpose of corporations and to whom companies are accountable. When debating the purpose of corporations, the discussion tends to focus on the shareholder view versus the stakeholder view of the firm.

Boards of directors and governing bodies  75 3.1

Shareholder View of the Firm

As part of its corporate governance project, The American Law Institute (ALI, 1994, Section 2.01, p. 55) defines the objective and conduct of companies as follows: §2.01 The Object and Conduct of the Corporation (a) … a corporation should have as its objective the conduct of business activities with a view to enhancing corporate profit and shareholder gain. (b) Even if corporate profit and shareholder gain are not thereby enhanced, the corporation, in the conduct of its business: (1) Is obliged, to the same extent as a natural person, to act within the boundaries set by law; (2) May take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of business; (3) May devote a reasonable amount of resources to public welfare, humanitarian, educational, and philanthropic purposes.

The definition above is still widely used and cited, albeit as an example of theories dominated by “shareholder primacy and profit maximisation” (Du Plessis et al., 2007, p. 419). Accordingly, under this definition of the purpose of companies, although shareholder primacy is the general rule, subsection (b) allows for reasonable ethical and charitable considerations to moderate shareholder primacy. Arguably, the word “may” in (b)(2) and (b)(3) has not stood the test of time. In another view that has not stood the test of time, Nobel Prize winner Milton Friedman (1962, p. 133) observes: Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.

Nowadays, many commentators would argue that Friedman’s statement is too narrow, too limited and, therefore, a form of extreme capitalism (for example, Haski-Leventhal, 2022). Taking a shareholder view of the firm creates various challenges. Shareholders are not a homogenous group (Veldman, 2019). In modern corporate governance, there is a large diversity of types of shareholders: retail, institutional, minority, majority, controlling, non-controlling and rentier (passive, pure money capitalists) shareholders. This range of types of shareholder reflects a multiplicity of interests and time horizons. Shareholders’ identities, interests and policy agendas may change over time. This range of shareholders leads to the possibility of agency problems between shareholders and not just between shareholders and management, where inter-shareholder conflict is exacerbated in closely held companies (Blair & Stout, 2000). Redirecting executives to the service of shareholders alone has also marginalized other stakeholder concerns (Fourcade & Khurana, 2017). In a contrary opinion to the shareholder primacy perspective, Eisenberg (1993) argues that companies should conduct themselves as social and economic institutions. The author considers the pursuit of profit and shareholder gain should be constrained by social imperatives and qualified by social needs. 3.2

Stakeholder View of the Firm

An alternative to the shareholder-centric view of the firm, such as that expounded by the American Law Institute (ALI, 1994), is the stakeholder view of the firm. Stakeholders are

76  Handbook of accounting, accountability and governance those who influence or are influenced by the activities of the entity. Companies obtain financial capital, labour capital and other benefits from stakeholders and conduct value-adding activities which, in essence, are to return value to stakeholders. Stakeholders include shareholders, lenders, employees, customers, suppliers, government, local communities and society more generally. Shareholders, however, are the residual claimants. Stern (2021) observes that having a corporate “Purpose” is “becoming an object of desire in boardrooms”, with attention increasing since the US Business Roundtable issued its statement on the purpose of a corporation in August 2019. The Purpose of the Corporation (http://​purposeofcorporation​.org), the Modern Corporation: Corporate Governance for the 21st Century (http://​themoderncorporation​.org) and the Future of the Corporation (www​ .thebritishacademy​.ac​.uk/​future​-corporation) projects are challenging the embedded shareholder primacy notions that remain prominent in some jurisdictions (for example, the UK). The three projects recognize that company purpose is not only or simply to maximize shareholder value. There is a certain “back to the future” feel about these projects, given that they reflect the provisions of The Corporate Report (Accounting Standards Steering Committee (ASSC), 1975) discussed later in the chapter. The three projects make various propositions regarding corporate purpose. For instance, they argue that corporate governance should align with a socially beneficial corporate purpose. They propose that corporate entities’ goals should aim to create long-term sustain­able value for customers and shareholders while also contributing to societal well-being and environmen­ tal sustainability, objectives that can be mutually reinforcing. They advocate that company law should require companies to specify their corporate purposes and that companies should therefore adopt structures that ensure they uphold the public good as well as their private interests. Particularly, they suggest that companies performing public and social functions, such as utilities, banks and companies with significant market power, should align their corporate and their social purposes. In addition, the regulatory framework should promote an alignment of corporate purposes with social purposes and ensure that companies’ ownership, governance, measurement and incentive systems are appropriate for these objectives. Carnegie and Napier (Chapter 1 of this Handbook, p. 18) suggest that the stakeholder-orientated approach is beginning to “displace the previous disposition to view the corporation and its affairs as being conducted primarily in the interests of shareholders”. 3.3

To Whom Are Directors Accountable?

The corporate purpose debate concerning company purpose and to whom companies are accountable, by extension, informs discussions on the role of boards of directors and to whom boards of directors are accountable. Boards of directors are a “central governance mechanism” (Cullen & Brennan, 2017, p. 1867). Since the 1980s, across many jurisdictions, norms and practices that assume directors are accountable to shareholders have influenced corporate governance standards (Deakin, 2005, 2011), reflecting the shareholder view of the firm and an agency theoretical perspective. Boards of directors, comprising non-executive directors independent of management,2 are a mechanism to mitigate the agency problem. Their primary role is to monitor the activities of organizational management to ensure management takes decisions that are in the best interests of shareholders (Fama & Jensen, 1983; Forbes & Milliken, 1999; Minichilli et al., 2009). Thus, taking a shareholder perspective, directors of public companies are “accountable only to the shareholders” and “only for maximizing the

Boards of directors and governing bodies  77 value of the shareholders’ shares” (Blair & Stout, 2001, p. 404). Furthermore, taking a shareholder perspective, focussing on the relationship between companies and their shareholders, suggests that the primary focus of corporate reports is to communicate financial information to shareholders (Brennan & Merkl-Davies, 2021; Stanton & Stanton, 2002). In this regard, accountability simply involves reporting upon the extent to which companies have discharged their responsibilities to shareholders. Stanton and Stanton (2002) argue that when researchers view corporate reports from an accountability perspective, such reports serve as vehicles through which managers react to shareholders’ concerns; they also acknowledge accountability to stakeholders, with managers reacting to stakeholder concerns. As previously discussed, in recent years calls have been made, and greater attention has been paid, to the wider group of stakeholders with whom companies interact. The UK Corporate Governance Code (FRC, 2018, p. 1) states, “to succeed in the long-term, directors and the companies they lead need to build and maintain successful relationships with a wide range of stakeholders”. This code suggests that cultures within companies should be responsive to the views of shareholders and wider stakeholders. Indeed, the code goes further than simply suggesting boards should be responsive to the views of both shareholders and wider stakeholders. It also suggests that for companies to meet their responsibilities to shareholders and stakeholders, boards should ensure effective engagement with, and encourage participation from, these parties. To facilitate wider engagement, the code recommends methods for enhancing relationships between the company’s board of directors and its workforce. One of the methods is the appointment of a director from the ranks of the company’s workforce. Thus far, we have considered directors’ responsibilities based on the two prevailing perspectives – the shareholder view and stakeholder view of the firm. However, a third perspective exists. The firm-centric perspective reflects the law in many countries, whereby directors owe their duties to the company, not to shareholders. Thus, the firm-centric perspective involves acting in the best interests of the company (Ahern, 2011; Lan & Heracleous, 2010). Taking this perspective, Lan and Heracleous (2010, p. 295) redefine the “status” (or higher-order duty) of directors as “autonomous fiduciar[ies] … entrusted with the power to act on behalf of and for the benefit of a beneficiary”. For the authors, the beneficiary is the firm rather than the shareholders of the firm. Lan and Heracleous (2010) and Heracleous and Lan (2012) argue that, contrary to agency theory, the principal is not the shareholder; rather, the principal is the firm. UK case law highlights the subtle but important distinction between the interests of shareholders and the interests of firms, which identifies that “What is in the interests of current shareholders … may not necessarily coincide with what is in the interests of the company”. Moreover, “The creation of parallel duties could lead to conflict” (Dawson International plc v. Coats Paton plc, 1989 Butterworths Company Law Cases, p. 243). The firm-centric perspective potentially addresses the succession problem in governance: that managing for today’s shareholders may not protect or enhance value for tomorrow’s shareholders. Leblebici and Sherer (2015) present a trusteeship perspective as an alternative to the agency theory perspective. Directors are not agents (or guardians) for shareholders but instead are guardians entrusted with ensuring continuity of the firm and protecting its legacy. Directors govern “by acting as guardians or keepers of the firm’s past, present, and future” (Leblebici & Sherer, 2015, p. 193). Possibly because it reflects the legal status of companies and their directors, the notion of guardianship is more prevalent in the legal literature. For example, in his director-primacy model, Bainbridge (2002, p. 551) states that directors are not agents of shareholders but “platonic guardian[s]” of the nexus of contracts making up the

78  Handbook of accounting, accountability and governance firm. We view the novel concept of “guardianship of the firm” as overcoming the inherent conflicts of interest between shareholders and managers. By expressing directors’ overarching role in terms of their guardianship of the firm, directors are viewed neither as the agents of shareholders nor as the advisors of management. Hence, directors can exercise the different, and potentially conflicting, aspects of their role. Although the distinction between directors’ duties to shareholders versus the firm has received some attention in the legal literature, it has received less attention in the governance literature. Contrary to the assumption introduced above that boards of directors’ primary responsibility is protecting shareholders’ interests and maximizing shareholder wealth, Bower and Paine (2017, p. 52) contend that “a company’s health – not its shareholders’ wealth – should be the primary concern of those who manage corporations”. Moreover, Bower and Paine (2017) continue, assuming that maximizing shareholder value is the number one responsibility of boards and managers is confused in terms of corporate law, is a poor guide for managerial behaviour and entails a major accountability problem. Winter (2020) goes one step further in advocating that legal regulations and corporate governance best practices add a duty of societal responsibility to complement current boards of directors’ fiduciary and due-care-and-skill duties. A duty of societal responsibility of the board of directors would complement the duty of loyalty and duty of care that are generally recognized as core director duties, in different ways in different jurisdictions. Winter (2020) suggests such a duty should be elaborated upon in corporate law and corporate governance practices. The firm-centric perspective may also be a way to navigate the conflicts of interests between different stakeholder groups. Given the multiplicity and often conflicting stakeholder interests, the firm-centric perspective is founded on the principle that the company’s interests prevail in the event of multiple conflicting objectives. The capacity to deal with the multiple interests of different shareholder and stakeholder types is the raison d’être of the board of directors.

4. ACCOUNTABILITY Definition ⑤ in Table 4.1 includes accountability as a subset of corporate governance. Zattoni and Pugliese (2019, p. 107) observe that few studies explore the concept of accountability in governance, from the perspective of board accountability processes and their execution by boards of directors, despite its centrality, citing Brennan et al. (2016) as an exception. In this section, we consider accountability and boards’ role in holding executives to account and board accountability. Drawing from Gray et al. (2014, p. 4), Dillard and Vinnari (2019, p. 19) argue that: One, if not the, primary reason for accounting is to facilitate accountability on the part of one party, having resources and power to act, to another party that holds an interest in (can be materially affected by) the first party’s actions.

They describe accounting as “a system and craft for making visible the activities of an actor” (Dillard & Vinnari, 2019, p. 19). Carnegie and Napier (Chapter 1 of this Handbook, p. 18) state that accountability is a long-accepted concept. Indeed, its pervasiveness is such that Cooper and Johnston (2012, p. 603) conclude that “accountability” is a “vulgate word”; a word that has taken on multiple meanings and consequently lacks impact and force. Sinclair

Boards of directors and governing bodies  79 (1995, p. 221) notes that definitions of accountability, including the external parties to whom individuals or entities are answerable, and the nature of the ends to be achieved, “is dependent on the ideologies, motifs and language of our times”. As such, the definition of accountability is context-specific. Moreover, the literature identifies different types or modes of accountability. For example, Goodman et al. (2021, p. 667) note that sources of accountability can be internal (for example, chair, company secretary, other directors) and external (for example, shareholders, external stakeholders). Citing Sinclair (1995), Dillard and Vinnari (2019) distinguish between personal accountability and structural accountability (that is, the systematic or technical properties of accountability and associated processes). Conversely, Roberts et al. (2005) distinguish between face-to-face accountability within boards between executive and non-executive directors and remote accountability to investors. Goodman et al. (2021, p. 667) refer to boards of directors as “objects of accountability” and, reflecting the wider stakeholder perspective, state that individual directors, in particular non-executive directors, “hold multiple accountabilities to varying sources”. Boards of directors are not only “objects of accountability” (as described by Goodman et al., 2021, p. 667) but are also responsible for holding other key players, specifically managers/executives, accountable (Aguilera, 2005). The distinction between holding people to account and being accountable is important in understanding the accountability role of boards of directors. 4.1

Boards of Directors: Holding to Account

Aguilera (2005, p. S45) states that “boards of directors are supposed to hold managers accountable”. In this regard, the boardroom is the main accountability arena. However, Roberts (2001) characterizes UK and US unitary boards as face-to-face forums for accountability, what he calls socializing forms of governance and accountability. He argues that the collective nature of board processes and the relative balance of power between board members create a dynamic of openness and engagement between executive and non-executive directors. Roberts (2002) adds that openness, necessary to build trust, requires the chair and non-executive directors to understand their roles and to invest in obtaining sufficient knowledge about the company’s context. Brennan et al. (2016, p. 159) use the phrase “accountability discourse in the boardroom” to capture the question-and-answer exchanges between executive and non-executive directors during board meetings. Carroll et al. (2017) apply discourse analysis to the transcripts of semi-structured interviews with 60 company directors. They classify discourse into four categories, together with subcategories: discourse of conformance (watchdog, border control, inspectorate); deliberation (investigative committee, debating forum, mentoring support); enterprise (strategy unit, council of elders, leadership team); and bounded innovation. They conclude that paradoxes arise from boards’ conflicting roles of monitoring/control and innovation/strategy-making, which remain unresolved. Nicholson et al. (2017) identify eight categories of habitual accountability routines: management explanation and justification, director explanation and justification, information request, judgement and consequences, team building, item open, meeting process and item close. In complementary studies, Pernelet and Brennan (2023a, b, c) develop a typology of accountability discourse in the boardroom in the form of question-and-answer interactions. The typology these authors adopted comprises six question categories (48 question subcategories) and eight answer categories (69 answer subcategories), which serves to highlight the complexity of boardroom accountability processes.

80  Handbook of accounting, accountability and governance Roberts (2002) and Roberts et al. (2005) argue that it is the chair’s role to manage the processes of accountability within the boardroom, which Roberts (2002, p. 515) describes as “process of learning, which acknowledges the inevitable incompleteness of individual thought, and through which strategy emerges as the synergistic outcome of board discussions”. Roberts (2002, p. 508) proposes that “accountability achieves most of its effects in the anticipation of non-executives’ concerns by executives”. Nicholson et al. (2017) study accountability routines in boards of directors and provide insights into how boards enable effective accountability creation in boardrooms. Boards engage in recurrent accountability routines as a group, but individual directors play different roles in those routines depending on the meeting agenda item, allowing directors and managers to hold each other to account. Given the prevailing assumption of the control and monitoring roles of boards, Roberts (2002, p. 507) expresses what might be considered a contradictory view, stating, “The role of the non-executive is to support the performance of the executive, and this is best served through strong accountability”. Paradoxically, Roberts (2002) argues that individual non-executive directors and how they combine their energies in processes of board accountability and complimentary rather than complementary relationships between executives and non-executive directors can indeed weaken board accountability. 4.2

Boards of Directors: Held to Account

Roberts and Scapens (1985, p. 447) describe accountability as “the giving and demanding of reasons for conduct”, which implies a narrative form of accountability. They contrast regular face-to-face accountability with other forms of accountability that span distances. They characterize face-to-face accountability as offering accountability explanations which can be challenged, which is more difficult using forms with remote accountability. Remote accountability involves physically remote people, which characterizes accountability between boards of directors and external stakeholders, particularly shareholders. Dillard and Vinnari (2019, p. 20) argue that traditional accounting-based accountability disclosures “provide the basis for evaluating the performance of an entity, for holding those responsible accountable for their actions, and for projecting future actions”. Aguilera (2005, p. S45), however, questions the relationship between shareholders and boards of directors from the perspective that boards of directors are expected to represent shareholders who are “unclear about their preferences and who have few mechanisms to demand director accountability”. Extending Aguilera’s (2005) argument, Goodman et al. (2021, p. 667) suggest that: The prevailing view, both in practice and literature, is that boards of directors charged with monitoring and controlling the decisions and actions of executive management often fail to be accountable to the company and shareholders.

Corporate and financial reporting is at the heart of corporate accountability. Boards of directors play a key role in ensuring the integrity of corporate and financial reports.

5.

CORPORATE AND FINANCIAL REPORTING

Financial reporting is a tool by which boards of directors and governing bodies can exercise accountability. Financial reporting is a means to an end, rather than an end in itself.

Boards of directors and governing bodies  81 Accountability is the end game of financial reporting. The Corporate Report (ASSC, 1975) is based on a broad definition of accountability. It draws on stewardship to define the objective of corporate reporting as “an implicit responsibility to report publicly … separate from and broader than the legal obligation to report and arises from the custodial role played in the community by economic entities” (ASSC, 1975, p. 15). The Corporate Report defines intended users of corporate reports widely as investors, creditors, employees, financial analysts, the government, and the public. By contrast, the International Accounting Standards Board (IASB, 2018, paragraph 1.22, our emphasis) defines the relationship between stewardship and accountability in the following way: Information about how efficiently and effectively the reporting entity’s management has discharged its responsibilities to use the entity’s economic resources helps users to assess management’s stewardship of those resources.

By adding the phrase “efficiently and effectively … use the entity’s economic resources”, the IASB moves the concept of stewardship close to the notion of decision-usefulness, thus allowing decision-usefulness to subsume stewardship (Zeff, 2013, p. 313). This rhetorical move has resulted in economic decision-making superseding accountability as the prime objective of corporate reporting. In this section of the chapter, we consider directors’ corporate reporting responsibilities. Corporate reporting, which includes financial reporting, continues to be the main vehicle through which boards of directors exercise remote, external accountability. 5.1

Directors’ Responsibility for Financial Reporting

Company law requires directors to prepare financial statements comprising a profit and loss account and a balance sheet. In the UK, directors should only approve financial statements that give a “true and fair view” (“present fairly”) the company’s performance and financial position. Depending on company size, directors must arrange for the financial statements to be audited. Auditors are responsible for auditing the financial statements and reporting whether, in their opinion, the financial statements give a “true and fair view” (“present fairly”). Statutory financial statements must be circulated to members/shareholders and laid before a company meeting (the “annual general meeting”) to be approved by the members/shareholders. In response to perceived failures in accountability in the late 1980s, the UK Cadbury Committee (1992) on corporate governance introduced a requirement that directors include a statement of responsibilities in annual reports. The statement of directors’ responsibilities is an initial UK requirement and has since been adopted in India. In the European Union, Article 4.2 of the European Transparency Directive (2004/109/EC) requires a statement of responsibilities in the annual reports of listed companies. Other jurisdictions have attestation processes reflecting directors’ responsibilities and require directors’ signatures on documents such as annual reports and financial statements. In some other jurisdictions, auditors’ reports explicitly identify the directors’ responsibilities. Both the statement of directors’ responsibilities (which generally appears in the directors’ report) and the statement of the respective responsibilities of directors and auditors (which appears in the auditor’s report) follow standard wording. The precise regulatory requirements will vary from jurisdiction to jurisdiction.

82  Handbook of accounting, accountability and governance Statements of directors’ responsibilities may include directors’ responsibilities for: ● preparing the annual report and financial statements in accordance with applicable laws and regulations ● selecting suitable accounting policies and then applying them consistently ● making judgements and estimates that are reasonable and prudent ● complying with applicable International Financial Reporting Standards (IFRS), subject to any material departures disclosed and explained in the financial statements ● preparing the financial statements on the going concern basis unless it is inappropriate to presume that the group will continue in business, including a management report containing a fair review of the development and performance of the business and the position of the parent company and the group taken as a whole, and a description of the principal risks and uncertainties facing the group ● preparing the financial statements of the parent company ● keeping proper books of account/adequate accounting records that disclose with reasonable accuracy at any time the financial position of the parent company and which enable directors to ensure that the consolidated financial statements are prepared following applicable international financial reporting standards ● appointing appropriate accounting personnel, including a professionally qualified finance director, to ensure that directors meet their requirements ● safeguarding the group’s assets and taking reasonable steps for the prevention and detection of fraud and other irregularities. While UK corporate governance regulations require directors to complete director responsibility statements, the process boards adopt before signing up to such statements is less clear. Accounting tends to be represented “by reference to numbers” (Carnegie & Napier, Chapter 1 of this Handbook, p. 17) and in this way, “accounting practices embody a rather restricted form of accountability” (Messner, 2009, p. 918). Messner suggests that accounting portrays “human beings as purely economic agents who relate to each other through their self-interests alone” and, as such, contemporary accounting practices imply a “partial form of accountability relations” (Messner, 2009, p. 919). Alternatively, in a new definition of accounting proposed for discussion and debate, Carnegie et al. (2021, p. 69) conceive accounting as “a technical, social and moral practice concerned with the sustainable utilization of resources and proper accountability to stakeholders to enable the flourishing of organizations, people and nature”. Dillard and Vinnari (2019, p. 18) claim that many view accountability as “a simple, unidimensional outcome of accounting systems”. In the context of social and environmental accounting, they challenge what they refer to as the “accounting-based accountability” perspective. This perspective presumes that “accountability follows from, and is enabled and constrained by, a pre-specified (traditional) accounting system” (Dillard & Vinnari, 2019, p. 17). Dillard and Vinnari (2019) consider the failure to appreciate the relationship between accounting and accountability systems as problematic. They acknowledge that accounting-based accountability is aimed at financial capital providers and propagation of this perspective serves to sustain and reinforce the needs and interests of financial capital providers. Dillard and Vinnari (2019, p. 18) claim that privileging accounting-based accountability accepts the view under the “neoliberal assumption that the information needs of all other interested groups are satisfied” by the information provided in financial statements.

Boards of directors and governing bodies  83 Financial accounting as a matter of process involves recording transactions, summarizing, classifying, analysing and interpreting those transactions, meeting legal requirements and communicating the results in financial statements. Robust internal control systems and risk management systems are key to the integrity of financial statements. Management executes the financial accounting function on a day-to-day basis. Boards of directors are responsible for the financial accounting function, especially as expressed in end-of-year and interim (half-yearly or quarterly) financial statements. Boards of directors can delegate the execution of the financial accounting function to suitably qualified management but can never delegate their ultimate responsibility for accounting. In the UK, boards of directors evidence their responsibility by two board members (often the chair and the CEO) signing the statement of directors’ responsibilities and the balance sheet (that is, statement of financial position) on behalf of the board. Boards of directors execute their governance roles by monitoring the production of the financial statements and related processes, assisted by board audit committees exercising oversight over the processes to support boards’ adoption of the year-end financial statements. In this section of the chapter, we review the role of boards and audit committees in financial reporting and the mechanisms to protect financial reporting integrity, directors’ statements on internal controls, directors’ letters of representation to auditors and directors’ statements on going concern.3 5.1.1 Board of directors Shareholders are often separated or removed from the day-to-day operation of companies. They delegate that task to company management. Consequently, there may be costs – where management act in its own personal interests rather than in the interests of the shareholders. These conflict-of-interest costs are referred to as agency costs (Jensen & Meckling, 1976). In some accounting scandals (for example, the Enron collapse in the US in 2001), these agency costs have been so high as to result in the company’s “death”. The separation of ownership and control of companies also leads to information asymmetry between shareholders (and stakeholders) on the one hand and company management on the other. Financial reporting bridges that information gap. Financial reports make public information that is previously known only to company management. Company management prepares financial reports which are made available to users. Boards of directors are required to ensure their companies: ● ● ● ● ●

keep adequate accounting records/proper books of account prepare financial statements annually ensure that financial statements are audited prepare financial statements that provide a true and fair view/fair presentation lay financial statements before the Annual General Meeting.

Directors and auditors are the “referees” in this process (Fama, 1980, p. 293). They provide users of financial statements with some assurance concerning the financial statements. However, the nature of the assurance offered is unclear. Do directors and auditors provide assurance on the accuracy/true and fair view/fair presentation of the financial statements? Shareholders appoint external auditors at company general meetings. Legislation and professional requirements govern auditors’ responsibilities and conduct. The wording of the audit report to members of the company is premised on the primary objective of an audit, as referred to earlier. However, investors generally do not understand the nature of the assurance provided by auditors. Auditors refer to this as an expectations gap; that is, the gap between

84  Handbook of accounting, accountability and governance the auditors’ actual standard of performance and the various public expectations of auditors’ performance (as opposed to their required standard of performance) (Brennan, 2006). More recently, there has been the counterargument of a delivery gap – the difference between how the auditing service is designed and how the service is delivered (Association of Certified Chartered Accountants (ACCA), 2019). This gap occurs when a service firm fails to deliver service according to existing service standards. The UK Department of Business, Energy and Industrial Strategy (BEIS, 2021) consultation paper Restoring Trust in Audit and Corporate Governance observes that there is a breakdown of trust in the auditing profession and that the audit no longer meets expectations. 5.1.2 Audit committee In the UK, the boards of publicly listed companies are required to establish audit committees comprising at least three independent non-executive directors. Independent means “in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director’s judgement” (FRC, 2016, p. 10 – interestingly, this definition does not appear in the later version of the code: FRC, 2018). Brennan and Kirwan (2015) review and critique prior research on audit committees through a practice theory lens, differentiating best practice and what audit committees actually do in organizational contexts (praxis). For audit committees to work well, non-executive directors should be willing to ask probing and tough questions, and they should be proactive rather than reactive. They should also have the necessary expertise – preferably a financial background. Audit committee meetings should be formal and meaningful in terms of frequency and length and should enable directors to fully exercise their duties and responsibilities, both of which should be clear. There should be meaningful interaction between the audit committee, management and external auditors. Audit committee oversight activities of internal audit include (i) reviewing and approving the internal audit charter (where there is one), (ii) overseeing the appointment or removal of the head of internal audit, (iii) reviewing internal audit plans and budgets, (iv) reviewing internal audit findings, (v) commissioning specific audit projects and (vi) requesting quality reviews of the internal audit function (Sarens & de Beelde, 2006). 5.1.3 Directors’ statement on internal controls Jensen (1993) identifies boards of directors as ultimately responsible for the system of internal control, which modern corporate governance regulations reflect. Boards will normally delegate the establishment, operation and monitoring of the system of internal control to management. The internal control system includes the reliability and integrity of information, compliance with policies, plans, procedures, laws and regulations, safeguarding of assets, the economical and efficient use of resources, and ensuring that an appropriate culture has been embedded throughout the organization. Under the UK and other corporate governance codes, audit committees, on behalf of their boards, are required to review internal financial controls. If not done by a separate risk committee, audit committees also oversee internal control and risk management systems. Many regulators publish guidance on risk management, internal control and related financial and business reporting. Boards must seek regular assurance that the system of internal control functions effectively and effectively manages company risks. Spira (2006, p. 183) acknowledges the difficulties of defining internal control effectiveness. As well as ongoing monitoring and review, boards are

Boards of directors and governing bodies  85 required to undertake an annual review of the effectiveness of the systems to ensure that it has considered all significant aspects of risk management and internal control. Boards are required to form a view on the effectiveness of the systems after due and careful enquiry. In practice, how do boards review the effectiveness of internal controls? Are separate processes required to review the effectiveness of internal financial and non-financial controls? At the very least, audit committees might engage with (i) the finance director, (ii) the corporate lawyers (to ensure no breach of laws), (iii) the chief risk officer, (iv) the CEO and (v) the compliance officer (if applicable). On behalf of the board, one approach an audit committee might adopt is to require business managers to present at meetings on an area of control under their responsibility. Managers might also be asked to sign up to attestations on the effectiveness of internal control and risk management systems under their responsibility, in a process mirroring the board of directors’ effectiveness statement. Where relevant, board statements on the effectiveness of internal control systems are directors’ mechanisms for communicating to shareholders their responsibility for the systems of internal control and their actions in connection with such systems. Many, if not most, board statements on the effectiveness of the internal control system are expressed in boilerplate and corporate language, which lacks credibility in terms of adopting a targeted and robust process. For example, Shrives and Brennan (2015) observe that boilerplate corporate governance statements (in their case, corporate governance non-compliance explanations in the annual reports of UK listed entities) represent someone else’s thinking and may not reflect individual company circumstances, concluding that boilerplate disclosures may be symbolic in nature rather than substantive in action. Cybersecurity is a growing risk for companies. Boards of directors are responsible for overseeing company risks, including IT risks. It is less clear how boards are to exercise this oversight, while at the same time they are not to encroach on management’s job to look after day-to-day company issues. We lack clarity on board roles in overseeing IT governance and how they should execute their roles. Caluwe et al. (2021) conclude that the value created by boards in governing IT depends on the roles they play. These authors find boards play five main roles, namely: behavioural control; strategic control; advice and counsel; networking, lobbying, legitimating and communication; and strategic participation. 5.1.4 Directors’ letter of representation In some jurisdictions, as part of the annual audit process, it is common practice for directors to provide external auditors with letters of representation (also called management representations or written representations) as supporting audit evidence, especially for hard-to-audit items with limited independent valuation evidence (Brennan, 2020). Letters of representation are letters from the directors addressed to the external auditors. The letter makes representations concerning amounts in the financial statements and aspects of the audit. The representations often concern difficult-to-audit amounts, prone to subjective judgements, such as corroboration of subsequent events and appropriateness of going concern assumptions. Unusually, external auditors draft the letter at the end of the audit. The letter is then submitted to the board of directors for approval. Once approved, letters of representation would generally be signed by the same parties who sign the financial statements, usually the chair and the CEO. The purpose(s) of letters of representation include:

86  Handbook of accounting, accountability and governance  

● ● ● ●

emphasizing the client’s responsibility for the financial statements minimizing misunderstandings between client and auditor documenting representations made verbally to the auditor providing corroborative evidence.

Letters of representation can lead to some circularity in auditing. Where other evidence is available, auditors should not rely solely on management representations. Where other evidence is not available, auditors should not normally consider management representations to be reliable. Typical representations include: ● ● ● ● ● ● ●

directors have made available all accounting records which properly record all transactions directors have no knowledge of fraud not already disclosed to the auditors liabilities have been provided for and fully disclosed directors have disclosed all legal actions the company has satisfactory title to all assets in the balance sheet there are no other bank or other financing facilities not already disclosed no events occurred between the balance sheet date and the date of the letter that would require adjustment or disclosure in the financial statements.

Audit committees/boards are required to make appropriate enquiries before approving the letter of representations for signature. For each representation, the board should have a process that supports the board in making the representations. What processes do directors adopt in providing this letter? Instead, is this part of the performativity of governance? Are auditors complicit in the lack of robust processes to support directors providing representations in representation letters? For instance, Janvrin and Jeffrey (2007) examine the factors associated with auditors’ search for information on subsequent events, including letters of representation. These authors report that auditors found letters of representation least effective of 10 audit procedures in auditors discovering subsequent events. 5.1.5 Directors’ going concern statements Boards of directors in the UK must include a statement that the organization is a going concern in the annual report – that it will continue in operation for the foreseeable future. The going concern statement may include supporting assumptions or qualifications. Boards of directors must provide evidence to demonstrate to the auditors that the going concern assumption is appropriate – that sufficient cash flow will arise for a period of 12 months from the date of approval of the financial statements. 5.2

Relationships with External and Internal Audit

Well-functioning human relationships are key to good governance (see Section 2). The ability of boards (including their audit committees), management and the internal and external auditors to work well together impacts how effectively each party fulfils its responsibilities to the company, its shareholders and its stakeholders. A key element of corporate governance is the role played by the external auditor. Management prepares financial reports, which are the ultimate responsibility of the company’s directors. These financial reports are made publicly available to users; that is, to shareholders and other stakeholders. The external audit function provides a third safeguard (the other two

Boards of directors and governing bodies  87 safeguards being the board/audit committee and internal audit). To be effective, auditors must be independent of management. Auditors must understand that they report to shareholders, not to company management. Understanding this reporting line can be difficult when management negotiates the audit and other fees payable. Internal audit is another safeguard of quality accounting and financial reporting. As a function, it is a corporate resource that can be used to support management and the audit committee. Internal audit functionally reports to the audit committee, with only a secondary administrative reporting line to the CEO. Liaison between the internal auditor and the audit committee on corporate governance, financial reporting and internal control issues is fundamental to best governance practice. The internal auditor must have a good working relationship with the audit committee. The internal auditor should have easy access to and open communication with the audit committee. To be effective, the internal audit unit should be properly resourced, with appropriately qualified staff, and be independent of organizational management. Best practice indicates that internal auditors should report directly to the audit committee and have access to that committee’s chair. However, best practice may not have gone far enough. For example, management determines the internal auditor’s pay and expenses, subject to the audit committee’s oversight. Research has found that incentive pay influences internal audit quality (DeZoort et al., 2001; Schneider, 2010). Material fraud is most likely to be perpetrated by senior management such as the chief executive and the financial director, as only they have the power to override the internal controls in an organization (Brennan & Hennessy, 2001). In such situations, would the chief executive properly resource internal audit? Many staff working in internal audit hope to be promoted to more senior positions in their organization, often in roles other than more senior internal audit-orientated posts. Can internal audit staff carry out their functions independently with such ambitions in mind? 5.3

Directors’ Responsibility for Non-Financial Reporting

Taking a stakeholder perspective, Brennan and Merkl-Davies (2021, pp. 15–16) argue that accountability is “the responsibility of the firm to provide an account of the use of financial and non-financial resources to shareholders and stakeholders”. They continue that a civil society perspective goes further and views accountability as “the responsibility of the firm to provide an account of the use of public and symbolic resources to the government and civil society actors who provide political and social support in the form of legitimacy and the licence to operate”. The issue for society is the rights of individuals over overly powerful institutions. Large companies have the potential to generate wealth, but they also have the potential to abuse their power at the expense of ordinary people and the natural environment which sustains all of us.

6.

PARADOXES OF CORPORATE GOVERNANCE

Table 4.2 summarizes the multiple conflicts/paradoxes of the roles and duties of boards and directors. Corporate governance codes have overlooked these conflicting dimensions. Aware of these paradoxes/potential tensions, effective boards can find the right balance that best suits the company, directors and managers (Van den Berghe & Levrau, 2013).

88  Handbook of accounting, accountability and governance Table 4.2

Paradoxes of corporate governance

Role

Conflicting role

Need to be entrepreneurial

Need to exercise prudent control

Need to be knowledgeable about the business

Need to stand back from day-to-day management

Be sensitive to short-term pressures

Assess broader trends

Focus on commercial needs of the business

Act responsibly towards employees and other stakeholders

Boards are collegial groups

More and more discussion occurs in board committees

Boards need to have collegial chemistry

Boards need to be diverse

Reach consensus fully supported by the whole board

Promote critical and constructive dissent by independent non-executive outsiders

Boards engage in collective decision-making based on effective

Independent “free thinking” individuals must engage in

group dynamics

constructive dissent

Boards must work together as a team

Board decisions must be based on a diverse set of individual opinions

Truly independent directors

Annual election/ad nutum dismissal (power of dismissal without justification)

Boards need to build trust

Boards need to be vigilant on verification

Executive directors are peers of non-executive directors on the

Non-executive directors monitor executives

board Board members direct Non-executive directors are advisors to senior management

Board members monitor Non-executive directors are critical monitors of senior management

Board members support executives

Board members challenge executives

Board duties and time commitment are increasing exponentially

Non-executive directors’ remuneration is not keeping pace

Board decisions are taken behind closed doors; Confidentially is

Increasing demands for transparency

a legal obligation Non-executive directors depend on the CEO for information

Non-executive directors have the same legal responsibilities, even though they know less about the company than the executive directors

Non-executive directors have less company-specific information

If non-executive directors had as much company-specific

than executive directors

information as executive directors, they could not do their job

The conformance role requires monitoring and scrutiny and is

The performance role requires vision, in-depth understanding

risk-averse

and an appetite for risk

Directors on a collegial board are equal

Executive directors (e.g. CFO) other than the CEO are day-to-day subordinates to the CEO, yet cannot act as subordinates on the board

Expectations of what boards can do; Boards have limited time

What boards can do in practice

available

Source: Garratt (2003); Van den Berghe and Levrau (2013).

6.1

Independence Paradox

Hooghiemstra and van Manen (2004) discuss what they call the “independence paradox”. The paradox arises because non-executive directors are expected to perform their duties independently from management. However, to execute their role, non-executive directors depend on the information provided by the same management. This paradox indicates that

Boards of directors and governing bodies  89 non-executive directors are “unable” to monitor managers because the information they need to do so comes from those same managers (Hooghiemstra & van Manen, 2004, p. 317). 6.2

Information Asymmetry Paradox

Brennan et al. (2016) propose that non-executive directors can contribute to board meetings and exercise their monitoring and advisory functions by virtue of information asymmetry. As such, information asymmetry creates the context in which non-executive directors both question and challenge managers. Put another way, if there was no information asymmetry and non-executive directors had the full information of managers, their contributions to the board would be limited. There would be no important question to pose at board meetings they could not answer themselves. Thus, instead of a barrier to effective board task performance, Brennan et al. (2016) propose that information asymmetry is necessary for effective boardroom accountability. They call this the “information asymmetry paradox”. 6.3

Responsibility Paradox

Boards of directors are assumed to have the power to contribute to improvements in accountability at the board level. The increasing influence of large companies and their boards requires questioning of directors’ responsibilities and accountabilities. For listed companies with dispersed shareholders, Figure 4.1 illustrates that: (i) the board is fully responsible for all aspects of the company’s operations and (ii) full authority is delegated to the board and from the board to management. Where a listed company has a significant shareholder, authority (power) may not fully lie with the board. However, Figure 4.1 contrasts with Figure 4.2. While the board is fully responsible, the board’s authority may be restricted by power imbalances such as the power of the parent company in the case of subsidiaries, of joint venture parties in the case of joint ventures, of founding patriarchs or matriarchs, in instances of family businesses, and by government ministers in the case of state-owned entities.

90  Handbook of accounting, accountability and governance  

Source: Authors.

Figure 4.1

Direction, management and ownership of organizations – plcs (default model)

Source: Authors.

Figure 4.2

Direction, management and ownership of organizations – wholly owned subsidiaries, joint ventures, family businesses and state-owned entities

Boards of directors and governing bodies  91  

6.3.1 Limitations of board authority: control, monitoring, oversight Cullen and Brennan (2017) discuss the consequences of restricted power for mutual/investment fund boards. They differentiate between boards’ control, monitoring and oversight roles, terms often used interchangeably in prior research, based on the level of influence implied by each. Control roles involve the ability of principals to monitor agents, by the degree of observability and degree of proximity of principals and agents and by the ability to subsequently act on the information. Monitoring roles involve the ability of principals to monitor agents, by the degree of observability and degree of proximity of principals and agents, without the ability to act on the information subsequently. Oversight roles involve overseeing the mechanism or construct without the powers of direct observation and without the ability to act on the information indirectly obtained subsequently. Cullen and Brennan’s (2017) findings can be extended to other board-of-director contexts in which boards have legal responsibility but limited power, such as where power is exercised by other parties with roles as large shareholders (for example, subsidiary boards, boards of state-owned entities). 6.3.2 Limitations of board authority: the expectations gap Brennan (2006, pp. 582, 585) characterizes the limitations of board authority as leading to an expectation gap concerning boards’ ability to perform consistent with investor expectations. She identifies five reasonableness expectations gaps and six performance expectations gaps. The reasonableness expectations gaps are: (1) (2) (3) (4) (5)

Lack of agreement on the role of boards Some roles may negatively impact company performance Boards have a limited and restricted role compared with that of managers Shareholder value is not the only aspect of interest to directors Directors have a limited ability to monitor and control

The six performance expectations gaps are as follows: (1) (2) (3) (4) (5) (6)

Monitoring in practice is difficult When to fire the CEO Boards do not exercise day-to-day control Information asymmetry Non-independent boards Other limitations of boards

6.3.3 Absence of challenge Company failures and scandals have led to concerns about board effectiveness (see Jones, 2011 for a review of international company failures and scandals). Many conclude that some boards may have neglected their roles by rubber-stamping management reports and failed to get sufficiently involved in decision-making by challenging management proposals. Corporate governance codes of practice urge non-executive directors to challenge and question managers, while managers provide information in response to the challenge and questioning. However, regulators do not guide non-executive directors on how to challenge, unlike other professions, such as the police interrogating suspects or courtroom lawyers cross-examining witnesses. The social-psychological difficulties in exercising challenge are captured by Warren Buffett (2002,

92  Handbook of accounting, accountability and governance p. 17) on stating, “Too often I was silent when management made proposals that I judged to be counter to the interest of shareholders. In those cases, collegiality trumped independence”. Commenting on proposed audit reforms, Ramanna (2021) criticizes the focus on fixing “rules”, not rebuilding “norms”. Regulators believe that new regulations and regulators will succeed where old ones failed. Ramanna (2021) expresses a contrary view, however, portraying the trouble as not being badly designed rules; rather, it is the lack of a systematic culture in audit firms and corporate boardrooms to challenge chicanery when it emerges and presents itself.

7. CONCLUSIONS Companies are legal constructs, virtual entities and are treated as legal persons separate from their owners. But how far can we take the legal premise that a company exists as a person? As colourfully expressed by the British Lord Chancellor Edward, First Baron Thurlow (1731–1806): “Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?” (Coffee, 1981, p. 386). This quote may have led to Kamara’s (2013) investor’s creed: “A corporation without a system of corporate governance is often regarded as a body without a soul or conscience”. 7.1

Agenda for Future Research

Grounded theory studies by Gibbins et al. (1990, 1992) cast a light on management’s production of corporate and financial reports. There is less understanding of the role of boards of directors and auditors in these processes. The work of Beattie and colleagues (2000, 2014, 2015) is an exception. For example, little academic research exists on letters of representation written by auditors for inclusion on client notepaper for approval and signature by the board. Are they substantive governance mechanisms or ceremonial and ritualistic? Future research on boards’ role in corporate and financial reporting could ask non-executive directors and managers questions using in-depth data collection methods, such as participant–observer studies, ethnographic research, tape recordings and video recordings of board meetings. How researchers express their research questions would depend on whether they intend to address testable propositions using quantitative survey-based data collection methods or use more qualitative approaches. We have chosen the latter approach in Table 4.3 to identify some research questions to be asked of directors and managers to examine corporate and financial reporting, derived from Table II in Brennan et al. (2016, pp. 154–155) and also adapted from Brennan (2021). We acknowledge that researching corporate and financial reporting requires creative approaches. We believe Table 4.3 highlights how little we know about accounting, accountability and corporate and financial reporting from an inside-the-boardroom perspective. We indeed encourage researchers to take on the challenge of researching these issues in the “black box” of the boardroom. More generally, we encourage all readers to appreciate that the state of play in accounting, accountability and governance has yet to reach its peak.  

Boards of directors and governing bodies  93 Table 4.3

Research questions on the role of boards of directors in corporate and financial reporting

To what extent do managers/executive directors present data in boardrooms concerning corporate and financial reporting, including on its regulation? To what extent do non-executive directors challenge management concerning corporate and financial reporting? How do managers respond to non-executive directors’ challenge concerning corporate and financial reporting? To what extent do signals from the boardroom versus from management (e.g. the CEO) influence corporate and financial reporting? What linguistic devices or language games do managers/non-executive directors use to communicate concerning corporate and financial reporting? To what extent do external auditors bring data into boardrooms concerning corporate and financial reporting? To what extent do non-executive directors challenge auditors concerning corporate and financial reporting? How do auditors respond to non-executive directors’ challenge concerning corporate and financial reporting? What linguistic devices or language games do external auditors use to communicate concerning corporate and financial reporting? To what extent do non-executive directors spend time in the company talking to finance staff concerning corporate and financial reporting? To what extent is intra-board, intra-company or extra-board communication between non-executive directors and finance staff controlled by the CEO facilitating/preventing knowledge transfer concerning corporate and financial reporting? To what extent do non-executive directors actively participate in accounting choices concerning corporate and financial reporting?

Source: Adapted from Brennan et al. (2016); Brennan (2021).

NOTES 1. The Oxford English Dictionary records the first usage of the term “board of directors” in a letter to The Spectator (No. 478) in 1712 from Mr Richard Steele, available at: www​.gutenberg​.org/​cache/​ epub/​12030/​pg12030​-images​.html​#section478 (last accessed 9 July 2023). The word “board” refers to the table around which a council meets. 2. Principle G of the UK Corporate Governance Code (2018, p. 6) states that boards of directors “should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive) directors”. Such reforms bring the UK’s unitary board tradition closer to the continental European tradition of two-tier boards. 3. In this section, although we draw on the norms and practices prevailing in the UK, including principles of the UK Corporate Governance Code (2018), many of the norms, practices and principles are also relevant to other jurisdictions.

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96  Handbook of accounting, accountability and governance Heracleous, L. and Lan, L.L. (2012), “Agency theory, institutional sensitivity, and inductive reasoning: towards a legal perspective”, Journal of Management Studies, Vol. 49 No. 1, pp. 223–239. Hooghiemstra, R. and van Manen, J. (2004), “The independence paradox: (im)possibilities facing non‐ executive directors in The Netherlands”, Corporate Governance: An International Review, Vol. 12 No. 3, pp. 314–324. International Accounting Standards Board (IASB) (2018), The Conceptual Framework for Financial Reporting. IASB, London. Janvrin, D.J. and Jeffrey, C.G. (2007), “An investigation of auditor perceptions about subsequent events and factors that influence this audit task”, Accounting Horizons, Vol. 21 No. 3, pp. 295–312. Jensen, M.C. (1993), “The modern industrial revolution, exit, and the failure of internal control systems”, Journal of Finance, Vol. 48 No. 3, pp. 831–880. Jensen, M.C. and Meckling, W. (1976), “Theory of the firm: managerial behavior, agency costs and ownership structure”, Journal of Financial Economics, Vol. 3 No. 4, pp. 305–360. Johnson, S., Boone, P., Breach, A. and Friedman, E. (2000), “Corporate governance in the Asian financial crisis”, Journal of Financial Economics, Vol. 58 No. 1–2, pp. 141–186. Jones, M.J. (ed.) (2011), Creative Accounting, Fraud and International Accounting Scandals. Wiley, Chichester. Kamara, L.T. (2013), The Investor’s Creed. America Star Books, Frederick, MD. Keasey, K. and Wright, M. (1993), “Issues in corporate accountability and governance: an editorial”, Accounting and Business Research, Vol. 23 No. 91A, pp. 291–303. Lan, L.L. and Heracleous, L. (2010), “Rethinking agency theory: the view from law”, Academy of Management Review, Vol. 35 No. 2, pp. 294–314. Leblebici, H. and Sherer, P.D. (2015), “Governance in professional service firms: from structural and cultural to legal normative views”. Hinings, B., Muzio, D., Broschak, J. and Empson, L. (eds), The Oxford Handbook of Professional Service Firms. Oxford University Press, Oxford (pp. 189–212). Markarian, G., Parbonetti, A. and Previts, G.J. (2007), “The convergence of disclosure and governance practices in the world’s largest firms”, Corporate Governance: An International Review, Vol. 15 No. 2, pp. 294–310. Messner, M. (2009), “The limits of accountability”, Accounting, Organizations and Society Vol. 34 No. 8, pp. 918–938. Minichilli, A., Zattoni, A. and Zona, F. (2009), “Making boards effective: an empirical examination of board task performance”, British Journal of Management, Vol. 20 No. 1, pp. 55–74. Nicholson, G., Pugliese, A. and Bezemer, P.-J. (2017), “Habitual accountability routines in the boardroom: how boards balance control and collaboration”, Accounting, Auditing & Accountability Journal, Vol. 30 No. 2, pp. 222–246. Nicholson, G.J. and Kiel, G.C. (2004), “A framework for diagnosing board effectiveness”, Corporate Governance: An International Review, Vol. 12 No. 4, pp. 442–460. Orts, E.W. (1998), “Shirking and sharking: a legal theory of the firm”, Yale Law & Policy Review, Vol. 16 No. 2, pp. 265–330. Pernelet, H.R. and Brennan, N.M. (2023a), “Challenge in the boardroom: director-manager question-and-answer interactions at board meetings”, Corporate Governance: An International Review, Vol. 31 No. 4, pp. 544–562. Pernelet, H.R. and Brennan, N.M. (2023b), “Impression management at board meetings: accountability in public and in private”, Working Paper, University College Dublin. Pernelet, H.R. and Brennan, N.M. (2023c), “Boards of directors performing governance: a dramaturgical analysis”, Working Paper, University College Dublin. Ramanna, K. (2021), “UK audit reforms fail to address the real problem behind scandals”, Financial Times, 20 March, available at: www​.ft​.com/​content/​58a64ea0​-e500​-4efb​-8e61​-07676b8609bc (last accessed 29 June 2021). Roberts, J. (2001), “Trust and control in Anglo-American systems of corporate governance: the individualizing and socializing effects of processes of accountability”, Human Relations, Vol. 54 No. 12, pp. 1547–1572. Roberts, J. (2002), “Building the complementary board. The work of the plc chairman”, Long Range Planning, Vol. 35 No. 5, pp. 493–520.

Boards of directors and governing bodies  97 Roberts, J. and Scapens, R. (1985), “Accounting systems and systems of accountability: understanding accounting practices in their organisational contexts”, Accounting, Organizations and Society, Vol. 10 No. 4, pp. 443–456. Roberts, J., McNulty, T. and Stiles, P. (2005), “Beyond agency conceptions of the work of the non‐ executive director: creating accountability in the boardroom”, British Journal of Management, Vol. 16 No. S1, pp. S5–S26. Sarens, G. and de Beelde, I. (2006), “The relationship between internal audit and senior management: a qualitative analysis of expectations and perceptions”, International Journal of Auditing, Vol. 10 No. 3, pp. 219–241. Schneider, A. (2010), “Determining whether there are any effects of incentive compensation and stock ownership on internal audit procedures”, International Journal of Auditing, Vol. 14 No. 1, pp. 101–110. Shleifer, A. and Vishny, R.W. (1997), “A survey of corporate governance”, Journal of Finance, Vol. 52 No. 2, pp. 737–777. Shrives, P.J. and Brennan, N.M. (2015), “A typology for exploring the quality of explanations for non-compliance with UK corporate governance regulations”, British Accounting Review, Vol. 47 No. 1, pp. 85–99. Sinclair, A. (1995), “The chameleon of accountability: forms and discourses”, Accounting, Organizations and Society, Vol. 20 No. 2–3, pp. 219–237. Spira, L.F. (2006), “Black boxes, red herrings and white powder: UK audit committees in the 21st century”, Journal of Banking Regulation, Vol. 7 No. 1, pp. 180–188. Stanton, P. and Stanton, J. (2002), “Corporate annual reports: research perspectives used”, Accounting, Auditing & Accountability Journal, Vol. 15 No. 4, pp. 478–500. Stern, S. (2021), “The boardroom’s futile pursuit of purpose”, Financial Times, 22 February, available at: www​.ft​.com/​content/​8025b36e​-7f70​-4072​-97c7​-3fde860883cf (last accessed 29 June 2021). Tricker, B. (2019), Corporate Governance: Principles, Policies, and Practices. 4th edn, Oxford University Press, Oxford. Tricker, R.I. (1984), Corporate Governance: Practices, Procedures and Powers in British Companies and Their Boards of Directors. Gower, Aldershot. Van den Berghe, L. and Levrau, A. (2013), “An effective board makes the necessary trade-offs”. Kakabadse, A. and Van den Berghe, L. (eds), How to Make Boards Work: An International Overview. Palgrave Macmillan, London (pp. 187–210). Veldman, J. (2019), “Boards and sustainable value creation”, European Business Law Review, Vol. 30 No. 2, pp. 279–300. Winter, J. (2020), “Towards a duty of societal responsibility of the board”, European Company Law, Vol. 17 No. 5, pp. 192–200. Zattoni, A. and Pugliese, A. (2019), “Opening the black box of boards of directors: taking stock of recent studies on board dynamics”. Gabrielsson, J., Khlif, W. and Yamak, S. (eds), Research Handbook on Boards of Directors. Edward Elgar, Cheltenham, UK and Northampton, MA, USA (pp. 102–118). Zeff, S. (2013), “The objectives of financial reporting: a historical survey and analysis”, Accounting and Business Research, Vol. 43 No. 4, pp. 262–327.

PART II MECHANISMS FOR ACCOUNTING, ACCOUNTABILITY AND GOVERNANCE

5. Accounting, accountability and governance: the roles of financial reporting Christoph Pelger

OVERVIEW The historical origins of (financial) accounting are strongly linked to accountability. However, in recent decades standard-setters have turned away from accountability and have instead highlighted the usefulness for valuation decisions of capital providers as the official objective of corporate financial reporting. The current chapter traces the development from accountability to valuation usefulness, which becomes most apparently manifest in the conceptual frameworks developed by the financial reporting standard-setters in the United States and at the international level. This chapter evaluates the standard-setters’ reluctance to consider accountability as a separate objective of financial reporting in light of analytical and empirical evidence in the accounting literature. On this basis, the chapter provides a critical discussion of the standard-setters’ views and concludes with some thoughts on the future role of accountability in corporate financial reporting and further research potential in this area.

1. INTRODUCTION What roles does financial reporting play in terms of the accountability and governance of companies that (have to) prepare and publish financial statements? In order to explore this question, we can take a look at how accounting standard-setters – which are, arguably, key players in the field of (regulated) financial reporting – perceive the link between financial reporting and accountability and corporate governance.1 A glance at the Conceptual Framework for Financial Reporting of the International Accounting Standards Board (IASB, 2018), a document developed to reflect the IASB’s mindset and to guide its decision-making, reveals the following: The Conceptual Framework provides the foundation for Standards that … strengthen accountability by reducing the information gap between the providers of capital and the people to whom they have entrusted their money. Standards based on the Conceptual Framework provide information needed to hold management to account. (IASB, 2018, SP1.5, emphases deleted).2

Thus, the IASB explicitly acknowledges that financial reporting has an accountability role in practice as the standards that the IASB produces are perceived to lead to information needed by capital providers to hold management to account. Following Ijiri (1975, p. ix), “accountability presumes a relationship between two parties, namely someone (an accountor) is accountable to someone else (an accountee) for his activities and their consequences”. Financial accounting information provides a tool to fulfil such accountability responsibilities of the accountor, which might arise from regulations, contracts 99

100  Handbook of accounting, accountability and governance or moral obligations, and to satisfy the corresponding demands by the accountee. Along this line, historical research has shown that the origins of accounting can be linked to accountability (Mattessich, 1987; Williamson & Lipman, 1991; Murphy et al., 2013). This accountability relationship can also be framed in terms of stewardship, where a steward is entrusted with resources by others and, thus, is expected to provide an account in that capacity, which can be achieved by the tools of (financial) accounting (Williamson & Lipman, 1991).3 For modern listed companies, the idea of stewardship has tended to be viewed in terms of a principal–agent relationship (for example, Chen, 1975; Birnberg, 1980), where information asymmetries exist between owners and employed managers who follow different objectives.4 The stewards/agents in these settings are typically required, by the owners/principals or regulations, to provide an account of their activity. These accounts can then be used by the principal to assess the managers’ performance and to take decisions, such as whether to retain or replace the managers or how to incentivize them through (variable) bonuses, which can be directly or indirectly linked to reported (financial) accounting numbers (Bushman & Smith, 2001). This principal–agent view of accountability/stewardship5 reflects the governance role of financial reporting in providing incentives for employed managers (for example, Gjesdal, 1981; Lambert, 2001). Despite the IASB’s general acknowledgement of the role that financial reporting information plays in holding management to account, the main text of its conceptual framework sets a different focus (Pelger, 2020). In a normative statement on the objective of financial reporting, the IASB highlights the usefulness of financial reporting information for resource allocation (that is, financial valuation) decisions of capital providers (IASB, 2018, para. 1.2). While the assessment of management’s stewardship might feature in these resource allocation decisions (IASB, 2018, para. 1.3), the IASB concludes that “assessing management’s stewardship is not an end in itself” (IASB, 2018, para. BC1.356). Thus, holding management to account is rather seen as a means for capital providers to make decisions about buying and selling or holding shares or bonds than to support their governance decisions, such as those outlined above, or the broader accountability of management. Considering the historical link between financial accounting and accountability as well as the role that financial accounting numbers still play in the governance of listed companies today, the IASB’s stance on the objective of financial reporting might seem surprising. This chapter is not the first study to notice this mismatch. In this regard, Murphy et al. (2013) analyse the role of stewardship as a “living law” of accounting vis-à-vis the IASB’s reluctance to consider it as an objective in its conceptual framework. Pelger (2016) provides an empirical account of the process leading to the 2010 conceptual framework revision of the IASB together with the US standard-setter, the Financial Accounting Standards Board (FASB), with regard to the objective of financial reporting.7 Pelger (2020) discusses the changes made by the IASB to the objective (and the qualitative characteristics8) in its 2018 revision of the conceptual framework and the implications of changes introduced for other parts of the conceptual framework. Building on this previous research on the roles of accountability in current financial reporting settings, the present chapter aims to position the IASB’s views in the broader academic literature on the accountability/stewardship and valuation roles of financial reporting. Thereby, this chapter complements and updates earlier reviews in this area (O’Connell, 2007; Murphy et al., 2013; Cascino et al., 2014). The chapter observes that there is a gap between the IASB’s views and the largest part of academic evidence on the role that stewardship should play in financial reporting standard-setting for corporate financial reporting, and then proceeds

The roles of financial reporting  101 to discuss which implications might arise from this gap for standard-setters and for future academic research. This chapter is structured as follows. Section 2 provides a brief overview of the historical link between financial accounting and accountability. Section 3 outlines the conceptual framework projects of standard-setters and their turn away from accountability to valuation usefulness. Section 4 presents research evidence on the accountability roles of financial reporting vis-à-vis valuation usefulness. Section 5 discusses the implications arising from the review of the academic literature, while section 6 concludes by providing a summary of the chapter and offering an outlook on future topics of interest in this area.

2.

HISTORICAL PERSPECTIVES ON THE ACCOUNTABILITY ROLES OF FINANCIAL ACCOUNTING

The early origins of accounting, which have been placed in Sumeria and date back to about 8,000 bc, can already be linked to accountability (Mattessich, 1987). Tasks delegated by masters to servants were monitored through accounting devices. A pure documentation was often sufficient to fulfil basic accountability purposes that Birnberg (1980, p. 73) refers to as “custodial stewardship”. Historical examples of such forms of stewardship include “the accounts of temples and sovereigns since antiquity, as well as merchants or lords of manors who employed people (stewards) to handle the estates for them” (Sunder, 1999, p. 25).9 As the context and the tasks of the steward changed over time, this also implied changes in the accountability demands. That the steward is tasked with making productive use of the entrusted resources is an understanding of stewardship that already emerged in the Bible10 and is also reflected in today’s constellations in large companies where the owners/shareholders delegate the task of managing the firm to employed managers (for example, Chen, 1975; Williamson & Lipman, 1991). Miller and Oldroyd (2018) study the historical demand for accounting information in pre-regulatory settings and, by means of reviewing historical papers, find that there is consistent evidence of a demand for stewardship information to control and motivate stewards/agents. In addition, they study to what extent financial accounting’s ability to provide decision-useful information can subsume the demand for stewardship information and show that, historically, “stewardship information [was] utilized to inform a wider set of decisions” (Miller & Oldroyd, 2018, p. 75). This implies that the provision of information for stewardship purposes was the primary motive, while this information could then also be used for other purposes. On this basis, they conclude that “an essence to accounting exists based on the legal protection of property rights, encompassing stewardship, which has remained constant since earliest times” (Miller & Oldroyd, 2018, p. 77). Murphy et al. (2013) also provide a thorough analysis of the historical links of accounting with accountability. They note that “stewardship/accountability is central to understanding both how and why accounting emerged in the first instance, and that accountability/stewardship is an intrinsic or ‘natural element’ of the living law of accounting” (Murphy et al., 2013, p. 81). The key claim of these authors pertains to the notion of a “living law”; that is, a law which guides a social group (in this case accountants) in their daily activities without being necessarily formally prescribed. While Murphy et al. (2013) do not provide original empirical evidence on the role of stewardship as a living law, they plausibly form their argument on the

102  Handbook of accounting, accountability and governance basis of prior literature, particularly historical studies of accounting. They conclude that even though accounting standard-setters might attempt to detach themselves from stewardship (see section 3 of this chapter), it could still continue as a living law in accounting practice. The studies presented in this section show that the accountability role is linked to the origins of financial accounting and remained important in practice over time, alluding to the notions of “an essence of accounting” (Miller & Oldroyd, 2018) or a “living law of accounting” (Murphy et al., 2013). Section 3 outlines how this importance of accountability was conceptually challenged in the second part of the 20th century when standard-setters came into existence and, in due course, developed conceptual frameworks that included normative statements about what they viewed to be the purpose of financial reporting. As these debates primarily arose and developed in the United States and at the level of the international standard-setter, the main focus of section 3 will be on these settings.

3.

STANDARD-SETTING PERSPECTIVES ON THE ACCOUNTABILITY ROLES OF FINANCIAL REPORTING

While there had been attempts to establish conceptual guidelines for financial reporting for some time in the United States during earlier parts of the 20th century (Zeff, 1999), the most crucial step in this direction was taken after the FASB took over US accounting standard-setting in 1973.11 As standard-setting bodies prior to the FASB had been criticized for their ad-hoc and inconsistent decision-making, the FASB quickly took the development of a conceptual framework as a major project on its agenda (Gore, 1992). While the framework project took a long time and included multiple elements, the first step to define the objective(s) of financial reporting was finalized in 1978 with the publication of the Statement of Financial Accounting Concepts (SFAC) 1 (FASB, 1978). In its endeavours to identify the objective of financial reporting, the FASB could build on previous conceptualizing efforts. In particular, the American Accounting Association (AAA) (1966) had produced A Statement of Basic Accounting Theory, also known as ASOBAT, and the Trueblood Committee had developed a report on “objectives of financial statements” in 1973 (AICPA, 1973). On this basis, the FASB decided to focus on decision usefulness as the sole objective of financial reporting in its conceptual framework (FASB, 1978, para. 32; Armstrong, 1977). Decision usefulness meant financial reporting’s role to support capital providers in their valuation decisions; that is, their assessment of the future cash-flow potential of listed companies (FASB, 1978, para. 47). This objective was not in line with previous understandings of the role of financial reporting in terms of stewardship in the United States and elsewhere (Zeff, 2013).12 Marshall S. Armstrong, the then Chair of the FASB, reported that there was notable opposition by the FASB’s constituents against its proposal to introduce the decision usefulness objective, which he found surprising. He associated constituents’ preference for stewardship with their resistance to clear standards (Armstrong, 1977). The FASB’s conceptual framework strongly influenced the development of conceptual frameworks in other (Anglo-American) countries and at the level of the International Accounting Standards Committee (IASC), the predecessor of the IASB (Zeff, 2013). These frameworks all took up decision usefulness as an objective of financial reporting but tended to put more emphasis on stewardship than the FASB’s framework, thereby sometimes positioning stewardship explicitly as a second objective at the same level as decision usefulness. For

The roles of financial reporting  103 instance, the framework of the UK standard-setter, the Accounting Standards Board (ASB), positioned stewardship on an equally important level with decision usefulness: “Th[e] objective [of general purpose financial reports is] to provide information about the financial performance and financial position of an entity that is useful to a wide range of users for assessing the stewardship of management and for making economic decisions (including those based on assessments of the stewardship of management)” (ASB, 1999, para. 1.6). Apparently, these conceptual frameworks, including that of the IASC (IASC, 1989, para. 12–14), were prepared to reflect a separate role for stewardship. The interest in, and the importance of, conceptual frameworks regained traction when the IASB succeeded the IASC in 2001 and strove to gain acceptance for its standards all over the world. The biggest target for the IASB in this regard was the United States with the largest capital market in the world. An important first step in this direction was the convergence programme of the IASB and the FASB that was officially started with the Norwalk Agreement between the two boards in 2002, an agreement that also found strong support with the Securities and Exchange Commission (SEC) which, in later years, considered the adoption of International Financial Reporting Standards (IFRS) for foreign and US issuers (Camfferman & Zeff, 2015). Apart from specific standard-setting projects, from 2004 on, the convergence agenda of the IASB and FASB also included a project to converge and update their conceptual frameworks. For pragmatic reasons, the conceptual framework revision project was split into eight phases (for example, Whittington, 2008), with the first phase dealing with the objective of financial reporting. This topic was discussed by the boards between 2004 and 2010.13 The length of the period of the revision reflects the controversial character of the debates among the boards and between the boards and their constituents (Pelger, 2020). Pelger (2016) provides a detailed analysis of the board discussions on the objective of financial reporting during the framework revision. While the objective of decision usefulness was never questioned in the discussions by the boards or their constituents, the debate centred on whether stewardship should be included as a separate objective or could be encompassed in decision usefulness. In this regard, it is important to note that early in the debates, in a Discussion Paper published by the boards in 2006, decision usefulness was defined to solely focus on resource allocation decisions; that is, valuation decisions.14 This position was also taken up in the final conceptual framework, published by the boards in 2010.15 Accordingly, the IASB and FASB agreed to regard valuation usefulness as the only purpose of financial reporting that, in their view, encompasses stewardship for which they did not envisage a separate role. Notably, the term “stewardship” did not even appear in the final conceptual framework document. According to the boards’ justification, this was meant to avoid difficulties in translation and misinterpretation of the term “stewardship” (IASB, 2010, BC1.28), which was seen as reflective of some board members’ annoyance about the earlier discussions on a possible role for stewardship in the conceptual framework (Pelger, 2016). When the IASB restarted its conceptual framework project without the FASB in 2013,16 it did not initially intend to review the chapter on the objective of financial reporting again as this had just been revised three years earlier. However, when constituents urged the IASB to reconsider the role of stewardship during the consultations, the board decided to make some changes that were included in the Conceptual Framework for Financial Reporting, published by the IASB in March 2018 (IASB, 2018). In particular, the term “stewardship” made a comeback into the conceptual framework, resulting in stewardship explicitly identified as part of the objective of financial reporting (IASB, 2018, para. 1.3). However, stewardship was still

104  Handbook of accounting, accountability and governance not included as a separate objective (IASB, 2018, BC1.35); rather, it was part of decision usefulness, which continued to be defined in narrow terms of valuation decisions (IASB, 2018, para. 1.2). As outlined in more detail by Pelger (2020), the inclusion of stewardship can be regarded as a concession to constituents’ criticism rather than entailing a fundamental change in the IASB’s thinking about the objective of financial reporting. There are several reasons why the IASB and FASB have been reluctant to provide a stronger role for stewardship as an objective of financial reporting in their conceptual frameworks. First, as mentioned earlier, an officially announced reason is that the term and concept of stewardship is perceived as ambiguous, officially phrased as the “difficulties of translating it into other languages” (IASB, 2018, BC1.31). This could generally be a fair point that, however, is not peculiar to stewardship but would also apply to other terms and concepts used in conceptual frameworks, not least “decision usefulness” (Pelger, 2016) or the IFRS more generally. More particularly, this argument seems awkward considering the historical importance of accountability for financial accounting (for example, Miller & Oldroyd, 2018) and the continuing role that financial reporting plays in the governance of publicly listed companies (for example, Bushman & Smith, 2001). As a second argument, focusing on a single objective of financial reporting might seem desirable for pragmatic reasons as the board does not need to balance two objectives which might simplify its decision-making (for example, see members of the FASB quoted in Pelger, 2016, p. 66). This reason, however, is at odds with the boards’ own arguments which consistently assumed that valuation useful information entails useful information for stewardship purposes as well (for example, IASB, 2018, BC1.29). If this assumption is true, no balancing effort would be necessary, even when considering both objectives. However, this assumption would first need to be tested in the practice of standard-setting: when considering both valuation and stewardship perspectives, it would be revealed whether this leads to the same standards being set or not. In addition to these arguments, and maybe most significantly, the standard-setters’ view can be put into a broader context. Along these lines, Zhang and Andrew (2014, 2022) have associated the changes made in the conceptual frameworks in 2010 and 2018 with the financialization of financial reporting; that is, the increasing importance of financial markets and their logics for regulated financial reporting. While Zhang and Andrew (2014) emphasize the narrow user focus in the conceptual framework on investors, Zhang and Andrew (2022) observe that in its 2018 conceptual framework the IASB “is, in effect, financialising stewardship” (Zhang & Andrew, 2022, p. 6). Thus, broader developments of financialization and the pursuit of neoliberal agendas (Ravenscroft & Williams, 2009) accompany the ideological reliance on markets and investors in financial reporting conceptual frameworks to the detriment of apparently outdated notions of stewardship. Overall, this section shows that the conceptual framework projects of standard-setters have generally put an emphasis on valuation usefulness as the objective of financial reporting. In the recent framework revisions by the IASB and the FASB this brought stewardship “under unprecedented attack” (Murphy et al., 2013, p. 88). While this section has illustrated that discussions about the appropriate status of stewardship in conceptual framework documents by financial reporting standard-setters were abundant in recent decades, the question might arise whether this really matters in today’s organizational and social contexts. To address this question, this chapter takes a closer look at the academic accounting literature that has discussed the stewardship role of financial reporting and its relationship to valuation usefulness

The roles of financial reporting  105 for several decades (for summaries also see O’Connell, 2007; Murphy et al., 2013; Cascino et al., 2014). Section 4 outlines the evidence that has been generated in this literature.

4.

ACADEMIC EVIDENCE ON THE ACCOUNTABILITY ROLES OF FINANCIAL REPORTING

This section reflects on the accounting standard-setters’ view that stewardship does not need to be stated as a separate objective of financial reporting in conceptual frameworks and, thus, does not need to be considered separately when developing new standards, on the basis of evidence in the academic literature. The topic of the relationship between financial valuation and stewardship usefulness has been approached both analytically and empirically. For most parts, the literature follows the principal–agent perspective on stewardship (Birnberg, 1980), focusing on the (accounting-based) incentives provided for employed managers by the firm owners. Analytically, this is typically scrutinized in what are known as principal–agent models (for example, Lambert, 2001), and empirically through studying the link between accounting numbers and top management compensation (for example, Aust et al., 2021). The following paragraphs first present the evidence from analytical models and then turn to insights from empirical studies. 4.1

Analytical Studies

In a seminal paper, Gjesdal (1981) derives analytically that preferences for different types of accounting systems might differ for valuation and stewardship purposes. In other words, the accounting system which solves the inherent principal–agent conflict between owner and employed managers may not be the same that is preferred by the capital market to provide the best anticipations of (uncertain) future cash flows. Paul (1992) further outlines the different emphasis of stewardship versus valuation when considering financial accounting information. While, for stewardship purposes, it is crucial to use the accounting information to learn about the (impact of the) managerial effort, which is not directly observable, the interest from a valuation perspective is rather to learn about the stochastic (uncertain) part of firm value that cannot be controlled by the manager (also see Lambert, 2001). Overall, these analytical studies indicate that it matters for an accounting system – that is, a set of accounting standards, such as IFRS or US-GAAP – whether it is designed for valuation or for stewardship purposes. However, these studies remain at a general level and do not go into any detail regarding specific elements of the accounting system that make it, in theory, more or less useful for valuation or stewardship purposes.17 There are a few analytical studies that shed more light on the role of specific accounting characteristics for the two purposes and their relationship. Christensen et al. (2005) focus on the role of earnings persistence, which is often associated with valuation usefulness, in a multi-period contracting setting. They find that the positive correlation between accounting performance measures over the periods, reflected in earnings persistence, exacerbates the incentive problem. Thus, the authors position their findings in line with previous literature, outlined above, that emphasizes the differences between stewardship and valuation roles of accounting earnings. In contrast, Drymiotes and Hemmer (2013) develop a multi-period agency model in which they derive a positive relationship between the valuation and stew-

106  Handbook of accounting, accountability and governance ardship uses of financial accounting information. In particular, in their analytical model they show that for both purposes specifically aggressive or conservative accounting, which is reversed in the following period, is preferred to neutral accounting. In a single-period static agency model, Kuhner and Pelger (2015) similarly find that both valuation and stewardship uses of accounting information react in the same way to changes in characteristics of the accounting system, in their case to changes in the relevance and reliability (freedom from error) of the accounting system. However, when opportunities for earnings management are considered in their model, Kuhner and Pelger (2015) find that this has a detrimental effect for stewardship purposes but was not found to affect the valuation usefulness of the accounting information. This finding is in line with other studies that have pointed to the particular importance of “hard” accounting measures for stewardship purposes (Gjesdal, 1981; Ijiri, 1975, 1983), which might, for instance, raise questions about the use of mark-to-model fair values from a stewardship perspective.18 In addition, Kuhner and Pelger (2015) find that, even in the absence of opportunities for earnings management, there are constellations in which the nature of the valuation/stewardship relationship is sensitive to contextual factors; for instance, manager and firm characteristics. Overall, these studies show that analytical considerations of more specific factors, such as accounting characteristics, can be valuable to gain deeper insights into the relationship between the valuation and stewardship uses of accounting information and can also develop propositions that can be put to empirical testing. 4.2

Empirical Studies

Only a few quantitative empirical studies have explicitly explored the relationship between the value relevance and the compensation relevance of accounting numbers.19 Bushman et al. (2006) develop an approach for the analysis of the relationship with a three-stage regression model and, generally, find significantly positive results in that higher value relevance of accounting earnings is accompanied by an increasing link between earnings and CEO compensation. They find that this positive relationship between valuation and stewardship uses of accounting information remains in multivariate regressions that consider a number of control variables. Banker et al. (2009) use a different empirical approach and find that the value relevance of earnings and operating cash flows has a positive influence on the compensation of CEOs. While these two studies suggest a positive empirical relation between the valuation and stewardship uses of accounting information, Gassen (2008), alternatively, comes to a different conclusion. His approach differs from the two studies discussed above in two regards: first, Gassen does not use compensation data but instead constructs a measure that reflects the supply (asymmetric timeliness of earnings) and demand (relative importance of stakeholders with high transaction costs (for example, creditors, suppliers, employees)) of stewardship useful information. Second, the author does not focus on the value relevance – that is, the correlation between earnings and stock returns – but on valuation relevance which captures the capital market reaction to earnings announcements in a three-day event window. Gassen finds that companies with more supply of or demand for stewardship information have lower valuation usefulness and thus concludes that these are separate objectives. Aust et al. (2021) follow the empirical model of Bushman et al. (2006), but – drawing on the analytical findings of Kuhner and Pelger (2015) – additionally consider the context-sensitivity of the relationship between valuation and stewardship usefulness with regard to firm and man-

The roles of financial reporting  107 agerial characteristics.20 Their univariate analysis of CEO compensation shows findings in line with Bushman et al. (2006) in terms of a positive relationship between the use of accounting earnings for valuation and compensation purposes. However, when using multivariate regressions and, in particular, when considering non-CEO management board members’ compensation, the empirical results change and the relationship does not remain significantly positive. These findings indicate that the context, in terms of firm and managerial characteristics, plays a role in the empirical question of how the valuation and compensation uses of earnings are related. Thus, general normative statements, such as those embraced in the conceptual frameworks of the IASB and FASB, that valuation usefulness leads to useful information for stewardship purposes do not gain empirical support from this study. Although the question of the relationship between stewardship and valuation is one of the most fundamental issues in financial reporting, there has been an astonishing scarcity of empirical studies that explicitly address the issue. In particular, the author is not aware of any study that has looked at the relationship in a cross-country setting, which would be particularly interesting in light of the use of IFRS in many different countries, with different economic and governance systems and different cultures.21 The focus of quantitative empirical research on the valuation role of financial reporting is driven by multiple factors. One of them is the emphasis of standard-setters on valuation, outlined in section 3, that originated in the United States in the 1970s. From an empirical researcher’s perspective, the valuation objective of IFRS and US-GAAP often seems to be taken for granted. Thus, these researchers tend to focus on valuation issues if they intend to derive policy implications for standard-setting. This makes the focus on valuation to some extent self-perpetuating as, on the one hand, the publication “market” for empirical studies on stewardship roles of financial reporting or the interplay between valuation and stewardship seems rather limited, while, on the other hand, accounting standard-setters can rarely be supplied with convincing empirical evidence of the relevance of stewardship and possible differences to valuation usefulness. In this regard, Pelger (2016) notes that in the IASB/FASB debates on a possible role for stewardship in their conceptual frameworks, academic research did not come up at all, which can at least partly be attributed to the limited research in this area. While all empirical studies discussed here, except for Gassen (2008), have used executive compensation as a proxy for stewardship usefulness, this focus seems rather narrow, even if following the line of the analytical agency models. Other governance aspects, such as votes in annual shareholder meetings or decisions about management retention or turnover, could also be studied with respect to their link to valuation usefulness. Regarding the latter, the study by Engel et al. (2003) provides some indirect insights, although it does not explicitly address the valuation/stewardship relationship. The authors find that forced CEO turnover is positively related to the correlation of accounting earnings and stock returns, which suggests that more value-relevant earnings provide a useful basis for the performance evaluation of CEOs. The fact that empirical studies on such governance aspects and their link to value relevance or other measures of valuation usefulness are rare can be attributed to the difficulties involved in obtaining relevant large-scale data; for example, on forced CEO turnover or votes at annual shareholder meetings. There remains strong research potential in this area. In recent years, several empirical studies have started to explore users’ views of financial reporting information more generally (for example, Georgiou, 2018; Cascino et al., 2021; Durocher & Georgiou, 2022). In a conceptual review paper on different groups of users of

108  Handbook of accounting, accountability and governance financial statements, Cascino et al. (2014, p. 190) conclude that “the stewardship and valuation roles of financial statements overlap, but are far from identical, even for the same class of investors”. Notably, the authors conceptually distinguish the demands from different groups of users and, for example, posit that capital providers who can influence the contracting decisions, such as institutional investors, have a higher regard for stewardship information. Cascino et al. (2021) conduct a survey experiment with investment professionals from multiple countries as well as a large-scale follow-up online experiment assigning valuation or performance evaluation objectives to the participants. Their study finds that current financial accounting information is regarded as more valuable for valuation than stewardship purposes, which is in line with the emphasis of standard-setters in recent decades. Cascino et al. (2021) also confirm prior results from agency theory (for example, Paul, 1992) that a performance evaluation objective leads to a focus on information about managerial actions, while the valuation perspective emphasizes information relevant to forecasting future cash flows. Interestingly, the authors highlight that financial accounting information is a key input for performance evaluation decisions and suggest that financial accounting’s competitive advantage may lie in this field. In a more specific setting, Georgiou (2018) provides an interview study with UK-based investment professionals to compare their views on fair-value accounting with those of the IASB. Among other things, he finds that both valuation and stewardship roles of financial reporting are important for the investors interviewed but that they do not necessarily look favourably at the IASB’s move to fair values during the last decades. Instead, Georgiou (2018) observes a state of dissonance where investors do not agree with the IASB’s views but also do not actively challenge or oppose these positions. Focusing on the IFRS requirements for goodwill accounting, Durocher and Georgiou (2022) interview financial analysts and find that these interviewees do not deem goodwill-related accounting information useful for valuation purposes and attribute only “a marginal stewardship role” to them. This indicates that, in the eyes of the financial analysts interviewed, current information on goodwill provides useful information neither for valuation nor stewardship purposes. While the studies of Georgiou (2018) and Durocher and Georgiou (2022) focus on several aspects related to fair-value accounting and goodwill accounting, respectively, they also shed some light on users’ perceptions of the stewardship and valuation usefulness of such information. Because of their use of qualitative interviews, the results might not be generalizable to broader populations of users but, nonetheless, these studies provide important in-depth insights into how and why user perceptions of certain accounting methods can differ for valuation and stewardship purposes. Overall, this section has shown that while analytical accounting research has analysed the role of financial reporting for stewardship and valuation purposes, the empirical literature on the relationship of the two information uses is rather limited. While there are several obstacles which make it unlikely that this will change in the near future, recent (quantitative and qualitative) empirical studies on user views seem promising in shedding further light on the information preferences of actual users regarding their valuation and stewardship decisions.22 Summing up, the studies presented in this section confirm the observation by Murphy et al. (2013, pp. 79–80) that “the notion that decision-usefulness and stewardship/accountability fulfil separate and distinct reporting objectives has a long history in academic accounting research”. Against this background, the following section discusses why the standard-setters’ reluctant stance on stewardship may (or may not) be problematic.

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5. DISCUSSION Based on the previous sections, a gap can be perceived between the predominant findings from analytical and empirical accounting literature on the uses of financial reporting and the normative statements made by standard-setters about the objective of financial reporting in their conceptual framework documents. The main question that follows is whether this gap is problematic or not. This section discusses why the gap is not necessarily only of intellectual interest for accounting academics but might also matter when it comes to financial reporting standard-setting and practice. From the outset, this chapter has put an emphasis on conceptual frameworks and their views on accountability/stewardship. However, it is a central question how important a conceptual framework, and more specifically the objective of financial reporting section therein, actually is for financial reporting standard-setting and practice.23 In an ideal world, the conceptual framework would play a very powerful role in shaping the consistent decision-making of a standard-setting body. However, in the so-called “real world”, which is messy and where none of the standard-setters that developed a conceptual framework has ever started with a clean slate, the relevance of the existing conceptual framework for standard-setting decisions is not straightforward. In the early days of official conceptual frameworks, Dopuch and Sunder (1980), when reflecting on SFAC 1, already raised doubts on whether conceptual frameworks would change the course of the FASB’s standard-setting projects (also see Macve, 1997). Other studies also question whether the general concepts, such as decision usefulness, can be meaningfully operationalized to deal with specific accounting problems (for example, Williams & Ravenscroft, 2015). Potter (2005, p. 281) goes as far as noting that conceptual frameworks are “widely regarded as functional failures” in the accounting literature. However, Barth (2014), a former board member of the IASB and, accordingly, not without potential bias, maintains the usefulness of conceptual frameworks for standard-setting. Notably, except for a few studies that look at how often certain terms from the conceptual framework come up in (drafts of) standards or board discussions (for example, Walton, 2009; Kabir & Rahman, 2018), empirical evidence in this area is almost non-existent. Thus, it is unclear to what extent and in which ways the conceptual framework, and the objective of financial reporting, influence the thinking and decision-making of standard-setters. In the absence of empirical evidence on the importance of the conceptual framework for standard-setting, it remains unclear how the status of stewardship as a separate objective of financial reporting would ultimately influence standard-setters’ discussions and the final content of their standards. A second related point is that it might not always be straightforward how accounting standards would differ if the conceptual framework (also) followed a stewardship objective. Pelger (2016) reveals that this issue was raised repeatedly in the FASB/IASB debates and proponents of stewardship were ultimately unsuccessful in convincing sceptics of how stewardship would make a difference. A review of the accounting literature, however, shows that some characteristics of accounting information have repeatedly been linked to stewardship and that a rather clear picture emerges of how financial reporting might differ if stewardship is taken into consideration by accounting standard-setters. Whittington (2008) provides the argument that a stewardship objective implies more attention to reliability, in particular verifiability, and would be more critical of introducing fair values in the absence of markets because of the accompanying measurement uncertainty and

110  Handbook of accounting, accountability and governance leeway for earnings management. Lennard (2007) also perceives a link between stewardship and verifiability and a stronger emphasis on “reliable historical information” (Lennard, 2007, p. 66). Ijiri (1975, 1983) develops an accountability-based framework of financial accounting and highlights that “objectivity and verifiability of accounting information is not only desirable but indispensable” in order to make sure “that the information presented to the accountee is reasonably free from any subjective bias on the part of the accountor” (Ijiri, 1983, p. 77). Taken together with similar insights from agency models (Kuhner & Pelger, 2015) and historical studies (Miller & Oldroyd, 2018), it can be concluded that a stronger emphasis on reliable and verifiable accounting information plays an important role in stewardship.24 That this view was not articulated more clearly and more forcefully in the debates during the FASB/IASB conceptual framework revision might be attributed to the zeitgeist in the 2000s that, at least until the financial crisis, tended to favour moves towards fair-value accounting (for example, Erb & Pelger, 2015; Zhang & Andrew, 2014). Acknowledging a link between stewardship and reliable/verifiable accounting information implies that placing more or less emphasis on stewardship might influence the choice of qualitative characteristics and the importance which is attributed to them. In this regard, it is notable that the IASB/FASB in their joint revision project decided to replace reliability with faithful representation as a qualitative characteristic of useful financial information, a step that involved a downgrading of verifiability (Erb & Pelger, 2015). Conversely, in the 2018 conceptual framework of the IASB, the higher emphasis on stewardship is accompanied by the “return” of reliability in the form of a tolerable level of measurement uncertainty (introduced as a subcomponent of the qualitative characteristic “faithful representation”) (Pelger, 2020). While neither the replacement of reliability nor the introduction of a tolerable level of measurement uncertainty was explicitly justified by the standard-setters by referring to the role of stewardship, this is nonetheless reflective of the link established in the accounting literature. Taking stewardship seriously thus implies giving a more prominent role to the reliability of accounting information which then, in a further step, influences standard-setting decisions on recognition, measurement and disclosure. In this regard, Pelger (2020) notices that the introduction of “a tolerable level of measurement uncertainty” in the 2018 IASB framework is actually taken up in later chapters of the conceptual framework dealing with recognition and measurement and, thus, might be expected to play a role in future standard-setting decisions. In addition to the relevance of the role of stewardship for (standard-setting) practice, there is a broader conceptual dimension to the status attributed to it. As outlined in section 1, in the pre-text to its conceptual framework, repeating the IFRS Foundation’s Mission Statement, the IASB acknowledges the role that financial reporting in fact plays in holding management to account and portrays its standards as supporting the accountability of companies using IFRS. However, this acknowledgement largely remains a facade in light of the content of the main text of the conceptual framework with the clear statement that “stewardship is not an end in itself” (IASB, 2018, BC1.35(a)). Such a statement may well carry over to other spheres of corporate reporting, as outlined in the next paragraph. Recently, the IFRS Foundation began to move into the field of sustainability reporting – a somewhat surprising step as its representatives had articulated quite consistently over the years that this was outside the scope of the Foundation. In September 2020, the Trustees of the IFRS Foundation published a consultation document that asked the (rhetorical) question whether the IFRS Foundation should become active in the area of sustainability reporting (IFRS Foundation, 2020, p. 15). In November 2021, the Trustees officially announced the cre-

The roles of financial reporting  111 ation of a new standard-setting body for these purposes under the roof of the IFRS Foundation, the “International Sustainability Standards Board” (ISSB).25 Apparently acting under time pressures driven by somewhat competing regulatory initiatives, particularly within the European Union, the IFRS Foundation already set the course of the ISSB towards a focus on investors and their interest in sustainability information (IFRS Foundation, 2021, p. 3). While this approach seems very much consistent with what the IASB does in its conceptual framework for financial reporting (see section 3), it also raises the question of whether designing requirements on sustainability information for listed companies only with an eye to financial valuation purposes can really be a sustainable and sensible approach (for example, Murphy et al., 2013; Flower, 2015; Carnegie et al., 2021; Adams & Abhayawansa, 2022). These current developments show the extent to which accountability/stewardship issues have been encompassed in a valuation perspective by standard-setters and how this is then also extended into other realms of corporate reporting.

6. CONCLUSION This chapter has studied the roles of corporate financial reporting in the context of accountability and governance. Historically, (financial) accounting arose because of the roles it can play in accountability/stewardship relationships. However, in recent decades, accounting standard-setters have reframed financial reporting’s roles in terms of valuation and have tried to simply encompass rather than separately consider a role for stewardship purposes. This chapter has shown that this perspective by standard-setters is not in line with the larger part of evidence that has been accumulated in the academic accounting literature. Analytical studies have quite consistently emphasized possible differences arising from the two uses, and some empirical studies on the relationship but also on users’ views of financial reporting information have begun to support this view. In terms of the implications of the standard-setters’ stance for stewardship, the literature suggests that this affects the role that reliability/verifiability plays in (the development of) financial reporting standards. There is also a broader spillover of this subordinate role of stewardship in other areas of corporate reporting, which recently became manifest in developments in (international) sustainability reporting. This chapter has pointed to some areas where further research on the accountability/stewardship roles of financial reporting seems worthwhile. Against the background of the IASB/ FASB conceptual framework revision, O’Connell (2007) published a list of relevant questions on stewardship that could be addressed by academic research. These questions pertained to the relationship of valuation and stewardship, the contemporary meaning of stewardship (for instance, among regulators, users and preparers), possible changes in the importance of stewardship over time, links between stewardship and corporate governance and the role of stewardship in social and environmental reporting. About 15 years later, many of these questions still remain unanswered. To take up one of the areas mentioned by O’Connell (2007), there is still a notable dearth of empirical research on the valuation/stewardship relationship as no research cluster has formed around this topic during the last decades.26 Such research is important to better understand the links between accountability and the capital market impacts of financial reporting. Future research in this area could explore the relationship in cross-country settings to explore a possible cultural dimension associated with stewardship (for example, Walker, 2010; Kuhner &

112  Handbook of accounting, accountability and governance Pelger, 2015). In terms of the empirical measurement of the stewardship uses of accounting information, future research could also go beyond a focus on CEO (or top management) compensation and consider other governance issues, such as managerial turnover or votes at annual shareholder meetings. Moreover, the emerging (quantitative and qualitative) research on the ways that users employ financial reporting information for different purposes has huge potential to explore how information can(not) be useful for stewardship and/or valuation purposes (Georgiou, 2018; Cascino et al., 2021). Future studies could also focus more specifically on the role of intermediaries and other channels that are involved in the dialogue of management with shareholders (Lennard, 2007; Herman, 2020). Additional insights could also be gained by exploring preparers’ perspectives on the users and purposes of financial reports and how they design their information accordingly. In this vein, Oberwallner et al. (2021) present a case study of a substantial change in the annual report at Siemens and show that actors at Siemens did not perceive a timely valuation role for the annual report but mainly saw it as a documentation tool to fulfil compliance purposes. These findings can be interpreted to imply, in the case studied, that the bulk of disclosures provided in financial statements is perceived by the preparers to serve accountability (and not valuation) purposes. It would be interesting to explore to what extent these findings can be generalized and which factors influence preparers’ view of the roles of financial reporting. Another area for future research that gains particular importance because of the developments in the area of sustainability reporting lies in broader reflections on listed companies’ accountability/stewardship responsibilities. As indicated in the literature presented in this chapter, the principal–agent view has shaped academic and practice understandings of the stewardship role of financial reporting, a development already noticed by Chen (1975)27 and Birnberg (1980). Interestingly, Chen (1975) concludes that in listed companies with dispersed ownership, stewardship about the use of the resources entrusted to management should be achieved in two ways: first, to the shareholders/owners by providing financial reports and, second, for broader society through (audited) social reports. While the interest in (social) sustainability reports has been revitalized in recent years, recent developments at the level of the IFRS Foundation understand neither financial nor sustainability reporting in terms of stewardship but with a focus on valuation usefulness. This is reflective of broader developments of financialization, which has been resilient to the financial crisis and increasing concerns about global economic inequalities (Zhang & Andrew, 2014, 2022). Reconsidering the accountability responsibilities of large, publicly listed companies in the spirit of Chen (1975) and other authors who have more generally reflected on accountability (Messner, 2009; Roberts, 2009) might provide an impetus for academics and standard-setters to broaden their horizon when it comes to the purposes of corporate reporting. While sustainability reporting is anticipated to be the entry gate for such considerations, this may, in a next step, even feed back into rethinking the purpose of financial reporting and its suitability (or not) for the preservation and conservation of the planet. Perhaps recent discussions about the ways that climate change not only impacts sustainability reporting but also, at several points, enters considerations of financial reporting may provide impetus for reviving standard-setters’ and academics’ interest in the stewardship purpose of corporate reporting.

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NOTES 1. 2.

3. 4. 5. 6. 7.

8. 9. 10.

11.

12.

13.

14.

This chapter focuses on corporate financial reporting. For the role of accountability in public sector financial reporting, for example, see Mann et al. (2019) and Chapter 12 of this Handbook. This prelude to the IASB’s conceptual framework, called “status and purpose”, abbreviated as SP, is taken from the mission statement of the IFRS Foundation, which states: “IFRS Standards strengthen accountability by reducing the information gap between the providers of capital and the people to whom they have entrusted their money. Our Standards provide information needed to hold management to account”. The mission statement is available at: www​.ifrs​.org/​content/​dam/​ifrs/​about​-us/​ who​-we​-are/​who​-we​-are​-english​-2018​-final​.pdf (last accessed 30 June 2023). For an outline of, and reflections on, different conceptualizations of accountability/stewardship, see Murphy et al. (2013, p. 80). Following principal–agent theory, the conflict consists in both owners and managers maximizing their utility, which owners achieve through a maximization of firm value (net of management compensation) and managers achieve by maximizing their compensation (for example, Lambert, 2001). In the following, the terms “accountability” and “stewardship” are treated as synonyms. Also see Murphy et al. (2013). BC refers to the Basis for Conclusions of the IASB’s conceptual framework. In the FASB’s conceptual framework (FASB, 2010) accountability/stewardship roles of financial reporting are not mentioned at all. This was also the case for the 2010 version of the IASB’s conceptual framework (IASB, 2010). Refer to Pelger (2016) for an analysis of the development of these documents. In the logic of financial reporting standard-setters’ conceptual frameworks, qualitative characteristics serve to operationalize the objective of financial reporting (for example, Erb & Pelger, 2015; Orthaus et al., 2023). Soll (2014) offers insightful historical cases to illustrate the importance of financial bookkeeping/ accounting as an accountability tool. The Bible includes the parable of the talents where a landowner entrusts his servants with different amounts of money (“talents”), then leaves them with the money and later on holds them to account on how they used the money. The landowner rewards those servants who used the money (talents) effectively and increased the monetary amount and condemns the servants who just kept the money safe (Matthew 25:14–30). Following the Securities Exchange Act, in the United States the development of financial reporting requirements has been the responsibility of the Securities and Exchange Commission (SEC). However, the SEC has deferred standard-setting authority to private bodies from the beginning: at first, the task was delegated to the accounting profession which installed the Committee on Accounting Procedure (1939–59) that was later succeeded by the Accounting Principles Board (1959–73). Since 1973, the SEC has deferred standard-setting authority to the private independent FASB. For details on the role of these bodies in developing (precursors to) conceptual frameworks, see Zeff (1999). It is important to note, however, that SFAC 1 still discussed stewardship, although it was not considered as a separate objective of financial reporting (FASB, 1978, para. 50–53). It is also important to recognize that financial accounting information has played a role in informing investors’ decision-making, at least since the creation of stock exchanges during the second half of the 19th century. For a historical case study, see Edwards and Boyns (2022). The first phase on the objective of financial reporting was carried out jointly with the second phase on qualitative characteristics of useful information. Hence, all consultation documents as well as the changes made to the conceptual frameworks in 2010 relate both to the objective and the qualitative characteristics (FASB, 2010; IASB, 2010). However, in this chapter the focus is on accountability and, thus, on the objective of financial reporting. For more details on the discussions around qualitative characteristics in the framework revisions, see Erb and Pelger (2015) for the joint IASB and FASB project and Pelger (2020) for the IASB-only revision leading to the 2018 conceptual framework. This was temporarily changed in an Exposure Draft in 2008, which suggested a broader understanding of decision usefulness that would also encompass stewardship decisions next to valuation

114  Handbook of accounting, accountability and governance decisions. For details, see Pelger (2016, p. 64). This more closely resembled the earlier framework of the IASC (IASC, 1989). 15. While the IASB issued a new chapter 1 (and 3) of its conceptual framework, the FASB issued SFAC 8 which replaced SFAC 1 (and SFAC 2) (see FASB, 2010). 16. The intention of the IASB when restarting the project was to complete the revision of the framework as the previous work with the FASB had only led to the completion of two phases of the initial framework revision project. 17. Discussing the general models, Lambert (2001, p. 81) concludes: “While they [i.e. valuation and stewardship usefulness] are not identical, I suspect there is a closer relationship between these two things than our current models imply”. 18. While Ijiri (1975) derives a strict historical cost preference from an accountability perspective, there might also be cases where fair-value accounting is actually preferred to historical cost. In the words of Gjesdal (1981, p. 224): “It is not immediately clear that historical cost … is preferred to current cost for stewardship purposes, as is sometimes claimed”. In an experiment, Anderson et al. (2015) show that fair-value information is preferred to historical cost information by investors when making stewardship decisions. 19. There is far more research on the valuation usefulness of accounting numbers but rather little research on the stewardship usefulness in terms of top management compensation individually. Refer to ICAEW (2015) for a summary of both types of research in the setting of IFRS adoption. As an example of a study analysing the stewardship usefulness of accounting information, Voulgaris et al. (2014) focus on the context of IFRS adoption and find that, in the United Kingdom, after IFRS adoption the use of earnings-per-share-based performance measures in CEO compensation contracts decreased. They attribute this effect to higher volatility in IFRS numbers due to fair-value accounting. 20. In contrast to the studies discussed in the previous paragraph, Aust et al. (2021) do not use US data but analyse data from German listed companies. 21. Walker (2010) elaborates on possibly different views on the objectives of financial reporting depending on the form of capitalism prevalent in a certain country/region. 22. Research on users’ views is also important as “the user” has been an abstract and idealized reference point constructed in standard-setting for several decades (Young, 2006). Notably, when preparing their financial statements, companies also construct users of their reports. Refer to Oberwallner et al. (2021) for a case study on the preparer’s construction of users. 23. For a broader perspective on the role of the IASB’s conceptual framework, see Dennis (2018). 24. During the revision of the conceptual framework (and other standard-setting discussions) the prevalent view was that more relevant future-orientated information would provide more decision-useful information (for example, Erb & Pelger, 2015). However, it is not entirely clear ex ante whether this is really the case. Valuation usefulness could actually also arise from the reliability of financial statement information, while more relevant and timely information is considered from other sources. 25. The IFRS Foundation’s press release is available at: www​.ifrs​.org/​news​-and​-events/​news/​2021/​ 11/​ifrs​-foundation​-announces​-issb​-consolidation​-with​-cdsb​-vrf​-publication​-of​-prototypes (last accessed 30 June 2023). 26. A major reason for the limited research in this area is the empirical challenge to approach the relationship which either leads to an empirical model involving multiple steps of regressions (Bushman et al., 2006) or to rather indirect attempts to create proxies for stewardship (Gassen, 2008). 27. Chen (1975, p. 536) reflects on this development by contrasting the principal–agent perspective with earlier views: “The medieval stewardship concepts are characterized by the notion that both the owner’s and the society’s interests are to be served. This notion has been eroded step by step as a result of the development of capitalism”.

The roles of financial reporting  115

REFERENCES Accounting Standards Board (ASB) (1999), Statement of Principles for Financial Reporting. ASB, London. Adams, C.A. and Abhayawansa, S. (2022), “Connecting the COVID-19 pandemic, environmental, social and governance (ESG) investing and calls for ‘harmonisation’ of sustainability reporting”, Critical Perspectives on Accounting, Vol. 82, article 102309. American Accounting Association (AAA) (1966), A Statement of Basic Accounting Theory. AAA, Evanston, IL. American Institute of Certified Public Accountants (AICPA) (1973), Objectives of Financial Statements: Report of the Study Group on the Objectives of Financial Statements. AICPA, New York. Anderson, S.P., Brown, J.L., Hodder, L. and Hopkins, P.E. (2015), “The effect of alternative accounting measurement bases on investors’ assessments of managers’ stewardship”, Accounting, Organizations and Society, Vol. 46, pp. 100–114. Armstrong, M.S. (1977), “The politics of establishing accounting standards”, Journal of Accountancy, Vol. 143 No. 2, pp. 76–79. Aust, V., Pelger, C. and Drefahl, C. (2021), “Exploring the relationship between valuation and stewardship uses of accounting information: empirical evidence from German listed firms”, Journal of International Accounting, Auditing and Taxation, Vol. 42, article 100375. Banker, R.D., Huang, R. and Natarajan, R. (2009), “Incentive contracting and value relevance of earnings and cash flows”, Journal of Accounting Research, Vol. 47 No. 3, pp. 647–678. Barth, M.E. (2014), “Measurement in financial reporting: the need for concepts”, Accounting Horizons, Vol. 28 No. 2, pp. 331–352. Birnberg, J.G. (1980), “The role of accounting in financial disclosure”, Accounting, Organizations and Society, Vol. 5 No. 1, pp. 71–80. Bushman, R.M. and Smith, A.J. (2001), “Financial accounting information and corporate governance”, Journal of Accounting and Economics, Vol. 32 No. 1, pp. 237–333. Bushman, R.M., Engel, E. and Smith, A.J. (2006), “An analysis of the relation between the stewardship and valuation roles of earnings”, Journal of Accounting Research, Vol. 44 No. 1, pp. 53–83. Camfferman, K. and Zeff, S.A. (2015), Aiming for Global Accounting Standards: The International Accounting Standards Board, 2001–2011. Oxford University Press, Oxford. Carnegie, G., Parker, L. and Tsahuridu, E. (2021), “It’s 2020: what is accounting today?”, Australian Accounting Review, Vol. 31 No. 1, pp. 65–73. Cascino, S., Clatworthy, M., García Osma, B., Gassen, J. and Imam, S. (2021), “The usefulness of financial accounting information: evidence from the field”, The Accounting Review, Vol. 96 No. 6, pp. 73–102. Cascino, S., Clatworthy, M., García Osma, B., Gassen, J., Imam, S. and Jeanjean, T. (2014), “Who uses financial reports and for what purpose? Evidence from capital providers”, Accounting in Europe, Vol. 11 No. 2, pp. 185–209. Chen, R.S. (1975), “Social and financial stewardship”, The Accounting Review, Vol. 50 No. 3, pp. 533–543. Christensen, P.O., Feltham, G.A. and Şabac, F. (2005), “A contracting perspective on earnings quality”, Journal of Accounting and Economics, Vol. 39 No. 2, pp. 265–294. Dennis, I. (2018), “What is a conceptual framework for financial reporting?”, Accounting in Europe, Vol. 15 No. 3, pp. 374–401. Dopuch, N. and Sunder, S. (1980), “FASB’s statements on objectives and elements of financial accounting: a review”, The Accounting Review, Vol. 55 No. 1, pp. 1–21. Drymiotes, G. and Hemmer, T. (2013), “On the stewardship and valuation implications of accrual accounting systems”, Journal of Accounting Research, Vol. 51 No. 2, pp. 281–334. Durocher, S. and Georgiou, O. (2022), “Framing accounting for goodwill: intractable controversies between users and standard setters”, Critical Perspectives on Accounting, Vol. 89, article 102357. Edwards, J.R. and Boyns, T. (2022), “Published accounts, stewardship, and decision making: a case study 1863–1940”, Abacus, Vol. 58 No. 2, pp. 300–333. Engel, E., Hayes, R.M. and Wang, X. (2003), “CEO turnover and properties of accounting information”, Journal of Accounting and Economics, Vol. 36 No. 1–3, pp. 197–226.

116  Handbook of accounting, accountability and governance Erb, C. and Pelger, C. (2015), “‘Twisting words’? A study of the construction and reconstruction of reliability in financial reporting standard-setting”, Accounting, Organizations and Society, Vol. 40 No. 1, pp. 13–40. Financial Accounting Standards Board (FASB) (1978), Statement of Financial Accounting Concepts No. 1 (SFAC 1): Objectives of Financial Reporting by Business Enterprises. Financial Accounting Foundation, Norwalk, CT. Financial Accounting Standards Board (FASB) (2010), Statement of Financial Accounting Concepts No. 8 (SFAC 8): Conceptual Framework for Financial Reporting Chapter 1, The Objective of General Purpose Financial Reporting, and Chapter 3, Qualitative Characteristics of Useful Financial Information. Financial Accounting Foundation, Norwalk, CT. Flower, J. (2015), “The International Integrated Reporting Council: a story of failure”, Critical Perspectives on Accounting, Vol. 27, pp. 1–17. Gassen, J. (2008), “Are stewardship and valuation usefulness compatible or alternative objectives of financial accounting?”, Working Paper, Humboldt University Berlin, https://​dx​.doi​.org/​10​.2139/​ssrn​ .1095215. Georgiou, O. (2018), “The worth of fair value accounting: dissonance between users and standard setters”, Contemporary Accounting Research, Vol. 35 No. 3, pp. 1297–1331. Gjesdal, F. (1981), “Accounting for stewardship”, Journal of Accounting Research, Vol. 19 No. 1, pp. 208–231. Gore, P. (1992), The FASB Conceptual Framework Project 1973–1985. Manchester University Press, Manchester. Herman, L. (2020), “Neither takers nor makers: the Big-4 auditing firms as regulatory intermediaries”, Accounting History, Vol. 25 No. 3, pp. 349–374. IFRS Foundation (2020), Consultation Paper on Sustainability Reporting. IFRS Foundation, London. IFRS Foundation (2021), IFRS Foundation Trustees’ Feedback Statement on the Consultation Paper on Sustainability Reporting. IFRS Foundation, London. Ijiri, Y. (1975), Theory of Accounting Measurement. AAA, Sarasota, FL. Ijiri, Y. (1983), “On the accountability-based conceptual framework of accounting”, Journal of Accounting and Public Policy, Vol. 2 No. 2, pp. 75–81. Institute of Chartered Accountants in England and Wales (ICAEW) (2015), The Effect of Mandatory IFRS Adoption in the EU: A Review of Empirical Research, available at: www​.icaew​.com/​-/​media/​ corporate/​files/​technical/​financial​-reporting/​information​-for​-better​-markets/​ifbm​-reports/​effects​-of​ -mandatory​-ifrs​-adoption​-april​-2015​-final​.ashx​?la​=​en (last accessed 30 June 2023). International Accounting Standards Board (IASB) (2010), Conceptual Framework for Financial Reporting. IFRS Foundation, London. International Accounting Standards Board (IASB) (2018), Conceptual Framework for Financial Reporting. IFRS Foundation, London. International Accounting Standards Committee (IASC) (1989), Framework for the Preparation and Presentation of Financial Statements. IASC, London. Kabir, H. and Rahman, A. (2018), “How does the IASB use the conceptual framework in developing IFRSs? An examination of the development of IFRS 16 Leases”, Journal of Financial Reporting, Vol. 3 No. 1, pp. 93–116. Kuhner, C. and Pelger, C. (2015), “On the relationship of stewardship and valuation: an analytical viewpoint”, Abacus, Vol. 51 No. 3, pp. 379–411. Lambert, R.A. (2001), “Contracting theory and accounting”, Journal of Accounting and Economics, Vol. 32 No. 1–3, pp. 3–87. Lennard, A. (2007), “Stewardship and the objectives of financial statements: a comment on IASB’s preliminary views on an improved conceptual framework for financial reporting – the objective of financial reporting and qualitative characteristics of decision-useful financial reporting information”, Accounting in Europe, Vol. 4 No. 1, pp. 51–66. Macve, R. (1997), A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, or Threat? Routledge, London. Mann, B., Lorson, P.C., Oulasvirta, L. and Haustein, E. (2019), “The quest for a primary EPSAS purpose: insights from literature and conceptual frameworks”, Accounting in Europe, Vol. 16 No. 2, pp. 195–218.

The roles of financial reporting  117 Mattessich, R. (1987), “Prehistoric accounting and the problem of representation: on recent archeological evidence of the Middle-East from 8000 B.C. to 3000 B.C.”, Accounting Historians Journal, Vol. 14 No. 2, pp. 71–91. Messner, M. (2009), “The limits of accountability”, Accounting, Organizations and Society, Vol. 34 No. 8, pp. 918–938. Miller, A.D. and Oldroyd, D. (2018), “Does stewardship still have a role?”, Accounting Historians Journal, Vol. 45 No. 1, pp. 69–82. Murphy, T., O’Connell, V. and Óhógartaigh, C. (2013), “Discourses surrounding the evolution of the IASB/FASB conceptual framework: what they reveal about the ‘living law’ of accounting”, Accounting, Organizations and Society, Vol. 38 No. 1, pp. 72–91. Oberwallner, K., Pelger, C. and Sellhorn, T. (2021), “Preparers’ construction of users’ information needs in corporate reporting: a case study”, European Accounting Review, Vol. 30 No. 5, pp. 855–886. O’Connell, V. (2007), “Reflections on stewardship reporting”, Accounting Horizons, Vol. 21 No. 2, pp. 215–227. Orthaus, S., Pelger, C. and Kuhner, C. (2023), “The eternal debate over conservatism and prudence: a historical perspective on the conceptualization of asymmetry in financial accounting theory”, Contemporary Accounting Research, Vol. 40 No. 1, pp. 41–88. Paul, J.M. (1992), “On the efficiency of stock-based compensation”, Review of Financial Studies, Vol. 5 No. 3, pp. 471–502. Pelger, C. (2016), “Practices of standard-setting: an analysis of the IASB’s and FASB’s process of identifying the objective of financial reporting”, Accounting, Organizations and Society, Vol. 50, pp. 51–73. Pelger, C. (2020), “The return of stewardship, reliability and prudence: a commentary on the IASB’s new conceptual framework”, Accounting in Europe, Vol. 17 No. 1, pp. 33–51. Potter, B. (2005), “Accounting as a social and institutional practice: perspectives to enrich our understanding of accounting change”, Abacus, Vol. 41 No. 3, pp. 265–289. Ravenscroft, S. and Williams, P. (2009), “Making imaginary worlds real: the case of expensing employee stock options”, Accounting, Organizations and Society, Vol. 34 No. 6–7, pp. 770–786. Roberts, J. (2009), “No one is perfect: the limits of transparency and an ethic for ‘intelligent’ accountability”, Accounting, Organizations and Society, Vol. 34 No. 8, pp. 957–970. Soll, J. (2014), The Reckoning. Penguin, London. Sunder, S. (1999), “Classical, stewardship and market perspectives on accounting: a synthesis”. Sunder, S. and Yamaji, H. (eds), The Japanese Style of Business Accounting. Quorum Books, Westport, CT, pp. 17–31. Voulgaris, G., Stathopoulos, K. and Walker, M. (2014), “IFRS and the use of accounting-based performance measures in executive pay”, International Journal of Accounting, Vol. 49 No. 4, pp. 479–514. Walker, M. (2010), “Accounting for varieties of capitalism: the case against a single set of global accounting standards”, The British Accounting Review, Vol. 42 No. 3, pp. 137–152. Walton, P. (2009), “Les deliberations de l’IASB en 2002 et 2003: une analyse statistique” [“IASB 2002 and 2003 deliberations: a statistical analysis”], Compatibilité – Contrôle – Audit, Vol. 15 No. 1, pp. 35–54. Whittington, G. (2008), “Fair value and the IASB/FASB conceptual framework project: an alternative view,” Abacus, Vol. 44 No. 2, pp. 139–168. Williams, P.F. and Ravenscroft, S. (2015), “Rethinking decision usefulness”, Contemporary Accounting Research, Vol. 32 No. 2, pp. 763–788. Williamson, J.E. and Lipman, F.J. (1991), “Tracing the American concept of stewardship to English antecedents”, British Accounting Review, Vol. 23 No. 4, pp. 355–368. Young, J.J. (2006), “Making up users”, Accounting, Organizations and Society, Vol. 31 No. 6, pp. 579–600. Zeff, S.A. (1999), “The evolution of the conceptual framework for business enterprises in the United States”, Accounting Historians Journal, Vol. 26 No. 2, pp. 89–131. Zeff, S.A. (2013), “The objectives of financial reporting: a historical survey and analysis”, Accounting and Business Research, Vol. 43 No. 4, pp. 262–327. Zhang, Y. and Andrew, J. (2014), “Financialisation and the conceptual framework”, Critical Perspectives on Accounting, Vol. 25 No. 1, pp. 17–26.

118  Handbook of accounting, accountability and governance Zhang, Y. and Andrew, J. (2022), “Financialisation and the conceptual framework: an update”, Critical Perspectives on Accounting, Vol. 88, pp. 1–15.

6. Mechanisms of accountability and governance: management accounting and control Maria Major, Ana Conceição and Stewart Clegg

OVERVIEW In a world ruled by financial disclosure, the traditional overview of accountability and governance has neglected the extremely important role of management accounting and control. Enron, WorldCom and other major financial scandals redirected that focus. Management accounting and control information is not the exclusive property of managers, as it is now required by stakeholders who value financial and non-financial information. Moreover, management accounting and control, governance and accountability mechanisms have been moving beyond traditional contexts, being extended to new fields and organizations, such as hybrid organizations, the public sector and social organizations, and embracing social and environmental concerns. In this chapter we explore these relationships and interconnections between management accounting and control systems (MACS), accountability and governance and corporate governance, the implications of which may be that management accounting and control textbooks need to be rewritten or substantially revised. Indeed, the times are exciting and this chapter intends to contribute to motivation in this space.

INTRODUCTION In this chapter we discuss how MACS are deeply implicated in accountability and corporate governance, including corporate social governance. Although MACS are recognized as contributing significantly to the systems and processes by which organizations are directed, controlled, steered and held accountable (Macintosh & Quattrone, 2010; Seal, 2006), traditional accounting research in corporate governance has primarily focused on financial reporting issues, highlighting its role in the governance mechanisms of accountability to shareholders and firms’ other stakeholders (Brennan & Solomon, 2008; Cornforth, 2003). Enron, WorldCom and other financial scandals challenged the traditional focus of corporate governance studies on the agency relationship and agency loss. Doing so opened broader perspectives on governance and accountability mechanisms (Lai et al., 2019; Brennan & Solomon, 2008), leading to the perspective that “many practices commonly associated with management accounting are, and certainly should be, implicated in corporate governance” (Seal, 2006, p. 390). Consideration of how governance deals with stakeholders’ interests to maximize profitability in the long term contributed to research being extended to new settings, organizations and contexts (Clegg et al., 2019; Lai et al., 2019) in which MACS are seen as playing a role. Areas in which this broader approach has started to embrace include “corporate social responsibility” (CSR) (Laguir et al., 2019; Sundin & Brown, 2017), hybrid organizations (Cornforth & Spear, 2010; Mair et al., 2015), public sector bodies (Almquist et al., 2013) and social institutions 119

120  Handbook of accounting, accountability and governance (Ebrahim et al., 2014; Hyndman & McDonnell, 2009) such as charities, voluntary bodies and religious organizations (Macintosh & Quattrone, 2010; see also Parker, 2007, 2018; Brennan & Solomon, 2008). MACS, including performance measurement systems, management and budgetary control, and financial and non-financial indicators, as well as the balanced scorecard mechanism, provide information for assessing risk, checking on strategy and monitoring the behaviour of managers (Eldenburg et al., 2020; CGMA, 2017; Seal, 2006), providing “most of the tools that make … governance possible” (Macintosh & Quattrone, 2010, p. 312). Recent developments, in the wake of #MeToo and various national instances of organizational cultures of toxic masculinity, have broadened consideration of governance to include the ways in which organizational cultures play a “governmental” role (Clegg, 2019; Lemke, 2015; McKinlay & Pezet, 2018; Wickramasinghe et al., 2021). Throughout the last four decades, different concepts of governance, governmentality and MACS have developed different perspectives and approaches. We propose to examine the relationship between these aspects and to trace these approaches in the literature from the perspective of management accounting and control. The chapter is subsequently structured in three sections. The next section commences with a discussion of the roles of MACS, accountability and governance systems and how the emergence of new perspectives of governance associated with the Enterprise Governance framework and Enterprise Risk Management has resulted in new demands to management accounting and control. In the following section, we proceed to examine the educational challenges posed for management accountants in responding to demands for strategic governance and consider how MACS can act as an instrument for socialization of the board. The third substantive section of the chapter considers how MACS are implicated in corporate governance and accountability mechanisms of organizations operating in various settings, including CSR, hybrid organizations, entities in the public sector and social institutions. The chapter ends by drawing some conclusions.

THE ROLE OF MANAGEMENT ACCOUNTING AND CONTROL IN ACCOUNTABILITY AND GOVERNANCE This section addresses the new perspectives of governance, accountability and MACS, as they are intertwined, influencing each other’s evolution and also being driven by the new demands that organizations face in a complex and competitive world. As organizations are challenged to deal with the risks of their operating environment, there is a request for strategic governance where MACS can act as an instrument for socialization of the board. In response to these changes, the role of management accountants is also changing, so we examine their broad new professional skills and how those skills enable management accountants to increasing their influence in the lives of organizations. MACS, Accountability and Governance While the term “governance” entails various meanings, especially in the social sciences and political science (Bhimani, 2009; Lai et al., 2019), its etymology derives from the Latin word gubernare, meaning to steer, being therefore connected to the function of direction (Solomon, 2021) and the authority to rule and control (Kourula et al., 2019; Ratnatunga & Alam, 2011).

Management accounting and control  121 Traditionally, mainstream accounting research has placed emphasis on corporate governance highlighting, in the vein of agency theory, management of the relationship between shareholders and managers as the key aspect of governance. Numerous financial scandals affecting several global corporations have led many to question the neoclassical economic underpinnings of principal/agency views of governance and notions of shareholders’ value as the aim of governance was questioned (Brennan & Solomon, 2008; Ratnatunga & Alam, 2011). Furthermore, the expansion of governance and accountability mechanisms beyond large private firms to the public sector and social institutions and the rise of an increasing variety of organizations requiring a new approach to the way they are governed, combined with the idea that business should be environmentally and socially sustainable, all contributed to broadening the concept and extending the meaning of governance and accountability (Bhimani, 2009; Brennan & Solomon, 2008; Macintosh & Quattrone, 2010). Accordingly, the concept of governance has evolved from the idea of a system that seeks to “constrain and direct management’s rationality and self-interest and to make sure shareholders’ rather than managers interests are pursued” (Macintosh & Quattrone, 2010, p. 313) to an “umbrella term for all aspects of the powers and competences in the relations among different organizational units and between the organization and its various stakeholders”, encompassing the “structures, rules, procedures and mechanisms for the proper steering and controlling of corporations” (Almquist et al., 2013, p. 479). As the Organisation for Economic Co-operation and Development (OECD, 2015) observed, “governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders” (p. 9). Effective corporate governance implies the capacity of organizations to discharge their accountability to a multiplicity of stakeholders either internal or external to the organization, with accounting playing a central role in processes of accountability. The arena of management accounting and control understood as “the sourcing, analysis, communication and use of decision-relevant financial and non-financial information to generate and preserve value for organisations” (CGMA, 2017, p. 8) represents an important device for discharging accountability and ensuring good governance practices. Macintosh and Quattrone (2010) describe MACS as a key practice in organizational life and as deeply implicated in accountability and governance systems. Management accounting and control is decisive and ubiquitous in people’s everyday lives such that “if accountants and information people wrapped up their systems and took them home, the whole process of producing society’s material goods and services, along with the governance of the social order, would grind to a standstill” (Macintosh & Quattrone, 2010, p. 3). MACS not only support processes of decision-making in organizations (management accounting) but also monitor and strive to control individuals’ behaviour (management control) so that organizational objectives are met (Malmi & Brown, 2008). The activity of control, which consists of “making sure (or having the impression) that someone and/or something that plays a ‘role’ … follows the script” (Macintosh & Quattrone, 2010, p. 5), promotes alignment of behaviour with organization objectives and strategies for organizational performance; accordingly, it is a powerful instrument of accountability and effective governance in organizations. MACS represent the “central nervous system” of organizations, without which “banks would close, factories would produce goods at random, supermarkets would be out of many products and overstocked on others, police would arrest and release the wrong people, and the military would not have a clue which way to point their missiles” (Macintosh & Quattrone, 2010, pp. 3–4). As Bhimani (2009, p. 4) states, “the control process is definition-

122  Handbook of accounting, accountability and governance ally typified by the intent to monitor the degree of alignment between organisational activities and precepts of desirable managerial outcomes”. Without control and effective managerial information produced by MACS, organizations would not be able to pursue their ends in the rational and monitored ways that they seek to do, and organizational chaos and disintegration would increase. Practice indicates that appropriate MACS need to be implemented in organizations and be part of organizational routines if they are to support accountability processes and effective direction and control (CGMA, 2017; Seal, 2006). MACS and the Enterprise Governance Framework Although MACS represent an important aspect of accountability and governance, they have often been overlooked in addressing corporate governance by accounting researchers, professional accounting bodies and reporting regulatory institutions. Traditionally, emphasis has been placed on financial accounting and reporting compliance requirements dominated by meeting institutional guidelines to improve disclosure practices (Brennan & Solomon, 2008; Ratnatunga & Alam, 2011; Uyar et al., 2017). Examples of this are the several reports issued from the early 1990s, such as the Cadbury Report (1992), the Treadway Commission Report (1992) and the Hilmer Report (1993), emphasizing the need for compliance with prescribed laws and regulations and provision of reliable financial reporting and the adequate implementation of internal controls. With the US Sarbanes-Oxley Act (2002), organizations’ responsibility for trustworthiness and reliability of financial reporting was reinforced and new requirements were established for the development of internal controls; however, similarly to previous regulations, the contribution of management accounting and control to governance was unclear. All these guidelines were based on an agency theory approach and supported the view that “improved disclosure can reduce agency costs for better information flows” (Ratnatunga & Alam, 2011, p. 351). By the beginning of the 2000s, effective corporate governance was essentially understood as dependent upon the “good practices” of financial accounting and financial reporting, with management accounting and control tending to play a minor role in accountability processes. The recognition of the potential stewardship role of MACS and of its relevance for governance mechanisms started to unfold with the exposure of the problems of corporate reporting that followed the financial scandals of firms such as Lehman Brothers, WorldCom and Enron, as well as the collapse of stock markets in the US and UK. These deviances and disruptions constituted a challenge to traditional perspectives on corporate governance, focusing merely on shareholders’ interests, representing an opportunity to extend governance concerns to other settings and organizations (Lai et al., 2019). Another consequence of these scandals and firms’ bankruptcy was to bring to the top of the agenda the need to set formal codes of ethics, as well as the need to improve audit effectiveness and the external requirements of financial reporting and corporate disclosure so that corporate malfeasance could be prevented and senior managers’ deviance inhibited. However, the establishment of “new oversight measures, controls and legislation intended to improve transparency, accountability and integrity” increased the previously developed “culture of compliance and checklist approaches” (Ratnatunga & Alam, 2011, pp. 343–344). Strict adherence to regulations and codes could potentially discourage management from behaving in an entrepreneurial and strategic way and be an obstacle to the long-term pursuit of value for organizations (Höglund et al., 2021; Ratnatunga & Alam, 2011). Accordingly,

Management accounting and control  123 regulations that sought the formalization and standardization of accountability could be seen to create incentives for managers to act “in the spirit of those codes in corporate governance reporting by placing undue constraints on entrepreneurial behaviour” (Ratnatunga & Alam, 2011, p. 352). “Managerial disaffection” and “reduction in organizational value” are an immediate implication of this “conformist box-ticking”, as known, even though “no regularity codes have been broken” (Ratnatunga & Alam, 2011, p. 352). In this spirit, the European Commission (2014) issued a recommendation for companies to adapt their corporate governance arrangements to their specificities (such as their size, shareholding structure or sectorial context), allowing them to govern themselves more effectively. The tension between governance and value creation and between conformance and performance was recognized in the Enterprise Governance framework (CIMA/IFAC, 2004), which described the need for MACS to hold a more prominent role in corporate governance and accountability processes than had hitherto been the case (CIMA/IFAC, 2004; Seal, 2006). Associated with the development of this new framework was the Chartered Institute of Management Accountants (CIMA), which in 2004 joined the International Federation of Accountants (IFAC) to explore the emerging concept of Enterprise Governance. In their advisory report they described governance as “the set of responsibilities and practices exercised by the board and executive management with the goal of providing strategic direction, ensuring that objectives are achieved, ascertaining that risks are managed appropriately and verifying that the organisation’s resources are used responsibly” (CIMA/IFAC, 2004, p. 4). In so doing they recognized that conformance and performance are two dimensions of good governance practices which “need to be in balance” (CIMA/IFAC, 2004, p. 4). While the conformance aspect of governance deals with structural issues such as the board structure and roles and executive remuneration, as well as with financial reporting and assurance (structural governance), the performance dimension supports strategy and value creation (strategic governance). By highlighting that efficient governance systems demand not only adequate structural mechanisms that ensure compliance with the procedures prescribed by regulatory and professional bodies but also the development of processes related to the formulation and implementation of strategy, and the management of risk and performance, the Enterprise Governance framework emerged as a new comprehensive perspective to analyse governance issues in organizations. Thus, akin to changes in the wider business literature, it is now accepted within accounting academia that corporate governance is a broader “process whereby the board provides direction, authority and oversight over the organization’s strategy execution” (Ratnatunga & Alam, 2011, p. 352). Similarly, Solomon (2021, p. 6) has redefined the concept of corporate governance as “the system of checks and balances, both internal and external to companies, which ensures that companies discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activity”. “Being forward and outward-looking, management accounting brings structured solutions to unstructured problems” (CGMA, 2017, p. 6), according to formal rhetoric. The idea that corporate boards should be able to oversee the quality of internal management and the strategic decisions of their organizations created expectations that management accounting and control techniques should support strategic governance (Eldenburg et al., 2020; Bhimani, 2009; Ratnatunga & Alam, 2011; Seal, 2006). The need of directors to use MACS to employ strategic thinking and develop risk-taking abilities requiring the use of reliable, relevant and timely information for the internal focus of strategic governance and value creation positioned boards to work more closely with senior management (Seal, 2006). The professional literature

124  Handbook of accounting, accountability and governance on accounting portrays the finance director and management accountants as representing the lynchpin of information provision, thus acting as “integrators” in providing communication in organizations (CIMA/IFAC, 2004; Ratnatunga & Alam, 2011). Through processes of data collection, information processing and analysis, management accountants can help to establish cross-functional communication between diverse management roles, breaking down their silos and barriers to work together, aiding boards to monitor the use of organizational resources and assist in making progress towards the achievement of strategic objectives. Moreover, it has been claimed that strategic management accounting links organization’s strategic financial and non-financial goals with performance evaluation. Accordingly, MACS can support directors in accomplishing long-term objectives and value creation strategies (Ratnatunga & Alam, 2011). Through the provision of detailed information about the organization and its environment, MACS support the formulation of strategic plans and oversee the execution of strategy. In doing so they contribute to “more informal, socializing forms of communicative governance”, thus “enhanc[ing] learning and in depth understanding” as well as “managers’ commitment to the organization” (Ratnatunga & Alam, 2011, pp. 371 & 352; see also Seal, 2006; Hiebl et al., 2014; Marsal, 2016). To create long-term value, the conduct of governance must not only be a control mechanism between the owners and the board but a “two-way process of communication and interaction between the board, senior management and employees for achieving the desired organizational performance” (Ratnatunga & Alam, 2011, p. 352; see also Hiebl et al., 2014; Marsal, 2016). As a way of bringing together all the relevant aspects associated with an organization’s strategic process, CIMA and IFAC developed the “strategic scorecard”, identified as “a pragmatic means of addressing the strategic oversight gap” (CIMA/IFAC, 2004, p. 6). The strategic scorecard has been proposed to organizations to help them in the management of strategic governance as “there was no equivalent mechanism to the audit committee in the conformance dimension to ensure adequate oversight of the performance or business dimension” (CIMA/ IFAC, 2004, p. 6). The strategic scorecard is composed of four elements: strategic position; strategic options; strategic implementation; and strategic risks, linked to the key aspects of the strategic determination process, each requiring the use of information provided by MACS. This notion of a strategic scorecard aims to help boards to focus on key aspects for success and to evaluate specific strategic options, setting out milestones for strategy implementation and identifying strategic risks. MACS and Enterprise Risk Management A key approach to emerge from the Enterprise Governance framework, with implications for management accounting and control in organizations, consists of Enterprise Risk Management (ERM). CIMA and IFAC described it as a “practical framework” that seeks “to integrate the management and consideration of risk with the management of the business” to reconcile both “the assurance requirements of the board and external stakeholders”, as well as “the need to better integrate risk management in decision-making activity at all levels” (CIMA/IFAC, 2004, p. 7). Such developments convey the idea that risk management should not be confined to “finance’s silo view of value at risk and derivatives” or to “the accounting silo’s view of disclosure in financial reports” (Soin & Collier, 2013, p. 84). There exist at least three factors that explain the growing interest in risk assessment and management: “first, the increased interest in corporate governance and a focus by Boards of Directors on identifying, assessing,

Management accounting and control  125 treating and monitoring risks as well as evaluating the effectiveness of management controls to manage risk; second, a trend towards world-wide government regulation utilising risk-based regulatory approaches that focus on tighter internal control mechanisms … third, the media amplification of scandals” (Soin & Collier, 2013, p. 82). MACS have been depicted as a key component in the management of risks through the activity of measuring, reporting and analysing the “financial and non-financial impact of decisions”, which provides “a unique position to play a leadership role in establishing ERM systems that are truly ‘enterprise’ driven, not limited by functional silos, but that permeate decision-making throughout the organization” (Bento et al., 2018, p. 4). Further, Bhimani (2009; see also Hiebl, 2022; Lees, 2017; Slagmulder, 2017; Rana et al., 2019) has observed the interdependence between management accounting, risk management and corporate governance: “[i]t is inept to consider management control as being distinctly separate and independent from risk management or corporate governance concerns”. Accordingly, in most modern organizations, management accounting and control involve “placing boundaries on risk taking and organisational functioning by identifying acceptable variances from predefined parameters of action” (Bhimani, 2009, p. 4). In 1992, after issuing an “Internal Control – Integrated Framework” (ICF) in which risk assessment was recognized as an important aspect of corporate governance, the “Committee of Sponsoring Organizations” (COSO) proposed that compliance requirements should be extended and integrated with strategic performance management through ERM (COSO, 2004). In 2017, the ERM framework was revised and a new framework released (COSO, 2017) including “a more explicit identification and ‘weaving’ of corporate governance and culture and strategy setting within the ERM process” (Prewett & Terry, 2018, p. 17). The 2017 framework, “Enterprise Risk Management – Integrating with Strategy and Performance”, sought to increase ERM responsibility to the top levels of management and in so doing created “a corporate-wide culture embedded in and informed by ERM” (Prewett & Terry, 2018, p. 20). Risk management and internal control, described as “two sides of the same coin” in the ERM frameworks, are claimed to hold important implications for MACS (Bento et al., 2018, p. 6). On the first side, management accountants can provide relevant information that allows potential identification of internal and external factors that may trigger risks (for example, financial, compliance, technology, economical and reputation – see Lundqvist, 2014) and opportunities. On the other side, they can also evaluate the impact of risks (risk management) (Hiebl, 2022; Lees, 2017; Palermo, 2017; Rana et al., 2019; see also Bracci et al., 2022 for the public sector). Accordingly, MACS can assist in the process of managing processes and activities that an organization needs to perform for its risk exposure to become aligned with the risk levels which are regarded as acceptable (internal control). Management accountants’ activities related to risk and internal control entail elements of prevention (avoiding problems before they occur), monitoring (ensuring compliance with requirements and standards), internal risk treatment (correcting problems when internal events have already increased risk exposure) and external risk treatment (mitigating profit losses due to external problems) (Bento et al., 2018). Yet, as Bhimani (2009) believed, the associations between risk management and control as part of the management accounting go further. Organizations should focus not only on operationalizing their MACS by deploying managerial controls that are seen as effective but also on signalling the adequacy of MACS by making their deployment transparent. The communication of these mechanisms contributes to providing organizations with legitimacy, as risk management has “become a cornerstone of good governance” (Soin & Collier, 2013,

126  Handbook of accounting, accountability and governance p. 83). However, this overemphasis on risk management transparency “may induce firms to create bureaucratic trails to prove sound corporate governance … making the production of evidence more important than managing real risk” (Caldarelli et al., 2016, p. 4; see also Stein et al., 2019).

EDUCATIONAL CHALLENGES POSED TO MANAGEMENT ACCOUNTANTS Over the last two decades, the development of a more encompassing and integrated perspective on the concept of governance and the role of management accounting in risk management, accountability mechanisms and strategic governance demands a new approach to the way internal organizational practices are framed and the professional skills required by professional bodies (Bhimani, 2009; CGMA, 2017, 2019; Eldenburg et al., 2020; Ratnatunga & Alam, 2011; Seal, 2006; Smith, 2015). The strategic view of the activity of management accounting, together with an emphasis on ethics and risk management, have become regarded as essential aspects of the educational background of management accountants (Butler, 2016; CGMA, 2017, 2019; IFAC, 2019; Eldenburg et al., 2020). While professional management accounting bodies and scholars agree that management accountants need to engage further with risk management and strategic governance, extant research has at times been critical of the effective role that management accountants play in these activities (cf. Collier et al., 2007; Seal, 2006; Soin & Collier, 2013). Collier et al. (2007), for instance, found that management accountants were marginalized in risk management because they were perceived as practising narrow skills, lacking broader perspectives on organizational risk (see also Palermo, 2017; Tillema et al., 2022). This view was reinforced by a 2017 survey of IFAC member organizations which recognized the gap in accountants’ skills as risk management is not always seen as a core competency of these professionals (IFAC, 2019). Further, Power (2004, p. 14) stressed that “secondary risks to an organization’s reputation are becoming as significant as the primary risks for which experts have knowledge and training”. Awareness of “the risks arising from the actions of people, systems and processes and a broader appreciation of the external risks facing organisations” are required in management accountants’ activity (Soin & Collier, 2013, p. 83; see also CGMA, 2019). Bento et al. (2018) proposed an expanded role for management accountants and a new paradigm for management accounting and control to enhance the profession’s strategic perspective as well as to overcome the “myopic view of planning and control, focused on measuring past performance and overlooking more forward-looking measurements of organizational sustainability and risk” (Bento et al., 2018, p. 4). That the prominence of topics such as corporate reporting and financial disclosure in the educational background of management accountants has been challenged is evident in shifts in the syllabi of the specialist professional bodies of management accountants over the past two decades or so (Ndiweni & Verhoeven, 2014; CGMA, 2019). Changes in the notion of accountability in terms of corporate governance regulations, embodying a new perspective on how the interests of stakeholders can be served, are the catalyst. “The CIMA approach seems to advocate a sort of ‘reverse takeover’ of corporate reporting by management accounting” (Seal, 2006, p. 403). “Financial accounting information, though essential, does not provide a sufficient knowledge base for making decisions about the future”, as “its focus is on past

Management accounting and control  127 activity” (CGMA, 2017, p. 6), during which time “the business environment has become more volatile, less predictable, more globalized and riskier” (Ratnatunga & Alam, 2011, p. 343). Therefore, if management accountants are to play a key role in strategic governance processes, they will need to develop a broader strategic perspective on organizations and their business environment (Eldenburg et al., 2020). CIMA and AICPA, represented by the Chartered Global Management Accountants (CGMA), state that management accounting lies “at the heart of an organisation, at the crossroads between finance and management”, and, as such, “it is the discipline that should be used to run the organisation, to control and improve performance” (CGMA, 2017, p. 8). Risk management and governance can no longer “be seen as a ‘box ticking’ exercise that does not impact on day-to-day organizational processes but merely represents a need for the external display of internal coherence” (Soin & Collier, 2013, p. 83). In consequence, “directors who have oversight of their organizations’ performance, and CEOs and their senior management teams who are responsible for leading organisations to sustainable success”, as well as “CFOs, senior finance professionals and non-executive directors with strategic and financial oversight” (CGMA, 2017, p. 7), need to obtain understandable, relevant and thorough data for quality decision-making to create and preserve value as generated by MACS. Indeed, “successful organisations have effective management accounting functions” (CGMA, 2017, p. 4). Acquiring these data generated by MACS requires higher-skilled management accountants able in a timely fashion to provide decision-makers with a wide spectrum of financial and non-financial information. The CGMA (2017, pp. 25–27) described the areas about which management accountants should be able to communicate information as follows: (i) cost transformation and management; (ii) external reporting of the organization’s financial and non-financial performance, business model, risks and strategy; (iii) financial strategy; (iv) internal control and the definition/operationalization of policies, systems, processes and procedures for managing risks to value generation and preservation; (v) investment appraisal; (vi) management and budgetary control; (vii) price, discount and product decisions; (viii) project management; (ix) regulatory adherence and compliance; (x) resource management; (xi) risk management; (xii) strategic tax management; and (xiii) treasury and cash management. The new demands that management accountants need to be able to adequately address, according to the CGMA (2017, 2019), equate with the work of those researchers who found evidence of the changing role of management accountants and of the emergence of “hybrid accountants” in organizations (see, for instance, Baldvinsdottir et al., 2010; Burns & Baldvinsdottir, 2005; Karlsson et al., 2019). MACS as an Instrument of “Socialization” of the Board The literature on management accounting approaches to corporate governance highlights how routines, such as budgeting and performance measurement, are powerful devices to control subordinates. In this perspective, it can be argued that MACS “offer a set of practices that could help to institutionalize the board” (Seal, 2006, p. 402; see also Marsal, 2016). In fact, strategic governance processes combined with pressure on organizations to communicate externally the effectiveness of their management actions and cost containment efforts can represent an opportunity for management accountants to socialize the board (Marsal, 2016; Ratnatunga & Alam, 2011). Good corporate governance requires that appropriate management accounting and control are embedded in organizational practices (Huynh, 2015). However,

128  Handbook of accounting, accountability and governance routinizing the decisions of corporate strategy deliberations can collide with the entrepreneurial spirit of directors (Ratnatunga & Alam, 2011) “because an over-emphasis on control and monitoring can have a negative impact on board effectiveness” (Fletcher & Ridley-Duff, 2018, p. 314). Thus, “although the CEO narrative may sit cosily with some aspects of management accounting routine such as budgeting and product costing, it may be in conflict with attempts to routinize (and thus de-mythologize) the production of corporate strategy” (Seal, 2006, p. 395). In response, directors may resist if they perceive MACS as limiting their role or they may selectively adopt MACS that enable them to maintain organizational control and power (cf. Fletcher & Ridley-Duff, 2018). The demand for a focus on the integrity of information and belief in the “multiple roles of management accounting”, including the production of rigorous and relevant information, have been accompanied by expectations of a “more positive role for non-executive directors” related to strategic governance (Seal, 2006, p. 405). MACS can provide non-executive directors with both financial and non-financial information with which they can “assess risk, check on strategy and monitor the behaviour of executive board members” (Seal, 2006, p. 404). Nonetheless “an emphasis on the unique character of the CEO implies that practices such as SMA [strategic management accounting] will be resisted because they seem designed to diminish, or at least commodify, the role of the CEO” (Seal, 2006, p. 404). “As agents with delegated authority, senior managers selectively adopt some management accounting routines which apparently offer them organizational control but reject other routines which seem to threaten their personal power and esteem” (Seal, 2006, p. 405). An important strand of literature developed from a Foucauldian perspective views management accounting and control as a governmental device that seeks to subordinate managers and workers through MACS embeddedness in organization routines (Alawattage & Wickramasinghe, 2021). Macintosh and Quattrone (2010, p. 281) posit that “MACS of all kinds become a way to construct, embed, and maintain order”, representing “a form of governmental control, a way in which through various financial and statistical information systems, order is brought into what would otherwise be a chaotic system”. The disciplinary power of management accounting and control is exerted by key performance indicators (KPIs) or metrics and other routinized practices that produce financial knowledge, permitting constant surveillance through the visibility that these practices create (cf. Sargiacomo & Walker, 2022). According to Roberts (2001), MACS have the potential to provide visibility through “representations of organizational activity in the form of departmental budgets and cost and profit centres”, hence “organiz[ing] the content and process of routine accountability through comparisons of individual performance with budget, one department with another, and one accounting period with another” (Roberts, 2001, p. 1553). In doing so, knowledge is produced, enabling those in hierarchical positions to exert their power over subordinates through decisions (cf. Macintosh & Quattrone, 2010, p. 281). In Foucauldian accounts, however, the governmentality of top managers is too often either exaggerated or neglected: Seal draws on the “Institutional Theory of Agency” to argue that “if management accounting is to play a role in improving corporate governance, then the establishment and reproduction of appropriate institutionalized practices and routines is crucial” (Seal, 2006, p. 402; see also Ter Bogt & Scapens, 2019).

Management accounting and control  129

THE ROLE OF MACS IN CORPORATE GOVERNANCE IN OTHER SETTINGS MACS are implicated in corporate governance and accountability mechanisms of organizations operating in various environments. Traditional accounting research in corporate governance focusing on financial reporting issues has given way to a broadened governance and management accounting and control encompassing a new range of organizations. This section covers some of these new settings, including CSR, hybrid organizations, public sector entities and social institutions. Management Accounting and Control and Corporate Social Responsibility An important area in which corporate governance and accountability research has expanded in the process of its diversification from a traditional shareholder-centric approach is the area of CSR (Larrinaga, 2021; see also Chapter 8 of this Handbook). The two King Reports (1994, 2002), produced in South Africa, as well as reports issued by the OECD and the Commonwealth Association on Corporate Governance (CACG), stressed the need for organizations to embrace a broader conception of to whom, and how, they should act responsibly. A consequence is that stakeholder accountability and social responsibility have become recognized as key aspects for business success and the sustainable development of organizations and for society (Brennan & Solomon, 2008; CIMA, 2013). The consideration of environmental and social concerns in corporate governance and accountability and its relationship with MACS is an issue which has been accorded considerable relevance (CIMA, 2013; Eldenburg et al., 2020; Gibassier, 2021; Sundin & Brown, 2017; Kaplan and McMillan, 2021). Yet, research on the interface of CSR and management accounting and control is still in its early days, lacking substantial understanding of the involvement of MACS in the effective implementation of CSR activities (Laguir et al., 2019; of the few examples, see Bhuiyan et al., 2022). It has been argued that management accounting and control is a powerful instrument that can be used to “operationalise strategic agendas related to CSR” (CIMA, 2013, p. 1). Prevailing literature on the area indicates that in circumstances where CSR concerns are embedded in the organization’s management accounting and control practices, MACS affords the possibility of aligning “the behaviour of organisational participants with strategic objectives concerning sustainability” (CIMA, 2013, p. 1; see also Laine, 2008; Eldenburg et al., 2020; Sundin & Brown, 2017). MACS are composed of mechanisms related to the nature of control systems (belief systems and boundary systems) and the way they are used (diagnostic and interactive) (Simon, 1995; Malmi & Brown, 2008; see also Palermo, 2017), through which individuals’ behaviour can be directed towards the achievement of objectives of social and environmental sustainability. Porter and Kramer (2006) claim that successful organizations are those that are capable of developing both responsive (that is, meeting stakeholders’ requirements) and strategic (that is, leveraging their competitive advantages) CSR practices, entailing for each of these categories different uses of MACS (Simon, 1995). While responsive CSR implementation involves mainly the adoption of boundary and diagnostic uses of MACS, strategic CSR is more dependent on the use of the belief system and interactive uses of MACS (CIMA, 2013). Accordingly, boundary systems in CSR have the potential to allow organizations to identify and monitor social and environmental risks, drawing boundaries for organizational partici-

130  Handbook of accounting, accountability and governance pants to secure firms’ licence to operate. In so doing they can help to prevent individuals from engaging in actions that expose the organization to social and environmental risks (cf. CIMA, 2013, pp. 2, 4). Alternatively, diagnostic systems are useful to identify and develop KPIs related to the management of environmental and social resources (for example, energy usage, carbon emissions, R&D expenditures, employee satisfaction and expenditures in training). When such diagnostic systems are incorporated into performance measurement and budgetary systems, they allow actual performance to be monitored and regularly compared against targets (cf. CIMA, 2013, pp. 2, 4). On using these systems, it is expected that the behaviour of organizational members will be aligned with stakeholders’ expectations of good social and environmental practices. Furthermore, interactive systems increasingly relate to discussions and debates about the organization’s CSR practices and objectives, involving the exchange of strategic information across the organization and among its stakeholders so that the organization’s competitive position is enhanced. Strategic CSR is further pursued when MACS through belief systems define CSR values and principles for organization members that, after being incorporated into management accounting practices, allow the exploration of opportunities and innovations of benefit to both society and the organization (CIMA, 2013, pp. 3, 4). Cumulatively, different uses of MACS afford the possibility for organizations to operationalize CSR activities, with the commitment of aligning individuals’ behaviour with stakeholders’ expectations of environmental and social welfare (CIMA, 2013; Laine, 2008; Sundin & Brown, 2017). There has been a movement since the 2000s towards environmental cost and sustainability reporting in response to expectations that organizations act in environmentally and socially responsible ways. As a result, four categories of environmental costs have been identified and proposed to be presented in an “environmental cost report” (Drury & Tayles, 2021; Eldenburg et al., 2020). These categories are thus: (i) environmental prevention costs (the costs of activities undertaken to prevent the production of waste that could cause damage to the environment); (ii) detection (costs which are incurred to ensure that a firm’s activities, products and process conform to regulatory laws and voluntary standards); (iii) environmental internal failure costs (costs supported from performing activities that have produced contaminants and waste that have not been discharged into the environment); and (iv) environmental external failure costs (incurred in activities performed after discharging waste into the environment). According to Sundin and Brown (2017), much of the reporting on environmental performance, of which the environmental cost report is a part, has been ceremonial not only because the “motivation for producing sustainability reports is to gain legitimacy rather than to enable tangible environment actions” but also because decisions “aimed at reducing environmental impact to be effective … may require trade-offs leading to reduced economic performance and tension within the organization” (Sundin & Brown, 2017, p. 620). Thus, although a large amount of sustainability reporting has increasingly been produced, there are important signals that this practice might be decoupled from the organization’s CSR activities. The increase of accountability of organizations for a broader set of environmental issues through external reporting to stakeholders does not translate the motivations and involvement of managers and employees into effective environmental change (Sundin & Brown, 2017). Unless organizations can bind individuals’ behaviour to environmental objectives, internal CSR practices will be detached from (financial and non-financial) environmental reporting. Binding mechanisms are required to create a “relationship where the agents’ interests are aligned to those of the principal” (Sundin & Brown, 2017, p. 621). While MACS offer the

Management accounting and control  131 possibility to bind employee behaviour to organizational objectives, thus integrating environmental activities with organizational practices, a “control package approach” is required. Previous research has evidenced that individual controls do not work alone and that multiple MACS work simultaneously in a package form (Malmi & Brown, 2008; Sundin & Brown, 2017). Consequently, systems to align behaviour other than environmental performance measurement that draw on a range of MACS, “such as administrative and governance mechanisms, planning mechanisms, vision statements and other cultural controls, along with well-designed incentive systems” (Sundin & Brown, 2017, p. 622), should be used to promote behaviour alignment. In tandem, this assemblage of measures can provide the framework for a governmental apparatus, in which the intent that Foucault saw in the emergence of a new kind of combination of governance and mentality is fused. In such situations of governmentality organization, subjects become objects for self-scrutiny in terms of their positive desire to become aligned with organizational objectives, as active governors of their selves. Notwithstanding that accounting academia globally is progressively becoming more engaged in broadening traditional research on corporate governance, by extending research to environmental and social issues, there are still few major studies at the interface between MACS, CSR and accountability, particularly those drawing on a wider range of theoretical approaches than those that stress the prime interests of shareholders. Developing research linking management accounting and control to CSR activities is paramount in illuminating an understanding of organizational strategies and their effectiveness for managing the increasing social and environmental concerns pervading contemporary organizational life. MACS in the Governance of Hybrid Organizations Another developing area has started to attract attention, which concerns the accountability and governance mechanisms of hybrid organizations (see also Chapter 14 of this Handbook). This follows criticism of the dominance of agency theory and the excessive focus of accounting research on corporate governance in listed firms. Hybrid organizations or hybrids represent an increasingly pervasive phenomenon in societies facing many challenges and difficulties in terms of processes of governance, accountability, decision-making and organization (Lusiani et al., 2019), which is, at least in part, because there are multiple demands and prescriptions from different and often conflicting institutional logics that need to be addressed (Battilana et al., 2017; Greenwood et al., 2011; Grossi et al., 2022; Pache & Santos, 2013). Hybrid organizations encounter unique governance challenges regarding their accountability as they are expected to combine not only potentially conflicting goals (for example, social and financial) but also potentially divergent stakeholder interests. Therefore, there are issues of what is accountable (economic and financial dimension; the mission-related dimension, essential in evaluating the performance of non-profit organizations; and the social-related dimension), as well as to whom accountability is owed (for example, shareholders, donors, funders, beneficiaries, workers, volunteers, state) (Costa & Andreaus, 2020). Hybrids often rely on a multiplicity of funding arrangements (for example, private and public financing, donations) and different governing modes (Grossi et al., 2020; Mair et al., 2015; Vakkuri et al., 2021); hence, they are particularly exposed to tensions and institutional complexity in governance and accountability processes. The major challenge for governance in these types of settings consists of aligning and prioritizing multiple interests (Ebrahim et al., 2014). By offering a wide set of control mechanisms (boundary, diagnostic, belief and

132  Handbook of accounting, accountability and governance interactive systems of control), management accounting and control can play a relevant role in supporting hybrids in the alignment of interests (Macintosh & Quattrone, 2010; Simon, 1995). In 2009 in Italy, for example, where a governmental programme of housing reconstruction was developed as a response to a major earthquake, the MACS were designed to combine distinct institutional logics and interests so that the intertwining of technologies drawn from engineering, architecture and accounting could be addressed (Sargiacomo & Walker, 2022). The result was the adoption of performance management systems (PMS) that translated a government programme into practices enabling governance. Hybrids require that complex, multi-directional and multi-stakeholder performance measurement systems are designed. Doing this encompasses difficulties not just in their effective implementation but also in data gathering and updating, explaining why the performance indicators adopted in these settings are often of a medium intensity (Costa & Andreaus, 2020; Grossi et al., 2017). In the management accounting and control literature, the coexistence of multiple organizational goals has been associated with ambiguity in existing PMS (Costa & Andreaus, 2020; Grossi et al., 2017, 2020). Within a logic where the goal is to maximize financial returns, PMS will be financial, so that organizations’ economic and financial performance can be measured. If the aim is to fulfil a socially orientated mission, different controls will need to be established to evaluate social outcomes. In cases where hybrids do not rely on prioritizing a single institutional logic and choose to combine and balance the prescriptions and interests of multiple stakeholders, the metrics for evaluating the performance of hybrids have been shown to often lack unambiguous performance criteria (De Waele & Polzer, 2021; Dooren, 2017). In hybrids, the intricate interrelationships between management accounting and control, accountability and governance are intensified; thus, more research is needed to analyse the role of MACS accommodating the growing complexity of hybrids. MACS and the Governance of Public Sector Organizations With New Public Management (NPM) and the rise of the neoliberal state, the public sector has become pervaded by business-orientated practices, quantification and performance management, with an underlying rationale pursuing greater economy, efficiency and effectiveness (Boden et al., 1998). The “strategy of amalgamating business practices into government operations” (Vakkuri et al., 2021, p. 247) has led to substantial changes in aspects of accountability and governance, namely “a notable advance in cost awareness and a switch from management of policy to management of resources” (Shaoul et al., 2012, p. 217). Indeed, the import of practices and logics from the private sector constituted “an array of globalised environmental disturbances that have directly impacted … design archetypes including governance, accountability, decision-making and communication” (Parker, 2002, p. 603; Ferri et al., 2021; see also Carnegie & Wolnizer, 1995, 1996; and, more recently, Carnegie & Kudo, 2022). To appraise the planning, execution and reviewing of the strategy in the public sector, strategic performance measures have been used. As articulated by the CGMA, “management accounting as a discipline is uniquely well placed to oversee this performance management cycle in organisations” (CGMA, 2017, p. 20). However, as Grossi et al. (2017, p. 382) argue, in these organizations the “link between PMS and organizational strategies will be quite diffuse because both concepts will only be loosely coupled”. In public organizations there are multiple and sometimes conflicting “value constellations” (Vakkuri et al., 2021, p. 252). For instance, in public–private partnerships, the public actor privileges transparency, which can

Management accounting and control  133 conflict with the core value of confidentiality of the private partner pursuing a competitive advantage (Shaoul et al., 2012; Stafford & Stapleton, 2022). This inconsistency of values is reflected in the ambiguity of the performance measurement systems, revealing a greater degree of complexity in the public sector compared to the private sector (Rajala et al., 2020). In this context, MACS face increasing challenges as these organizations are under more pressure to demonstrate their efficiency while delivering public value (Grossi et al., 2020). Public value occurs when the services provided improve people’s lives, but “[p]ublic value and its outcomes are complex and challenged. Furthermore, they involve trade-offs not only good and bad but also between competing strategic priorities” (Höglund et al., 2021, p. 1611). Moreover, most of the time, there is no market-price information on services provided by public organizations, making their performance difficult to evaluate. In addition to dealing with multiple competing values and strategic priorities, MACS must accommodate the pillars of public administration: the often described “three Es” (efficiency, effectiveness and economy) and, increasingly, the fourth E of social “equity”. These different performance dimensions influence the design of performance measurement systems which assume a multidimensional and complex nature to deal with the ambiguities, synergies and frictions that arise from combining these pillars (De Waele & Polzer, 2021). Granting accountability, transparency and legitimacy in public organizations is not restricted to regulatory compliance. NPM reforms sought to change procedural accountability towards a performance accountability, “which became the fashion of the day” (Shaoul et al., 2012, p. 216). The main objective of public accountability is democratic control, so that citizens can monitor the performance of public organizations by assessing satisfaction of “collective aspirations expressed through the political process” (Höglund et al., 2021, p. 1610). Stakeholders typically do not accept a monologue from public organizations; they want to be involved in decisions that will very often affect their lives, whether environmental or social in nature or relating to sustainability. Communities, despite being relevant, may not be the most powerful stakeholder, being limited in their ability to influence organizations’ decisions (Kaur & Lodhia, 2018). In addition to downward accountability to citizens, public organizations face an upward accountability through public sector hierarchies towards those which provide legitimacy and support and dispose the inherent resources that enable public organizations to function (Höglund et al., 2021). Constituencies of public organizations include political entities, regulating authorities, auditors and professional associations, business and media (Höglund et al., 2021; Shaoul et al., 2012). Public value is interpreted differently by each of these stakeholders, representing a strategic challenge to public managers (Höglund et al., 2021). Therefore, “[a]ccountability in the public sector is described as a heterogeneous, complex, chameleon-like and multifaced concept encompassing several dimensions” (Almquist et al., 2013, p. 480). Furthermore, as Pellinen et al. (2018, p. 627) point out, this increased complexity of public organizations erodes accountability and promotes sub-optimization as it allows avoidance of responsibility (that is, “who is accountable to whom and for what”). Although one of the banners of NPM is individual responsibility for resources, rather than collective management (Shaoul et al., 2012), public sector managers need to deal with growing governance problems that limit their ability to comply with multiple accountabilities and act effectively (Pellinen et al., 2018). The nature of the accountability of these hybrid public organizations also impacts and indeed changes the power relations between managers, technical experts and other stakeholders (for example, academics and managers in universities or doctors and managers in

134  Handbook of accounting, accountability and governance hospitals) (Grossi et al., 2020). Therefore, in public organizations, besides dealing with “conflicting interests between an organisation and its stakeholders, heterogeneous expectations of stakeholders, difficulty in negotiating a consensus and the impossibility of direct dialogue with certain stakeholders such as future generations” (Kaur & Lodhia, 2018, p. 340), governance procedures and MACS must also incorporate conflicting needs, interests and power relations among the affected actors (for example, Campanale et al., 2021; Ferry & Ahrens, 2017; Lusiani et al., 2019). As Vakkuri et al. (2021, p. 252) observe, when “measuring the performance of hybrid public organizations, we end up with ‘a little bit of everything’”, which is a recipe for ambiguity. Where this state of play transpires, this “may be both a blessing and a curse for accounting, accountability and management of such organizations” (Vakkuri et al., 2021, p. 252). MACS in the Governance of Social Institutions As accounting research in corporate governance has primarily addressed the corporate sector, until relatively recently the study of how social institutions are directed and controlled did not attract scholars’ attention (Ebrahim et al., 2014; Hyndman & McDonnell, 2009). Parker’s (2007, 2018) papers are amongst the first studies to focus on the context of governance of not-for-profit organizations. Further, Hyndman and McDonnell’s (2009) study opened the way for new directions in research in the arena, highlighting the importance of “good” governance in charities. Furthermore, interest in these organizations led scholars to question the focus of corporate governance studies during the period following the publication of the Cadbury Report (1992) (Brennan & Solomon, 2008). Governance “is still a relatively recent topic in historical terms” (Lai et al., 2019, p. 328). Yet governance issues are not new; they “have arisen for as long as there has been separation of ownership and control in business” (Brennan & Solomon, 2008, p. 889). It is claimed that “historical research in this area has a great potential, not just for the accounting history research agenda, but for governance research as well” (Lai et al., 2019, p. 328; see also Chapter 2 of this Handbook). Delving into the past will help scholars embrace a less “myopic” view of governance issues (Brennan & Solomon, 2008). Unveiling the interplay between MACS and governance in the past is also of great importance because by knowing what happened historically, one can better understand the present and possible futures (Brennan & Solomon, 2008; Lai et al., 2019) in terms of the contribution of management accounting and control to governance and accountability mechanisms. Charities, religious organizations, mutual societies, professional bodies and family business firms are among the settings in which the relationship between MACS and corporate governance requires further analysis drawing on a historical perspective (Ebrahim et al., 2014; Hyndman & McDonnell, 2009). An important study on how management accounting and control was used to support governance and accountability in the past is the research of Quattrone, firstly with Macintosh (Macintosh & Quattrone, 2010) and then in Quattrone (2015). In the first study, the two authors describe the “complex machinery of controls” (Macintosh & Quattrone, 2010, p. 10) that the Society of Jesus developed in the 16th century. The principles governing the Society were outlined in the General Constitutions, in which a system of “self-discipline” and “self-control” to be reached through “Spiritual Exercises” was envisaged (see also Silva & Quattrone, 2021). Although the Society of Jesus was organized in a strong hierarchical way

Management accounting and control  135 with the appointment by the General of the Society, at the top of the hierarchy, of Assistances (countries; for example, Italy) and Provinces (geographical territories; for example, Sicily) to which the Jesuit Colleges and Residences belonged, the Order was marked by a great level of flexibility and a capacity for adaptation. The balance between control and flexibility was to be achieved through accounting and accountability mechanisms promoted by the various activities undertaken by the Society. As the Society travelled and colonized, its routines of governance were translated into new contexts as modes of organizational control. To ensure that the directives received from the Pope were implemented in each of the Colleges, the Provincial in charge of each Province (or his representative) made periodical visits to the Colleges, checking the state of affairs through the accounting books. The case of the Society of Jesus indicates that management control mechanisms were in place for accountability and governance purposes as early as the 16th century (Macintosh & Quattrone, 2010, p. 13). With the rapid growth of the Society (in 1615 there were more than 13,000 members, 370 Colleges and 120 Residences), there was a need to increase the instruments of control and governance of the Order. The Catologi Triennales were among the devices developed to report not only Society members’ personal details (such as name, age, role within the order, individuals’ attitudes and characters, etc.) but also economic information on the activities undertaken by each College. Through accounting, exhaustive processes of accumulation and consolidation of information took place, allowing the General to supervise the Society from a distance (Macintosh & Quattrone, 2010; Quattrone, 2015). However, the MACS in play exceeded the technical aspects; there were controls operating through the practices of “Spiritual Exercises”, hence allowing the combination of control and flexibility in an early form of governmentality under the surveillance of the order and of God (cf. Silva & Quattrone, 2021). The complex system of controls in play at the Society of Jesus provides a rich source of evidence on the variety of roles that MACS can play in ensuring accountability and governance processes in organizations and sectors other than those traditionally researched through an agency theory perspective. Although accounting scholars are now turning their attention to understanding the mechanisms of accountability and governance in a wider variety of settings and contexts, there is still little knowledge on the role of MACS and how they operate in charities, cooperatives, churches and other not-for-profit organizations (Ebrahim et al., 2014; Hyndman & McDonnell, 2009). Further research is needed to explore the multifaceted relationship between management accounting, accountability and governance in these institutions.

CONCLUSION Previous conceptions of corporate governance focused on agency problems, which implied the need for managers to be controlled, to reconcile the conflicting aims and objectives of corporate management and its principals, the shareholders (Brennan & Solomon, 2008; Ratnatunga & Alam, 2011). This narrow view of corporate governance has been extended. Regarding accountability to whom, shareholders gave way to a stakeholder-orientated focus; accountability not only encompassed financial information required by corporate management but was also complemented by non-financial information, broadening accounting’s technical dimensions, including within the field of management accounting, to encompass social and moral practice (Carnegie et al., 2021a, 2021b). Indeed, these authors define accounting as “a technical, social and moral practice concerned with the sustainable utilisation of resources

136  Handbook of accounting, accountability and governance and proper accountability to stakeholders to enable the flourishing of organisations, people and nature” (Carnegie et al., 2021a, p. 69). Including stakeholders’ interests in a company’s management was considered vital for organizations’ long-term profitability. A challenge was constituted “for the traditional corporate governance studies that only prioritised shareholders’ interests, as well as an opportunity to extend research on governance to other settings and organisations … where shareholders are less important or even absent” (Lai et al., 2019, p. 326). New organizations, such as non-profit or hybrid organizations, have challenged the boundaries of management accounting, control and governance, whose interdependencies need to accommodate the growing diversity and complexity of these organizations. Besides an emphasis on ensuring that corporate management “follows the script” (Macintosh & Quattrone, 2010, p. 5), MACS also provide information for risk assessment, aligning organization objectives and strategies to the creation of value (Eldenburg et al., 2020). The new dimension of corporate governance gained space after organizations realized that complying with standards and following practices of financial accounting and disclosure were insufficient to create value for stakeholders. Conformance joined performance and simultaneously financial accounting joined MACS. Managers cannot be focused only on short-term perspectives; therefore, MACS must be embedded in corporate governance routines, supporting the accomplishment of long-term strategic goals. Intrinsic to this strategy process is risk management. MACS also play a key role in integrating risk management throughout the decision-making process, while also ensuring internal control. MACS signal the quality of management controls, granting legitimacy to organizations. Hence, MACS, accountability and corporate governance mechanisms are interdependent; consequently, their operationalization must be transparent so as to gauge their adequacy. Strategic governance processes combined with pressure on organizations to communicate the effectiveness of their MACS and their governance systems externally represent an opportunity for management accountants to socialize the board. MACS allow for the routinization of corporate strategy but, in consequence, can induce corporate managers’ resistance. Protecting their entrepreneurial spirit, role and power may induce directors to selectively adopt MACS that enable them to maintain their status. Furthermore, it is argued that MACS can provide non-executive directors with relevant information for monitoring executive directors, thus according them a much more relevant role in organization strategic governance (Fletcher & Ridley-Duff, 2018; Seal, 2006). Therefore, MACS have the potential to socialize and change power relations among board members, while also endowing management accountants with a much more interventionist and influential role in organization management. The new definition of accounting (Carnegie et al., 2021a, 2021b), especially this broader perspective of MACS, implies framing new practices for organizations. Doing so represents an educational challenge for management accountants striving to constitute themselves as a meaningful part of organizations’ governance. New skills are required. We are currently witnessing a growing debate in accounting academia on the new roles of accounting in society, for which an encompassing view of MACS and corporate governance is a mirror of a new reality being born, leading to the need to redefine the role of management accountants in organizations. The new demands on management accountants imply they become “hybrid accountants” in organizations. The question that then arises is: should our public universities meet this challenge by providing hybrid academic formation, and what elements of knowledge should constitute this hybridity? Raising such questions signals the transformation of management

Management accounting and control  137 accounting from a largely functional and technical discipline to one much more akin to that of the social sciences, such as sociologically orientated management and organization studies. Hybridization has been extended to organizational forms, processes, practices and expertise. Organizations’ boundaries have, therefore, been expanded, becoming increasingly complex in reacting differently to uncertainty. Hybrid organizations face a unique challenge regarding the tensions and institutional complexity in accountability and complex governance processes. Hence, more research is needed to analyse the role of MACS accommodating the complexity of hybrids. Within the broad spectrum of complex organizations, the public sector holds a prominent and essential position. In terms of governance, public organizations encompass a variety of hybrid governance models. Strategic processes also cover additional dimensions, such as regulatory compliance, political control, community expectations and pressures to demonstrate their efficiency while delivering public value. All these features must be reflected in MACS and governance arrangements, incorporating conflicting needs, interests and power relations. Public sector complexity, together with the scarcity of literature on PMS in hybrid public organizations (De Waele & Polzer, 2021; Rajala et al., 2020), make fertile ground for future research. Moreover, within these settings, management accounting information is sometimes constrained by having a “symbolic or ‘political’ use” (Grossi et al., 2017, p. 381). Therefore, it remains actual the claim of Shaoul et al.’s (2012, p. 215) that “the context of hybrid organisations offers a challenging arena in which to develop new approaches to corporate governance research because the realities of the new public sector have exposed an accountability gap between accountability doctrine, conventions and reality and a need for hybrid models of accountability” (see also Höglund et al., 2021; Vakkuri et al., 2021). Besides the private and public sectors, new types of organizations have emerged and presently prevail. Social institutions require academic attention to their specific characteristics that constrain the way they are directed and controlled. The breadth of analysis in this area is vast but there is still room for further research on the relationship between MACS, accountability and governance in these organizations. The last research avenue we propose concerns one of the most prominent themes in the media and in our lives presently: sustainability. The awareness of the impacts of climate change on our planet, which is becoming increasingly known as a “climate crisis”, has made demands ever more insistent for all organizations to become more environmentally focused (Larrinaga, 2021). In turn, organizations have realized that this issue cannot be ignored, not only because it has the potential to affect their image but also because they recognize that adopting a strategy that encompasses CSR enhances the probability of achieving high financial results. These environmental issues have induced organizations to link their environmental strategy to concrete performance measures. MACS support the operationalization of responsive and strategic CSR, meeting the demands of stakeholders that require the development of corporate governance mechanisms to ensure the effective implementation of CSR policies. In summary, we hope to have addressed the challenge posed to us by our editors who, in the invitation they sent, recognized that management accounting textbooks need to be rewritten or substantially revised. Indeed, the times are “a-changing” and this chapter intends to contribute to a wider understanding of the changes addressed and to help to facilitate other changes of the genre in future, indeed literally from tomorrow, thereby opening doors to several lines of inquiry into the links between MACS, accountability and corporate governance.

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ACKNOWLEDGEMENTS The authors are very grateful to the two reviewers of this chapter for their detailed revision and feedback, as well as to the book’s editors for their insightful comments and suggestions.

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7. Mechanisms of accountability and governance: audit, assurance, and internal control Nieves Carrera, Marco Trombetta, and Amanda Wilford

OVERVIEW We adopt a historical perspective to understand the current landscape of accountability and governance mechanisms. In adopting assurance as the umbrella concept for audit and internal control, we explore how the notion of accountability (“accountability for what”) and the beneficiaries of corporate accountability (“accountability to whom”) have changed over time, leading to the re-definition of “old” mechanisms of accountability and governance and the development of new mechanisms (“accountability through”). We then provide an overview of recent studies examining how these mechanisms contribute to accountability and governance. We show that the recent trend of combining traditional financial reporting with other reporting activities in an integrated report is questioning the traditional boundaries among the three mechanisms, challenging the attempts to compartmentalize them (“combined assurance”). The chapter concludes by proposing a taxonomy as a tool to help conceptually organize the recent debates on assurance, audit, and internal control practices.

INTRODUCTION It has been argued that the concept of accountability cannot claim relevance unless it is combined with some form of regular reporting that is externally validated (Normanton, 1966; Bird, 1973). The relationship between accountability and corporate governance has been analysed in Chapter 1 of this Handbook by Carnegie and Napier. Regardless of how we interpret this relationship, the capacity of corporate governance to have an impact on real outcomes depends on how it is implemented through processes and practices. Consequently, any attempt to give a comprehensive coverage of the issues related to accountability, governance, and its ramifications would not be complete without including an examination of those mechanisms through which their external validity is supported: audit, assurance, and internal control. The purpose of this chapter is to explore how audit, assurance, and internal control contribute to accountability and governance. An intuitive and common view associates audit with the certification of financial information, assurance with the certification of non-financial information, and internal control with the internal measures put in place to guarantee that managers act according to existing codes of practice. If these mechanisms function well, “proper” accountability and governance are “guaranteed”. As with any simplification, this viewpoint has its limitations and can be misleading and deceiving. Our purpose is to go beyond this conveniently simplified view and explore how a deeper understanding of the link between these mechanisms of accountability and governance may help us to understand their historical development and envisage some possible future development. We show how the progressive 144

Audit, assurance, and internal control  145 extension of the boundaries related to “for what” and “to whom” an organization is publicly held accountable has led to a re-problematization of the same concept of assurance (that is, the medium “through” which accountability is certified). This open debate about what assurance means and what it should cover has also generated a new competition in the professional space where traditional auditors are challenged as providers of assurance services (for example, O’Dwyer, 2011; Andon et al., 2015). Financial auditors have reacted to this challenge by taking the lead in the debate on new forms of extended assurance and in the formation of the interdisciplinary teams in charge of providing this extended assurance (Maroun, 2018). This chapter proceeds as follows. In the next section we develop and propose a conceptual framework through which the concepts of assurance, auditing, and internal control are viewed within the chapter and for purposes of widespread understanding. We discuss the historical context related to these concepts in the third section. In the fourth section we provide an overview of recent research on assurance and the fight for predominance in the new market for extended assurance. In the fifth section we provide a taxonomy that can guide our understanding of the recent debates. Finally, we present concluding comments.

CONCEPTUAL PRELIMINARIES: ASSURANCE AS THE UMBRELLA OF AUDIT AND INTERNAL CONTROL Any attempt to establish a clear relationship between assurance, auditing, and internal control does not do justice to the complex system of overlaps and intersections that exists among them. However, establishing a conceptual map for these three concepts can serve as a framework to guide the analysis of their historical evolution, discussions, and debates on the boundaries of accountability, and potential future developments in these arenas. At a conceptual level, assurance emerges as a higher-order concept with respect to audit and internal control. Within an organization, audit and internal control ultimately provide assurance on certain aspects of organizational life. Traditionally, audit has focused on the assurance of the contents of financial reports, whereas internal control has focused on assurance of organizational processes with respect to the mission and internal and external codes adopted by the organization.1 At least two distinct theoretical frameworks may be adopted to interpret assurance as a higher-order concept. On the one hand, we can follow contract theory and view the world as a nexus of contracts between parties whose actions are guided by (possibly bounded) rationality (Milgrom & Roberts, 1992). The enforcement of these contracts often requires information about what has happened in the past and what could happen in the future. Within this framework the fundamental purpose of assurance is to “verify” this information (Christensen et al., 2021; Dye, 2017). On the other hand, we can adopt a broadly defined social perspective (for example, sociological, anthropological, political, and organizational) and envisage the world as an arena where individuals, groups, and organizations interact under the influence of non-rational as well as rational motives. Within this framework the fundamental purpose of assurance is to create “trust” as a key ingredient in the deconstruction of these interactions (Pentland, 1993). The divide between these two approaches is well known (Cho, 2020; Michelon, 2021; Gendron & Rodrigue, 2021). Within a contract theory framework, assurance is defined by referring implicitly or explicitly to an information system. An authoritative document on assurance is the International Standard on Assurance Engagements (ISAE) 3000 issued by

146  Handbook of accounting, accountability and governance the International Auditing and Assurance Standards Board (IAASB, 2013, para. 10), which advises readers: In conducting an assurance engagement, the objectives of the practitioner are: (a) To obtain either reasonable assurance or limited assurance, as appropriate, about whether the subject matter information is free from material misstatement; (b) To express a conclusion regarding the outcome of the measurement or evaluation of the underlying subject matter through a written report that conveys either a reasonable assurance or a limited assurance conclusion and describes the basis for the conclusion; and (c) To communicate further as required by this ISAE and any other relevant ISAE.

This definition assumes the existence of an objective reality (the subject matter) that is communicated as “information” with the possibility of being misstated. The possibility of objectivity is evoked by the reference to a “measurement” activity. In our view, this is reflective of information economics models. A crucial element of these models is the verifiability of messages. The less verifiable the message, the less likely the possibility of a meaningful communication between the sender and the audience. Hence, often these models assume away the possibility of cheating, using the assurance on financial reporting provided by accountants and external auditors as a justification (Dye, 2017). If we consider the literature that has adopted what we call a social approach, Smith et al. (2011, p. 426) state that “[t]he essence of ‘assurance’ is that the information provided by companies is deemed more credible if it has been subjected to an independent examination by external third parties”. The emphasis apparent is on the actors involved in the assurance process rather than on the object of it. The structured and codified interactions that take place among these actors have been effectively described as interaction rituals aimed at providing (re)assurance on certain aspects of organizational life (Pentland, 1993; Power, 1999). The conceptual relationship between audit, internal control, and assurance can be interpreted as one of a means to an end, where audit and internal control are tools to reach assurance (COSO, 2013; Zhou et al., 2020; IAASB, 2021). Two official documents substantiate this: As the basis for the auditor’s opinion, this standard requires the auditor to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. (IAASB, 2021, para. 10) Internal control is a process, effected by an entity’s board or directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance. (COSO, 2013, p. 3)

In both cases assurance is what is “obtained” or “provided” through audit or internal control. As stated in the IAASB definition, “audit” refers to assurance of financial statements (Hasan et al., 2005), whereas the term “assurance services” is usually referenced as a subject matter other than financial reporting. We argue that this creates an artificial divide between these two categories, ignoring that external audit is itself an assurance engagement. This is due to a rhetoric that presents “assurance services” or “other assurance services” as an extension or as a complement to the “audit service”. We problematize this position later in the chapter, while looking at the historical evolution of the demand for assurance services other than audits because of the evolution of the concepts of accountability and corporate governance. Some confusion may also exist between internal control and internal audit. However, if we

Audit, assurance, and internal control  147 accept that audit refers to financial services, then we can delineate internal control as a concept broader than internal auditing even if they are clearly related (Maijoor, 2000). A visual representation of the conceptual hierarchy discussed above is presented in Figure 7.1.

Source: Authors.

Figure 7.1

Conceptual hierarchy of audit and assurance services

THE HISTORICAL EXPANSION OF THE CONCEPT OF ASSURANCE The present debate on the boundaries of accountability for companies and the mechanisms better suited to implement it has not developed in a vacuum. It has profound historical roots. To present the historical development of audit, internal control, and assurance, we complement the conceptual map introduced above with the framework proposed by Porter (2009). Her focus of attention is on the evolution of two fundamental dimensions of accountability: accountability to “whom” and accountability for “what”. We intersect these two dimensions with a third one: accountability “through” (that is, to signify which mechanism(s) are used). Given that our focus in this chapter is the third dimension, we simplify the scheme proposed by Porter (2009) into three historical periods: pre-1950s, 1950s to 1990s, and post-1990s. We focus on the UK and the US because these are the countries where the most important shifts in the scope of accountability and governance took place and because of their influence in shaping accountability and governance practices around the world (Boussebaa, 2015).2

148  Handbook of accounting, accountability and governance Pre-1950s: Financial Audit Dominates the Scene The need to give account can be traced as far back as the origin of transactions and the need of the owners of economic resources to monitor the activities of those to whom such resources were entrusted (Imhoff, 2003; Power, 1999; Watts & Zimmerman, 1983). Although there is evidence of the conduct of audits of financial matters in the context of manors and states in medieval times (Jones, 2008; Kozub, 1994), the modern idea of audit in the context of financial reporting gains ground with the development of business corporations (Flesher et al., 2005; Watts & Zimmerman, 1983).3 More specifically, the separation of control and ownership in railway and banking companies in the UK in the 19th century generated the need for managers to be accountable to shareholders (“to whom”) for the financial capital provided to the company (“for what”) (Harris, 2013; Napier, 2010; Power, 1999). This prompted a “natural stimulus” for some form of assurance whose main purpose was “to attest”; that is, verify the “truth and fairness” of the financial accounting records (Power, 1999, p. 17; Napier, 2010). The scope of the financial audit function and the identity, characteristics, qualifications, and responsibilities of those in charge of these audits were problematic from the start. Audits of financial matters were voluntary, closely related to bookkeeping (that is, auditors checked the accuracy of the accounts, therefore the contents of financial statements were verified and guarded against fraud), and performed by shareholders appointed as amateur shareholder auditors. The Joint Stock Companies Registration and Regulation Act 1844 included the requirement of mandatory audits (Harris, 2000, p. 284; Napier, 2010) and the Companies Clauses Consolidation Act 1845 further prescribed the governance rules of future corporations, including auditing provisions. Regarding “who” was qualified to act as an auditor, the 1845 Act stated that “every auditor shall have at least one share in the undertaking; and he shall not hold any office in the company, nor be in any other manner interested in its concerns, except as a shareholder” (Companies Act, 1845). The rationality of this early requirement on the eligibility of an individual to hold office was that, if a financial audit was performed in the interest of the shareholders, then a shareholder had the best incentives to perform it properly. The 1845 Act also opened the possibility of employing external, professional accountants assisting amateur shareholder auditors in conducting the audit (Companies Act, 1845; Flesher et al., 2005). Thus, the issue of “who” should be the audit providers (shareholders or external professional accountants) was on the table. Over time, amateur shareholder auditors were replaced by professional accountants and by the end of the 19th century around 90 per cent of public companies were audited by professional accountants (Matthews, 2006). The auditing provisions of the 1845 Act were repealed by the Joint Stock Companies Act of 1856, which made auditing arrangements optional (Napier, 2010). A mandatory audit requirement for joint-stock companies was introduced again by the British Companies Act of 19004 but the Act did not specify who was supposed to provide audits (Chandler & Edwards, 1996). It is with the Companies Act of 1947 (which was immediately consolidated into the better-known Companies Act of 1948) that every limited company was required to have an audit opinion issued by an independent professional auditor stating whether the financial statements of an entity gave a “true and fair view” (Napier, 2010, p. 263; Power, 1999), thereby formally recognizing the role of professional chartered accountants as the only eligible providers of financial audits. It is difficult to determine whether this outcome was the result of increasing demand for accounting and auditing services generated by the development of

Audit, assurance, and internal control  149 business corporations or if it was due to a successful self-promotion strategy implemented by the nascent profession of accountants and auditors itself. However, there is strong evidence in favour of the active role played by the profession in this process (see, for example, Maltby & Chandler, 2020; Matthews, 2017). The historical development of financial audit and its appropriation by professional accountants in the US has many similarities with the UK. As in the UK, auditing became popular after the incorporation laws (Flesher et al., 2005). The increasing number of corporations and the wave of mergers in the 1890s led to an increase in the demand of audits, which were done primarily by bookkeepers and whose main objective was the detection of fraud and error. By 1926 more than 90 per cent of industrial companies listed on the New York Stock Exchange were audited (Zeff, 2003), but the direction and scope of auditing was still determined by auditors themselves (Levy, 2020). The debate on “who” should be legitimized as audit providers was open until the 1930s. At that time, businesses were more in favour of independent audits performed by professional accountants than any alternative of government intervention (Previts & Merino, 1979). After the stock market crash of 1929, the US Congress “became convinced that [the crisis] was due, in part, to the lack of meaningful reporting requirements to protect investors and creditors” (Imhoff, 2003, p. 117). The passage of the Securities Act of 1933 and the Securities Exchange Act of 1934 established the Securities and Exchange Commission (SEC) and the new regulation of public company auditing. This was the first step towards further guidance on auditing procedures and the audit report (Levy, 2020). Both these Acts were aimed at regaining public confidence in the capital markets (Imhoff, 2003). These regulatory changes illustrate the evolving nature of the notion of “accountability to whom”, as the new rules extended the accountability domain beyond the boundaries of the company (directors and/or existing shareholders) to include potential investors. In summary, since the mid-19th century until at least the early 1960s, the scope and objectives of financial audits changed from verification of financial statements and the detection of error and fraud to providing assurance as to whether the financial statements offer a true and fair view (for example, Edwards & West, 2021). In the UK, it was possible to produce a kind of “doing the books audit” (Matthews, 2006) while maintaining, legally and publicly, auditing as a function separate from accounting. Furthermore, during this period there is evidence of auditors as providers of “continuous audits”, understood as a kind of non-audit service supplied by the auditors for top management, that focused mainly on employee fraud (Edwards & West, 2021). Hence, auditors were successful in offering a broad range of services, including bookkeeping, auditing, and non-auditing services. In this context, independence was a contentious issue and many of the elements of the present-day controversy on auditor independence were present in the debate (Chandler & Edwards, 1996; Edwards & West, 2021; Maltby, 1999; Maltby & Chandler, 2020). From the 1950s to the 1990s: Internal Control Enters the Scene While the role of internal control has been documented as early as 3400 bc (Lee, 1971), it was not until the early to mid-1900s that internal controls were formally recognized in accounting publications, including textbooks (Kester, 1922). The impetus for a change in scope of accepted accountability and governance mechanisms came from the US. The recognition and definition of internal controls was first provided by the American Institute of Accountants

150  Handbook of accounting, accountability and governance (AIA) in 1949. At this time, the AIA recognized that because of changes in business (for example, increases in size and complexity), auditors would no longer be able to reasonably examine all transactions and they would need to rely on management’s representations (Hay, 1993). To do so, an assessment of internal controls employed was requisite. With these matters in mind, the AIA provided the first definition of internal control as: [T]he plan of organization and all of the coordinate methods and measures adopted within a business to safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency, and encourage adherence to prescribed managerial policies. (AIA, 1949, p. 6)

In the 1950s, other countries began to formally recognize and discuss internal controls. For example, requirements were issued on the evaluation of internal control in Australia in 1951 and in the UK in 1953 (Hay, 1993). In 1953, the Institute of Chartered Accountants in England and Wales (ICAEW) broadly defined internal control as “including the whole system of controls, financial and otherwise, established by the management in the conduct of the business, including internal audit, internal check and other forms of control” (ICAEW, 1953). The definitions of internal controls contained elements of the AIA definition and broadly included administrative and financial controls (Wilson et al., 2014). These broad definitions prompted a debate on the scope of action of professional accountants’ and auditors’ responsibility together with concerns about legal liability (Hay, 1993). Accounting regulatory bodies reacted by providing additional guidance that auditors should focus their work only on accounting controls (AICPA, 1958). The fight against fraudulent reporting prompted a series of initiatives that are important to understand how the boundaries of assurance and accountability have been constantly questioned and expanded through time. In the US, the National Commission on Fraudulent Financial Reporting (NCFFR, later renamed Committee of Sponsoring Organizations of the Treadway Commission, COSO) was established in 1985 by the AICPA and other accounting bodies. It found that fraudulent financial reporting could result from management control and not just internal accounting controls (NCFFR, 1987). Hence, in 1992, COSO produced its first definition of internal control together with a proposed framework for internal control. This definition became widely recognized and accepted worldwide.5 In 1995, the American Institute of Certified Public Accountants (AICPA) adopted this new definition of internal control, in full, within Statement on Auditing Standards No. 78 (AICPA, 1995). In the UK, the Committee on the Financial Aspects of Corporate Governance published a report, known as the Cadbury Report (Mallin, 2006), which recommended that company directors should make an internal control statement and auditors should report on the effectiveness of the statement (Cadbury Report, 1992). While the central components of this report were voluntary, the London Stock Exchange required companies to follow the “comply or explain” principle (Arcot et al., 2010). With this “voluntary” requirement, the UK led the way in promoting the internal control regulation of management’s and auditors’ attestation of internal control. At the same time, other organizations worldwide began to broaden their definitions of internal control as they sought to comply with changing regulations (Spira & Page, 2003). The emergence of a focus of internal control has caused companies to re-evaluate whether bookkeeping and financial reporting are the only tools to implement accountability (accountability “through”). Moreover, it has also pushed companies to re-evaluate the role and scope of

Audit, assurance, and internal control  151 the audit. During this time period, societal and regulatory pressure started to push the boundaries of audit beyond financial accounting to assurance that was generally based on COSO’s broad definition of internal control. Post-1990s: From Audit to Assurance Audit under scrutiny and the regulation of internal control With the end of the 1990s and the turn of the century, the debate on audit and internal control as mechanisms of accountability and governance was reinvigorated. A new wave of scandals in Europe (for example, BCCI, Maxwell), the US (for example, Enron, WorldCom), and Australia (for example, HIH Insurance, One.Tel) prompted a new round of public debate on the usefulness of the financial statement audit (Coffee, 2006). On the one hand, the investigations and official documents produced during this period mentioned the “audit expectations gap”, the auditors’ responsibility for the detection of fraud, and auditors’ independence as major issues facing the audit profession. On the other hand, management responsibility for establishing adequate systems of internal control emerged as a key theme. The US Congress responded with the Sarbanes-Oxley Act of 2002 (SOX) (USHoR, 2002). SOX instituted numerous changes that have dramatically impacted the audit profession, the provision of audit services, and the structure of the US market (DeFond & Lennox, 2011). First, it ended the profession’s self-regulation and governance through the creation of the Public Company Accounting Oversight Board, which is the body in charge of inspecting, investigating, and, whenever appropriate, sanctioning audit firms for audit failures. Second, it introduced several stipulations designed to enhance auditor independence (for example, a ban on the provision of non-audit services and mandatory partner rotation). With respect to internal control, SOX also imposed more stringent attestation requirements than those imposed within the Foreign and Corrupt Practices Act. Companies publicly traded in the US are mandated to provide management and auditor attestation of the organization’s internal control system. This new regulation imposes stiff penalties for non-compliance and at its inception relied on COSO’s 1992 broad definition of internal control (COSO, 1992; see also USHoR, 2002). The push to extend the scope of accountability for companies (“accountability for what”) and to extend the responsibility of auditors was clear. However, after discussions and comments from professional accounting organizations and industry leaders, the SEC determined that the definition applied to internal control would strictly relate to “internal control over financial reporting” (SEC, 2003). Following the passage of SOX, many countries adopted similar regulations. A common characteristic of these reforms was the dominance of the 19th-century notion of accountability from a shareholders’ perspective (“accountability to whom”) (Brennan & Solomon, 2008). The foundations for a “more stakeholder-oriented” perspective were already laid out in documents that include the King Report (1994) in South Africa, the Principles for Corporate Governance in the Commonwealth issued by the Commonwealth Association on Corporate Governance (CACG, 1999), and the Principles of Corporate Governance of the Organization for Economic Co-operation and Development (OECD, 1999). Still, it seems that corporate governance policymakers across the world were not ready to embrace a broader view of corporate governance. Pressured by practical problems that included corporate fraud, abusive managerial power, and lack of social responsibility (Letza et al., 2004, p. 242), they reiterated much of the emphasis of previous corporate governance reforms (for example, Cadbury Report) on

152  Handbook of accounting, accountability and governance “protecting and enhancing shareholder wealth” (Brennan & Solomon, 2008, p. 886). Yet, the emphasis was changing and the debate about corporate governance issues, both in practice and academia, started to focus on the dichotomy between corporate governance as a private matter vs. corporate governance as the result of interactions between various stakeholders (Brennan & Solomon, 2008; Letza et al., 2004; Solomon, 2007). The assurance explosion While internal control was becoming an important pillar of financial audits, the 1990s witnessed the emergence of a broader view of accountability. In 1993, KPMG produced its first worldwide Survey of Sustainability Reporting (the most recent edition was published in 2020 – KPMG, 2020). This document highlighted the importance of providing non-financial information (“accountability for what”) to non-financial stakeholders (“accountability to whom”). Since then, the provision and assurance of non-financial information has become increasingly important for organizations as well as for the audit profession, becoming a worldwide phenomenon (Edgley et al., 2010; Mori et al., 2014; O’Dwyer & Owen, 2005). A case illustration helps elucidate the magnitude of the transformation. The 1980 Annual Report of The Coca-Cola Company was a short document (49 pages) focused on the description of the financial performance of the business. Environmental sustainability concerns were discussed briefly: only one (the last) page of the report titled “Other Information” was dedicated to truly non-financial issues and it described the company’s efforts to promote gender and ethnic diversity among its employees. Conversely, the 2020 official Annual Report (Form 10-K) of the same company is a 194-page document. At the top of the report, the company provides, through a separate section of the website called “Sustainable Business,” an 82-page “Business & Environmental, Social and Governance Report”. This is not an isolated example. According to the 2020 edition of the Survey of Sustainability Reporting, the percentage of a worldwide sample of large companies that report on sustainability issues increased from 12 per cent in 1993 to 80 per cent in 2020 (KPMG, 2020). Whether this increase in the quantity of disclosures really improves the communication between companies and their stakeholders is debatable. However, we witness a push for the extension of the boundaries of accountability that is having a profound impact on the scope of assurance services and on the market for assurance providers. Until very recently, reporting on sustainability information was completed on a voluntary basis and no official regulatory framework was available as a guidance. This regulatory vacuum facilitated the proliferation of numerous private initiatives aimed at filling it. In particular, the increasing volume and importance of sustainability reports has raised questions on who should prepare these reports and how and by whom assurance on these reports should be provided. Since the late 1990s, initiatives, boards, and committees have been developed that have sought to provide solutions to the above two questions. Of particular interest is the International Integrated Reporting Committee (later Council – IIRC). Founded in 2011, it had the purpose of creating a framework that could be used by companies to expand the boundaries of their traditional financial reporting by extending the notion of “capital” from financial to other forms, such as manufactured, intellectual, human, social and relationship, and natural. Their framework, known as the Framework, was eventually published in 2013 and since then has been voluntarily adopted by companies in 75 countries around the world. Despite this apparent “success”, the Framework has generated resistance and critics. We will reflect on this in the next section.

Audit, assurance, and internal control  153 Even though the market for the provision of assurance on sustainability reports is still unregulated and the nature of assurance on non-financial (sustainability) information is voluntary, this phenomenon has gained importance in the first two decades of the 21st century. In 2020, 51 per cent of sustainability reports were accompanied by some form of assurance statement or report, compared to 33 per cent in 2005 (KPMG, 2020). In the US, in 2020, 35 per cent of the companies in the Russell 1000® index obtained external assurance of non-financial environmental, social, and governance disclosures (24 per cent in 2019). For the S&P500® companies, the percentage was 44 per cent, up from 29 per cent in 2019 (GA-Institute, 2021). To summarize, within the accountability domain, historically we have witnessed an expansion of the boundaries of to whom organizations are accountable, starting from “shareholder accountability” focused on owners and moving towards “stakeholder accountability” that now may include all the members of society at large (Brennan & Solomon, 2008). There is also a clear extension of the issues on which an account must be given (“accountability for what”) that now go well beyond financial matters, acknowledging the impact that organizations have on the natural world and society. This broader notion of accountability calls for an extension of the assurance mechanisms as well (“accountability through”) that need to embrace an assurance perspective beyond the mere financial audit and a broader scope for internal control. The debates on what and to whom should companies be held accountable and who should provide assurance on their reports are not new. As described in this section, professionally qualified accountants contested existing shareholders as providers of financial audits in the late 19th century and beginning of the 20th. We also showed how the push to extend accountability beyond financial reporting into a broad definition of internal control has been resisted by professional accountants since the turn of the 20th century. Within this dynamic context, a new push is taking place to extend the boundaries even more, leading to a contest to occupy the “sustainability assurance space” that is being created (Andon et al., 2015). This historical overview showing how the mechanisms of accountability and governance have evolved over time supports the conceptual map presented in Figure 7.1.

THEMES IN EMPIRICAL RESEARCH ON AUDIT, INTERNAL CONTROL, AND ASSURANCE The historical overview provided in the previous section highlighted some themes that have played an important role in the development of accountability mechanisms. We now present some recent work related to these themes to show the central role that they still play in recent academic debates. Audit, Corporate Governance, and the Question of Auditors’ Accountability We have seen that the establishment of mandatory financial audit and internal control was in response to the need to protect existing shareholders from the possibility of misbehaviour by company management.6 A crucial theme, which was already present in the 19th-century debate (Edwards & West, 2021), is who external auditors perceive they are working for: shareholders or managers? Recent research demonstrates the existence of “triangular” (external auditor/ audit committee/management) rather than dual (external auditor/audit committee) relationships among the participants in the audit process (Compernolle, 2018; Cohen et al., 2002).

154  Handbook of accounting, accountability and governance This triangular vision of the audit process provides an interesting framework to associate internal control as a key aspect of fraud prevention when the role of management is recognized as one of the crucial determinants of fraud itself. More generally, the complexity of agency networks present in the audit process has raised the question of to whom auditors are accountable. Auditors have often defended that their engagement contract is with the client firm and that their accountability stops there. However, the object of the audit process (financial and/or non-financial information) is publicly available. Hence, the assurance role played by auditors goes beyond the limits of the organization being audited. Hurley et al. (2019) use an experiment to examine whether changes in an auditors’ accountability framework impact audit quality. They manipulated auditors’ economic accountability (that is, who hires the auditor: a manager or an independent third party) and auditors’ psychological accountability to investors (that is, stating the auditor is hired on the investors’ behalf) (Hurley et al., 2019, p. 233). The results indicate that when auditors’ economic accountability to managers is removed and replaced with psychological accountability to investors, audit quality is enhanced, irrespective of the third party hiring the auditors. Accountability to investors matters because “in real-world practices … auditors are informed that the audit committee hires them in the interest of investors” (Hurley et al., 2019, p. 234). The study confirms the importance of the definition of the reference set of stakeholders (“accountable to whom”) for assurance providers in shaping their incentives while providing their professional services. The lack of accountability of audit firms themselves has been an issue of concern for years (for example, SEC, 2002; EC, 2011). In some jurisdictions, these concerns have led regulators to pass laws requesting that audit firms publish the so-called “transparency reports” (for example, in the European Union (EU), European Statutory Audit Regulations, Art. 13 of Regulation (EU) 537/2014). Some recent studies have examined the content and production of audit firms’ transparency reports in EU countries and Australia (Deumes et al., 2012; Fu et al., 2015; Girdhar & Jeppesen, 2018; La Rosa et al., 2019; Zorio-Grima & Carmona, 2019). Overall, the findings suggest that while audit firms fulfil formal accountability requirements by making these reports available, the contribution of such reports to substantial accountability and audit quality is still in question. In fact, there are calls for more research that aims to demystify the “black box” of audit firms to gain an understanding of their culture and organizational climate and how they may impact the quality of the assurance provided. The works of Thomas Alberti et al. (2020) and Andiola et al. (2020) provide insights about future research on what is known as the audit firm culture (AFC) and how the notion of AFC may influence audit quality. For example, we may question to what extent recent forces such as regulatory pressure may have caused a cultural shift in audit firms towards professionalism (Thomas Alberti et al., 2020). The provocative and critical essay by van Brenk et al. (2022) calls into question the business model of audit firms and the status quo of audits of organizations known as public interest entities (PIEs). They offer some thoughts on the concept of “audit board”, conceived as a quasi-governmental organization in charge of PIEs’ audits, which, from a public interest perspective, would be a more sustainable alternative. Humphrey et al. (2021, p. 445) go one step further and question to what extent the statutory financial audit can evolve into “something more consistently valued and socially purposeful”. Contrary to our proposal, they argue that “assurance should be treated as a sub-set of audit rather than the other way round, as this provides a broader canvas for conceptual innovation in audit” (Humphrey et al., 2021, p. 447). We see here some interesting contributions to

Audit, assurance, and internal control  155 the debates on the shaping and reshaping of traditional and new audit and assurance spaces (“accountability for what”), as well as on the boundaries of accountability for auditors (“accountability to whom”). Internal Control: The Importance of SOX As our historical overview has shown, the first big push to extend the boundaries of assurance provided by auditors beyond financial reporting took place after the introduction of the concept of internal control, especially in the US. Prior to the passage of SOX, internal control data was largely categorized by companies as proprietary and research surrounding internal control in organizations primarily utilized case studies, surveys, and modelling.7 As an exception to the primary research methods being used pre-SOX, McMullen et al. (1996) turned to archival data. During the time of their research, management internal control reporting was voluntary. They found that smaller companies with management internal control reports in place were less likely to have financial reporting issues. This result was in line with the belief that internal control was crucial for fraud prevention. As we have seen, this belief played a crucial role in the insurgence of internal control as a key element of the assurance process. When the reporting requirements of SOX were implemented, all public companies listed on US exchanges were required to provide management reports on internal control and companies with a public float larger than $75 million were required to provide public auditor attestation on their internal controls. With this new publicly available information, large-scale empirical studies on internal control have become mainstream. While arguments may at times ensue regarding the value of this stream of research, the added transparency provided through internal control regulation has facilitated a better understanding of the assurance process. Specifically, we have learned that smaller, more complex firms are more likely to have weak internal controls (Ashbaugh-Skaife et al., 2007) and that weak internal controls are associated with lower levels of investment efficiency (Lai et al., 2020) and lower levels of social capital (Krishnan et al., 2022). These results have confirmed on a larger scale that internal control and financial audit are intimately connected and that professional assurance on financial reporting cannot ignore internal control processes (Bauer et al., 2020; Bhaskar et al., 2019). Assurance of Non-Financial Information: Professional Domains and Combined Assurance We described above a historical expansion of the provision of assurance services from financial audits to assurance of non-financial information. An open debate exists, both in practice and within the regulatory arena, on how and who should provide assurance on these extended disclosures by organizations. For this reason, we focus on studies that have covered the assurance aspect of non-financial and corporate social responsibility (CSR) reporting. Peters and Romi (2015) investigate the connection between corporate governance and sustainability assurance. They find that the presence of a chief sustainability officer (CSO) has a positive effect on the assurance provision. Moreover, companies with a CSO are more likely to hire consultants as assurance providers. However, in the absence of a CSO, Environmental Committees are more likely to hire auditors. We see here again an emerging complexity in the assurance agency relationship. As in the case of the “continuous audit” of the 19th century (Edwards & West, 2021), if in the assurance relationship the auditors’ priority

156  Handbook of accounting, accountability and governance is to satisfy management rather than shareholders, the consultancy aspect of assurance (that is, management consulting) gains importance. On the contrary, when the relationship is such that auditors’ primary concern is “their responsibilities as guardians of shareholders’ interests” (Edwards & West, 2021, p. 264), then the independent external evaluation aspect seems to prevail. Another interesting study within this research stream is Maso et al. (2020). These authors study the potential effect of CSR assurance on the quality of the traditional financial audit. The authors conjecture the existence of “knowledge spillovers” between the audit and the assurance team, like those studied between the provision of financial audit and other non-audit services such as management consultancy or taxation (Wu, 2006). These spillovers could improve the quality of the financial audit. For example, the CSR assurance team may uncover deficiencies while reviewing CSR-related data (for example, personnel data, supplier details) and pass this information on to the financial audit engagement team.8 Maso et al. (2020) show that the joint provision of assurance for both financial and CSR information by the same audit firm is positively associated with financial audit quality. Thus, there are possible positive externalities in the provision of assurance for financial and non-financial information. This is a strong argument for auditors in their attempt to occupy the new assurance space created by the increased provision of non-financial information. Michelon et al. (2019) adopt a different theoretical approach. Their investigation focused on formal restatements of information previously published in sustainability reports. In the absence of clear standards on what is good or bad practice, the assurer may have an incentive to highlight the inadequacy of the information provided to create demand and legitimacy for its services. Michelon et al. (2019) support this argument, showing a statistically significant positive association between formal restatements and the presence of formal assurance for the report. This result is consistent with the idea that the increase in the demand for assurance services for sustainability reports is not just a demand-driven phenomenon, fostered by changing attitudes in society towards sustainability issues. Silvola and Vinnari (2021) take this argument a step further with their analysis of the Finnish case. They argue that one category of potential assurers, auditors, has adopted a deliberate strategy (institutional work) aimed not only at occupying the new professional space but also at making sure that sustainability assurance is run in a way that resembles financial audit. As highlighted in our historical synthesis, in the realm of non-financial reporting a new concept is gaining ground both at the theoretical and practical level: the integrated report. This report aims to present all the areas of an organization in relation to a common mission and vision. The practice of integrated reporting is expanding. Adopting an eclectic theoretical framework, Ackers and Eccles (2015) study the implementation, through the King III Code, of integrated reporting as the model for the periodic reporting activity of quoted companies in South Africa. According to the King III Code, CSR assurance is regulated on an “apply or explain” basis. The authors show that the introduction of the King III Code increased the percentage of companies providing independent CSR assurance within the integrated report. They also look at the identity of the CSR assurance providers. They find a predominance of auditors as assurance providers as opposed to specialized consultants. Interestingly, auditors and consultants appear to provide different levels of assurance. Auditors provide “limited” assurance while consultants provide “reasonable assurance” (ISAE, 3000). However, through a content analysis of the publicly available information contained in the annual/CSR and/or CSR assurance reports of the selected quoted companies, Ackers and Eccles (2015) detect that

Audit, assurance, and internal control  157 users, particularly “uninformed users” (p. 536), have difficulty distinguishing between these two types of assurance. Zhou et al. (2019) look at combined assurance (CA) as an innovative framework to provide assurance for an integrated report. CA aims to leverage three categories of actors to enhance the credibility of the report: managers, internal assurance providers, and external assurance providers. The outcome of a CA process is a statement issued by a representative body of the organization (for example, the governing body or the audit committee) that describes and certifies the effectiveness of the assurance process. Based on this assurance process the issuing body assumes responsibility for the information provided in the integrated report. Using a South African sample, Zhou et al. (2019) show that the provision of a CA statement is beneficial because it helps to reduce information asymmetry among investors in the stock market. Maroun (2018) proposes an “interpretative assurance model” that shifts the focus from the objective verification of the underlying data, which characterizes the traditional approach, to the interpretation and analysis of the information of the integrated report. This model requires auditors to improve their understanding of the integrated reporting framework and the strategic systems of the company, to be trained extensively on qualitative analytical techniques which will help them to evaluate the information provided by the client, and to rethink the composition of audit teams. This process is currently dominated by auditors (that is, experts in financial reporting) rather than strategic business management. The model was developed after taking into consideration the views of experts in integrated reporting (both auditors and preparers), thereby omitting the view of other stakeholders that could include environmental groups or regulators. To summarize, recent research on assurance of non-financial and sustainability reporting documents a progressive occupation of this space by professional auditors at the expense of consultants or specialists. Synergies and complementarities between financial audit and sustainability assurance are exploited to define the object of extended assurance in a narrow sense, which helps auditors argue in favour of their professional legitimacy based on the skills developed to conduct financial audits.9 However, is this the only possible way forward?

MAKING SENSE OF THE DEBATES: A TAXONOMY To make sense of the discourses taking place around the concepts of audit, internal control, and assurance that are highlighted in the previous sections, we propose the use of a taxonomy. In line with the conceptual map provided in Figure 7.1, we consider assurance as a general concept embracing both financial audit and internal control. We organize our taxonomy along two dimensions. On the one hand, and in line with our conceptual section, we can adopt contract (economics) theory as the main theoretical framework, or we can adopt a more eclectic (social) theory approach. On the other hand, we can consider non-financial information as separate and complementary to financial information or we can investigate integrated reporting as a new way to coordinate financial and non-financial information into a holistic approach to corporate reporting. By intersecting these two dimensions we can organize the possible answers to the three questions that have guided our interpretative framework throughout both the historical outline and the review of the recent academic debates: “to whom”, “for what”, and “through which” report is an organization accountable? The taxonomy is presented in Figure 7.2.

158  Handbook of accounting, accountability and governance

Source: Authors.

Figure 7.2

Taxonomy for understanding assurance

Within a contract theory approach, information asymmetry is perceived as an obstacle to the achievement of economic efficiency and to the enforcement of optimal contracts and regulation. In this context, non-financial information disclosure is seen as an additional and separate opportunity to reduce such information asymmetry. It does not have to be coordinated with financial reporting. It simply increases the amount of information available to the economic agents that make decisions related to organizational life. Assurance has the capacity to increase the effectiveness of this communication process and, consequently, improve the effectiveness of such decisions. This is the top-left quadrant of the taxonomy. When an organization is seen as a nexus of contracts involving various stakeholders, multiple disclosure documents are produced for different stakeholders as a part of these contracts. A term like “corporate social responsibility” may acquire different meaning depending on which stakeholders and contracts are considered (O’Dwyer, 2003; Freeman & Hasnaoui, 2011). In this context, the identity of assurance providers does not necessarily matter. What matters is whether assurance improves the enforcement of contracts and economic efficiency. The disclosure of non-financial information, separately from financial reports, can be studied under theoretical frameworks other than contract theory. This is the bottom-left quadrant of the taxonomy. Legitimacy theory has often been used in this literature. According to this approach, the aim of communicating non-financial information is to gain legitimacy for both the disclosing (client) firms and the assurance providers (Cho & Patten, 2007; O’Dwyer et al., 2011; Patten, 2020). In fact, from this perspective corporate managers and assurors are likely to be accused of “capturing” what should be an exercise of public accountability (Smith et al., 2011, p. 425). The identity of the assurers matters because different professions may have different roles and different levels of hegemony within a jurisdiction (for example, Abbott, 1988; Andon et al., 2015).

Audit, assurance, and internal control  159 The provision of non-financial assurance is one of the jurisdictions where the status of each profession is to be determined. Indeed, it is precisely the fragmented status of corporate communication (financial, environmental, governmental, societal, e-commerce, etc.) that creates opportunities for a potential power shift from more established professions (for example, auditors) to new players (for example, environmental consultants, IT specialists). Whether these potential power shifts are seen as threats or opportunities depends on multiple factors, including how stakeholders and society perceive the new domains. The focus of interest is on the social equilibrium, of which the economic dimension is merely one among others, including the anthropological, sociological, political, affective, emotional, and organizational dimensions. As mentioned before, integrated reporting is the latest trend in corporate communication and accountability. The way “integrated reporting” is interpreted depends on the theoretical framework adopted. If we adopt a contract theory framework, we are in the top-right quadrant of the taxonomy. Here, the purpose of integrating different types of information in one report is still to improve economic efficiency by facilitating the enforcement of contracts between the organization and its various stakeholders. However, the possibility of sending different messages to different audiences is not available. The same document is presented to all stakeholders. They can obviously focus more on one part of the document than on another, but they are exposed to the whole message. Hence the format and the content of the document depends on the relative importance that the sender of the message places on each stakeholder. The danger here is giving priority to one stakeholder category over the others. In this regard, it is interesting to look at the most popular standardized version of integrated reporting at the time of writing in 2022 (that is, the Framework elaborated by the IIRC). On p. 2 of the Framework it is stated: Integrated reporting aims to: • Improve the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital • Promote a more cohesive and efficient approach to corporate reporting that draws on different reporting strands and communicates the full range of factors that materially affect the ability of an organization to create value over time. (IIRC, 2021, p. 2)

No other stakeholder is given the same predominance in the document as the “providers of financial capital” and no other purpose is more important than the “creation of value”. It goes beyond the scope of this chapter to discuss at length the Framework itself.10 We want to focus on the implications for assurance. If the primary audience of an integrated report are the providers of financial capital, it is reasonable to expect that the provision of assurance on this document will be seen as an extension of the provision of assurance within its financial section. Large companies like Danone (Arjalies et al., 2018; Eccles et al., 2019) have decided not to adopt the Framework because of its narrow approach. Nevertheless, this approach facilitates the view of non-financial information assurance as a non-financial “audit” (that is, the extension of financial audit techniques and processes to the other parts of an integrated report). Accordingly, auditors are likely to have an advantage over alternative assurance providers. Nevertheless, adopting a contract theory approach to integrated reporting doesn’t have to lead to such a conclusion. Other scenarios are possible depending on how the idea of integrated reporting is implemented (Maroun, 2018; Zhou et al., 2020).

160  Handbook of accounting, accountability and governance Finally, integrated reporting does not have to be interpreted only within the boundaries (or constraints) of contract theory. A holistic approach to the study of society, nature, and the planet can lead to the adoption of a holistic model of corporate communication. We are now in the bottom-right quadrant of the taxonomy. Decades of critical research in accounting are calling for a new definition of accounting that goes beyond the boundaries of a technical practice concerned with monetary values and financial performance. Carnegie et al. (2021) have taken the challenge to propose this new definition of accounting: “Accounting is a technical, social and moral practice concerned with the sustainable utilisation of resources and proper accountability to stakeholders to enable the flourishing of organisations, people and nature” (Carnegie et al., 2021, p. 69). This definition serves well the idea that all the stakeholders of an organization are members of the same global society and living on the same planet. No stakeholder category is given priority over another. “Accountability to stakeholders” can be interpreted as accountability to today’s society, nature, and the planet as well as accountability to the future; that is, the planet and the future of the planet as a collective stakeholder. If this is the case, the previously fragmented conversation that was taking place through separate “reports” can be recomposed in a unified discourse that materializes in an integrated report. This process of reunification of the discourse may have profound implications for assurance as a mechanism of accountability. It could lead to the re-composition of the different realms of assurance provisions into one. Internal and external financial audits, internal control, and sustainability assurance would all contribute to an organic provision of societal trust for the organizational discourse. No pre-existing group of professionals and no pre-existing assurance techniques would appear as “winners” of the competition for professional supremacy. New multi-disciplinary teams would work together to build an assurance report that is likely to be different from any existing, both in terms of format and content. Combined Assurance or “interpretative assurance” (Maroun, 2018) can be seen as first steps in this direction, but it needs to develop outside the boundaries of contract theory to evolve into holistic integrated report assurance.

CONCLUSION Within this chapter, we have explored how audit, assurance, and internal control contribute to accountability and governance. To do so, we first presented a conceptual map that established assurance as the umbrella embracing at its base audit services and internal control. An overview of the historical development allowed us to see that the subject matter of assurance provision as a mechanism of accountability has been expanding from financial audit to internal control and to a broader set of societal and environmental issues. More specifically, through this historical lens, we show how “accountability for what”, “accountability to whom”, and “accountability through which” have evolved and continue to evolve within the current global context. The malleable and problematic nature of these three dimensions of accountability still generates debates today. We have reviewed some of the recent contributions in the research domain that contribute to these debates and proposed a taxonomy of potential options for the provision of assurance services in the 21st century. The purpose of the taxonomy is to help continue these conversations. As we have seen, similar situations of critical reconsideration of accepted paradigms

Audit, assurance, and internal control  161 about governance, accountability, and assurance have already taken place in the past and have prompted drastic shifts in practice and regulation. Hence, it is reasonable to envisage important changes taking place in the future sphere of accountability in organizations, including audit firms, as well as in the professional space of assurance providers. These shifts will be accompanied by a reshaping of organizations’ communication landscape, both internally and externally.

NOTES 1. Humphrey et al. (2021) propose exactly the opposite; that is, to see assurance as a subset of audit. While we share the same willingness to explore innovations in the audit space, we believe that this can be done within the traditional conceptual order (audit as a subset of assurance) through a new definition of the meanings and processes associated with these concepts. Reversing the order runs the risk of facilitating the attempt of “financial” audit theories and practices to colonize assurance. 2. We recognize the limits of this approach but providing worldwide coverage of the historical development of accountability and governance would go beyond the aims of this chapter. 3. The existence of limited liability corporations was allowed under British law as early as 1553 (for example, Edwards (2019) indicates that the East India Company was granted the royal charter in 1600). 4. The requirements only affected companies raising capital from the public. For details about the origins of private companies in Britain, see Harris (2013). 5. The most recent version of this COSO definition of internal control can be found in the conceptual section of this chapter. 6. The literature reviews and meta-analyses of Hay et al. (2006), Carcello et al. (2011), Hay (2013), DeFond and Zhang (2014), and Hay et al. (2017) provide good summaries of prior archival research on the links between auditing and corporate governance. 7. A large body of this research focused on auditors’ assessments of internal control as they relate to the financial statement audit (Ashton, 1974; Gaumnitz et al., 1982; Meservy et al., 1986; Frederick, 1991; Smith et al., 2000). 8. Maso et al. (2020, p. 1255) provides anecdotal evidence of the existence of these knowledge spillovers. 9. Canning et al. (2019), Edgley et al. (2010), O’Dwyer (2011), and O’Dwyer et al. (2011) offer insights into the transfer of financial audit-based methodologies and concepts to new assurance areas. 10. For a study on the emergence of the IIRC and its efforts to promote integrated reporting, see Humphrey et al. (2017).

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8. Paradigm shift or shifting mirage? The rise of social and environmental accountability Jill Atkins and Karen McBride

OVERVIEW Climate change and crisis have raised awareness throughout the world towards the wider stakeholders in business, bringing accountability for environmental and social issues to the fore. Climate impacts are now a key aspect of many companies’ strategic decisions and management objectives. While some argue that the traditional drivers of business and of accountability to investors are the primary concerns of companies, with profit and other financial priorities top of the agenda, we argue that the risks of climate change are so fundamental to companies’ success that they need to be included. The success of socially responsible, green investments would indicate that many investors agree. Indeed, the growing demand from the responsible investment community for enhanced, comparable and consistent reporting in the social and environmental area is driving improvements in both quality and quantity of such reporting. For accounting, accountability and governance, blending both social and environmental matters with traditional financial measures is the necessary approach. New developments in the area reflect heightened risks in the natural world from habitat and species loss, which engender the rapid development of biodiversity reporting frameworks and the evolution of extinction accounting. The growing prominence of dual materiality necessitates social and environmental corporate accountability based on financial materiality of these issues, as well as the need to discharge accountability for impacts. These emerging issues are discussed in the chapter with reflections on future trajectories of reporting, governance and accountability.

INTRODUCTION Social and environmental accountability is core to a holistic governance framework that discharges accountability to the broadest range of stakeholders, human and non-human (Solomon, 2021). Over the last 30 years or so, understandings of governance and accountability have evolved significantly from a narrow form of financial accountability where companies were perceived as being driven entirely by the need to maximize shareholder wealth, within an agency theory framework, to a very different perception of governance and accountability. A growing awareness, especially since the turn of the 21st century, of global challenges and threats such as climate change, poverty, child labour, modern slavery, the biodiversity and extinction crises has ushered in a strikingly different understanding of an organization’s responsibilities and, therefore, how it needs to discharge accountability and to whom. In the 20th century, attempts to promote social and environmental accounting and accountability were significant, especially within the academic environment. The pioneering work of the late Professor Rob Gray and colleagues Professors David Owen, Keith Maunders, Lee 168

Paradigm shift or shifting mirage?  169 Parker, Reg Matthews and many others to establish the Centre for Social and Environmental Accounting Research (CSEAR),1 the social and environmental accounting project, resulted in a proliferation of research activity, published papers and books, and doctoral work. This academic endeavour has gradually seeped into accounting practice, demonstrating the emancipatory power of academic research (Bebbington & Unerman, 2011; O’Dwyer, 2011). Similarly, academic research has investigated practice as social and environmental accounting has evolved.

DEFINING SOCIAL AND ENVIRONMENTAL ACCOUNTABILITY This first section of the chapter considers the importance of accountability. It continues by exploring what is meant by accountability, defining social and environmental accountability and examining how new definitions of accounting provide insights into the evolution and trajectory of social and environmental accountability. We then investigate how social and environmental accountability can be discharged. Newborn Puppies, Afternoons in the Park – and Accountability The gradual refocusing of governance and accountability towards a more stakeholder-inclusive approach was highlighted in a special issue of Fortune magazine devoted to corporate accountability in April/May 2021. The special issue editorial focused on the increasing integration of social and environmental issues into corporate accountability over the last 20 years,2 making the salient point that: [C]orporate accountability – particularly when it comes to social policies and politically fraught issues – can be tricky to measure, let alone devise appropriate parameters for … and yet more and more of us are demanding just that of the companies we work for, buy from, and invest in. (Leaf, 2021, p. 8)

The inherent paradox is that everyone may want “accountability” but ensuring companies and other organizations genuinely discharge social and environmental accountability to their stakeholders is challenging, to put it mildly. “Accountability. It’s one of those rare things like newborn puppies and afternoons in the park that are unlikely to find many detractors” (Leaf, 2021, p. 8). The need for corporate social and environmental accountability cannot be over-emphasized because: Corporations dominate all aspects of our lives. Their power affects the quality of life, food, water, gas, electricity, seas, rivers, environment, schools, hospitals, medicine, news, entertainment, transport, communications and even the lives of unborn babies … Unaccountable corporate power is damaging the fabric of society, the structure of families, the quality of life and even the very future of the planet. (Mitchell & Sikka, 2005, p. 2)

We are not aspiring to provide a comprehensive summary of the academic literature pertaining to social and environmental accountability as this is beyond the scope of this chapter and has been done in many other texts (Andrew & Baker, 2020; Baker & Schaltegger, 2015; Dillard & Vinnari, 2019; Parker, 2011, 2014a). We do intend, however, to provide a flavour of the

170  Handbook of accounting, accountability and governance shift in social and environmental accountability in practice and with reference to key academic works. Our aim is to assess the extent to which there has been a paradigm shift in corporate social and environmental accountability over the last 50 years from the early 1970s, where social and environmental accountability currently stands and where it needs to go next. What Do We Mean by Accountability? We are setting a disciplinary boundary in our discussion by limiting social and environmental accountability mainly to its meaning within accounting, although we do consider other related means of discharging accountability. Accountability has many meanings, definitions and interpretations across multiple disciplines including law, religion, sociology and other social sciences (Ahrens, 1996; Sinclair, 1995). For the purposes of our discussion, we are focusing on accountability from an accounting perspective. Further, to keep our coverage within manageable limits, we have also purposely focused primarily on corporate accountability, although we do acknowledge accountability across other forms of organization for the sake of completeness, as governance and accountability, and issues of sustainability, are receiving increasing attention across public, voluntary and charity organizations (Solomon, 2021). Historically, there was a consensus that accounting and annual reports in the private sector should provide useful information to users, and that use could be defined in terms of relevance to decision-making (Rutherford, 1992). However, while it is possible to construct a list of potential users of the accounts of organizations, it is rather more difficult to identify the decisions that rational users might take with general purpose financial statements. Ijiri (1975) suggested accountability as a descriptive theory of accounting: “Current accounting practice can be better interpreted if we view accountability as the underlying goal. We are also suggesting that unless accounting is viewed in this manner, much of the current practice would appear inconsistent and irrational” (Ijiri, 1975, p. 37). A dominant view of the nature of accountability in the private sector was based on the requirement of agents to be accountable to principals. There arose many counter-arguments against this idea of accountability based on agency theory (for example, Armstrong, 1991; Arrington, 1990; Arrington & Francis, 1989; Gray et al, 1996; Roslender, 1992; Tinker & Okcabol, 1991; Tinker & Puxty, 1995; Walker, 1989). These focused on the limitations and narrowness of considering the world in purely economic terms in considering people as rational economic beings acting purely in their own self-interest and viewing accounting information as an economic good. Munro (1996) outlined a view of accountability coming from the work of psychologists and sociologists, who have a propensity to define accountability as the capacity to give an account, explanation or reason. He broadly proposed that accountability is about making the invisible visible. Accountability can be considered as the requirement to give an account, the explanation or justification of actions that are currently taking place and of planned activities. Perhaps some of the most insightful explorations into the meaning and understandings of accountability and, particularly, social and environmental accountability may be found in the works of Roberts (1991, 2009, 2018). Within this work, the author observes that: Accountability is … a vital social practice – an exercise of care in relation to self and others, a caution to compassion in relation to both self and others, and an ongoing necessity as a social practice through which to insist upon and discover the nature of our responsibility to and for each other. (Roberts, 2009, p. 969)

Paradigm shift or shifting mirage?  171 Defining Social and Environmental Accountability and Delineating the Discussion When we move to consider the field of social and environmental accountability, again it is important to provide a definition. However, there is no overarching definition (Dillard & Vinnari, 2019; Gray, 1992; Gray et al., 1988; Roberts, 1991, 2009). In this section we consider competing definitions as well as the historical evolution of definitions of social and environmental accountability. A basic definition of accountability is “the duty to provide an account or reckoning of those actions for which is held responsible” (Gray et al., 2014, p. 50). Or at its simplest, “accountability is a duty to provide information to those who have a right to it” (Gray et al., 2014, p. 7). An early attempt to raise awareness of the environmental accountability of companies and their responsibility to deal with this through action and through the accounting function was the work of Tony Tinker. Tinker (1985) discusses the case of Hooker Chemical and their pollution of Love Canal in Niagara Falls in the 1940s, which resulted in deaths and illnesses among local residents that became apparent in the 1970s when deadly toxins such as tetradioxin (used to make Agent Orange) were found to have been dumped by the company. Tinker (1985) outlined the details of this notorious case and explained how, in his view, accounting was at the root of the problem. The company failed to report potential legal liabilities associated with dumping the deadly chemicals, with their impacts only becoming apparent some 40 years later. Tinker (1984, 1985) viewed an emancipatory accounting as being one solution to these problems as the act of accounting for these impacts and responsibilities could lead to behavioural change. The emancipatory role of accounting has also been referred to in the literature as “information inductance” (Gray et al., 1996, p. 42), this concept of information inductance being essentially synonymous with the concept of emancipatory accounting. Since the 1990s, seminal books and articles have been written and published that have sought to establish definitions of corporate social and environmental accountability, and in tandem, social and environmental accounting (referred to as “corporate social reporting” (CSR) by Gray et al., 1996). The exposition of early conceptualizations of corporate accountability for social and environmental issues drew on a wide range of ideas and notions, such as participative democracy, neo-pluralism, systems thinking and sustainability, to create detailed explanations of the growing practice of, and need for, social and environmental accounting and accountability, for example: Accountability … is the necessary link between a (neo-pluralist) view of how our world is currently ordered and a democratic view of how it should be ordered. (Gray et al., 1996, p. 33) In a participative democracy there must be flows of information in which those controlling the resources provide accounts to society of their use of those resources. This is accountability, the development of which we see to be the major potential for CSR.3 (Gray et al., 1996, p. 37)

There is also a need to identify power relations, or rather power inequalities, that render accountability crucial to a company’s relationships with its stakeholders: Accountability is a profoundly radical notion because it requires the powerful (large corporations and the state for example) to be accountable to those with rights but (individually at least) little power – civil society. (Gray et al., 2014, p. 58)

172  Handbook of accounting, accountability and governance As well as the concept and mechanisms of accountability, there is also the theoretical framework of accountability. Accountability “theory” is just one of many theoretical lenses through which social and environmental reporting practice may be explained and analysed. In this chapter, we adopt the accountability explanation for social and environmental reporting, as our focus is on accountability.4 However, when we consider the role of institutional investors in holding companies to account, demanding they discharge their social and environmental accountability to stakeholders, decision-usefulness connected to the financial materiality of social and environmental factors also becomes relevant. At this point, we believe it is timely to note that the language has evolved significantly since the 1980s, with social and environmental accountability considering corporate accountability for “social, ethical and environmental” (SEE) issues in the 1990s, morphing into accountability for sustainable development/sustainability around the turn of the century. Around 2006, the global institutional investment community began to shift their terminology towards addressing “environmental, social and governance” (ESG) issues, and demanding corporate accountability regarding ESG risks.5 This shift came because of the formation of the “Principles of Responsible Investment” (PRI),6 which adopted the ESG terminology. Recently, the ESG terminology has shifted into the accounting arena with corporate reporting focusing on ESG issues. This reflects a belief in accounting’s ability to enhance accountability by means of more disclosure in external reports and more effective governance (for example, Adams, 2015; Adams & Larrinaga-González, 2007; Adams & McNicholas, 2007; Adams & Whelan, 2009; McNally & Maroun, 2018) with some belief in the possibility of ESG benefiting stakeholders and businesses (Aras & Crowther, 2009; Burritt & Schaltegger, 2010). Often research in this area is more critical, noting that disclosures in reports often do not increase accountability further than shareholders and creditors (Gray, 2002; Gray et al., 2014; Deegan, 2017; Dillard & Vinnari, 2019). Consequently, what may seem to be a paradigm shift towards a higher level of social and environmental accountability being discharged through increased disclosure (rather than genuine transparency) may be merely a shifting mirage. We also need to discern clearly between social and environmental accountability and social and environmental accounting. One way of approaching this may be to consider that accountability is what companies “should” do whereas the accounting is what they “do” do. Accountability in this area is about what society and stakeholders expect companies to do, as well as what companies consider they are responsible for. Accounting is the eventual outcome of a dialogue, or we may even describe it as the result of a metaphorical battle between that which companies are expected to produce and what they consider they should produce. This is eloquently expressed in relation to the killing versus protection of whales: [F]or illustration, the preservation of whales. Those making the case believe an accountability is due to them. Those from whom the accountability is owed do not. Who is right? (Gray et al., 2014, p. 59)

Such a battle is over competing views of reality, an issue we come to again towards the end of this chapter. The accounting is effectively the product of this conflict. The establishment of the level of corporate accountability may be viewed as an equilibrium between the “demand” for accountability (from stakeholders) and the “supply” of accountability from the corporation.7 There are many agents and groups pressurizing companies to discharge accountability for so many different aspects of their activities and behaviour by changing their actions and behaviours, as well as by discharging these accountabilities through their accounting. This

Paradigm shift or shifting mirage?  173 “battle”, as we portray it here, has been alluded to many times in the literature. Establishing and enacting an “ethic of accountability” is core to understanding social and environmental accountability: Organizational [business] management is specifically granted fiduciary responsibility over society’s economic resources. By exercising these rights, an ethic of accountability is established whereby the actor agrees to being held accountable by those who grant these rights, and those who grant the rights accept the responsibility for holding the recipients accountable for the related outcomes. (Dillard, 2007, p. 43)

Therefore, both the companies and their stakeholders are bound into responsibilities through the accountability relationship and especially through this concept of an “ethic” of accountability. This ethic of accountability, determined and worked out through conversation between companies and their stakeholders, is crucial to the determination of the “levels” of social and environmental accountability discharged: Conceptually, an ethic of accountability is not a one-time, isolated event, but an ongoing conversation between the actor and all affected parties carried out within a sustaining, and sustainable, community … An ongoing community presumes sustainable natural and social systems. Fitting action as well as the act of holding accountable depends upon open and trustworthy discourse between the actor and the community members as well as among the community members themselves. A preliminary condition in implementing an ethic of accountability requires stipulation of what constitutes legitimate communal dialogue whereby the rights and responsibilities of all community members are recognised. (Dillard, 2007, p. 44)

We seek to consider a range of the various stakeholders and the ways in which they drive social and environmental accountability in our discussion. Stakeholder engagement and dialogue are critically important drivers of corporate social and environmental accountability, as will be outlined later in the chapter. It is partly this process of “conversation”, or dialogue, that establishes the “equilibrium” of accountability between companies and their stakeholders and allows a joint reality to be created and established. Social and environmental accounting is the outcome of this process of dialogue, this “battle of wills”; indeed, this conversation. It has been acknowledged in the literature, however, that the dialogic engagement between financial stakeholders (institutional investors) and their investee companies can result in the creation of a “myth” of social and environmental accountability rather than representing a demythologizing process characterized by “genuine” accountability being discharged (Solomon & Darby, 2005; see also Martins et al., 2021; Solomon et al., 2013). There is also discussion in the literature about the limits of accountability and the need to acknowledge that “perfect” accountability, or total transparency, may not ever be achievable, as: the vulnerability of the accountable self implies that there are limits to accountability as an ethical practice – in the sense that too much accountability can become an ethically problematic burden for the accountable self. (Messner, 2009, p. 919)

Essentially, social and environmental accountability involves calling organizations to account for their impacts on, usage of, reliance on and risks arising from a wide range of social and environmental issues, and the translation of these into social and environmental accounting and disclosures. How can we identify these issues? One relatively recent list includes: inequality, climate change, species extinction, habitat destruction, drought, poverty, desertification,

174  Handbook of accounting, accountability and governance acid rain, soil erosion, air pollution, water pollution, land pollution, noise pollution, resource scarcity, urban violence, deforestation, debt in developing countries, waste disposal, energy usage, starvation, population, water depletion, toxic chemicals, nuclear waste, displacement of ethnic peoples, child labour, racism and genocide, excess consumption, social alienation, and drug addiction (Gray et al., 2014). There are, however, hundreds of social and environmental factors that companies are increasingly called upon to discharge their purported accountability. We will discuss the ways in which these are being prioritized at different points throughout the chapter. The emergence of “dynamic materiality”8 is one approach to such prioritization, as social and environmental issues grow and recede in importance over time. As we will see in a later section, biodiversity has recently become a hot topic for investors, for non-governmental organizations (NGOs), for companies and for society and as such is now being prioritized by companies in their reporting and by stakeholders demanding accountability. So, having considered above various attempts to pin down a definition of social and environmental accountability: what actually is it? It is an abstract notion: a social construction. Accountability only becomes a tangible, physical “thing” when it is discharged or when an account is rendered. At that point accountability becomes a real, measurable object when the “level” of accountability discharged is “known”. Of course, then there is a discussion to be had as to whether the level of accountability discharged by the company is genuine or characterized by impression management and “greenwashing”,9 as is unfortunately so often the conclusion of academic accounting research. Consequently, accountability is only a “real thing” when it becomes a social narrative account of actions taken or manifests itself in actions and behaviours. It is the result of accountability rendered that becomes a proxy for the concept of accountability. Accountability per se remains an elusive, abstract concept, an abstract noun, but the actions taken, behaviours changed, cultures modified or accounts rendered represent or cast an image of the accountability. Like the passion of love, accountability can only be measured, felt or assessed when it is expressed through words or actions. New Definitions of Accounting Provide Insights into the Evolution and Future Trajectory of Social and Environmental Accountability Recent definitions of accounting are far broader than traditional interpretations of what is understood by accounting and such new definitions provide insights into the ways in which corporate social and environmental accountability is evolving, as we proceed through the 21st century (Carnegie et al., 2021a; Lai & Stacchezzini, 2021). Carnegie et al. (2021b) provide an example of a more representative, proposed definition of accounting: For debate and improvement, we propose a potential definition of accounting for consideration: Accounting is a technical, social and moral practice concerned with the sustainable utilisation of resources and proper accountability to stakeholders to enable the flourishing of organisations, people and nature. (Carnegie et al., 2021b, p. 69)

Picking up on calls in the recent literature for further evolution of the definition of accounting (Carnegie et al., 2021a, 2021b), in this chapter we focus specifically on how accounting can evolve and be redefined to incorporate greater social and environmental accountability around the globe.

Paradigm shift or shifting mirage?  175 How is Social and Environmental Accountability Discharged? Given the focus of the chapter on corporations and corporate social and environmental accountability, most of the research attention in this field tends to be on discharging social and environmental accountability through the medium of social and environmental accounting. Accounting as the outcome of the process of accountability is discussed at length in the various texts on the subject (for example, Gray et al., 1993; Gray et al., 1996; Gray & Bebbington, 2001; Unerman, 2007; Hopwood et al., 2010; Bebbington et al., 2014) with relatively less attention paid to other ways in which companies may discharge their accountability or on its governance. As argued by Roberts (2009), increasing transparency/accounting alone in order to render account is insufficient: [W]e cannot manage only with transparency – our instinct to invest in yet more transparency as the only remedy for the failures of transparency – but rather should see transparency as at best a supplement to more context specific “intelligent” accountability. (Roberts, 2009, p. 968)

We acknowledge that corporate behaviour and the actions of corporations are also ways in which their social and environmental accountability may be discharged. The linkages are extremely important and this is where we emphasize the importance of an accounting that is emancipatory. Without an emancipatory accounting the linkage between corporate behaviour and corporate accounting is tenuous: with an emancipatory accounting, then accountability leads to the accounting and the transformation of behaviour through the creation of an interconnected two-way, dialogical relationship. Thus we move from accountability based in accounting to accounting based in accountability (Carnegie et al., 2021a, b; Dillard & Vinnari, 2019). Some research has explored how accountability may be discharged through ways other than accounting, given the acknowledgement that “it is often suggested that extant financial and management accounting practices embody a rather restricted form of accountability that falls short of our mutual responsibilities as more than economic subjects” (Messner, 2009, p. 918). There are various examples in the literature of non-accounting forms of accountability (or lack of accountability), including the behaviour of the employees and executives in charitable organizations (Yates et al., 2021), the behaviour of religious orders (Jacobs & Walker, 2004) and the actions of early industrialists (Parker, 2014b). Actions speak louder than accounts, perhaps. Social and environmental accountability through action certainly predates discharging accountability through accounting, unless we begin to interpret accounting in a wider sense, by extending the “form” of account. Accounting through different media such as artwork, pamphlets, letters, diaries and stories may be viewed as early forms of account (Atkins & McBride, 2022).10 In fact, recent research suggests that rock and cave art represent the earliest form of environmental and ecological account (Atkins et al., 2022b). Indeed, it is fair to say accountability was discharged through actions and by means of other media and forms than formalized accounting as we look further back in time, as formal accounting is a relatively recent 19th-century development (apart from the earlier origins of Italian double-entry bookkeeping (Sangster, 2016, 2018). The only way organizations could discharge social and environmental accountability before “accounting” was via their behaviours towards people and nature/the environment when social and environmental accounting was yet to be developed.

176  Handbook of accounting, accountability and governance Early industrial philanthropists, such as Abraham Darby, discharged accountability towards his workforce at the dawn of the Industrial Revolution in England through, for example, provision of social housing (Solomon, 2021). Parker (2014b) focused on four industrial philanthropists, namely Robert Owen, Titus Salt, George Cadbury and William Hesketh Lever, to demonstrate how their actions discharged social accountability. We can see, therefore, that moral accountability is accountability driven by the ethical and moral principles of the organization (see, for example, Roberts, 2009; Parker, 2014b). A certain level of social and environmental accountability may be driven by feelings of moral responsibility of individual corporate directors without any need for them to be “called to account”. This brings us back to Gray et al.’s (2014) linking of accountability and responsibility, where accountability is seen as a result of responsibility and, in turn, increases responsibility. Further, it is reminiscent of their (although likely just Gray’s) comment that, “the recognition that being accountable, the giving of an account, is often a morally sound and spiritually uplifting thing to do” (Gray et al., 2014, p. 59). Similarly, a certain level of social and environmental accountability may be discharged by companies through their actions and behaviours as a result of the religious beliefs of those running the organization. Examples are the philanthropic activities of the Quakers (in the UK during the Industrial Revolution – Solomon, 2021), accountability discharged due to the Christian faith and philanthropic giving by companies arising from the Muslim faith (Harahap, 2021; Murtuza et al., 2020). Discharging accountability for species protection and biodiversity by means of accounting but also through actions such as philanthropic giving and donations, inter alia, has been identified as a direct result, in part, of the moral and ethical feelings of responsibilities of executives in South African companies, and their care for the ecological heritage of their country (Atkins et al., 2018). The moral, ethical need for accountability to be driven “for the other” rather than by self-interest has been raised in the academic accounting literature (Shearer, 2002) and “other” may include non-human species and other non-human stakeholders such as “the environment” and ecosystems. Alternative and possibly stronger, or more effective, ways of rendering account other than through formal accounting mechanisms have been called for in the literature (Gray, 1992; Parker, 2014b). These thoughts also cast some light perhaps on how social and environmental accountability may be differentiated from mere financial accountability. Perhaps we can assume that the moral (and religious) drivers are stronger, with a certain level of social and environmental accountability arising from personal conviction. Of course, financial accountability to shareholders or other agents has an ethical and moral basis, but caring for the environment, local communities, society and workers seems more naturally embedded in moral sentiment and conviction than merely overseeing money. The issues and modes of rendering account and discharging social and environmental versus financial accountability are also naturally different. We may indeed speculate that social and environmental accountability predates financial accountability, as moral duties and responsibilities for people and planet predate the creation of formal financial units of exchange. The ancient concept of stewardship feeds into more modern understandings of accountability. Indeed, in a recent presentation, Bebbington (2021) suggested that the stewardship concept fits more neatly with ideas of ecological accountability than the more traditional concept of accountability.11

Paradigm shift or shifting mirage?  177 Having discussed what is meant by social and environmental accountability and the forms in which it manifests itself, we now turn to discussing the drivers of social and environmental accountability.

SOME DRIVERS OF SOCIAL AND ENVIRONMENTAL ACCOUNTABILITY It is important at this point to pose a key question: “So, who, and what, holds companies to account today?” In the following sections we discuss selected drivers of social and environmental accountability. We start by considering legal frameworks as the most formal of these drivers. We then consider the role of codes of corporate governance (see also Chapter 3 of this Handbook). Then we outline the needs of global institutional investors. We follow this by considering other drivers of such accountability that supplement the force of legal frameworks and codes. Specifically, we examine the role of the global institutional investment community, NGOs and other non-shareholding stakeholders, as well as societal expectations, and the role of social media that has enhanced the power of individuals to influence companies through disclosing information about impacts. Legal Frameworks Driving Social and Environmental Accountability To some extent corporate social and environmental accountability is determined and driven by legal frameworks. Where reporting is mandatory, companies have no choice regarding the discharging of their accountability for social and environmental matters. The law establishes the baseline, or lowest common denominator, for the exercise of accountability (Tinker & Okcabol, 1991). In some countries, elements of social and environmental accounting are mandatory. In others, less is commanded. Climate change disclosures, for example, on greenhouse gas emissions and carbon footprint are now mandatory whereas reporting on species and biodiversity is not. The legal framework establishes the bare minimum, or the lowest bar for social and environmental accountability. Voluntary efforts to discharge higher levels of accountability for impacts on society and the environment are entirely in the hands of the corporations. The uncomfortable conclusion reached by early theorists is that companies appear to view social and environmental accountability as an “unnecessary activity” (Gray et al., 1996, p. 50). However, we argue that since then there has been to some extent a paradigm shift, whether grounded in genuine morality or ethical concerns or not, whereby companies are beginning to choose to perceive social and environmental accountability as a necessary activity. The reputational damage of taking an alternative viewpoint and the reactions of broad groups of stakeholders had rendered a lack of accountability regarding social and environmental externalities. Companies today are producing massive amounts of social and environmental information in accounts. Whether this reporting represents a genuine improvement from an accountability perspective has been debated extensively in the academic literature: greenwashing, impression management and philanthropic accounts are all characteristics associated with such increased reporting. Nevertheless, it is our contention that at least to some degree, some of this heightened accountability is also motivated by a genuine concern for the natural environment. Given the critical state of our planet, of nature and of the environment and the shift in “lifeworld” or

178  Handbook of accounting, accountability and governance “worldview” across global societies, would not all company boards want to demonstrate a duty of care has been met? This may be a rose-tinted perspective but there is certainly a strong wave of interest in ESG which can be fuelled by concerns for the future of the planet and future human generations, as well as for non-human species, as we discuss a little later. Legal frameworks can hold companies to account; for example, in the UK one of the most significant shifts has been in the legal framework for companies. A Company Law Review process culminated in the production of the Companies Act 2006.12 This shifted the focus from stakeholder accountability to the materiality constraint such that directors were responsible for managing and disclosing information pertaining to social and environmental issues only where they considered such issues were considered material, as: “It will, of course, be for directors to decide precisely what information is material to their particular business” (DTI, 2002, Section 4.33; see also DTI, 2000). This is known as the “Enlightened Shareholder” approach (more detail in Keay, 2007, 2013; Keay & Iqbal, 2019), where the focus continues to be on shareholder satisfaction but at the same time it is acknowledged that stakeholder accountability contributes to shareholder wealth and corporate value creation. The linkages between accountability, materiality and audit are complex, especially in the social and environmental domain. Materiality decisions are notoriously difficult where complicated issues relating to consumers, local communities, suppliers, the environment, natural capital and biodiversity are concerned, to name but a few. From the 1990s, countries around the world have brought stakeholder accountability, and consequently social and environmental matters, into their corporate governance codes of practice or commercial/company legal frameworks. Almost every country in the world has developed a code of best practice for corporate governance that is regularly updated and refined. Analysing the evolution of these codes across countries shows a clear shift over time away from a narrow, shareholder-orientated definition of governance towards a more stakeholder-orientated approach. This is especially the case, for example, for South Africa where the successive evolution of the King Codes since 1994 represents a world-leading governance framework that enshrines stakeholder inclusivity, going further than an Enlightened Shareholder approach (IODSA, 2016). The South African governance framework sets an agenda for companies and all organizations to integrate social and environmental as well as economic issues into the heart of organizational strategy, decision-making and reporting. This approach is expressed as integrated thinking that leads to integrated reporting (De Villiers & Maroun, 2017; De Villiers et al., 2014). It is interesting, however, that despite the creation of the International Integrated Reporting Committee (IIRC) and its South African equivalent, the International Integrated Council of South Africa, the integrated reporting framework still maintains an essentially shareholder-driven approach to reporting (De Villiers & Sharma, 2020). Notwithstanding this comment, this again appears to be shifting as the frameworks develop (De Villiers et al., 2017; Dumay et al., 2016, 2017). Corporate reporting is changing with an increase of voluntary and often separate reporting that provides more useful information, corporate transparency and an accountability perspective of economy, environment and society to a wider group of stakeholders beyond investors.

Paradigm shift or shifting mirage?  179 The Role of Codes of Corporate Governance in Social and Environmental Accountability The increasingly developing holistic governance frameworks around the world represent a driver of social and environmental accountability to stakeholders. Internal corporate governance mechanisms, such as the role of the board of directors and the involvement of non-executive directors, can enhance or detract from social and environmental accountability. We have witnessed what may be described as recent paradigmatic shifts in these internal governance mechanisms, with an increasing focus on enhancing boardroom diversity, where this may be defined as diversity of director background and characteristics, gender, ethnicity and recently inter-generational diversity. The multi-capitals approach enshrined in integrated reporting arises from integrated thinking. Integrated thinking is a core component of King IV (IODSA, 2016), the latest corporate governance principles in South Africa, that have led to the global development of integrated reporting. Such observable shifts in governance assist in embedding social and environmental concerns into the heart of organizations, their strategy and decision-making. Indeed, including stakeholder representation at board level is a direct way of effecting greater social and environmental accountability at the heart of companies, where these stakeholders are knowledgeable of and communicant with such issues. An example is the proposed inclusion of an “Ecological Value Officer” on boards of directors to ensure the integration of issues of biodiversity, species protection and ecosystems (King et al., 2022). Furthermore, the gradual development and evolution of corporate governance codes of best practice around the world is, it appears, driving greater corporate social and environmental accountability. A casual glance at the latest codes of corporate governance of stock exchanges reveals significant changes, when compared to earlier codes, with social and environmental issues, and a need for stakeholder accountability to be explicitly mentioned and set as an objective of good governance. Institutional Investors as Drivers of Social and Environmental Accountability From a decision-usefulness perspective, the financial stakeholders of companies need adequate information on social and environmental issues for their decision-making. This is especially the case where social and environmental issues are deemed material, although increasingly also in circumstances where there are social and environmental impacts from the companies’ activities. Since the turn of the century there has been an increasing awareness within the global institutional investment community that social and environmental issues represent material financial risks – and opportunities – for companies. Consequently, social and environmental issues represent significant financially material risks across their investment portfolios and therefore need to be managed. The growth of accounting and investor activism and especially the development of processes of investor engagement and dialogue around social and environmental issues has been exponential since the late 1990s. This process was instigated by the Cadbury Report in 1992 that recommended the institutional investment community, given the weight of its potential influence on companies through substantial shareholdings, to engage directly with companies by conducting one-to-one meetings. The academic accounting literature has analysed the content of these meetings as a form of private social and environmental reporting; that is,

180  Handbook of accounting, accountability and governance social and environmental information disclosed to shareholders through private information channels. The earliest work to our understanding in this area found substantial evidence of engagement by institutional investors with investee companies on SEE issues (Solomon & Solomon, 2006). Further, the authors found that the process represented a two-way dialogue with both investors and companies learning from this “private” disclosure process. Of course, the efforts of investors to enhance and demand corporate accountability for society and the environment have been seen in the social and environmental accounting literature as purely self-serving: Financial markets the world over have demonstrated – in general at least – an awesome indifference to the social and environmental activities of the companies they own. Indifferent, that is, except in so far as the social or environmental activities can be seen to have direct and fairly immediate financial implications. (Bebbington & Gray, 1993, p. 6)

Nevertheless, social and environmental reporting channels (synonymous with investor engagement) have continued to grow over time, becoming more formalized and containing more detailed SEE and, more recently, ESG information (Atkins et al., 2015). Institutional investor engagement processes have increasingly focused on climate change issues (Solomon et al., 2011). Indeed, the ESG reporting process has evolved to such an extent that it is now becoming integrated, with public integrated reporting and financial directors and financial investment managers increasingly including ESG issues in their engagement with investee companies (Atkins et al., 2015). Even those initially sceptical of the possible positive fruits on investor ESG engagement have softened in recent years, commenting that: [M]any of the SRI [socially responsible investment] movers and shakers continue to lobby, argue and press for increase in formal, mandatory and substantive social and environmental accountability, and such efforts probably deserve our support, albeit that they have, as yet, had only marginal success. (Gray et al., 2014, p. 205)

While shareholder pressure on investee companies to discharge their social and environmental accountability is founded primarily in financial materiality (Unerman & O’Dwyer, 2010; Unerman & Zappettini, 2014), it is our view that this has altered recently. The change has come with the realization across financial markets that overbearing threats such as climate change, deforestation, biodiversity and species loss threaten humanity, the financial markets themselves and in fact the whole of global society (Atkins & Atkins, 2019). The change witnessed over the last 30 years or so in institutional investor attitudes and behaviour towards ESG issues and their growing consideration of these factors in shareholder advocacy and activism represents one of the most significant and powerful holistic governance mechanisms of stakeholder accountability (Solomon, 2021). Indeed, the role of financial market intermediaries and decision-makers in effectively forcing companies to alter their social and environmental behaviour is, we consider, affecting a paradigm shift across industries globally that is evidenced by the growth in investor engagement, the increasing integration of ESG issues into bank lending decisions and the proliferation of ESG metrics and targets for financial decision-makers: There is an enormous number of very positive initiatives and possibilities with the financial sector from which one can draw various levels of optimism. The most substantial impetus is certainly that

Paradigm shift or shifting mirage?  181 which comes from the considerable and exciting developments in SRI along with the increasing integration of ESG into the mainstream of investment practice. (Gray et al., 2014, p. 207).

The current terminology tends to refer to what was known as SRI as “sustainable investment”, with the latest Global Sustainable Investment Review (GSIA, 2020) defining it as “an investment approach that considers environment, social and governance (ESG) factors in portfolio selection and management” (p. 7). The report views sustainable investment as synonymous with responsible investment and socially responsible investment. At the start of 2020 global sustainable investment reached $35.5 trillion across five major markets, representing a 15 per cent increase in two years. Further, the latest statistics show that sustainable investment assets under management constitute a total of 35.9 per cent of total global assets under management (GSIA, 2020). These figures alone demonstrate the potential power of institutional investors to hold companies to account and drive social and environmental accountability. In our understanding, there is evidence of a paradigm shift in private social and environmental reporting, in collaborative investor engagement on ESG issues, that is driving companies to adopt the means to discharge greater social and environmental accountability. Social and Environmental Accountability Driven by NGOs, Social Audit and Society From the previous sections, it is discernible that a certain level, or equilibrium, of social and environmental accountability is achieved, driven by the evolution of: company law and legal frameworks; social and environmental reporting frameworks; and the role of institutional investors in calling companies to account. Despite what we interpret as a paradigm shift in corporate social and environmental accountability, as evidenced by the proliferation of reporting frameworks and now their convergence, by changes in company law and by increasing private social reporting activities, there remains a shortfall. There also remains significant concern that accountabilities discharged in various ways, through reporting and through corporate behavioural change, do not go far enough to meet the challenges of the 21st century and the needs and demands of societal worldview. Others, therefore, need to step in as: [I]f organisations will not discharge their own social and environmental accountability, and if the state will not act to introduce such regulation enforcing that discharge … then civil society must act in its own interests. (Gray et al., 2014, p. 255)

One only has to consider the media furore over COP26 to see how the ongoing environmental crisis is permeating global society, thereby likely creating a demand for heightened corporate social and environmental accountability from society (Suresh, 2021; Vella, 2021). So, who were the first agents to call companies to discharge social and environmental accountability? Historically, activism by “external social audits” arising from the 1960s in the UK and USA (Gray & Herremans, 2012; Montero & Le Blanc, 2019) contributed to a growing awareness among companies and society of corporate social and environmental accountability. External social audit was defined as: “A broad and imprecise term … [referring] to the preparation and publication of information about one organization by a body independent of that organization” (Gray et al., 1993, p. 259). For example, Social Audit Ltd aimed to “publish data covering an organization’s interactions with employees, consumers, community and the environment, in the interests of a wider accountability and the presentation of a ‘balancing view’” (Gray et al., 1993, p. 264).

182  Handbook of accounting, accountability and governance Indeed, social audits have to date shown themselves to be highly effective in forcing organizations to discharge their social and environmental accountability (Islam et al., 2018; Gray & Herremans, 2012), covering social issues such as employees’ wages, job conditions, job security, equality, health and safety, employee motivation, advertising policy and local community impact. Environmental impact13 was also covered in relation to contemporaneous standards (Gallhofer & Haslam, 2003). These authors provide a summary of some of the newer forms of accounts emerging from civil society, including: accounts of capitalism, accounts of unsustainability, accounts of the oppressed/silenced, accounts of the profession/corruption, silent and shadow accounts, external social audits, counter-accounts, performance-portrayal gaps, accounts for sustainability, accounts as imagining, and regional accounts of water, air, land and so on. We add to these the following: accounts of biodiversity and extinction accounts. As introduced by Gallhofer and Haslam (2003), social and environmental accountability is also driven in part by the production of counter and shadow accounts. We will not dwell on this mechanism of accountability in any detail as it is the subject of Chapter 16 of this Handbook. Stakeholder engagement has been termed a potentially strong mechanism of stakeholder accountability (Solomon, 2021) as direct engagement between stakeholders and companies can result in a higher level of social and environmental accountability. Indeed, stakeholder engagement processes have attracted substantial attention in the academic literature, especially from the late Jeffrey Unerman and his collaborators (see, for example, Bebbington & Unerman, 2011; Bebbington et al., 2014; De Villiers et al., 2014; Hopwood et al., 2010; Unerman et al., 2014, 2018; Unerman & Zappettini, 2014). As ever, the genuine impact of stakeholder engagement has been questioned by researchers, with the conclusion frequently being that they are under-developed and sporadic, with little impact on raising accountability (Owen et al., 2001; Tregidga & Milne, 2020). There has been a shift in NGO engagement as a driver of social and environmental accountability. In the past, academic research has suggested that NGOs’ relationship with companies has tended to be adversarial. Greenpeace serves as a good example, with Rainbow Warrior,14 and other high-profile events such as the demonstrations of Extinction Rebellion. However, new research suggests that in some cases NGO–company engagement has evolved into a more collaborative and constructive relationship with NGOs establishing partnerships with companies to work towards shared goals (Atkins et al., 2022a). Social and Environmental Accountability Driven by Events Corporate-related events, often disasters, tend to drive changes in the level of social and environmental accountability discharged by the perpetrator but also by peers in their industry. A prime example was the way in which the Exxon Valdez tanker spill drove forward the environmental reporting agenda by means of the Coalition for Environmentally Responsible Economies (CERES) and their publication of the Valdez (later CERES) Principles in 1989 (Solomon, 2021). Similarly, the BP-Amoco explosion in the Mexican Gulf in 2010 focused attention again on the oil and gas sector, extracting greater reporting and rhetoric from BP and others in the industry. There are many similar examples: Bhopal (Broughton, 2005), Torrey Canyon (Cooper & Green, 2017) and Volkswagen (Florio & Sproviero, 2021; Siano et al., 2017), to name but a few. Sadly, raising the bar of social and environmental accountability often happens in a reactionary way rather than in a more proactive manner.

Paradigm shift or shifting mirage?  183 The COVID-19 pandemic has alerted and continues (at the time of writing) to alert society to poor social and environmental accountability in companies around the world. As a global and pervasive event that shocked every business sector and every industry, this pandemic also revealed severe deficiencies in the environmental and social domain, acting as a catalyst exposing unethical treatment of workers, including poor health and safety during the pandemic (Breen, 2020; Pegden, 2020; Watterson, 2020). With modern slavery as one of the most concerning ESG challenges for the corporate sector at present (Gold et al., 2015), it seems that this global pandemic enhanced corporate transparency around workplace issues acting as a catalyst forcing companies to discharge accountability to their workers. Optimistically, this could lead to enhanced transparency in the future; from a more cynical viewpoint, this could simply be a short-term disaster response with no longer-term impact on corporate social accountability. Which Social and Environmental Issues are Being Prioritized? Given the massive growth spurt in ESG interest over recent years, how do companies know which of the many ESG issues to prioritize? ESG issues, for example, modern slavery, health and safety of the workforce, working conditions and pay, may be suddenly escalated for a particular sector by events. The concept of dynamic materiality developed in the European Union Taxonomy allows for ESG issues to rise in importance in response to the external environment, events and changes in priorities in society or within companies. We can see, as an illustration, the projects currently being prioritized by the Sustainability Accounting Standards Board (SASB)/Value Reporting Foundation. For environmental issues, ongoing projects are in the following areas: raw materials sourcing in the apparel industry; renewable energy in the electric utilities industry; and addressing the use of single-use plastics in the pulp, paper and chemicals industry. In relation to social issues, they are working on a standard-setting proposal focusing on workplace culture which addresses diversity and inclusion. The work of the Value Reporting Foundation, and its recent absorption into the International Sustainability Standards Board (ISSB), is discussed later in this chapter. Climate change and global warming are now embedded as issues for serious consideration by the corporate sector (Bebbington et al., 2014; Unerman et al., 2018), as seen in the above discussion due to initiatives such as the Climate Disclosure Standards Board (CDSB) and the introduction of mandatory climate change reporting on greenhouse gas emissions and carbon footprint, for example. However, an environmental, or rather ecological, area that has exploded across the financial markets over the last couple of years is biodiversity. In tandem with the warming and changing climate, biodiversity collapse around the world and accelerating species extinctions are becoming increasingly recognized as representing financially material risks for companies and of course for investors. The World Economic Forum’s Annual Risk Report 2020 ranks biodiversity loss as the third most impactful risk facing the global economy, and the fourth most likely to occur.15 There has been a massive proliferation of targets and metrics across the financial markets that seek to provide financial decision-makers with the information they need on biodiversity-related issues (see Atkins & Macpherson, 2022). In 2016, the Capitals Coalition produced the Natural Capital Protocol (Natural Capital Coalition, 2016), and in 2021 the Biological Diversity Protocol (Endangered Wildlife Trust, 2021) was launched. This latter framework provides a comprehensive guide for organizations to report on their impacts on biodiversity and species, as well as to explain what they are doing to lessen these impacts. It has already been trialled by companies in South Africa and

184  Handbook of accounting, accountability and governance Denmark and has demonstrably enhanced biodiversity and species protection. The framework is informed by academic research into extinction accounting, especially in the construction of the taxa accounting framework.16 Although there has been a steadily growing body of academic research into accounting for biodiversity from around the year 2000, it has taken until now for practitioners in accounting and finance to focus on this critically important area. Again, this demonstrates a paradigm shift in our view, as ESG issues that have been relatively ignored are now shifting up the agenda for companies, for the finance industry and for society.

THE VALUE REPORTING FOUNDATION The month of September 2020 witnessed probably the most significant developments in social and environmental accounting and accountability: the intended convergence of sustainability reporting frameworks.17 Naturally the basis upon which these frameworks have evolved differs significantly, with some being more focused on a stakeholder-inclusive approach and others devoting more efforts to shareholder needs. Nevertheless, the intention to develop a unified approach is there. In September 2020, the South African Accounting Standards Board, Global Reporting Initiative (GRI), IIRC, CDP and CDSB committed to developing a shared vision for a comprehensive corporate reporting system that includes ESG reporting and financial accounting, effectively a form of integrated reporting. This was followed in November 2021 by the formation of an ISSB18 which plans to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs. The main challenge facing this initiative to merge the various standard bodies and the frameworks is the target audience of investors. As outlined on the SASB website, “SASB Standards are designed for communication by companies to investors about how sustainability issues impact long-term enterprise value.”19 Similarly, the IIRC framework is aimed at creating long-term value within organizations, with the aim of enhancing shareholder value and providing information for the shareholders of those organizations (IIRC, 2015). Therefore, for these two bodies there is no real conflict of interest. Yet, when we look at GRI, there is a conflict, as GRI is stakeholder-orientated; however, this is the most widely adopted framework globally. Further, in November 2020, SASB and IIRC declared their intention to merge into one organization, namely the Value Reporting Foundation, with the aim of “simplifying the corporate reporting landscape”. This planned merger was completed in June 2021. An important aspect of social and environmental accountability where it leads to social and environmental accounting is obviously who the intended audiences are: social and environmental accountability for whom? The various contemporary frameworks for social and environmental reporting make their intended audiences very clear. For example, as stated on the Value Reporting Foundation website: The Value Reporting Foundation is a global non-profit organization that offers a comprehensive suite of resources designed to help businesses and investors develop a shared understanding of enterprise value – how it is created, preserved and eroded.20

Reflecting on Gray’s (1992) perspective, this statement views social and environmental accountability as a driver of shareholder value maximization, with no mention of other stakeholders, ethics or any other possible motivations. However, other stakeholders are important when we consider GRI. On their website SASB state that the SASB standards and the GRI

Paradigm shift or shifting mirage?  185 framework provide “complementary” standards for ESG information. The underlying motivations for the two frameworks are fundamentally in conflict, therefore the only way they can be “merged” is to use them both together. Financial materiality for investors is the raison d’être for SASB, whereas GRI is driven entirely by stakeholder accountability considerations and, therefore, a different form of materiality: the materiality of ESG decision-making to diverse non-shareholding, as well as shareholding, stakeholders to provide sustainable development from a multi-stakeholder perspective. Indeed, to address this inherent conflict, A Practical Guide to Sustainability Reporting: Using GRI and SASB Standards was released in 2021, a report that provides evidence from companies that are using both frameworks in order to discharge social and environmental accountability that attempts to satisfy the needs of all their stakeholders.21 At COP26 the International Financial Reporting Standards (IFRS) Foundation Trustees announced the formation of a new ISSB which aims to provide a comprehensive global basis for sustainability disclosure standards. This appears to sideline the GRI22 who currently set their widely adopted standards, and with whom cooperation is imperative. The IFRS Foundation completed the consolidation of the CDSB and the Value Reporting Foundation (and consequently the integrated reporting framework and the SASB) in 2022. The ultimate objective of these shifts is to create a global sustainability disclosure standard-setter for financial markets.23 It is undeniable that the recent shifts towards a collaborative and merged approach to sustainability accounting and reporting represents a substantial paradigm shift in the social and environmental accountability expected from companies. We have yet to see the impact of these changes on the level of accountability rendered by the corporate sector. Investors and other stakeholders are demanding comparable and consistent social and environmental information and driving forward this fast-moving agenda. The role of the institutional investors in driving social and environmental accountability is therefore tightly linked to the role of accounting and disclosure frameworks, as we will see in the following section.

SOCIAL AND ENVIRONMENTAL ACCOUNTABILITY: PARADIGM SHIFT OR SHIFTING MIRAGE? Overall, from the evidence presented throughout this chapter, we consider that there has been a paradigm shift in corporate social and environmental accountability over the past 50 years or so. In Figure 8.1 we attempt to present the drivers and outcomes of social and environmental accountability as discussed throughout this chapter. The different shades are an attempt to introduce a historical dimension to show which drivers and outcomes arose before others. The lighter shades indicate drivers that have evolved more recently such as institutional investor engagement. The darker shades indicate drivers such as moral and ethical principles that have influenced accountability for the longest periods of time. Similarly, in terms of outcomes, the relative newness of sustainability reporting is shown by lighter shades compared to the older outcomes of social and environmental accountability enshrined in action and behaviour. Overall, we can see over time an increase in drivers of social and environmental accountability, as well as a development in outcomes that demonstrate how that accountability has been discharged.

Figure 8.1

Source: Authors.

The drivers and outcomes of corporate social and environmental accountability: a paradigm shift over time?

186  Handbook of accounting, accountability and governance

Paradigm shift or shifting mirage?  187 Consideration of competing realities and the creation of realities around social and environmental accountability is an important research area for social and environmental accounting academics, with a long tradition. Hines’s work on environmental accountability raised issues of reality creation (Hines, 1988). We can immediately see that there are vastly different perspectives on reality between companies and those calling the companies to account, as illustrated by the earlier reference to saving whales. Achieving greater social and environmental accountability may be seen as a matter of trying to align these realities. All the efforts to bring corporate views of their social and environmental responsibilities closer to those of their stakeholders are broadly problems of competing realities – for example, social and environmental accounting with the reality of pandemics (Cho et al., 2021), or in the context of developing countries (Samkin & Wingard, 2020; Qian et al., 2021), or in the time of political, social and economic crisis (Al Mahameed et al., 2021). It is only by aligning and achieving a rapprochement of these circumstances that a utopian level of social and environmental accountability may be reached, however that may be defined. So, to what extent has there been a genuine paradigm shift in corporate social and environmental accountability over the last 40 to 50 years? From one perspective it seems that there has been a significant shift given the substantial increase in social and environmental reporting, through separate sustainability reports, through integrated reporting and through website disclosures. Certainly, the content and quantity of reporting on social and environmental issues is significantly different from that in the last century. However, we also acknowledge that the academic literature deems much of this reporting to be imbued with impression management and dismisses it as greenwashing or uses a similar term. Instead of approaching a desirable oasis of social and environmental accountability, are we instead moving towards shifting mirages that disappear as we travel across the sands of time? Is there an oasis at all? We consider that there is and, if not by any chance, there ought to be, but we have not quite made it there yet. The increasing mandatory nature of social and environmental accountability through regulation, especially in the climate change and carbon footprint area, combined with the attempts to conflate the competing frameworks, as well as increasing demand for accountability from the institutional investor community, from the banking sector and from other influential societal and stakeholder groups, all represent influential mechanisms calling companies to discharge their accountability. Genuine social and environmental accountability is, we believe, achievable as we progress through the 21st century. It must be achieved if we are to survive as a species, improve ecological and environmental conditions and have a fairer global society with reduced poverty, better working conditions and the end of modern slavery. Where is audit in all of this? The audit function is startlingly absent from the discussion in this chapter. Why? It may be acknowledged that audit currently has enough problems (for example, the audit expectation gap) without suggesting that the external audit needs to start to drive greater social and environmental accountability. Yet there is a crucial role for audit in the ESG domain that needs to be further developed. Significant efforts have been made to incorporate social and environmental issues into audit and assurance but clearly more work remains to be done and not delayed. Perhaps audit reform and a greater focus on the role of audit in demanding corporate social and environmental accountability represents a potential area for recommendations and improvement? This certainly is a potential avenue for academic research. To what extent is audit a driver of social and environmental accountability?

188  Handbook of accounting, accountability and governance Governance, accounting, the finance industry and the audit profession or audit industry must be transmogrified in order to urgently address the diabolical social and environmental issues of our time, by holding companies to account and forcing them to discharge their social and environmental accountability through actions, behavioural change and, of course, accounting. Let us return to Gray’s (1992) assertion that mandatory reporting is required to exact social and environmental accountability. ESG reporting that is mandatory, but also emancipatory, can lead to changes in corporate behaviour and to the attainment of higher levels of social and environmental accountability action and being seen to be discharged. There is a huge agenda for future research in all the areas mentioned throughout this chapter, including: the increasing role of institutional investor engagement on ESG issues; the impact of new frameworks such as the BD Protocol; changes in social and environmental accountability as a result of the convergence of sustainability reporting frameworks; the role of audit in ensuring social and environmental accountability is discharged by companies; and the effectiveness of corporate governance codes of practice and principles in enhancing and ensuring corporate social and environmental accountability. This is not by any means an exhaustive list of key research potential but it highlights the vast array of potential research projects around social and environmental accountability that can help in driving us closer to new and improved levels of accountability. We are at a critical point in human history where there is an urgent need for companies, as well as organizations in all sectors, governments, and supra- and intra-national institutions, to purposely act to exact levels of social and environmental accountability from the business or the commercial sector that are not just adequate in preserving people and planet but that exceed the highest expectations. There is no leeway for inadequate performance and delays in acting in the public and the planet’s interest against these widely held and increasing expectations.

NOTES 1. CSEAR was established at the University of Dundee, Scotland in 1991. 2. Specifically, this editorial focused on the way in which five editions of Corporate Governance and Accountability (the most recent edition is Solomon, 2021) have demonstrated the evolution in accountability, from an interview with one of the authors of this chapter. 3. By CSR, Gray was referring to corporate social reporting, which he explained was a term that covered social and environmental reporting. 4. Gray et al. (1996) asserted that, “We continue to believe that the accountability framework is the most useful one for analysing accounting information transmission in general, and CSR in particular” (p. 32). 5. There is a full discussion of this shift in terminology in Solomon (2021). 6. Originally these Principles were referred to as the UNPRI, being backed by the United Nations, but now they are simply PRI. 7. Messner (2009) discusses demand for and supply of accounting. We take a slightly different perspective by considering the demand for and supply of accountability leading to the settling at a particular “level” of accountability discharged. 8. Dynamic materiality acknowledges that the items deemed material may change over time. It takes an adaptive, forward-looking approach to ESG topics and their prioritizing, thus allowing more action on newly identified risks. 9. Greenwashing describes marketing or PR techniques that are used to make a company appear environmentally friendly without decreasing its impact on the environment.

Paradigm shift or shifting mirage?  189 10. This unpublished paper is the draft editorial for a forthcoming special issue of Accounting, Auditing & Accountability Journal on “Exploring the Historical Roots of Environmental and Ecological Accounting, Auditing and Accountability”. 11. This was a presentation made for the Centre for Research into Accounting and Finance in Context (CRAFiC), Sheffield University research workshop series on 20 October 2021 by Jan Bebbington on “Translation and the SDGs”. 12. The full title is: “An Act to reform company law and restate the greater part of the enactments relating to companies; to make other provision relating to companies and other forms of business organisation; to make provision about directors’ disqualification, business names, auditors and actuaries; to amend Part 9 of the Enterprise Act 2002; and for connected purposes”. 13. Environmental impact is any effect on the environment, positive or negative, that results from an organization’s products, services, activities or actions. 14. The Greenpeace boat, known as Rainbow Warrior, actively supported campaigns against seal hunting, whaling, nuclear testing and nuclear waste dumping campaigns in the late 1970s and early 1980s. 15. See Cambridge Institute for Sustainable Leadership (CISL), University of Cambridge (2020). 16. See Atkins and Maroun (2018); Maroun and Atkins (2018); and Atkins and Atkins (2019). “Taxa” are the units of classification used in the branch of biology known as taxonomy. 17. See, for example, the SASB website announcement: www​.sasb​.org/​about/​sasb​-and​-other​-esg​ -frameworks, as well as details on the Value Reporting Foundation website: www​.valu​ereporting​ foundation​.org (last accessed 30 March 2022). 18. See www​.ifrs​.org/​groups/​international​-sustainability​-standards​-board (last accessed 30 March 2022). 19. See www​.sasb​.org/​about/​sasb​-and​-other​-esg​-frameworks (last accessed 30 March 2022). 20. See www​.valu​ereporting​foundation​.org (last accessed 30 March 2022). 21. This was published in 2021 by GRI and SASB with support from PricewaterhouseCoopers, the Impact Management Project and ClimateWorks Foundation, and is available at: www​ .globalreporting​.org/​media/​mlkjpn1i/​gri​-sasb​-joint​-publication​-april​-2021​.pdf (last accessed 30 March 2022). 22. Carol Adams’ commentary is available at: https://​ drcaroladams​ .net/​ a​ -trial​ -balance​ -for​ -sustainability​-reporting​-reconciling​-the​-issb​-and​-the​-gssb and the GRI response is available at: www​.sustainability​-reports​.com/​gri​-responds​-to​-ifrs​-foundations​-creation​-of​-a​-new​-sustainability​ -board​-and​-consolidation​-of​-cdsb​-and​-vrf​-into​-the​-foundation (last accessed 30 March 2022). 23 See www​.ifrs​.org/​news​-and​-events/​news/​2021/​11/​ifrs​-foundation​-announces​-issb​-consolidation​ -with​-cdsb​-vrf​-publication​-of​-prototypes (last accessed 30 March 2022).

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PART III ACCOUNTING, ACCOUNTABILITY AND GOVERNANCE IN DIVERSE CONTEXTS AND SECTORS

9. Accounting, accountability and governance in junior stock markets Neeta Shah

OVERVIEW Junior (or second-tier) stock markets provide an alternative to listing on main markets, especially for innovative and growth companies and those with relatively low market capitalization. One of the most established such markets is the UK’s Alternative Investment Market (AIM), with over 800 quoted companies. Entities quoted on junior markets often have less developed governance and accountability structures than those on main markets. For example, chair/CEO duality, where the same individual (often a corporate founder) takes on both roles, is a recurring feature of such entities, and board sizes and the number of independent directors are often smaller than full corporate governance codes would expect. AIM companies rarely comply with the full UK Corporate Governance Code. An important alternative governance mechanism is the requirement for a “nominated adviser” (NOMAD), which advises an AIM company on its activities and reports regularly to the London Stock Exchange. The NOMAD reflects the tradition of relying on “soft” mechanisms of regulation in the UK, and the system relies on cooperation and transparency on the part of corporate management, which is not always forthcoming.

INTRODUCTION A junior stock market (sometimes referred to as a second-tier stock market – Granier et al., 2019) is a securities market that is usually organized as a sub-market of the main stock exchange. This chapter concentrates on the largest of these markets, the AIM of the London Stock Exchange (LSE). The AIM was established in 1995 to replace the Unlisted Securities Market (see Buckland, 1989), which had been created in the UK in 1980. Junior stock markets should be distinguished from “secondary markets”, which are markets for the buying and selling of existing securities, as opposed to “primary markets”, where new securities are offered for acquisition. Most stock exchanges operate mainly as secondary markets. As well as AIM, important junior stock markets around the world include Alternext (a second-tier market of the Pan-European transnational market EuroNext), AIM Italia and TOKYO PRO Market. Companies with securities traded on junior stock markets tend to be smaller, younger or newer than those on the associated main stock exchange. The attraction of a quotation on a junior stock market is that such companies often face a less rigorous regulatory regime than companies listed on the main stock exchange, and this may extend to lighter governance expectations (Stringham & Chen, 2012; Alon-Beck, 2020). Junior stock markets are expected to act as feeders for promising companies that would eventually graduate to the main market 196

Accounting, accountability and governance in junior stock markets  197 segment (Posner, 2005). Additionally, they support venture capitalists’ exit opportunities and diversifications (Granier et al., 2019). Unlike the larger listed companies, AIM companies are unlikely to exhibit full separation of ownership and control, as founders and venture capitalists may retain substantial block shareholdings and be represented on boards of directors. A founder with a large block of shares may be both chair of the board and CEO. This may suggest that simple principal–agent models will provide only limited insights into issues of accountability and governance. In addition, this would reduce investor protection in AIM companies. According to Mortazian et al. (2019), these companies might be affected significantly by blockholders because of high ownership concentration compared to the companies listed on the main market. The term “gentlemanly capitalism” used by Cain and Hopkins (1986, 1987) helps us to understand the UK’s institutional environment and why the UK has historically relied on voluntary self-regulation over law for stock exchange listing, takeovers and accounting. Gentlemanly capitalism is legitimized through the voluntary approach rather than a legislative mandate. Voluntary self-regulation is emphasized in developing codes for corporate governance. In the UK, the Financial Reporting Council (FRC) has responsibility for setting the UK Corporate Governance Code (“UK Code”) (FRC, 2018a) and Stewardship Code (FRC, 2020), as well as the UK standards for accounting. Institutional differences between the US and the UK capital markets influence choice of location for companies making initial public offerings (IPOs), for various reasons. First, the US emphasizes formal rule-based regulation, whereas the UK tends to prefer voluntary codes. Second, the US focuses on arm’s-length market transactions while the UK is influenced by dense social networks. Finally, the US approach to solving the conflict between shareholders and managers has predominantly relied on incentive alignment, whereas the UK adopts a more monitoring role (Moore et al., 2012). The attractiveness of AIM for international listing (Mendoza, 2008) can be seen by examining the statistics provided by the LSE. At end of September 2022,1 825 companies from 22 different countries including tax havens like the British Virgin Islands, Cayman Islands and Guernsey were listed on the AIM. The number of companies is broken down into world regions: Pacific (21), Asia (5), Africa (1), Latin America (1), Middle East (4), North America (54) and Europe (729). Of the 729 European companies, 649 were incorporated in the UK. The aggregate total market capitalization of the entities listed on AIM was nearly £93 billion, which had dropped by 10 per cent from the previous month.2 The structure of the remainder of this chapter is as follows. In the next section, the background to AIM is set out. This is followed by a discussion of the specific accountability and governance issues that arise in junior stock markets, using AIM as an illustration. One of AIM’s key governance factors is using NOMADS, which is discussed in a separate section. The following section includes a brief survey of previous research relating to AIM and the accounting, accountability and governance issues that arise for entities quoted on this market. Finally, there is a conclusion setting out some suggestions for further research.

BACKGROUND TO THE ALTERNATIVE INVESTMENT MARKET The first formal, rule-enforcing stock exchange in the UK was in the 18th century when stockbrokers transformed coffee houses in London into private clubs. The clubs accommodated more reputable brokers, introduced entrance requirements and removed those who intention-

198  Handbook of accounting, accountability and governance ally or unintentionally defaulted. The stock trading evolved through Garraway’s Coffee House and Jonathan’s Coffee House, New Jonathan’s, the Stock Subscription Room and eventually to the LSE, whose members adopted “My word is my bond” as their motto (Stringham & Chen, 2012, p. 38). Similar stock markets emerged in the 18th and 19th centuries in other countries, but by the latter part of the 20th century, emerging companies found it increasingly difficult to gain listings on the more established stock exchanges. This was because stock exchanges imposed restrictions, such as requiring companies to have been in existence for at least a minimum number of years, to have an initial market value exceeding a stated minimum and to have at least a specified percentage of shares available for trading on the market. Posner (2005) states that between 1995 and 2005, 12 European countries created at least 20 “new” stock markets designed explicitly for entrepreneurial and growth companies to enable them to access different sources of finance. Most of these “new” markets were modelled on the US market established by the National Association of Securities Dealers Automated Quotations (NASDAQ). A second-tier market acts as a potential feeder to the country’s main market and is usually established under the auspices of the main market rather than as a stand-alone entity. However, many of the first generations of new markets from the 1980s to late 1990s, such as Germany’s Neuer Markt (NM)3 (see Audretsch & Lehmann, 2008; Revest, 2019), focused narrowly on technology stocks and the collapse of the dotcom bubble in 2000 severely weakened these markets and ultimately led most of them to close (Vismara et al., 2012; Abbate & Sapio, 2019). Although AIM has a high number of technology stocks, it extended its scope to include companies engaging in financial and non-financial sectors, and currently the four largest sectors are basic material, consumer discretionary, industrial goods and services, and technology, comprising 58 per cent of the total AIM companies.4 AIM started in 1995 with 10 companies, with a total market capitalization of £82.2 million (Mallin & Ow-Yong, 1998). Since then, AIM has flourished internationally as a market representing a range of business sectors and a wide investor base (Mallin & Ow-Yong, 2013b; Roscoe & Willman, 2021). These companies are not considered listed companies but instead quoted or traded companies. AIM has supported over 3,800 companies, raising a total of £45.4 billion at admission.5 The financial crises of 2000–02 and 2007–09 benefited AIM for several reasons. According to Lagneau-Ymonet et al. (2014), Europe had a gap as it did not have a stock market similar to the AIM for smaller-growth companies. Additionally, the regulatory and legislative tightening post-Enron meant that the US stock market became less attractive. AIM as a market model has proved to be successful (Mallin & Ow-Yong, 2013a) for the UK and internationally, being mimicked by other exchanges, for instance AIM Italia regulated by Borsa Italiana (Manelli et al., 2020) and the TOKYO AIM (Granier et al., 2019). In July 2012, TOKYO AIM altered its name to TOKYO PRO Market, and since then Tokyo Stock Exchange, Inc. has continued to operate this junior market. Fundamental to both TOKYO PRO Market and AIM Italia is the concept of the NOMAD. Several Asian countries have also established similar markets with reduced regulations aimed at accommodating small companies, such as China’s Shenzhen ChiNext and Hong Kong’s Growth Enterprise Market. The firms listed on the AIM are relatively small and fast-growing (Gerakos et al., 2013). There is a dichotomy in the debate on producing accounting information for small-cap companies from a regulatory perspective, transparent communication to the user needs and the costs related to producing the financial reports. The International Accounting Standards Board developed International Financial Reporting Standard (IFRS) for small and medium

Accounting, accountability and governance in junior stock markets  199 enterprises (SMEs) and may be more suitable for the AIM companies as IFRS for SMEs reduces choices and simplifies presentation and disclosure requirements. However, AIM rule 19 specifies that companies incorporated in the UK and the European Union should prepare consolidated accounts using IFRS, whereas company-only accounts should use either IFRS or the national Generally Accepted Accounting Principles (GAAP).6 Furthermore, the European Securities and Market Authority has questioned the usefulness and quality of the financial reporting of innovative small firms (Filip et al., 2021). Hyndman and McKillop (2018) regard accounting as a goal-directed activity, fixed to a stated end, meeting users’ or stakeholders’ information needs. For AIM companies, accounting for transparency is through the publication of the financial reports and accountability through the implementation of internal structures such as audit committees, internal audit and risk management as assurances of the quality of the financial reporting and the need for an external audit. However, the value of mandatory auditing by independent auditors required for AIM companies may not always be clear. The cost of an IPO and ongoing accountability and governance costs can be a challenge for smaller companies, but despite this, disclosure of the governance structure and how it operates may reduce monitoring costs for shareholders (Mallin & Ow-Yong, 2012). Solomon (2021, pp. 4–5) suggests that corporate governance has evolved and that, instead of focusing on specific corporate governance items, there is a greater focus on the management of the company, strategic direction, accountability to stakeholders (rather than narrowly aligning to shareholders) and finally the impact of the company on society and the environment. She reminds us that this approach to corporate governance, exemplified by the South African corporate governance code, is the approach to be taken by all modern companies. Here, the management needs to discharge their accountability to the stakeholders who can affect or is affected by the company’s operations (Freeman, 1984) and who should be regarded as equally important for the long-term sustainability of companies (McLaren, 2004). To be an AIM company, there is no restriction on the level of shares in the hands of the public, rather than block shareholders, while on the LSE there needs to be a minimum of 25 per cent of shares expressly held by the public. There is no minimum market capitalization and no requirement for a minimum trading period (the LSE requires three years of trading before permitting a listing). There is also no maximum market capitalization, with extreme variation in capitalization ranging from over £3 billion to a low of £500,000, at the end of September 2022. To aid in improving market liquidity (Mendoza, 2008) and to provide benchmarks for assessing the performance of individual AIM securities, three index measures have been constructed: FTSE AIM UK 50, FTSE AIM 100 and FTSE AIM All-Share.7 Although reducing the requirements for listing onto the AIM can be an effective measure in supporting SMEs, any unchecked trust in the ability of stock markets to stimulate real performance is hard to reconcile with the effects of financialization (Revest & Sapio, 2013). Abbate and Sapio (2019) observe that financialization tendencies can involve smaller companies and the reduced stock listing recommendations for the junior market conduces to a “mild form of financialization”, thus compartmentalizing companies that are unable to list on the main stock exchange and the listing decision is outsourced to a financial intermediary such as the NOMADs. Andersson et al. (2010, p. 632) note that financialization for the AIM bio-pharma sector relies on the “capital market for funding because it is cash hungry until, and if, products in pipeline become commercially viable”. The bio-pharma business model of financialization is

200  Handbook of accounting, accountability and governance also true for other highly speculative sectors. Despite the international nature of AIM, Amini (2013) and Amini and Keasey (2013) have shown that a company’s proximity to London enhances its ability to achieve a successful IPO on the AIM market, underlying the extent to which personal knowledge and social networks are still important for fundraising on junior markets. Often, though, reliance on personal relationships in the context of accountability and governance can prove problematic, and this can be a significant issue for junior markets. The next section of this chapter considers accountability and governance in the context of AIM.

AIM, ACCOUNTABILITY AND GOVERNANCE Like companies with securities listed on the main LSE, AIM companies are required to publish annual and interim reports including audited financial statements. These reports are intended primarily for investors, and accountability to other stakeholders may be limited. Anbleyth-Evans and Gilbert (2020) criticize the oil and mining companies that choose to list on the AIM for disregarding the local people’s rights to protect their ecosystems and exercise autonomy. By contrast, the putatively “democratic” governance system that the City of London community enjoys hinders effective transparency of the activities of oil corporations listed on the AIM that take advantage of the continued post-colonial relationship. City institutions enable secrecy jurisdictions or tax havens in British overseas territories (for example, Bermuda and the Cayman Islands) or British Crown dependencies (for example, the Channel Islands and the Isle of Man). Anbleyth-Evans and Gilbert (2020) further critique the regulatory system for poor response to financial misconduct and the use of secrecy jurisdictions. Their study also makes use of data from the Bahamas, Panama and Paradise Papers to show how corporations listed on the AIM market may use legal structures to hide the ultimate beneficial owners. Financial collapses have led policymakers in many jurisdictions to focus on disclosure and corporate governance by introducing and enforcing rules aimed at ensuring investor protection (Mendoza, 2008). Corporate governance has various definitions, and the most commonly used definition has emanated from the Cadbury Report (1992), which states, “Corporate Governance is the system by which companies are directed and controlled” (p. 15, para. 2.5). The Cadbury Committee focused on financial aspects of corporate governance, and hence emphasized financial reporting, external audit and internal control, as well as the roles of the board of directors in governing companies mainly in the interests of shareholders. However, the modern environment calls for a broader stakeholder-orientated approach to corporate governance, demanding more significant levels of transparency and accountability (Solomon, 2021, p. 6). Corporate governance is now taught at both undergraduate and postgraduate levels, with some excellent books on corporate governance (for example, Solomon, 2021; Tricker, 2019) and also reviews (for example, Claessens & Yurtoglu, 2013; Shleifer & Vishny, 1997). The predominant theory used in corporate governance research is agency theory, which describes the incentive problems and the conflict between the management and the shareholders (see Jensen & Meckling, 1976; Fama, 1980; Eisenhardt, 1989; Shapiro, 2005) caused by the separation of ownership and control. This is known as the principal–agent relationship, where one party (the agent – in this case, management) acts on behalf of another (the principal – in this case, the owners). Agency theory assumes that the goals of the principal and agents

Accounting, accountability and governance in junior stock markets  201 are likely to be incompatible; for example, that the principals require a high quality of financial information that is received in a timely and appropriate format, while, in contrast, the agent may prefer to provide less information so as to obscure the agent’s actions. Empirical work in accounting/corporate governance that explicitly adopts an agency theory framework is broad and extends globally. The agency theory has helped in the understanding of the accountability mechanisms (Keay, 2017) covering tensions between principals’ and agents’ conflicting interests, opportunism, informational asymmetry and compensation. Keay further argues that accountability by the board consists of accurate disclosure and reporting of information to shareholders, explaining, justifying their actions, evaluating and potentially imposition of consequences. Although most of the research is on large, listed companies, any understanding and knowledge gained here can be extended to the junior market companies. For example, Morris (1987), in considering the corporate lobbying for proposed accounting standards, uses agency theory to explain the decision to lobby, where larger companies tend to lobby and use the GAAP as the minimum for disclosure of accounting information. However, companies characterized by high-quality as well as poor-quality companies will both have the incentive to lobby the accounting profession. The UK Code adopts the recommendations made of the Cadbury Report (1992) and further work done by several other committees (see Roberts et al., 2020; Solomon, 2021, pp. 43–54; see also Chapter 3 of this Handbook). Although the emphasis of the UK Code is on the larger listed companies, for AIM companies it is not mandatory to adopt the UK Code (Xue & O’Sullivan, 2023). The discourse on the suitability of the UK Code suggests the development and enactment of second-tier corporate governance recommendations for smaller companies (Mallin & Ow-Yong, 1998). The Cadbury Report (1992, para. 3.10) suggests that consideration should be given to the company’s circumstances and “precedence to substance over form”. It is clear that the AIM companies cannot have equivalent levels of corporate governance structure as the LSE; however, the latter recommends that the AIM companies use the UK Code and many larger AIM companies do follow the voluntary adoption of the UK Code and its mandatory disclosure. However, smaller AIM companies often find it difficult to separate the roles of chair of the board and CEO, especially when these positions were occupied by a founder with a substantial block shareholding. Another area of difficulty was having enough independent non-executive directors (NEDs), which impacted the audit and remuneration committees. Since there was no equivalent code directly applicable to other quoted companies, the Quoted Company Alliance (QCA, previously known as the City Group for Smaller Companies – CISCO) published its Corporate Governance Code for Small and Mid-Size Quoted Companies in 1994, two years after the Cadbury Report (see Solomon, 2021, p. 56). In 2001, the QCA revisited their guidance and recommended alternatives in the following areas: the role and number of NEDs, audit committee structure, board meetings, a senior independent NED and nomination committees. Since then, the QCA has continuously updated their guides. The most recent QCA Corporate Governance Code in 2018 is a response to changes made by the LSE to the AIM rules.8 As of September 2018, the LSE has announced that all AIM companies, under AIM rule 26 disclosures, are to disclose on their website the corporate governance code the board of directors has applied and explain how the company complies with the current code. This is central to the voluntary ethos of corporate governance codes in the UK and elsewhere, where the “comply or explain” concept is used. This means that a company’s duty under normal circum-

202  Handbook of accounting, accountability and governance stances is to comply with the code provision; if it does not, it must explain why it has deviated and avoid boilerplate text explanations (Keay, 2014; Roscoe & Willman, 2021). Either the UK Code or the QCA code of corporate governance should be adopted as appropriate for their size and stage of development.9 Most AIM quoted companies currently state that they comply with the UK Code or QCA code (companies incorporated in jurisdictions other than the UK would need to comply with local governance regulations). The latest data on compliance comes from 2018, when 89 per cent of AIM companies followed the QCA code.10 However, many AIM companies make a qualified compliance statement; for example, “they do not qualify in full, but as appropriate for a company of their size”. The QCA code specifies 10 principles focusing on enhancing medium- to long-term shareholder value, which include specific requirements and disclosures. For instance, the QCA Code expects each company to provide a statement of its business model to include the following: understanding shareholders’ needs, accountability to the wider stakeholder group and social responsibilities, risk management, balanced board, appropriate skills and experience among directors, board performance, promotion of ethical values and behaviour culture, an appropriate governance structure and communication with stakeholders. In addition, the chair needs to provide a clear explanation of how the company has applied the QCA Code. In general, compliance with the corporate governance code aligns with the principal’s interests and is typically assumed a reliable proxy for good corporate governance. However, Roberts et al. (2020) state that this approach can be misleading. Hence the “comply or explain” disclosures should be seen merely as a form of board accountability. At the same time, the primary objective of the corporate governance code itself is normative, as it seeks to establish and promote a set of norms or ideals that will shape directors’ conduct. Academic researchers have tended to adopt a “box-ticking” approach of investors by focusing only on levels of compliance with the Code; for instance, separation of the roles of the chair and the CEO, board size including the number of NEDs and the existence of board committees. Earlier studies of companies listed on the main LSE market tended to show the efficacy of information disclosure (Harvey et al., 2020) as strong adherence to the principles in the Code (Conyon, 1994; Conyon & Mallin, 1997). However, later studies have considered explanations provided by the board for non-compliance as per the “comply or explain” concept (for example, Seidl et al., 2013). Shrives and Brennan (2017), in their study of FTSE 100 companies, criticize the quality of the explanations on the corporate governance rhetoric. Remaining silent on non-compliance is seen as tactical for soft law disclosures and may be implicitly accepted as compliance by the users or as an explanation used as an excuse for best practice. Bradbury et al. (2019) focus on audit committees in the Australian context and find that firms that do not have an audit committee give an explanation that “firm size does not justify an audit committee”, “the board size does not justify an audit committee”, or “the firm is not complex enough to justify an audit committee”. They find that company characteristics such as having lower reported total assets, smaller boards and less leverage as an explanation for not having an audit committee are genuine rather than a pretext to avoid adopting governance best practices. An interesting find by Mallin and Ow-Yong (2012) is that shell and highly geared AIM companies disclose relatively lower levels of corporate governance information than recommended under QCA guidelines, suggesting that there is reduced oversight by regulators.

Accounting, accountability and governance in junior stock markets  203 It is an advantage for the AIM companies not to adhere to the same quality of corporate governance required by the main market. At the time of publication of the Cadbury Report (1992), AIM did not exist in its present form. Still, the recommendation by this Report on smaller listed companies could equally apply to the AIM companies: “The board of smaller listed companies who cannot, for the time being, comply with parts of the Code should note that they may instead give their reason for non-compliance” (Cadbury Report, 1992, para. 3.15). The advantage of the “comply or explain”, principles-based approach, for instance, has been enough to generate improvements in the efficiency and development of the audit, remuneration and nomination committees, as well as the internal control system. The “comply or explain” concept continues to be effective in the UK’s financial markets. However, the continuous collapse of corporations casts doubt on the efficacy of the Stewardship Code for institutional investors as it continues to use the “comply or explain” approach and remains unenforceable (see Solomon, 2021). To explain changes in the expected roles and duties of the auditor of UK listed companies, Napier (1998) set out two models of corporate governance: the “collectivity” and “business company” models. He argued that the “collectivity” model, where the company was regarded as the shareholders collectively, who appointed a board of directors to oversee the management of the company’s business, was more descriptive of companies in the 19th and early 20th centuries but, more recently, had been largely replaced by the “business company” model. In this model, there is greater separation of shareholders and the board of directors, with many directors being executive managers working in the company’s business. The trajectory since the publication of the Cadbury Report (1992) has been to move more towards a largely independent board with a majority of NEDs, but this is more difficult for younger and smaller companies with founders actively working in the business and expecting to play a role on the board. If independent NEDs are crucial for effective governance but are less well represented on the boards of AIM companies, then an alternative governance mechanism needs to be put in place. For AIM companies, this is the NOMAD. Shah and Napier (2019) developed a simplified version of the business company model, and, as shown in Figure 9.1, this has been adapted to reflect the role of the NOMAD, an individual who often provides a degree of external governance for AIM companies (Mallin & Ow-Yong, 1998). The next section of this chapter explores in more detail the role of the NOMAD in the governance of AIM companies.

204  Handbook of accounting, accountability and governance  

Source: Adapted from Shah and Napier (2019).

Figure 9.1

AIM business company model and governance

NOMINATED ADVISER (NOMAD) The LSE operates two different regulatory environments: the main market and the AIM. Both the AIM rules for companies (LSE, 2018a) and the AIM rules for the NOMADs (LSE, 2018b) are underpinned by the European regulatory framework for public markets as well as by UK company law. The role of the exchange is to design an appropriate governance mechanism and for this AIM has built a unique governance mechanism based on the social networks using the NOMADs (Mallin & Ow-Yong, 2012; Stringham & Chen, 2012; Abbate & Sapio, 2019). Under the AIM rules for NOMADs, “The nominated adviser is responsible to the Exchange for advising and guiding an AIM company on its responsibilities under the AIM Rules for Companies both in respect of its admission and its continuing obligations on an ongoing basis” (LSE, 2018b, rule 17). AIM companies must retain a NOMAD and a broker at all times (LSE, 2010, 2018b). The importance of the NOMAD is emphasized by the AIM rules. Since the regulatory regime is relaxed as compared with the main London market maintained by the UK Listing Authority (UKLA) and known as the Official List, the responsibility of regulatory supervision for AIM is placed upon a company’s sponsor or NOMAD. While IPO firms on the main market are monitored and regulated by the UKLA, IPO firms on the AIM must appoint and retain a NOMAD who undertakes the role of regulator. NOMADs are private companies – for instance, investment banks, corporate finance firms or an accountancy firm approved by the LSE – that play the role of adviser and regulator (Alhadab et al., 2016). There were 27 NOMADs listed on the LSE website in late 2021, some of which represent large numbers of AIM companies.11 This use of a NOMAD as the regulatory structure has several benefits. A NOMAD can reduce disclosure, auditing and governance recommendations as it seems appropriate and

Accounting, accountability and governance in junior stock markets  205 fitting for a company wanting to list on AIM. Theoretically, public disclosure can be replaced by private disclosure to the NOMAD, which publicly attests to the firm’s quality (Gerakos et al., 2013). According to Mallin and Ow-Yong (2012), NOMADs’ role is that of “gatekeepers”, where they either accept or reject an individual company’s quotation on the AIM (see Mendoza, 2008; Revest & Sapio, 2013; Roscoe & Willman, 2021). To ensure that lack of accountability, unethical behaviour and corrupt practices are minimized, the NOMADs are monitored by the LSE (Rousseau, 2007) (and those who have not performed to the acceptable standards may be subject to private/public censure, fines or removal from the list of approved NOMADs by the LSE as the regulator). AIM has attracted controversy with critics arguing that its lax regulatory regime has failed to protect investors adequately, hence the unbounded fervour for punishing those that break AIM rules (Elliott et al., 2008; Mallin & Ow-Yong, 2012). Mallin and Ow-Yong (2012) question the diligence with which NOMADs perform their duties and suggest that acting as a broker may conflict with the role of the NOMAD (Mallin & Ow‐Yong, 1998). The most commonly violated AIM rules are number 10 (principles of disclosure), 11 (general disclosure of price sensitive information) and 31 (AIM company and directors’ responsibility for compliance). The LSE prefers to privately discipline NOMADs (Campbell & Tabner, 2014). Although critics could argue that fraud cases relate to the failure of the AIM model, it should be recognized that no system, including the government-regulated markets, has prevented all fraud (Stringham & Chen, 2012). When failures of transparency, accountability and governance come to light, the LSE may take disciplinary action against the company, its directors and the NOMAD. In May 2019, for instance, the LSE published an AIM Disciplinary Notice in respect of Real Good Food plc, which had been found to be in breach of several AIM rules. One of these was rule 13, requiring AIM companies to consult with their NOMAD before entering into any related party transaction. Real Food Group was publicly censured and fined £450,000 for breaching the rules, reduced to £300,000 for early payment.12 This case shows that the effectiveness of the NOMAD system in ensuring good governance relies heavily on the willingness of boards of directors to consult their NOMAD as required by the AIM rules. Under rule 31, AIM companies are required to seek advice from their NOMAD and provide the NOMAD with any information that is requested or required, but if such requests are poorly formulated, the NOMAD may not be properly informed and the AIM company may, therefore, breach the AIM rules.

AIM, ACCOUNTING AND AUDIT Accounting is one of the elements of the corporate governance systems and establishing convergence in accounting needs awareness of accounting rules and its interdependencies with corporate governance regulation. The financial reporting requirements for AIM companies are set out in rule 19 of the AIM Rules for Companies (LSE, 2018a). The UK and European Economic Area (EEA) incorporated companies are required to prepare consolidated accounts using the IFRS as adopted by the UK and EU, respectively, encouraging financial reporting convergence. However, company-only accounts may use either IFRS or national GAAP as applicable to the relevant jurisdiction (EU or the UK). Companies incorporated outside the UK and EEA are prepared in accordance with IAS/IFRS, US GAAP, Canadian GAAP, Australian IFRS or Japanese GAAP (LSE, 2018a, rule 19; see also Shah, 2014). Further regulations

206  Handbook of accounting, accountability and governance with the ending of the Brexit transition period on 31 December 2020 require AIM companies incorporated in the UK, including the Channel Islands and the Isle of Man, to use UK-adopted International Accounting Standards (UK IAS) for financial years that begin on or after 1 January 2021. AIM companies incorporated in the UK with financial years that begin before 1 January 2021 can carry on using EU IAS as they stand at the end of the transition period (LSE, 2021). Further, AIM rule 19 requires the disclosure of certain related party transactions and the disclosure of individual directors’ remuneration. The remuneration disclosure will include emoluments and compensation of cash or non-cash benefits, share options and long-term incentive plan and contributions to the pension scheme. In 2015, the FRC conducted a review of the quality of financial reporting in smaller listed and AIM quoted companies (FRC, 2015). The FRC found that “the quality of reporting by smaller quoted companies [which would include AIM companies] is generally regarded by investors and other users to be timely and of a good standard, but with room for improvement” (FRC, 2015, p. 6). However: Many smaller quoted companies think that investors do not read their annual reports and therefore that the reports are of little value. As a result, the preparation of the annual report becomes a compliance exercise rather than being seen as an opportunity to provide relevant information to stakeholders. (FRC, 2015, p. 6)

In response to the 2015 document, several respondents (including the Association of Accounting Technicians and PricewaterhouseCoopers) raised the issue of “boiler-plate disclosures”, where smaller companies tended to use standard forms of words for disclosures such as accounting policies and risk factors, meaning that the financial statements did not communicate adequately the specific aspects of the individual company. The issue of boilerplate disclosures was again identified in the FRC’s follow-up review in 2018 (FRC, 2018b), in which a small sample of eight AIM companies’ annual reports was reviewed. The FRC declared: “We do not expect to see boiler-plate accounting policies, copied directly from IFRS or other literature, particularly where they do not appear to relate to material balances or transactions” (FRC, 2018b, p. 26). The review flagged up shortcomings in the disclosure of accounting policies for revenue, and information about judgements and estimates. Central to principal–agent theory is that independent boards assist to mitigate problems that arise from the separation of ownership and control problems. In the business company model of corporate governance shown in Figure 9.1, the auditor has an intermediary role between shareholders and the directors. However, how the auditor engages with the board of directors has undergone changes in recent years through the establishment of audit committees. The UK Code (FRC, 2018a, para. 24) states that the board should establish an audit committee of a least three, or for smaller companies two, members who shall all be independent NEDs. The audit committee has several important tasks, including recruiting external auditors, monitoring internal audit and internal control, and monitoring and reviewing the annual report and accounts. The audit committee acts as a channel of communication between the external auditor and senior corporate management. Larger companies, in general, can comply with an independent audit committee; however, this is problematic in smaller companies as directors may not be independent. The QCA recognizes that AIM companies may find it difficult to set up an entirely independent audit committee. The flexibility provided by the “comply or explain” approach suggests that the company needs to explain the reason why.

Accounting, accountability and governance in junior stock markets  207 Regulators in the major capital markets require a mandatory audit for publicly listed companies and, by extension, for other public-interest entities (PIEs). Given recent corporate failures involving AIM companies, particularly Patisserie Holdings plc, the owner of café chain Patisserie Valerie, which failed in early 2019, it seems appropriate that at least the largest companies quoted on AIM should be regarded as PIEs and subject to the same requirements as listed companies (some of which are smaller than the largest AIM companies). The FRC imposed sanctions against the external auditors and the audit engagement partner of Patisserie Holdings.13 Their comment stated that the auditors showed a lack of competence on numerous breaches of relevant requirements in their audit work in the period of three financial years from 2015 to 2017. The auditors had signed off on a clean audit opinion pertaining to the financial statements and missed red flags in crucial areas that included reports around revenue, cash and non-current assets. As a result, the net assets had been overstated by £94 million14 (see also Ryans & Tuna, 2019). The executive chairman of Patisserie Holdings, Luke Johnson, apparently sat on the board of 17 other companies, and the NEDs of the company were criticized as being passive.15 In its 2015 consultation, the FRC found that AIM companies were often audited by second-tier and smaller audit firms rather than the “Big Four” international professional services firms (FRC, 2015, p. 19). In many cases, AIM companies are likely to have simpler business models and a less complex range of transactions. Hence, a smaller audit firm with ready access to appropriate and adequate skills should be able to undertake an appropriate external audit. However, there will be cases when the auditor is not adequately skilled, and this can lead to missing important warning signs, as occurred in the Patisserie Valerie case. The role of the auditor in the governance of AIM companies therefore faces the risk of being compromised, particularly in circumstances where the auditor is dealing with a dominant chair/CEO. More research on certain topics and issues is almost certainly needed into the specific audit issues relating to AIM companies.

PREVIOUS RESEARCH INTO AIM According to Google Scholar (accessed 30 August 2022), the specific term “Alternative Investment Market” appears in about 6,400 published items, but it is referenced in the title of only 153 items. Of these, only one item (Filip et al., 2021) includes the word “accounting” in the title. This paper suggests that innovative firms on AIM are more likely to show abnormal cash flows than to engage in earnings management and disclose more cash flow than earnings information on social media, in comparison with non-innovative firms. None of the 153 items include the word “accountability” in their title, but as many as 15 items listed mention “governance” in the title. Of these items, three turned out to be just citations, one was a book review, two were different versions of a conference paper subsequently published under a different title (Roscoe & Willman, 2021) and three items were PhD theses (Shah, 2014; Almulhim, 2020; Nayyar, 2021). The last of these theses examined the relationship between common corporate governance factors and financial performance and found that board gender diversity was positively associated with performance, while greater board independence was negatively associated with performance. This situation may show that independent directors are effective in controlling riskier corporate activities but may also indicate that such directors, who may lack detailed knowledge of

208  Handbook of accounting, accountability and governance the company and its industry, may contribute little to effective corporate management. Other corporate governance variables, such as chair/CEO duality, board size and audit committee size, were not associated with corporate performance at a statistically significant level. This was the case even though the chairs of many AIM companies also acted as CEO. Of the other six items with both “governance” and “Alternative Investment Market” in the title, five were authored by Mallin and Ow-Yong (1998, 2008, 2009, 2012, 2013a) and addressed factors influencing corporate governance structures and disclosures by AIM companies. Chandrakumara and Walter (2015) undertook a content analysis of disclosures relating to NEDs. They found differences in how the roles of such directors were described when comparing AIM companies with executive chairs against companies with non-executive chairs, suggesting that chair/CEO duality can be a key governance risk factor. Finally, although the word “governance” was omitted from the title of the published version of the paper by Roscoe and Willman (2021), the authors argue that AIM uses a system of market organization based on market imperfections. They suggest that AIM draws on reputation, social relationships and practitioner knowledge to organize governance, and they emphasize the importance of NOMADs in AIM company governance. As searching article titles had identified only a few research publications, the search was extended to identifying items that included both “governance” and “Alternative Investment Market” anywhere in the text. Google Scholar identified about 3,600 items fitting this search specification, which are too many to analyse. However, the Google Scholar search was reviewed for both frequently cited and recent items. Some of these papers mention governance only in passing: for example, the discussion of social reporting in AIM companies by Parsa and Kouhy (2008), while the more extensive discussion of AIM companies’ corporate governance disclosures in Parsa et al. (2007), which found that on average only about 50 per cent of expected governance disclosures were provided, is likely to be out of date. Several studies indicate that managers manipulate earnings around IPOs to misinform investors. Several studies also attest to the aggressive use of accruals around the time of stock issuance to overstate earnings (Alhadab, 2016; Alhadab et al., 2016). Gerakos et al. (2013) find that AIM companies tend to underperform compared to the main market. This underperformance is economically significant and consistent relative to each of the comparative exchanges (LSE main market, NASDAQ and OTCBB16) and consistent for domestic and foreign firms. This is problematic if AIM companies underperform, representing a far higher risk profile than those in regulated markets, and potentially could pose a risk for investors. Mortazian et al. (2019) find that the firm value of AIM companies is enhanced for non-managerial blockholder ownership holding between 5 and 32 per cent, whereas at higher than 32 per cent, the firm value is reduced. They suggest that large non-managerial block shareholders, who are likely to have board representation, may act to “expropriate the minority” shareholders by facilitating wealth transfers to corporate insiders. Despite the UK exhibiting diffused ownership, however, AIM companies exhibit a higher level of ownership concentration; that is, there will be low level of separation of ownership and control in these companies (for example, majority ownership held by founding members). Here, the conflict arises between large and minority shareholders, where the latter will see very little return as managers could expropriate shareholders’ funds; for example, absconding with their money or selling the assets (Claessens et al., 1999; Solomon, 2021; Smaili et al., 2022). Two recent papers that discuss AIM companies’ accountability to broader stakeholder groups are Anbleyth-Evans and Gilbert (2020), which has already been discussed in this

Accounting, accountability and governance in junior stock markets  209 chapter, and Boakye et al. (2021), which examines the effect of environmental management on the financial performance of AIM companies. By accepting broader accountability, AIM companies may enhance both environmental and financial performance. Although this chapter concentrates on the AIM in the UK, other junior markets have also been the object of research, and some of this has touched on issues of accounting, accountability and governance. In addition to the comparative study of European and Japanese junior markets by Granier et al. (2019) already discussed in this chapter, examples of such studies include the examination of firm-specific characteristics influencing the choice of main versus junior markets for IPOs in Sweden (Baade-Mathiesen & Melnikova, 2019) and the similar study of IPOs in Norway (Bjærum & Reksen, 2021).

CONCLUSION AND FURTHER RESEARCH Since 1995, AIM has continued to successfully provide a platform for innovative and growth companies (Arcot et al., 2007; Keasey, 2007). The success of AIM has been dependent on the flexible and lighter-touch approach to regulation and the use of NOMADs. The UK’s corporate governance has evolved since the original Cadbury Report (1992) and the adoption of “comply or explain” has made it attractive. AIM companies are encouraged to adopt the spirit of the standards and the theoretical framework. AIM provides rich data sources for researchers studying smaller and growing companies with a different regulatory environment that reflects accounting, accountability and governance compared to both main markets and other junior markets. Within the context of the government’s political agenda, increasing demand for legitimacy and transparency of information disclosure, the complex relationship between accounting, accountability and governance is still open to debate and potentially under-researched in the junior markets. Research into accountability and governance in AIM companies has shown that governance structures are often less well articulated than in companies listed on the main market. Boards tend to be smaller and less independent, with chair/CEO duality a recurring feature (not surprisingly as many AIM companies are still effectively controlled by founders), and the more relaxed QCA Corporate Governance Code probably reflects the reality applying particularly to the smaller AIM companies that a full-blown governance structure would be costly and not particularly effective. The important alternative governance mechanism of the NOMAD reflects the old “gentlemanly capitalism” aspect of corporate and financial regulation in the UK, relying not only on the effectiveness of individual NOMADs but also on full disclosure and frankness on the part of corporate management. AIM companies are beginning to recognize accountability to broader stakeholders, but the influence of large block shareholders on the corporate policy may not always be in the interests of wider investors or necessarily other stakeholders. Unfortunately, few studies offer insights into junior markets operating in other countries (examples such as Vismara et al., 2012 are becoming increasingly dated). This chapter relates mainly to the UK’s AIM market, and further studies on other junior markets, including those in emerging markets, are warranted to understand the importance of the junior markets’ accounting, accountability and governance relationships. Future studies should focus on both qualitative and quantitative critical and interpretive research. Researchers often focus on large listed companies in accounting research, particularly when data extending over extensive

210  Handbook of accounting, accountability and governance time periods is required, and AIM companies may be overlooked in researchers’ samples. Governance research on AIM companies often involves the use of corporate governance disclosure checklists, and more qualitative research, for instance interviews with AIM board members (as suggested by Revest & Sapio, 2013), could provide further insights. Furthermore, studies that replicate and extend research undertaken over a decade ago may indicate how far AIM companies have, on average, developed their accountability and governance structures. Are larger AIM companies more like similar-sized companies listed on the main market or more like smaller AIM companies? Ultimately, should entities quoted on AIM or other junior markets be held to lower standards than those listed companies on main markets? The trade-off between lighter regulation and greater risk for investors needs to be examined both empirically and theoretically, and opportunities for research into accounting, accountability and governance in junior markets are extensive. Greater understanding through further research of AIM in the context of the dynamics of accounting, accountability and governance, therefore, is actively encouraged.

NOTES 1. See www​.londonstockexchange​.com/​reports​?tab​=​issuers (accessed 20 October 2022). 2. The issuer list archive 2022 is available at: www​.londonstockexchange​.com/​reports​?tab​=​issuers (accessed 27 October 2022). 3. See www​.dw​.com/​en/​german​-stock​-exchange​-closes​-neuer​-markt/​a​-644849 (accessed 2 September 2022). 4. See www​.londonstockexchange​.com/​reports​?tab​=i​ssuers (accessed 20 October 2022). 5. See www​.grantthornton​.co​.uk/​globalassets/​1​.​-member​-firms/​united​-kingdom/​pdf/​publication/​ 2020/​economic​-impact​-of​-aim​-june​-2020​.pdf (accessed 2 September 2022). 6. See www​.iasplus​.com/​en​-gb/​resources/​other​-regulatory/​market​-rules/​aim (accessed 10 October 2022). 7. See www​.londonstockexchange​.com/​indices​?tab​=​ftse​-indices (accessed 24 August 2022). 8. See www​.theqca​.com/​information​-centre/​corporate​-governance/​156826/​aim​-companies​-and​ -recent​-corporate​-governance​-developments​-the​-direction​-of​-travel​.thtml (accessed 20 September 2021). 9. See www​.cgi​.org​.uk/​knowledge/​governance​-and​-compliance/​features/​technical/​governance​-code​ -aim (accessed 5 September 2022). 10. See https://​www​.theqca​.com/​news/​briefs/​175536/​whichcorporate​-governance​-codes​-do​-aim​ -companies​-apply​-​.thtml (accessed 9 July 2023). 11. See www​.londonstockexchange​.com/​adviser (accessed 11 November 2021). 12. See https://​docs​.londonstockexchange​.com/​sites/​default/​files/​documents/​ad21​.pdf (accessed 20 October 2021). 13. See www​.frc​.org​.uk/​news/​september​-2021/​sanctions​-against​-grant​-thornton​-uk​-llp​-and​-david (accessed 20 October 2021). 14. See www​.theguardian​.com/​business/​2021/​sep/​27/​patisserie​-valerie​-auditors​-fined​-frc​-grant​ -thornton (accessed 30 October 2021). 15. See www​.nedonboard​.com/​the​-collapse​-of​-patisserie​-valerie​-offers​-some​-key​-lessons​-for​-non​ -executive​-directors​-and​-board​-members​-find​-out​-what​-these​-lessons​-are (accessed 27 August 2022). 16. On 8 November 2021, the Financial Industry Regulatory Authority (FINRA) ceased operation of the OTC Bulletin Board (OTCBB) – a FINRA-operated inter-dealer quotation system – and deleted the OTCBB-related rules from the FINRA rulebook, available at: www​.finra​.org/​rules​-guidance/​ notices/​21​-38 (accessed 27 October 2022).

Accounting, accountability and governance in junior stock markets  211

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Accounting, accountability and governance in junior stock markets  213 Mallin, C. and Ow-Yong, K. (2008), Corporate Governance in Alternative Investment Market (AIM) Companies. Institute of Chartered Accountants of Scotland, Edinburgh. Mallin, C. and Ow-Yong, K. (2009), “Corporate governance in Alternative Investment Market (AIM) companies: determinants of corporate governance disclosure”, available at: https://​papers​.ssrn​.com/​ sol3/​papers​.cfm​?abstract​_id​=​1326627 (last accessed 22 October 2022). Mallin, C. and Ow-Yong, K. (2012), “Factors influencing corporate governance disclosures: evidence from Alternative Investment Market (AIM) companies in the UK”, European Journal of Finance, Vol. 18 No. 6, pp. 515–533. Mallin, C. and Ow-Yong, K. (2013a), “The development of the UK Alternative Investment Market: its growth and governance challenges”. Cressy, J., Cumming, D. and Mallin, C. (eds), Entrepreneurship, Finance, Governance and Ethics. Springer, Dordrecht, pp. 113–135. Mallin, C. and Ow-Yong, K. (2013b), “The UK Alternative Investment Market: ethical dimensions”. Cressy, J., Cumming, D. and Mallin, C. (eds), Entrepreneurship, Governance and Ethics. Springer, Dordrecht, pp. 223–239. Manelli, A., Viserta, L., Montecchiani, J. and Pace, R. (2020), “The Alternative Investment Market Italia listing process: a sustainable Alternative Investment Market for small medium enterprises (SMEs)?”, Rivista di Studi sulla Sostenibilità, Vol. 10 No. 2, pp. 83–101. McLaren, D. (2004), “Global stakeholders: corporate accountability and investor engagement”, Corporate Governance: An International Review, Vol. 12 No. 2, pp. 191–201. Mendoza, J.M. (2008), “Securities regulation in low-tier listing venues: the rise of the Alternative Investment Market”, Fordham Journal of Corporate and Financial Law, Vol. 13 No. 2, pp. 257–328. Moore, C.B., Bell, R.G., Filatotchev, I. and Rasheed, A.A. (2012), “Foreign IPO capital market choice: understanding the institutional fit of corporate governance”, Strategic Management Journal, Vol. 33 No. 8, pp. 914–937. Morris, R.D. (1987), “Signalling, agency theory and accounting policy choice”, Accounting and Business Research, Vol. 18 No. 69, pp. 47–56. Mortazian, M., Tabaghdehi, S.A.H. and Mase, B. (2019), “Large shareholding and firm value in the Alternative Investment Market (AIM)”, Asia-Pacific Financial Markets, Vol. 26 No. 2, pp. 229–252. Napier, C.J. (1998), “Intersections of law and accountancy: unlimited auditor liability in the United Kingdom”, Accounting, Organizations and Society, Vol. 23 No. 1, pp. 105–128. Nayyar, K. (2021), Examining the Relationship between Corporate Governance Mechanisms and Financial Performance of Small and Medium Size Enterprises listed in the FTSE-Alternative Investment Market. PhD thesis, University of the West of Scotland. Parsa, S. and Kouhy, R. (2008), “Social reporting by companies listed on the Alternative Investment Market”, Journal of Business Ethics, Vol. 79 No. 3, pp. 345–360. Parsa, S., Chong, G. and Isimoya, E. (2007), “Disclosure of governance information by small and medium-sized companies”, Corporate Governance, Vol. 7 No. 5, pp. 635–648. Posner, E. (2005), “Sources of institutional change: the supranational origins of Europe’s new stock markets”, World Politics, Vol. 58 No. 1, pp. 1–40. Revest, V. (2019), “Junior stock markets and SMEs: an ideal relation? The case of the Alternative Investment Market”. Chambost, I., Lenglet, M. and Tadjeddine, Y (eds), The Making of Finance: Perspectives from the Social Sciences. Routledge, London, pp. 114–119. Revest, V. and Sapio, A. (2013), “Does the alternative investment market nurture firm growth? A comparison between listed and private companies”, Industrial and Corporate Change, Vol. 22 No. 4, pp. 953–979. Roberts, J., Sanderson, P., Seidl, D. and Krivokapic, A. (2020), “The UK Corporate Governance Code principle of ‘comply or explain’: understanding code compliance as ‘subjection’”, Abacus, Vol. 56 No. 4, pp. 602–626. Roscoe, P. and Willman, P. (2021), “Flaunt the imperfections: information, entanglements and the regulation of London’s Alternative Investment Market”, Economy and Society, Vol. 50 No. 4, pp. 565–589. Rousseau, S. (2007), “London calling? The experience of the Alternative Investment Market and the competitiveness of Canadian stock exchanges”, Banking and Finance Law Review, Vol. 23 No. 1, pp. 51–105.

214  Handbook of accounting, accountability and governance Ryans, J. and Tuna, İ. (2019), “I’m only the auditor …”, London Business School Review, Vol. 30 No. 2–3, pp. 22–24. Seidl, D., Sanderson, P. and Roberts, J. (2013), “Applying the ‘comply-or-explain’ principle: discursive legitimacy tactics with regard to codes of corporate governance”, Journal of Management & Governance, Vol. 17 No. 3, pp. 791–826. Shah, N.S. (2014), Corporate Governance in the Alternative Investment Market of the London Stock Exchange. PhD Thesis, School of Management, Royal Holloway, University of London, available at: https://​pure​.royalholloway​.ac​.uk/​portal/​files/​23098935/​2014shahnphd​.pdf (last accessed 11 November 2021). Shah, N. and Napier, C.J. (2019), “Governors and directors: competing models of corporate governance”, Accounting History, Vol. 24 No. 3, pp. 338–355. Shapiro, S.P. (2005), “Agency theory”, Annual Review of Sociology, Vol. 31 No.1, pp. 263–284. Shleifer, A. and Vishny, R.W. (1997), “A survey of corporate governance”, Journal of Finance, Vol. 52 No. 2, pp. 737–783. Shrives, P.J. and Brennan, N.M. (2017), “Explanations for corporate governance non-compliance: a rhetorical analysis”, Critical Perspectives on Accounting, Vol. 49, pp. 31–56. Smaili, N., Arroyo, P. and Issa, F.A. (2022), “The dark side of blockholder control: evidence from financial statement fraud cases”, Journal of Financial Crime, Vol. 29 No. 3, pp. 816–835. Solomon, J. (2021), Corporate Governance and Accountability. 5th edn, Wiley, Hoboken, NJ. Stringham, E.P. and Chen, I. (2012), “The alternative of private regulation: the London Stock Exchange’s Alternative Investment Market as a model”, Economic Affairs, Vol. 32 No. 3, pp. 37–43. Tricker, B. (2019), Corporate Governance: Principles, Policies and Practices. Oxford University Press, Oxford. Vismara, S., Paleari, S. and Ritter, J.R. (2012), “Europe’s second markets for small companies”, European Financial Management, Vol. 18 No. 3, pp. 352–388. Xue, B. and O’Sullivan, N. (2023), “The determinants of audit fees in the Alternative Investment Market (AIM) in the UK: evidence on the impact of risk, corporate governance and auditor size”, Journal of International Accounting, Auditing and Taxation, Vol. 50, article 100523.

10. Accounting, accountability and governance in emerging economies: a development perspective Thankom Arun, Junaid Ashraf, Kelum Jayasinghe and Teerooven Soobaroyen

OVERVIEW Many of the emerging economies have maintained a good economic record over the last decade or so, implicitly lending credibility to the global development discourse. No matter how commendable, this economic progress cloaks the “problems” inherent in the development discourse, thus warranting a critical analysis. Development in emerging economies affects and is in turn affected by accounting, accountability and governance issues at both the local and international level. This chapter therefore seeks to present a critical overview of the accounting, accountability and governance issues in emerging economies in a development context. Our analysis covers three axes of global development: direct foreign investment, non-government organizations (NGOs) and transfer of technical accounting infrastructure from the developed world. We contend that these development modes strengthen the corporations and the NGOs at the expense of governments of emerging economies, thus limiting the abilities of these states to govern and hold corporations/NGOs accountable. This imbalance results in some serious adverse consequences of global development. We recommend “new” accounting measures that correctly calculate the “net” social, environmental and financial benefits of development. We also suggest restoring the balance between the power of the governments of emerging economies and NGOs/corporations to address some of the governance and accountability issues that have arisen from the development discourse.

1. INTRODUCTION The post-colonial era is marked by a development discourse that “promises” to share the fruits of development which is built on a few critical assumptions about the “ailments” preventing emerging economies1 from joining the fast lane of development (Chang, 2008; Khan & Christiansen, 2011). These include the lack of industrialization and economic prosperity; lack of organized social institutions to provide the bulk of the population with basic social services and care (for example, in the health and education sectors); and lack of technical knowledge and infrastructure to support economic and social prosperity (Andrews, 2013; Hopper et al., 2017; Jayasinghe & Uddin, 2019). Consistent with the diagnosis, the remedy came in the form of a multifaceted approach that addresses all three axes of the diagnosis: provide (1) direct financial investment and facilitation of trade resulting in economic growth of these emerging economies; (2) direct financial 215

216  Handbook of accounting, accountability and governance assistance to NGOs to support the fledgling states to cater to the human and social care needs of their population; and (3) technical accounting infrastructure to help countries in their economic growth. Interventions across all three axes give rise to serious challenges vis-à-vis accounting, accountability and governance (AAG) issues, raising questions about the validity of a global development narrative (Arun et al., 2021a; Kan et al., 2021; Moses & Hopper, 2022). Direct financial investments in the form of operation of multinational corporations (MNCs), for example, raise concerns about the emerging states’ ability to govern MNCs and their accountability (Andrew & Baker, 2020; Lauwo et al., 2020). Similarly, financial assistance to NGOs to cater to the social needs of the population living in developing countries, bypassing the developing governments, raises questions about the impact of these measures in further weakening the governance mechanisms of emerging economies (van Zyl & Claeyé, 2019). These measures can also potentially impact on the accountability of powerful NGOs by the governments in emerging economies (Lewis & Kanji, 2009; Davies, 2019; Agyemang et al., 2019; Goddard, 2021). Notwithstanding the emerging economies’ efforts in achieving Sustainable Development Goals (SDGs) and the progress towards reaching middle-income levels, we have noted an intriguing set of AAG issues in these economies, which run throughout the three axes of development in the chapter. Domestic and foreign private investments play a crucial role in facilitating economic growth in many countries. The investment climate in recipient countries reflects the independence of economic and political institutions, and sound regulatory policies attract private investments. While emerging economies may be keen to implement investor protection schemes to alleviate concerns about the safeguarding of investment, the political economy of emerging economies warrants closer scrutiny on the impact of private investment. Direct foreign investment (DFI) popularizes the promise of economic prosperity for the middle class and the associated “trickle-down” effect for the poor and the working classes. Against this promise, these multinational corporations pillage profit out of these emerging economies with little regard to the environmental damage they cause during the process. Hence, issues relating to the environment, social impact and governance arising from private investment becoming critical, and one wonders how far one is addressing these concerns in emerging economies (Arun et al., 2021a) amidst very well-crafted statements of good intentions (Lauwo et al., 2020). Key questions arise: ● Does the private investment generate positive social and environmental impact along with financial returns? ● How competent are the regulatory agencies to ensure the social responsibility of MNCs? ● Does the influence of multinational corporations affect the state’s ability to regulate them? ● What are the implications of emerging value chains on decent work? ● Do the new players add to the scope for enhancing corruption? The answers to these questions are considered in section 2. In many countries, NGOs influence state policies (Keck & Sikkink, 1998), mainly because of their global links and relationship with the state. The operation of non-state players such as NGOs in national settings poses in-depth questions on cooperation, conflict, competition and co-optation with states (Najam, 2000; Lewis & Kanji, 2009). Furthermore, Banks (2021) argues that a deeply managerial-driven aid system has constrained NGO effectiveness which led NGOs to prioritize service delivery over social justice. Many emerging countries are

Accounting, accountability and governance in emerging economies  217 increasingly becoming sceptical about the operation of NGOs (Wright, 2012; Davies, 2019). This growing scepticism about the role of NGOs in emerging economies is explored through the following questions in section 3: ● What are the consequences of viewing NGOs as complementary to the state to empower civil society? ● Do the NGOs understand the local notions of accountability and modes of governance? ● Do the NGOs grow as alternative power centres? Infrastructure sector development, both physical and technical, is a priority agenda for many economies. The evidence shows that infrastructure investment can positively affect growth that goes beyond the effect of the capital stock because of economies of scale, network externalities and competition-enhancing effects (Égert et al., 2009). However, the poor quality of technical infrastructure demands closer attention such as those relating to AAG. In terms of technology and knowledge, the sector development relies heavily on external sources (van Helden & Uddin, 2016; Degos et al., 2018; Boolaky et al., 2019). This opens up a new set of challenges on AAG in emerging economies; for instance, the development and integration of social and environmental accounting standards and practices and corporate governance codes ended with little effort (Areneke et al., 2022; Cahaya et al., 2015; Mahadeo & Soobaroyen, 2016; Egbon & Mgbame, 2020): ● What are the consequences of adopting global standards in emerging economies? ● What is the nature of implementing corporate governance practices and social and environmental reporting in emerging economies? We discuss these issues in section 4 by considering the evidence on the role and consequences of the technical architecture of AAG. Overall, the chapter seeks to provide a critical overview2 of the interrelationship between AAG and the three selected axes of global development in emerging economies, acknowledging that emerging economies are a vibrant subset of the so-called “developing world” (Duttagupta & Pazarbasioglu, 2021). In the next three sections, we discuss each of the axes of diagnosis with possible cures and practices, followed by an over-arching conclusion.

2.

DIRECT FINANCIAL INVESTMENT, GLOBAL VALUE CHAINS, CORRUPTION AND AAG

Emerging economies are making significant economic progress on the back of de‑regularization of their markets and inflow of DFI. Needless to say, most of the de-regulation of markets of emerging economies, including the lowering of trade barriers and permission of foreign investors to invest and repatriate the profits to their home countries, has come through “nudges” and at times forceful “pushes” from global financial institutions such as the IMF, the World Bank (WB) and other multilateral financial institutions (Kalderimis, 2004; Andrews, 2013). The most important mode of DFI comes through MNCs (OECD, 2015),3 which are mostly controlled by a few developed countries. To put it in context, about 60 per cent of production of global multinational companies is controlled by seven Organisation for Economic Co-operation and Development (OECD) countries (that is, the US, the UK, France, Germany,

218  Handbook of accounting, accountability and governance Japan, the Netherlands and Switzerland), with emerging economies (for example, BRICS – Brazil, Russia, India, China and South Africa) being major recipients of DFI of these global entities (OECD, 2015). MNCs, the most influential player in the global economic scene, represent the ideal vehicle for transferring wealth and technology to emerging economies and symbolize the ideals of globally connected markets (Dahan et al., 2006). The size of some of the large multinational companies is such that they dwarf the economic size of some of the emerging economies, as illustrated below. The significance and size of these large MNCs raise important AAG issues vis-à-vis their activities in emerging economies. The return on equity and assets employed are highlighted to demonstrate the superior economic efficiency potential of these entities (Chiapello, 2017). The pages of managerial commentary that precede these financials are filled with reasons such as high investment in R&D, taking extra care of human resources and paying closer attention to consumers’ needs. Seen through the pages of their published annual reports, including audited financial statements, multinationals become the poster children of economic citizenship and thereby are often perceived as justifying and celebrating the hegemonic order in existence today (Ezzamel, 2009; Neu et al., 2014; Lauwo et al., 2020). However, the conventional accounting and accompanying managerial narratives gloss over a number of governance and accountability issues that surround the activities of MNCs in emerging countries (Rahaman, 2010; Mir & Mir, 2016). The size and scope of operations of MNCs take them beyond the reach of AAG regimes of emerging economies. This includes emerging countries governments’ ability to tax the MNCs according to the income and assets falling in their jurisdictions or to apply labour and other economic laws equitably and strictly. The threat of MNCs to exit a particular jurisdiction makes such states very vulnerable before the power of the mobile capital. This vulnerability is not just limited to emerging economies. Even developed countries feel pressured to go easy on multinational corporations because of their sheer size. Microsoft, the multinational technology giant, for example, declared a profit of $315 billion in its Irish subsidiary in 2020, when the total GDP of the country for the year 2020 was $433 billion (The Guardian, 2021). The size of large multinational tech firms, such as Microsoft and Apple, and their significance for the national economy of Ireland has allegedly pressured the Irish government to not levy and collect the fair share of taxes. In 2016, the European tax court forced the Irish government to impose €14 billion from Apple Corporation. While the amount was sufficient to finance the yearly health bill of the country, the Irish government was very reluctant to impose and recover the tax for fear that it would reduce its attractiveness to foreign investors (The Guardian, 2018). Given the economic status of emerging countries and their dependence on foreign investment, their ability to regulate and govern the multinational companies is not very different and the role of accounting technology and accountants in this regard has not been very promising (Sikka & Lehman, 2015; Barak, 2017; Stringer & Michailova, 2018). The influence of MNCs on weakening the state’s ability to regulate and govern is not limited to taxation issues. MNCs are also known to influence the agricultural policies of emerging countries to sabotage the alternative forms of subsistence and increase the control of labour, which is the essence of neo-liberalization, which is “the commodification and privatization of land and the forceful expulsion of peasant populations [and] the conversion of various forms of property rights into exclusive private property rights” (Harvey, 2005, p. 159). We observe multiple examples of this growing corporate influence over the state policies in emerging economies. For example, the Indian government recently came up with a policy

Accounting, accountability and governance in emerging economies  219 which liberalized farm economic regulations and paved the way for large corporations to enter the agricultural sector, making farmers extremely fearful of corporate enslavement (Jodhka, 2021). While the policy is couched in economic terms, it is accounting that converts abstract economic concepts into apparent realities, at least in terms of the objectivity readily attached to numbers or figures, such as costs of farming, revenues, subsidies expense and so on, that shape the concrete terms on which such battles are fought (Hopwood, 1990; Rahaman, 2010). Environmental law is another area of concern for governance and accountability, with MNC entities chiefly responsible for bringing development to emerging economies. They bring with them the promise of economic prosperity for the middle class and the associated “trickle-down” effect for the poor and working classes. Against this promise, MNCs pillage profit out of these developing markets with little regard to the environmental damage they cause during the process, which impacts on the health and well-being of humans and nonhumans alike. It is difficult for emerging economies to prevent them from environmental destruction because of the enormous economic and political clout of MNCs. Elaborating such issues, Noah et al. (2020) describe how international oil companies violate Nigerian environmental safety regulations in the form of oil spillage but still avoid being penalized. Drawing on capture theory, these authors explain the capture of state institutions at the hands of MNCs in the oil and gas and cement industry in Nigeria to incapacitate the state “to hold corporations accountable for their environmental activities” (Noah et al., 2020, p. 80). The capitulation of the emerging state’s ability to govern the corporate behaviour is exemplified in instances when governments of emerging economies themselves start to do the “wet work” for corporations. Chinese and Russian governments’ forceful acquisition of agricultural lands from peasants for economic activities of multinational corporations are prime examples where social and environmental considerations are sacrificed for economic gains of corporations (Mir & Mir, 2016; Wang et al., 2019). The role of accounting as an institution that gives primacy to some activities and takes the ontological rug out from under the feet of some other activities is crucial in an ever-weakening state apparatus for governance and control of MNCs (Lauwo et al., 2020), even in specific cases where transparency initiatives were meant to address corrupt practices (Ejiogu et al., 2019). Another important challenge to AAG arrangements within emerging economies has come through the evolution of global value chains, and accounting has an important role to play in this regard. Economic and political changes associated with globalization, especially increasingly competitive supply chains, have created cost pressures on the Western-led firms that are then passed on to manufacturing entities in emerging economies (Ayaz et al., 2019). This leads to the creation of sweatshops in the emerging economies where workers in these factories are employed on precarious terms and are forced to work under dismal work conditions in total disregard of human and workers’ rights (Neu et al., 2014). The fear of losing all-important foreign exchange prevents the emerging states from stepping in and protecting labour rights (Ayaz et al., 2019). In fact, governments in some developing countries will go a step further and even deny clear violations of human rights of labour at the hands of global or local corporations (Siddiqui & Uddin, 2016). In the absence of any other governance mechanism, accounting plays a very important role in governing the activities of firms within the global value chain and the resulting intensification of labour that the workers have to face on the production sites within emerging economies (Neu et al., 2014). The governance and resulting intensification qua accounting come in the form of determining the target costs within which the manufacturers

220  Handbook of accounting, accountability and governance have to produce their output, as well as the managerial control techniques, including prolonged hours and reduced wage rates that managers and contractors have to use to ensure that these cost targets are achieved. Corruption is also an important variable which shapes the relationship between the developed world and emerging economies, influencing the flow of funds between the two sets of countries (Baker, 2005). There are many examples of how government officials, the judiciary and even the media within emerging economies are involved in widespread “elite corruption” (Noah et al., 2020). These bribes are often given by powerful global corporations to the local elites, rendering the state institutions “toothless watchdogs” (Noah et al., 2020). The proceeds of corruption are siphoned out to Western countries and would remain hidden there behind the impenetrable layers of financial secrecy created through a network of global financial institutions, lawyers and large professional accounting firms. Corruption thus acts as a reverse channel through which funds flow back from emerging countries to the developed world. The famous 2020 FinCEN files leak4 revealed that between 2000 and 2017, large Western banks facilitated $2 trillion of “dirty” money to move through the banking channels. Corruption is thus a regressive mechanism that is growing in volume. In 2005, the total yearly aid given by the developed world to developing countries was $50 billion, and the money that flew back, in the form of corruption proceeds, to the developed world’s banking system was $500 billion annually (Baker, 2005). Almost 10 years later or so, conservative estimates suggest that the flow of “dirty” money from poor countries to offshore accounts and Western financial institutions has at least doubled (OECD, 2014; Otusanya & Adeyeye, 2021). Accounting has an important role to play in this regressive mechanism of taking crucial funds away from emerging economies. Accounting creates blind spots, in the form of financial contracts and their reporting/accountability, that allow local elites within emerging economies to commit corruption (Sikka & Lehman, 2015; Ferry & Lehman, 2018). It also creates motivation for states to feign ignorance in the face of blatant corruption of local elites (Pianezzi & Ashraf, 2020). This accounting knowledge is mostly disseminated through globalized accounting firms which seek to facilitate the covering up of a trail of corrupt transactions by creating complex and opaque financial arrangements (Sikka & Lehman, 2015). Seen in this light, the relationship between developed and emerging economies is not straightforward and, indeed, is more complicated than it might at first appear. While the funds and technology flows from the developed world to emerging economies have certainly allowed many countries to come out of acute poverty, the “net profit” in the process needs to be determined anew. Determination of this “net profit” requires a careful consideration of collateral environmental and social damage caused by MNCs, the human rights violations caused by global value chains and the proceeds of corruption that have flown back from the emerging countries into the Western financial system. The calculations of costs and profits would require new accountings that would form the basis of more pervasive AAG arrangements and their adequate or improved monitoring in future.

3.

NGOS AND AAG

This section elaborates the consequences of viewing NGOs as a complementary form of empowering civil society and particularly the issues and tensions over the social accountability of NGO operations and their modes of governance (see also Chapter 13 of this Handbook).

Accounting, accountability and governance in emerging economies  221 Further attention is paid to the controversial hegemonic power of NGOs that has grown in some of the “weaker” emerging economies. The section concludes with the positive signs and highlights of the “successful” NGOs that have been responsive to local customs and traditions of accountability. 3.1

Localization of Development and Governance through NGOs

NGOs enjoyed unprecedented support in engaging development efforts and assisting national governments in emerging economies. The WB concluded that the best way to ease poverty is to restructure the state and civil society relations (Ebrahim, 2003; Kaldor et al., 2003; Hopper et al., 2017). In this context, NGOs develop civil societies with the intention of leading to good governance and accountability in the Global South (Jayasinghe & Wickramasinghe, 2006). The notions of governance are built into the NGOs, popularizing ideas of AAG that align with the neo-liberal concept and private sector. The neo-liberal expectations of NGO governance are thus built around the argument of a resolutely non-interventionist state and responsible and accountable market actors behaving around market rationality. Besides, the autonomous civil society organizations, including NGOs that organized on community, national and international levels to perform social or political goals such as humanitarian and environment causes, hold the non-interventionist governments accountable at the same time. Under these assumptions, Western donor agencies (for example, the WB and UNDP) bypassed national states and channelled funds into emerging economies via NGOs (Kilby, 2006; O’Dwyer & Boomsma, 2015). By doing so, local (grassroot organizations – GROs), national or international NGOs are expected to provide better accountability to a variety of services and humanitarian functions through increased political participation at the community level (Edwards, 2000; Gray et al., 2006; Uddin & Belal, 2019; Goddard, 2021). In addition, NGO-led large-scale social accountability programmes are assumed to strengthen the ability of communities and individuals to assess service delivery. Because of bureaucracy and corruption, the lack of trust in governments in emerging economies further encouraged foreign sponsors to pool their attention more towards NGOs (Lewis & Kanji, 2009; Uddin & Belal, 2019). NGOs are thus viewed as a more important complement to the state in emerging economies towards empowering civil society. Yet, an inescapable principal–agent relationship exists when international donors assist emerging economies through NGOs (World Bank, 1999; Jayasinghe & Wickramasinghe, 2006). The WB consistently argued that NGO involvement has re-orientated emerging economies to conform to a new vision: the “globalization and localization” development strategy (World Bank, 1996, 1998, 1999, 2000). Such transformations inspired specific accounting and social accountability practices. For example, changes to project performance reports and accounting systems ensured accountability to wider stakeholder groups and especially to foster downward/social accountability (Dhanani & Connolly, 2015; O’Dwyer & Boomsma, 2015; Jayasinghe & Uddin, 2019; Cordery et al., 2019), with performance targets/parameters set for NGOs and GROs at the local level. However, some empirical findings suggest many emerging economy NGOs adopted short-term “functional” or manipulated forms of accountability responses at the expense of longer-term “strategic” processes (Jayasinghe & Wickramasinghe, 2006, 2011; Goddard, 2021).

222  Handbook of accounting, accountability and governance 3.2

Reality: The Unintended Consequences of NGO-Led Development and Accountability

Several of these unintended results have stricken many emerging economies. Jayasinghe and Wickramasinghe (2006, 2011) and Yasmin and Ghafran (2019) argued that these notions of AAG did not adequately appreciate local understandings and practice. For instance, “impact” is defined as the long-term and sustainable changes to the lives and livelihood of beneficiaries introduced by a given NGO intervention, while a “results framework” seeks to outline how discrete activities/outcomes will lead to the impact. However, it is argued that these mechanisms generate an “audit culture”, which merely encourages box-ticking and symbolic reporting rather than focusing on resolving real problems (Townsend & Townsend, 2004; Owczarzak et al., 2016). Many critics have raised serious questions about the ability of NGOs in emerging economies to meet such long-term transformative goals (Banks, 2021). Particularly given the weak organizational contexts in civil society and the dominance of technocracy in the world of foreign aid (Goddard, 2021), most NGOs in emerging economies are inadequately positioned or are not always interested in influencing social change. Some NGOs even design deviated or false accountability reports (Jayasinghe & Wickramasinghe, 2011) to meet the expectations set out in impact assessments and results frameworks. NGO actors (for example, NGOs’ local field staff and village elites) also seek to further their own interests, while delivering the “expected” accountability to international donors. Competition between different development agencies and agents in the same context also deteriorated NGO performance and accountability (Jayasinghe, 2009). Specifically, in the Sri Lanka context, Jayasinghe and Wickramasinghe (2006, 2011) unveil that the formally reported “fairness” in local resource allocation serves to hide manipulative practices and patronage relations by local NGO staff. Often, NGOs wasted scarce resources, but by showing off their performance metrics, NGO funding and job security from international funds continue (Jayasinghe, 2009). Second, many governments in emerging economies have become more sceptical about NGO operations because of their national stature and questions about unfriendly cooperation, conflict and competition (Najam, 2000). In some cases, NGOs explicitly built their hegemonic influence on state policies and politics through their global links and relationship with transnational donors (Keck & Sikkink, 1998; Kamat, 2002, 2003). The size and significance of some NGOs, such as the Grameen Bank and the Bangladesh Rural Advancement Committee, challenged the expected relationships between the state, donors and NGOs (Karim, 2011, 2016). These large “multitasking” NGOs have in fact been competing with the state for donor funding, leading to some countries instituting NGO regulations. Unusually, some NGOs or their representatives have reportedly engaged in political party activities (for the 1992 elections in Bangladesh, see, for example, Kennedy et al., 1999). This signalled that NGOs were abandoning Western ideals of promoting transparency and accountability and moving towards an unplanned territory privileging political capital and popular participation. Therefore, this forced national states and policymakers to investigate the growing links between NGOs, private finance and their corporate interests. For example, relying on instances of a lack of transparency and a misuse of resources, the government of India has restricted NGOs from distributing foreign contributions (Sabharwal, 2020). Third, the co-production between public, private and non-profit organizations has recently become a way forward to develop emerging economies. Thus, NGO-led development in

Accounting, accountability and governance in emerging economies  223 emerging economies has moved towards adopting NGO–business hybrid and collaborative working models (The Guardian, 2013; Theodosopoulos, 2011). For example, the San Francisco-based company Embrace was established first as an NGO to provide free warmers to infants with low birth weights and others in need, but then started a for-profit company to design, manufacture and clinically test the warmers (Awad, 2019). Albeit a potentially interesting approach, there are more questions than answers on how the regulators can control and ensure such hybrid organizations are accountable to the state and other stakeholders. In a similar vein, microfinance NGOs, operating in Cameroon, reportedly converted their organizational form to that of a commercial bank or financial institution once after achieving their financial sustainability status (Tucker & Miles, 2004; Akanga, 2017). This led to fierce competition between these microfinance NGOs and created lower levels of accountability practice (Akanga, 2017), given the “morally unacceptable” behaviours and exploitation of poor loan clients. This move has created a market-based poverty alleviation strategy at the village level in emerging economies based on the assumption of “reducing poverty by employing market forces” (Hammond et al., 2007). This widespread capitalist market approach to economic development in emerging economies has created an unhealthy challenge to moral values, such as helping the poor, changing the traditional development mentality and the social accountability focus of development NGOs (Karim, 2011; Dhanani & Connolly, 2015). 3.3

Positive Signs

Notwithstanding the above, there were plenty of examples of “successful” NGOs that have been sensitive to local customs and traditions of accountability while addressing local social problems. For instance, Awad (2019) reports on the socially accountable services provided by some local NGOs to communities affected by COVID-19. In such an example, a well-known NGO named Amref Health Africa responded to post-crisis recovery from COVID-19 in East, West and southern Africa, successfully adapted maternal, child health, sexual and reproductive health programmes, and ensured the delivery of critical health services during the full or partial lockdown. These positive examples, along with the accountability failures highlighted in the previous discussion, emphasize the importance of building learning (Arun et al., 2021b) and collaborative (Jayasinghe et al., 2020) forms of accountability for NGO-led development programmes in emerging economies. These results suggest that collaborative and mutual forms of accountability can feature and play a significant role in aid disbursements. However, more clarity is required to understand the contribution of multiple accountability structures and processes in global development. For instance, the extent of the trade-off between dual objectives and the multiplicity of pathways imperatively calls for systems of checks and balances for NGOs’ development-related operations (Imai et al., 2010).

4.

TECHNICAL INFRASTRUCTURE AND AAG

Underpinning much of the efforts leading to the development of a technical infrastructure of AAG in post-independence emerging economies has been the involvement of major Western nations (notably, the US, the UK and, to a lesser extent, France) and, thereafter, international agencies and regional blocks (WB, IMF and European Union (EU)) (Lassou et al., 2021). Proximity from the colonial legacy would lead to a preference (or perception) to adopt the

224  Handbook of accounting, accountability and governance accounting infrastructure from ex-colonizer countries (Boolaky et al., 2018; Elad, 2015). In the specific example of Egypt, the end of the socialist era in the early 1980s (Ghattas et al., 2021) spurred major funding to establish local equity markets, set up/expand local accounting bodies, (re)structure the audit profession and reform corporate and business laws/regulations, purportedly to foster foreign investment and economic development (Hopper et al., 2017). Similar efforts have been observed in other emerging economies in Africa and Asia towards embedding a range of agencies and intermediaries concerned with the need to ensure “better” forms of accounting (Boolaky & Jallow, 2008; Degos et al., 2018). For instance, Khlif et al. (2020) highlight the limited progress made with accounting practices in North Africa due to a combination of institutional and contextual influences (for example, increase in foreign investment into Algeria during the last decade, recommendations from global Big Four audit firms and stimulus from Algeria’s strong trade relationship with the EU). More generally, France’s own haphazard efforts to engage with international accounting developments weighed heavily on the reforms it itself sought to pilot in Francophone Africa (Degos et al., 2018; Elad, 2015). As the WB and IMF gradually emerged as prominent actors in the fields of accounting, finance and market policy in developing and emerging economies, the switch to international pronouncements (for example, International Financial Reporting Standards, International Standards on Auditing) became legitimized and conveyed as the common set of practices underpinning the communication and assurance of financial information (Song & Trimble, 2020). Soon followed the expansion of international agencies, such as the International Federation of Accountants, whose statement of membership obligations scheme effectively became an evaluation and monitoring process for national professional accounting organizations (PAOs). In parallel to the IFRS (and ISA) dissemination process, a significant body of research has sought to examine the likely consequences of IFRS adoption in emerging economies (for example, Othman & Kossentini, 2015; Moses & Hopper, 2022), with some divergent answers. From the perspective of “visible” outcomes (for example, annual report comparability; mandatory disclosure levels; value relevance; earnings management), positivist-led research provides a somewhat positive picture (Outa et al., 2017; Srivastava & Muharam, 2022; Moses & Hopper, 2022), particularly in relation to the larger emerging economies and primarily from an equity (listed) market perspective. IFRS also appeared to have some bearing on foreign direct investment (FDI) (Gordon et al., 2012; Othman & Kossentini, 2015; Lungu et al., 2017), although the evidence from African settings has been less straightforward. In particular, inward investment in Anglophone African countries fared better (Akisik et al., 2020) relative to Francophone ones, while Nnadi and Soobaroyen (2015) noted a negative association between IFRS and foreign investment in Africa, arguing that large multinationals concerned with external scrutiny may tend to invest in emerging economies that have less transparency standards and requirements. Contrastingly, Houqe and Monem (2016) argued that relative to developed countries, emerging economies would benefit more from IFRS in lowering perceived corruption. While these studies are supportive of the need to develop the AAG infrastructure as a way to abandon “archaic” practices (Boolaky & Jallow, 2008), one key consideration is that the number of firm observations underpinning these findings remains relatively low. Equity markets in many emerging economies do not usually incorporate a large segment of the economy. Even where results are supportive of the relevance of IFRS, there remains far less

Accounting, accountability and governance in emerging economies  225 understanding about how corporate accounting reforms impact on other key economic and social actors (for example, family-held firms, state-owned entities, small and medium enterprises), and the local benefits thereof. Field studies on the implementation of IFRS have examined in more depth the implications for different companies and stakeholders. For example, Albu et al. (2011) explore the case of Romania. By providing a detailed timeline of the different adoption initiatives (firstly based on French advice and secondly in relation to a WB project), the authors conclude that Romania displayed low conformity and resistance to change. A familiar set of emerging economy obstacles were highlighted, namely the primacy of tax laws, the absence of training and staff and the limited ability of stakeholders in pushing for change. The relatively low level of compliance was also noted in the case of Bangladesh (Mir & Rahaman, 2005), where the government readily agreed to adopt IFRS as a way to legitimize its position and willingness to implement reforms towards international lenders and donor institutions. However, the apparent absence of consultation and involvement with key stakeholders led to resistance to the new regime and noted in other countries, for example Jordan (Al-Htaybat, 2018). More generally, a review of IFRS adoption in emerging economies (Samaha & Khlif, 2016) reveals limited evidence on the regulation and longer-term implementation of accounting standards (for a Bangladesh case study, see Nurunnabi, 2015). Instead, research studies have seemed to favour methodologies that focus on corporate outcomes/decisions made across a short time period (that is, post-adoption) rather than considering implications over a longer time frame. The authors also call for more theoretical perspectives that recognize the contextual and regulatory differences of emerging economies. For instance, given the fairly extensive reliance on institutional theory and its isomorphic processes (coercive, mimetic and normative) as a way to analyse IFRS adoption, what seems to be more of interest, but far less understood, is the nature of institutional voids in many developing countries, namely the “specific conditions in which institutions were either not working well or were completely absent, undermining the function and workings of the market” (Khanna & Palepu, 1997, p. 42; see also Doh et al., 2017). An understanding of institutional voids can help one consider the conditions that effectively disables the functional role of accounting (including IFRS and ISA) in the economy and society more generally. Closely associated with the challenges of financial accounting reforms in emerging economies is the case of the accounting profession, auditing practice and auditor regulation. While there is a notable body of work charting the rise of local professions in these contexts, particularly after independence (for example, Sian, 2006; Poullaos, 2009; Altaher et al., 2014) and the primacy of the so-called Big Four in local markets, what has been gradually revealed are several insights into the contemporary strategies of local PAOs with regards to certification, registration (Samsonova-Taddei & Humphrey, 2014) and the regulation of accounting professionals. For instance, Macve (2020) provides a detailed analysis of the rise of Chinese global challenger firms as they operate in tandem with the state’s intentions to foster the success of a firm that would alter the current Big Four market structure. Eldaly and Abdel-Kader (2017) and Ghattas et al. (2021) focus on the case of Egypt to highlight the long journey relating to the establishment of its PAO post-independence and the related auditor registration process. The fragmented nature of professional membership that arose from the government’s original decision to open the accounting profession to a range of individuals having accounting-related qualifications/expertise has led to contemporary challenges in developing a more effective, independent and competent profession regulation beyond the confines of a few internationally

226  Handbook of accounting, accountability and governance affiliated firms. In parallel, the government’s attempts to create an agency to register, regulate and inspect auditors were not initially successful because of the challenges of having appropriate staff and methodology to operate an effective, local, time-specific regulatory inspection system (Boolaky et al., 2019). Furthermore, a two-tier system of audit oversight operated with little power to monitor Big Four firms and instead concentrated on regulating smaller local firms. While many emerging economies developed local auditor oversight bodies on the basis of the ones set up in the US, the UK or France, there is little understanding as to how these operate and the consequences thereof (Eldaly & Abdel-Kader, 2017). A third and prolific strand of research in the emerging economy literature focuses on the role of corporate governance codes and practices (Uddin et al., 2017; Soobaroyen et al., 2017; Armitage et al., 2017; Ahmed & Uddin, 2018; Kimani et al., 2020; Areneke et al., 2022). In parallel to the dissemination of international accounting and auditing standards, the WB and IMF sought to embed more Western-based notions of effective board oversight/management and foster corporate accountability and transparency to shareholders and stakeholders (Uddin & Choudhury, 2008) in emerging economies. This is made visible mainly through the adoption of corporate governance codes (Aguilera & Cuervo-Cazurra, 2009; Cuomo et al., 2016; for more on codes of governance, see Chapter 2 of this Handbook), which have been increasingly adopted in emerging economies. Positivist research evidence on the beneficial impact of the code has been noted (Claessens & Yurtoglu, 2013). The quality of corporate governance is often associated with the extent to which a company adopts/engages with the requirements of the code. Many of these studies (Krambia‐Kapardis & Psaros, 2006; Armitage et al., 2017) traditionally conceived governance as a fairly rigid set of mechanisms that are deemed beneficial in a variety of settings and crucial for effective board effectiveness performance, although empirical evidence about the beneficial impact of codes has been more mixed (Areneke et al., 2022). Furthermore, what has been largely ignored in the initial studies is that the dynamics of adoption may be mediated by aspects such as family ownership, lack of board independence, patronage politics and political interference (for example, Ahmed & Uddin, 2018; Kimani et al., 2020; Islam et al., 2020). A shareholder-led model has also become more challenging as the actions and consequences of a company’s decision do impact significantly on the different stakeholders. To this extent, therefore, mainstream corporate governance practices are often adopted on a symbolic basis (Soobaroyen et al., 2017) or have been subverted with a view to maintaining, or even strengthening, existing political and economic elites. This has been observed in a number of studies (for example, Saliya & Jayasinghe, 2016; Uddin et al., 2017; Armitage et al., 2017; Ahmed & Uddin, 2018; Kimani et al., 2020). At the same time, one has to acknowledge the significant contribution of Mervyn King in developing a stakeholder model of corporate governance code in South Africa, inclusive of a change from a compliance (“comply or explain”) approach to that of an explanation approach (“apply and explain”). However, there is little understanding as to how companies and boards would implement an “apply and explain” approach. Notwithstanding that there are many studies examining the disclosure and board implications of the code in the emerging economy context, what is less clear is the black box of governance; that is, how decisions are taken by directors (McNulty et al., 2013; Brennan, 2021). Furthermore, given the stakeholder nature of current governance codes and the responsibilities for boards to take into account demands of non-financial stakeholders, it is not always clear whether companies have been able to action these principles. What has perhaps been more

Accounting, accountability and governance in emerging economies  227 visible so far has been an increasing use of social and environmental reports, which we briefly discuss below. Over the last 20 years or thereabouts, studies of corporate social responsibility (CSR) reporting or social and environmental reporting (SER) in emerging economies have been gradually coming to the fore, with particular acknowledgement of key authors such as Belal (2001). Earlier work has emphasized the rather unstructured (and often perfunctory) and voluntary nature of SER. The initial motivation for the communication strategy centred on philanthropy, which was primarily associated with the peculiarities of a company’s management/ownership and the socio-cultural contexts in which it operates. Later developments and work in emerging economies shifted to the influence of international stakeholders (for example, buyers, global activism) and multinational firms (Belal et al., 2013; Gerged et al., 2018). Equally, for some countries, the state has been seen to take the lead in influencing companies’ commitment to social responsibility and thus having an impact on SER practices. For example, Amran and Devi (2008) highlight the role of the Malaysian government in influencing the extent of corporate social reporting. De Villiers and Van Staden (2006) explored how South African companies adjusted the extent of their environment disclosures in relation to the stated priorities of the government, while the evidence from China (for example, Li & Belal, 2018; Parsa et al., 2021) highlights a long-standing political agenda towards embedding social and environmental accountability in line with state priorities (see also Haji et al., 2023). Overall, the level of social and environmental concerns (climate change, labour rights, community support, human rights) has significantly been heightened, although the extent to which some emerging economies have sought to engage with social and environmental accountability differs considerably. In some countries, several models for SER have been formally adopted or encouraged (Cahaya et al., 2015; Tauringana, 2020; Tilt et al., 2020; Erin & Bamigboye, 2022), namely the Global Reporting Initiative, Integrated Reporting and corporate Sustainable Development Goals (SDGs) reporting, with the intention of fostering a more holistic approach to communicating the impact of corporate operations on the environment, community, individuals and society. More widely, however, and beyond the usual context of high-performing emerging economies and companies (for example, large listed companies, mainly in South Africa, Egypt, Nigeria, the Middle East, China and India), SER practices remain very much at the discretion of companies and critically may even serve to further the business interests and status quo, as is often noted in countries with significant mineral resources (Egbon & Mgbame, 2020; Lauwo et al., 2020). Undoubtedly, as in the developed country context, greenwashing and impression management has long been the name of the game. Recent reforms at the global level suggest that greater structuration and formalization of SER is on the cards, although there is a concern this leads to “quantity” SER rather than “quality” information (Soobaroyen et al., 2023). As we conclude consideration of the technical infrastructure, we do need to signal the concerns about AAG research itself in emerging economies and its ability to have an impact on the wider scholarship and on policy-making. Alam et al. (2020) give a classic account of how developed countries establish a conceptual or discursive “hegemony” over developing countries, namely in terms of how carrying out accounting and accountability research acquired a hegemonic status in Bangladesh and Sri Lanka. A form of intellectual colonization starts with the financial and technological advantage that developed countries have over these two emerging economies.

228  Handbook of accounting, accountability and governance Doctoral scholarships given to faculty members of universities in emerging economies constitute another mechanism through which this conceptual colonization is established and reinforced. As a result, local faculty members become completely unaware of alternative traditions of research and the benefits that can accrue from following these traditions to develop new knowledge and contribute to addressing actual development challenges in emerging economies (see also Ashraf et al., 2019). A similar concern has been highlighted by Moses and Hopper (2022) and Lassou et al. (2021) as a result of their analysis of accounting research in emerging economies and in Africa in particular, where the potential for engaging in deeper and more contextually and methodologically appropriate research is severely constrained. While the relationship between the developed and emerging economies is an important factor that impedes the human, social and ecological development in latter contexts, the role of the local elites is thus important in perpetuating the economic and discursive exploitation of the local population (Jayasinghe & Wickramasinghe, 2011; Alam et al., 2020). These local elites are invariably enslaved within the political and economic ideology churned out through the ideological state apparatus of leading nations in the developed world. Local elites position themselves in such a way that they draw material interests from this ideological subordination as well. Many articles do touch upon this symbiotic relationship between the local elites and the developed world. For example, Alam et al. (2020) describe the role of senior accounting professors in perpetuating one research methodology that they had acquired during their doctoral studies in the US. Professors also draw material gains, including perks and privileges, from this hegemony. The emergence of alternative methodologies should diminish their prestige and corresponding perks, thereby effectively supplying them with material reasons to “kill off” all efforts that are aimed at proliferating alternative research methodologies. Another example of intellectual hegemony is given by Macve’s (2020) work on the development of the local accounting profession in China. Developed in the Western world, the institution of an “independent” accounting profession shapes global accounting practices through a carefully knit system of practices enacted by powerful players. This system includes the creation of knowledge (accounting standards by International Accounting Standards Board – IASB), imparting this knowledge to aspiring accounting students through professional accounting bodies that act as gatekeepers of accounting knowledge and the enforcement of this knowledge through large international accounting firms, also known as the “Big Four”. The control of this accounting knowledge, developed in the West, is so immense that almost all emerging economies have mimicked the system to ensure their legitimacy and survival in the global economy, albeit the Chinese state seems keen to develop a hegemony of its own (Macve, 2020). As we seek to address some of the perennial AAG challenges in emerging economies, it is therefore important to recognize the range of material and mental barriers to the development of locally appropriate solutions.

5. CONCLUSION This chapter has summarized the vital AAG issues that have been persisting as well as those that have more recently surfaced in the context of emerging economies. The development agenda financed and executed by international aid agencies and global corporations has certainly overshadowed critical dimensions of development. After more than three decades of living, breathing and running with the development discourse, it is high time for everyone to

Accounting, accountability and governance in emerging economies  229 take an introspective pause. The three approaches of global development, which we discussed in the chapter, have undoubtedly generated some benefits, including the provision of basic necessities and improvement in the quality of life of some segments of the population in emerging economies. However, there are a number of unintended adverse outcomes of this development strategy. Many of these unintended adverse outcomes, for example economic, environmental and social exploitation by MNCs, unfettered power of NGOs and deficiencies in AAG, open up a new set of AAG challenges in emerging economies. We conclude the chapter by suggesting some of the measures that can be taken to address these issues. Since the acknowledgement of the role of MNCs in China’s development, DFI has become a change agent of globalization. This recognition influenced many countries, which has contributed to opening up their economies, lowered trade barriers and provided massive incentives to welcome MNCs. This chapter argues that the dominance of MNCs has raised questions about the state’s ability to govern and cast shadows on the societal benefits of MNCs. In many economies, MNC interests interfere with the agriculture and environment sectors, affecting the lives of the local population. Transferring knowledge and building a technical infrastructure have been emerging economies’ priority areas. The development, monitoring and implementation of global accounting standards, such as IFRS/ISA, have become a significant concern in emerging economies, yet they seem to be fixated with improving information and accountability for a few companies and businesses. The same applies to implementing corporate governance practices that have been symbolically benefiting a privileged few organizations, owners and executives. This is not surprising given the challenges of the mainstream governance model in developed countries. Over time, AAG have become increasingly present, while these were under-discussed in the post-war development era. They have become more potent over the years, and many national governments have become more concerned with their role in civil society. NGOs have also realized the importance of this issue and, accordingly, initiated alternative approaches such as NGO–business hybrid models and responded to the local population’s interest and traditions of accountability. In fact, in emerging economies, there is a resurgence of interest in identifying locally designed AAG practices (Arslan & Alqatan, 2020; Lassou et al., 2020; Areneke et al., 2022; Khlif et al., 2022). After having become the agents of global growth, the evidence from emerging economies strengthens the argument that one size does not fit all. The contextual diversity in emerging economies poses new challenges to AAG practices. In particular, their so-called growth experience revealed the need for an enhanced state’s role in regulating the impact of foreign investment, influencing NGOs and maximizing technical cooperation potential in the AAG fields. At the same time, issues of political economy, corruption and political interference, as well as limited regulatory reach, need to be addressed to ensure a more sustainable and inclusive path to development.

NOTES 1. Different terminologies and technical definitions have sought to classify (and measure) nation states’ level of economic and social development (refer to Hopper et al., 2017; Hopper at al., 2009), for example developing countries, less developed countries, Global South, Southern countries. The World Bank’s current nomenclature emphasizes income classifications (for example, low income, lower or upper-middle income, and high income). Over time, these terms became more (or less)

230  Handbook of accounting, accountability and governance prominent in the literature, although accounting scholars typically addressed issues that were common across these different contexts. For the sake of consistency, we rely on the term “emerging economies” in this chapter whilst acknowledging that there are widely different rates of “emergence” and these countries may be at the forefront of those that are pejoratively classified as developing economies, notably in terms of sustained market access, progress in reaching middle-income levels and greater global economic relevance (Duttagupta & Pazarbasioglu, 2021). 2. We do not seek to provide a comprehensive review of the work published on accounting in developing countries, emerging economies and the Global South. Refer to Moses and Hopper (2022) for such a recent review. 3. Organisation for Economic Co-operation and Development (OECD), see: www​.oecd​.org/​corporate/​ FDI​-in​-Figures​-October​-2015​.pdf (last accessed 4 March 2022). 4. The US Treasury’s Financial Crimes Enforcement Network (FinCEN) files were leaked to BuzzFeed News and the International Consortium of Investigative Journalists (ICIJ) on 20 September 2020, see: www​.bbc​.co​.uk/​news/​uk​-54226107 (last accessed 5 December 2021).

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232  Handbook of accounting, accountability and governance Degos, J.G., Levant, Y. and Touron, P. (2018), “The history of accounting standards in French-speaking African countries since independence: the uneasy path toward IFRS”, Accounting, Auditing & Accountability Journal, Vol. 32 No. 1, pp. 75–100. De Villiers, C. and Van Staden, C.J. (2006), “Can less environmental disclosure have a legitimising effect? Evidence from Africa”, Accounting, Organizations and Society, Vol. 31 No. 8, pp. 763–781. Dhanani, A. and Connolly, C. (2015), “Non-governmental organizational accountability: talking the talk and walking the walk?”, Journal of Business Ethics, Vol. 129 No. 3, pp. 613–637. Doh, J., Rodrigues, S. and Saka-Helmhout, A. (2017), “International business responses to institutional voids”, Journal of Business Studies, Vol. 48 No. 3, pp. 293–307. Duttagupta, R. and Pazarbasioglu, C. (2021), “Miles to go”, Finance and Development, Vol. 58 No. 2, pp.  1–9, available at|: www​.elibrary​.imf​.org/​view/​journals/​022/​0058/​002/​article​-A002​-en​.xml (last accessed 4 March 2022). Ebrahim, A. (2003), “Accountability in practice: mechanisms for NGOs”, World Development, Vol. 31 No. 5, pp. 813–829. Edwards, M. (2000), NGO Rights and Responsibilities: A New Deal for Global Governance. Foreign Policy Centre, London. Egbon, O. and Mgbame, C.O. (2020), “Examining the accounts of oil spills crises in Nigeria through sensegiving and defensive behaviours”, Accounting, Auditing & Accountability Journal, Vol. 33 No. 8, pp. 2053–2076. Égert, B., Kozluk, T.J. and Sutherland, D. (2009), “Infrastructure and growth: empirical evidence”. OECD Economics Department Working Paper, No. 685, available at: https://​papers​.ssrn​.com/​sol3/​ papers​.cfm​?abstract​_id​=​1360784 (last accessed 15 November 2021). Ejiogu, A., Ejiogu, C. and Ambituuni, A. (2019), “The dark side of transparency: does the Nigeria extractive industries transparency initiative help or hinder accountability and corruption control?”, British Accounting Review, Vol. 51 No. 5, article 100811. Elad, C. (2015), “The development of accounting in the Franc zone countries in Africa”, International Journal of Accounting, Vol. 50 No. 1, pp. 75–100. Eldaly, M.K.A. and Abdel-Kader, M. (2017), “An independent audit oversight system in a non-developed market: the case of Egypt”, International Journal of Accounting, Auditing and Performance Evaluation, Vol. 13 No. 3, pp. 254–279. Erin, O.A. and Bamigboye, O.A. (2022), “Evaluation and analysis of SDG reporting: evidence from Africa”, Journal of Accounting & Organizational Change, Vol. 18 No. 3, pp. 369–396. Ezzamel, M. (2009), “Order and accounting as a performative ritual: evidence from ancient Egypt”, Accounting, Organizations and Society, Vol. 34 No. 3–4, pp. 348–380. Ferry, L. and Lehman, G. (2018), “Trends in corruption, environmental, ethical and social accounting”, Accounting Forum, Vol. 42 No. 1, pp. 1–2. Gerged, A.M., Cowton, C.J. and Beddewela, E.S. (2018), “Towards sustainable development in the Arab Middle East and North Africa region: a longitudinal analysis of environmental disclosure in corporate annual reports”, Business Strategy and the Environment, Vol. 27 No. 4, pp. 572–587. Ghattas, P., Soobaroyen, T. and Marnet, O. (2021), “Charting the development of the Egyptian accounting profession (1946–2016): an analysis of the state–profession dynamics”, Critical Perspectives on Accounting, Vol. 78, article 102159. Goddard, A. (2021), “Accountability and accounting in the NGO field comprising the UK and Africa: a Bordieusian analysis”, Critical Perspectives on Accounting, Vol. 78, article 102200. Gordon, L.A., Loeb, M.P. and Zhu, W. (2012), “The impact of IFRS adoption on foreign direct investment”, Journal of Accounting and Public Policy, Vol. 31 No. 4, pp. 374–398. Gray, R., Bebbington, J. and Collison, D. (2006), “NGOs, civil society and accountability: making the people accountable to capital”, Accounting, Auditing & Accountability Journal, Vol. 19 No. 3, pp. 319–348. Haji, A.A., Coram, P. and Troshani, I. (2023), “Consequences of CSR reporting regulations worldwide: a review and research agenda”, Accounting, Auditing & Accountability Journal, Vol. 36 No. 1, pp. 177–208. Hammond, A.L., Kramer, W.J., Katz, R.S., Tran, J.T. and Walker, C. (2007), The Next Four Billion: Market Size and Business Strategy at the Base of the Pyramid. World Resources Institute and International Finance Corporation, Washington, DC.

Accounting, accountability and governance in emerging economies  233 Harvey, D. (2005), A Brief History of Neoliberalism. Oxford University Press, Oxford. Hopper, T., Lassou, P. and Soobaroyen, T. (2017), “Globalisation, accounting and developing countries”, Critical Perspectives on Accounting, Vol. 43, pp. 125–148. Hopper, T., Tsamenyi, M., Uddin, S. and Wickramasinghe, D. (2009), “Management accounting in less developed countries: what is known and needs knowing”, Accounting, Auditing & Accountability Journal, Vol. 22 No. 3, pp. 469–514. Hopwood, A.G. (1990), “Ambiguity, knowledge and territorial claims: some observations on the doctrine of substance over form: a review essay”, British Accounting Review, Vol. 22 No. 1, pp. 79–87. Houqe, M.N. and Monem, R.M. (2016), “IFRS adoption, extent of disclosure, and perceived corruption: a cross-country study”, International Journal of Accounting, Vol. 51 No. 3, pp. 363–378. Imai, K.S., Arun, T. and Annim, S.K. (2010), “Microfinance and household poverty reduction: new evidence from India”, World Development, Vol. 38 No. 12, pp. 1760–1774. Islam, M.T., Rahman, M. and Saha, S. (2020), “Corporate governance reform and overstatement of compliance: illustrations from an emerging economy”, Business Strategy & Development, Vol. 3 No. 4, pp. 648–656. Jayasinghe, K. (2009), Calculative Practices of the Rural: Emotionality, Power and Micro-Entrepreneurship Development. VDM Publishers, Germany. Jayasinghe, K. and Uddin, S. (2019), “Continuity and change in development discourses and the rhetoric role of accounting”, Journal of Accounting in Emerging Economies, Vol. 9 No. 3. pp. 314–334. Jayasinghe, K. and Wickramasinghe, D. (2006), “Can NGOs deliver accountability? Predictions, realities and difficulties”. Bhargava, H. and Kumar, D. (eds), NGOs: Roles and Accountability. ICFAI Press, Hyderabad, pp. 296–327. Jayasinghe, K. and Wickramasinghe, D. (2011), “Power over empowerment: encountering development accounting in a Sri Lankan fishing village”, Critical Perspectives on Accounting. Vol. 22 No. 4, pp. 396–414. Jayasinghe, K., Kenney, C.M., Prasanna, R. and Velasquez, J. (2020), “Enacting ‘accountability in collaborative governance’: lessons in emergency management and earthquake recovery from the 2010–2011 Canterbury earthquakes”, Journal of Public Budgeting, Accounting & Financial Management, Vol. 32 No. 3, pp. 439–459. Jodhka, S.S. (2021), “Why are the farmers of Punjab protesting?” Journal of Peasant Studies, Vol. 48 No. 7, pp. 1356–1370. Kalderimis, D. (2004), “IMF conditionality as investment regulation: a theoretical analysis”, Social & Legal Studies, Vol. 13 No. 1, pp. 103–131. Kaldor, M., Anheier, H. and Glasius, M. (2003), Global Civil Society. SAGE, London. Kamat, S. (2002), Development Hegemony: NGOs and the State in India. Oxford University Press, Oxford. Kamat, S. (2003), “The NGO phenomenon and political culture in the third world”, Development, Vol. 46 No. 1, pp. 88–93. Kan, K.A.S., Agbodjo, S. and Gandja, S.V. (2021), “Accounting polycentricity in Africa: framing an ‘accounting and development’ research agenda”, Critical Perspectives on Accounting, Vol. 78, article 102234. Karim, L. (2011), Microfinance and Its Discontents: Women in Debt in Bangladesh. University of Minnesota Press, Minneapolis, MN. Karim, L. (2016), “Reversal of fortunes: transformations in state–NGO relations in Bangladesh”, Critical Sociology, Vol. 44 No. 4–5, pp. 579–594. Keck, M. and Sikkink, K. (1998), Activists beyond Borders: Advocacy Networks in International Politics. Cornell University Press, London. Kennedy, C., Hussain, I. and Zaidi, S. (1999), “Reconsidering the relationship between the state, donors and NGOs in Bangladesh”, Pakistan Development Review, Vol. 38 No. 4, pp. 489–510. Khan, S.R. and Christiansen, J. (eds) (2011), Towards New Developmentalism. Routledge, London. Khanna, T. and Palepu, K.G. (1997), “Why focused strategies may be wrong for emerging markets”, Harvard Business Review, Vol. 75 No. 4, pp. 41–51. Khlif, H., Ahmed, K. and Alam, M. (2020), “Accounting regulations and IFRS adoption in Francophone North African countries: the experience of Algeria, Morocco, and Tunisia”, International Journal of Accounting, Vol. 55 No. 1, article 2050004.

234  Handbook of accounting, accountability and governance Khlif, W., Karoui, L. and Ingley, C. (2022), “Systemic sustainability: toward an organic model of governance – a research note”, Journal of Management and Governance, Vol. 26 No. 1, pp. 11–25. Kilby, P. (2006), “Accountability for empowerment: dilemmas facing non-governmental organizations”, World Development, Vol. 34 No. 6, pp. 951–963. Kimani, D., Ullah, S., Kodwani, D. and Akhtar, P. (2020), “Analysing corporate governance and accountability practices from an African neo-patrimonialism perspective: insights from Kenya”, Critical Perspectives on Accounting, Vol. 78, article 102260. Krambia‐Kapardis, M. and Psaros, J. (2006), “The implementation of corporate governance principles in an emerging economy: a critique of the situation in Cyprus”, Corporate Governance: An International Review, Vol. 14 No. 2, pp. 126–139. Lassou, P.J., Hopper, T. and Ntim, C. (2021), “Accounting and development in Africa”, Critical Perspectives on Accounting, Vol. 78, article 102280. Lassou, P.J., Hopper, T. and Soobaroyen, T. (2020), “Financial controls to control corruption in an African country: insider experts within an enabling environment”, Financial Accountability & Management, Vol. 37 No. 2, pp. 107–123. Lauwo, S., Kyriacou, O. and Otusanya, O.J. (2020), “When sorry is not an option: CSR reporting and ‘face work’ in a stigmatised industry – a case study of Barrick (Acacia) gold mine in Tanzania”, Critical Perspectives on Accounting, Vol. 71, article 102099. Lewis, D. and Kanji, N. (2009), Non-Governmental Organisations and Development, Routledge, London. Li, T. and Belal, A. (2018), “Authoritarian state, global expansion and corporate social responsibility reporting: the narrative of a Chinese state-owned enterprise”, Accounting Forum, Vol. 42 No. 2, pp. 199–217. Lungu, C.I., Caraiani, C. and Dascălu, C. (2017), “The impact of IFRS adoption on foreign direct investments: insights for emerging countries”, Accounting in Europe, Vol. 14 No. 3, pp. 331–357. Macve, R. (2020), “Perspectives from mainland China, Hong Kong and the UK on the development of China’s auditing firms: implications and a research agenda”, Accounting and Business Research, Vol. 50 No. 7, pp. 641–692. Mahadeo, J.D. and Soobaroyen, T. (2016), “A longitudinal study of the implementation of the corporate governance code in a developing country: the case of Mauritius”, Business & Society, Vol. 55 No. 5, pp. 738–777. McNulty, T., Zattoni, A. and Douglas, T. (2013), “Developing corporate governance research through qualitative methods: a review of previous studies”, Corporate Governance: An International Review, Vol. 21 No. 2, pp. 183–198. Mir, M.Z. and Rahaman, A.S. (2005), “The adoption of international accounting standards in Bangladesh: an exploration of rationale and process”, Accounting, Auditing & Accountability Journal, Vol. 18 No. 6, pp. 816–841. Mir, R. and Mir, A. (2016), “The ‘iron’ in the iron cage: retheorizing the multinational corporation as a colonial space”. Prasad, A., Prasad, P., Mills, A.J. and Mills, J. (eds), The Routledge Companion to Critical Management Studies. Routledge, London, pp. 369–382. Moses, O. and Hopper, T. (2022), “Accounting articles on developing countries in ranked English language journals: a meta-review”, Accounting, Auditing & Accountability Journal, Vol. 35 No. 4, pp. 1035–1060. Najam, A. (2000), “The four C’s of government: third sector relations”, Nonprofit Management and Leadership, Vol. 10 No. 4, pp. 375–396. Neu, D., Rahaman, A.S. and Everett, J. (2014), “Accounting and sweatshops: enabling coordination and control in low‐price apparel production chains”, Contemporary Accounting Research, Vol. 31 No. 2, pp. 322–346. Nnadi, M. and Soobaroyen, T. (2015), “International financial reporting standards and foreign direct investment: the case of Africa”, Advances in Accounting, Vol. 31 No. 2, pp. 228–238. Noah, A.O., Adhikari, P., Ogundele, B.O. and Yazdifar, H. (2020), “Corporate environmental accountability in Nigeria: an example of regulatory failure and regulatory capture”, Journal of Accounting in Emerging Economies, Vol. 11 No. 1, pp. 70–93.

Accounting, accountability and governance in emerging economies  235 Nurunnabi, M. (2015), “Tensions between politico‐institutional factors and accounting regulation in a developing economy: insights from institutional theory”, Business Ethics: A European Review, Vol. 24 No. 4, pp. 398–424. O’Dwyer, B. and Boomsma, R. (2015), “The co-construction of NGO accountability: aligning imposed and felt accountability in NGO–funder accountability relationships”, Accounting, Auditing & Accountability Journal, Vol. 28 No. 1, pp. 36–68. Organisation for Economic Co-operation and Development (OECD) (2014), Illicit Financial Flows from Developing Countries: Measuring OECD Responses. OECD, Paris, available at: www​.oecd​.org/​ corruption/​illicit​_financial​_flows​_from​_developing​_countries​.pdf (last accessed 15 November 2021). Organisation for Economic Co-operation and Development (OECD) (2015), FDI in Figures: October 2015. OECD, Paris, available at: www​.oecd​.org/​corporate/​FDI​-in​-Figures​-October​-2015​.pdf (last accessed 4 March 2022). Othman, H.B. and Kossentini, A. (2015), “IFRS adoption strategies and theories of economic development: effects on the development of emerging stock markets”, Journal of Accounting in Emerging Economies, Vol. 5 No. 1, pp. 70–121. Otusanya, O.J. and Adeyeye, G.B. (2021), “The dark side of tax havens in money laundering, capital flight and corruption in developing countries: some evidence from Nigeria”, Journal of Financial Crime, Vol. 29 No. 1, pp. 62–100. Outa, E.R., Ozili, P. and Eisenberg, P. (2017), “IFRS convergence and revisions: value relevance of accounting information from East Africa”, Journal of Accounting in Emerging Economies, Vol. 7 No. 3, pp. 352–368. Owczarzak, J., Broaddus, M. and Pinkerton, S. (2016), “Audit culture: unintended consequences of accountability practices in evidence-based programs”, American Journal of Evaluation, Vol. 37 No. 3, pp. 326–343. Parsa, S., Dai, N., Belal, A., Li, T. and Tang, G. (2021), “Corporate social responsibility reporting in China: political, social and corporate influences”, Accounting and Business Research, Vol. 51 No. 1, pp. 36–64. Pianezzi, D. and Ashraf, M.J. (2020), “Accounting for ignorance: an investigation into corruption, immigration and the state”, Critical Perspectives on Accounting, Vol. 86, article 102147. Poullaos, C. (2009), “Professionalisation”. Edwards, J.R. and Walker, S.P. (eds), The Routledge Companion to Accounting History. Routledge, London, pp. 264–290. Rahaman, A.S. (2010), “Critical accounting research in Africa: whence and whither”, Critical Perspectives on Accounting, Vol. 21 No. 5, pp. 420–427. Sabharwal, A. (2020), “Contested spaces: a coinciding rise of state regulations and technomoral politics of rights-based NGOs in India”, Third Sector Review, Vol. 26 No. 2, pp. 107–127. Saliya, C.A. and Jayasinghe, K. (2016), “Creating and reinforcing discrimination: the controversial role of accounting in bank lending”, Accounting Forum, Vol. 40 No. 4, pp. 235–250. Samaha, K. and Khlif, H. (2016), “Adoption of and compliance with IFRS in developing countries”, Journal of Accounting in Emerging Economies, Vol. 6 No. 1, pp. 33–49. Samsonova-Taddei, A. and Humphrey, C. (2014), “Transnationalism and the transforming roles of professional accountancy bodies: towards a research agenda”, Accounting, Auditing & Accountability Journal, Vol. 27 No. 6, pp. 903–932. Sian, S. (2006), “Inclusion, exclusion and control: the case of the Kenyan accounting professionalisation project”, Accounting, Organizations and Society, Vol. 31 No. 3, pp. 295–322. Siddiqui, J. and Uddin, S. (2016), “Human rights disasters, corporate accountability and the state: lessons learned from Rana Plaza”, Accounting, Auditing & Accountability Journal, Vol. 29 No. 4, pp. 679–704. Sikka, P. and Lehman, G. (2015), “The supply-side of corruption and limits to preventing corruption within government procurement and constructing ethical subjects”, Critical Perspectives on Accounting, Vol. 28, pp. 62–70. Song, X. and Trimble, M. (2020), “The historical and current status of global IFRS adoption: obstacles and opportunities for researchers”, International Journal of Accounting, Vol. 57 No. 2, article 2250001.

236  Handbook of accounting, accountability and governance Soobaroyen, T., Tsamenyi, M. and Sapra, H. (2017), “Accounting and governance in Africa: contributions and opportunities for further research”, Journal of Accounting in Emerging Economies, Vol. 7 No. 4, pp. 422–427. Soobaroyen, T., Ramdhony, D., Rashid, A. and Gow, J. (2023), “The evolution and determinants of corporate social responsibility (CSR) disclosure in a developing country: extent and quality”, Journal of Accounting in Emerging Economies, Vol. 13 No. 2, pp. 300–330. Srivastava, A. and Muharam, H. (2022), “Value relevance of accounting information during IFRS convergence period: comparative evidence between India and Indonesia”, Accounting Research Journal, Vol. 35 No. 2, pp. 276–291. Stringer, C. and Michailova, S. (2018), “Why modern slavery thrives in multinational corporations’ global value chains”, Multinational Business Review, Vol. 26 No. 3, pp. 194–206. Tauringana, V. (2020), “Sustainability reporting challenges in developing countries: towards management perceptions research evidence-based practices”, Journal of Accounting in Emerging Economies, Vol. 11 No. 2, pp. 194–215. The Guardian (2013), “The NGO–business hybrid: more than the sum of its parts?”, 21 November. The Guardian (2018), “Ireland collects more than €14bn in taxes and interest from Apple”, 18 September. The Guardian (2021), “Microsoft’s Irish subsidiary posted £220bn profit in single year”, 3 June. Theodosopoulos, G. (2011), “Voluntary hospices in England: a viable business model?”, Accounting Forum, Vol. 35 No. 2, pp. 118–125. Tilt, C.A., Qian, W., Kuruppu, S. and Dissanayake, D. (2020), “The state of business sustainability reporting in sub-Saharan Africa: an agenda for policy and practice”, Sustainability Accounting, Management and Policy Journal, Vol. 12 No. 2, pp. 267–296. Townsend, J.G. and Townsend, A.R. (2004), “Accountability, motivation and practice: NGOs North and South”, Social & Cultural Geography, Vol. 5 No. 2, pp. 271–284. Tucker, M. and Miles, G. (2004), “Financial performance of microfinance institutions: a comparison to performance of regional commercial banks by geographic regions”, Journal of Microfinance/ESR Review, Vol. 6 No. 1, pp. 41–54. Uddin, M.M. and Belal, A.R. (2019), “Donors’ influence strategies and beneficiary accountability: an NGO case study”, Accounting Forum, Vol. 43 No. 1, pp. 113–134. Uddin, S. and Choudhury, J. (2008), “Rationality, traditionalism and the state of corporate governance mechanisms: illustrations from a less‐developed country”, Accounting, Auditing & Accountability Journal, Vol. 21 No. 7, pp. 1026–1051. Uddin, S., Jayasinghe, K. and Ahmed, S. (2017), “Scandals from an island: testing Anglo-American corporate governance frameworks”, Critical Perspectives on International Business, Vol. 13 No. 4, pp. 349–370. van Helden, J. and Uddin, S. (2016), “Public sector management accounting in emerging economies: a literature review”, Critical Perspectives on Accounting, Vol. 41, pp. 34–62. van Zyl, H. and Claeyé, F. (2019), “Up and down, and inside out: where do we stand on NGO accountability?”, European Journal of Development Research, Vol. 31 No. 3, pp. 604–619. Wang, Y.L.M., Song, Y. and Li, C. (2019), “Land acquisition induced conflicts in suburban China: a procedural perspective”, Geographical Research, Vol. 57 No. 3, pp. 275–285. World Bank (1996), From Plan to Market. World Development Report, World Bank, Washington, DC. World Bank (1998), Knowledge for Development. World Development Report, World Bank, Washington, DC. World Bank (1999), Entering the 21st Century. World Development Report, World Bank, Washington, DC. World Bank (2000), Attacking Poverty. World Development Report, World Bank, Washington, DC. Wright, G.W. (2012), “NGOs and Western hegemony: causes for concern and ideas for change”, Development in Practice, Vol. 22 No. 1, pp. 123–134. Yasmin, C. and Ghafran, C. (2019), “The problematics of accountability: internal responses to external pressures in exposed organisations”, Critical Perspectives on Accounting, Vol. 64, article 102070.

11. Higher education governance and accountability in developing economies: the case of Sierra Leone Lee Parker and Gabriel Kaifala

OVERVIEW While the literature is replete with studies of higher education (HE) governance and accountability in developed economies, remarkably little is known about HE contexts, governance systems and accountability processes in developing economies. Yet the latter may differ from developed country settings quite significantly, reflecting a wide diversity of institutional, socio-cultural and politico-economic contexts. In an African context case study, this chapter offers an examination of HE governance and accountability processes at the University of Sierra Leone in Sierra Leone on the west coast of Africa. It examines university governance structures, coalface governance processes and the accompanying accountability implications. The pervasive social, institutional, political, economic, cultural and regulatory environmental influences in Sierra Leone are also considered. Based on the case of Sierra Leone, the chapter reveals implications for African and developing country HE governance and accountability in general. In doing so, it offers a specific analysis of governance and accountability challenges in a crucial national sector set in the context of the developing African continent.

INTRODUCTION The research literature and knowledge regarding the state of and trends in HE governance and accountability in developed economies have generated a significant corpus of work and attention (for example, Capano & Pritoni, 2020; Magalhaes et al., 2013; Harman & Treadgold, 2007). The same cannot be said of university corporate governance and accountability in developing countries. Indeed, what is available sometimes tends towards a presumptive importation of developed economy approaches or globally based prescriptions that pay limited attention to local and national cultures and practices. Just as international accounting standards advocates have presumed international standardization and comparability is both desirable and achievable, so corporate governance research has tended towards similar presumptions regarding developed country system transferability into unique developing country settings. The risk is that even when attempts are made to import global governance systems into developing country universities, apparent compliance may mask governance and accountability approaches that instead are decoupled from the presumed Western model. This chapter presents a case study of the structures and processes of university governance and accountability in the context of the major public university in the African country of Sierra Leone. This is being offered as a reflection upon the issues of governance and accountabil237

238  Handbook of accounting, accountability and governance ity implementation in a specific developing country with a view to penetrating beneath the surface of more generalized literature on HE corporate governance in both developed and developing countries (Carnegie & Tuck, 2010). It allows us to engage with the particulars of social, political, economic and educational national context, both past and present. It is only in this way that researchers and policymakers can hope to understand and plan for effective university governance and accountability in the developing country environment. While these institutions sit within a global HE context, nonetheless they are subject to powerful nationaland local-level influences and challenges that have hitherto been little understood or accounted for in the literature. The sources for this case study have been drawn from prior published literature on HE governance in the African and developing country context, as well as published literature on the history and legal/institutional structures in both Sierra Leone and the University of Sierra Leone (USL). Exploratory evidence regarding governance and accountability structures and processes within the case study university has been garnered from interviews with a small selection of six senior academics and administrators ranging across roles of dean, department head, senior academic and specialist administrators in the case study organization. The sample size of interviewees reflects the limitations of access in a developing country context during the onset of the global COVID-19 pandemic. This included the inability of researchers to travel to Sierra Leone, the inadequacy of national internet access to facilitate online interviews and significant cultural reluctance to engage in phone interviews. Nonetheless, the depth of interview data, the correlating views expressed and the correspondence of interviewee data with published literature have supported authentic and credible observations and conclusions regarding university governance and accountability in this developing country context. The chapter commences with a brief review of recent prior research and commentaries on developing country corporate governance and its import within universities. The Sierra Leone context surrounding HE will then be outlined, and the general research design for this case study will also be explained. Observations on the Sierra Leone universities’ case will then be outlined, and on that basis, the implications for HE governance across the African continent will then be discussed. Our conclusions regarding the forward trajectory of developing country HE governance and accountability will finally be provided.

A PRIOR RESEARCH PERSPECTIVE Brennan and Solomon (2008) have signalled the need for closer examination of corporate governance and accountability systems and approaches in developing country contexts. As Parker (2012) found, regardless of differences across nations and regions, both developed and developing country universities have joined a global trend towards a marketized, commercial orientation in strategy and management. Western-derived New Public Management philosophies have become endemic in university missions and strategies, driven by a strong financial resourcing imperative. In both developed and developing countries, this trend has been exacerbated by restricted government HE funding and the emergence of competing private sector educational institutions (Parker, 2012). In the South African context, for example, Luescher-Mamashela (2010) recognizes the penetration of neoliberalism and the associated arrival of European university ideas of universities, led by a business-focussed management offering services in a competitive market.

Higher education governance and accountability in developing economies  239 Varghese (2016) has also observed public universities in Africa being either permitted or effectively forced to enter the private student market to fund their operations. The global university trend towards educational massification and international revenue generation has driven competition between and within countries for students, staff, research funds and new technologies (Christopher, 2012; Parker, 2013). From a South African perspective, Veldman (2018) sees HE institutions as attempting survival and renewal by joining “the global project”. Imitating private sector business, vice-chancellors have been rebadged as CEOs, deans have become directors, staff are assets and university outputs are commercialized. In a developing country context, Abubakar (2016) recommends that Nigerian universities adopt “good governance” and collaborative strategies to concentrate resources, become market competitive and achieve global recognition and ranking. Global and Local Environments The pursuit of resources can lead developing country universities down the same paths as developed country counterparts, especially as poor governance and economic pressures can produce major disparities between universities even within the same country (Veldman, 2018). This poses challenges to the balance between authority-based governance (with its recourse to centralization, formalization and standardization) and autonomy-based governance (with its emphasis on decentralization, flexibility and enterprise) (Macheridis, 2015). In a developing country environment, local context can play a major role. A conservative university culture can produce university governance that is largely authority based with power concentrated at the top of the governance structure. Governance and accountability processes become largely opaque and focussed on governance and strategic status quo (Griffin, 2018). As Letza (2017) has argued, this emanates from national and cultural African history where the colonial ruling classes were often replaced with an indigenous ruling class. This new ruling class inherited the colonial economy and, instead of transforming it, employed it to the advantage of their own networks, so that the “haves” and “have nots” were defined in terms of being “connected” or “not connected”. The resulting clan control and opaque governance (Letza, 2017) has been reinforced by cultural tools such as social networks as observed in Sierra Leone by O’Kane (2017), whereby individuals, groups and institutions become connected and bound together, significantly influencing the nature and implementation of policies determined. For example, in their Sub-Saharan Africa study with reference to Nigeria, Nakpodia et al. (2018) identified the failure of imported corporate governance codes being due to the failure to integrate them with a country’s own national culture. Maassen (2017) argues that any governance reform must also consider a university’s historical and structural characteristics, balancing university management’s governance and control role and academics’ creativity and productivity. Government and Governance In most cases public universities are to some degree funded by government and subject to (in)direct supervision, so that any governance actions are subject to approval, delay or disapproval as cited in the case of Ghanaian universities (Abugre, 2018). Government influence over university objectives, impinging on their autonomy by means of regulatory, funding and accountability instruments, is on the increase (Bleiklie & Kogan, 2007). In Nigeria, Etejere et

240  Handbook of accounting, accountability and governance al. (2017) report that university council members are appointed by the government in power which thereby can exercise a steering influence over university governance and strategic direction. So, in the West African context, government intervention has negatively affected both effective university governance and institutional quality. At the same time, developing country governments, as reported by Jackson (2015) in the case of Sierra Leone, are often unable to supply sufficient resourcing for universities who then seek private sector partners and markets. Yet despite such funding limitations, governments still demand control and accountability over university strategy and operations. University management responds by driving staff towards the government’s economic and other goals (Bleiklie & Kogan, 2007; Christopher, 2012; Abugre, 2018). Hlatshwayo and Fomunyam (2018) contend that in the African context, universities have at times been effectively captured by the state and poorly governed, leading to a general mistrust in the relationship between HE and the state. University councils or boards may formally and have power to shape governance but are themselves shaped and constrained by the very university structures of which they are a part (Kretek et al., 2013). The balance of any power within the university council has swung in favour of external rather than internal members (Larsen et al., 2009). Hence, the corporate managerial model, distanced from the university’s academics, governed by the CEO in concert with the board chair, has become pervasive (Brown, 2011). This trend has also become evident in the African universities’ setting, with diminished collegiality and faculty and student participation in governance becoming evident (Sall & Oanda, 2016). Rarely do councils challenge their CEO and his or her executive prerogatives (Shattock, 2012). Decision-making power and accountability have been centralized under the purview of the CEO (Larsen et al., 2009; Rytmeister, 2009). Thus, any potential university council influence over policy and strategy or ability to extract accountability appears subject to the wishes of the board chair (chancellor) and CEO (vice-chancellor) (Rytmeister, 2009). This raises all sorts of questions, including to whom university boards are accountable and for what, how and by whom board members are selected, to whom board chairs and CEOs are really accountable, whether they are effectively held accountable, what philosophies and factors drive university governance structures, and to what extent governance and accountability approaches and outcomes are driven by global trends versus local institutions and cultures (Bleiklie & Kogan, 2007; Brown, 2011). Implementing Policy Researchers have also pointed to the potentially tense relationship between university and academics’ governance, accountability and autonomy (Carnegie & Tuck, 2010). National governments can influence right down to the level of individual academics with potential consequences for their autonomy, creativity and innovation (Pandey, 2004; Hlatshwayo & Fomunyam, 2018). The performance management, control and approval systems applied to universities by governments can both directly and through university managements’ performance and control systems be applied to individual academics (Christensen, 2011; Christopher, 2012; Abugre, 2018). While arguably this may enhance academics’ and universities’ accountability, it may simultaneously erode their autonomy with dysfunctional consequences for both productivity and achievement of strategic objectives, both at university and national levels.

Higher education governance and accountability in developing economies  241 The further problem this can pose is the breakdown of trust between universities and their national governments, and between university management and academic staff who may feel their autonomy threatened by government agendas and university management intervention (Larsen et al., 2009; Madikizela-Madiya, 2018; Hlatshwayo & Fomunyam, 2018; Xiao & Chan, 2020). This is also pointed to by Sall and Oanda (2016), who observe that in the African context, university-shared governance, strategic planning, consultation, transparency and accountability to stakeholders (students, staff, parents and community) are receding under pressure from government and national priorities. Local Adaptation Returning to the relationship between developed country and developing country approaches to corporate governance and accountability, it is evident that researchers are, on balance, beginning to recognize the cultural and institutional necessity and possibility of different or unique approaches that may be required for effective implementation in developing country settings. Furthermore, there are particular situational factors in African countries such as limited government funding for public universities and the resort to growth of private universities to fill the gap. This may at first sight allow universities more autonomy if they can tap into alternative non-government sources of funding, but severely limit their autonomy and self-governance if they cannot (Abugre, 2018). Recommendations to adopt developed country corporate governance models such as in the varied African environment are now being countered by alternative diagnoses that recognize the need for adaptation to local contexts if any effective governance and accountability implementation in both national and transnational organizations is to be achieved (Ekakitie Emonena, 2018; Halter & de Arruda, 2009). No longer can it be assumed that a European or Anglo-American governance system can be simply transplanted into the highly diverse African environment (Clarke, 2015). Instead, for universities as for other organizations, the challenge is to identify and incorporate recognition of the pervasive national, cultural and institutional histories and present traditions, the often complex network of stakeholders, and the values and networks that permeate national life (Nakpodia et al., 2018).

AFRICA AND SIERRA LEONE Historical Context As a former British colony, Sierra Leone gained independence in 1961 under the premiership of Sir Milton Margai and experienced a few years of functioning democracy. The election of an opposition party in 1967, the All People’s Congress (APC) led by Siaka Stevens, heralded a long era of political unrest. Stevens’ government declared the country a republic in 1971 and won the 1973 general elections by a landslide which effectively transformed the country into a de facto one-party state under the APC. A single-party constitution was adopted after a referendum in 1978 which made the APC the only legal party in the country (Kandeh, 1992; Bellows & Miguel, 2006, 2009). In 1991, Sierra Leone descended into a decade-long civil war (1991–2002), perpetrated by the Revolutionary United Front (RUF). In 1992, a group of young army officers led by

242  Handbook of accounting, accountability and governance Captain Strasser ousted the APC government and promised a return to multi-party democracy (Zack-Williams, 1999; Bellows & Miguel, 2006). The civil war emaciated the country’s economy, institutions and physical infrastructure. It has been estimated that around 50,000 Sierra Leoneans lost their lives during the conflict; more than half of the population was internally displaced, while 250,000 women became victims of rape and 100,000 (men, women and children) brutally amputated (Wang et al., 2007). The vicious attack on the capital Freetown by the RUF in January 1999 engendered the intervention of a large deployment of UK and UN military troops that finally brought an end to the war in 2002 (Bellows & Miguel, 2009). Since 2002, Sierra Leone has enjoyed a relatively stable socio-political landscape with a growing economy until mid-2014 when the outbreak of the Ebola Virus Disease (EVD) was first reported. This became the deadliest outbreak of the disease since its discovery in 1976 (Centers for Disease Control and Prevention, 2016). The World Health Organization (WHO) estimates that between May 2014 and December 2015, Sierra Leone reported a total of 14,122 cases of EVD infection and 3,955 deaths as a result. The country was declared EVD free in late 2015 (WHO, 2016). Socio-Political Context The Republic of Sierra Leone is a developing country situated on the west coast of Africa, with an estimated population of 7.8 million in 2019 (World Bank, 2021a), comprising 18 ethnic groups including Mende, Temne, Limba and Krio. Mende and Temne are the largest ethnic groups, although Krio (an indigenous language which emerged as a hybrid of English and local dialects initially introduced by freed slaves) is widely spoken and/or understood by almost everyone in the country irrespective of tribe or ethnicity (Visit Sierra Leone, 2021). Unsurprisingly, however, English is the official language for parliamentary and legal proceedings, business, education and the professions, given its British colonial heritage. The social context of Sierra Leone is represented by the extended family, tribe, village and religion. Islam and Christianity are its major religions with a following of 60 per cent and 30 per cent of the population, respectively (Visit Sierra Leone, 2021). Sierra Leone is a constitutional multi-party democracy with an executive president and a unicameral parliament of 124 seats. Both president and parliament serve five-year terms. The parliament comprises 112 elected members and 12 paramount chiefs (elected separately), representing each district in the country. The governance system is divided into three separate arms: legislature, executive and judiciary. The current president, Retired Brigadier Julius Maada Bio, was elected in 2018. Economic Context The Sierra Leone economy is largely based on agriculture and mining. Of total land area, 75 per cent is arable, of which 10 per cent is cultivated mainly for food crops such as rice, cassava and yam (Turnbull et al., 2008). A large proportion of the population is engaged in subsistence farming which accounts for 54 per cent of GDP (World Bank, 2021b). The country is endowed with diverse mineral resources including diamond, bauxite, iron ore, rutile, zircon and petroleum, hence once nicknamed the “Land of Iron and Diamonds” (Natural Resource Governance Institute, 2016). However, despite its significant resource bequest, the post-independence

Higher education governance and accountability in developing economies  243 economy has suffered prolonged deterioration with accompanying low standards of living for most of the population. The decade-long civil war and the resultant general insecurity caused the economy to shrink substantially in the 1990s as major economic activities, including agriculture, mining and service-related sectors, were disrupted. However, the economy showed signs of recovery immediately after the end of the war with annual GDP growth rate of 8.1 per cent in 2007. This gradually fluctuated over the years to 2011, rising to 15.3 per cent in 2012 and then recording the highest GDP growth of 20.9 per cent in 2013. However, GDP growth fell significantly during the EVD outbreak to 4.6 per cent in 2014 (World Bank, 2021b). A World Bank (2015) report on the socio-economic impacts of EVD in Sierra Leone suggests that agricultural and business activities now show increasingly positive signs of improvement. Recent macro-economic data shows a 3.3 per cent growth in GDP despite the ongoing COVID-19 pandemic (World Bank, 2021b). Higher Education Context Kandeh (1992) has claimed that historically, the standard of education in Sierra Leone was globally competitive. The country played an important role in the training of the first corps of administrators, doctors and teachers in English-speaking West Africa in the first half of the 19th century (Wang et al., 2007; Turnbull et al., 2008). The first higher education institution (HEI) in Sierra Leone – the Fourah Bay College (FBC) – was founded in 1827 by the Church Missionary Society primarily to train teachers and missionaries to educate and spread Christianity in West Africa. In 1876, FBC became a degree-granting institution with an affiliation to the University of Durham, England, and since then has maintained a reputable tradition of HE in Africa. To expand provision for HE in the country, FBC was dissolved in 1950, reconstituted and renamed Fourah Bay College – the University College of Sierra Leone (FBC-UCSL) and was then granted a Royal Charter of incorporation (Fourah Bay College Ordinance, 1950). Appendix 1 provides a summary of legislation relating to the establishment, (re)constitution, governance and administration of HEIs in Sierra Leone. The second HEI – Njala University College (NUC) – was founded in 1964, shortly after independence by an act of parliament (The Njala University Act, 1964). In 1967, the FBC-UCSL and NUC were merged to establish the USL with a federal governance system that allowed the constituent colleges to operate independently (The University of Sierra Leone Act, 1967). A unitary governance structure replaced the federal system in 1972 (The University of Sierra Leone Act, 1972). The USL was further restructured by the Universities Act (2005) to produce two mutually exclusive universities: (1) Njala University, incorporating: (a) Njala University College (b) Bo Campus, consisting of Bo Teachers’ College and School of Health Sciences, constituted from the School of Hygiene and Paramedical School (c) Bonthe Technical Institute as an affiliate institution.

244  Handbook of accounting, accountability and governance (2) USL, incorporating: (a) Fourah Bay College (b) College of Medicine and Allied Health Sciences, incorporating the National School of Nursing and the Pharmacy Technicians School (c) The Institute of Public Administration and Management. The Universities Act 2005 also made provision for the establishment of other universities (public and private) in the country, giving rise to a new private university – the University of Makeni – which was initially established in 2005 as The Fatima Institute and was granted university status in 2009. Further establishment of new universities was provided for by the Universities Amendment Act (2014) which led to the emergence of another public university – the Ernest Bai Koroma University of Science and Technology (EBKUST). As noted elsewhere by Abugre (2018) and Etejere et al. (2017) in the case of Ghana and Nigeria, respectively, university governance and accountability processes in Sierra Leone have been variously influenced by the state throughout its post-independence history. The extent of government influence ranges from the legal requirement for the serving president to act as chancellor of all public universities, through to the appointment by government of the vice-chancellor and principal, as well as the appointment of key members to university court and senate (see Appendix 2 for a summary of the governance structure of public universities in Sierra Leone). However, years of post-independence political instability, sustained corruption and mismanagement, further compounded by the decade-long civil war, have affected the quality of HE in the country. Wang et al. (2007, p. 15), for example, describe the effect of the civil war on the country’s educational landscape in the following way: It left a multitude of scars in the education sector: devastated school infrastructure, severe shortages of teaching materials, overcrowding in many classrooms in safer areas, displacement of teachers and delay in paying their salaries, frequent disruptions of schooling, disorientation and psychological trauma among children, poor learning outcomes, weakened institutional capacity to manage the system, and a serious lack of information and data to plan service provision.

SIERRA LEONE UNIVERSITY GOVERNANCE AND ACCOUNTABILITY As explained by interviewees, under the Universities Acts of 2005 and 2014, USL has its three affiliate institutions governed by a university secretariat responsible for managing the affairs of all three universities combined. These Acts specify the university governance structure, with the country’s president holding the role of USL chancellor. The chancellor appoints the USL vice-chancellor who supervises three deputy vice-chancellors, one controlling each affiliated institution (campus). Each affiliated institutional deputy vice-chancellor supervises deans of schools who in turn supervise their school’s department heads. The USL secretariat has a finance director who manages the finances of all three affiliated institutions, which in turn each have a senior assistant finance officer who manages the finances of their own institution with reporting responsibility to the secretariat finance director. Each affiliated institution deposits a predetermined percentage of their revenues into a secretariat pool account managed by the finance director for addressing university-level requirements. Hence, at first

Higher education governance and accountability in developing economies  245 sight, the governance structure follows a conventional university hierarchy of authority and accountability. Relationship-Based Governance Interviewees, however, point out that how governance and accountability processes occur in practice differs markedly from the formal structure projected by the university and its governing legislation: “the part that is problematic is how governance is implemented and how things get done across the university” (Interviewee 1). Interviewees report that at the highest level of governance, while the university senate is empowered to make crucial governance decisions, the effective power lies with the vice-chancellor who is indebted to the country’s president for his appointment. Indeed, as with the vice-chancellor position, appointments to the senate are influenced by the country’s president who is also the university’s chancellor. Thus, decisions of the senate are not made independently of the university’s senior line management. With respect to the accountability and control exercised by university line managers below the USL vice-chancellor, it is repeatedly observed by interviewees that personal relationships with the vice-chancellor and deputy vice-chancellors are crucial determinants of any actions that deans and department heads wish to take. Interviewees report varying circumstances where no governance and accountability systems exist, or where such systems appear to formally exist but, in practice, are ignored or subverted. This they argue is the product of both a cultural inclination to preserve the status quo, and the dominance of personal relationships as the pathway to eliciting the attention and decisions of senior management. Multiple interviewees report that while the governance structure lays down formal hierarchical channels and accountabilities within the university for decision-making, exercising control and delivering accountability, in reality, personal relationships (either present or historical) with and access to the vice-chancellor or deputy vice-chancellors are the media for securing effective action. This state of play, therefore, requires line managers to circumvent formal protocols and employ their personal reputation and relationship to secure direct access to the vice-chancellor or a deputy vice-chancellor to lobby for action on a specific issue. Such managers avoid working through the formal hierarchy of authority in the organizational structure, instead appealing directly to top management. You have to know people high up in the governance chain for you to be taken seriously. Those who have that connection are usually listened to. (Interviewee 4) [Y]ou have to have that personal rapport … for somebody like me, absolutely yes, if I call, he’ll answer my call, ask what’s your problem, and discuss. But unfortunately, not everybody has that level of rapport or network with the powers that be. (Interviewee 1)

This is recognized as being a potentially transient strategy, however, since when the identity of the vice-chancellor (and possibly deputy vice-chancellors) changes, some managers will lose their relationship and communication pathway to top management, while others may gain previously unavailable access through their personal connections to the new vice-chancellor. Personal relationships also even affect internal performance reviews and promotion at most levels of the hierarchy since the university follows civil service promotion tradition based on years of service provided, while supervisors are also reluctant to be seen to limit their subordinates’ upward career progression.

246  Handbook of accounting, accountability and governance Political Accountability Government and political influence is therefore a key player in university governance, as interviewees attested at length. Decisions made publicly may be conceived and made behind closed doors with a view to complying with the government’s agenda. Rationales behind some major decisions are not always readily explicable, and enquiries can elicit responses from senior university managers such as “it’s not for me to decide” or “this is the godfather’s agenda, my hands are tied”. General university policy is governed by the vice-chancellor who is concerned to align those with the agenda of the university chancellor (who is the country’s president) in pursuit of the government’s policies. Indeed, interviewees spoke of meetings of senior management called by the chancellor to challenge them on how their strategies would fit with and divert financial resources to the government’s “New Direction programme”. As with senior appointments that may change as government changes, so interviewees observe that university strategies may be discarded or change direction in response to changes in government. Therefore, interviewees observe that in Sierra Leone as in other African countries, university strategies are driven by currently dominant political interests. The political influence on governance and strategy is therefore pre-eminent, with the dominant accountability exercised being political. This governance structure is characterized by interviewees as inappropriate: [I]t does not enhance or even contribute to meeting the overall vision or mandate of the university as a whole. It does not provide the level of autonomy that … allows universities to make decisions … that enable them to strive and do what they do really well. (Interviewee 3)

Senior appointments being politically influenced by the government in power have a cascading effect down through the university hierarchy. Positions may be advertised, and interviews conducted, but the outcomes may result from political influence. This is observed by interviewees to be the system common in the country’s judicial system appointments as well: all ultimately influenced and approved by the president. The key prerequisite is senior university appointees’ willingness to work in sympathy with the government’s objectives. This is seen to directly affect all university academics and their work: So it always has that dynamic whereby it has a direct impact on our role as university academics. It does affect us directly. (Interviewee 6)

Examples of political influence upon academic governance issues and activities provided by interviewees included influence exerted on managing staff refusing to be relocated, academic staff association consideration of strike action for a salaries increment being characterized as sabotaging the government, a supervisor finding they have formal organizational authority but not political authority to deal with subordinates and a staff relocation decision made by the courts being revisited because of “political interference”. Further examples of government policy influence penetrating right through university governance and strategizing included a curriculum re-engineering process initiated by the government and required for immediate actioning without adequate time for evaluation, expert advisory services and long-term planning. As one interviewee remarked: Those at the top of the governance chain basically dance to the tune of the government because they are somehow indebted to the president or some other minister. (Interviewee 4)

Higher education governance and accountability in developing economies  247 Grassroots Governance and Accountability The effect on individual academics can be one of compliance with the informal accountability to the ruling government ethos, given that change is realistically exceedingly difficult to instigate. Once again, especially if they are junior academics or academics returning from overseas, they gradually realize that without personal political connections, influence and change is difficult to achieve. This is accentuated by the poor and sometimes intermittently paid salaries they receive. In many cases, this requires them to generate additional sources of personal income outside the university to support their families. This, in itself, is seen as laying the foundations for potential corruption as academics may become financially susceptible to bribery. Indeed, a proportion of Sierra Leone academics returning to USL ultimately decided to return to university posts overseas because of these pressures: Remember the saying “the cow has no option but to feed around the tree to which it is tied?”. That’s the justification for corruption in many offices. (Interviewee 4) I am acutely aware that a lot of the system is broken or in some cases no system at all. (Interviewee 5)

In this politically driven environment, then, governance and control are very much exercised from the top down: I would say the governance system looks like a top-down system because whatever comes from the bottom is often ignored. (Interviewee 1)

Strategic priorities within the university depend heavily on the priorities and support from the top of the hierarchy. Interviewees explain that faculty and department heads may appear to have formal governance authority but, in fact, find their authority restricted to decisions on minor, mostly student-related, issues. Any significant decision and any change initiative “has to come from those above you and those above you also take instructions from those above them and this could go up to the highest level of government” (Interviewee 1). Indeed, one interviewee alluded to the military background of their higher-level connection in the university and his predilection for taking action if he chooses. Interviewees argue that this environment produces a culture within the lower ranks of the university hierarchy of focussing on their own immediate local-level responsibilities over which they have some jurisdiction, “because then I get to do pretty much what I feel is good for me and my students” (Interviewee 6) and “my conviction is that I have to contribute meaningfully in my own little way to the system” (Interviewee 5). So at the mid- to lower levels of the organizational hierarchy, staff tend to “focus on what we’re contracted to do, because anything more is not worth the hassle, because there is no incentive” (Interviewee 4). In addition, interviewees reported that their ability to manage subordinates could be constrained by the subordinates’ personal connections to higher-level university management or government. The entire top-down governance culture therefore produces in senior management a self-governing tendency to restrict their decisions based on their perceived accountability to government, while lower university levels focus on their local-level scope of governance over which they are allowed some limited jurisdiction.

248  Handbook of accounting, accountability and governance This top-down governance and restricted local-level academic jurisdiction is argued by interviewees to have produced a reluctance to change the system and a breakdown in accountability: To be honest there is a high degree of lethargy of administrative staff simply because people are not generally held to account, and they are used to that over a long period of time. (Interviewee 2)

Academic staff, too, may feel threatened by any public discussion of assessment problems or other issues they feel may reflect on their own performance in this top-down governance and accountability culture. This can extend to staff resistance to any changes in teaching programme content and delivery, or any introduction of workload models for organizing and managing course delivery and staff contributions. The result can be that: [S]ome people go to teach with nothing at all and no materials for students either. But they will go to class and say whatever they like until their period is over, but they haven’t actually taught anything meaningful. (Interviewee 1)

Unaccountable Resourcing Interviewees report that USL students have rioted on campus at least three times in recent years, protesting a lack of facilities, teaching materials and the lateness or complete lack of release of their examination grades. Hence, governance failure extends even to the classroom level without consequences for the academic staff involved. On the other hand, interviewees also report academic staff experiencing poor financial, equipment and teaching materials resourcing and, in some cases, resorting to using their own personal resources to assist their teaching. Faced with such constrained salary and materials resourcing, staff become susceptible to the risk of succumbing to malpractices including bribery and corruption. These are alleged by interviewees as becoming entrenched under this system, reflecting a culture even extending to various examining bodies across the country. As already indicated, USL is composed of three institutional campuses that in part retain their own revenues and contribute part of their revenues to the central university secretariat for the overall running of the university. This, however, creates financial disagreements where campuses feel they contribute more than their equitable share to the central university (especially if they are earning a higher total revenue stream than their companion institutional campuses): [R]espective heads of campuses have concerns that the proportion they remit to the university account is not fair. (Interviewee 3)

Indeed, this can trigger a campus to develop alternative income streams (such as short courses) to retain the revenues outside the central funding system and pursue its own campus infrastructure development. It also creates tensions where staff on different campuses perceive different salary levels being paid across campuses, and staff object to what they see as differential benefits being accorded by the university across campuses. These stress points are aggravated by government grants to USL and its constituent campuses being paid late or never being paid at all (sometimes not for several years). This can produce situations where USL may receive as little as half the student scholarship fees it has

Higher education governance and accountability in developing economies  249 generated, since those are technically to be paid by the government. The unpredictability of government financial contributions cascades right down to the academic staff level where payment of monthly salaries is unpredictable and can even involve non-payment periods as long as three months. Thus, the overall USL three-campus internal and government financing system is seen by interviewees to be highly complex, contentious, inefficient and difficult to manage. This general financial resourcing failure compounds the problem of holding even individual academics accountable for their work and performance. As one interviewee explained: But governance generally also depends on funds. … [Y]ou are not going to ask a head of department to do ABCD if they don’t have the requisite materials such as computers and good internet … so governance is about how do we manage, how do we control, how do we hold people to account. But these things are also intricately related to resources … so sometimes somebody cannot be accountable simply because they don’t have the requisite resources to make them accountable. (Interviewee 2)

REFLECTING ON CORE ACCOUNTABILITY RELATIONSHIPS This case study yields several fundamental observations about the nature of university governance and accountability in an African developing country context such as Sierra Leone. Governance is primarily implemented through personal relationships that thereby leave significant gaps in overall organizational governance effectiveness. Accountability emerges as being primarily defined and exercised in terms of political and personal accountability with top-down control triggered from the level of government that ultimately limits the governance mandate of middle management and lower down the university hierarchy. Overall, however, any prospect of effective governance and accountability is undermined by significant and periodic under-resourcing of institutional campuses, staff and classrooms. The findings in this Sierra Leone case support some of the observations made in prior research on the African continent. Top-down control by means of national government intervention and influence on university policies and strategies has been observed in prior literature already cited in this chapter. The indigenous government can constitute the new ruling class to which university leadership at both board and executive levels owe their positions and hence loyalty and compliance. In the case presented here, we see more specific accounts of how this takes place and its impacts on governance and accountability within the university. This has been referred to in more general terms by the prior literature as universities being subject to local contexts and influences and needing to integrate governance and management control systems with a country’s national culture. This case study, however, points to the challenges involved in such approaches when university management concerned to comply with government expectations raises questions about the appropriateness and effectiveness of governance and accountability processes and outcomes within the university. This includes the problem of academics’ and students’ inadequate participation in, and influence upon, internal governance. That challenge is compounded by the lack of resources referred to in the prior literature and clearly pointed to by interviewees in this case study. The impacts referred to in the literature and identified in this case study are clearly evidenced in the oftentimes inadequate salaries and teaching resourcing for academics, the variable quality of teaching in the classroom and the (in)adequacy of physical infrastructure to support university functioning.

250  Handbook of accounting, accountability and governance Governance within this case study university could be typified as governance by relationship, whereby access to, and influence over, university leaders by management and academic subordinates is exercised through personal relationships, as historically developed between individuals either outside or within the university. It reflects the phrase “It’s not what you know, but who you know”. Such personal relationships appear to allow individuals to wield direct influence on university leaders regardless of an individual’s position or rank in the university while conveniently bypassing formal corporate governance systems and accountability hierarchies and processes. This decoupling of actual governance lobbying and decision-making from the formally specified and declared governance and accountability structures leaves the latter as largely ceremonial in function. Instead, informal relationships manipulate, avoid and ultimately undermine the formal governance system and accountability structure. In so doing, the related parties manage their own informal governance process, protecting their own autonomy from the formal governance system and avoiding other parties’ intervention and public scrutiny (Meyer & Rowan, 1977; Oliver, 1991; Scott, 2003; Tucker & Parker, 2015; Narayan et al., 2017; Masum & Parker, 2020). Sinclair (1995) identified five forms of accountability: political, public, managerial, professional and personal. Two of these appear to dominate accountability exercised within the case study university, namely political and personal accountability. However, in this developing country context, they have particular meanings. Under political accountability, the public servant exercises authority on behalf of elected representatives. In this case, university management operates under the expectation that they will directly execute the will of government. Thus, given the dominance of political accountability, the publicly funded university retains little, if any, independence from government with respect to governance, strategy or accountability. The notion of personal accountability emerging in this case study diverges somewhat from Sinclair’s (1995) notion, in that rather than representing managers’ fidelity to their internalised moral values, it has transmogrified into an accountability to superiors with whom an individual has long-standing personal relationships and to whom they owe loyalty (Parker & Gould, 1999). Arguably, then, the relationship-based accountability exercised within this university setting, both by senior managers and by individuals with personal links to university leadership, is internally and self-focussed rather than reflecting an accountability orientated towards the community and the common good. It instead is focussed on the government as “owner” (Shearer, 2002; Shenkin & Coulson, 2007; Messner, 2009; Parker, 2014). For all levels of academic staff, be they in managerial or teaching roles, including those without personal relationships to senior leadership and government, there is an observed compliance with the government of the day’s agenda. Either by means of formal government announcements or instructions, formal or informal senior management communications, past experience and related learnings of rejected or unanswered proposals, or unspoken understandings of what cannot be resourced, staff develop an appreciation of the bounds of their discretion. This produces what some interviewees observed as an individual focus limited to one’s immediate workplace environment and what is feasible given available resources. From a governmentality perspective, therefore, government’s governance and control within the university reaches right down to the lowest levels of the university hierarchy: to each individual academic. Yet it is largely invisible. The political rationalities of the day are understood by university staff who exercise self-governance in compliance with what they perceive to be the policy and strategy agendas of government and therefore of university

Higher education governance and accountability in developing economies  251 leadership. Compliance and immediate responses to shifts in government agendas become normalized and absorbed into the routines of academic activity (Miller, 1990; Rose & Miller, 1992; Miller & O’Leary, 1994; Jeacle & Parker, 2013).

WHITHER UNIVERSITY GOVERNANCE AND ACCOUNTABILITY? While internationally based authors can be tempted to envisage a forward trajectory on such matters as public university governance and accountability based on developed country literature and experience, caution is a wise reaction. It can be a hasty rush to judgement if researchers and policymakers assume that developed country approaches are inevitably a basis for international benchmarking. Indeed, it can be argued that the institutional, social, cultural and political characteristics of developing countries can yield unique insights into governance and accountability issues that are sometimes more visible than similar, but more concealed, phenomena in developed countries to which inadequate attention has hitherto been paid. Such may be the situation with respect to this study of university governance and accountability in Sierra Leone. Both direct and indirect government intervention in university governance, and the strategic and processual compliance of university management and staff, have been in clear view in this case study. Relevant literature suggests that such a phenomenon can be found across several countries on the African continent. However, evidence of similar tendencies in developed countries’ public universities has been identified in the accounting research literature. In many Western democracies, researchers have identified evidence of governments treating public universities as export revenue-earning businesses, also required by government to produce employment ready graduates for the national workforce, thereby becoming major contributors to national economic development. Research too has come under government scrutiny, with national grant systems often tailored to the current priority economic objectives set by government. In fact, instead of funding supporting research as a desirable objective, research itself has been transmogrified into a fund-seeking/generating activity. Governments have effectively commodified research as a marketable private interest commodity, diverting it from its earlier orientation towards a public good for societal benefit. So public universities increasingly serve the highly instrumental policy agendas of government. Financial resources are also invariably in short supply. Research reveals national developed country governments committing less and less in their budgets in real terms to HE and forcing public universities to seek their own funds from international student revenues and industry partnerships. In countries such as Australia, for example, student/staff ratios have been deteriorating over many years, with staff teaching workloads commensurately increasing. Mass education with low-cost delivery has increasingly become the order of the day. Public university vice-chancellors operate as corporate CEOs running their organizations as businesses responding always to latest government policies and initiatives. Their governing councils are arguably passive observers and compliant with CEO agendas (Parker, 2012, 2013; Guthrie & Parker, 2014; Du & Lapsley, 2019; Martin-Sardesai et al., 2021). Public university governance and accountability trends do exhibit some degrees of parallelism between developed and developing countries. Both groups exist in a global HE market-

252  Handbook of accounting, accountability and governance place but have national government agendas, resource constraints and conditioning national contexts and cultures. While international guidelines and standards may be promulgated for use globally, as Masum and Parker’s (2020) study of attempts to implant international accounting standards in a developing country such as Bangladesh found, local developing country institutional and cultural contexts and traditions can significantly undermine such attempts despite an overt appearance of compliance. Universities globally are increasingly subject to government audits of teaching quality, graduate satisfaction, research quality and societal engagement and impact. These tend to focus on and induce a proliferation of control systems and documentation and accountability reports. Yet even in developed economies, apparently compliant performance against such control metrics can conceal significant decoupling between reported statistics and the situation as observable on the ground. In developing country contexts, then, the way forward may require small initial steps that, in the first instance, focus on accountability through action: accountability executed and transmitted through publicly observable action (Parker, 2014). In this sense, accountability is not simply claimed and audited through documentary reports but through staff, student, management and the general public’s observation of actions and outcomes produced by government and university. It is accountability for good governance determined through key stakeholders’ observable actions. In Goffman’s (1959) impression management language of frontstage and backstage performances, it is an accountability based on the public audience’s witnessing the actual frontstage performance and delivery of university work and services: by developing country government, university leadership and staff.

REFERENCES Abubakar, A. (2016), “Collaborative approach: strategy for competitive universities in Nigeria”, International Journal of Economic Perspectives, Vol. 10 No. 4, pp. 111–117. Abugre, J.B. (2018), “Institutional governance and management systems in Sub-Saharan Africa higher education: developments and challenges in a Ghanaian research university”, Higher Education, Vol. 75 No. 2, pp. 323–339. Bellows, J. and Miguel, E. (2006), “War and institutions: new evidence from Sierra Leone”, The American Economic Review, Vol. 96 No. 2, pp. 394–399. Bellows, J. and Miguel, E. (2009), “War and local collective action in Sierra Leone”, Journal of Public Economics, Vol. 93 Nos. 11–12, pp. 1144–1157. Bleiklie, I. and Kogan, M. (2007), “Organization and governance of universities”, Higher Education Policy, Vol. 20 No. 4, pp. 477–493. Brennan, N.M. and Solomon, J. (2008), “Corporate governance, accountability and mechanisms of accountability: an overview”, Accounting, Auditing & Accountability Journal, Vol. 21 No. 7, pp. 885–906. Brown, R. (2011), “What do we do about university governance?”, Perspectives, Vol. 15 No. 2, pp. 53–58. Capano, G. and Pritoni, A. (2020), “What really happens in higher education governance? Trajectories of adopted policy instruments in higher education over time in 16 European countries”, Higher Education, Vol. 80 No. 4, pp. 989–1010. Carnegie, G.D. and Tuck, J. (2010), “Understanding the ABC of university governance”, Australian Journal of Public Administration, Vol. 69 No. 4, pp. 431–441. Centers for Disease Control and Prevention (2016), “Ebola virus disease”, available at: www​.cdc​.gov/​ vhf/​ebola/​about​.html (last accessed 8 July 2023). Christensen, T. (2011), “University governance reforms: potential problems of more autonomy?”, Higher Education, Vol. 62 No. 4, pp. 503–517.

Higher education governance and accountability in developing economies  253 Christopher, J. (2012), “Governance paradigms of public universities: an international comparative study”, Tertiary Education and Management, Vol. 18 No. 4, pp. 335–351. Clarke, T. (2015), “The transformation of corporate governance in emerging markets: reform, convergence, and diversity”, Emerging Markets Finance & Trade, Vol. 51 No. sup. 2, pp. S25–S46. Du, J. and Lapsley, I. (2019), “The reform of UK universities: a management dream, an academic nightmare?”, ABACUS, Vol. 55 No. 3, pp. 452–482. Ekakitie Emonena, S. (2018), “Corporate governance and global best practices: perspectives, mechanics & lessons”, Global Journal of Management and Business Research, Vol. 18 No. 10, pp. 31–41. Etejere, P.A.O., Aliyu, O.K., Aburime, A.O. and Jekayinfa, O.J. (2017), “Towards quality governance and management of West African universities: the way forward”, eJournal of Education Policy, Spring, pp. 1–10, available at: https://​files​.eric​.ed​.gov/​fulltext/​EJ1158148​.pdf (last accessed 8 July 2023). Fourah Bay College Ordinance (1950), Government of Sierra Leone, Freetown. Goffman, E. (1959), The Presentation of Self in Everyday Life (1st edn). Penguin Books, London. Griffin, A.-M. (2018), “Toward deliberative democracy: the institutional forum as an innovative shared governance mechanism in South African higher education”, African Journal of Business Ethics, Vol. 12 No. 1, pp. 1–21. Guthrie, J. and Parker, L.D. (2014), “The global accounting academic: what counts!”, Accounting, Auditing & Accountability Journal, Vol. 27 No. 1, pp. 2–14. Halter, M.V. and de Arruda, M.C. (2009), “Inverting the pyramid of values? Trends in less-developed countries”, Journal of Business Ethics, Vol. 90 No. 3, pp. 267–275. Harman, K. and Treadgold, E. (2007), “Changing patterns of governance for Australian universities”, Higher Education Research and Development, Vol. 26 No. 1, pp. 13–29. Hlatshwayo, M. and Fomunyam, K.G. (2018), “Othering the higher education sector in governance and democratic processes in Africa”, CODESRIA Bulletin, No. 2, pp. 1–3. Jackson, E.A. (2015), “Competitiveness in higher education practices in Sierra Leone: a model for sustainable growth”, Economic Insights – Trends & Challenges, Vol. 67 No. 4, pp. 15–25. Jeacle, I. and Parker, L.D. (2013), “The ‘problem’ of the office: governmentality and the strategy of efficiency”, Business History, Vol. 55 No. 7, pp. 1074–1099. Kandeh, J.D. (1992), “Politicization of ethnic identities in Sierra Leone”, African Studies Review, Vol. 35 No. 1, pp. 81–99. Kretek, P.M., Dragšić, Ž. and Kehm, B.M. (2013), “Transformation of university governance”, Higher Education, Vol. 65 No. 1, pp. 39–58. Larsen, I., Maassen, P. and Stensaker, B. (2009), “Four basic dilemmas in university governance reform”, Higher Education Management and Policy, Vol. 21 No. 3, pp. 33–50. Letza, S. (2017), “Corporate governance and the African business context: the case of Nigeria”, Economics and Business Review, Vol. 3 No. 1, pp. 184–204. Luescher-Mamashela, T.M. (2010), “From university democratisation to managerialism: the changing legitimation of university governance and the place of students”, Tertiary Education and Management, Vol. 16 No. 4, pp. 259–283. Maassen, P. (2017), “The university’s governance paradox”, Higher Education Quarterly, Vol. 71 No. 3, pp. 290–298. Macheridis, N. (2015), “Coordination between governance actors in universities: the role of policy documents”, Tertiary Education and Management, Vol. 21 No. 3, pp. 173–185. Madikizela-Madiya, N. (2018), “Mistrust in a multi-campus institutional context: a socio-spatial analysis”, Journal of Higher Education Policy and Management, Vol. 40 No. 5, pp. 415–429. Magalhaes, A., Veiga, A., Ribeiro, F.M., Sousa, S. and Santiago, R. (2013), “Creating a common grammar for European higher education governance”, Higher Education, Vol. 65 No. 1, pp. 95–112. Martin-Sardesai, A., Guthrie, J. and Parker, L. (2021), “The neoliberal reality of higher education in Australia: how accountingisation is corporatising knowledge”, Meditari Accountancy Research, Vol. 29 No. 6, pp. 1261–1282. Masum, M.A. and Parker, L.D. (2020), “Local implementation of global accounting reform: evidence from a developing country”, Qualitative Research in Accounting & Management, Vol. 17 No. 3, pp. 373–404.

254  Handbook of accounting, accountability and governance Messner, M. (2009), “The limits of accountability.” Accounting, Organizations and Society, Vol. 34 No. 8, pp. 918–938. Meyer, J.W. and Rowan, B. (1977), “Institutionalized organizations: formal structure as myth and ceremony”, American Journal of Sociology, Vol. 83, No. 2, pp. 340–363. Miller, P. (1990), “On the interrelations between accounting and the state”, Accounting, Organizations and Society, Vol. 15 No. 4, pp. 315–338. Miller, P. and O’Leary, T. (1994), “Accounting, ‘economic citizenship’ and the spatial reordering of manufacture”, Accounting, Organizations and Society, Vol. 19 No. 1, pp. 15–43. Nakpodia, F., Adegbite, E., Amaeshi, K. and Owolabi, A. (2018), “Neither principles nor rules: making corporate governance work in Sub-Saharan Africa”, Journal of Business Ethics, Vol. 151 No. 2, pp. 391–408. Narayan, A., Northcott, D. and Parker, L.D. (2017), “Managing the accountability-autonomy tensions in university research commercialisation”, Financial Accountability & Management, Vol. 33 No. 4, pp. 335–355. Natural Resources Governance Institute (2016), “Transfer pricing in the extractive sector in Sierra Leone”, available at: https://​resourcegovernance​.org/​sites/​default/​files/​documents/​nrgi​_sierra​_leone​ _transfer​-pricing​-study​.pdf (last accessed 8 July 2023). O’Kane, D. (2017), “Tropes, networks, and higher education in post-conflict Sierra Leone: policy formation at the University of Makeni”. Højbjerg, C.K., Knörr, J. and Murphy, W.P. (eds), Politics and Policies in Upper Guinea Coast Societies: Change and Continuity. Palgrave Macmillan US, New York, pp. 291–307. Oliver, C. (1991), “Strategic responses to institutional processes”, Academy of Management Review, Vol. 16 No. 1, pp. 145–179. Pandey, I.M. (2004), “Governance of higher education institutions”, Vikalpa, Vol. 29 No. 2, pp. 79–84. Parker, L.D. (2012), “From privatised to hybrid corporatised higher education: a global financial management discourse”, Financial Accountability & Management, Vol. 28 No. 3, pp. 247–268. Parker, L.D. (2013), “Contemporary university strategising: the financial imperative”, Financial Accountability & Management, Vol. 29 No. 1, pp. 1–25. Parker, L.D. (2014), “Corporate social accountability through action: contemporary insights from British industrial pioneers”, Accounting, Organizations and Society, Vol. 39 No. 8, pp. 632–659. Parker, L.D. and Gould, G. (1999), “Changing public sector accountability: critiquing new directions”, Accounting Forum, Vol. 23 No. 2, pp. 109–135. Rose, N. and Miller, P. (1992), “Political power beyond the state: problematics of government”, British Journal of Sociology, Vol. 43 No. 2, pp. 173–205. Rytmeister, C. (2009), “Governing university strategy: perceptions and practice of governance and management roles”, Tertiary Education and Management, Vol. 15 No. 2, pp. 137–156. Sall, E. and Oanda, I. (2016), “Framing paper on higher education governance and leadership in Africa”, Council for the Development of Social Science Research in Africa, available at: www​.codesria​.org/​ spip​.php​?article2296 (last accessed 8 July 2023). Scott, R. (2003), Organizations: Rational, Natural and Open Systems. 5th edn, Prentice Hall, Upper Saddle River, NJ. Shattock, M. (2012), “University governance: an issue for our time.” Perspectives, Vol. 16 No. 2, pp. 56–61. Shearer, T. (2002), “Ethics and accountability: from the for-itself to the for-the-other”, Accounting, Organizations and Society, Vol. 27 No. 6, pp. 541–573. Shenkin, M. and Coulson, A.B. (2007), “Accountability through activism: learning from Bourdieu”, Accounting, Auditing & Accountability Journal, Vol. 20 No. 2, pp. 297–317. Sinclair, A. (1995), “The chameleon of accountability: forms and discourses”, Accounting Organizations and Society, Vol. 20 No. 2/3, pp. 219–237. The Njala University Act (1964), Supplement to the Sierra Leone Gazette. Government of Sierra Leone, Freetown. The Universities (Amendment) Act (2014), Supplement to the Sierra Leone Gazette, Vol. 145, No. 50. Government of Sierra Leone, Freetown. The Universities Act (2005), Supplement to the Sierra Leone Gazette, Vol. 136 No. 11. Government of Sierra Leone, Freetown.

Higher education governance and accountability in developing economies  255 The University of Sierra Leone Act (1967), Supplement to the Sierra Leone Gazette. Government of Sierra Leone, Freetown. The University of Sierra Leone Act (1972), Supplement to the Sierra Leone Gazette. Government of Sierra Leone, Freetown. Tucker, B. and Parker, L.D. (2015), “Business as usual? An institutional view of the relationship between management control systems and strategy”, Financial Accountability & Management, Vol. 31 No. 2, pp. 113–149. Turnbull, P., Kamara, J.A.L., Pessima, J.N.S. and Kobie, F. (2008), A National Strategy for the Development of Statistics in Sierra Leone: 2008–2012. Sierra Leone National Statistical System, Freetown. Varghese, N.V. (2016), “What changed after ‘peril and promise’? An analysis of higher education in developing countries”, International Journal of African Higher Education, Vol. 3 No. 1, pp. 97–112. Veldman, F.J. (2018), “Market driven global directives and social responsibility in higher education”, African Journal of Business Ethics, Vol. 12 No. 1. pp. 78–103. Visit Sierra Leone (2021), Sierra Leone History, available at: www​.visitsierraleone​.org/​background​ -information/​history (last accessed 8 July 2023). Wang, L., Rakotomalala, R., Gregory, L., Cichello, P., Dupigny, A.C.T and Wurie, A.T. (2007), “Education in Sierra Leone: present challenges, future opportunities”, Africa Human Development Series. The World Bank, Washington, DC. World Bank (2015), “The socio-economic impacts of Ebola in Sierra Leone”, available at: www​ .worldbank​.org/​en/​topic/​poverty/​publication/​socio​-economic​-impacts​-ebola​-sierra​-leone (last accessed 8 July 2023). World Bank (2021a), “Sierra Leone population”, available at: https://​data​.worldbank​.org/​indicator/​SP​ .POP​.TOTL​?locations​=​SL (last accessed 8 July 2023). World Bank (2021b), “Sierra Leone economy and growth”, available at: https://​data​.worldbank​.org (last accessed 8 July 2023). World Health Organization (WHO) (2016), “Ebola situation report 20 January 2016”, available at: https://​apps​.who​.int/​iris/​bitstream/​handle/​10665/​204172/​ebolasitrep​_20Jan2016​_eng​.pdf (last accessed 8 July 2023). Xiao, H.Y. and Chan, T.C. (2020), “An analysis of governance models of research universities”, Educational Planning, Vol. 27 No. 1, pp. 17–28. Zack-Williams, A.B. (1999), “Sierra Leone: the political economy of civil war, 1991–98”, Third World Quarterly, Vol. 20 No. 1, pp. 143–162.

256  Handbook of accounting, accountability and governance

APPENDIX 1 Table 11A.1

Relevant legislation and key issues covered

Relevant legislation acts

Key issues covered

The Fourah Bay College Ordinance,

Dissolved and reconstituted the FBC and renamed it FBC-UCSL, the aim being to

1950

expand provision for HE in Sierra Leone.

The Njala University Act, 1964

Established the NUC in a bid to expand HE provision to the provinces of the country.

The University of Sierra Leone Act,

Amended the NUC Act 1964. Provided for the merger of NUC and FBC-UCSL to

1967

establish the University of Sierra Leone (USL) with a federal governance structure, allowing for both constituent institutions to continue to operate exclusively in accordance with the FBC Ordinance 1950 and NUC Act, 1964, respectively.

The University of Sierra Leone Act,

Repealed the FBC-USL Ordinance 1950, consolidated and amended the NUC Act,

1972

1964 and the USL Act 1967. Replaced the federal governance system with a unitary governance structure, where both institutions were governed by and answerable to one vice-chancellor, court and senate.

Tertiary Education Commission Act,

Established the Tertiary Education Commission for the development of tertiary

2001

education. Functions include advising the government on tertiary education; fundraising for tertiary education; vetting the budgets of tertiary institutions; ensuring relevance of offerings; ensuring equity in admissions, conditions of service and staff promotions.

The Universities Act, 2005

Repealed the NUC Act, 1964 and the University of Sierra Leone Act, 1972. Reconstituted the constituent colleges of USL (FBC and NUC) to establish two new universities: Njala University and the University of Sierra Leone. Allows for university autonomy in matters of administration and academics. Provided for the establishment of other public as well as private universities.

The Universities (Amendment) Act,

Amended the Universities Act, 2005 to provide for the establishment of the Ernest Bai

2014

Koroma University of Science and Technology (EBKUST).

Higher education governance and accountability in developing economies  257

APPENDIX 2 Table 11A.2

Public universities’ governance structure

Chancellor

● President of Sierra Leone ● Head of all public universities ● Power to confer academic awards; visit/probe as necessary ● Chairman of the university on all ceremonial occasions

Pro-chancellor

● Appointed by the chancellor on the advice of the minister ● Chairman of the university court ● Additional responsibilities as determined by the court ● Performs chancellor’s duties where necessary

Vice-chancellor and

● Appointed by the chancellor on the advice of the minister

principal

● Based on the recommendation of the court ● Chief academic and administrative officer ● Responsible to the court and senate ● University vote controller ● Co-signatory with the finance director to university bank accounts

Pro-vice-chancellor

● Appointed by the court from among the deputy vice-chancellors ● Performs the duty of the vice-chancellor and principal (V-CP) where position is vacant or where the V-CP is unable to perform his duties ● Holds office for two years, eligible for re-appointment for a further two-year term only

Deputy vice-chancellor

● Appointed in accordance with the statutes ● Persons who are not below the rank of associate professor ● Oversees a designated campus ● Chief academic, administrative and accounting officer of their campus ● Supervises teaching, research and community activities of deans of faculties, heads of departments within his campus, under the direction of the V-CP

University court

● Highest authority on all administrative matters ● Chaired by the pro-chancellor ● Authority to exercise all administrative powers

University senate

● Highest authority on all academic matters ● Chaired by the V-CP

12. Public-sector accountability: a journey from performance measurement to performance governance Mariannunziata Liguori and Martin Kelly

OVERVIEW Over the last 30 years, the public sector has been characterized by continuous upheavals and pressures to demonstrate increased accountability. Researchers have drawn attention to the momentum for changes in government financial reporting, largely associated with New Public Management (NPM) ideology and an increased emphasis on performance measurement and reporting. Accordingly, performance measurement and governance systems have been progressively modified and developed, encouraging an incredibly rich body of research and studies in the field. By exploring the link between the concepts of accountability, performance measurement and governance, the chapter advances proposals in relation to gaps in the current literature that can inform both future research and practice in the area of public-sector accountability and governance.

INTRODUCTION During the past three decades, the public sector has been characterized by continuous upheavals and pressures to demonstrate increased accountability (Bovens et al., 2008; Overman, 2021). If the term accountability embraces the means used and relationships set in place to explain and take responsibility for political and administrative actions (Roberts & Scapens, 1985; Dubnick, 2005), it also entails being able to collect relevant information and report it in a meaningful way. Therefore, the ways and rationales to measure performance, its need and content have consistently been progressively modified and developed, encouraging an incredibly rich body of research and studies in the field (Lapsley, 2009; Liguori & Steccolini, 2014; Steccolini, 2019). While one of the main purposes of performance-measurement systems has always remained to address the necessity and duty to be accountable, both within an organization and towards citizens and taxpayers, how to achieve an effective balance between comprehensive performance measurement and meaningful accountability in the context of the public sector has continued to remain a controversial topic. By exploring the relationship between the concepts of accountability, performance measurement and governance in the public sector, this chapter aims to highlight the main milestones reached to date and provide proposals and way forwards in relation to gaps in the literature that can inform both future research and practice. The chapter critically explores interactions between public-sector performance measurement and accountability practices (especially in government), identifying key factors to interpret their relationship and variations in practice. 258

Public-sector accountability  259 This provides the basis for the proposal of possible under-explored themes that can constitute a response to some of the shortcomings identifiable in the literature. The chapter posits that such shortcomings particularly highlight the necessity for a more holistic and dialogic1 approach in the following areas: citizen engagement and citizen-led accountability, systematic environmental and social sustainability measures and practices, and structured approaches to performance governance (Almquist et al., 2013; Grossi & Steccolini, 2014). While the subject matter under analysis is extremely broad and it is, therefore, impossible to provide a comprehensive and systematic review of the literature in the short space allowed in a chapter, the contribution aims to propose possible new research directions to support a strong and informed research agenda in the area. Firstly, the chapter highlights that the involvement of citizens in the performance assessment of public services has been studied using a range of perspectives. Prior accounting literature has focused on: different ways to involve citizens in performance management (Heikkila & Isett, 2007); frameworks of citizen-driven performance initiatives (Holzer & Kloby, 2005); roles of citizens as armchair auditors in monitoring government expenditure (O’Leary, 2015); and citizen involvement in designing local-government performance measures (Ammons & Madej, 2018; Mizrahi & Minchuk, 2019). Barbera et al. (2016) have called for more research on citizen–government interaction. Overall, prior studies illuminate the importance of citizen participation in government to improve performance management and accountability. While there is a body of literature on stakeholder accountability (Greiling & Grüb, 2014), the link to citizen accountability has been given limited attention in the literature. Secondly, the chapter proposes that more work is needed in relation to the measures and practices of environmental and social sustainability within public-sector organizations. It has been observed that while the concept of environmental and social sustainability has “saturated the modern world” (Niemann & Hoppe, 2018, p. 203), “sustainability practices for public services have been neglected by scholars and others as a subject of theoretical research and in-depth investigation” (Guthrie et al., 2010, p. 450). When evaluating the prevalence of sustainability reports, a common theme from the literature is that the uptake and practice of sustainability reporting among public-sector organizations is still in its infancy compared to the private sector (Niemann & Hoppe, 2018). Adams (2017) suggests that much of the existing public-sector sustainability reporting has focused on compliance, albeit voluntary, with external global governance expectations, with less attention being given to more bespoke national issues. Finally, while it is acknowledged that public-sector organizations are still closely linked to NPM ideologies, scholars have called for a move towards a more cohesive view of performance and accountability (Anessi-Pessina et al., 2016; Steccolini, 2019). The increasing need for both financial and performance accountability necessitates a broader set of management, accounting and accountability systems and involves embracing the idea of performance governance. Governance is an umbrella term which refers to the steering and coordination of different actors, often in network-type patterns of collaboration (Almquist et al., 2013; Grossi & Steccolini, 2014). These networks occur out of the necessity to interact. Recognizing stakeholder heterogeneity and pluralism in service delivery (Steccolini, 2019), public governance advocates the need for public-sector organizations to strengthen accountability, participation and transparency. Implementing a performance-governance system necessitates a move from a focus on outputs of individual public-sector agencies to one which focuses on outcomes

260  Handbook of accounting, accountability and governance of collaborative efforts (Almquist et al., 2013). The adoption of a performance-governance approach has direct implications for the forms and means of accountability. The chapter is structured as follows: the next section provides an overview of current literature on accountability and performance measurement in the public sector, highlighting current gaps and shortcomings. There then follows an elaboration on the identified gaps and the need for a more holistic interpretation and understanding of such issues under a perspective of governance, suggesting three possible areas for future development in response to this. The subsequent three sections review each of these areas in more detail, identifying possible developments for future research. Finally, the conclusions offer an overview of the main contribution of the chapter and delineate future steps and implications for practice.

ACCOUNTABILITY AND PERFORMANCE MEASUREMENT IN THE PUBLIC SECTOR: THE STORY CONTINUES The past few decades have seen an escalation of interest in different forms of accountability, both at the organizational and individual levels (Munro & Mouritsen, 1996; Agyemang et al., 2019; Overman, 2021). The increasing prominence of “accountability” and “performance”2 within a public-sector context, driven by NPM reforms, has given rise, in turn, to a proliferation of scholarly debate and analysis within accounting and other disciplines. The concept of accountability has come to dominate the discourse within both the public and private sectors and, when combined with disclosure, is offered as a resolution for many of the problems that confront organizations, individuals and society (Dillard & Vinnari, 2019). In its simplest form, accountability entails a relationship in which people are required to explain and take responsibility for their actions: “the giving and demanding of reasons for conduct” (Roberts & Scapens, 1985, p. 447). Dubnick (2003, p. 406) views accountability as “the means used to control and direct administrative behaviour by requiring ‘answerability’ to some external authority”. Such an account is expected to render the organization transparent and allow stakeholders to assess its performance. While financial statements are useful in this respect, in most cases, wider performance information (and, in particular, information on effectiveness and efficiency) is essential for public-sector organizations to adequately discharge a broader concept of accountability (Parker, 1996; van Dooren et al., 2015). Prior research has pondered accountability in the context of principal–agent theory (Edwards & Hulme, 1995; Connolly & Kelly, 2020), legitimacy theory (Tilling & Tilt, 2010; Deegan & Unerman, 2011) and stakeholder perspectives (Mäkelä & Näsi, 2010; Gray et al., 2014). The concept has also been examined in terms of the role and value of the different mechanisms of accountability (O’Dwyer & Boomsma, 2015) and the play-out of accountability in organizations (Ezzamel et al., 2007). In any accountability relationship, the core interaction involves asking questions and presenting information. In practice, however, different rationales may lead to unanswered questions and unsolicited responses (Busuioc & Lodge, 2017; Overman, 2021). Moreover, any accountability relationship “presupposes agreement about what constitutes an acceptable performance … [including] the language of justification” (Day & Klein, 1987, p. 5). Almquist et al. (2013) contend that accountability in the public sector can take a variety of forms, with scholars distinguishing between internal and external (Romzek & Dubnick, 1987) and vertical or hierarchical and horizontal accountability (Bovens, 2009; Hodges, 2012).

Public-sector accountability  261 External accountability is outward-looking and aimed at discharging information towards external stakeholders, whereas internal accountability is management-focused and may be motivated by a “felt responsibility” (O’Dwyer & Boomsma, 2015), where management chooses to account. While issues around external accountability have been widely studied in the accounting literature, there is less work, particularly within a public-sector context, that evaluates the internal organizational responses to external accountability pressures (Agyemang et al., 2019). Vertical or hierarchical accountability involves establishing accountable behaviour to superiors and actors higher in the hierarchy. It refers to “the legal structures underlying public sector organizations, and which conform to the processes of authorization and defined mandates” (Hodges, 2012, p. 30). In contrast, horizontal accountability reflects obligations as perceived by organizations that report to entities of equal standing to provide public services (Almquist et al., 2013). Accountability in the public sector is invariably described as complex, heterogeneous and multifaceted (Mulgan, 2000; Shaoul et al., 2012). On a more critical note, Brown and Dillard (2013, p. 17) suggest that some scholars, particularly those working in the social and environmental space, seem to suffer from what they describe as “disclosure sclerosis”, generally diagnosed, in terms of accounting, as an obsession with “if we disclose it, responsible decisions will follow”. What is not in doubt is that public-sector organizations are confronted with a plethora of accountability requirements (Power, 1997; Overman, 2021). Simultaneously, these organizations also provide accountability information to a diverse range of stakeholders as part of an obligation (Mulgan, 2000; Overman, 2021). In this context, Bovens (2007, p. 450) defines accountability as “a relationship between an actor and a forum, in which the actor has an obligation to explain and justify his or her conduct, the forum can pose questions and pass judgement, and the actor may face consequences”. Dillard and Vinnari (2019) view the accountability system as pluralistic, reflecting a range of constituency groups and socio-political lookouts. Consistent with this broader perspective, public accountability is needed not only to induce trust in the organization but also to fulfil wider socio-political purposes. Accountability, therefore, must not be consigned to a unidimensional outcome of accounting systems, or, as Dillard and Vinnari (2019) put it, “a vacuous signifier” (p. 18), nor should it be envisaged as an “accountability mirage” (Carnegie & West, 2005, p. 914; Carnegie, 2023, p. 1062). In the context of delivering public services, Romzek et al. (2012) distinguish between formal and informal accountability arrangements. In the former, explicit reporting and performance standards and hierarchical oversight are the norm. In the latter, and like Roberts’ (2018) idea of social accountability, informal interpersonal dynamics are central, whereby accountability is fostered through implicit norms and unofficial performance expectations. Roberts (2018) and O’Dwyer and Boomsma (2015) argue that formal or imposed forms of accountability are important for performance monitoring, oversight, control and compliance within hierarchical relationships. Public accountability is also concerned with the accountability of ministers and government to the electorate, together with a focus on the stewardship of public funds and on mechanisms for ensuring probity and efficiency in public spending (Day & Klein, 1987; Allen et al., 2014). It is suggested that the ongoing need for financial and performance accountability necessitates comprehensive management and control systems that provide feedback for decision-making and enhance public accountability (Broadbent et al., 1996; Chow et al., 2007; Almquist et al., 2013). Public accountability can also be viewed through the prism of paradigm shifts that have taken place over time, such as the move away from NPM towards public governance

262  Handbook of accounting, accountability and governance (Osborne, 2006). This latter can be, in part, regarded as a response to the NPM developments and emphasizes organizational networks as opposed to individual organizations (Almquist et al., 2013). While NPM systems tend to be more hierarchical and typically based on contractual relationships, public governance places more significance on the importance of interdependent horizontal relationships (Klijn, 2012). A Focus on Performance Accountability Performance-based accountability often relies on terms such as inputs, activities (processes), outputs and impacts (or outcomes). In the public sector, inputs are usually identified with the resources used in providing a service (for example, expenditure incurred and number of staff); processes represent activities carried out (for example, number of visits made, number of cancer research projects funded); outputs are the actual services provided (for example, number of projects completed); and impacts (or outcomes) are concerned with the long-term effect of an organization’s activities on both individual and societal levels (for example, change in the level of poverty, change in the level of employment in a population, overall satisfaction with the services provided) (van Dooren et al., 2015). Building on such measures, financial and non-financial performance indicators in a public-sector setting highlight several potential functions, including the following: helping to clarify the organization’s objectives; evaluating the outcome/impact of the organization; and triggering further investigation and possible remedial actions. However, while setting objectives is critical to performance measurement, there is also the danger that, unless care is taken in developing and implementing suitable systems, such processes may degenerate into a formal ceremony that does little to improve accountability or the efficiency and effectiveness of the organization itself (Sharifi & Bovaird, 1995; Thompson, 1995). Performance-measurement tools may serve as accountability mechanisms because they create methods for reporting and for bestowing rewards. NPM ideas have often been seen as providing a path to stronger accountability and performance within the public sector, although empirical evidence of whether such performance-measurement systems lead to enhanced accountability is indeed sparse. Consequently, there has been a growing emphasis on reporting external information on non-financial performance (for example, measures of efficiency and effectiveness) as opposed to budgetary compliance (Hyndman & Liguori, 2016). At the same time, over the last decades, governments have increasingly moved from the direct provision of public services to outsourcing them (Bovaird, 2007). This has given rise to new public-sector governance forms, where public and private actors, and interests, interact (Kurunmäki & Miller, 2011). The discharge of accountability has, therefore, become even more complex as public-service delivery is mediated by contracts, partnerships and networks. Consistently, a significant body of literature has identified the need for tools that measure and evaluate performance and accountability in the context of public–private partnerships, contracting out, co-production, austerity3 and public value (Bovaird & Loeffler, 2012; Ditillo et al., 2015; Steccolini, 2019). Existing accounting and performance-measurement tools and, indeed, the NPM paradigm itself have been largely subject to criticism and seen as being unable to capture the complexity of the design, delivery and management of public services in the 21st century (Grossi & Steccolini, 2014) and bridge the rhetoric gap of reforms (Lapsley, 2008; Osborne, 2010). Nevertheless, this process has promoted a debate among academics and practitioners about

Public-sector accountability  263 accountability and performance in the public sector and the unsuitability of a one-size-fits-all application of accounting and management techniques (Anessi-Pessina et al., 2016; Steccolini, 2019; Ferri et al., 2021). The accounting literature has long recognized that accounting numbers, as a basis for performance measurement, are inherently incomplete, often uncertain and leave out important facets that should still be considered (Jordan & Messner, 2012). Dubnick (2005) suggests that the link between accountability and performance has become highly embedded, and perhaps lost, within the rhetoric of public-sector organizations. Politicians, as principals, are assumed to make use of available performance information to hold agents accountable; however, evidence evaluating whether politicians actually make use of such information, at least for accountability purposes, has been contradictory (Ter Bogt, 2004; Liguori et al., 2012; Saliterer et al., 2019). Moreover, the literature has frequently accentuated the negative effects of performance measurement and management, whereby undue emphasis is given to key performance indicators and targets that are easily measurable. Consequently, performance metrics have often become instrumental in performance managing staff, supporting existing power structures and, ultimately, crowding out organizational learning. Potentially dysfunctional roles of accounting may be more likely to materialize when accounting systems and measures are set up to drive performance and accountability (with long-standing narrow and functional views), rather than vice versa. Often, too much focus is placed on specific accounting practices and on their interpretation. However, such attention sometimes overlooks the external context or the variety of stakeholders involved. This chapter proposes the need for a more holistic view, where it should be accountability-based principles to drive the design and interpretation of accounting, as well as other forms of measurement systems. It is argued that the time is now ripe for the emphasis on accountability systems to progress towards the active inclusion of a multitude of stakeholders. Such broad-scope accountability (Parker, 1996) includes citizens and incorporates consideration of the complex environment public-sector organizations operate in. Performance measurement and management have a critical role in this journey as they contribute to deliver public-sector innovation,4 help political representatives to hold government to account, enable citizens to make informed choices in relation to public services and demonstrate attention to sustainability issues.

A MORE HOLISTIC APPROACH TO ACCOUNTABLE PERFORMANCE MEASUREMENT While changes in the public sector have progressively evoked the move to an increased reliance on performance-related budgeting and management and the fusion of financial and non-financial aspects of performance, a fundamental question remains whether private-sector ideas and tools of performance measurement and accountability are applicable to the public sector. Indeed, accountability and performance measurement can also generate negative feedback loops, creating more accountability and performance measures, while providing little or no tangible influence on actual operating performance (Ittner & Larcker; 1998; Demirag, 2004). Ideally, performance measurement should enhance accountability by making organizations subject to publicly accessible goals (Heinrich & Marschke, 2010). However, in practice, some performance-measurement tools lead to “gaming”, whereby what is measured is all that matters (Bevan & Hood, 2006).

264  Handbook of accounting, accountability and governance Bevan and Hood (2006, p. 521) define gaming as “reactive subversion such as ‘hitting the target and missing the point’ or reducing performance where targets do not apply”. On this point, Radin (2006) laments how what has been devised in the name of accountability often limits the organizations’ responsibilities and prevents them from accomplishing what they have been asked to do. Accountability in public organizations is often deemed a good thing, of which one cannot have enough, despite any possible negative consequences (Busuioc & Lodge, 2016). However, we cannot escape from the fact that certain performance-measurement practices are being introduced in the name of accountability, while they are in truth detracting from it. Performance measures, for instance, are usually presented in quantitative terms, and so have an appearance of fact and may convey impressions of neutrality and objectivity. Nevertheless, in practice, such measures are effectively narrative constructions of reality, although this subjective aspect is often ignored. Indeed, while incomplete, performance measures are frequently seen from a principal–agent perspective and strictly implemented as a control tool to hold public managers to account. As accounting provides for only a limited understanding of organizational life, however, managers will often complement such accounting measures with other sources of information (Jordan & Messner, 2012). A dialogic perspective, as presented by Brown and Dillard (2013) and by Dillard and Vinnari (2019), may help to overcome some of these risks, suggesting that the discourse on accountability and performance needs to gravitate towards processes that culminate in the development of accountability-based accounting systems and forms of critical dialogic accountability and pluralism. A critical dialogic approach to accountability prioritizes “the rights and responsibilities of the constellation of constituencies, human or non-human, affected by an account provider’s actions in contrast to stakeholder engagements, which are initiated by the party being held accountable” (Dillard & Vinnari, 2019, p. 18). In line with this perspective, performance reporting and accountability within the public sector can be viewed to rather foster more inclusive and democratic interaction, and not be merely or primarily couched as a set of techniques to construct governable realities. Such a dialogic conceptualization of accountability requires discursive mechanisms and the consideration of the plurality of perspectives involved. Performance-measurement systems and performance-based dialogic accountability principles can contribute to building and strengthening the quality of public-governance systems as a whole and, thereby, improve prospects that the public sector can achieve its objectives and mission (whatever they may be), integrating the needs and perspectives of the multitude of stakeholders they are responsible for. Public-sector governance relates to accountability systems set in place to manage specific relationships and goals, including, for instance, public-service delivery and implementation of public policies. In this sense, public governance and accountability are intrinsically linked and it is difficult to understand one without the other, as public governance gives order and purpose to systems and structures that are meant to create good conduct, collaboration and hold various stakeholders accountable both internally and externally (Almquist et al., 2013). Nevertheless, the authors propose that gaps can be identified in current public-sector accounting literature, especially in relation to developing more citizen-led accountability and integrating critical governance measures, such as sustainability measures and practices, within a dialogically based accounting and accountability system. It is suggested that more work is needed to explore how public-sector governance and accountability can help deliver the best possible outcomes for citizens in the context of a rapidly changing world. The purpose of public-sector organizations is, indeed, to deliver public benefit and serving society; however,

Public-sector accountability  265 a danger persists that competition both within and between public-sector organizations (for example, public universities) may conflict with the public interest (Carnegie, 2021). In the following sections, three main thematic areas of development (for both research and practice) are identified and critically discussed. These represent the authors’ proposals when assembling together ideas on governance, accountability and performance measurement in the public sector.

STRENGTHENING CITIZEN-LED ACCOUNTABILITY As citizens play an important role in holding the state to account, equally important is how citizens interact with, contribute and demand accountability for performance from the government itself. Social accountability, sometimes referred to as horizontal or stakeholder accountability (Bovens, 2007; Brummel, 2021), has been put forward to improve alignment between government policy implementation and needs of citizens and other stakeholders (Meijer & Schillemans, 2009). Social accountability suggests that citizens should be able to exert some control over public-sector organizations, and mechanisms should be put in place against accountability deficits (Brummel, 2021). Contrary to what has come to be known as stakeholder engagement in much of the accounting literature, a dialogic approach to accounting and accountability (Brown & Dillard, 2013), referred to earlier, begins with the identification of the various interested constituencies and a determined recognition of the pluralistic nature of their information needs. In the public sector, a particularly important constituency within a dialogic framework would be the citizens who engage with public services every day. Adopting such a framework should enable any citizen, or other interested party who might have been affected or otherwise influenced by a public-sector organization’s exercise of authority, to have some fair influence in collective decision-making and performance evaluation. To broaden the attention to actual social impacts, the accountability concept should incorporate a more overt social dimension that includes citizens not only as recipients of public services but also as having input in the design and implementation of those services (Brandsen et al., 2018). This also aligns with a public-governance perspective, where the desirability of having an ever-increasing diverse range of stakeholders involved in deciding and designing public services is rarely disputed (Barbera et al., 2016; Strokosch & Osborne, 2020). Citizen participation in government performance measurement may empower citizens by providing them with the information they need (Mizrahi & Minchuk, 2019), but also, more importantly, legitimize the role of performance data in public policy-making processes under the belief that engagement of citizens enhances public decision-making (see, for example, Woolum, 2011). As mentioned earlier in the chapter, prior accounting studies have highlighted the need for more scholarly research on the involvement of citizens in holding government to account for its performance. Similarly, within the public-administration discourse, several studies are concerned with how service-user participation can be included within the process of service planning and production to improve the quality of such services. This is seen as a form of co-production, where value is actively “co-created”. Osborne et al. (2016, p. 640) define co-production as “the voluntary or involuntary involvement of public service users in any of the design, management, delivery and/or evaluation of public services”. The involvement of professional bodies (such as the British Medical Association or the British Association of Social Workers) when designing health and social-care pathways is an example of co-production.

266  Handbook of accounting, accountability and governance In this instance, the relevant professional body, together with the UK Department of Health and relevant civil-society organizations, is recognized as having a role in co-creating or co-producing the design and delivery of a particular care pathway. In addition to the well-established concepts of service efficiency and effectiveness, a dialogic focus on social accountability is consistent with the co-production approach, as it prioritizes consultation with, and participation of, stakeholders – especially citizens (Moore, 2016). Citizen engagement in public-service delivery is desirable because it challenges and changes underlying preferences that are part of the government governance and controlling power. Furthermore, the involvement of citizens in governance, service delivery and decision-making is considered essential in an era when many local governments are experiencing financial constraints (Arun et al., 2021). Again, and consistent with a dialogic approach to accountability, the expectation is that the affected citizens, through their participation, will be influential in the decision-making process via the evaluation criteria to which the public official or minister is held accountable. Drawing on a case study of Newcastle City Council in the UK and its response to austerity measures, Ferry et al. (2019) highlight how local consultation practices can integrate citizens and other groups’ voices within local-authority governance, service delivery and funding. Social or informal/horizontal forms of accountability are included in various accountability frameworks within the existing literature (O’Dwyer & Unerman, 2008; O’Dwyer & Boomsma, 2015), although the concept of social accountability and its “explicit linkage” with citizen accountability within a public-sector context are less well developed. This may be due to the bureaucratic and hierarchical nature of many government agencies/departments. More recently, the rise of social media has provided new possible mechanisms for discharging accountability and highlighted a critical attribute of social accountability, namely that it connects account-givers with “accountability forums” or “audiences” (Romzek & Dubnick, 1987; Brummel, 2021; Masiero et al., 2023). Beyond formal requirements, government officials and managers should have a felt obligation to render an account for their conduct to citizens and other stakeholders (Overman, 2021). Under a dialogic approach to accountability, citizens can demand accountability from public-sector organizations, but they can also get involved directly in their decision-making. Recent studies provide evidence on the active participation of citizens in gathering information, aimed at monitoring and evaluating the performance of public officials (Mizrahi & Minchuk, 2019). Meijer (2016) urges caution, however, in that government performance data require significant handling and interpretation before most citizens and other interest groups can fully understand and use them. As suggested by Neu et al. (2020), new technologies allow us to aggregate and organize different voices. Unlike politicians, however, citizens who require up-to-date publicly available performance information do not have the formal mechanisms to demand it. Increased performance information provided via the internet, moreover, has generated what Meijer (2016) refers to as “fire alarms” for vertical accountability. For example, when the media exposes a public scandal, parliament and public officials are often forced to act in order to protect their reputation in the eyes of citizens and the public in general. It is with the emergence of ideas of new forms of pro-active citizenship, as well as of broader conceptions of co-production and co-design (Bovaird, 2007; Barbera et al., 2016; Sicilia & Steccolini, 2017), that citizens are increasingly seen as active players in the public-governance process, directly involved in deliberations and provisions of services.

Public-sector accountability  267 The deliberation process associated with participatory budgeting5 is a further example of an important tool for fostering democracy (Bingham et al., 2005; Manes-Rossi et al., 2023). Barbera et al. (2016) formulate a scheme for participatory budgeting based on three levels of citizen participation: pseudo, partial and full. In pseudo participation, the local government controls the entire process and makes the final decisions. Although citizens are encouraged to put forward their ideas, their involvement is essentially symbolic. Partial participation means citizens can express their ideas and aspirations but their influence is limited in terms of agnostic dialogue and decision-making. However, in full participation, citizens may be afforded a more decisive influence, whereby agonistic dialogue and debate are encouraged (Brown & Dillard, 2015) and accountability systems emerge as opposed to accounting or performance systems being imposed or dictated by the power holders (that is, public officials). The literature discussed above highlights several areas and themes that are currently under-investigated as far as the linkage across citizen participation, accountability and public-governance mechanisms is concerned. Such themes have the potential to support future research in the area and more effective practice. Citizen participation, in both public provision and decision-making, can be a powerful tool to grant legitimacy to government policies and actions, but also to strengthen a sense of responsibility, accountability and trust at the societal level; this ultimately contributes to improving the overall governance systems of the state. In this perspective, citizens are both holding government accountable and being accountable themselves for their actions and demands, a relational loop so far little investigated. This, in part, can be explained by a prevailing research focus on budgetary compliance, rather than ex-post reporting and accountability during the provision of public services. This has resulted in less attention being paid to the role of citizens and communities in evaluating public-service delivery (Arun et al., 2021). Indeed, only a few studies have looked at the experiences of citizens’ engagement in evaluating and assessing performance (for example, see Ammons & Madej, 2018; Mizrahi & Minchuk, 2019). While the literature (see, for example, Brown & Dillard, 2013; Dillard & Vinnari, 2019) suggests that dialogic engagement during the design and implementation of accounting and performance-measurement systems is essential, further research on social or citizen-led accountability should also investigate under what conditions and to what extent social accountability forms can lead to undesirable outcomes within a public-sector context. Furthermore, there is the need to develop an understanding of how the legitimacy gained through citizen involvement could influence the design of accountability systems and enhance public governance. It is proposed that while, on the one hand, citizen participation might become a political tool to be used instrumentally to increase political visibility and legitimation while developing and implementing public policies, on the other hand, the perceived threats of sanctions by judicial and political forums could also constrain the possibilities for actual and influential citizen-led accountability. These all represent dangers, which practitioners in the sector should appreciate. These are also important aspects to facilitate future research aimed at strengthening citizens’ voices and improving performance-based accountability and public-governance systems.

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INTEGRATING ENVIRONMENTAL AND SOCIAL SUSTAINABILITY PRACTICES A second area of investigation relates to the need for more systematic environmental and social sustainability measures and practices within the public sector. Today, more than ever, the world is faced with grand global challenges, such as climate change, inequality and poverty. It is imperative that public-sector scholars engage in research which can provide direction as to how public-sector accounting and accountability can respond to such emerging challenges. In simple terms, public organizations have a moral duty in terms of fidelity to public interests, compassion for those adversely affected and responsiveness to human needs and the wider common good. Publishing the annual financial statements and quantitative-based performance measures can no longer be considered sufficient to enable public-sector organizations to discharge accountability to a broad range of stakeholders. Specifically, when communicating on sustainability initiatives, the public sector often attempts to incite the private sector to implement sustainability policies, on the one hand, while, on the other hand, the government itself should also have the moral duty to implement and promote their own sustainability policies (Williams et al., 2011; Alcaraz-Quiles et al., 2014). Public-sector organizations deliver important public services for a variety of citizens and, accordingly, should be under even greater accountability pressures to communicate the sustainability of their activities (Tommasetti et al., 2020). Because of their size and significant impact on the environment and society, it has become increasingly important to investigate and evaluate public-sector sustainability accounting and reporting practices (Ball et al., 2014; Kaur & Lodhia, 2019). Sustainability initiatives are viewed as instruments that can enhance legitimacy across all government institutions. Social and environmental accountability scholarship (see also Chapter 8 of this Handbook) has a long history of interdisciplinary research, propagating several representations and analyses of the concerns inherent in the governance of social-ecological systems for the achievement of sustainability (Rinaldi, 2019). Writing in the context of corporate organizations, Adams (2017) notes that prior literature has identified governance and accountability processes as having a significant impact in facilitating changes in approaches to value creation that embrace sustainable development. However, much of the existing public-sector sustainability reporting has been based on voluntary compliance with external global governance expectations (for example, the Global Reporting Initiative, known as GRI guidelines), with less attention given to national issues. While discussions around sustainability have invaded every aspect of society, sustainability practices in relation to public services have been neglected and under-investigated as a subject of theoretical research (Guthrie et al., 2010). Prior literature indicates that sustainability reporting in public-sector organizations, including local councils, is still in its infancy and tends to lag behind developments in reporting in the private sector (Dickinson et al., 2005; Kaur & Lodhia, 2018). Existing literature has focused on motivations for sustainability reporting (Marcuccio & Steccolini, 2005; Farneti & Guthrie, 2009), sustainability disclosure practices and stakeholder engagement (Ball et al., 2014; Williams, 2015; Kaur & Lodhia, 2019). Adams et al. (2014), in a study of performance-measurement practices in federal government departments in Australia, observe that sustainability, environmental or social responsibility measures tend to be the least-used performance measures. Furthermore, these authors also note that employee diversity and economic activity were the main sustainability performance measures used, with much less atten-

Public-sector accountability  269 tion paid to ecological and social welfare issues. In the context of inadequate public-sector reporting of social and environmental indicators, the evaluation of public reports to determine sustainability performance is unlikely to be conclusive. Standardized frameworks, such as the GRI’s guidelines and “triple bottom line” (TBL) that are widely used in the private sector (see Laine et al., 2022, for a detailed review of the main frameworks on sustainability reporting), have until recently been less prevalent within public-sector organizations. Bellringer et al. (2011) suggest that a key reason for the poor reporting of GRI indicators is that public-sector sustainability information is mainly produced for internal stakeholders. A TBL reporting approach to sustainability within public-sector organizations would be timely and consistent with the contemporary expectations of ensuring transparency and accountability for both financial and non-financial performance and would serve to highlight the environmental and social impacts of these organizations. However, such reporting is not equivalent to being accountable for the public value that has been created. Similarly, the explicit linkage between sustainability measures and governance, as well as sustainability measures and citizen accountability/participation, has been subject to less investigation (Greiling & Grüb, 2014) in the accounting literature. Drawing on a case study of the State of Victoria in Australia, Coffey (2013) assesses strategic governmental policy and planning processes aimed at promoting sustainability. The study highlights the importance of public engagement and other governance arrangements as solid foundations for promoting and realizing sustainability goals. The research concludes that failing to shape the social and cultural dimensions can impede the achievement of policy objectives despite the efforts made by government to fulfil its sustainability ambitions. Dillard and Vinnari (2019) highlight the need to develop and employ democratic dialogue (dialogic) mechanisms to empower a broad range of stakeholders to contribute effectively to sustainability practices, including reporting on sustainability performance. Nevertheless, within the extant literature, this relationship is still reversed, with stakeholder engagement emerging as an outcome of public-sector sustainability practices rather than as its driver (Lodhia et al., 2012). The environmental and social dimensions within sustainability reporting should receive more attention by scholars also on the basis that public-sector organizations need to demonstrate, and be accountable for, how they generate value for their key stakeholders. Nevertheless, we should be careful not to make the mistake of importing incomplete techniques from the private sector such as providing measurement systems which are often incomplete, non-standardized, imprecise, misleading and with a focus on outputs as opposed to outcomes. By privileging financial capitalism and failing to account for environmental and social externalities, accounting has also impacted on “the culture and focus of governments, societies and corporations” (Cooper & Morgan, 2013, p. 418), leading Brown and Dillard (2015) to propose that accounting and performance reporting need to move from being “technologies of hubris” to “technologies of humility”. This would require accountants to take account of the perspectives of stakeholders themselves and the envisioning of new processes and methods for dealing openly with normative questions. Integrated reporting, whose aim is to overcome duplications and “silo thinking” by integrating information systems of internal and external reporting, has been put forward as a way to capture sustainability information for decision-making purposes (Niemann & Hoppe, 2018). This approach is gaining traction also within public-sector circles (Bartocci & Picciaia, 2013). According to the International Integrated Reporting Council (IIRC, 2013), integrated reporting can be an important tool in improving the understanding of the relationship between

270  Handbook of accounting, accountability and governance financial and non-financial factors that determine how an organization creates sustainable value in the longer term. Prioritizing such reporting could contribute to regaining the public trust that was eroded by the neoliberal policies introduced under the auspices and rhetoric of previous public-sector reforms and innovations. For local governments, for instance, the linkage of policies and actions to local outcomes constitutes the ultimate management and accountability demand, and this is not achievable with standardized frameworks such as GRI. Increasingly, the United Nations’ 17 Sustainable Development Goals (SDGs) are also being viewed as critical indicators for sustainability. It is in this context that public-sector governance and accountability processes are essential to the national implementation of SDGs (Abhayawansa et al., 2021). What is currently missing from the literature is an understanding of the nature of accountability and governance mechanisms that can enable the effective realization of the SDGs (Abhayawansa et al., 2021). Stakeholder- or citizen-led engagement has been increasingly cited as being a critical factor in enhancing the contribution of accountability processes to sustainability strategy and their implementation (Buhmann et al., 2019). The public sector is, however, unlikely to embrace comprehensive sustainability performance measures, which tend to remain voluntary with no perceived need to be competitive in these areas. Moreover, when public-sector organizations report on broader economic, social and environmental performance (for example, through sustainability reports), they tend to do so using business-related frameworks and concepts. There is, therefore, the danger that such reporting will only reinforce a business-as-usual perspective (Brown & Dillard, 2013; Gray et al., 2014). In their study of sustainability reporting covering six cities in four European countries, Niemann and Hoppe (2018) posit that the focus on disclosure in sustainability has had its day, and that more impact-orientated studies are urgently needed so that we can look beyond what is presented in reports and evaluate the impact on those stakeholders involved in the reporting process. The improvements to accountability structures suggested by many social and environmental accounting scholars often derive from modifications to existing systems, as opposed to embracing new dialogic forms of accounting and performance measurement. There is still a dearth of public-sector research that provides meaningful evidence that governments are engaging in measuring and reporting relevant sustainability outcomes (Adams et al., 2014; Niemann & Hoppe, 2018). This represents a promising new research agenda at the intersection of accountability studies and organizational research. The authors anticipate that scholars will look, in future esearchh, beyond what is already visible in the sustainability reports and evaluate, using a more holistic approach, the impact on those stakeholders involved in the reporting process. While avoiding information overload for readers and acknowledging always-present limitations of performance-measurement systems, the theme of sustainability also presents a learning aspect that is critical to inform and improve accountability practices. The reporting of voluntary self-assessments, for instance, can help invigorate engagement by citizens on specific government sustainability policies. Such learning processes also represent important, albeit currently under-investigated, avenues of future study.

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TOWARDS PERFORMANCE GOVERNANCE In the wider literature, performance measurement and management have been associated with organizational efforts to understand the links between desired results and their determinants, often with the assumption that organizations that better understand and manage these mechanisms can continuously improve performance (Fitzgerald et al., 1991; Sarrico et al., 2012). In the public sector, performance-measurement systems typically include a few different, sometimes competing, perspectives, such as financial, operational, developmental, citizen-related and so on (van Dooren et al., 2015). The risks highlighted by the existing forms of managerial performance measurement suggest the need for these to be translated into more integrated and comprehensive forms for governing performance. Measurement and performance have been the strong keywords, over the past decades, of the managerial agenda introduced into the public sectors worldwide (Halligan et al., 2012; Steccolini, 2019). This process has, however, highlighted the inability of current systems to provide a complete picture of reality, as well as their risks of unintended consequences and gaming (Bevan & Hood, 2006; Mizrahi & Minchuk, 2019). Many calls have been made to encourage overcoming the managerial trap public-sector organizations are currently under (van Helden et al., 2008; Jacobs, 2016; Anessi-Pessina et al., 2016; Steccolini, 2019). Performance that is identified, measured and used in a more dialogic way could strengthen both internal and external accountability. While empirical evidence still suggests a strong attachment to NPM-like managerial ideas by public-sector organizations, the shortcomings of such systems are now pervasive and the time is ripe to progress towards a more integrated idea of both performance and accountability. The authors propose that this could take the form of performance governance, moving from a more managerial governing of performance to governing for performance in a multidimensional way. This could strengthen information and feedback flows within and across organizations and actors operating in, but not necessarily belonging to, the public sector. The evidence discussed in the previous sections in relation to the ever-increasing forms of collaboration between public, private and not-for-profit sectors in the delivery of public services, as well as the necessity to consider environmental effects and sustainability of their actions, all suggest the importance of continuing to reappraise the question of how performance should be approached, viewed and managed in a public-sector context. Bouckaert and Halligan (2008, p. 2) posit that “performance management has to be located within a broad construction of organizational life, which recognizes that performance management cannot be considered in isolation from other factors that make up public management and the more general public administration system”. They suggest that governing performance is, by definition, an intergovernmental exercise, which stresses the importance of the sustainability and effectiveness of service delivery towards a multitude of different stakeholders. If performance is to be effective in such a complex setting, particularly in areas where the measurement of outcomes may be difficult, it can be argued that a governance approach to performance becomes essential, although its implementation may be convoluted and challenging. Performance governance, indeed, requires knitting together a range of processes, structures and indicators at differing levels, inside and outside the specific public-sector organization (Bouckaert & Halligan, 2008; Conaty, 2012). The pressures for public services to move towards the inclusion of the private and not-for-profit sectors, as well as societal trends

272  Handbook of accounting, accountability and governance towards greater external engagement, have generated the need for an alternative governance approach in several areas, and performance measurement is not exempt. The idea of performance governance links together a holistic approach with the measurement needs to assess public-sector results in a way that includes organizational relationships with the external environment and citizens. Over time, as the performance focus has moved from improving processes and inputs to results and impacts, the agenda in both research and practice has moved forward to linking specific indicators to broader objectives and activities of the public sector (Hawke, 2012; van Dooren et al., 2015; Steccolini, 2019). Moreover, the joint consideration of governance and performance management can result in expanding our understanding of public-sector systems, recognizing the greater complexity and always-changing role of governments that we have been witnessing for a while now. With reference to accounting systems, in particular, this perspective complements and aligns with changes introduced in the following terms: co-production (Pollitt, 2003); horizontal accountability (Sproule-Jones, 2000); whole-of-government accounts (Christensen & Lægreid, 2007; Bouckaert & Halligan, 2008); integrated governance and collaborations (Mandell, 2001; Broadbent & Laughlin, 2013); and citizen engagement and participatory budgeting (Manes-Rossi et al., 2023). A dialogic use of whole-of-government accounting and reporting, where information is collected and kept together in a comprehensive and organic way based on a shared structure, for instance, could contribute to integrate ideas of both democratic governance and results-based accountability. While this does not necessarily mean creating completely new tools for accounting and measuring, the implementation of systems where multiple contributions converge to highlight the generation of shared results in a relational chain would also allow the inclusion of and reporting to citizens as users of both services and information. Performance governance differentiates itself from the traditional and business-like forms of management because of the following: the type and purpose of the measures used (more holistic and outward-looking); the level of government activity and societal outcomes addressed; and the degree of integration of performance management across government agencies and other social institutions (Halligan et al., 2012). A performance-governance approach is argued to contribute fruitfully to more accountable performance-measurement practices by acknowledging: (i) organizational relationships and integration of performance to address a range of (public and private) collaborations through networks, partnerships and coordination mechanisms (Grossi & Steccolini, 2014), which often require the production of inter-organizational, consolidated reports, objectives and measures to be identified and shared for horizontal and vertical accountability within and outside government (Halligan et al., 2012); (ii) citizen engagement in terms of performance feedback and other active participation forms (Epstein et al., 2006; Callahan, 2007; Dutil et al., 2010); and (iii) societal impacts, such as those on the environment, with the identification of multi-level performance indicators (for example, following the different stages of service implementation, their value added and improved levels of sustainable service delivery) (Dutil et al., 2010). The adoption of a performance-governance approach has direct implications for the forms and means of accountability. The need for effective inter-agency, inter-sectoral and inter-jurisdictional collaboration is well established (Ansell & Gash, 2008; Edwards, 2011), yet systems of shared accountability, especially concerning societal, environmental and sustainability results, are often underdeveloped. The achievement of global results and impacts is often too difficult to measure and account for. Within central and local governments, recent initiatives have reflected a more systemic and collaborative approach, at least at the concep-

Public-sector accountability  273 tual level, to sharing outcomes and accountability (Manes-Rossi et al., 2023). Examples of joined-up government have been proposed, for instance, in the UK for some time now, through means including cross-departmental performance targets of public-service agreements shared by more than one government department (Ling, 2002). It is important to stress that measuring performance at an integrated level itself represents a governance tool. Integrating both an internal and external focus, such measures could be used by politicians and managers, as well as the other stakeholders involved in the decision-making processes. As precise shared objectives are difficult to agree on in this setting, trust between parties will play an essential role (Pierce et al., 2002). The challenges of implementing such an approach are, of course, potentially multiple both in terms of effectively engaging with the private sector and citizens (who cannot be forced into it) and in terms of creating a supportive culture where the benefits of common engagement and shared control and disclosure are seen as bigger than the other agency and transaction costs (Dutil et al., 2010; Halligan et al., 2012). Moreover, these forms of reporting require greater cooperation efforts, especially in the attempt to identify and measure the possible value added by each of the actors involved (Agranoff, 2005). Where more stakeholders are involved, not only in decision-making processes but also in the contribution and measurement of outputs and outcomes, this becomes particularly challenging and subject to a high degree of interpretation and subjectivity. Because of the different layers and levels involved, accountability processes become more difficult and blurred. While these represent essential aspects if we want to move away from a managerial approach towards a more holistic, dialogic and democratic approach, empirical research in these areas is limited to date. How can joint action be effectively measured and accounted for? How can the costs and benefits of the different parts involved be evaluated in this process? What are the risks and consequences of such blurred relationships for citizens? More academic research is needed in this area, and a greater investment in terms of governments’ resources and time would also be welcomed.

CONCLUSIONS The chapter has focused on exploring and providing an overview of some emerging themes and relationships as far as public-sector accountability, performance measurement and, ultimately, governance systems are concerned. This review is, of course, necessarily partial because of space constraints; much more could be stated about the links and interactions across accountability, performance measurement and governance, and the multiple approaches these can be studied under. Several alternative perspectives are, indeed, proffered in the literature with a view to strengthening the governance momentum, including social accountability and outcomes-based performance measures, sustainability reporting and delivery of public value (Almquist et al., 2013; Hyndman & Liguori, 2016; Arun et al., 2021). The literature discussed above highlights the need, for both scholars and practitioners, to pay greater attention to how we interact with and use accounting representations, and for what purposes. The chapter contributes to previous literature by providing a critical assessment of the existing research on such themes and identifying possible avenues for future study. This, obviously, also has important implications for practice. To avoid repeating mistakes of the past, the authors suggest, the development of public-sector accountability systems should be recognized as interactive, holistic and integral to proper governance, so that accounting and

274  Handbook of accounting, accountability and governance performance reporting gain meaning through their relationship with accountability itself. Just as we would prefer a medical doctor to investigate and assess our situation as a patient from a holistic and comprehensive point of view, rather than focusing only on one problem/issue and missing the greater picture, both researchers and public officials/managers should strive to adopt a more holistic interpretation and use of accounting and accountability systems. Taking a dialogic perspective, in an always more complex environment, we should be able to study and set in place accountability-based accounting systems rather than accounting-based accountability systems. The three broad themes identified in this chapter represent particularly apt spaces for future advancements of public-sector accounting theory and practice. Particular attention should be paid to research and practice on sustainability. The interaction between sustainability practices and accountability and governance systems has been widely under-theorized and under-investigated. Finally, we should not underestimate the role of accountability, performance measurement and governance structures in promoting learning (see Arun et al., 2021, for a review of “learning accountability” within a public-sector context) within public-sector organizations. Accountability systems provide the opportunity for public officials and public managers to reflect upon and adjust the effectiveness of their performance in achieving both social and functional goals, and to maintain a balanced relationship with a diverse range of stakeholders. This also constitutes an opportunity for improved governance across public-sector departments and organizations. Looking ahead, and with a specific focus on research, it is unthinkable not to view governance systems as interwoven and dependent on accountability systems and tools. Such concepts are, indeed, inseparable and affect all ranges of account-giving behaviours and relationships (both in terms of financial and non-financial measures and dimensions). A structured, dialogic and holistic view of public-sector accountability can enhance our understanding of governance arrangements and, in turn, their influence on other aspects of organizational life. Moreover, these systems may progress and develop in very unexpected ways. Similar upheavals, the authors suggest, are what future studies should particularly focus on to contribute substantially to future developments to come.

NOTES 1. As discussed later in the chapter, a dialogic approach enables a broad range of societal actors to account for things that traditional accounting ignores and to develop accounting and accountability systems that acknowledge diverse ideological positions (Brown & Dillard, 2015). 2. Performance within the public sector has been constructed around pillars such as “efficiency”, “effectiveness” and “economy” (van Dooren et al., 2015). 3. The term “austerity” is commonly used in the context of public-expenditure cuts and the need to restore balance in government finances (Bracci et al., 2015). 4. Public-sector innovation, in this context, is understood as a process involving a change to achieve widespread improvements in governance and service performance. 5. Participatory budgeting focuses primarily on empowering citizens by placing the final budget decision-making in their hands (see, for example, Manes-Rossi et al., 2023).

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13. Accounting, accountability and governance in non-governmental organizations Andrew Goddard

OVERVIEW The chapter commences with a brief introduction to the nature and context of non-governmental organizations (NGOs). There follows an outline of the general definitional and research approaches which have been adopted by practitioners and academics in the prior literature. Practitioner approaches have largely been influenced by broader New Public Management (NPM). A dichotomy exists in academic approaches and primarily includes those who view accounting, accountability and governance in hierarchical terms, with an emphasis on procedures and processes, tending to regard accountability as an objective phenomenon. The other major approach involves those who take a more subjective approach and view accountability as something which is perceived and ascribed meaning by participants. The next section comprises a brief descriptive overview of the principal research which has been undertaken. This is followed by a thematic analysis of the findings of the prior research. The final section outlines issues and recommendations for future research from both practitioner and academic perspectives.

INTRODUCTION NGOs play an extremely important role in the contemporary world, particularly in developing countries where they are often more active than central and local government in providing a wide range of services in areas with limited financial resources. The structure of the field of NGOs is complex. The main institutions operating in this field are Northern NGOs based in the developed economies and Southern NGOs based in the developing economies Northern NGOs raise funds from individuals, other organizations and governments to address the problems in developing economies, such as poverty reduction, crisis aid and Acquired Immune Deficiency Syndrome (AIDS). They often pass these funds on to Southern NGOs who are directly involved with providing services to address the problems. In such a complex structure accountability and governance are inevitably complex but also of great importance. The NGO term is a post-World War II expression which was initially coined by the United Nations (UN) in Article 71 of the UN Charter adopted in 1945, which stipulated that NGOs could be accredited to the UN as consultants. This was a very narrow definition referring to those societal actors which were international bodies, engaged within the UN context (Martens, 2002) to address problems such as poverty reduction. There have been many attempts at defining NGOs since 1945, not only in the accounting literature but also in disciplines such as Developmental Studies, Public Administration, Economic Geography, Organizational and Third Sector Studies. By the end of the millennium, the term came to refer 281

282  Handbook of accounting, accountability and governance to a much broader set of organizations. Martens (2002, p. 282) suggested a revised definition: “NGOs are formal (professionalized) independent societal organizations whose primary aim is to promote common goals at the national or the international level”. Salamon and Anheier (1992a, b) offered a similar, structural/operational definition, which includes organizations that are formal, private, non-profit-distributing, self-governing and voluntary, thus incorporating charities and civil societal organizations (Cordery et al., 2019). As the NGO sector has grown in size, influence, breadth and complexity definitions have inevitably concentrated more on NGO characteristics. The contribution by Cordery et al. (2019), introducing a special edition of Accounting Forum on NGO accounting and accountability, is particularly helpful in our understanding of the nature of NGOs and of NGO accountability. The writers draw upon multiple disciplinary research to develop a set of NGO characteristics. They note that registered charities have received the most attention from NGO accounting researchers who have used jurisdictional-specific definitions of charities which enable (and require) the official registration of certain entities with a regulator (Cordery & Deguchi, 2018). Thus, appropriate registration, and related recognition, is an important characteristic of many NGOs. Funding is the next characteristic, which incorporates a range of different sources of funds, including membership fees, public sector grants, research grants, project grants, bequests and income from trusts, among many others. How an NGO funds its activities directly affects its accountability demands (Boomsma & O’Dwyer, 2019; Edwards & Hulme, 1996). The governance of NGOs is also important and organizational theorists, such as Hansmann (1980), offer a simplistic dichotomy comprising member-controlled or independently managed. The specific governance arrangements in an NGO will impact on internal and external accounting practices that themselves have effects, and the extent to which they are formalized is related to organizational purposes and regulatory requirements (O’Leary, 2017). Cordery et al. (2019) added the characteristics of purpose, activities and stakeholders to defining NGOs. Many researchers identify social purpose as a central characteristic that takes precedence in NGOs (Christensen & Ebrahim, 2006; Agyemang et al., 2019; Kaba, 2021). Agyemang et al. (2019, p. 2353) summarize this as follows: “NGOs differ from for-profit corporations (and share a key characteristic with public service/sector bodies) in that their purpose is not to generate a financial surplus, but to use their income to fulfil their social remit to the greatest extent possible”. However, there is an enormous range of more specific activities and social purposes also associated with NGOs. Unerman and O’Dwyer (2006b) identified NGO activities as being “welfare providers” or “advocacy focused”. However, Salamon and Anheier (1992b) identified 12 different categories of activities (Culture and Recreation; Education and Research; Health; Social Services; Environment; Development and Housing; Law, Advocacy and Politics; Philanthropic Intermediaries and Voluntarism Promotion, International Activities; Religion; Business and Professional Associations, Unions; Others). The importance of stakeholders has been a recurrent theme in accounting and accountability research (for example, Roberts, 1991, 2003; O’Dwyer & Unerman, 2007, 2008; Goddard & Assad, 2010). These have highlighted key issues of various kinds. Instances of key issues include the assumption that within NGOs there is a greater commitment to genuinely address the interests of a broad range of stakeholders (O’Dwyer & Unerman, 2007, 2008), the prime focus on substantive as opposed to procedural accountability (Gray et al., 2006) and the importance of recognizing the context of the NGO, whether it be a Northern or Southern NGO, and its position within the field (Goddard, 2021).

Accounting, accountability and governance in non-governmental organizations  283 To summarize, to understand any specific NGO a thorough appreciation of its regulatory context, funding, governance structure, purpose, stakeholders and activities is required. “Each NGO has a unique configuration of accounting and accountability practices that is shaped by the complex, contextual interaction of these six major themes” (Cordery et al., 2019, p. 2). In this chapter research specifically into charities’ accounting has been largely excluded as the focus of the chapter is on NGOs involved with development.

APPROACHES TO ACCOUNTING, ACCOUNTABILITY AND GOVERNANCE IN NGOS Since the 1990s there has been a developing literature on accountability in NGOs. Edwards and Hulme (1995, p. 4) emphasized the importance of accountability and the need to take it “much more seriously”, but also note that “little is known about the changing nature of … NGO accountability”. Smillie (1995) refers to accountability being the “Achilles’ heel” of the NGO movement. Lewis (2001) extends even further and suggests that concerns about NGO accountability may be the key to the survival of the movement. This section will outline the general approaches which have been adopted by practitioners and in the academic literature. Practitioner approaches have largely been influenced by broader NPM initiatives. The importance and impact of NPM across the public sector globally is well established, although it is clear it is very diverse in application (Pollitt & Bouckaert, 2004). One of the central components of NPM is accountability and its association with performance management. Many bodies concerned with NGOs in developing economies have propounded NPM initiatives. For instance, in the UK, the Department for International Development (DFID) established its Public Financial Management and Accountability initiative which was followed by the establishment of its Platform Approach to Improving Public Financial Management (DFID, 2005). The Organisation for Economic Co-operation and Development (OECD) also noted that “sound public financial management supports aggregate control, prioritization, accountability and efficiency in the management of public resources and delivery of services, which are critical to the achievement of public policy objectives” (OECD, 2005, p. 75). Many other bodies published reports and briefings exhorting the importance of public financial management including the World Bank (2003), Allen et al. (2004), the Overseas Development Institute (ODI, 2004, 2007) and the Economic Commission for Africa (2003). Many of these exhortations were accompanied with prescriptions of models of financial management, such as performance/output budgeting and the importance of accountability, all drawing upon the template of NPM. Academic research into NGO accountability has utilized a bewildering array of conceptualizations. This has been highlighted by Kaba’s (2021) conceptual review of 217 research articles published within the previous 20 years, analysing conceptualizations of accountability in the major journals of five disciplines: accounting (34 articles), development studies (111), international relations and political science (19), organization studies and management (29), and public administration (24). The study revealed 113 different conceptualizations of accountability, 90 of which are rarely used. Kaba (2021) attempted to categorize this unwieldly range of approaches by noting that underlying all this research was the acceptance that NGO accountability is relational (see, for example, Dubnick, 2002; Ebrahim, 2003a,

284  Handbook of accounting, accountability and governance 2009, 2016; Mulgan, 2000, 2003, 2014; Schillemans, 2013). Dubnick (2002) analysed this relational phenomenon in terms of “the direction of accountability: to whom?” and “the nature of accountability: how and for what?” The direction of accountability is, of course, well developed in accountability research generally. In NGO research it often refers to upward accountability, concerned with interactions between NGOs and (institutional) funders or external regulators like the host state. In addition, some researchers were also concerned with interactions among NGOs themselves and referred to this as horizontal (Ebrahim & Weisband, 2007) or peer accountability (Grant & Keohane, 2005). Other research was more concerned with the notion of downward accountability, referring to relations between NGOs and project beneficiaries (Ebrahim, 2003a). Kaba (2021) also found research concerned with how NGOs respond to values and expectations of staff or board of directors and hold themselves internally accountable to their mission. This approach was variously described as internal (Murphy et al., 2019), lateral (Christensen & Ebrahim, 2006) or inward accountability (Ebrahim, 2003a). Kaba (2021) categorizes the nature of accountability between principal–agent perspectives on accountability and value-focused perspectives. The principal–agent model (P–A model) applies particularly to situations where a principal defines certain goals and subsequently employs an agent(s) to achieve said goals. Such narrowly defined accountability can also be referred to as short-term (O’Dwyer & Boomsma, 2015), functional or hierarchical accountability, and is generally motivated by the power of external stakeholders (O’Dwyer & Unerman, 2008). Many researchers have taken such a perspective and identified a variety of accountability relationships such as compliance (Kearns, 1994), compliance-driven (Ebrahim, 2016), imposed (O’Dwyer & Boomsma, 2015; Yasmin et al., 2018), instrumental (Knutsen & Brower, 2010), rule-based (Morrison & Salipante, 2007), technical (Heidelberg, 2017), formal (Romzek & Johnston, 2005) and involuntary accountability (Yesudhas, 2019). This perspective is particularly familiar to accounting researchers where formal standards and arrangements like audits, donor reports, performance management and board governance structures form the basis of legal and the so-called first-order accountability (Howell et al., 2019). Given it is one of the first and most rudimentary accountability requirements, good governance of financial resources is also referred to as first-wave accountability (Hielscher et al., 2017). Kaba (2021) found many articles where donors resorted to this default accountability for finances, also known as administrative (Koliba et al., 2011), financial (Keating & Frumkin, 2003) or fiduciary (Scherer, 2017) accountability. Other research was more concerned with NGOs being required to demonstrate the results of their work, leading to practical (Cavill & Sohail, 2007), substantive (McDonnell & Rutherford, 2019), performance (Benjamin, 2008), programme (Greiling & Hebesberger, 2018), output (Ebrahim 2016), results-based (Benjamin, 2008), outcome (Mitchell, 2012) or ex-post accountability (Uddin & Belal, 2019). Kaba (2021) suggests an alternative value-focused perspective has been adopted by other researchers and notes Kilby’s (2011, p. 103) argument that “NGOs’ values are their primary point of accountability, rather than the people they are working with”. He notes that when NGOs and their employees willingly adhere to and make themselves accountable for certain informal standards of behaviour, it is referred to as informal (Romzek et al., 2012, 2014), voluntary (Karsten, 2015) or socializing accountability (Chynoweth et al., 2018). Kaba (2021) suggests that NGO employees are motivated internally through so-called felt accountability, referring to employees’ feelings of accountability demands (Hall, 2017) or feelings of com-

Accounting, accountability and governance in non-governmental organizations  285 mitment (most often) towards the beneficiaries and mission of their organizations (Fry, 1995; O’Dwyer & Boomsma, 2015). Furthermore, by providing an excellent and detailed analysis of the way a range of disciplinary researchers have approached accountability, Kaba (2021) has also highlighted the complexity and often the resulting confusion that such research has inevitably produced. Academic accounting approaches reflect much of Kaba’s analysis and have fallen into two broad categories. The first views accounting, accountability and governance in hierarchical terms. These approaches place an emphasis on procedures and processes external to the organizational participants and thereby tend to view accountability itself as an objective phenomenon. The second category takes a more subjective approach and views accountability as something which is perceived and ascribed meaning by participants. For instance, Ebrahim (2005, 2009) called for more empirical work in which accountability is seen as a social construct. Such research would provide “thick description” and interpretation that might enable us better to understand how social regimes of accountability operate. Other researchers developed similar approaches, as discussed below. The work of Unerman and O’Dwyer (O’Dwyer, 2005; Unerman & O’Dwyer, 2006a, b; O’Dwyer & Unerman, 2007, 2008, 2010) has made a significant contribution to our understanding of accountability and accounting in NGOs. Unerman and O’Dwyer’s contribution in collating and summarizing the different approaches to NGO accountability is of particular interest. Their approach to accountability is developed from earlier research by Ebrahim (2003a, b). As discussed above, Ebrahim (2003b, p. 191) suggested that NGO accountability is complex and multidimensional. He further suggested that it is “relational in nature and is constructed through inter and intra-organizational relationships”. Unerman and O’Dwyer (2006b) and O’Dwyer and Unerman (2008) develop this further by using stakeholder theory to characterize hierarchical and holistic accountability. On these two key notions/forms of accountability, hierarchical accountability is “short-term in orientation and favours accountability to those stakeholders who control access to key resources” (O’Dwyer & Unerman, 2008, p. 803). It is most often enacted by means of accounting and performance reports and tends to favour upwards accountability to funders. Reliance on this approach alone is likely to result in dysfunctions. To counter these, holistic accountability which incorporates a broad range of other organizations, individuals and the environment is suggested and comprises qualitative and quantitative practices based on the long-term impact. Such an approach recognizes the importance of downward accountability towards service beneficiaries and broader accountability for the social impacts on other organizations, individuals and the wider environment (O’Dwyer & Unerman, 2007; Ebrahim, 2005). Again, developing the work of Ebrahim (2005), Unerman and O’Dwyer (2006b) introduce the concept of identity accountability. This “represents a means by which managers (or activists) running organizations take responsibility for shaping their organizational mission and values … and for assessing their performance in relation to their goals” (Unerman & O’Dwyer, 2006b, p. 356). This is a narrow and introvert notion of accountability and organizations displaying this approach take little or no heed of broader accountability relationships. Although these approaches taken together are useful and certainly more encompassing than mere functional accountability, they still tend to view accountability itself as an objective phenomenon, albeit more broadly spread. Another approach would be to view accountability more subjectively in the specific context within which it operates, as something which is perceived and ascribed meaning by participants. This in turn will influence their subsequent

286  Handbook of accounting, accountability and governance actions and therefore the accountability and accounting processes that are undertaken in the NGOs. Indeed, Ebrahim (2005, 2009) critiques normative approaches to accountability which can mask the realities of social structure and the relations of power that underlie them. Shenkin and Coulson (2007) note a similar trend in broader accountability research whereby accountability tends to be described in procedural terms. They further note that more subjective conceptions of accountability have been exhorted by such researchers as Roberts (1991, 2009), who draws on the works of psychological theorists such as Butler and Lacan to inquire into the limits that the accountable self faces when giving an account. Messner (2009) further develops this strand of research and asserts that because of these limits, we cannot expect demands for accountability always to be fully met. McKernan (2012) again develops the approach by applying Derrida’s work on responsibility, testimony and gift to the problematic of accountability. However, these strands of research are broadly of a theoretical and conceptual nature with a concentration on the individual self. Shenkin and Coulson (2007) move beyond a concentration on the self to argue that Bourdieu’s concepts of field, habitus and distribution of capital can be used to address the problems noted with procedural forms of accountability. Their emphasis was to use Bourdieu’s theories to constitute a new position from which to look at accountability as a politicized issue. Again, this was a conceptual study with no empirical content. Agyemang et al. (2019) also exhorted more studies of accountability that are less formalized. The authors suggest that the notion of identity accountability research would benefit from a more subjective approach and that “a core stage of identity formation involves organizational members coping with a possible, meanings void in which they struggle to give meaning to a leader’s vision” and “this form of sensemaking may operate in conjunction with, and influence, the nature and development of accountability mechanisms in NGOs” (Agyemang et al., 2019, p. 2361). O’Leary (2017) takes a similar approach and conceptualizes accountability as a process that enacts a specified promise, stemming from moral responsibilities. In summary, there has emerged to date an almost bewildering range of research approaches and foci in NGO accountability and accounting research. Such a broad range of approaches make it difficult for researchers new to the area to decide on their own approach. Kaba’s (2021) categorization of a wide range of disciplinary research in terms of the direction and nature of accountability has been broadly reflected in NGO accounting research in terms of hierarchy, identity and subjective approaches. These categorizations provide a useful structure to analysing the empirical research, particularly for researchers new to this area.

EMPIRICAL RESEARCH This section provides a brief descriptive overview of the principal research which has been undertaken in accounting, accountability and governance in NGOs since around 2000 when empirical and theoretical research began to emerge and play a role in better understanding these organizations and their operations, including organizational accounting, accountability and governance. Much of the earlier research into accounting in NGOs was normative rather than empirical or theoretical. It concentrated on conformance aspects of accounting. A good deal of attention was made to the applicability of business practices to NGOs. Some researchers such as Bradley et al. (2003) advocated the adoption of such practices to improve efficiency. However, others such as Simsa (2003) and Myers and Sacks (2003) recognized the

Accounting, accountability and governance in non-governmental organizations  287 complexity of NGOs in terms of their different strategies, internal ideologies and management styles. These complexities were likely to confound a simple transference of business practices. In the early years of research authors drew attention to various aspects of NGO accountability such as the importance of ensuring functional and strategic aspects (Avina, 1993), the multiplicity of stakeholders (Edwards & Hulme, 1995; Najam, 1996) and the importance of board structures (Tandon, 1995). The dysfunctional behaviour which flows from the imposition of inappropriate and demanding systems of accountability by funders has also been noted by Wallace et al. (2006) and Chambers (2005). Since the early 2000s, these normative approaches have largely been replaced with empirical research by accounting researchers. This research is summarized in Appendix 1. It is clear from the previous two sections that to understand and evaluate the empirical research its context is extremely important. In addition, the research approaches to accountability have been exceptionally varied. To fully appreciate the findings of the empirical research these two factors need to be known. Therefore, Appendix 1 provides this information for each study.

THEMATIC ANALYSIS Appendix 1 clearly shows the significant growth in empirical research since 2000. It is also clear that this research has been undertaken in a broad range of contexts incorporating many different countries, across both Northern and Southern settings. It incorporates a range of different types of NGO, covering most of those included in the above discussion on NGO definitions. This has produced a deeper and developing understanding of NGO accounting and accountability. It is important to acknowledge the role academic journals, such as Accounting, Auditing & Accountability Journal and Accounting Forum, have played in encouraging this body of research, particularly by publishing special issues on the topic. The range of NGO types and approaches does make it difficult to generalize on the research findings. However, several themes are emerging from the research which enable a tentative analysis of the overall findings to be attempted. This section comprises such an analysis by outlining and discussing these themes. Dominance of Institutional Donors and Regulators Many of the studies report this dominance over the practices and perceptions of accounting and accountability, together with consequences (see, for example, O’Dwyer & Unerman, 2008; Goddard & Assad, 2010; Agyemang et al., 2017; Kuruppu & Lodhia, 2019; Goddard, 2021). Almost all these studies view such dominance negatively. For instance, Goddard and Assad (2010) report that the dominance has been to the detriment of beneficiary accountability. Agyemang et al. (2017) found that upward accountability was perceived as external control, again to the detriment of “felt” responsibility to beneficiaries. Kuruppu and Lodhia, (2019) also report powerful actors controlling perceptions of accountability within NGOs. Goncharenko and Khadaroo (2020) report similar findings with respect to regulators and accounting regulation was used to discipline NGOs. Martinez and Cooper (2017) found international development funding and accountability requirements produced changes in the very nature of NGOs.

288  Handbook of accounting, accountability and governance However, several studies reported NGOs not being acquiescent to such dominance. Goddard and Assad (2006), for instance, found that some NGOs were managing the relationship with funders adopting “bargaining for change” strategies intended to direct funders and regulators to adopt strategies conducive with the NGOs’ requirements. Similarly, O’Dwyer and Boomsma (2015) observed that NGOs were proactively involved in steering the funder towards accountability requirements suited to their circumstances. Yasmin and Ghafran (2019) found NGOs adopting tactics allowing them to gain the trust of stakeholders and anticipate and negotiate accountability demands. Cazenave and Morales (2021) show the influence of institutional donors over (audit) evaluation systems on NGOs, but also how NGOs can react to regain control over their work and turn the frames of evaluation and accountability to their own advantage. However, despite several decades of calls for broader conceptions of NGO accountability, the case study NGO preferred to promote a very narrow view of its performance, based solely on accounting compliance. It took some pride in its ability to comply with funders’ and auditors’ demands. Limited Success of Achieving Downward/Beneficiary Accountability Downward or beneficiary accountability has continued to be the concern of several researchers with somewhat mixed results. Awio et al. (2011) reported some success in a grassroots NGO which supplemented upward accountability with “bottom-up” accountability to beneficiaries. Uddin and Belal (2019) suggested that donor accountability of NGOs has enabling features which can be mobilized to the advantage of beneficiaries. In their case study they found powerful stakeholders like donors can influence NGOs, and in that process facilitate beneficiary accountability. These stakeholders used direct and indirect influence strategies to facilitate NGO accountability towards beneficiaries. Other studies, however, have reported less success in achieving downward/beneficiary accountability. O’Dwyer and Unerman (2008) researched the concept of holistic accountability in practice. They found that a hierarchical conception of accountability had begun to dominate external accountability discourse and practice. Taylor et al. (2014) provided a critical assessment of the interplay between downward, upward (or hierarchical) and internal (or identity) accountability. They question whether the concept of “downward accountability” loses meaning when applied to published special-purpose disaster recovery reports. The appearance of downward accountability traits in these reports appeared to be an artefact of the motivation for upward and internal accountability. O’Dwyer and Unerman (2010) sought to identify and assesses the extent to which downward accountability mechanisms in non-governmental development organizations had the potential in practice to contribute to the effectiveness of rights‐based approaches to development. They found only a rhetorical commitment to downward accountability and variations in practice about the substantive implementation of key downward accountability mechanisms. Other researchers have suggested successful downward accountability is highly dependent on implementation and contextual conditions. Marini et al. (2017) problematize downward accountability by illustrating how certain accountability tools need to be tailored to the needs of “clients”. These authors suggest that four factors are critical to downward accountability: design; appreciation of the local culture; the nature of its distribution by fieldworkers; and its responsiveness to the clients’ perspective. Similarly, Dewi et al. (2021) found that beneficiary accountability does not have to be limited to any formal mechanism of accountability; rather, it

Accounting, accountability and governance in non-governmental organizations  289 needs to be viewed more widely and connectedly, such as in terms of four attributes: casually demanded, action based, quasi-instrumental and focusing on beneficiary self-reliance. Limitations of Accounting in Achieving Accountability A major issue from most studies is the importance of accounting in achieving accountability and governance in NGOs, whether by enhancing objective approaches such as hierarchical accountability or constituting and reflecting perceptions. However, many researchers also report the limitations and adverse consequences associated with using accounting to achieve accountability. Westerdahl (2001) concluded that NGO identity and accounting are shown to be mutually interlinked. They further argued that the main asset in the development, a community based on trust, cannot be mirrored in the formal accounts, demonstrating the need for complements to statements based on numbers. The importance of alternative accounts to enhance accountability was also suggested by Denedo et al. (2019). Rahaman et al. (2010) found that accounting assisted funders by providing information that allowed them to direct specific actions and enable a form of discipline. They also showed how accounting can sometimes conflict with the social-purpose activities. Furthermore, O’Leary and Smith (2020) considered the role of accounting in moments of resistance in day-to-day institutional (NGO) contexts. They showed accounting reports related to performance and impact gradually moved along a continuum from being received in authoritative mode to internally persuasive mode and how, as a result, resistance to an authoritative discourse of accountability was created and maintained. Chenhall et al. (2013) examined how debates and struggles over the design and operation of a performance measurement system affected the potential for productive debate and compromise between different modes of evaluation. They suggested sites can bring together (or indeed push apart) organizational actors with different evaluative principles and can be potentially productive and/or destructive. The Centrality of Legitimacy Several researchers have noted the centrality of legitimacy to understanding accounting and accountability. Goddard and Assad (2006) found that NGO accounting and auditing practices were primarily aimed at helping secure funding by demonstrating the legitimacy of the NGO to existing and potential funders. Moreover, the perceptions of legitimacy changed over time, generating changes to these practices. Kuruppu and Lodhia (2019) suggested NGO accountability is inevitably determined by powerful actors who possess legitimacy and power. They use their powerful positions to fundamentally shape NGOs by influencing the embedded habitus and doxa. Goddard (2021) found that the most influential aspect of an NGO’s context was the amount of symbolic capital that each could acquire, and legitimacy was the principal currency of this symbolic capital. The specific form of legitimacy, closely related to NPM and accounting practices, became the currency because of the economic and cultural power held by rich Northern NGOs and enabled them to dominate the whole field. In an unusual and interesting article, Islam et al. (2018) used legitimacy theory alongside media agenda-setting theory and responsive regulation. The study adopted a quantitative analysis to examine the posited link between networked governance (the activities of NGOs and the media) and the anti-bribery disclosures of two global telecommunication companies. The findings showed that anti-bribery disclosures were positively associated with the activ-

290  Handbook of accounting, accountability and governance ities of the media and NGO initiatives. They also showed that companies make anti-bribery disclosures to maintain symbolic legitimacy but are shown to be less prominent in effecting a substantive change in their accountability practices. Goncharenko (2019) examined how the accountability agenda of advocacy NGOs is shaped by the need to maintain independence, preserve values and keep reputation unsullied when faced with financial and legitimacy pressures. The study revealed that the accountability agenda of advocacy NGOs is partly determined by legitimacy challenges alongside interrelated threats of financial vulnerability, potential loss of independence and the high level of public scrutiny. Emergence of Culture and Values Several authors have noted the interaction between culture, underlying values and accountability. Marini et al. (2018) specifically adopted a cultural approach to their case study. Adopting a post-colonial lens, the case study demonstrated that accounting and accountability practices of the colonizing (finance) culture endured. This suggests that the “in-between” or “hybrid” spaces created by microfinance, where the organizational culture intersects with the client culture, are quickly colonized to ensure the accountability expectations of the dominant culture are privileged. Scobie et al. (2020) developed the concept of grounded accountability, which locates NGO practices within the culture of the communities they serve. Grounded accountability is presented to extend the concept of felt accountability that is understood as an ethical affinity between an employee and the goals of operational NGOs that employ them to benefit third parties. Grounded accountability involves devolving responsibility for defining goals to the third parties who can then realize their own self-determination. To the extent that grounded accountability has been instilled and operates, through the design of an organization based on the values of primary stakeholders and continuous engagement with those stakeholders over time, it overcomes some potential limitations of perpetuating beneficiary dependency inherent in felt accountability. Other researchers have used Bourdieu’s concepts of habitus and doxa, to some extent like culture and values, to investigate NGO accountability (Dewi et al., 2019; Kuruppu & Lodhia, 2019; Goddard, 2021). These are discussed in more detail below. Importance of a Moral Dimension Related to the cultural theme is the attention some researchers have given to the importance of a moral aspect to accounting and accountability. Everett and Friesen (2010) examined the move towards accountability in the field of humanitarian relief. Taking a unique approach informed by a “theatrical” analysis, this move was framed as a theatrical performance that pits humanitarians against their donors. While donors increasingly ask humanitarians to follow technical scripts in their performances, the latter counter by offering scripts that highlight the humanitarian’s moral obligation to the “suffering other”. The paper demonstrates the inseparability of technical and moral accountability. Rahaman et al. (2010) and Duval et al. (2015) both found that accounting sometimes conflicts with the social-purpose activities and privileges narrow performance focused on hierarchical accountability over social obligations. These are essentially issues of morality. Goddard’s (2021) analysis demonstrated the importance of moral/ethical “existential doxa” underpinning the accountability habitus. Indeed, in some cases, these doxa directly led to

Accounting, accountability and governance in non-governmental organizations  291 different practices. For instance, one of the strategies most prevalent in one UK NGO was to address the very nature of what was meant by accountability. The source of the strategy was a conscious and ethical decision to reorientate itself towards its fund recipients rather than its donors. Use and Role of Prior Theory, Often Taking a Subjective Approach There has been an interesting and varied use of prior theories to attempt to understand accounting and accountability in NGOs and possibly develop a more general theory of these phenomenon. Some have taken a subjective methodology including ethnography and ethnomethodology (Westerdahl, 2001; Scobie et al., 2020), grounded theory (Goddard & Assad, 2006), Roberts’ socializing forms of accountability (Yates et al., 2019; Yasmin & Ghafran, 2019) and netography (Goncharenko, 2019). Others have taken a meta-theoretical approach by using specific prior theories to understand the phenomena. These include the use of Stark’s concept of “organizing dissonance” (Chenhall et al., 2013), governmentality (Martinez & Cooper, 2017), post-colonial culture and Bhabha’s concepts of spaces of hybridity (Marini et al., 2018), institutional logic (Cordery et al., 2019), Foucault (Goncharenko & Khadaroo, 2020), Bakhtin’s dialogism (O’Leary & Smith, 2020) and Rubenstein’s concept of surrogate accountability (Pazzi & Svetlova, 2021). These studies have all provided interesting insight into and understanding of specific contexts, but their very dispersion has limited their ability to develop a coherent body of knowledge. The closest such prior theory has come to achieving such a body is that of Pierre Bourdieu. Seven of these papers have used Bourdieu to inform their research including theoretical exhortations by Shenkin and Coulson (2007) and Ebrahim (2009). Shenkin and Coulson (2007) suggested that the relation between field and habitus in terms of the distribution of capital can be used to address the problems noted with procedural forms of accountability. Ebrahim (2009) draws upon some of Bourdieu’s concepts, particularly social and symbolic capital, to achieve such an understanding of accountability in NGOs. These exhortations have been taken up by five empirical studies. Bell et al. (2009) use Bourdieu’s concept of field which theorizes the way social space is organized and the nature of relationships between social organizations or agents. These authors suggest that accountability is implicated in the struggle between these fields and between organizations as a mechanism through which each seeks to augment its capital through exercising control over what is accounted for and to whom. Dewi et al. (2019) studied the habitus of volunteers and social and cultural capitals in the field of volunteering to elaborate on the socializing dimension of accountability to beneficiaries. They explored how participation of volunteers in the NGO’s programmes became a practice that drew on the cultural and social capital embodied by volunteers and institutionalized by the NGO’s value base, while it aided the formation of patterns of beneficiary accountability. Chenhall et al. (2010) used Bourdieu’s concept of social capital to outline a distinctive approach to understand the interplay between management control systems and the development of social connections in and between organizations. They showed how social capital is implicated in efforts to attract economic capital and cultural capital and how elements of a management control system can either enhance or inhibit the bonding and bridging dimensions of social capital with potential consequences for both economic and cultural capital.

292  Handbook of accounting, accountability and governance These studies, however, can only provide a partial understanding of accountability because they have only taken individual elements of Bourdieu’s concepts. Malsch et al. (2011) criticize Bourdieusian research in accounting for not mobilizing Bourdieu’s core concepts of field, capital, habitus and doxa in a holistic manner. They suggest it is only by taking the full set of his concepts that the full contribution of Bourdieu can be achieved. This is because the individual elements interact in a complex manner and each cannot be properly understood without careful consideration of these interactions. Only two studies of accountability in NGOs adopt a fuller Bourdieusian framework. Kuruppu and Lodhia (2019) show how accountability is a contested notion that is shaped by struggles among stakeholders within a field. They explored how the “widespread field” consisting of the aid context in Sri Lanka and internationally was rapidly shifting. This created pressures within the “restricted field” of the case NGO and its constituents. These pressures were manifested in the contest of the different capitals held by various stakeholders to shape the NGO. The nature of access to these capitals was important in the way that the NGO was shaped by external forces and by the individuals within the organization, including executives and managers. The study illustrates how an NGO’s identity was shaped within a complex and shifting context using Bourdieu’s concepts of habitus, capital, field, doxa, illusio and symbolic violence. The study also suggests NGO accountability is inevitably determined by powerful actors who possess legitimacy and power and use this to shape the habitus and the doxa embedded within a field. Goddard (2021) draws upon a broad set of Bourdieu’s concepts comprising field, capital, doxa and habitus to develop an understanding of accounting and accountability practices and perceptions in NGOs operating in Africa. The analysis revealed the dominance of Northern NGOs, resulting from their ownership and control of capital, in influencing accountability perceptions and the importance of legitimacy. It also revealed the importance of habitus and doxa underpinning conceptions and practices of accountability and accounting. “Existential doxa” and “accountability doxa” provided the link between the field and the accountability habitus to be understood. The resulting understanding explains accounting and accountability practices as resulting from strategies adopted in response to the accountability habituses, underpinned by doxa, which themselves are responses to the contexts with in which the NGOs operate.

FUTURE RESEARCH While achieving a deeper body of sector-specific knowledge, predominately over the last two decades, the very range of contexts being examined does present a problem of obtaining a deeper understanding within specific contexts as many of these studies are single cases. The range of research approaches and methodologies also presents a problem in developing a coherent understanding as discussed above. Kaba (2021) notes that 113 conceptualizations of accountability have been used but they often duplicate each other and/or have conflicting meanings. This ambiguity undermines our ability to analyse accountability (Dubnick, 2011). Future research needs to address these problems. Agyemang et al. (2019) have suggested several specific areas that require further research. These include the emergence of new developments in practice, including the shift within donor institutions from a focus on “aid to NGOs” to “aid through NGOs”, pressure from donors for NGOs to adopt more entrepreneurial ways of working and to engage with the private sector,

Accounting, accountability and governance in non-governmental organizations  293 aid being linked to specific governmental objectives and the changing roles of NGOs as Southern NGOs increasingly demand direct funding from governments, resulting in Northern NGOs being cut out. The importance of institutional donors in controlling NGO accountability practices and perceptions is well established, as discussed above. Any changes in these donors’ policies will inevitably result in changes to these NGO practices and perceptions. Another area of future research suggested by Agyemang et al. (2019) is how identities in NGOs are formed in conjunction with the development of specific types of accountability. They propose that, in future research, use is made of Gioia et al.’s (2013) organizational identity formation process to understand how types of accountability evolve in key stages within identity formation (and change) processes. They also encourage more studies of accountability in NGOs that are less formalized. Indeed, more diverse decentralized movements such as Occupy Wall Street and online movements such as #MeToo challenge our conception of what an NGO might be and offer new accountability challenges. Another area suggested is for more studies on the use of more sophisticated accountability techniques being developed by NGOs, such as the complementary use of quantitative and qualitative methods, social return on investment (Hall et al., 2015) and blended value accounting (Nicholls, 2009). Agyemang et al. (2019) also recommend more research on “means–ends” decoupling in NGOs where accountability mechanisms are weakly correlated with the core tasks of an organization. They note that such problems may be particularly prevalent in the development NGO field. In these circumstances NGO managers may see certain mechanisms as possessing little utility but choose to pursue them anyway in the presence of larger structural pressures (see, for instance, Goddard & Assad, 2006; Martinez & Cooper, 2017). Balboa (2017, p. 128) takes this further and notes that “we must redefine our ideas, analysis, and tools so that the missions of these organizations do not interfere with their accountability and the calls for accountability do not interfere with their missions”. Further, there also appear to be several gaps in the research agenda. For instance, given the extensive literature across disciplines identified by Kaba (2021), it is surprising that there is very little multidisciplinary research. Such research could significantly enhance that undertaken by accounting researchers by bringing new insights and approaches. For instance, little empirical research has been undertaken into the policy impact of accountability practices and perceptions. This would be enhanced by involving development study experts in our research. Such multidisciplinary research would be further enhanced by engaging practitioners. This could help to spread academic learning into practice and suggest ways to improve not only accountability but also services provided. One way of achieving this would be to ensure research projects incorporate practitioner workshops to both enhance understanding and improve accountability and performance practices. It would also be beneficial for academics to undertake evaluation studies, or critiques, of practitioner initiatives. These might include placing more emphasis understanding participants’ perceptions rather than imposing one-size-fits-all practices, placing more emphasis on internal, management accounting as well as beneficiary needs. Other initiatives might include extending the use of internal audit with a performance emphasis rather than external audit with annual reporting emphasis and developing accounting practices in a supportive, collaborative way. Another area where little research has been undertaken by accounting researchers in development NGOs is that of governance structures. Again, this is surprising as a good deal of such research has been undertaken in charities. Really quite basic research into establishing just

294  Handbook of accounting, accountability and governance who are the NGO trustees, how boards are structured and whether board compositions and governance structures make a difference to accountability and service outcomes, among other areas, would be interesting to pursue. Similarly, the role and effect of audit is largely absent from our NGO accounting research. Early researchers emphasized the fundamental importance of accountability to NGOs, for instance Smillie’s (1995) reference to accountability being the “Achilles’ heel” of the NGO movement. In all other sectors audit is considered a central tool of facilitating accountability. More research in this area is long overdue. Topics might include the existence, role and effectiveness of external audit and audit committees, as well as the existence of internal audit initiatives such as those being developed by some Northern donor NGOs and the possible development of bodies modelled on the UK’s Audit Commission and National Audit Office to report on value for money and evaluation of funding projects. Bribery and corruption have also long been of concern in the NGO sector, yet very little research has been undertaken in this arena. A notable exception has been Islam et al. (2018) who found that anti-bribery disclosures were positively associated with the activities of the media and NGO initiative to counter bribery. Although a difficult subject to research, there is increasing interest in such research and in forensic accounting in the developing world, which could be further developed for NGO accountability research. Most of the empirical research to date has been undertaken by using a limited number of qualitative case studies but very few quantitative studies. The exceptions have been two interesting surveys (Cordery & Sim, 2018; Cordery et al., 2019) as well as the insightful work of Islam et al. (2018). More such studies could enhance our knowledge, particularly in the areas of governance, audit and bribery. To achieve a more thorough understanding of accounting, accountability and governance in NGOs, there is also a need for more extensive use of theory. Although more theoretically informed studies have recently been undertaken, they have still been rather eclectic in breadth. Currently, the most appealing meta theories that would benefit more empirical studies in different contexts include Bourdieu’s concepts, Foucault’s approaches to governmentality and post-colonial theory. However, studies using new theoretical approaches would also be welcome, for broadening of the literature purposes and particularly to ascertain if deeper understanding could be gained and by which key approaches. These might include institutional theory, network theory, diversity theory and sustainability theory. Different theoretical approaches may enhance our understanding as well as providing more rigour to our findings. Significant progress has been made in understanding accountability, governance and accounting in NGOs over the last two decades. However, much more needs to be explored as the importance of NGOs in developing communities continues to grow, with their essential concern in the early 2020s for alleviating poverty, protecting human rights, addressing health issues, including future pandemics, and filling the policy gaps left by the traditional public sector.

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298  Handbook of accounting, accountability and governance Messner, M. (2009), “The limits of accountability”, Accounting, Organizations and Society, Vol. 34 No. 8, pp. 918–938. Mitchell, G.E. (2012), “The construct of organizational effectiveness: perspectives from leaders of international nonprofits in the United States”, Nonprofit and Voluntary Sector Quarterly, Vol. 42 No. 2, pp. 324–345. Morrison, J.B. and Salipante, P. (2007), “Governance for broadened accountability: blending deliberate and emergent strategizing”, Nonprofit and Voluntary Sector Quarterly, Vol. 36 No. 2, pp. 195–217. Mulgan, R. (2000), “‘Accountability’: an ever-expanding concept?”, Public Administration, Vol. 78 No. 3, pp. 555–573. Mulgan, R. (2003), Holding Power to Account: Accountability in Modern Democracies. Palgrave Macmillan, Basingstoke. Mulgan, R. (2014), “Accountability deficits”. Bovens, M., Goodin, R.E. and Schillemans, T. (eds), The Oxford Handbook of Public Accountability. Oxford University Press, Oxford, pp. 545–559. Murphy, S., Friel, E., McKiernan, G., Connsidine, P., De Marco, A., Cunningham, A. and Middlehurst, M. (2019), “Do results-based management frameworks frustrate or facilitate effective development practice? Irish international development sector experiences”, Development in Practice, Vol. 29 No. 6, pp. 697–707. Myers, J. and Sacks, R. (2003), “Tools, techniques and tightropes: the art of walking and talking private sector management in non-profit organisations”, Financial Accountability & Management, Vol. 19 No. 3, pp. 267–306. Najam, A. (1996), “NGO accountability: a conceptual framework”, Development Policy Review, Vol. 14 No. 4, pp. 339–353. Nicholls, A. (2009), “‘We do good things, don’t we?’: ‘Blended Value Accounting’ in social entrepreneurship”, Accounting, Organizations and Society, Vol. 34 No. 6, pp. 755–769. O’Dwyer, B. (2005), “The construction of a social account: a case study in an overseas aid agency”, Accounting, Organizations and Society, Vol. 30 No. 3, pp. 279–296. O’Dwyer, B. and Boomsma, R. (2015), “The co-construction of NGO accountability: aligning imposed and felt accountability in NGO-funder accountability relationships”, Accounting, Auditing & Accountability Journal, Vol. 28 No. 1, pp. 36–68. O’Dwyer, B. and Unerman, J. (2007), “From functional to social accountability: transforming the accountability relationship between funders and non-governmental development organisations”, Accounting, Auditing & Accountability Journal, Vol. 20 No. 3, pp. 446–471. O’Dwyer, B. and Unerman, J. (2008), “The paradox of greater NGO accountability: a case study of Amnesty Ireland”, Accounting, Organizations and Society, Vol. 33 No. 7, pp. 801–824. O’Dwyer, B. and Unerman, J. (2010), “Enhancing the role of accountability in promoting the rights of beneficiaries of development NGOs”, Accounting and Business Research, Vol. 40 No. 5, pp. 451–471. O’Leary, S. (2017), “Grassroots accountability promises in rights-based approaches to development: the role of transformative monitoring and evaluation in NGOs”, Accounting Organizations and Society, Vol. 63, pp. 21–41. O’Leary, S. and Smith, D. (2020), “Moments of resistance: an internally persuasive view of performance and impact reports in non-governmental organizations”, Accounting, Organizations and Society, Vol. 85, article 101140. Organisation for Economic Co-operation and Development (OECD) (2005), Harmonising Donor Practices for Effective Aid Delivery. Volume 2: Budget Support, Sector Wide Approaches and Capacity Development in Public Financial Management. OECD, Paris. Overseas Development Institute (ODI) (2004), Why Budgets Matter: The New Agenda of Public Expenditure Management. ODI, London. Overseas Development Institute (ODI) (2007), Budget Monitoring and Policy Influence. ODI, London. Pazzi, S. and Svetlova, E. (2021), “NGOs, public accountability, and critical accounting education: making data speak”, Critical Perspectives on Accounting, Vol. 92, article 102362. Pollitt, C. and Bouckaert, G. (2004), Public Management Reform: A Comparative Analysis. 2nd edn, Oxford University Press, Oxford. Rahaman, A., Neu, D. and Everett, J. (2010), “Accounting for social-purpose alliances: confronting the HIV/AIDS pandemic in Africa”, Contemporary Accounting Research, Vol. 27 No. 4, pp. 1093–1129.

Accounting, accountability and governance in non-governmental organizations  299 Roberts, J. (1991), “The possibilities of accountability”, Accounting, Organizations and Society, Vol. 16 No. 4, pp. 355–368. Roberts, J. (2003), “The manufacture of corporate social responsibility: constructing corporate sensibility”, Organization, Vol. 10 No. 2, pp. 249–265. Roberts, J. (2009), “No one is perfect: the limits of transparency and an ethic for ‘intelligent’ accountability”, Accounting, Organizations and Society, Vol. 34 No. 8, pp. 957–970. Romzek, B.S. and Johnston, J.M. (2005), “State social services contracting: exploring the determinants of effective contract accountability”, Public Administration Review, Vol. 65 No. 4, pp. 436–449. Romzek, B.S., Leroux, K. and Blackmar, J.M. (2012), “A preliminary theory of informal accountability among network organizational actors”, Public Administration Review, Vol. 72 No. 3, pp. 442–453. Romzek, B.S., Leroux, K., Johnston, J.M., Kempf, R.J. and Piatak, J.S. (2014), “Informal accountability in multisector service delivery collaborations”, Journal of Public Administration Research and Theory, Vol. 24 No. 4, pp. 813–842. Salamon, L.M. and Anheier, H.K. (1992a), “In search of the non-profit sector. I: The question of definitions”, VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, Vol. 3 No. 2, pp. 125–151. Salamon, L.M. and Anheier, H.K. (1992b), “In search of the non-profit sector. II: The question of definitions”, VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, Vol. 3 No. 3, pp. 267–309. Scherer, S.C. (2017), “Organizational identity and philanthropic institutions”, Nonprofit Management and Leadership, Vol. 28 No. 1, pp. 105–123. Schillemans, T. (2013), “The public accountability review. A meta-analysis of public accountability research in six academic disciplines”. Working paper, Utrecht University School of Governance. Scobie, M., Lee, B. and Smyth, S. (2020), “Grounded accountability and Indigenous self-determination”, Critical Perspectives on Accounting, Vol. 92, article 102198. Shenkin, M. and Coulson, A.B. (2007), “Accountability through activism: learning from Bourdieu”, Accounting, Auditing & Accountability Journal, Vol. 20 No. 2, pp. 297–317. Simsa, R. (2003), “Fighting heroes, repair-workers or collaborators? Strategies of NGOs and their consequences”, Financial Accountability &Management, Vol. 19 No. 3, pp. 225–242. Smillie, I. (1995), The Alms Bazaar: Altruism under Fire Non-Profit Making Organisations and International Development. Intermediate Technology Publications, London. Tandon, R. (1995), “Board games: governance and accountability in NGOs”. Edwards, M. and Hulme, D. (eds), Non-Governmental Organisation Performance and Accountability: Beyond the Magic Bullet. Earthscan, London, pp. 41–49. Taylor, D., Tharapos, M. and Sidaway, S. (2014), “Downward accountability for a natural disaster recovery effort: evidence and issues from Australia’s Black Saturday”, Critical Perspectives on Accounting, Vol. 25 No. 7, pp. 633–651. Uddin, M.M. and Belal, A.R. (2019), “Donors’ influence strategies and beneficiary accountability: an NGO case study”, Accounting Forum, Vol. 43 No. 1, pp. 113–134. Unerman, J. and O’Dwyer, B. (2006a), “On James Bond and the importance of NGO accountability”, Accounting, Auditing & Accountability Journal, Vol. 19 No. 3, pp. 305–318. Unerman, J. and O’Dwyer, B. (2006b), “Theorising accountability for NGO advocacy”, Accounting, Auditing & Accountability Journal, Vol. 19 No. 3, pp. 349–376. Wallace, T., Bornstein, L. and Chapman, C. (2006), The Aid Chain: Coercion and Commitment in Development NGOs. ITDG Publishing, London. Westerdahl, S. (2001), “Between business and community: as accounting practice”, Financial Accountability & Management, Vol. 17 No. 1, pp. 59–72. World Bank (2003), Bank/Fund Collaboration on Public Expenditure Issues. World Bank, Washington, DC, available at: https://​documents​.worldbank​.org/​en/​publication/​documents​-reports/​documentdetail/​ 157391468764376114/​bank​-fund​-collaboration​-on​-public​-expenditure​-issues (last accessed 8 October 2021). Yasmin, S. and Ghafran, C. (2019), “The problematics of accountability: internal responses to external pressures in exposed organisations”, Critical Perspectives on Accounting, Vol. 64, article 102170. Yasmin, S., Ghafran, C. and Haniffa, R. (2018), “Exploring de-facto accountability regimes in Muslim NGOs”, Accounting Forum, Vol. 42 No. 3, pp. 235–247.

300  Handbook of accounting, accountability and governance Yates, D., Gebreiter, F. and Lowe, A. (2019), “The internal accountability dynamic of UK service clubs: towards (more) intelligent accountability?”, Accounting Forum, Vol. 43 No. 1, pp. 161–192. Yesudhas, R. (2019), “Towards an era of official (involuntary) accountability of NGOs in India”, Development in Practice, Vol. 29 No. 1, pp. 122–127.

Accounting, accountability and governance in non-governmental organizations  301

APPENDIX 1 Table 13A.1

Table of empirical research in accounting, accountability and governance in NGOs since 2000

Researchers

Research context Research approach Broad findings

Westerdahl (2001)

Swedish

Ethnographic and

development

ethnomethodological accounting. A community based on trust lives a life beyond

cooperative

methods.

formal accounting, impossible and probably meaningless to

Hierarchical

measure, demonstrating the need for complements to statements

and methodology There is a limit as to what can be achieved by hierarchical

based on numbers. Goddard and Assad

Tanzanian welfare Grounded theory,

Accounting practices are primarily aimed at helping secure

(2006)

NGOs

funding by demonstrating the legitimacy of the NGO to

legitimacy

existing and potential funders with perceptions of legitimacy changing over time. Davison (2007)

UK welfare NGO

Barthes’ theoretical

Considers the accountability of NGOs through an examination

work on photography of an Annual Review front cover photograph. O’Dwyer and Unerman Irish welfare

Hierarchical, holistic NGOs sought to create a partnership with the

(2007)

funder that embraced a form of holistic accountability.

O’Dwyer and Unerman Irish advocacy (2008)

Hierarchical, holistic Conceived holistic accountability as a combination of

NGO

hierarchical and downward accountability. Hierarchical conception of accountability had begun to dominate external accountability discourse and practice.

Bell et al. (2009)

Kenyan

Bourdieu’s concept

development fund of field

Accountability is implicated in the struggle between organizational fields, as a mechanism through which each seeks to augment its capital through exercising control over what is accounted for and to whom.

Goddard and Assad

Tanzanian welfare Grounded theory,

Overseas donors were the stakeholders with the highest salience

(2010)

NGOs

and they significantly influenced accountability relationships

stakeholder theory

and accounting processes and practices within NGOs. There appeared to be little accountability by NGOs to beneficiaries. Moreover, accounting was virtually unemployed in internal decision-making. Rahaman et al. (2010) Ghanaian NGO field

Hierarchical,

Accounting assisted funders by providing information that

upwards

allowed them to direct specific actions and enable a form of discipline. However, they also showed how accounting sometimes can conflict with the social-purpose activities.

Chenhall et al. (2010)

Australian welfare Bourdieu, social

Different combinations of controls were related to different

NGO

forms of social capital and attempts to introduce formal controls

capital

such as budgets failed as they were overly focused on obtaining and managing finance and were introduced coercively. Theatrical analysis

Actors jeopardize their goals by adhering to a number of

Everett and Friesen

Three UK

(2010)

humanitarian relief informed by Beckett contradictory scripts related to neutrality, commerce and performance. It further demonstrates the inseparability of

NGOs

technical and moral accountability. O’Dwyer and Unerman Rights-based NGO Hierarchical,

Questioned the rhetorical commitments to downward

(2010)

accountability embedded in the rights-based approach.

downward

302  Handbook of accounting, accountability and governance Researchers

Research context Research approach Broad findings

Awio et al. (2011)

Uganda, welfare,

Hierarchical,

NGOs augmented formal accountability duties to funders with

Grass Roots

downward

“bottom-up” accountability to their service beneficiaries.

and methodology

Organisation (GRO) Chenhall et al. (2013)

UK welfare NGO

Stark’s concept

Debates and struggles over the design and operation of

of “organizing

a performance measurement system affected the potential for

dissonance”

productive debate and compromise between different modes of evaluation. Accounts can create sites that bring together (or push apart) organizational actors with different evaluative principles.

Taylor et al. (2014)

Australian welfare Hierarchical,

Downward accountability, enacted in the context of

NGOs

charitable deeds-based recovery actions, was devoid of

downward

principal–agent expectations and in the context of a natural disaster, downward accountability did not sit well in a stakeholder-orientated accountability framework. O’Dwyer and

Dutch NGO

Hierarchical, upward NGOs were proactively involved in steering the funder

Boomsma (2015)

towards accountability requirements suited to their particular circumstances. This shows the conditions under which NGO-preferred conceptions of accountability can gain (but also lose) influence among key funders.

Duval et al. (2015)

Canadian funding

Hierarchical,

The prescriptive arrangement of information in application

agency

upwards

forms led to a representation of NGOs as “financially inclined performers” who delivered results as defined by funders. The agency was shown to impart normative views privileging narrow performance focused on hierarchical accountability over social obligations.

Hall (2017)

UK volunteering

Strategizing

NGO

The study examines the process of “crafting compromises” whereby organizational members make mutual adjustments and concessions to reach consensus on new strategic plans and positions.

Hierarchical/

The fieldworkers’ perception of upward accountability was

Agyemang et al.

North Ghana

(2017)

development NGO upward

one of external control and they enacted a skilful form of

fieldworkers

compliance accountability. Fieldworkers craved a voice in the development of upward accountability, thereby enabling them to fulfil their sense of felt responsibility to beneficiaries.

O’Leary (2017)

Indian rights-based Hierarchical,

Accountability to beneficiaries was not merely a process of

NGOs

providing a post-hoc account of NGO activity within which

downward

beneficiaries participated. The NGOs perceived themselves to be accountable for the enactment of certain promises and outcomes within their communities. Marini et al. (2017)

South African

Hierarchical,

microfinance NGO downward

Four factors were critical to downward accountability: design; appreciation of the local culture; the nature of its distribution by fieldworkers; and its responsiveness to the clients’ perspective. The paper problematizes downward accountability by illustrating how certain accountability tools need to be tailored to the needs of “clients”.

Accounting, accountability and governance in non-governmental organizations  303 Researchers

Research context Research approach Broad findings

Martinez and Cooper

Guatemala and

(2017)

El Salvador NGO

and accountability requirements are implicated in the

field

so-called disarticulation of a social movement. It highlights

and methodology Governmentality

This paper examines how international development funding

how accountability enables a form of governance that makes possible the emergence of certain entities, while restricting others. Marini et al. (2018)

South African

Post-colonial culture. In the first space of hybridity, translation shaped an

microfinance NGO Bhabha’s concepts of accountability that aimed at leveraging local cultures. The spaces of hybridity

second was the interaction between oral and written cultures and the translation of responsibilities and expectations, prioritizing accountability practices consistent with organizational requirements.

Dewi et al. (2019)

Volunteers

Bourdieu’s concepts Participation of volunteers in the NGO’s programmes became of habitus and social a practice that drew on the cultural and social capital embodied and cultural capital

by volunteers and institutionalized by the NGO’s value base, while it aided the formation of patterns of beneficiary accountability.

Cordery and Sim

UK NGOs

(2018)

Survey/stakeholder

Highlights differences in to whom NGOs across different

and accountability

categories (or types) perceive themselves to be accountable,

theory

what for and the different practices they undertake to discharge accountability. NGOs weight upwards and downwards stakeholders equally and undertake voluminous reporting.

Islam et al. (2018)

International NGO Legitimacy theory, regulators

The findings show that anti-bribery disclosures are positively

media agenda-setting associated with the activities of the media and NGO initiative theory

to counter bribery. The findings also show that companies

and responsive

make anti-bribery disclosures to maintain symbolic legitimacy

regulation

but are less prominent in effecting a substantive change in their accountability practices.

Uddin and Belal (2019) International NGO Hierarchical, holistic Powerful stakeholders like donors can use direct and indirect influence strategies to facilitate NGO accountability towards beneficiaries. Yates et al. (2019)

UK welfare NGOs Roberts’ socializing forms of

Goncharenko

Advocacy NGOs

(2019)

The usefulness of formal management accounting controls was challenged and sometimes subverted in favour of a more

accountability

intelligent accountability dynamic at the grassroots level.

Stakeholder theory

Accountability agenda and related practices of advocacy

and netography

NGOs is determined by the interrelated threats of financial vulnerability, potential loss of independence, legitimacy challenges and the high level of public scrutiny.

Denedo et al. (2019)

Human rights

Hierarchical

Alternative accounts demanded greater accountability from

NGOs in Niger

horizontal/dialogic

others, made visible problematic activities, building capacity

Delta

action and

and networks for change and addressed power imbalances.

accountability

NGOs and local community representatives asserted that the production and communication of accounts of their suffering were making a difference.

Cordery et al. (2019)

Survey of NGOs

Institutional logic

While the majority of the survey respondents believe that there is a need to develop international standards related to non-profit organization reporting, there are tensions/conflicts in their beliefs.

304  Handbook of accounting, accountability and governance Researchers

Research context Research approach Broad findings

Kuruppu and Lodhia

Sri Lanka NGO

Bourdieu’s concepts Accountability shaped by struggles among stakeholders

(2019)

field

of habitus, capital,

within a rapidly shifting field. NGO’s identity was shaped

doxa and field

within a complex and shifting context and suggests NGO

and methodology

accountability is inevitably determined by powerful actors who possess legitimacy and power and use this to shape the habitus and the doxa embedded within a field. Yasmin and Ghafran

UK Muslim NGOs Kearns’ strategic

Muslim NGOs become “exposed” organizations where

analysis and Roberts/ demands for accountability, framed by security and

(2019)

Messner/McKernan/ counter-terror concerns, limit their ability to be accountable. Butler approaches to Discretionary accountability tactics allow the NGOs to gain accountability

trust of stakeholders. Strategic change processes help the NGOs

Ethnographic case

Develops the concept of grounded accountability, which

study, grounded/felt

locates practices of operational NGOs within the culture of

accountability

the communities they serve. To the extent that grounded

to anticipate and negotiate heightened accountability demands. Scobie et al. (2020)

New Zealand

accountability exists, it overcomes some potential limitations of perpetuating beneficiary dependency inherent in felt accountability. Goncharenko and

Russian human

Hierarchical

Shows the potency of accounting in enabling governments to

Khadaroo (2020)

rights

upwards/Foucault

use the pretext of visibility to indirectly achieve an outcome. It examines how an accounting regulation was utilized to discipline human rights organizations and their members of staff.

O’Leary and Smith

Australian welfare Bakhtin’s dialogism

Accounting reports related to performance and impact gradually

(2020)

NGO

moved along a continuum from being received in authoritative mode to internally persuasive mode and how, as a result, resistance to an authoritative discourse of accountability was created and maintained.

Goddard (2021)

UK and African

Bourdieu’s concepts Dominance of Northern NGOs, resulting from their ownership

welfare NGOs

of habitus, capital,

and control of capital, in influencing accountability perceptions

doxa and field

and the importance of legitimacy. The importance of habitus and doxa underpinning conceptions and practices of accountability and accounting.

Pazzi and Svetlova

Italian advocacy

Rubenstein’s

Extends Rubenstein’s idea of surrogate accountability by

(2021)

NGOs

concept of surrogate

pointing to education as an important element of informational

accountability

surrogates’ activities. Highlights the emancipatory potential of a specific type of accounting education coupled with internet access to data.

Cazenave and Morales French (2021)

Hierarchical upward Shows the influence of evaluation systems on NGOs. NGOs

humanitarian

can react to regain control over their work and turn the frames

NGOs

of evaluation and accountability to their own advantage. However, the NGO preferred to promote a very narrow view of its performance, based solely on accounting compliance.

Accounting, accountability and governance in non-governmental organizations  305 Researchers

Research context Research approach Broad findings

Gazzola et al. (2021)

Italian NGOs

and methodology Sustainability

Links between sustainability and Italian percentage-tax law are

reporting

identified. Sustainability reporting offers social advantages for NGOs. The higher the funding received, the higher the level of sustainability reported. The capture of sustainability and social impact is diverse in practice.

Dewi et al. (2021)

Indonesian welfare Hierarchical

Beneficiary accountability does not have to be limited to any

NGO

downward/

formal mechanism of accountability; rather, it needs to be

beneficiary

viewed more widely and connectedly, such as in terms of four

accountability

attributes: casually demanded, action based, quasi-instrumental and focusing on beneficiary self-reliance.

14. Accounting, accountability and governance in hybrid organizations Enrico Bracci and Nadra Pencle

OVERVIEW Hybrid organizations are ubiquitous and their accounting, accountability and governance structures can be complex. We broadly refer to hybrid organizations as those organizational forms where public, private and civil societies interact through various logics, ownerships, funding sources and forms of control. In this chapter, we aim to provide a thought-provoking synthesis of the empirical and theoretical works that address the complex relations among accounting, accountability and governance within hybrid organizations. We examine some of the accounting and accountability systems adopted by hybrid organizations and how those impact and are impacted by the hybrid’s governance structures. We address questions related to the adequacy of existing accounting and accountability theories in the context of hybrid organizations. We anticipate that hybrids will continue to morph and evolve, and so we conclude this chapter by highlighting knowledge gaps that can serve as new paths to further discoveries at the unique intersection of hybrids, accounting, accountability and governance domains of study.

1. INTRODUCTION Since the mid- to late 20th century, we have seen a proliferation of organizations that seek to combine multiple institutional logics to address complex societal and business problems. Such organizations can be collectively classified as hybrids. Hybrid organizations represent an interwoven set of economic and social actors involved in addressing complex problems at macro-, meso- and micro-organizational and societal levels. We broadly refer to hybrid organizations as those organizational forms where public, private and civil societies interact through various logics, ownerships, funding sources and forms of control (Vakkuri et al., 2021). The typologies of what form hybrid organizations can take are growing from social enterprises to public–private partnerships, from corporatized public service institutions (for example, universities) to state-owned enterprises, from non-profit organizations to benefit corporations. Scholars and practitioners alike have outlined a variety of reasons to explain why hybrids are typically formed and operated. Notwithstanding the specificity of the reasons for the hybrid formation and operation, the United Nations (UN) 2030 Sustainable Development Goals (SDGs) have made it clear that public policies and private efforts are entangled with an interplay among domains of public, private and civic actions (Abhayawansa et al., 2021; Bebbington & Unerman, 2018). The UN aims to achieve 17 SDGs along with 169 related targets, addressing specific issues related to global poverty, hunger, health, education, climate change, gender equality, sanitation, energy, water and environmental and social justice. 306

Accounting, accountability and governance in hybrid organizations  307 These goals will require action on global, national, state, company and individual levels. Such entanglements create various hybrid relationships at the macro, meso and micro levels. Research has focused on the role of global accounting, governance and accountabilities in attaining the SDGs (Abhayawansa et al., 2021). Stated differently, these goals create the need for various levels of inter-dependencies, accounting, governance and accountabilities for all involved. Like all business forms, this entanglement will require structures and procedures to function sustainably and continue as a going concern. Such structures and procedures are most evident in hybrid organizations’ governance, accounting and accountability. Therefore, this chapter aims to provide a thought-provoking synthesis of the empirical and theoretical works that address the complex relations among accounting, accountability and governance in hybrid organizations. We specifically examine some of the main accounting and accountability systems adopted by hybrid organizations. Attention is also paid to how the hybrid’s governance structures impact those systems and are in turn impacted by such systems. We will also attempt to answer questions related to the adequacy of existing accounting and accountability theories in the context of hybrid organizations. According to Grossi and Thomasson (2015), we are living in an era of increased hybridization of organizations. As such, we anticipate that hybrids will continue to morph and evolve, and so we conclude this chapter by highlighting knowledge gaps that can serve as new paths to further discoveries at the unique intersection of hybrids, accounting, accountability and governance domains of study.

2.

HYBRID ORGANIZATIONS: DEFINITIONS, CHARACTERISTICS, TYPOLOGIES

The entanglement among public, private and civic actions manifests itself in the form of competing multiple logics, mixed ownership, goal incongruence and different funding arrangements. The interplay and bidirectional relationships among these factors are depicted graphically in Figure 14.1. These various entanglements therefore in turn affect the governance of hybrid organizations by means of the accounting and accountability structural and procedural arrangements. Stakeholders of hybrid organizations, both internal and external, are calling for new and increasing demand for legitimacy, transparency and control (Baudot et al., 2020, 2022). We propose that a fundamental understanding of governance, accountability and accounting precede fulfilling such stakeholders’ demand. We lay that foundation in this section. Accounting, accountability and governance are relatively difficult concepts for the academics and practitioners to agree upon within a typical for-profit or not-for-profit entity. Within hybrid organizations, these concepts and their relationships to each other are further complicated by the multiple constituents and logics that hybrids serve. Therefore, before proceeding, a consideration is taken in this section to understand the nature of hybrids. We undertake this task with the understanding that within the hybrid settings, concepts are notoriously “difficult to define, and measures and tools difficult to agree upon” (Weichselberger & Lagström, 2022, p. 706).

308  Handbook of accounting, accountability and governance  

Source: Adapted from Johanson and Vakkuri (2017).

Figure 14.1

Accounting and accountability in hybrids: a conceptual view

Extant literature has provided us with multiple definitions and characterizations for hybrid organizations. Despite the variety of definitions and characterizations, scholars tend to agree that hybrid organizations offer a mix of modalities in terms of tangibility or intensity of services offered (Bos-Nehles et al., 2017; Grossi et al., 2020); ownership (Thynne, 2011); structural arrangements and stated objectives (Conrath-Hargreaves & Wüstemann, 2019; Pache & Santos, 2013); stakeholders served (Baudot et al., 2020, 2022); and institutional logic adopted (Grossi et al., 2020). Therefore, throughout this chapter, we will adopt Vakkuri et al.’s (2021) definition of hybrid organizations based on the characteristic of its breadth. According to these authors, hybrid organizations represent the “interaction among public, private and civil society via distinct modes of ownership, parallel but often competing institutional logics, diverse funding bases and various forms of social and institutional control” (p. 246). Collectively, hybrid organizations represent various “forms of organizing concepts, modes or perspectives” (Grossi et al., 2017, p. 379). Hybrids operate at the intersection and extended boundaries of diverse organizations and practices and have been referred to as an “impure” organizational type existing “between pure types” (Johanson & Vakkuri, 2017, p. 15). Stated differently, hybrids are heterogeneous organizations that bring together two or more separate and different elements to contexts, and the elements are constantly added, layered, blended, and recombined (Miller et al., 2008; Stafford & Stapleton, 2022; Weichselberger & Lagström, 2022). In fact, recent empirical work by Stafford and Stapleton (2022, p. 950) describes in some detail “significant differentiation in how multiple logics engage at different levels and in varying combinations” within hybrids. Therefore, it is contended that hybrid organizations

Accounting, accountability and governance in hybrid organizations  309 are not necessarily a simple dichotomy of the modalities or elements listed above but rather a phenomenon with its distinctive mix of characteristics (Maine et al., 2020). Hybrids are ubiquitous and can vary considerably in their manifestations. That is, the way the various elements combine and recombine to form hybrid organizations is almost infinite. Hybrids evolve and are typically in differing stages of their formation and reformations. This hybridization process is “continuing and dynamic” (Miller et al., 2008, p. 3). Furthermore, hybrids may stabilize or even temporarily become institutionalized before returning to their evolutionary process (Miller et al., 2008, p. 3). Hence, below we provide some contemporary examples representing the types of hybrids identified and studied by academics, primarily within the accounting and management disciplines. Admittedly, providing the discrete categories for each hybrid described below is daunting and not necessarily productive. Therefore, we adhere closely to how the researchers categorize the institution or phenomenon under investigation (see Table 14.1). Table 14.1

Hybrid organizations: examples of manifestation

Examples of hybrids

References

Regulatory/institutional hybrids

Kurunmäki and Miller (2011)

Agencies

Kickert (2001)

State-owned enterprises

Grossi and Thomasson (2015); Maran and Lowe (2022)

Social enterprises

Ebrahim et al. (2014); Mongelli et al. (2019)

Benefit corporations

Baudot et al. (2020, 2022)

Public–private partnerships

Stafford and Stapleton (2022)

Knowledge-intensive public sector organizations

Conrath-Hargreaves and Wüstemann (2019); Gebreiter and Hidayah (2019);

and higher learning institutions

Bos-Nehles et al. (2017); Grossi et al. (2020)

The extant literature mainly examines regulatory and institutional hybrids. Kurunmäki and Miller (2011) indicate that regulatory hybrids result from “inter-organizational processes, practices, and expertise that are formed from two or more elements that previously existed separately” (p. 221). This broad categorization somehow overlaps with the concept of institutional hybrids. As such, institutional hybrids and regulatory hybrids share an interest in organizational practices that result from the combination of diverse sources of justification in a shifting operating environment (for example, Baudot et al., 2022; Pache & Santos, 2013; Stafford & Stapleton 2022; Vakkuri et al., 2021). Examples of institutional hybrids are benefit corporations (B-Corps), state-owned enterprises (SOEs) or agencies. Arguably, benefit corporations are one of the newer instalments of institutionalized hybrids. Baudot et al. (2020) outline the initial and evolutionary stages related to how legislative actions serve to aid in the institutionalization of B-Corps within the United States. In contrast, Baudot et al. (2022) delve deeper into the rationales of the key players merely adopting third-party certification available to any for-profit entity meeting set criteria as a B-Corp or electing to incorporate as a full-fledged Benefit Corporation (BC). Unlike other hybrids with state or local government funding, such as SOEs, BCs are legally listed as for-profit entities and many BCs are also B-Corps. Stafford and Stapleton (2022) study a more institutionalized type of hybrid known as public–private partnerships (PPPs). Typically, these hybrids integrate resources and/or structures that come from public and private sectors alike. The PPP hybrids typically take the structural form of a limited liability company or special purpose vehicle (SPV). Similar to yet

310  Handbook of accounting, accountability and governance different from PPPs are organizations known as municipal corporations (MCs). According to Maine et al. (2020, p. 3), these hybrids combine “public non-profit and private for-profit characteristics”; however, they “might not be considered hybrid in terms of ownership” since they are fully owned by governmental agencies. The authors suggest that municipal corporations are “located in a twilight zone” since these hybrids are simultaneously oriented towards the needs of both public and private stakeholders (Maine et al., 2020, p. 3). Institutions of higher learning, such as in public universities, also present an interesting type of hybrids that researchers and others may not fit neatly into any category (Conrath-Hargreaves & Wüstemann, 2019; Gebreiter & Hidayah, 2019). Conrath-Hargreaves and Wüstemann (2019) document the role of identity and organizational characteristics during voluntary reorganization by means of a single case study, where this organization is geared towards more autonomy. Gebreiter and Hidayah (2019) use multiple case studies to highlight for us the individual-level responses to professional and commercial logic. They provide insight into the coping mechanisms lecturers employ. Relatedly, researchers are delving into hybrids referred to as knowledge-intensive public organizations (KIPOs) (Bos-Nehles et al., 2017; Grossi et al., 2020). Collectively KIPOs include organizations that offer expert services that are considered “knowledge-intensive” with the objective of creating public value (Bos-Nehles et al., 2017; Grossi et al., 2020). Examples of KIPOs include education, healthcare, security, transport and social services organizations. Such organizations are considered hybrids since they are predominantly public organizations that provide knowledge-intensive services shifting “toward adopting private-sector practices” in varying degrees (Grossi et al., 2020, p. 257). KIPOs’ hybridity exists on multiple levels, including “interorganizational structure, roles, work practices, knowledge and management systems that operate in the gray area between the public and private sectors” (Grossi et al., 2020, p. 257). KIPOs are complex and thus create multiple decision-making challenges in the areas of governance, accounting and accountability. In this section, we have provided an understanding of the hybrids. As the above examples demonstrate, as a phenomenon, hybrid organizations are complex and, accordingly, require a unique set of accounting, accountability and governance structures. The complex interdependent relationships resulting from competing logics and/or values present in hybrids intensify the role of accounting and accountability (Busco et al., 2017). Traditionally accounting is viewed as an art that requires skills and judgement, concerned with recording and classifying transactions, primarily using monetary values, and providing information for decision users. Relatedly, accountability identifies the parties involved in the giving and receiving of accounts as well as what is typically accounted for in the operations of these organizations. Governance typically refers to all mechanisms that determine how organizational resources are used. As we discuss in the next sections, hybridity questions and complicates many of the fundamental understandings of these concepts. We expand our understanding of hybrids and their structural and procedural undertakings. We do this by reviewing and elaborating on pertinent literature at the intersection of governance and hybrids, accountability and hybrids, as well as accounting and hybrids.

Accounting, accountability and governance in hybrid organizations  311

3.

THE GOVERNANCE OF HYBRIDS

Governance is a broad term with different meanings and perceptions and is generally used in different disciplines such as political science, public administration, economics and management (Almquist et al., 2013). Governance in hybrids has been studied from a meso and a micro perspective. A meso governance perspective is concerned with the debate around the steering principles and tools to coordinate and control actors in networks and hybrid organizations, often called public governance (Grossi et al., 2015). A micro governance perspective focuses, instead, on the steering and controlling mechanisms through which power is exercised within hybrid organizations in order to achieve the corporate goals, often called corporate governance. Starting from the meso perspective, public governance refers to all processes undertaken either by government, market or network dealing with the steering and coordination of various actors (Rhodes, 1994). It deals with the interactive processes that take place in those networks (Klijn, 2008), and the accountability in relation to specific goals, which are not limited to service delivery but also to public policies (Grossi et al., 2015). Furthermore, public governance considers that public services and policies are polycentric and involve governmental organizations and private third parties (both for-profit and not-for-profit). In such contexts, governance mechanisms can be formal and informal (Okhmatovskiy et al., 2021). Examples of the former can be performance contracts between the government and the third parties, loan agreements and intermediate ownership structures where the government participates in financing third-party organizations (for example, SOEs). Informal mechanisms relate to external influence through informal interpersonal communication. Studying hybrid organizations from a public governance perspective means examining the underlying institutional and regulatory changes, which help to explain the emergence and the evolution of hybrids. The use of regulatory authority can influence organizational resource allocation, the emergence of new organizational forms and the interplay in many policy contexts of conflicting logics (Convery & Kaufman, 2022). Social enterprises (SEs), SOEs, PPPs and B-Corps are all examples of changes in the regulatory/institutional context creating and diffusing a growing number of hybrids. Regulatory interventions by the state emerge as a primary mechanism through which certain forms of social action are promoted or discouraged. Three primary regulatory manifestations are at play: the way public resources are allocated through legislatively enacted budget (Kaufman & Covaleski, 2019); the emergence of competing logics through legislatively enacted regulation (Kurunmäki & Miller, 2011); and the mixed forms of public and private financial and social control (Vakkuri & Johanson, 2020). We will dedicate subsequent paragraphs to highlighting current research on each of these three public governance perspectives on the emergence and evolution of hybrids. The mode of budget allocation is possibly the most direct and effective means through which hybrid organizations are constituted. Scholars suggest that this form of hybrid formation is typically formal and undertaken publicly to facilitate the resource transfer (Convery & Kaufman, 2022). State-mandated budgetary allocation is well documented in the accounting literature, as scholars seek to uncover how hybrid organizations position their organizations to “secure (or protect) resources allocated by the state” (Convery & Kaufman, 2022, p. 665). Legal threats are opposed to monetary incentives, prompting organizations to undertake activities and the state logic for action (Grossi & Thomasson, 2015). Regulation is also an alternative means through which hybrids emerge. In this case, the state does not provide direct financing but acts by means of legal threat and incentives to influence

312  Handbook of accounting, accountability and governance the behaviour of organizations. Regulation can be either public or private, the former exerted by governmental bodies (for example, ministries, independent regulatory bodies), the latter by market and/or professional bodies (for example, the European Financial Reporting Advisory Group – EFRAG). Also, in this case, the acts of regulation will entail forms of social and financial controls of the markets, professional self-control and customer-driven market control (Vakkuri et al., 2021). Hybrid organizations subject to some form of social and financial control seek to resist the reduction of social and economic costs, to avoid delegitimation. Similar to other forms of hybrids, institutional/regulatory hybrids lead to the coexistence of diverse sources of legitimation and the presence of multiple and competing logics (Pache & Santos, 2013). As Convery and Kaufman (2022) argue, regulation can impose state-logic activity or prevent market-logic activity without the need to transfer public resources. The regulatory manifestations discussed above and the institutional setting have implications for the corporate governance policies and choices at the organization (micro) level. Indeed, regulatory requirements may impose constraints on organizational governance by means of a dominant logic for action and legitimation. The literature indicates that hybrid organization governance structures, processes and mechanisms evolve within their institutionally complex environment (Convery & Kaufman, 2022; Kurunmäki & Miller, 2011). From a micro perspective, we refer to organizational governance, often equated with corporate governance, as all mechanisms that determine how organizational resources are used to achieve the goals of hybrids and resolve conflicts between its various stakeholders (Daily et al., 2003). Organizational (corporate) governance encompasses all the “influences affecting the institutional processes, including those for appointing the controllers and/or regulators, involved in organizing the production and sale of goods and services” (Turnbull, 1997, p. 181). This definition of corporate governance captures the vast array of stakeholders involved in an organization and facilities publicly traded, privately held, for-profit or not-for-profit and all alternative arrangements, hence it covers hybrid organizations. Corporate governance typically includes governance mechanisms such as internal and external control and governing boards. Within a hybrid organization, such mechanisms are tasked with addressing diverse performance objectives to multiple stakeholders. Thus, organizational governance is concerned with both strategy (providing strategic direction) and control (monitoring and ensuring accountability). Organizational governance also provides guidelines for managing relationships (Monks & Minow, 2004; Zahra & Pearce, 1989), defining board composition and functioning (Alexius et al., 2019) and clarifying accountability (Vakkuri et al., 2021). That is, organizational governance is often referred to as the systems and processes by which organizations are directed, controlled and held accountable (Cornforth, 2003). Governance thus includes different types of mechanisms, namely: structures to clarify the responsibilities of the various stakeholders; approaches to foster the capabilities for meeting these responsibilities; and tools for internal and external accountability (Almquist et al., 2013). Therefore, the study of governance in hybrid organizations entails the examination of the balancing of institutional logics in terms of strategic direction and adhering to stakeholders’ interests and the governance approaches and practices that could result from the combination and balancing of logics. Indeed, organizational governance mechanisms are considered crucial in balancing prescriptions from distinct institutional logics (Mair et al., 2015; Spear et al., 2009). The discussion considers which governance master(s) hybrid organizations are to serve. Is compliance with traditional corporate governance required by the law or recommended by codes of practice for for-profit organizations appropriate and, if so, adequately sufficient?

Accounting, accountability and governance in hybrid organizations  313 Should hybrids add compliance with the public sector (for example, The Good Governance Code for Public Services issued by The Independent Commission on Good Governance in Public Services, 2004) or follow a more generic code such as the G20/OECD Principles of Good Corporate Governance issued by the Organisation for Economic Co-operation and Development (2015)? What are, or should be, the power dynamics related to changes and adoption among these two primary structures within a hybrid? Or, finally, should existing governance structures be modified, even cease to exist, and new or different structures be constructed? In part because of the above issues, hybrid organizations’ governance tends to be affected by some specific challenges, which may not be present in for-profit (Spear et al., 2009). In particular, the following challenges emerge: ● The composition of the boards. The recruitment of board members may be affected by external pressures by stakeholders and not solely guided by the search of the most suitable candidate. The presence of external and independent members tend to be a rare case. Alexius et al. (2019) show how the appointment of board members in hybrid organizations is characterized by the negotiation and alignment of diverse, sometime competing, institutional logics. ● The relationships between boards and management. The distinction of roles between the boards and management is often not sufficiently clear-cut. This may lead to two opposing situations. From the one side, a weak board may be readily captured by the more professional management, with the former becoming a “rubber stamp” for management’s proposals. This implies the development of limited controlling and accountability mechanisms. From the other side, the board may go beyond its role by meddling in day-to-day operational activities and decision-making. Drawing a clear boundary between operational and strategic considerations is important, with this distinction between management and board members being inherently difficult (Cornforth, 2003). ● Balancing between social and financial goals. Hybrid organizations, by definition, attempt to compose different institutional logics coming from different stakeholders with different goals. Differently from for-profit organizations, there is no financial primacy, but also differently from public sector organizations, there is no social primacy. Social and financial goals are both to be pursued with difficult trade-offs. Hybrid organizations run into the risks of mission drift and financialization (Ebrahim et al., 2014) because of a tendency to reduce complexity by measuring results in financial terms. Corporate governance mechanisms and the interplay between opposing logics can attenuate the pervasive effects of financialization in contemporary society (Modell & Yang, 2018). Corporate governance is important in the context of institutional plurality as it protects organizations from the pressures and inferences of multiple and often competing stakeholders’ objectives, which translates into organizational goals. The existence of multiple goals evokes ambiguity in accountability, performance assessment and evaluation. These factors, in turn, may lead to a legitimacy deficit of hybrid organizations (Zuckerman, 1999). Governance as a means to foster legitimacy may reduce such a deficit and act as a valuable signal for external stakeholders (Townsend & Hart, 2008). That is, governance can provide important organizational mechanisms for successfully and continuously balancing and combining multiple logics to ensure hybrid organizations remain legitimate and preserve their credibility (Reay & Hinings, 2009).

314  Handbook of accounting, accountability and governance For example, in SOEs, corporate governance can be designed to combine public governance and private governance mechanisms to address complex challenges that cannot be effectively handled only through private systems (OECD, 2015; Okhmatovskiy et al., 2021). As Bruton et al. (2015) argue, the increasing hybridization of SOEs affects their institutional and organizational settings and structures, also by combining governance modes and practices to handle different, and sometimes competing institutional logics. These attempts to balance competing logics may lead to unintended consequences, such as long and inconsequential decision-making processes, lack of a clear strategy and different performance objectives, which are examples of dysfunctionalities. Likewise, governance arrangements may let a single and even narrow institutional logic prevail, rendering the monitoring and accountability mechanisms ineffective (Stafford & Stapleton, 2017). In hybrid organizations, corporate governance arrangements are expected to comprise different stakeholders’ requirements, aspirations and expectations. This poses a trade-off to governance structures and mechanisms, which should be able from one side to satisfy different parties’ needs and, from the other, avoiding too rigid and formalistic procedures. The management of plural logics may thus represent a resource for innovation, legitimation and long-term sustainability. Indeed, dissenting hybrids develop governance structures and processes that allow them to effectively involve and satisfy a variety of stakeholders, pursue multiple and often conflicting goals and engage in divergent or inconsistent activities (Mair et al., 2015). Governance constitutes a critical mechanism to balance institutional logics and to foster and protect external and internal legitimacy where there are conflicting social and financial goals. Ebrahim et al. (2014) highlight the importance of governance mechanisms such as governing boards to address the challenges of being effectively accountable for dual performance objectives and to multiple stakeholders. Governing boards of hybrid organizations carry out important fiduciary and oversight functions, while being responsible for strategic decision-making. As Mair et al. (2015) argue, governance mechanisms may be moulded by conforming to a prevalent institutional logic or combining logics. On the one hand, these authors refer to the former as conforming hybrids, where the governance approach is aligned with the prescriptions of corporate governance. In such contexts, the commercial logic tends to prevail over other logics, be it social or state. On the other hand, hybrid organizations may attempt to balance conflicting institutional logics in their governance structure. Mair et al. (2015) define such organizations as dissenting hybrids and identify three potential patterns: defiance, selective coupling and innovation. Defiance occurs when there is an active rejection of having to choose between competing logics. Selective coupling refers to the careful picking of governance tools associated with both logics. Dissenting hybrids is present when the attempt to compose more logic at the time leads to innovation and development of new governance practices and mechanisms. In summary, governance in hybrid organizations plays a crucial role for mixing, compromising the different and oftentimes competing values (Grossi et al., 2021). Attention should be given both at the meso and micro governance level that we called public governance and corporate governance. The two levels are strictly correlated as the meso relate to the institutional relations among public, private and hybrid actors, which inevitably will influence the micro level and the way internal controls operate and the functioning of the boards.

Accounting, accountability and governance in hybrid organizations  315

4.

ACCOUNTABILITY AND ACCOUNTING TECHNOLOGIES IN HYBRIDS

Accounting and accountability are related but separate concepts; they share an interdependent bidirectional relationship. Accountability can be broadly conceptualized as a communicative interaction between an accountor and an accountee. An accountor accounts for his/her own behaviour and results to the latter and incurs in potential negative/positive consequences (Roberts & Scapens, 1985). This giving of an account usually takes the form of reports and disclosures that specify how the organizational actors used the resources that are under their control. Accounting is affected and, in turn, affects accountability. Typically, the report and disclosures used in an accountability system are artefacts of the organization’s accounting systems. Accountability, therefore, requires the accountor to have or to feel the duty to give an account to the accountee, which has the authority/power to impose direct/indirect sanctions. Accountability is external in that the accountor (an individual, an organization, a group) gives an account to some other forum; it is to be considered first as a process with an interactions/communication between the actors involved. In this process, formal and informal means can be deployed by the accountor to be answerable to the relevant others (Dubnick, 2005). This basic definition reveals how hybrid organizations’ accountability systems are affected by their own nature. Indeed, hybrid organizations’ arena is characterized by multiple accountability forums (Convery & Kaufman, 2022), leading to multiple and sometimes competing forms of accounts. Multiple accountabilities result from conflicting expectations, goals, institutional pressures and complexities that have significant impact on the accountability mechanisms and technologies. It may be difficult to combine and/or prioritize between different expectations of the several accountability forums. Hybrid organizations tend to have multiple responsibilities and associated responsibility that vary greatly in terms of its nature and the intertwining of competing logics (Baudot et al., 2020). The accountability systems may also result in nebulous and indeterminate means, such generic annual reports, when competing interests are not orderly managed (Baudot et al., 2022). Romzek and Dubnick (1987) refer to the “accountability dilemma” that may occur when the accountor is unable to solve the problem of many forums and under the conditions of multiple accountability relationships. Typically, the principal–agent theory is diffusely used to predict the model of how accountability functions and evolves, although it has strong limits in providing guidance in complex institutional contexts (Schillemans & Busuioc, 2015). A principal–agent perspective conceives accountability as a problem of agency and control, where agents try to get asymmetric information capital to serve its own interests and escape accountability if possible. This view of the accountability relations is not sufficiently robust to predict behaviour as well as means deployed in complicated accountability webs, leading to malfunction or even tragedy (Romzek & Dubnick, 1987). Given the mixing of market, politics and social/communal principles, a hybrid organization can create difficulties applying traditional accountability principles (Johanson & Vakkuri, 2017). In hybrid organizations, the accountability structures tend to be inherently complex and ambiguous, given the multiple responsibility towards stakeholders with competing interests. Hybrids can create barriers to accountability because of the potentially ambiguous blending of institutional logics, goals and forms of control (Rajala & Kokko, 2022). The hybridization of many traditional public sector organizations, for example, has eroded the traditional notion

316  Handbook of accounting, accountability and governance of accountability. According to Willems and van Dooren (2011), hybridization weakens political control while simultaneously emphasizing the performativity function of accountability, in this respect, creating an accountability system in which performance is measured by the extent to which stated goals are achieved. While the relationship between principals and agents remains a key factor, accountability in hybrid organizations moves beyond the concept of a single upward relationship (rooted in hierarchy) or a downward relationship (rooted in communal and social relations). Accountability in hybrid organizations for effectiveness needs to consider the horizontal relations to, and from, different bodies not part of the traditional hierarchical line of relations (Stafford & Stapleton, 2022). As Ebrahim et al. (2014) argue, in the context of hybrid organizations (social enterprises in their case), accountability “for what” balances the dual performance objectives of combining social and business outcomes and raises the roles of monitoring both activities and actors concerned. Therefore, the answer to the “for what” question also has implications for the governance of hybrid organizations. Ensuring accountability means defining the organization’s mission and goals in terms of both financial and social performance (Ebrahim et al., 2014). This has relevant implications for the presence/absence of general accepted standards and principles to account for social performance. The lack, in most contexts, of compulsory requirements of standards and quality assurance mechanisms makes accountability technologies in hybrid organizations unable, at best, to fulfil the duality of their nature. Likewise, Ebrahim et al. (2014) also highlight the risk of hybrids suffering from mission drift due to the difficulties in accounting for the social performance, which is usually measured through outcomes, compared to the more easily accessible and comparable financial performance. Mission drifts, however, are not always undesirable when those shifts are coupled with mission work, maintaining the legitimacy from multiple stakeholders (Grimes et al., 2019). Regarding the “to whom” question, hybrid organizations have specific implications coming from the governance structure. The presence of multiple accountability forums, as addressed, is not unique to hybrid organizations, but it is more compelling than in private firms and public sector organizations. The issue is related to the way in which the interests of various stakeholders can be aligned (Ebrahim et al., 2014) and prioritized. Extant literature suggests that besides the multiple stakeholders, or demanders of accountability by stakeholders who are involved, the process requires the identification of appropriate upward and downward (vertical) streams of accountability. However, we would add the third, horizontal stream identified by Shaoul et al. (2012), as an account needs to be delivered from the private sector to the public sector partners. As Dillard and Vinnari (2019) argue, the accountability system should be aligned with the responsibility networks with the latter representing “dialogically constructed sets of salient concerns/issues” (p. 21) to be addressed through the account-giving. That is, the means of giving account, and the dimensions of the account, should come from the responsibility networks and the interfaces with the interested constituents. Through outward accountability, organizations attempt to achieve external legitimacy for their actions, which will depend on the ownership structure, funding arrangements and goals, requiring constant negotiation and communication for their existence (Vakkuri & Johanson, 2020). Managers in hybrid organizations express the pluralistic set of responsibility towards the different constituencies by setting plural performance objectives. In so doing, the accounting and related accountability means are bent towards the expectations of different constituents beyond the shareholders,

Accounting, accountability and governance in hybrid organizations  317 such as employees, customers, suppliers and others (Baudot et al., 2020). This involves the development of both horizontal and vertical accountability relationships (Schillemans, 2008). Scholars argue that the traditional accounting systems constrain accountability and are designed to produce financially orientated reports that a priori favour financial/economic stakeholders. In fact, Dillard and Vinnari (2019) refer to the accountability that results from such systems as “accounting-based accountability”. Instead, they argue for the adoption of a dynamic and interactive accounting system that focuses on a broad array of stakeholders’ informational needs and uses financial and non-financial information. They refer to such a system as “accountability-based accounting”. Furthermore, Grossi and Thomasson’s (2015) work highlights the fact that hybrids cannot simply “secure accountability hierarchically” but, in addition, need to also “now secure [accountability] horizontally” from their constantly changing heterogeneous group of stakeholders (p. 605). Because of the diverse nature of the components of the stakeholder group typically served by hybrid organizations, a traditional accounting or accountability system would, most typically, not be ideal. Information requirements within and across stakeholder groups will differ, and the hybrid will thus need to produce various reports and disclosures to satisfy such needs. Following Willems and van Dooren (2011), Grossi and Thomasson (2015) reject the idea of simply embedding horizontal accountabilities into existing vertical systems. Instead, Grossi and Thomasson (2015) propose a “multidimensional approach in which accountability is claimed in different forums could be a way to increase the ability to hold responsible people to account for their decisions” (p. 617). According to Schillemans (2008), horizontal accountability arrangements address peers and stakeholders in general outside the traditional, hierarchical principal–agent relationship. This assumption does not necessarily hold in every hybrid organization, as it may depend on the priority given to each stakeholder (Yetano & Sorrentino, 2021). In their study, Yetano and Sorrentino (2021) showed how the disclosure of non-financial information might not have prominence in a hybrid organization, if it is considered part of a distant accountability relationship, rather than a critical accountability one. And the distance and the critical nature of the accountability will depend on whether managers prioritize some constituents over others, and whether some motivating factors or “attractors” are in place. Baudot et al. (2022) show how the “B-Corp” certification may enable and constrain the way hybrid organizations conceive their responsibility and accountability. French and Mollinger-Sahba (2021) demonstrate how the UN’s SDGs may act as performance attractors influencing the development of performance indicator construction, particularly in inter-organizational contexts. The above discussion leads to the concept of ethics on accountability. This term was coined by Dillard and Vinnari (2019) and refers to the principle that organizations recognize that they are part of a wider community and societal institutions and, therefore, they should accept their responsibility and obligation for the long-term sustainability of the wider community. Consequently, accountability becomes more horizontal in nature as well as more dialogical. Dialogical accountabilities resonate with the establishment of an ideal communication (Smyth, 2012), considering the pluralism of interests when considering accountability systems. Dillard and Vinnari (2019) propose to invert the dialogical relationship between accounting and accountability, moving from an accounting-based accountability system to an accountability-based accounting. This means considering the information needs of constituents first, not limiting accountability to an economic/market-based logic, but rather opening to relevant interests.

Figure 14.2

Hybrid accountability: an input–output representation

Source: Adapted from Rajala and Kokko (2022).

318  Handbook of accounting, accountability and governance

Accounting, accountability and governance in hybrid organizations  319 Overall, accountability in a hybrid organization is linked to the specific nature and the relationships created, and the obligations and requirements accepted by its governance and the public forums. Figure 14.2 summarizes these relationships, in an input–output view, and the complexity of what we can call hybrid accountability (Rajala & Kokko, 2022). The typical accountability questions (To whom? For what? What direction? By what means? And via what mode?) are affected by six elements (ownership, governance and operational priorities, distinctive human resources, distinctive other resources and financial resources, goal incongruence, and institutional logics). The ownership structure influences the definition of the primary account-holders. However, other accountability forums may be present in relation to the governance and operational priorities and the presence of distinctive resources providers. Other characteristics, such as the distinctive human resources, affect who is accountable (for example, politicians, managers, professionals). Goal incongruence may affect the different values that account-holders should take into consideration when providing accountability and when subject to judgement. Finally, the presence of multiple institutional logics affects the interpretative schemes both of account-givers and account-holders. As such, hybrid organizations can benefit from the accounting system conceptualized as accountability-based accounting facilitated by means of vertical and horizontal stakeholder relationships. An example of such a system could be the accounting system(s) documented by van Erp et al. (2019); they noted that the accounting system “developed in unexpected directions and became multiple” (van Erp et al., 2019, p. 8). That process resulted in the production of different accounts geared towards the interests of various stakeholders who used the information differently. The accounting system was dynamic, and the authors regarded the system as an “actor-network rather than as a system” (van Erp et al., 2019, p. 9). The goal incongruence and the institutional logics affect the priorities given to certain values. In sum, and depending on the specific contextual issues, all these factors will have the capacity to influence the ways accountability is rendered in hybrid organizations. The establishment of a well-functioning accountability system in hybrid organizations requires the clarification of that responsibility that is part of a broader social control (Forrer et al., 2010). In their work on PPPs, Forrer et al. (2010) suggest that six dimensions require attention in setting up the hybrid accountability system. They propose a set of accounting technologies to be deployed in hybrid contexts, namely: risk analysis, cost and benefit analysis, social and political impact, and performance measurement. Accounting and accountability are of course two sides of the same coin, as accounting provides the visibilities needed to account for, as well as the invisibilities (Hopwood, 1992). The relationship between hybrid organizations and accounting is now well established and has attracted vast interest among researchers (Grossi et al., 2021). The hybridity of organizations affects how accounting technologies are used to manage the institutional complexities derived by the competing institutional logics. Recent research has focussed on different topics such has budgeting (Kaufman & Covaleski, 2019), performance measurement (Carlsson-Wall et al., 2016; De Waele et al., 2021; Rajala et al., 2021), management accounting (Järvinen, 2016; Schäffer et al., 2015) and business planning (Busco et al., 2017; Dai et al., 2017). Much of this scholarship highlights the fact that this adaptation of accounting technologies relates to the institutional complexity of hybrid organizations. There co-exists potentially five primary classes of stakeholders, namely: providers of financial capital, the state, customers/ users (or their representative), donors and owners. According to institutional theory, these groups correspond to archetypes of institutional logics (Thornton et al., 2013), with hybrid

320  Handbook of accounting, accountability and governance organizations selectively leveraging those logics, or a combination, to achieve legitimacy and/ or resources (Pache & Santos, 2013). Accounting is not just a technical and “value-free” set of technologies (Carnegie et al., 2021). Rather, accounting may incorporate its own values and legitimacy factors. Accounting is a social and moral practice constructed by society and organizations that dictates what is legitimate or not (Hines, 1988; Hopwood, 1992). Besides, accounting technologies are performative, which means that they can construct new realities and practices, bringing about new values, principles and legitimizing factors (Vosselman, 2014). Accounting, therefore, can contribute to the hybridization or de-hybridization of organizations (Kastberg & Lagström, 2019), or to the emergence of new and dominant institutional logics where there was none (Modell & Yang, 2018). As Thornton et al. (2013) argue, institutional logics change can be transformational or developmental, depending on how logics are replaced, blended, segregated, assimilated, elaborated or expanded/contracted. The literature portrayed examples of the dynamic relationship between accounting and the emergence or change of hybrid organizations. Kaufman and Covaleski (2019) show how the ways in which public resources are allocated through a legislatively enacted budget can create new hybrids, named regulatory hybrids. Historically, this process can “wax and wane”, as Convery and Kaufman (2022) describe in their analysis of the Bonneville Power Administration. They describe the oscillating impact of state- and market-logic influence through time and the interaction with accounting technologies as a reflection and triggering tool. The influence of state budgetary allocation on institutionally complex spaces is well developed within the accounting literature. Prior studies effectively demonstrate the ways in which hybrid organizations pursue (or impede) shifts in activity to secure (or protect) resources allocated by the state (Amans et al., 2015; Grossi et al., 2015). Budgeting is not the only accounting technology that can be applied to diffuse a market logic, which prefers an economic primacy to a social or communal one. Hybrid organizations subject to a state- or social-logic influence will develop institutional responses to resist or adapt to the financial logic. Failing to do so may lead to de-legitimation of its social action. Performance regimes in hybrid organizations may also partake of the prevalence of a specific institutional logic (Gebreiter & Hidayah, 2019). Gebreiter and Hidayah (2019) show how a business school’s lecturers were pressured towards a more commercial logic. In this hybrid, administrators used the performance measurement system to support this shift to commercial logic. The lecturers’ responses were mixed from compliance, to defiance, from combination to compartmentalization (Pache & Santos, 2013). At the same time, accounting can contribute to the stability of hybrid organizations, allowing for the composition of different interests and values. As an example, budgeting may itself be a mechanism through which the co-existence of multiple logics may be managed (Ezzamel et al., 2012) and connections made between logics (Amans et al., 2015). Furthermore, the budgeting process may act as a mechanism for institutional maintenance. It can provide a platform for compromise between disparate institutional logics for action, while permitting gradual changes to take place, thus facilitating the emergence of new or even stronger competing logics (Kaufman & Covaleski, 2019). Organizations, as well as individuals, can behave strategically by selecting competing yet complementary institutional logics, or selectively coupling some elements of competing logics to appeal to key stakeholders (Pache & Santos, 2013; Smets et al., 2014). This dynamic may also occur at the organizational field level, not only at the organizational level. De Aquino

Accounting, accountability and governance in hybrid organizations  321 and Batley (2021) portray an analysis at the macro level and the effects of broad categories of actors across an entire organizational field. They present a case of hybridization of the public financial management system in Brazil, and the agency of different actors at different stages and positions in the organizational field (de Aquino & Batley, 2021). As such, budgeting is a locus of competition and resolution between alternative logics. As Ezzamel et al. (2012) conclude, budgeting will not necessarily bring about the emergence and/or domination by market/ business logics, as other competing logics can emerge to find organizational legitimacy. Accounting can also accommodate conflicting values by moving them away from each other and bringing them back as it serves (Schrøder et al., 2022). Accounting allows one to compartmentalize competing approaches or practices at the operational level of hybrid organizations, not only to avoid clashes but allowing their persistence (Schrøder et al., 2022). In other cases, accounting can show its limits in providing sufficient support to professionals in hybrid organizations (Rautiainen et al., 2022). This is particularly true under conditions of conflict and leading to the inability to manage conflicting institutional logics. Although accounting is often considered the language of business, alternative logics may remain dominant and persist through time (de Aquino & Batley, 2021). Accounting can play different roles in hybrid organizations and/or in the hybridization processes (see Table 14.2). Accounting can act as a mediator and support the persistence of conflicting logics and innovation (Busco et al., 2017). Alternatively, accounting practices can engage with different interested parties, establishing complex interconnections between conflicting perspectives and their objects of concern. In the latter context, accounting does not necessarily sustain a specific logic. Instead, it contributes to lock different parties to their own logic, while at the same time allowing them to engage with each other. Weichselberger and Lagström (2022) portray a more complex picture of how accounting emerges and manifests itself in an entangling and disentangling hybrid setting. Hybridization is considered as an ongoing process (Ahrens & Ferry, 2018; Convery & Kaufman, 2022). It occurs as accounting plays a mediating role. Accounting can enable boundary-crossing discussions (Busco et al., 2017; Rajala et al., 2021; Zawawi & Hoque, 2021) and agreement over contentious issues (Chenhall et al., 2013; Sargiacomo & Walker, 2022; Schrøder et al., 2022). Additionally, as Table 14.2 further shows, accounting can be used as a decoupling mechanism to satisfy a specific institutional logic ceremonially while implementing distinctive practices promoted by other competing logics (Rautiainen, 2010; Rautiainen & Järvenpää, 2012; Siti-Nabiha & Scapens, 2005). In so doing, accounting sustains the persistence of existing arrangements, as it separates conflicting logics through decoupling mechanisms. Therefore, eventual conflicts are resolved while neutralizing the impact of institutional complexity (Siti-Nabiha & Scapens, 2005). Table 14.2

Accounting’s role in hybrid organizations

Accounting’s role

Description

Literature

Mediation

Practices used to engage with different interested

Busco et al. (2017); Weichselberger and

parties, establishing interconnections between

Lagström (2022); Morinière and Georgescu

logics.

(2022)

Decoupling

Practices used ceremonially to satisfy a specific

Rautiainen (2010); Rautiainen and Järvenpää

logic, while promoting other logics.

(2012); Siti-Nabiha and Scapens (2005)

Combining

Practices used to embody different and conflicting Contrafatto (2014); Contrafatto and Burns logics.

(2013); Thomson et al. (2014)

322  Handbook of accounting, accountability and governance Accounting can be used to reconcile conflict by combining elements from the different logics (Thomson et al., 2014). Following this line of reasoning, Contrafatto and Burns (2013) show that multiple accounting practices can unfold overtime to embody different and conflicting demands (for example, social, environmental and economic demands). Accounting can reconcile apparently irreconcilable objectives through an ongoing shared sense-making process (Contrafatto, 2014). As demonstrated above, accounting itself is dynamic. Therefore, modern scholars contend that the definition of accounting has not kept pace with the role that accounting and accountants do and can play in society. Recently, Carnegie et al. (2021, p. 69) proposed that accounting be defined as “a technical, social and moral practice concerned with the sustainable utilisation of resources and proper accountability to stakeholders to enable the flourishing of organisations, people and nature”. In light of the proliferation of hybrid organizations and their plurality of transactions, foci, stakeholders and logic, one may argue that a definition of accounting that is not primarily financially focused but instead caters to a broad set of stakeholders, and captures and records a variety of transactions in monetary and non-monetary terms, is worthy of consideration for potential adoption.

Source: Authors.

Figure 14.3

Accounting and hybrid organizations: a dual relationship

As Figure 14.3 shows, the relationship between accounting and hybrid organizations is bidirectional. Accounting not only serves to enable hybrid organizations’ functioning and emergence but it is also affected by hybrid organizations’ nature (Kastberg & Lagström, 2019; Miller et al., 2008; Thambar et al., 2019). Miller et al. (2008) refer to this relationship as the “dual hybridization process” where accounting provides accounts of hybrids, while also being hybridized. As an example, hybrid organizations can influence the performance measurement framework adopted (De Waele et al., 2021; Morinière & Georgescu, 2022; Olsen et al., 2017) and then accounting systems can emerge in numerous and unexpected ways (van Erp et al., 2019, p. 8). As such, accounting as a social and moral practice is performative and can deliver

Accounting, accountability and governance in hybrid organizations  323 new values that lead to the hybridization of organizations (Revellino & Mouritsen, 2015). On the other hand, the institutional complexities and multiple logics affect the forms and use of accounting technologies to accommodate them (Hazgui & Gendron, 2015). Olsen et al. (2017) argue that the institutional logics at play in hybrid organizations influence the assessment of performance, leading to the need to balance, emphasize or prioritize the logics. Even though hybridity implies examining the combination and the inherent contradictions of different sets of values, this duality of values is not usually considered within the design of performance measures (Grossi & Thomasson, 2015). De Waele et al. (2021) propose a hybrid performance measurement framework to assess the influence that the different logics have on the dimensions of performance, in addition to the way the development of certain performance measures may affect the prevalence/persistence of logics. The relationship between accounting and hybrid organizations’ values is continuous and the stability can easily be lost. The literature shows the dualistic relationship between accounting and hybrids, where accounting mediates among competing logics in the emergence of hybrids, while the hybrid nature of an organization colonize accounting (Miller et al., 2008; Thambar et al., 2019). There is a growing literature showing how the accounting technologies themselves hybridize in hybrid organizations (Miller, 2001; Budding et al., 2021; Costa & Andreaus, 2021; Sargiacomo & Walker, 2022). Thambar et al. (2019) explained how hybrid organizational forms and hybrid control processes operate influencing each other and combining competing values (public/private). Schrøder et al. (2022) show how performance measurement regimes can be hybridized by the sequencing of competing values. The latter persisted through temporary compartmentalization to avoid conflicts. The research shows that a compromise might be reached using accounting technologies; it might also potentially be subject to tensions and reshaped over time in a dynamic way (Kastberg & Lagström, 2019; Morinière & Georgescu, 2022). Morinière & Georgescu (2022) argue that professionals value the way accounting varies over time in a dynamic way, oscillating between tensions and compromises and diverging according to specific circumstances and audiences. This is due to the asymmetrical temporal dimension of the materialization of the compromise, which may bring the values of the actors at the centre stage, eroding the compromise over time. Rautiainen et al. (2022) show how a negative perception and emotions by professionals over accounting technology can lead to a lack of hybridization between professional and market logic. We know, for instance, that professions and individuals might hybridize – or not – when new regimes or tools of measuring and managing their work are implemented (Kurunmäki, 2004; Jacobs, 2005; Pache & Santos, 2013; Gebreiter & Hidayah, 2019). The dual nature of the accounting–hybrid relationship can also lead to the development of accounting innovation in practice. This is the case, as an example, in the development of social investment technologies (Weichselberger & Lagström, 2022), which embraces impact/ outcome-based financing and performance budgeting (Dixon, 2020; Minassians, 2015). As an example, Weichselberger and Lagström (2022) investigate social investments. This hybrid type features investments from various “co-founders” including state bodies, municipalities and regions, ideally all organizations that benefit from its purpose. The invested funds in this type of hybrid are earmarked to relieve or reduce future social exclusion, such as long-term unemployment among citizens (Weichselberger & Lagström, 2022). Studying accounting in hybrid contexts may open opportunities for observing innovation processes and how accounting becomes part of the same hybrid setting. This process is not

324  Handbook of accounting, accountability and governance linear. Framing or compartmentalization, entanglements and disentanglements may occur in a dynamic relationship (Kastberg & Lagström, 2019).

5.

CONCLUDING REFLECTIONS

Our review of extant literature on hybrid organizations leads us to question if a nexus of accounting, accountability and governance would render a more comprehensive understanding of the management of hybrids. While we are doubtful of a unitary answer, it is believed that comparative studies that provide a baseline of the characteristics of the individuals who successfully manage hybrids is a starting point. More specifically, are they a set of stable (trait) or transient (state) that need to be present in the governing members of hybrids? What organizational factors can foster higher levels of these characteristics? As we have established throughout this review, hybridity represents a blend of multiple logics; yet human cognitive capacity is limited. Therefore, literature from management and psychology that shed light on various ways in which humans engage in non-linear thinking can help us address some of the above questions. By way of an illustration, we propose that a starting point could be the work of an interdisciplinary scholar such as Jay (2013). His work builds on works from management scholars (for example, Smith & Lewis, 2011) who propose the use of a paradoxical lens to help organizational actors better understand seeming contradictions within hybrids. We suggest adopting paradox theory at the micro level to evaluate existing management of hybrids. Laboratory experiments where researchers isolate the variables of interest could be a starting point. Naturalistic experiments could serve to address some of the above questions equally well. Beyond paradox theory, we call for other theoretical frameworks that focus on sense-making in potentially ambiguous environments. We garner from our review that there is a potential gap in the literature regarding how external stakeholders view hybrids and the efforts of those who internally manage hybrid organizations. In this regard, Grimes et al. (2019) present an interesting framework for evaluating and possibly correcting mission drift and stakeholder concerns surrounding authenticity in hybrid organizations. While the current literature on hybrids is replete with garnering an understanding of the internal accounting, governance and accountability dynamics, their work proposes a complementary view: that of external stakeholders. Their theoretical piece offers multiple propositions related to theorizing, understanding and ultimately correcting mission drift. When impression management fails, the authors propose changes to governance practices to help with issues of organizational authenticity. The authors offer specific changes in the governance practices (for example, decentralization and diversification) as possible ways to correct stakeholders’ view of hybrid responsiveness to mission drift. We propose that future research can test each proposition within their theoretical model using longitudinal studies to capture the effectiveness of Grimes et al.’s (2019) conjectures. Furthermore, future work focusing on the external stakeholder view may also serve to complement several earlier works. For instance, Pache and Santos (2013) highlight the delegitimizing effects and costs of deceptions or negotiations on hybrid organizations when the social welfare logic is not fully embedded together with the commercial logic. Through this process, the constituting role of accounting needs to be further investigated. Accounting, both in the forms of management accounting and performance measurement, has a role in sustaining hybridity

Accounting, accountability and governance in hybrid organizations  325 as well as de-hybridizing organizations (Weichselberger & Lagström, 2022). Further studies need to look at the intersections between accounting and accountability at different levels of governance (that is, public governance vs. corporate governance). As also argued elsewhere (Grossi et al., 2021), the analysis at the macro, meso and micro governance level will involve the adoption of a multidisciplinary perspectives to address the intricacy of the elements involved. In 2021, after lobbying by the Government of Canada along with a coalition of over 55 Canadian public and private institutions, the International Financial Reporting Standards Foundation (IFRS) opened its International Sustainability Standards Board (ISSB) headquarters in Canada. ISSB seeks to use data to provide standards and disclosures that can be used to evaluate progress towards sustainable goals. Such goals include “climate change and nature degradation, improving opportunities for women, visible minorities, and other underrepresented groups, and enhancing public and private sector governance” (Freeland, 2021). Work in Canada at the new headquarters began in 2022. IFRS and its ISSB may be viewed as hybrid organizations and both represent fertile soil for research into governance accountability on a macro, meso or even micro scale. Additionally, the public–private discourse and processes surrounding how the new location was selected and the resulting disclosures offer multiple research opportunities for scholars. As we continue to grapple with the effects (Bastida et al., 2021), we call for researchers working at the intersection of hybridity, accounting, accountability and governance to examine the effects of natural disasters, war and pandemics on such organizations and their practices. Researchers may wish to conduct country or regional comparative studies, to address questions such as: how do natural disasters vs. human-made disasters affect the structures and processes in place at hybrid organizations before, during and after their occurrences? How can accounting support or limit the capacity of hybrid organizations to achieve their social mission?

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Accounting, accountability and governance in hybrid organizations  327 Dubnick, M. (2005), “Accountability and the promise of performance in search of the mechanisms”, Public Performance & Management Review, Vol. 28 No. 3, pp. 376–417. Ebrahim, A., Battilana, J. and Mair, J. (2014), “The governance of social enterprises: mission drift and accountability challenges in hybrid organizations”, Research in Organizational Behavior, Vol. 34, pp. 81–100. Ezzamel, M., Robson, K. and Stapleton, P. (2012), “The logics of budgeting: theorization and practice variation in the educational field”, Accounting, Organizations and Society, Vol. 37 No. 5, pp. 281–303. Forrer, J., Kee, J.E., Newcomer, K.E. and Boyer, E. (2010), “Public-private partnerships and the public accountability question”, Public Administration Review, Vol. 70 No. 3, pp. 475–484. Freeland, C. (2021), “Letter from the Deputy Prime Minister to the Chair of the Board of Trustees of the IFRS Foundation”, available at: www​.canada​.ca/​en/​department​-finance/​programs/​financial​-sector​ -policy/​letter​-from​-deputy​-prime​-minister​-chair​-board​-trustees​-ifrs​-foundation​.html (last accessed 20 March 2022). French, M. and Mollinger-Sahba, A. (2021), “Making performance management relevant in complex and inter-institutional contexts: using outcomes as performance attractors”, International Journal of Public Sector Management, Vol. 34 No. 3, pp. 377–391. Gebreiter, F. and Hidayah, N.N. (2019), “Individual responses to competing accountability pressures in hybrid organisations: the case of an English business school”, Accounting, Auditing & Accountability Journal, Vol. 32 No. 3, pp. 727–749. Grimes, M.G., Williams, T.A. and Zhao, E.Y. (2019), “Anchors aweigh: the sources, variety, and challenges of mission drift”, International Journal of Public Sector Management, Vol. 28 No. 4–5, pp. 274–285. Grossi, G. and Thomasson, A. (2015), “Bridging the accountability gap in hybrid organizations: the case of Copenhagen Malmö Port”, International Review of Administrative Sciences, Vol. 81 No. 3, pp. 604–620. Grossi, G., Papenfuß, U. and Tremblay, M.S. (2015), “Corporate governance and accountability of state-owned enterprises: relevance for science and society and interdisciplinary research perspectives”, International Journal of Public Sector Management, Vol. 28 No. 4–5, pp. 274–285. Grossi, G., Vakkuri, J. and Sargiacomo, M. (2021), “Accounting, performance and accountability challenges in hybrid organisations: a value creation perspective”, Accounting, Auditing and Accountability Journal, Vol. 35 No. 3, article 326525. Grossi, G., Kallio, K.-M., Sargiacomo, M. and Skoog, M. (2020), “Accounting, performance management systems and accountability changes in knowledge-intensive public organizations: a literature review and research agenda”, Accounting, Auditing & Accountability Journal, Vol. 33 No. 1, pp. 256–280. Grossi, G., Reichard, C., Thomasson, A. and Vakkuri, J. (2017), “Theme: performance measurement of hybrid organizations – emerging issues and future research perspectives”, Public Money and Management, Vol. 37 No. 6, pp. 379–386. Hazgui, M. and Gendron, Y. (2015), “Blurred roles and elusive boundaries: On contemporary forms of oversight surrounding professional work”, Accounting, Auditing and Accountability Journal, Vol. 28 No. 8, pp. 1234–1262. Hines, R.D. (1988), “Financial accounting: in communicating reality, we construct reality”, Accounting, Organizations and Society, Vol. 13 No. 3, pp. 251–261. Hopwood, A. (1992), “Accounting calculation and the shifting sphere of the economic”, European Accounting Review, Vol. 1 No. 1, pp. 125–143. Jacobs, K. (2005), “The sacred and the secular: examining the role of accounting in the religious context”, Accounting, Auditing & Accountability Journal, Vol. 18 No. 2, pp. 189–210. Järvinen, J.T. (2016), “Role of management accounting in applying new institutional logics: a comparative case study in the non-profit sector”, Accounting, Auditing & Accountability Journal, Vol. 29 No. 5, pp. 861–886. Jay, J. (2013), “Navigating paradox as a mechanism of change and innovation in hybrid organizations”, Academy of Management Journal, Vol. 56 No. 1, pp. 137–159. Johanson, J.-E. and Vakkuri, J. (2017), Governing Hybrid Organisations: Exploring Diversity of Institutional Life. Routledge, London.

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PART IV NEW PERSPECTIVES ON ACCOUNTING, ACCOUNTABILITY AND GOVERNANCE

15. Islamic accounting, accountability and governance Abdullah Almulhim, Mohammed Alomair and Christopher J. Napier

OVERVIEW Islam is the world’s second-largest religion, and accountability (to God and to fellow humans) lies at its heart. Islamic principles and rules of conduct, constituting the Shariah, restrict the actions of Muslims, in particular forbidding the payment and receipt of interest. Since the 1970s, an Islamic financial industry has emerged to provide Shariah-compliant transactions and financial structures to devout Muslims. This has given rise to a need for specific accounting approaches for these transactions. Under Islam, organizations and members of society are considered to have wider accountability responsibilities, with social and environmental reporting a long-standing issue for Islamic organizations. To demonstrate compliance with Shariah, many organizations have established Shariah supervisory boards consisting of Shariah scholars familiar with commercial and financial transactions. This unique governance mechanism provides a model for more conventional entities that wish to enhance their accountability to society. Research into Islamic accounting, accountability and governance has grown substantially in recent years, but there are still potentially fruitful avenues for further research.

INTRODUCTION Islam is the second-largest religion in the world. Like many other religions, Islam assumes that individuals are accountable to God for their actions and inactions. However, Islam is unusual in giving rise to specific business transactions and institutions, generally referred to as “Islamic finance” (Usmani, 2002; Iqbal & Mirakhor, 2011; Visser, 2019). Islamic financial institutions (IFIs) include Islamic banks, investment companies and providers of insurance (takaful – see Archer et al., 2009; Al-Salih, 2014). Outside the commercial sector, not-for-profit entities known as waqf operate like trusts in Western countries but are subject to the same Islamic principles as for-profit IFIs (Alomair, 2018). In the modern era, the emergence of Islamic banking is often linked to the founding of the Mit Ghamr Bank in Egypt in 1963, although Islamic banking grew rapidly in both the Middle East and South-East Asia following the oil price rises of the mid-1970s, which provided new supplies of funding that coincided with an emerging demand for finance that was structured in ways consistent with Islamic principles (Asutay et al., 2013). By the 1990s, Islamic finance became an increasingly global phenomenon, with conventional banks opening “Islamic windows” (Hasan & Risfandy, 2021) to undertake transactions complying with Islamic law. As Napier and Haniffa (2011, p. xiii) point out: “The word ‘Islam’ means total submission or surrender to the will of God (Allah), and a Muslim is one who so submits”. But what 332

Islamic accounting, accountability and governance  333 is God’s will? Muslims refer to two main sources. The first of these is the Qur’an, which Muslims consider to be the revelation of God’s own words to the Prophet Muhammad (Ali & Leaman, 2008). The second main source is the Sunnah, which sets out the sayings and actions of Muhammad and has been handed down through “hadith”, traditions that were originally oral but are now written down and collected in books with varying degrees of authority (Brown, 2017). The principles derived from these sources are known as Shariah (Esposito & Delong-Bas, 2018). A key principle of Shariah is that interest on loans (in Arabic, the term riba is used) is forbidden (Tomkins & Karim, 1987, p. 131). Interest is seen as inherently unfair and exploitative, and as tending to remove resources from the productive economy rather than fostering economic growth (Siddiqui, 2004). Alternative modes of finance that are structured so that they do not involve the receipt and payment of interest have been developed, or in some cases rediscovered from older sources. Instead of making a loan, an investor could enter into a profit and loss sharing agreement (mudaraba), providing funding to an entrepreneur in exchange for a pre-determined share of any profit. For shorter-term trade credit, deferred sale arrangements such as murabaha can be established, where a purchaser can ask a financial institution such as a bank to buy an item at the current price and deliver it to the purchaser in exchange for a promise to pay a higher price subsequently. The difference between the current and future prices is not considered to be interest in terms of the form of the transaction (for a discussion of these forms of transactions, see, for example, Baydoun et al., 2018). Instead of conventional interest-bearing bonds, securities known as sukuk can be issued. These are likely to be secured against property assets, and they are formally structured as a combination of leases and profit-sharing contracts (Zulkhibri, 2015). In addition to the prohibition of riba, Shariah also prohibits contracts involving gharar or indeterminacy and maysir or gambling. These prohibitions are taken to exclude contracts such as options from Islamic finance, as there is uncertainty when the option is set up as to whether it will actually be exercised (Chowdhury, 2015). Finally, Islam forbids various activities, such as the consumption of alcohol and eating pork, and financing of such haram activities is not permitted. This can also impose constraints on equity investment, as Muslims should not invest either directly or indirectly in companies engaged in haram activities, including paying or receiving interest. Islamic finance tries to accommodate the requirements of Shariah, and IFIs will routinely seek the approval of Islamic scholars for proposed transactions, to confirm that they are Shariah-compliant. This is increasingly formalized through the establishment of “Shariah supervisory boards” (SSBs) as part of the governance structure of IFIs (Meslier et al., 2020). The existence of Shariah-compliant transactions and institutions has created a demand for a specifically Islamic form of accounting. It also shapes and constrains accountability and governance in IFIs and other Islamic institutions. In the next section of this chapter, we consider briefly the different contexts in which Islamic accounting may arise. The following sections provide a closer examination of how Islamic accountability is derived from the fundamental principles of Islam, and a consideration of specific issues of governance in Islamic contexts. The chapter finishes with a conclusion and recommendations for further research.

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ISLAMIC ACCOUNTING Napier (2009) suggested that “Islamic accounting” could be understood in three distinct senses. The first of these is the accountability, primarily to Allah but also to others in society, that Islam imposes. This accountability is the subject of the next section of this chapter. The second sense is “accounting in parts of the world where Islam is the majority religion” (Napier, 2009, p. 124). This presumes that accounting found in Muslim-majority countries is different from accounting in other countries, which may manifest itself in the form of different regulatory institutions leading to different regulations, which, when put into practice, lead to different forms of accounting by some or all entities in specific countries. The third sense relates to actual practice, both historically and in the present, in Muslim-majority countries and specifically Islamic institutions. Possibly the earliest appearance of the term “Islamic accounting” in the academic literature was in the historical examination of medieval commerce in the Islamic world by Labib (1969, p. 92), who bemoaned the absence of surviving accounting records from this period, forcing him to rely on the indirect evidence of legal books and administrative treatises. The earliest contribution to the English-language scholarly literature on Islamic accounting was the theoretical study of accounting in Islamic banks by Abdel-Majid (1981). Napier (2009, p. 125) has pointed out that “the Islamic accounting literature has tended to fall into three main groups”. The first group emphasizes theoretical discussions setting out general principles, sometimes applying these principles to analyse actual practice. An example of this would be the investigation of social reporting by Islamic banks undertaken by Maali et al. (2006), who developed a prescriptive framework for social and environmental disclosures “based on an Islamic perspective of accountability, social justice and ownership” (Maali et al., 2006, p. 267) and examined how far Islamic banks’ social and environmental disclosures met the authors’ expectations. The second group concentrates on the practice of accounting for Islamic financial products, and research may be both conceptual and empirical. The third and final strand of research, according to Napier (2009), examines regulation, including setting standards for accounting by IFIs. A significant focus of this research has been the operations of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), established in Bahrain in 1991 to develop not only accounting standards for IFIs but also to promulgate Shariah standards (setting out how typical transactions may be structured to ensure compliance with Shariah), auditing standards and governance standards (https://​aaoifi​ .com/​?lang​=​en). Another key aspect of research into regulation is SSBs, the bodies of scholars that act to advise IFIs on whether their activities and transactions are Shariah-compliant. The SSB is discussed in more detail in the section on Islamic governance. The literature on Islamic accounting is now extensive. Google Scholar (accessed 28 May 2023) shows over 15,000 items with the term “Islamic accounting” included, of which nearly 600 have the term in the item’s title. A recent review (Alshater et al., 2022) covering the period 1982–2020 examines nearly 200 publications drawn from the Scopus database, and identifies seven streams of research: accounting for waqfs; accounting for zakat (that is, the requirement for Muslims to contribute a proportion of their wealth every year to charity – see, for example, Adnan & Gaffikin, 1997; Clarke et al., 1996); Shariah auditing; corporate Shariah governance and screening (the process of determining whether the business activities of companies are such that they are not appropriate investments for Muslims – see, for example, Ayedh et al., 2019); accounting for different modes of Islamic financing; education; and ethics. Their

Islamic accounting, accountability and governance  335 general view of the literature is that it is becoming increasingly empirical, and that the more prescriptive aspects should enhance stewardship and accountability as well as better, more informed, decisions. In one of the most widely cited academic studies in the Islamic accounting field, Kamla (2009) expresses disappointment in the way in which Islamic banking has developed. She notes that, in practice, Islamic banks tend to be reluctant to use profit and loss sharing devices to provide business finance. She endorses the criticism of El-Gamal (2006) that Islamic financial products “are merely ‘thinly veiled versions’ of contemporary financial instruments with interest embedded in them” (Kamla, 2009, p. 925). Kamla also questions the extent to which IFIs are driven by the social and developmental concerns emphasized in much of the more conceptual literature (from Gambling & Karim, 1986, onward) on Islamic accounting. She views the AAOIFI as playing an ambivalent role, with its standards relating to Islamic financial products that may be Shariah-compliant only in form tending to legitimize such products as “Islamic”. She concludes: The Islamic accounting and banking project must respond to the masses of Muslims who supported it initially on the grounds of advancing social justice, eradication of poverty and freedom from forms of subjection, imperialism and colonialism. Unless it does so, it will most certainly begin to lose Muslims’ support and diminish as it will be exposed as a superficial phenomenon that does not constitute the substance and spirit of Islam. (Kamla, 2009, pp. 930–931)

Despite this critical conclusion, Islamic finance and banking have continued to thrive, particularly in Muslim-majority countries, though they tend to operate more at the corporate than the individual level in Western countries. According to Puri-Mirza (2021), “in 2019, the total assets value of global Islamic finance markets amounted to about 2.88 trillion U.S. dollars”. This was predicted to grow to about US$3.7tn by 2024. So Islamic finance will continue to be economically important in the future. In accounting terms, IFIs tend to report their financial position and performance using International Financial Reporting Standards (IFRS), as these are mandated (often with slight local variations) by the countries in which they are based. The International Accounting Standards Board established the Islamic Finance Consultative Group (IFCG) in 2011 to provide a point of discussion on the application of IFRS to Islamic finance transactions and products. The membership of the IFCG includes representatives of AAOIFI, standard-setters from some Muslim-majority countries, auditors, bankers and regulators (IFRC Foundation, 2022). In practice, therefore, Islamic accounting has become largely assimilated to conventional accounting. However, the principles of Islamic accountability provide a benchmark against which accounting practice may be assessed, and accountability in Islam is addressed in the next section of this chapter.

ISLAMIC ACCOUNTABILITY The accountability of Muslims is influenced by their Islamic beliefs. These originate from their belief in one God (tawhid) and their function as stewards (khalifah) over God’s resources on Earth, which are considered as being held in trust (amanah) rather than owned absolutely (Yasmin et al., 2014). Tawhid is the very foundation of Islam on which other principles depend. Philips (1994) observes that if tawhid is not sound, the rest of one’s Islam will

336  Handbook of accounting, accountability and governance become questionable rituals. Philips (1994) also mentions that the outcome of sound tawḥid is that everyone should associate all his or her actions to Allah. According to Baydoun and Willett (2000), Islam is built on a unique and deep understanding of accountability because of the notion of Allah’s unity. The Qur’anic verse “Allah takes careful account of everything” (Qur’an, 4:86) reaffirms the belief in the Day of Judgement when each person will be held responsible for their acts during their lifetimes. The principle of khilafah (vicegerency or stewardship) indicates that humanity is chosen by God as a trustee on this Earth; humans are expected to act as stewards in dealing with the world and its composition. As the Qur’an puts it: “Your Lord said to the angels, ‘I am appointing someone as my deputy on earth’” (Qur’an, 2:30). Based on the concept of khilafah, a person is not the owner of what is in his or her hand; instead, he or she is only a vicegerent (or viceroy) chosen by God. The ownership of resources is a trust, or amanah. Therefore, any financial resources available to any organization are made in the form of a trust, and what is relevant regarding accountability is the connection that occurs between the trustee and God (Allah) as well as between the trustee and stakeholders. In Arabic, the official language of Islam, the root word for an account is hisab. According to Askary and Clarke (1997, p. 142), words based on this root appear in the Qur’an more than 80 times in different verses. As Lewis (2006, p. 20) notes: [E]very Muslim has an “account” with Allah, in which is “recorded” all good and all bad actions, an account which will continue until death, for Allah shows all people their accounts on their judgement day.

In Arabic, there is no direct equivalent of the English word “accountability”, though there are some words and expressions that can be used to show the meaning of accountability. The word taklif is used to refer to holding a responsible person (mukalaf) to account. “It is generally used to talk about the age of contractual maturity, when an individual becomes accountable for his or her own actions based on Shariah” (Alomair, 2018, p. 58). Taklif is linked to the personal accountability of one’s own actions and inactions (Nahar & Yaacob, 2011). The expression almusa alah discloses the capability to question a person. This is demonstrated in the Qur’an in various places, for example: “And stop them; indeed, they are to be questioned” (Qur’an, 37:24). According to Napier and Haniffa (2011), the accountability of humans to Allah for their actions is a fundamental concept in Islam. Islam depends on accountability relationships and organizing life between individuals and their community (ummah) and between individuals and God through Shariah (Alshehri, 2012). Two sides of human life are viewed under Shariah: worship (ibadat) and transactions (mua’amalat). In Islam, providing an account (whether written or oral) to discharge accountability through providing an explanation for one’s actions is recognized as part of worship to Allah. Muhammad emphasized (in a hadith reported by Muslim and others) that accountability is an important requirement for relationships performed within Islamic society: You are all custodians, and you all will be questioned about the things under your custody. The Imam is a custodian, and he shall be questioned about his custody. The man is the custodian of his family, and he shall be questioned about his custody. The woman is a custodian in her husband’s home, and she will be questioned about her custody. The employee is a custodian of the property of his employer, and he shall be questioned about his custody. (Sahih Muslim, 1829a)

Islamic accounting, accountability and governance  337 Accountability is as a result ingrained in committed Muslims and leads to a strong sense of responsibility to do right, as they feel their actions are constantly being recorded and will be accounted for not only in this life but also on the Day of Judgement, which is sometimes described in the Qur’an as the yawm al-hisab or Day of Account (Qur’an, 38:16). On the Day of Account, God will question everyone about their actions and, accordingly, hold them accountable. So, even though God knows what people have done, God still enacts the rendering of accounts to emphasize individual responsibility. Therefore, people are aware that the outcome of the judgement is deserved, whether it leads to paradise or hellfire.

Source: Authors.

Figure 15.1

Accountability relationships in Islam

Islamic accountability encompasses both the primary spiritual accountability relationship between human beings and God and the secondary secular accountability relationship established with other individuals and physical subjects (Ibrahim, 2000; Siraj & Karbhari, 2014). This is illustrated in Figure 15.1. The concept of accountability in Islam, therefore, is not restricted to spiritual aspects but extends to social, business and any other contractual dealings. Islam is concerned with the social environment and the way individuals interact with each other when it comes to comprehending relationships within the community (Kamla et al., 2006). Islamic civilization’s use of the term “brotherhood” (ukhuwwah) exemplifies the religion’s emphasis on civic participation. It is the duty of Muslims to care for others in society: in a famous hadith, Muhammad is reported (by Bukhari and others) as saying: “The Muslims in their mercy towards each other are like a body, if single part of it complains the other parts would be affected” (Sahih Al-Bukhari, 6011). As a result, submitting to Allah means respecting the rights of others and contributing to society in an equitable manner (Maali et al., 2006).

338  Handbook of accounting, accountability and governance In the conventional sense, holistic accountability implies that organizations are accountable to every individual whose life might be affected by the organization’s activities, directly or indirectly (O’Dwyer & Unerman, 2008). In Islam, holistic means that individuals are accountable primarily to God, not only to their fellow humankind and society. According to Ihsan et al. (2016), conventional accountability concepts have two main weaknesses in demonstrating accountability from the Islamic perspective. Firstly, conventional accountability concepts are human-made and aim to establish a certain material status of the individual and community. In addition, Al-Safi (1992) underlined that the conventional notion of accountability concept neglects God’s guidance, whereas the accountability concept in Islam comes from God’s revelation, which is aimed at achieving rewards in this world and the hereafter. Secondly, in Western society where conventional accountability concepts were born and developed, fulfilling accountability is regarded as having nothing to do with religious matters. When it comes to Islamic accountability, Abdul-Rahman (1998) distinguishes it from Western accountability, which focuses on being answerable to shareholders, although this has since been expanded to include other stakeholders. For Abdul-Rahman (1998, p. 68), Islamic accountability “combines the concepts of tawhid, khilafah, and taklif on the one hand, with the requirement of proper book-keeping on the other”. Abdul-Rahman also mentions shura (mutual consultation) and hisba (religious audit) as important aspects of accountability. Control systems, in fact, play a critical role in ensuring that accountability measures are properly implemented. However, as explained by Parvez and Ahmed (2004, p. 9), these control systems alone cannot achieve such improvements: From the Islamic perspective, controls and laws that are to be employed for guiding personal and business conduct should be enacted to protect minimum standards or as deterrents to wrongdoing. More than this, there is a need to cultivate a higher consciousness, morals, and a sense of accountability as a prerequisite since they develop an inner respect for societal values and laws.

For Yunanda et al. (2016, p. 110), accountability within an Islamic perspective “encompasses commands, forbidden things as well as matters left to choice”. According to Abdul-Rahman (1998), these three components of Islamic accountability need tools and mechanisms, while the religious audit ensures that the entity is run Islamically through three functions: (1) provision of advice (ex-ante auditing), (2) monitoring performance (ex-post auditing) and (3) the audit of Islamic tax (zakat). According to Islamic accounting principles, businesses have an obligation to report to the public on the impact of their operations on the community’s well-being (Lewis, 2001, 2006). Accordingly, Islamic companies are obligated to report on their compliance with great responsibility in the context of an Islamic society (Aribi & Gao, 2012). Boards of Islamic organizations, both for-profit and not-for-profit, must make a point of stressing the adherence to Islamic principles in all their business dealings and products. One of the key goals of Islamic accounting and reporting is to guarantee that the firm adheres to the Islamic principle of accountability (Maali et al., 2006). Islamic ethics and morals should therefore be emphasized in Islamic corporate reports, particularly in narrative disclosures, because of this emphasis on accountability. The SSB audit report in Islamic organizations is crucial as it determines the accountability of Islamic organizations not only to financial statement users but also, more importantly, to God (Kasim & Sanusi, 2013). The goal of a religious audit is to ensure that a company’s commercial activities are in accordance with God’s laws for both insiders and outsiders.

Islamic accounting, accountability and governance  339 Empirical research (for example, Farook et al., 2011; Alam & Miah, 2021; Mim & Mbarki, 2021) suggests that the effectiveness of the SSB is an important determinant of the quality of corporate social responsibility disclosures in IFIs. As the SSB is a specific component of Islamic governance structures not just for commercial organizations but also for not-for-profit entities such as waqfs, this mechanism is considered further in the next section as an important aspect of Islamic corporate governance.

ISLAMIC CORPORATE GOVERNANCE Conventional Governance The principles of Islamic Shariah established the rules of governance more than 1,400 years ago, and these Shariah principles were clear and evident in the verses of the Qur’an. After the emigration of Prophet Muhammad from Makkah to Madina, he laid down all the necessary principles of good governance based on justice, equity and accountability to the one true God. Corporate governance came to promote general and basic concepts and principles such as integrity, justice, equality, transparency, efficiency, participation, empowerment, independence, responsibility, accountability and other positive concepts. Islamic corporate governance is very similar to traditional corporate governance. However, Islamic corporate governance is in fact a mix of two models, the shareholder model (Anglo-American model) and the stakeholder model (European model), with the addition of Islamic values and standards that may add features distinct from traditional governance (Hasan, 2009; Alam et al., 2019). The Islamic religion is concerned with discussing all matters of individuals and groups, in addition to the ways people deal with commercial and economic matters in life. As already noted, the Islamic law or Shariah is based on the Qur’an and the Sunnah, and contains not only specifically religious teachings but also many matters, issues and aspects that an individual deals with during his or her normal day, whether socially, commercially or economically. Some verses of the Qur’an focus on commercial transactions, such as, “O you who have believed, when you contract a debt for a specified term, write it down. Moreover, let a scribe write [it] between you in justice” (Qur’an, 2:282). An Islamic corporate governance framework, in compliance with Shariah rules and the principle of tawhid (the divine oneness and unity of God), should not only focus on increasing shareholders’ wealth but should also safeguard the interests of all stakeholders and embrace the ethics of Islam (Khan & Zahid, 2019). Islamic corporate governance has two elements: conventional corporate governance and Shariah governance (Jan et al., 2021). Conventional corporate governance is provided through a board of directors responsible primarily to the shareholders. In Muslim-majority countries, it is usual for there to be a corporate governance code for companies traded on capital markets, which is likely to be modelled on the UK or Organisation for Economic Co-operation and Development (OECD) corporate governance codes. For instance, Malaysia introduced the first version of the Malaysian Code on Corporate Governance as long ago as 2000 (Ooi et al., 2021), while in Saudi Arabia, the Capital Market Authority introduced the first set of corporate governance regulations in 2006 (Naif & Ali, 2019). In both cases, the codes reflected international best practice at the time and have been regularly updated. The most recent version of the Malaysian code (SCM, 2021) moves away

340  Handbook of accounting, accountability and governance from the more traditional “comply or explain” approach to an “apply or explain an alternative” approach, considering that this will “promote a more meaningful application of good corporate governance practice” (SCM, 2021, para. 5.2). An extensive literature has developed examining conventional corporate governance in Muslim-majority countries: Farah et al. (2021) reviewed over 530 articles relating to corporate governance in the Middle East and North Africa (MENA), while Khatib et al. (2022) surveyed over 120 publications addressing corporate governance in Malaysia. However, only some of this research acknowledges specifically Islamic aspects of governance. We would expect Muslims on boards of directors and in other governance roles to reflect their religious beliefs in their practices (Abu-Tapanjeh, 2009). In addition, Islamic corporate governance is concerned with social responsibility (Lewis, 2005). The Islamic model is based on the idea that corporate governance depends on the stakeholder theory, which is a more widely used pattern that describes corporate governance as a web of relationships between a company and its stakeholders, such as employees, customers, suppliers, shareholders and managers (Almulhim, 2014). According to Hasan (2009, p. 286), “The Islamic corporate governance based on the stakeholder-oriented model is preoccupied by the two fundamental concepts of Shariah principles of property rights and contract frameworks”. This general approach is endorsed by Bhatti and Bhatti (2009), who stated that the model of Islamic corporate governance has three main pillars: the principles of property rights and contract frameworks; governance by Islamic law (i.e. Shariah); and the inclusion of all stakeholders. Abu-Tapanjeh (2009) used the OECD Principles of Corporate Governance then in force (OECD, 2004) as a benchmark for establishing a set of 24 Islamic corporate governance principles. These principles emphasized the importance of conducting business within the ethical framework imposed by Shariah, which stresses the duties of individuals and organizations to promote social welfare. Accountability is not only to conventional stakeholders but also to God. Accountability to conventional stakeholders is best achieved through consultation and consensus seeking. Shariah Governance The most important characteristic of Islamic corporate governance is the presence of an SSB or council to limit ethical and ideological transgressions that might be bypassed. This board is concerned with looking into financial operations and the extent to which activities and transactions violate the provisions of Islamic law, as well as the extent of the firm’s commitment to Islamic law in its dealings, such as articles of incorporation, financial transactions, internal auditing and the extent of commitment to transparency, integrity and disclosure. An SSB issues fatwas (Shariah opinions) for newly introduced products and services that guarantee their conformity to Islamic rules and regulations (Jan et al., 2021). The AAOIFI has published 12 governance standards, covering the appointment, composition and reporting of the SSB, how the activities of IFIs should be subject to external review (sometimes referred to as “Shariah audit”) and to internal review, the activities of the main board’s audit and governance committee(s), the independence of the SSB, general governance principles, how IFIs should address corporate social responsibility issues, and governance issues relating to specific transactions such as sukuk. The SSB should be appointed by the IFI’s shareholders at the annual meeting and should consist predominantly of experts in Islamic commercial jurisprudence. The SSB should undertake or commission the Shariah review,

Islamic accounting, accountability and governance  341 examining how far the IFI is complying with the requirements of Shariah in its policies, contracts and transactions. The SSB will report on the outcome of this review in the IFI’s annual report (http://​aaoifi​.com/​e​-standards/​?lang​=​en). Research into SSBs is extensive, with a total of over 8,000 items listed on Google Scholar (accessed 28 May 2023) under different spellings of the word “Shariah”. Studies often echo more conventional corporate governance research in endeavouring to explain characteristics of the SSB membership, such as size and educational background, and to investigate how the make-up of the SSB can impact on both firm performance and more general governance practices. For example, Farag et al. (2018) examined 90 Islamic banks across 13 countries in the period 2006–14, finding that there was a positive relationship between the size of the SSB and firm performance. They suggest that a larger SSB, by making it easier for Islamic banks to set up complex Shariah-compliant transactions, may have the effect of reducing agency costs. This finding is confirmed by Mim and Mbarki (2021), who find that larger SSBs can reinforce larger board of directors in enhancing performance of Islamic banks. Safiullah and Shamsuddin (2018) found that an increase in the number of Shariah scholars on the SSB tended to reduce operational and insolvency risks in Islamic banks but did not have a significant influence on liquidity and credit risks. Although much of the research into SSBs and governance adopts quantitative approaches, insights may also be gained from more qualitative studies, usually involving interviews with SSB members, managers responsible for Shariah compliance, directors and external stakeholders. Ullah et al. (2018) found tensions in IFIs between the desire to follow Shariah and the typical commercial pressures to expand within the market for Islamic finance, where customers would be willing to pay a premium for Shariah compliance – sometimes referred to as the “cost of being Muslim” (Zinser, 2018). These tensions gave rise to pressures on the Shariah scholars on SSBs to provide fatwas confirming the acceptability of transactions and arrangements that IFI managers wished to offer that were arguably not consistent with Shariah: Even though Shariah scholars are believed to be the final authority when it comes to Shariah certification of IFIs’ transactions, operational contingencies may force them to sacrifice or compromise on their desire to achieve Shariah objectives through IFIs. (Ullah et al., 2018, p. 915)

The process of compromise is described as “fatwa repositioning”, where the respective strengths and bargaining abilities of management and Shariah scholars can lead to different degrees of Shariah compliance, from deep to merely superficial in nature. Although AAOIFI provides some standards relating to the structure and activities of SSBs, these are not mandatory. This means that there may be a lack of consistency in how SSBs operate, indeed whether a formal SSB is established rather than independent Shariah scholars providing ad hoc services. Alam et al. (2022a) use an interview-based study to find that, in Bangladesh, there is a lack of guidance on Shariah governance, which means that the opinions of boards of directors and IFIs’ specific commercial motivations can combine with diversity of thought among Shariah scholars, leading to inconsistencies in practice. They recommend that Bangladesh’s central bank should establish a centralized SSB to reduce diversity. Another study of Shariah governance in Bangladeshi IFIs (Alam & Miah, 2021) finds that a strong SSB will enhance the image of an IFI as not just complying superficially with Shariah but embodying its principles deeply. On the other hand, commercial pressures, the external political environment and social limitations may hinder the willingness of IFIs to engage fully with Shariah.

342  Handbook of accounting, accountability and governance A problem with the effectiveness of SSBs is that the number of Shariah scholars is limited because of the long period of training and development to become a Shariah scholar and the specialized knowledge required to be able to comment on commercial transactions. Kachkar and Yilmaz (2023) report that, in 2018, there were just over 1,000 recognized Shariah scholars working in the finance field. They examined the membership of SSBs for IFIs, and entities with Islamic windows, in 52 countries, and found that there were 428 individual scholars spread over 238 SSBs. Several scholars sat on multiple SSBs, with one scholar being a member of 17 SSBs. Many SSBs were quite small, with the average size being only about two members. Kachkar and Yilmaz (2023) found that the majority of Shariah scholars on SSBs were aged 61 and above, and only 2 per cent of scholars were women. This relative scarcity of scholars can lead to their becoming entrenched on SSBs, holding appointments for many years, and Virk et al. (2022) have found that having a prominent Shariah scholar as chair of an IFI’s SSB is associated with lower financial performance on the part of the IFI. The growing literature on SSBs and their role in governance extends beyond IFIs to cover not-for-profit organizations. Many of these are structured as a waqf (Arabic plural awqaf), which literally means “endowment” (Ashraf & Hassan, 2013). A waqf is a “voluntary and irrevocable dedication of property with the implication that this is kept in the ownership of God” (Alomair, 2018, p. 11). The use of waqfs can be found in the public sector (for example, universities may be established as waqfs), the private sector (where the waqf structure may be used to maintain family wealth) and the not-for-profit sector. It is more likely that public sector waqfs will use an SSB, but all waqfs will be established with a board of trustees as the main organ of governance and accountability. The nature of the waqf’s activities will determine the extent and nature of accountability, and specifically Islamic features of governance and accountability may be difficult to discern in practice. A recent review of the limited amount of research into waqf accountability (Ainol-Basirah & Siti-Nabiha, 2023) finds that various theoretical approaches are used to study this issue, though strong links are usually drawn between the design of governance structures and the effective achievement of accountability. The study of waqf accountability and governance is one of the areas for future research discussed in the final section of this chapter.

CONCLUSION AND FURTHER RESEARCH The practice of Islamic accounting, accountability and governance adds an extra layer on top of conventional accounting, accountability and governance. The principles of Islam, as embodied in Shariah, stress humanity’s responsibility to use the Earth’s resources in accordance with the teachings of Islam, which constitutes humans as God’s deputies or stewards. Accountability to God is a principle that permeates the Qur’an and the Sunnah, and accountability to wider stakeholders, indeed the whole community (ummah), through consultation and consensus-building is central not just to self-identified Islamic entities but to all entities in a Muslim society. The literature of Islamic accounting, accountability and governance has developed substantially over the past 40 years, with regular contributions reiterating the Islamic principles that should apply in these areas. However, in practice Islamic accounting is difficult to distinguish from conventional accounting. Most IFIs report using some version of IFRS, as adopted in the countries in which they are based, and substantially all Muslim-majority countries have

Islamic accounting, accountability and governance  343 adopted IFRS (sometimes with small local variations). Despite views that IFRS are fundamentally based on the use of interest, particularly in fair-value measurement and, therefore, are inconsistent with Shariah, the majority of scholars and managers are reconciled to IFRS (Aljedaibi, 2014; see also Bakr & Napier, 2022). Specific issues still arise with respect to certain Islamic transactions, such as zakat, but the guidance provided by AAOIFI and textbooks such as Baydoun et al. (2018) is sufficient to guide accountants and auditors in dealing with such transactions. Given the central position of accountability in Islam, it is not surprising that a substantial literature has developed, covering both financial accountability and social accountability. The earlier literature tended to focus on the questions “accountability by whom?” and “accountability to whom?”. More recently, however, attention is being given to the question “accountability for what?” (Kamaruddin & Auzair, 2020). Yet even here there is a degree of déjà vu in the literature, as this was the approach of Maali et al. (2006) in their early study of Islamic social and environmental reporting. A useful feature of the Kamaruddin and Auzair (2020) study is that they triangulate their initial prescriptive development of “accountability for what?” by surveying stakeholders who might wish to use the reports of the Islamic social enterprises that they study. Much research into corporate governance in an Islamic context is based on comparable research in more conventional contexts. Quantitative research examines statistical associations among standard governance variables (sometimes aggregated into “governance scores”) and firm characteristics such as performance. In many studies, there are few, if any, specifically “Islamic” variables. However, governance research into the distinctive element of Islamic governance, the use of Shariah scholars and, particularly, the SSB provides a range of insights into the effectiveness of a governance mechanism that may be specific to IFIs and other Islamic entities, but could suggest new structures for more conventional entities. A formal board or committee that reflects on the ethical propriety of transactions and activities, rather than focusing on commercial concerns, could provide a model for business as a social and moral, not just a profit-seeking, activity (compare Carnegie et al., 2021a, b). However, research already mentioned in this chapter shows that the SSB does not always work as its advocates expect. As well as tensions between a desire to comply in a deep and sincere way with the principles of Shariah and pressures to maximize revenues and profits, the supply of Shariah scholars qualified to sit on SSBs is often limited. Research opportunities in Islamic accounting, accountability and governance abound. There is still a role for conceptual research exploring how commercial pressures and Islamic principles can best be reconciled through innovative accountability and governance structures. How far is the SSB model effective in practice, and could it be modified for non-Islamic entities? Is diversity in the structure of the SSB either within a single country or across different countries a problem, or is diversity actually or potentially a positive feature? An issue in terms of not only conceptual but also empirical research is the use of theory. As is the case for conventional governance and accountability research, the dominant theoretical paradigm is agency theory, with stakeholder theory often influencing more qualitative and interpretative study, but other theoretical perspectives, such as institutional theory (Karbhari et al., 2020) and resource dependence theory (Alam et al., 2022b), need to be explored. Empirical studies should be more ready to use qualitative methods such as interviews and observation, and mixed methods can often provide insights in situations where superficial compliance with the requirements of local governance regulations may hide significant var-

344  Handbook of accounting, accountability and governance iations in practice (Almulhim, 2014). Does chairman/CEO duality really operate effectively when the chairman is the CEO’s father? However, it is important to focus on distinctively Islamic aspects of governance, for instance in the operation of the board of directors. Is this a consultative and consensus-seeking process, as principles of Islamic governance such as those presented by Abu-Tapanjeh (2009) would suggest, or does the board effectively follow the lead of the chairman with no opportunity for discussion let alone dissent? Accountability and governance research in Muslim-majority countries is likely to echo such research in emerging economies, as most Muslim-majority countries, despite the wealth of some of them, fall into that category. Good research can be carried out following conventional approaches, but it is useful to consider specifically Islamic dimensions (for example, the study by Piesse et al., 2012 of corporate governance in MENA countries, despite being deeply informative, mentions Islam only in passing). It is not surprising that the first phase of research into Islamic accounting, accountability and governance concentrated on Islamic banks. The literature has been steadily widening to encompass different types of financial institution, to look at governance in businesses more generally in Muslim-majority countries, and into public sector and not-for-profit contexts. Recent studies examine Islamic governance in hospitals (Abdul Rahman et al., 2020) and zakat institutions (Mubtadi, 2019). This expansion of the literature should continue, with scope to address Islamic governance and accountability mechanisms in contexts such as schools and universities, workers’ organizations, professional associations, and social and sports clubs, among many others. A common deficiency of accountability and governance research is that it concentrates on the accountable organization and the individuals (such as directors and SSB members) who participate in performing accountability. Although it may be more difficult to obtain data, it must be remembered that accountability, to be effective, is a communication process, and the views and wants of those to whom organizations are or should be accountable need to be researched and understood. Opportunities for both conceptual and empirical research will continue to emerge, as this religion, with its overarching concern for society and the environment (Kamla et al., 2006), retains its exceptional position as a focus for the study and development of accounting, accountability and governance.

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16. Counter accounts, accountability and governance Darlene Himick and Eija Vinnari

OVERVIEW Counter accounts are alternative representations of the activities and impacts of organizations, industries or governance regimes. Often developed by activists or non-governmental organizations, their aim is to flag abuses of power and thereby rectify a state of affairs that is considered societally or ecologically harmful or otherwise undesirable. In this chapter, we examine extant counter-accounting research from the perspective of accountability and governance. Somewhat surprisingly, there appears to be fairly little research on these themes. The link between accountability and counter accounts is either ignored or taken for granted, whereas the notion of governance is hardly addressed. Much future research potential thus exists. We envisage opportunities for further enquiry that investigates these linkages in more depth. This is especially so since, considering the state our planet is in, counter accounts contesting the neoliberal hegemony and the misfortune it spawns are likely to increase in both number and form.

INTRODUCTION In this chapter, we explore whether and, if so, how counter accounts are implicated in shaping accountability and governance. These accounts, which take a wide variety of forms including reports, stories, poetry, images and more, are intended to provide a counter-narrative to powerful representations like traditional accounting, with its formally reported figures and narratives. Grounded in the notion of a multi-voiced, plural society, counter accounts aspire to introduce such pluralism into the governance and accountability of organizations, governments and other powerful entities by bringing a diversity of views and impacts to light. This is hoped to result in the eradication or at least reduction of unequal power distribution, and the emancipation of marginalized constituencies on behalf of whom the counter accounts are produced. The power of counter accounts is the way in which they engage people to pay attention to the alternative narratives which are otherwise hidden or silenced. Breaking free from formal accounting rules, including accounting standards and structures, the creativity and freedom which counter accounts enjoy help them to garner attention and activate emotion in their audiences. Frequently created and mobilized by social activists, they provide alternative takes on rational, quantified events, re-framing them to include their impacts, including the suffering of humans and non-human animals and the degradation of the environment. Their goal is to give voice to those who are sidelined in traditional dominant accounting narratives and to hold such narratives up for scrutiny. In this way, they could be expected to be deeply implicated 349

350  Handbook of accounting, accountability and governance in shaping accountability and governance and, in the process, broadening understandings and perspectives. This chapter proceeds as follows. We begin with an overview of the concept of counter accounts and its link to a multi-vocal, dialogical view of accounting, with a focus on how the concept has been mobilized in the academic accounting literature. The vast majority of counter accounts aim to hold actors to account for particular practices, and we review the ways in which counter accounts work to focus a lens on the accountability of powerful actors. Next follows a section on how counter accounts enact different forms of governance, through their ability to problematize existing governance structures, and how they incorporate differing views of effective governance. Finally, we end with their potential – both in the academic literature and in society – and close with suggestions for further study of counter accounts.

WHAT ARE COUNTER ACCOUNTS? Counter accounts have been defined as alternative representations of organizations, industries or governance regimes, produced by civic society groups in order to rectify a state of affairs that is considered harmful or otherwise undesirable (Thomson et al., 2015). Such accounts first attracted the attention of social and environmental accounting researchers who had become disillusioned by corporate social responsibility (CSR) reporting. For years, CSR reporting was considered the way forward to help tame corporate and organizational misdeeds. According to its proponents, the social and environmental information provided in voluntary CSR reports would help providers of finance and other stakeholders undertake comprehensive evaluations of companies’ overall performance, make appropriate decisions and thereby gradually steer production and consumption onto a more sustainable track (see Gray et al., 2014a). Yet, despite having become a firmly institutionalized practice among multinational companies (Bebbington et al., 2014), voluntary CSR disclosures have largely failed to fulfil the societal expectations placed on them (Deegan et al., 2002; Adams, 2004; Cho et al., 2010). A primary reason for this failure is that companies compile and publish CSR reports mainly for the purpose of image management, to guarantee their societal licence to operate, which is why the reports highlight positive results while downplaying or omitting negative ones (for example, Aerts & Cormier, 2009; Boiral, 2013; Milne et al., 2009). Moreover, it has been pointed out that the situation is unlikely to change due to conflicting institutional pressures that in effect compel companies to engage in organized hypocrisy by decoupling the promises made in their CSR reports from their proper actions (Cho et al., 2015). Criticism has also been levelled at those who believe that voluntary CSR reporting would, in any way, shatter the foundations of the capitalist market economy (Gray et al., 2014a; Spence, 2009). These fundamental shortcomings in corporate reporting and action have given rise to the need for complementary sources of information, which contemporary scholars call counter accounts.1 It is claimed that by offering additional information and portraying problematic issues in a different light, counter accounts are able to problematize and “make ‘thinkable’ and ‘governable’ such issues that are currently regarded as ‘unthinkable’ and ‘ungovernable’ by those in power” (Dey et al., 2011, p. 66). In addition, critical accounting scholars prompted by similar concerns of societal power inequalities and the dominance of particular worldviews see counter accounts as having potential to foster pluralistic democracy, which “recognizes and addresses differentials in power, beliefs and desires of constituencies” (Brown et al., 2015,

Counter accounts, accountability and governance  351 p. 627; see also Brown & Dillard, 2015; Gallhofer et al., 2015). Brown and Dillard (2013), for instance, maintain that the often-used consensus-orientated models of democracy entail a risk that those in a privileged socio-economic position end up dominating and imposing their own viewpoints in both broader societal discussions and corporate stakeholder engagement processes. The authors perceive various forms of counter accounts as potentially effective media for giving marginalized constituencies visibility and voice, thereby enhancing the pluralist quality of such debates and perhaps even facilitating the emancipation of such constituencies. Likewise, Lehman et al. (2016, p. 44) point out that counter accounts could offer “a way of challenging prevailing official positions” by providing new knowledge and alternative visibilities to the dominant neoliberal representation. Counter accounts have also been defined with reference to the core concepts of traditional accounting, namely information, users and decisions. While the traditional purpose of conventional accounting is to provide investors and creditors with predominantly quantitative and financial information about economic entities for the purposes of decision-making and assessing management’s accountability (APB, 1970; IASB, 2018), counter accounts may contain also qualitative and non-financial information concerning entire industries or governance regimes, for a broad range of constituencies who can utilize this information for making not only economic decisions but also moral and political ones (Vinnari & Laine, 2017). In practice, counter accounts can assume a variety of forms, such as one-off written reports, videos or a longer-term campaign including a range of materials. Often-cited examples from the early 2000s include the Other Shell Report, published by the Friends of the Earth as a response to Shell’s report People, Planet and Profit, and British American Tobacco: The Other Report to Society, published by Action on Smoking and Health, as an alternative perspective on the tobacco company’s social auditing initiative and associated disclosures (see Thomson et al., 2015). Counter accounts can be categorized in various ways. An early typology is offered by Dey (2003), who distinguishes between silent accounts and shadow accounts. A silent account refers to an alternative representation of organizational activities, compiled from the information produced and published by a focal organization, serving the purpose of presenting the organization in a different light. Although silent accounts may sound reformist rather than radical, their advantage lies in the fact that the organization in question cannot easily deflect accusations by claiming that the data upon which the account is based is false. A shadow account, in turn, refers to the disclosure of information that has been gathered from sources external to the organization under scrutiny. The purpose of shadow accounts is to fill in gaps in organizational reporting and challenge aspects that the organization may have misrepresented. In other words, shadow accounts are more radical in their aspirations than silent accounts, but because they rely on information produced outside the organization, they might become subject to allegations of data misrepresentation. A comprehensive typology of counter accounts has been developed by Thomson et al. (2015) building on previous research in accounting and social movement studies. The typology consists of four categories of counter accounts:2 systematic, partisan, contra-governing and dialogic. The types are distinguished on the basis of “differences in the underlying intentions, values and rationalities of those producing the accounts” (Thomson et al., 2015, p. 813). Systematic counter accounts question some aspects of a target organization’s activities, for instance by submitting evidence of environmental harm to appropriate regulatory authorities. Partisan external accounts, in turn, aim at transforming particular technologies, organizational

352  Handbook of accounting, accountability and governance conduct or elements of the dominant governance regime that are condemned by the actor(s) producing the counter account. Although partisan counter accounts may resemble systematic accounts, a major difference is that partisan counter accounts weave emotional narratives among factual evidence with the aim of emphasizing the morally and ethically questionable aspects of organizational or institutional action. Partisan counter accounts are confrontational in the sense that they are employed to “antagonize and de-legitimate elements within the existing governance regime” (Thomson et al., 2015, p. 814). In contrast, contra-governing accounts do not focus on a specific technology, organization or element of the governance regime, but instead aim to critique, challenge and ultimately radically transform the entire governance regime. Such accounts aim to “critique the fundamental knowledge base (ideology) of those in power” (Thomson et al., 2015, p. 814) and to replace it with their own ideology. Finally, dialogic counter accounts underscore the necessity of opening up discussions, listening to multiple voices and acknowledging the diversity of potentially irreconcilable viewpoints associated with a particular issue. The major difference between dialogic accounts and the three other types of counter accounts is that the producers of the former call for multiple accounts related to an issue and employ such accounts to identify common ground as a basis for initiating cooperation, rather than conflict. To summarize, the main purpose of counter accounts is to problematize organizational or institutional conduct that is perceived to emanate from unequal power configurations and to have harmful social or environmental impacts. Counter accounts are compiled by actors who are external to an organization and beyond its control, with the aim of initiating debate and discussion that will result in the emancipation of marginalized groups and, hopefully, lead society towards socially and environmentally beneficial forms of organizing.

STUDIES OF COUNTER ACCOUNTS AND COUNTER ACCOUNTS AS STUDIES The literature on counter accounts has approached the topic from a variety of angles. Some studies have investigated the counter accounts produced by activists and others, using these accounts as empirical examples of the phenomenon from a variety of theoretical standpoints. Other studies have themselves constructed their own counter accounts. Other research has remained at a conceptual level, arguing for the increased use of these accounts to bring a more democratic lens or provide pathways for participation in otherwise marginalized issues, or perhaps offering suggestions on what needs to change for counter accounts to have more impact. Studies of Counter Accounts A key question in research on counter accounts pertains to their emancipatory intent and potential. An early paper in this theme is Gallhofer et al. (2006), which examines this potential in the case of online reporting. In their study, emancipation is understood in a broad sense, as the challenging of the hegemonic positions held by governments, large companies and associated institutions to promote democratic principles and practices for the benefit of citizens (Gallhofer et al., 2006, p. 682). The authors noted that at the time, some of the positive potential of online reporting was being realized in that it helped activist organizations engaged

Counter accounts, accountability and governance  353 in a counter-hegemonic struggle to produce and disseminate a wealth of material, contact other non-governmental organizations (NGOs) and reach a wide audience to broaden deliberation on proposals or strategies. On the other hand, that potential was also impeded by the increasing colonization of the internet by anti-democratic states and commercial interests. These findings anticipate what is well established today (spring 2022); that the internet, especially social media, provides tools for both hegemonic and counter-hegemonic forces. Apostol (2015) continues the theme of emancipation, analysing the role of civil society’s counter accounts in facilitating democratic change. She examines the popular protests and counter-accounting campaigns that emerged as a response to a Canadian mining company’s plans to open a gold mine in Romania, a project strongly supported by the Romanian state. Civil society groups produced counter accounts that contested the purported economic benefits while laying out the various ways in which the mine would produce destructive impacts on ecosystems and biodiversity, historical artefacts and other cultural heritage, as well as the local community who would need to move away from the village. Apostol argues that the counter accounts had many positive impacts, such as revealing the unbalanced representation of the project in the company’s reports, bringing out the voice of the locals resisting the mine, initiating public discussion on the social, cultural and environmental problems associated with the mine, and showing how the Romanian state sided with the company. Yet, unfortunately but not unexpectedly, the counter accounts did not result in the company withdrawing from its plans or the Romanian state changing its viewpoint in this respect. Similar small-scale emancipatory effects have been found by Laine and Vinnari (2017), who focus on the societal dynamics and effects associated with animal rights activists’ counter accounts compiled on behalf of farmed animals. With these accounts, the activists sought to show and question the ways in which animal production violates the animals’ rights and welfare. In practice, the counter accounts took the form of, among other things, secretly filmed videos from Finnish piggeries. In theoretical terms, Laine and Vinnari (2017) combine Thomson et al.’s (2015) typology of counter accounts with discourse theory (Laclau & Mouffe, 1985; Laclau, 2005) to analyse interview and documentary data. They find that although the counter accounts were to some extent able to rearticulate the meaning of animal production in the Finnish context, their societal impacts remained rather small-scale; public discussion emerged for a moment and meat consumption decreased marginally. Laine and Vinnari (2017) suggest that one potential reason for this might be the dominant societal groups’ dismissal of the counter accounts and those groups’ attempts to constitute the activists’ identity as irresponsible, militant and negligent, resulting in a polarized situation where the parties harbour an antagonistic relationship towards each other. The mechanism by which counter accounts are expected to produce emancipatory effects has also been awarded attention. Vinnari and Laine (2017) examine the moral mechanism of counter accounts in their case study of animal rights’ activists counter accounts of the animal industry (empirically related to Laine & Vinnari, 2017, reviewed above). Drawing on a combination of media studies and critical (semiotic) discourse analysis, they find that the emancipatory and transformative potential of counter accounts is associated with their ability to act as a form of moral and political education. This is because they repeatedly suggest to their audiences how to feel about, and act publicly/politically on, the suffering of an oppressed group. In relation to the small-scale effects noted by Laine and Vinnari (2017), the authors suggest that in order to engender transformative political action, counter accounts would need to explicate

354  Handbook of accounting, accountability and governance the moral case against a harmful practice, articulate a clear vision of the sought-after future as well as evolve over time in terms of both mode and content. In the same vein, Himick and Ruff (2020) analyse how social movement activists’ counter accounts frame profitmaking or profits and how those accounts give rise to action in multiple case settings. Informed by framing theory, the authors examine counter accounts of profit produced by the UK abolition movement, by the Médecins Sans Frontières access to essential medicines campaign and by the Brigitte Bardot Foundation’s opposition to the Canadian seal hunt. In the empirical cases examined, counter accounts sought to emancipate, respectively, colonial slaves from a life of drudgery under violent oppression, poor individuals from the power of rich pharmaceutical companies and non-human animals from unnecessary death through an arguably recreational activity. Similar to Vinnari and Laine (2017), Himick and Ruff (2020) find that the activists reframe profit for the purpose of making visible the suffering of distant others, eliciting moral outrage on behalf of these oppressed groups and, ultimately, achieving a more just society. They remind readers that all framings are necessarily incomplete, and accounting is no exception; in this case it allows outsiders to challenge conventional interpretations of profit and illustrate how accounting can be utilized as an apparently rational tool for “emancipation at a distance” (Himick & Ruff, 2020, p. 700). Research that examines counter accounts produced by activists and others is very diverse in terms of empirical settings and theoretical perspectives. Perkiss et al. (2021) examine how Nestlé’s child labour practices are both presented (as Goffman’s frontstage) and critiqued (by activist-generated counter accounts). In this view of counter accounts, emancipation is connected to questioning and problematizing a corporate organization’s legitimacy. The counter account is a tool, used to question the organization’s legitimacy in a way that is to some degree a challenge to the established order. An interesting aspect to their study is the extension to the “counter- to the counter-accounts”, in which Nestlé responds to its critics, partly by controlling certain media narratives. These corporate responses demonstrate the potential limits to the emancipatory identity of the counter account if powerful actors can themselves also draw upon the same strategies as the activists who seek change. The issue of how, through what media or material means, counter accounts are produced or disseminated is an important topic, and one which is linked with emancipation as it provides a venue to level the playing field against the corporative control of narratives. For instance, in today’s digital era, social media is a means for dissemination that provides cost-effective access to wide audiences, contributing to democratizing the construction of narratives around a cause. In contrast to official media accounts, which we have seen can be used strategically by corporations to control the narrative, online forums still have much potential for counter account dissemination (Perkiss et al., 2020). These online forums facilitate new counter accounts as well as responses to counter accounts (see also Lowe et al., 2012 for a discussion of the potential of the internet, and particularly digitized open data). In line with research that studies the forum in which the counter accounts are produced is the idea that not all participants in a debate have equal access to information in different forums. In other words, it is important to acknowledge the lack of information available to those outside the organization when considering how available counter accounts are as a strategy. Sikka (2011), for instance, calls for the use of counter accounts, particularly pointing to how citizens can participate more deeply in corroborating corporate claims. However, given the “selective disclosures” which are “bolted on to financial reports” (Sikka, 2011, p. 824), it is imperative to strengthen the ways in which counter accounts could be produced in the first place. While civil

Counter accounts, accountability and governance  355 society organizations elevate the human rights agenda through these accounts, more could be done to strengthen the availability of information they need to do so. In his study on Chad and Cameroon, Sikka (2011) suggests concrete actions, such as placing freedom of information laws on corporations (which are increasingly displacing the state – an entity already subject to freedom of information regulation), so that they are required to publish their investor agreements and enhance the ability to scrutinize their practices as well as enhance the accountability of corporations. Given how much counter accounts depend upon providing information and countering information, their emancipatory potential is constrained in the face of dominant interests who control that information. But in the absence of regulation, as Deegan (2017) notes, it is difficult to see how this will emerge. Deegan (2017, p. 84) suggests the development of “practice sets” within the classroom, presenting counter accounts to learners. This would assist in showing them that for many areas of operation there are potentially multiple perspectives. Counter accounts as a strategy are, thus, nested within broader forms of struggle and reform. Even if activists, or those outside the organization, get access to the information they need, or find more democratic venues to disseminate their counter accounts, there remains the issue around whether the account genuinely confronts the dominant entity in a way that holds them to account and creates the demand for a response. Pupovac and Moerman (2020), for instance, take two separate accounts about the Niger Delta oil spills: Shell’s CSR reports and Friends of the Earth’s counter account. They show, using the concept of the spectacle as used by Debord (1967), how these two accounts can confront one another – in the theatre. Setting up the two as actors on stage, their paper illustrates how accounts need the space to truly respond to moral critique; and also how those for whom civic society organizations like Friends of Earth speak for also need to be “on stage” to be part of the dialogue. It is not enough to create a counter account. The way in which they are used and the strength with which they confront the hegemony they seek to alter are crucial for their emancipatory potential. Studies that are Counter Accounts As mentioned above, counter accounts are also used as research method by scholars with an emancipatory intent. Some of these studies focus on individual companies or industries, while others target entire governance regimes such as neoliberal capitalism. To begin with the first group, Boiral (2013) produces a counter account of energy and mining firms’ Global Reporting Initiative (GRI)-based sustainability reports that had been rated A or A+ by the organization. He finds that those reports are significantly biased towards reporting positive events as some 90 per cent of the significant negatives that took place during the reporting period were omitted from the firms’ reports. In addition, his analysis indicates that the majority of the pictures included in the reports can be conceptualized as simulacra that are disconnected from the actual effects of the firms’ operations. Boiral (2013) concludes that counter accounts are necessary to reveal discrepancies in firms’ sustainability reports and to flag flaws in the transparency of information provided. In broader terms, he considers such accounts necessary so that we can “emancipate ourselves from the hegemonic discourse conveyed in sustainability reporting” (Boiral, 2013, p. 1045). In constructing counter accounts, scholars can themselves participate in challenging dominant narratives. Such work can generate meaningful comparisons between corporate claims and other forms of knowledge. For instance, Talbot and Boiral (2018) create their own counter

356  Handbook of accounting, accountability and governance account by comparing a select group of company-produced climate reports against the GRI method these companies should have used in their reporting. Using the concept of counter account as a challenge to corporate impression management, they revealed the disclosure of noncompliant information, the legitimation of negative information through neutralizing or obfuscating it, as well as enhancement of positive performance. Contrasted with this disclosure-focused work is academic counter accounts created through interviews of labour rights NGOs. Islam et al. (2021) create counter accounts by asking NGOs about the narratives produced by multinational corporations (MNCs) operating in Bangladesh around the time of the Tarzeen fire and the Rana Plaza collapse (the period covering 2012–14). By putting the MNCs’ account to the representatives of these NGOs, the authors uncovered the counter account which challenged the MNCs’ moral power and, consequently, their moral authority to determine what was “acceptable” labour-orientated human rights. A study that well demonstrates the usefulness of scholarly counter accounts is Ylönen and Laine (2015), which constructs a counter account of how a major Finnish pulp and paper company used transfer pricing to gain considerable tax benefits. In this case, the counter account is produced on behalf of the Finnish government, which did not receive the tax income due to it, and, ultimately, on behalf of the citizens who are either deprived of certain public services due to lack of public funds or have to pay more taxes to compensate for the corporation’s tax planning activities. The company’s silence on these arrangements is contrasted with its purported commitment to accurate and transparent communication, to the highest ethical principles and, therefore, to being a role model willing to engage in an open dialogue with its stakeholders. Ylönen and Laine (2015) point out that counter accounts created by scholars to challenge corporate hegemony are particularly significant in areas such as financial reporting and taxation, which require professional knowledge, expertise and ethics. Moving on to the group of scholarly counter accounts which targets entire governance regimes, Collison et al. (2010) criticize Anglo-American neoliberal capitalism by offering a counter account of its socio-economic performance. In terms of empirics, the authors review and update cross-sectional and longitudinal indicators on child mortality in wealthy nations and the relationship between these figures and income inequality. They argue that the statistical correlation between hard-nosed capitalism and increased child mortality strongly calls into question the claimed superiority of this variant of capitalism. Lehman et al. (2016) continue the critique of neoliberalism by compiling counter accounts in the form of immigrant narratives of their lived experiences. More specifically, the authors’ aim is to reveal the social imbalances and inequalities associated with neoliberal immigration policies of the USA, Canada and the UK. The authors find that three countries’ immigration policies are operationalized through the responsibilization of individuals, corporations and universities, with accounting technologies facilitating such responsibilization processes. As other entities are responsibilized, the authority of immigration policies shifts away from elected and civil officials. The immigrants in turn learn to internalize fear as they become subject to surveillance and classification, which divides them into wanted and unwanted based on their capacity to contribute to the economy. These scholarly counter accounts therefore make visible the darker side of immigration policies that privilege the productive capacity of immigrants over their social and moral agency. Finally, Andrew and Baker (2020) explore the transformative potential of a new form of data, leaked documents, as a form of counter accounting. They do this by producing a shadow account of the nature of neoliberal hegemony based on documents published by Wikileaks as

Counter accounts, accountability and governance  357 part of the public scandal titled “Cablegate”. These documents revealed private communications between various United States Embassy officials concerning Chevron Nigeria between 2002 and 2010, illustrating how local communities’ resistance towards the continuation of oil production in Nigeria was overpowered and silenced by the state–capital nexus involving both government and business actors. Andrew and Baker (2020) claim that leaked documents hold potential to be used as a basis for counter accounts to challenge powerful hegemonic coalitions or, in the spirit of Mouffe (2018), to re-politicize and radicalize democracy.

WHAT DO COUNTER ACCOUNTS HAVE TO DO WITH ACCOUNTABILITY? In this section we will examine how the relationship between counter accounts and accountability has been addressed in prior research. Overall, we note that the majority of counter-accounting studies do not engage with the theme of accountability, except in passing, and many of those that do seem to take the concept and its connection to counter accounting for granted. Hence, only a handful of studies in our sample offer theorized notions of accountability and/or in-depth reflections on the accountability mechanism associated with counter accounts. In what follows, first we provide examples of articles that provide fairly straightforward definitions of accountability but still explain how they consider counter accounts to advance accountability and, second, we consider in more detail the studies that theorize accountability and/or reflect on how counter accounts might contribute to the discharge of accountability. One of the posited linkages between counter accounts and accountability is the idea that such accounts are intended to pressure companies to be more accountable to societal groups. This is illustrated by O’Sullivan and O’Dwyer’s (2009) study, which concerns NGOs’ counter-accounting activities related to the initiation and development of the Equator Principles, a set of social and environmental risk management guidelines for commercial banks’ project finance activities. O’Sullivan and O’Dwyer (2009) define accountability in a broad sense with reference to Roberts and Scapens (1985, p. 447) as “the giving and demanding of reasons of conduct”. They state that one of the key motivations for NGOs’ counter accounts is “a desire to hold organisations to account and force them to be more accountable for their actions” (p. 559). In the case they examined, various types of counter accounts were utilized by NGOs to, first, reveal the socially and ecologically harmful impacts of projects financed by commercial banks; second, pressure the banks to screen projects to be financed by applying the Equator Principles; and third, compel the banks to report on their activities in this respect in a transparent and holistic fashion. As a result of their longitudinal study of the dynamics between the NGOs and the banking sector, O’Sullivan and O’Dwyer (2009) conclude that although the NGOs’ counter accounts set in motion the development of the guidelines, they were less successful in increasing accountability as the banks only agreed to a minimal level of disclosure. Dynamics between stakeholders and business are also analysed by Rodrigue (2014). However, whereas O’Sullivan and O’Dwyer (2009) examine counter accounts as a tool wielded by NGOs to increase societal awareness and pressure organizations to implement more comprehensive accountability mechanisms, Rodrigue (2014) combines academic enquiry of the dynamics of counter accounts with an evaluation of the type of accountability

358  Handbook of accounting, accountability and governance approach adopted by the focal company. In this respect, Rodrigue (2014) responds to Dey’s (2007) call to form a comprehensive picture of organizational accountability by comparing the information provided by a Canadian forestry company with the information included in its stakeholders’ counter accounts. Rodrigue (2014) defines accountability with reference to Gray et al. (1997) as “the duty of an organization to provide an account of the actions for which it is held responsible in the eyes of its stakeholders” (Rodrigue, 2014, p. 122). Further, she mobilizes Unerman’s (2007) idea of different types of accountability forming a continuum from holistic to strategic accountability. Briefly, holistic accountability demands that a firm be accountable to all stakeholders impacted by its operations regardless of their importance to the firm, whereas strategic accountability extends only to those stakeholders that are considered important by the firm because they can have an impact on the achievement of its objectives. In addition to identifying different patterns of information flows between stakeholders and the company, Rodrigue (2014) finds that the company’s stance on accountability is mostly strategic as it reports selectively on aspects of its performance that are most relevant to its shareholders and rarely reacts to other stakeholders’ counter accounts. Thus, also in this case counter accounts were perceived to have only a relatively small impact on improving an organization’s accountability to a broader stakeholder base. While the two studies reviewed above (O’Sullivan & O’Dwyer, 2009; Rodrigue, 2014) examine counter accounts intended to problematize the harmful practices of, respectively, an industry and a single company, Denedo et al. (2017) consider counter accounts that problematize the practices of not only businesses but also local and national government. Denedo et al. (2017) note as their starting point that one of the main drivers of counter accounts is the lack of accountability and governance systems designed to protect human rights and the natural environment. In particular, counter accounts are devised by what the authors call alternative networks of accountability and governance, which use the accounts to problematize extant practices and to instigate intervention from the part of power holders. Interestingly, although accountability is mentioned often, the authors do not define it in any way. In empirical terms, Denedo et al. (2017) examine international advocacy NGOs’ counter-accounting campaigns aimed at making visible accountability gaps exploited by multinational oil companies operating in the Niger Delta, such as the lack of effective government regulation of the industry, to change harmful practices and bring about reforms of governance and accountability systems. Interestingly, the interviewed NGO representatives seem to have implicitly questioned the importance of accountability as an end in itself. They doubted that counter accounts and other forms of increased accountability would result in any significant change in the Niger Delta. Instead, they perceived a pressing need for NGOs to establish coalitions with power holders such as investors, judicial systems and international rule enforcers (Denedo et al., 2017, p. 1329) so as to initiate a comprehensive reform of the country’s governance and accountability systems and thereby curb multinational oil companies’ destructive practices. As mentioned above, only a handful of papers offer theorized notions of accountability. One of these is Murphy and Moerman (2018), which discusses how “Strategic Law Suits Against Public Participation” (SLAPPs)3 effectively prevent the use of counter accounts and other forms of citizen participation in politically tuned public debates. The authors define accountability with reference to Bovens (2010), distinguishing between accountability as a mechanism and accountability as a virtue. Accountability as a mechanism is an ex post facto process which

Counter accounts, accountability and governance  359 consists of three stages: an actor’s obligation to provide an account to explain their actions and decisions, the opportunity to question this actor about the account, and the judgement passed by the forum to whom the account is presented (Bovens, 2010, p. 951). This type of accountability, which is discharged, for instance, through organizations’ formal reports, is passive and backward-looking. In contrast, accountability as a virtue is future-orientated and active as it calls for the ex ante exercise of judgement, focusing on what should be done in each situation. Accountability as a virtue is also normative as it offers a set of standards for evaluating the actions of others in a public sphere where being accountable is considered, in itself, to be virtuous (Bovens, 2010). The mechanism through which Murphy and Moerman (2018) expect counter accounts to improve accountability is by “problematizing self-serving and hegemonic organizational reporting” (p. 1775) and by promoting instead “a civic ideal of transparency and accountability” (p. 1782). In particular, counter accounts are considered to offer an alternative accountability mechanism that enables the relative virtue of corporate behaviour to be evaluated against civil society’s norms (p. 1788). In empirical terms, the authors study SLAPPs brought by McDonald’s to quell public resistance to its plans to open an outlet in an Australian suburb and find that SLAPPs are a threat to both accountability as a mechanism and accountability as a virtue. An alternative theorization of accountability is employed in Perkiss et al. (2020), which considers the potential of Spotlight Accounting to “improve the accountability propensity of contemporary CSR” (p. 399). Spotlight Accounting is, according to the authors, a form of counter accounting that relies on crowdsourcing to compile publicly available information about organizations’ social responsibility on an online platform. Such information can be gathered by interested individuals from corporate CSR reports, official government reports and news media, as well as silent and shadow accounts. In theoretical terms, Perkiss et al. (2020) see Spotlight Accounting as a “third space” between conventional, company-focused financial accountability and critical dialogic accountability as envisioned by Dillard and Vinnari (2019). For more on Spotlight Accounting, see Chapter 17 of this Handbook. Critical dialogic accounting is inspired by Mouffe’s (2013) agonistic democracy, a political theory which considers deliberative, consensus-seeking approaches to democracy to be insufficient in contemporary (Western) democracies characterized by plurality of values and power differentials. In Mouffe’s (2000, 2013) view, we should acknowledge such power differentials and the antagonisms stemming from irreconcilable viewpoints, while being open about the political nature of the decisions that ultimately need to be made. In this spirit, Dillard and Vinnari (2019) theorize critical dialogic accountability as an iterative process whereby an organization is considered to be accountable to all constituencies, human and non-human, affected by its activities. These constituencies’ interests are represented by responsibility networks, which devise criteria that are then utilized to evaluate the organizations’ activities based on disclosures emanating from the organization’s accounting systems designed to accommodate each constituency’s information needs. According to Perkiss et al. (2020), Spotlight Accounting adheres to some of these principles as it enables a plurality of stakeholders to create and view accounts of CSR. In empirical terms, the study engaged university students to collate information about selected companies and indicators on WikiRate, a non-profit platform where users can upload corporate data related to CSR and sustainability. As a result of their analysis, the authors note that the theoretical potential of this form of counter accounting was left largely unfulfilled because of obstacles in data accessibility, ambiguities in the scope of data covered, lack of benchmarks for materiality

360  Handbook of accounting, accountability and governance considerations and the vast amount of effort required from the “crowd” gathering the data. They conclude that because of the paucity of other data sources, improved accountability through Spotlight Accounting requires improved corporate reporting. This is somewhat ironic as deficiencies in corporate reporting are one of the reasons why counter accounting emerged in the first place. In contrast to the studies considered above, Gray et al. (2014b) explicitly challenge the taken-for-granted position of counter accounts as a mechanism for discharging accountability. Taking their cue from Wright’s (2010) work on social transformation, Gray et al. (2014b) explore the potential of social accounting and different types of accounts to this end. Based on many years of research, Wright (2010) differentiated between three main ways in which social change can take place: rupture, symbiotic transformation and interstitial transformation. Of these, rupture refers to a revolution in a Marxist sense, whereby capitalist structures are more or less violently crushed; symbiotic transformation indicates reformist changes to alleviate the most harmful consequences of capitalism; and interstitial transformation refers to the construction of non-capitalist institutions within the niches of capitalism. According to Gray et al. (2014b), the social accounting project has thus far experimented mainly with symbiotic transformations, such as voluntary social and environmental reporting, which are easier for the powerful to accommodate but easily result in co-optation and a watering down of initial aims through selective reporting (Boiral, 2013) and representational techniques (Tregidga et al., 2014). Those authors appear to agree with Wright’s (2010) view that interstitial transformation holds the most promise in terms of attaining a more equal, democratic society, and call for more counter accounts and other interstitial accounts to further such development. However, they also point out that the position of such accounts in relation to accountability is ambiguous (Gray et al., 2014b, p. 270): Those [accounts] of a more symbiotic intent appear to be motivated to help an entity develop and discharge its own accountability whilst those of more explicitly interstitial intent would seem to be engaged in some combination of speaking for/on behalf of those whose relationships demand an accountability; speaking for some notion of principle regarding such accountability; and/or directly and unequivocally seeking to speak truth to power. Whilst accountability remains clearly one part of the functioning of these accounts, it may actually be that accountability can no longer be seen as the sine qua non of some of these developmental forms of social accounting.

Unfortunately, Gray et al. (2014b) do not delve deeper into what the relationship between accountability and counter accounts – as well as interstitial accounts more broadly – could look like. To us this suggests an opportunity for further research, an issue that we will pick up again in the concluding section of this chapter.

HOW ARE COUNTER ACCOUNTS RELATED TO GOVERNANCE? Governance is a term so broad in both scholarship and practice as to virtually escape definition (Pierre & Peters, 2000). Indeed, its “structures, systems, and practices” (CAAF, 2021) include monitoring, reporting and decision-making about all aspects of an organization. For the purposes of connecting counter accounts (in practice or research) to governance, we position these accounts in two ways. They can attempt to change existing governance practices into

Counter accounts, accountability and governance  361 something which they believe will improve the condition of the issue they call attention to, or they can use existing governance practices to stake their claims. Regarding the use of counter accounts to transform existing governance structures, in one of the only studies that expressly dealt with governance, Denedo et al. (2017, as discussed in the previous section) outline how the NGOs in Nigeria sought out the reform of certain aspects of the governance system related to oil and its exploration in that country. The NGOs decided upon counter accounts as a strategy to alter pre-existing governance systems and found some success in reforming part of the regulatory structure, with one of their interviewees suggesting that the counter accounts “galvanised companies to become a lot more serious about responding to concerns as they are raised” (p. 1332). To those activists, a “catalogue of harm to people and their natural environment” (p. 1321), which had not been included in the corporate or governmental accounts of the Niger Delta, was one way to address the lack of transparency. One of the ways in which governance was impacted and altered was through the disruption of the political dynamics and power struggles around the governance of the oil reserves. Problematic, though, was that despite an increase in transparency brought about by the catalogue of harm and related counter accounts, the governance structure related to how resources were assigned to mitigate/prevent oil spills or remediate impacted lands and rivers did not change. As Denedo et al. (2017, p. 1333) note, “Better accounting for this problem allowed [NGOs] and other coalition partners to ask better questions about what had been done, but had not led to the resolution or remediation of the problematic consequences of oil spillage”. For that to take place, the authors argued that the involvement of local communities in the governance practices that related to remediation – and not to transparency – was necessary. This fascinating account drills down into the different manifestations of governance practices, hinting that some are more important for transformative action than others. It points to research that, we believe, is needed to begin to connect the dots between counter accounts and governance. As governance is broad, there are multiple ways in which it materializes, and this nuance can be captured with a look at where, and to what practice, a counter account is directed. Clearly, more research is warranted that examines how, and to what extent, actual governance practices and systems are either the target of counter accounts, or are changed or reinterpreted, in reaction to counter account production. Concerning the second mode of connection between governance and counter accounts, we can turn to the practices of corporate governance for a fruitful example of how counter accounts can use governance practices themselves. For instance, one of the classic mechanisms for corporate governance is the annual general meeting (AGM) which offers the opportunity for owners (and their proxies) to pose questions to management. This venue presents a physical and temporal space in which the accounts of management can be directly challenged, including through the presentation of alternative accounts. As Apostolides (2007, p. 1279) notes, mere attendance at or even outside an AGM by protest groups can often create headlines, and the opportunity to question the board at AGMs offers one of the few routes through which small private investors can make their views heard, often in the “eager earshot of the press and other media, who focus on such debacles as newsworthy events”. Some activist groups purchase shares (since only one share is needed for participation) and these “protestor-shareholders” gain access to the AGM to raise their concerns including through the provision of counter narratives to the management account. ShareAction, an organization that advises shareholders and others to become engaged in a number of environmental and social issues and use their voice to effect change, expressly uses the AGM process

362  Handbook of accounting, accountability and governance as one of its protest tools, training volunteers to become “AGM Activists”.4 For example, the fossil fuel divestment movement has recently begun to produce counter accounts related to the claims that companies make regarding their “net zero” targets. Protestors at the British Petroleum (BP) London AGM targeted the company’s claims made around moving to net zero by producing a counter account listing actions taken by BP that undermined the claim (Hayhurst, 2021). Another classic venue in which corporate governance is practised is the board of directors – its composition, meeting procedures and decision-making processes. By taking further the research that exposes the benefits of diversifying the composition of boards, a counter-accounts focus can highlight how such diversity opens the potential for new accounts to be produced and in what ways. This sort of focus turns the lens not only to the “who” of the counter account (that is, whether it is produced by activists) but also to the “where” of the counter account; in other words, the venue in which the account is disseminated, which also influences whether the accounts themselves are written, oral, visual or other. Finally, thinking about governance and counter accounts leads us to problematize the microand macro-levels at which governance operates. The practices we have identified are enacted at the organizational level all the way up to “global governance” in which broad, international networks operate to govern transnationally. As Perkiss et al. (2021, p. 21) ask, “Might counter accounts be more effective if they were orientated to possibilities for global governance? Or, realistically, are different counter accounts, each tackling micro-level issues, needed in addition to addressing the global condition?” These questions support the need for researchers to begin to unravel the different governance structures, at various levels, exercised through a variety of practices, with which counter accounts interact.

CRITIQUES OF COUNTER ACCOUNTS As we noted earlier, one of the main goals of counter account production is to transform some (undesirable) practice into something different. Further, there is a strongly emancipatory element to counter account production, under the belief that bringing transparency and information to misdeeds is the path towards outrage and reform. But some scholars have noted the weakness in this approach, suggesting that capitalism is highly skilled in “re-articulating” in ways that do not “threaten the basic modus operandi of business and markets” (Spence, 2009, p. 224; see also Catchpowle & Smyth, 2016). Taking a Gramscian approach, Spence (2009, p. 224) suggests that so long as counter accounts operate within that existing structure where business can legitimately offer only superficial change to the status quo, the “new order cannot quite be born”. The task, then, is to avoid placing too much of the heavy lifting on the counter account, and instead pair it with a completely separate activity; that is, the formation of a countervailing power, which itself is distanced from the economic base that can so handily capture the narrative in ways that are so unthreatening to it. Perhaps the opposite approach is also possible, in which activists work closely with the hegemony they wish to supplant. A good example of this approach is the study by Toms and Shepherd (2017), which looked at the campaign to regulate child labour during the 19th-century British Industrial Revolution. They showed how the movement’s “Trojan horse” strategy included progressive business interests in its leadership, gaining access to their business records and mounting their argument in concert with that group’s interests. What is

Counter accounts, accountability and governance  363 suggested here is a deep understanding of the complex and myriad forms that power can take; for example, in that study it mattered whether the interests of capital were all aligned during a conflict, or whether they were pitted one against the other from within. In the latter case (as shown by Toms & Shepherd, 2017), a social movement might construct counter accounts in alliance with one of the competing factions, even gaining access to privileged information (like accounting information) by doing so. Further, the scope of the counter account target can, at times, be seen as simply too broad and imprecise to directly challenge in meaningful ways. According to Li and McKernan (2016), counter, shadow and silent accounts represent what Srnicek and Williams (2015, p. 3) call “folk-political thinking” or “the fetishisation of local spaces, immediate actions, transient gestures, and particularisms of all kinds”. Echoing the views of Srnicek and Williams (2015), Li and McKernan (2016) claim that counter accounts and other alternative forms of accounting and activist campaigning might generate notable local effects but, being more symbolic than substantive, fail to instigate any systemic change in the battle to eradicate global capitalism, suggesting that counter accounts themselves are problematic. Gallhofer (2018) briefly considers counter accounts through an ecofeminist lens and finds them dualist and anthropocentric. She argues that although counter accounts have brought to the fore the voices and views of marginalized groups affected by corporate actions, they reflect “a problematic Western dualism (i.e., official reports/unofficial reports)” (p. 2120). Further, Gallhofer (2018) claims that counter accounts represent only human beings and such anthropocentrism is untenable from an ecofeminist perspective. As a solution, she calls for counter accounts that would try to represent the point of view of non-human beings, although this would necessitate an act of mediation. Although it is not our intention to engage in a critique of Gallhofer’s (2018) claims, we would like to point out that the representation of non-human animals’ viewpoint is precisely the point behind the animal rights activists’ counter accounts reviewed further above (Laine & Vinnari, 2017; Vinnari & Laine, 2017; Himick & Ruff, 2020).

WILL COUNTER ACCOUNTS SAVE OUR PLANET (AND US)? SOME FUTURE RESEARCH AVENUES As far as we can tell, counter accounts maintain their position as part of a broad array of activist tactics. So long as human rights or animal rights are violated and human activities wipe out entire species and ecosystems while governments and companies wring their hands or simply do not care, there is a pressing need for accounts constructed “for the other, by the other” (Dey et al., 2011, p. 64). The development of new technologies is likely to result in a proliferation of the forms assumed by counter accounts, prompting researchers to investigate these new forms. As mentioned earlier, the majority of counter-accounting studies do not take issue with accountability and of those that do, many seem to take the connection between counter accounts and accountability for granted. The only exception seems to be Gray et al. (2014b), who suggest that accountability might have something to do with counter accounts but is likely to play a smaller role than in the case of formal corporate reporting. Such observations can be drawn upon to provide plenty of opportunities for future research efforts. For one, scholars could try to construct a more nuanced typology of the different ways in which the relationship between such accounts and accountability is conceived or theorized, either explicitly or

364  Handbook of accounting, accountability and governance implicitly. The studies we have cited herein broadly suggest that counter accounts are expected to (i) pressure or help an organization to be accountable to a broader stakeholder base; (ii) discharge accountability on behalf of an organization; or (iii) offer an alternative mechanism of accountability that enables public evaluation of organizational activities. All these are slightly different things, and therefore it might be interesting to examine these more deeply or determine whether more such conceptions can be identified. Future research could also investigate if there is an association between the type of entity targeted by the counter account and the expectations regarding accountability. We could imagine that the role of accountability would be clearer in the case of counter accounts that criticize individual organizations or industries, and less clear in the case of counter accounts that critique entire governance regimes. Moreover, as a complement to scholarly interpretations, it would be interesting to learn how the developers of counter accounts perceive accountability and its relationship to such accounts. For instance, Denedo et al. (2017) indicate that activists did not consider increased accountability a panacea; what they were trying to achieve was a more fundamental change in societal power configurations and regulatory institutions. Therefore, as also insinuated by Gray et al. (2014b), could it be that accountability only plays a minor role in the mechanism of change implied by counter accounts? This might suggest that “accountability” as a formal mechanism is not given the weight by activists that it has within governance regimes that rely upon it to legitimate their actions, an idea in need of empirical investigation. This leads to a more fundamental question for the counter-accounting project, which is: how do we know whether counter accounts work or rather partly work? One problem with the literature has been its reluctance to get into the level of detail required in terms of discovering impact. As Dillard and Vinnari (2017, p. 102) note, the starting point is to clearly articulate the “source and extent” of the injustice at issue. What would it mean, in a given setting, for an alternative account to be successful? If counter accounts are to have the future we predict, which is that they increase in scope and number, including through new venues and technologies, then an underlying issue will be to consider ways to compare and contrast their successes and their failures. Future research could also pay attention to the way that governance is implicated in the production and use of counter accounts. The broad meaning and scope of governance means that researchers have a variety of potential settings in which counter accounts might play a role. For instance, is governance the target of the counter account? Or is it the means through which the counter account is disseminated? In the former case, it would be useful for research to pull out deeper understandings of how activists problematize particular governance practices, and what expertise they draw upon when producing the counter account. Do they engage with the technical and financial information that informs the governance practice, or do they create their own understandings of governance to try to completely transform how governance works? Work which investigates the latter (means) could contribute to our understandings of the venues, spaces and technologies through which counter accounts operate more broadly. It could purposely look for, and try to theorize, the choice of venues (in-person AGMs vs. online petitions, for instance), and how these contribute to the kind of account which is produced and the way that the account becomes amenable to “travel” (through whose agency, through what material means). Another line of enquiry is, as we mentioned earlier, to take as a focus the level of governance that is at issue. Some counter accounts are specifically aimed at the micro- while others

Counter accounts, accountability and governance  365 are aimed at the macro-level of practice and procedure. For instance, whether an account aims to highlight how a single polluting instance was managed versus how an entire industry is governed has implications for what kinds of accounts are even possible, what audiences those accounts are aimed at, the kinds of answers they present as possible and, moreover, what lessons can be learned.

CONCLUSION Our hope in this chapter has been to highlight the research origins of the counter accounts concept, and to organize the current literature into roughly two lines of focus: those which have analysed the accounts produced by some social movement and those which have produced their own counter accounts. In addition, we have brought the concept back to the theme of this Handbook. As counter to existing accounts, these narratives are intimately related to accounting and its formal, dominant representations of organizational events. As ways to bring new visibilities to organizational actions, they implicitly and explicitly demand accountability from those they target. And, as accounts which are aimed at, or disseminated through, the very means that govern organizations, they are connected to governance mechanisms and practices. If we have one message to leave the reader, it is that, in parallel with the accounts themselves, the extant work on counter accounts is essentially in its infancy. As counter accounts proliferate by means of new technologies, new forms of organizing and new “open” data sources, among other things, so will their presence around us, and the need for us all to understand more about them. Research will be confronted with multiple opportunities to further develop what we already know, through new theorizations of how counter accounts work and through engaging with our knowledge from other fields and concepts. This is indeed a topic of growing importance where leadership, innovation and education to reach the next level are warranted.

ACKNOWLEDGEMENTS Darlene Himick wishes to thank the Social Sciences and Humanities Research Council (Canada) for supporting this research. Eija Vinnari wishes to thank the Academy of Finland for supporting this research as part of a funded project on “Constructing Accountability in Business–Stakeholder Relationships: The Role of CSR Communication”, research grant 324215.

NOTES 1. Other, often synonymously used terms include social audits (Medawar, 1976; Harte & Owen, 1987), silent or shadow accounts (Dey, 2003) and external accounts (Thomson et al., 2015). For the sake of clarity, we use counter accounts as an umbrella term throughout the chapter in line with its increased recognition in recent years. 2. Throughout their discussion, Thomson et al. (2015) employ the term external accounts instead of counter accounts.

366  Handbook of accounting, accountability and governance 3.

SLAPPs are civil lawsuits that target citizens or groups to undermine their efforts to influence public opinion, for instance by deterring their otherwise legal behaviours such as mounting protests and distributing pamphlets. SLAPPs are often brought by corporations with an economic interest in the outcome of the issue at stake. Their power comes not from their legal position but from the way in which they exhaust the resources of the target in responding to the lawsuit (Scott & Tollefson, 2010). 4. See https://​shareaction​.org/​agm​-activism (last accessed 21 October 2022).

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368  Handbook of accounting, accountability and governance Li, Y. and McKernan, J. (2016), “Human rights, accounting, and the dialectic of equality and inequality”, Accounting, Auditing & Accountability Journal, Vol. 29 No. 4, pp. 568–593. Lowe, A., Locke, J. and Lymer, A. (2012), “The SEC’s retail investor 2.0: interactive data and the rise of calculative accountability”, Critical Perspectives on Accounting, Vol. 23 No. 3, pp. 183–200. Medawar, C. (1976), “The social audit: a political view”, Accounting, Organizations and Society, Vol. 1 No. 4, pp. 389–394. Milne, M.J., Tregidga, H. and Walton, S. (2009), “Words not actions! The ideological role of sustainable development reporting”, Accounting, Auditing & Accountability Journal, Vol. 22 No. 8, pp. 1211–1257. Mouffe, C. (2000), The Democratic Paradox. Verso, London. Mouffe, C. (2013), Agonistics: Thinking the World Politically. Verso, London. Mouffe, C. (2018), For a Left Populism. Verso, London. Murphy, D. and Moerman, L. (2018), “SLAPPing accountability out of the public sphere”, Accounting, Auditing & Accountability Journal, Vol. 31 No. 6, pp. 1774–1793. O’Sullivan, N. and O’Dwyer, B. (2009), “Stakeholder perspectives on a financial sector legitimation process: the case of NGOs and the Equator Principles”, Accounting, Auditing & Accountability Journal, Vol. 22 No. 4, pp. 553–587. Perkiss, S., Bayerlein, L. and Dean, B.A. (2020), “Facilitating accountability in corporate sustainability reporting through Spotlight Accounting”, Accounting, Auditing & Accountability Journal, Vol. 34 No. 2, pp. 397–420. Perkiss, S., Bernardi, C., Dumay, J. and Haslam, J. (2021), “A sticky chocolate problem: impression management and counter accounts in the shaping of corporate image”, Critical Perspectives on Accounting, Vol. 81, article 102229. Pierre, J. and Peters, G. (2000), Governance, Politics and the State. Palgrave Macmillan, Basingstoke. Pupovac, S. and Moerman, L. (2020), “Bringing Shell and Friends of the Earth on stage: a one-act spectacle of oil spills in the Niger Delta”, Critical Perspectives on Accounting, Vol. 85, article 102264. Roberts, J. and Scapens, R. (1985), “Accounting systems and systems of accountability: understanding accounting practices in their organisational contexts”, Accounting, Organizations and Society, Vol. 10 No. 4, pp. 443–456. Rodrigue, M. (2014), “Contrasting realities: corporate environmental disclosure and stakeholder-released information”, Accounting, Auditing & Accountability Journal, Vol. 27 No. 1, pp. 119–149. Scott, M. and Tollefson, C. (2010), “Strategic lawsuits against public participation: the British Columbia experience”, Review of European Community & International Environmental Law, Vol. 19 No. 1, pp. 45–57. Sikka, P. (2011), “Accounting for human rights: the challenge of globalization and foreign investment agreements”, Critical Perspectives on Accounting, Vol. 22 No. 8, pp. 811–827. Spence, C. (2009), “Social accounting’s emancipatory potential: a Gramscian critique”, Critical Perspectives on Accounting, Vol. 20 No. 2, pp. 205–227. Srnicek, N. and Williams, A. (2015), Inventing the Future: Postcapitalism and a World without Work. Verso, London. Talbot, D. and Boiral, O. (2018), “GHG reporting and impression management: an assessment of sustainability reports from the energy sector”, Journal of Business Ethics, Vol. 147 No. 2, pp. 367–383. Thomson, I., Dey, C. and Russell, S. (2015), “Activism, arenas and accounts in conflict over tobacco control”, Accounting, Auditing & Accountability Journal, Vol. 28 No. 5, pp. 809–845. Toms, S. and Shepherd, A. (2017), “Accounting and social conflict: profit and regulated working time in the British Industrial Revolution”, Critical Perspectives on Accounting, Vol. 49, pp. 57–75. Tregidga, H., Milne, M. and Kearins, K. (2014), “(Re)presenting ‘sustainable organizations’”, Accounting, Organizations and Society, Vol. 39 No. 6, pp. 477–494. Unerman, J. (2007), “Stakeholder engagement and dialogue”. Unerman, J., Bebbington, J. and O’Dwyer, B. (eds), Sustainability Accounting and Accountability. Routledge, New York, pp. 86–103. Vinnari, E. and Laine, M. (2017), “The moral mechanism of counter accounts: the case of industrial animal production”, Accounting, Organizations and Society, Vol. 57, pp. 1–17. Wright, E.O. (2010), Envisioning Real Utopias. Verso, New York. Ylönen, M. and Laine, M. (2015), “For logistical reasons only? A case study of tax planning and corporate social responsibility reporting”, Critical Perspectives on Accounting, Vol. 33, pp. 5–23.

17. Spotlight Accounting in the context of accounting, accountability and governance Leopold Bayerlein and Stephanie Perkiss

OVERVIEW Spotlight Accounting is an emerging concept and practice that redistributes the existing locus of control over an organization’s accounting, accountability and governance (AAG) activities through applying dialogic accounting principles. As a concept, Spotlight Accounting conceptualizes all forms of AAG as user-initiated activities between an organization (actor) and “societal interest groups” (SIGs) wanting specific action and information prepared in a form that is suitable for their purpose. This positioning explicitly acknowledges context-specific differences between SIGs and places the provision of contextually relevant information at the heart of accounting practice. As a practice, Spotlight Accounting allows SIGs to make their context-specific needs, expectations and perceptions visible, and supports both individual actors and SIGs in addressing context-specific societal needs through tailored AAG activities. Spotlight Accounting has the potential to impact all areas of AAG substantially. Impact arises because control over, and responsibility for, accountability, as well as its implementation through the application of governance principles, processes and targets, is transferred from individual actors to a space that is shared between an actor and the SIGs to which they are accountable. This co-location of control and responsibility embeds the contextualized needs of SIGs at the centre of both accountability and governance, while also requiring society to actively support improvements in an actor’s governance activities. The chapter sets out the objectives and principles of Spotlight Accounting and explores how Spotlight Accounting may be used to improve an actor’s activities in the AAG field individually, as well as the connectivity between, and overarching focus of, these areas within a wider frame of accounting practice. Exemplars outlining the potential impact arising from the application of Spotlight Accounting in different contextual settings are provided.

INTRODUCTION Any information presented, be it in a professional or lay-person context, is only partially reflective of the total picture that is described (Morgan, 1988). As a result, even information that is presented with the intention to fully inform an audience of an activity or outcome “‘says something’, [but] it also leaves a great deal unsaid” (Morgan, 1988, p. 477). The accounting discipline is challenged by this reality because although the operationalization of the high-level public interest concept in accounting is not well understood (Dellaportas & Davenport, 2008; Killian & O’Regan, 2020), the commitment to serve the public interest is at the centre of the accounting profession’s identity (CPA Australia, 2022; Paisey & Paisey, 2020). 369

370  Handbook of accounting, accountability and governance The accounting profession’s commitment to serve the public interest is usually operationalized through activities, and the disclosure of information about these activities, aimed at meeting the needs of stakeholders (Dellaportas & Davenport, 2008). When undertaking, or reporting on, activities that aim to meet stakeholder needs, professional accountants have the proud and long-standing aspiration to produce information that provides a value-judgement-free representation of reality. While these intentions are laudable, the diffuse identity of stakeholders and their needs represents a difficult reality in which to appear because it requires accountants to be moderators of the multiplicity of needs, expectations and perceptions that may underpin individual stakeholder views about accounting structures, processes, activities and information (Morgan, 1988). For accountants, these challenges are not new because, in the words of Morgan (1988, p. 482), “as every practicing accountant knows, it is pretty well impossible to defend one’s objectivity under close attack from people who have a detailed knowledge of the situation to which the accountant’s statements relate”. Further challenges arise because the exact identification of “the public” whose interest accountants are supposed to serve, as well as the exact meaning of the “interest” that is expressed by the relatively diffuse concept of the public interest, are often unclear (Dellaportas & Davenport, 2008). To manage this challenge, accounting practice, and the reporting of accounting information to the public, has traditionally focused on relatively narrow definitions of the public interest, and located responsibility for key decisions related to AAG activities, as well as decisions related to the reporting of these activities within organizations, rather than public stakeholder groups. Narrowing the scope within which the accounting profession’s public interest intentions are discharged represents one way to effectively conceptualize the complex and multifaceted public interest concept. However, such a narrowing is likely to limit the information that is presented to SIGs and provides each actor with the opportunity to manage the content and focus of that information (Bayerlein & Davidson, 2012; Brennan & Merkl-Davies, 2018). While the challenges associated with the communication of accounting information to SIGs is not new to the literature (see, for example, Lee, 1982), it is also well documented that additional accounting, and reporting, does not automatically lead to better societal outcomes (Dillard & Vinnari, 2019). Previous literature has called for the development of new accounting models that actively engage the views of multiple SIGs (Brown, 2009), that are more discursive (Morgan, 1988; Perkiss et al., 2021) and that use new engagement mechanisms to achieve greater accountability (Bebbington et al., 2007). Within this stream of thought, each individual actor is encouraged to recognize, and effectively integrate, their multifaceted relationships with society in their accounting activities (Dey & Gibbon, 2017; Dillard & Vinnari, 2019; Gray, 2004; Perkiss et al., 2019; Thomson et al., 2015; van der Laan, 2009), to uplift traditional accounting practices towards inclusive, and participative, AAG activities (Bebbington et al., 2007; Bellucci et al., 2019; Brown, 2009; Murphy & Moerman, 2018; Perkiss et al., 2021). This chapter is based on the notion that the application of increasingly discursive concepts, and improved transparency through the development and provision of information, applicable to a larger range of SIGs provide accountants with the opportunity to discharge their public interest obligations more effectively (Paisey & Paisey, 2020). Discursive engagements with all interested members of society are critically important for accountants because the needs, expectations and perceptions of all SIGs should provide the basis for all activities within the AAG environments (see also Dellaportas & Davenport, 2008). In choosing to support

Spotlight Accounting in the context of accounting, accountability and governance  371 particular societal viewpoints in the course of their work, accountants not only legitimize those viewpoints but also shape future discussions about which activities and viewpoints are deemed most appropriate in a given circumstance (Morgan, 1988). In practice, this positions professional accountants as the moderators responsible for constructing the economic, social and moral realities through which individual actors and their SIGs interact (see also Carnegie et al., 2021, 2022, 2023). This chapter utilizes the emerging concept of Spotlight Accounting (Perkiss et al., 2019, 2021) to establish a framework through which the mediation activities expected of professional accountants can be guided. The Spotlight Accounting concept is applicable across a range of situations in AAG because it requires that the public interest is placed at the heart of the professional accountant’s considerations. Spotlight Accounting achieves this positioning of the public interest by requiring that an actor, and accountants as their agents, consider the identity as well as needs, expectations and perceptions of all relevant SIGs in their work, and establish mechanisms that enable decision making to be shared between an actor and their SIGs. The application of the Spotlight Accounting concept in practice has important implications for imagining and exploring new discursive ways to appropriately account for actors’ societal impact by aligning the work of professional accountants with societal expectations (Perkiss et al., 2019). Within this chapter, the term accounting is understood as “a technical, social and moral practice concerned with the sustainable utilization of resources and proper accountability to stakeholders to enable the flourishing of organizations, people and nature” (Carnegie et al., 2021, p. 69). The term accountability is used to describe the processes through which an actor is held to account (Mulgan, 2000) by SIGs and society at large. In practice, accountability is closely linked with the provision of relevant and contextually appropriate information to SIGs (Perkiss et al., 2021). The term governance is used within this chapter to refer to the systems and processes through which an actor’s organization is controlled (Governance Institute of Australia, 2022). Within this chapter, Spotlight Accounting is positioned as a concept and practice that mediates the interactions between an individual actor and SIGs. The term actor is chosen to represent any individual, organization, corporation or other entity that exercises functions, or undertakes activities, within society, and provides an account of its activities to SIGs or society at large. The commonality that defines an actor is the provision of an account of the actor’s activities to society, regardless of the form of activity undertaken, or the organizational structure of an actor. SIGs encompass all individuals, groups, organizations or other entities within society that are not part of the actor, and who have a genuine interest in the actor’s actions, performance and impact on themselves, their constituents, other members of society or society at large. The commonality that defines a SIG is their position outside the actor, and their genuine interest in accounts of the actor’s activities, regardless of the nature of their relationship with an actor. Importantly, SIGs may exist even if the actor’s activity does not have a direct, or even indirect, impact on the members of a SIG, so long as the SIG has a genuine interest in the actor’s activities and impacts on society. Following this definition, it is important to distinguish between SIGs and traditional stakeholder groups. To be recognized as a stakeholder group, an individual, group or entity requires a tangible connection to an actor, while SIGs encompass any individual, group or entity that is genuinely interested in an actor’s conduct and impact on society. The identification of SIGs as the ultimate benefactors of Spotlight Accounting is critically important because it defines

372  Handbook of accounting, accountability and governance the scope of an individual actor’s accountability obligations. In essence, it defines to whom an actor should be obliged to render an account of their activities, and what the boundaries of such an account should be. The current chapter does not specify the criteria or thresholds that should be met by individuals, or groups of individuals, to be recognized as a SIG because such definitions are highly context specific. In practice, the identification of SIGs will require individual actors to establish a mechanism through which SIGs can express their genuine interest in the actor’s activities and impacts, and outline the criteria against which the actor should, ideally, provide account. Such expressions of interest provide the basis for an actor’s Spotlight Accounting activities because they establish which activities or impacts are of most concern to SIGs. However, Spotlight Accounting does not envision that individual actors meet the information needs of all SIGs when providing their account. Instead, Spotlight Accounting requires each actor to engage with SIGs to review the information needs of society at large, and to employ transparent processes to collaboratively establish a set of criteria against which the actor will provide an account. The concept and practice of Spotlight Accounting may be applied in a variety of contexts, ranging from its application to individual activities within the realms of AAG to its holistic application across all facets of AAG. This chapter does not specify at which level Spotlight Accounting should be used because its applicability is strongly dependent on context-specific circumstances, and the intended outcomes associated with its application. However, it is important to note that the holistic application of Spotlight Accounting across AAG activities of an actor’s organization is likely to create benefits for SIGs that exceed the benefits that arise from an individualized application within the realm of AAG. This is the case because the holistic application of Spotlight Accounting changes the way an actor’s organization engages with SIGs across all aspects of its activities. In contrast, the benefits that arise from localized application of the Spotlight Accounting concept or practice are likely to be limited to the boundaries in which the application occurred. The following sections introduce Spotlight Accounting and identify the objectives on which it is founded. The remainder of this chapter operationalizes the outlined objectives through the development of Spotlight Accounting principles at a conceptual and practical level. In addition, this chapter discusses how Spotlight Accounting enables a refocusing of activities between actors and SIGs away from accounting and towards higher-level AAG activities. Finally, the application of Spotlight Accounting in two specific exemplar environments is discussed, and the benefits arising from the use of Spotlight Accounting in both situations are described. The chapter closes with an assessment of the challenges associated with Spotlight Accounting and a conclusion.

OVERVIEW OF SPOTLIGHT ACCOUNTING Spotlight Accounting describes a concept, as well as a practice, that requires individual actors to discharge their AAG obligations through the establishment of a system of control over these activities that is shared between individual actors and their SIGs. An actor’s obligations to provide account against particular criteria within, or holistically across, the realms of AAG are dependent on each individual actor’s agreement – either formal or implied – with their relevant

Spotlight Accounting in the context of accounting, accountability and governance  373 SIGs. Within this chapter the term AAG is used to signify individual activities within one or more of these realms, as well as activities that holistically impact an actor’s AAG activities. Traditional accounting literature is focused on the behaviour of actors, and often relies on frameworks such as signalling or agency theory to explain an individual actor’s AAG behaviour through actor-specific factors (Archer et al., 1998; Lambert, 2006; Mnif & Gafsi, 2020). While such frameworks are highly useful to conceptually organize actor-driven behaviours, their ability to systematically describe processes, structures and activities that emanate from the needs, expectations and perceptions of SIGs is limited. This limitation exists because traditional frameworks locate decisions about how individual actors – through internal systems, processes and reporting mechanisms – meet the needs of SIGs within the actor’s organization. This limits the influence of SIGs to requesting information, without an ability to influence how individual actors meet such requests. The Spotlight Accounting concept relocates decisions about how individual actors meet a wide set of needs, expectations and perceptions into a space that is shared between the actor and their SIGs (Perkiss et al., 2021). Although Spotlight Accounting was initially developed as a concept and process to describe emerging social responsibility reporting practices (Perkiss et al., 2019), its applicability to AAG extends well beyond this initial field of application. This chapter extends earlier research (Perkiss et al., 2019, 2021) in which Spotlight Accounting was identified and described as a specific form of dialogic accounting, and applied within the context of corporate social responsibility (CSR) reporting and social accounting. This positioning of Spotlight Accounting reflects the ability of social accounting to promote democratic participation in accounting processes (Brown, 2009), and the ability of dialogic social accounting to capture the plurality of individual actors, as well as the needs of SIGs, through targeted discourse and emancipatory governing (Brown, 2009; Thomson et al., 2015). Spotlight Accounting draws on Brown’s (2009) concept of dialogic accounting, as well as the social and moral facets of accounting practice discussed by Carnegie and colleagues (Carnegie et al., 2021, 2022, 2023) to establish a participatory mechanism through which the historically narrow field of accounting is expanded. Brown (2009) also argues that accounting must allow for a “pluralist expression of the public interest” and be viewed as a tool to foster democratic interaction (Brown, 2009, p. 317). In an examination of the literature on social and dialogic accounting, Perkiss et al. (2019) identified avenues for alternative forms of accounting and accountability aimed at improving stakeholder participation (for example, Brown, 2009), and the transfer of influence over reporting processes from actors to SIGs (for example, Thomson et al., 2015). In their assessment of a crowdsourced CSR platform, Perkiss et al. (2019) established the concept and practice of Spotlight Accounting and identified social accounting to be present in Spotlight Accounting. Perkiss et al. (2019) also developed Spotlight Accounting as a concept to theoretically explain how crowdsourced external accounts would be used to “illuminate … global organizational transparency and disclosure practices by centrally locating and recording information to enable comparability, aggregation, and other analysis from content provided by independent stakeholders” (Perkiss et al., 2019, p. 93). Even within this initially narrow application of Spotlight Accounting, Perkiss et al. (2019) identified the concept’s ability to describe the involvement of the community – SIGs – in creating appropriate CSR information as its defining feature. Perkiss et al. (2021) tested the theoretical capabilities of Spotlight Accounting through an assessment of a specific accountability-based SIG-driven CSR reporting system. Following this assessment, Perkiss et al. (2021) argued that Spotlight Accounting encourages

374  Handbook of accounting, accountability and governance dialogic accounting and the pluralism of accounting information as envisioned by Brown (2009), and improves the discharge of accountability, as envisioned by Dillard and Vinnari (2019). This chapter extends the CSR-specific Spotlight Accounting positioning of Perkiss et al. (2019, 2021) into a broader AAG context. This extension is achieved through the provision of a systematic foundation for the concept and practice of Spotlight Accounting, as well as an exploration of the different contexts in which Spotlight Accounting may be applied. It is possible to apply Spotlight Accounting in the boarder context than originally described by Perkiss et al. (2019, 2021) because it can be used to theoretically describe and organize the dialogic processes that are required to ensure that all AAG activities within an organization serve the needs of a multitude of SIGs (see also Morgan, 1986). As a practice, Perkiss et al. (2019, p. 93) described Spotlight Accounting as “the process of systematically collating crowdsourced information … in a central, public database for shared utility”. The practical application of Spotlight Accounting in the previous work of Perkiss et al. (2019, 2021) utilized a technology-enabled crowdsourcing platform that allowed all SIGs to act as citizen accountants, and to ask questions, establish measurement criteria and collect and analyse data related to individual actors’ CSR activities. Reverberating within this practical application of Spotlight Accounting is the underpinning intention of the concept to maximize the extent to which the needs, expectations and perceptions of all SIGs are captured and spotlighted. In their initial identification of Spotlight Accounting, Perkiss et al. (2019) provided the following description of the term: The term “spotlight” is an astute selection for its visual and representative imagery. Symbolically, a spotlight emerges when multiple lights illuminate a single point and all that resides there. And, in giving centre stage to a space, all else is contrasted in darkness. Imagine that each light contributing to the spotlight represents a stakeholder or to a member of crowd that uses this technology to brighten sustainability information for the public to see and use. Looking back at the sea of lights from the spotlight exposes the locations and obscurities of organisational transparency where the darkness falls. (Perkiss et al., 2019, p. 93)

In drawing together, and spotlighting, the needs, expectations and perceptions of SIGs, the concept of Spotlight Accounting is aligned with other dialogic accounting frameworks that aim to improve accountability and participation through holistic thinking and active questioning of monologic practices (for example, Bebbington et al., 2007; Brown, 2009). Embedded within Spotlight Accounting is a transition away from statutory-based notions of meeting the needs, expectations and perceptions of defined (regardless of their definition) stakeholder groups towards a model in which all actors are treated similarly to public institutions within a deliberative democracy (Mulgan, 2000); where all SIGs are empowered to have a voice – which is listened to – in all governance and accountability processes. The participatory dialogic process (Brown, 2009) that underpins Spotlight Accounting enables continual collaborative exchange between individual actors and their SIGs, and allows multiple ideological views to be critically evaluated and spotlighted (Perkiss et al., 2019). Spotlight Accounting is set apart from other accounting concepts because through greater dialogue and open participation, SIGs and individual actors are jointly responsible for identifying, implementing and reporting on AAG activities that meet the needs of the largest possible number of SIGs.

Spotlight Accounting in the context of accounting, accountability and governance  375

IDENTIFYING AND INCULCATING THE OBJECTIVES OF SPOTLIGHT ACCOUNTING The identification of objectives represents a key component of the establishment of new accounting concepts or practices because objectives delineate the boundaries of a concept, or practice, and assist in the systematic development of a set of principles through which objectives are achieved (Pallot, 1992). This section outlines three objectives that shape the concept of Spotlight Accounting, which in turn informs the application of Spotlight Accounting as a practice. Objective One: Actors have stewardship obligations for their own resources, as well as societal (public) resources. Objective One focuses on the resources, and activities impacting on resources, for which individual actors are held to account by society. The objective asserts that actors are responsible for the stewardship of resources under their control, as well as their impact on (public) resources that are controlled by other actors or society at large. In the context of Spotlight Accounting, the term stewardship is used in alignment with Donaldson and Davis’ (1991) stewardship theory. Given this definition of stewardship, actors’ activities should be aligned with the objective of their principals (Davis et al., 1997). The positive relationship between public assets and societal cohesion is well established in the literature (for example, Pallot, 1992; Wan et al., 2021). In drawing on this body of literature, Spotlight Accounting establishes an expectation that actors’ AAG stewardship obligations must capture all resources that are relevant to the SIGs that are interested in an actor’s activities or impact. As a result, this objective challenges the relevance of the traditional entity concept (Husband, 1954) and asserts that individual actors should be held to account for their impact on resources that have been allocated to them for their (private) use, as well as their impact on (public) resources outside their organization. Objective Two: Actors give account for their actions to society at large. Objective Two is concerned with the SIGs to which individual actors must render account (for details on the requirements implicit in the rendering of account, see, for example, Bovens, 2007) about their stewardship obligations. This objective establishes that individual actors must discharge their accountability through active engagement with, and provision of information to, all individuals and groups within society that are genuinely interested in the actor’s conduct and impact on private and public resources. Objective Two consequently extends traditional notions in accounting – such as agency theory (Jensen & Meckling, 1976) – by expanding the circle to whom individual actors are accountable for their actions beyond owners, stakeholders or interest groups. Indeed, this objective is premised on the notion that any member, or group, within society (SIGs) that is genuinely interested in an actor’s actions or impacts has a valid claim on that actor to provide an account. Objective Three: Actors meet the contextualized needs, expectations and perceptions of SIGs when discharging their accountability obligations. Objective Three focuses on the manner in which, and the reason why, individual actors discharge their obligations towards SIGs. Within the accounting environment, theoretical contributions – such as signalling theory (Akerlof, 1970) – have traditionally required actors to render account in situations where information asymmetries exist, and actors have utilized disclosure and accountability mechanisms to remove this asymmetry. Implicit within the application of such theoretical frameworks in accounting is the individual actor’s assumption that a removal, or reduction, of information asymmetry has positive benefits for the actor or their principals (see, for example, Akerlof,

376  Handbook of accounting, accountability and governance 1970; Morris, 1987). The third objective of Spotlight Accounting includes a recognition that the provision of information based on the application of traditional accounting concepts, such as signalling theory, may result in economic and social impacts for actors and SIGs. However, this objective is also underpinned by the notion that actors must give account to their SIGs even if the provision of that account is detrimental to the private interests of an actor, their principals or SIGs. A further consideration that is captured by the third objective relates to the volume, and level of detail, of the information that actors provide to SIGs. Accounting concepts – such as materiality (see, for example, IASC, 1989) – have traditionally limited the information that actors provide to SIGs to a sub-set of the overall information available and provided individual actors with the power to decide what information is provided to their SIGs. When determining the materiality of a particular item of information, actors consider the impact of that item on different, often narrowly defined, stakeholder groups. However, as noted elsewhere (for example, Nicholls, 2018), traditional notions of materiality have not met the needs, expectations and perceptions of all SIGs to which an actor is providing account. The third objective of Spotlight Accounting captures these concerns by highlighting that, in discharging their obligation to provide account, actors must meet the needs, expectations and perceptions of their SIGs, regardless of their economic links or organizational proximity to the actor.

THE CONCEPT/PRINCIPLE AND PRACTICE OF SPOTLIGHT ACCOUNTING Spotlight Accounting utilizes a series of principles to operationalize its three underpinning objectives at a conceptual as well as practical level. Across both levels, Spotlight Accounting aims to reduce AAG barriers associated with the application of neo-classical economic paradigms in the accounting discipline. It achieves this outcome by focusing the attention of accountants, actors and SIGs on the creation of an inclusive social discourse (Boyce, 2000) through which individual actors render an account, both financial and non-financial (Gray et al., 1996), to society at large. As a result of this focus, the concept and practice(s) of Spotlight Accounting are closely linked to the principles underpinning public accounting, where actors are held responsible for their actions and impacts (Gray et al., 1996) through the discharge of their public accountability obligations (Dhanani & Connolly, 2012; Pallot, 1992). As a concept, Spotlight Accounting locates all actors within society at large, and describes the influence of SIGs on an actor’s AAG activities (Figure 17.1). The application of Spotlight Accounting as a practice enables SIGs and individual actors to jointly develop AAG activities and reporting processes that discharge an individual actor’s stewardship obligations over private and societal resources. However, as shown in Figure 17.1, Spotlight Accounting practices may also be utilized by SIGs to create external accounts (Perkiss et al., 2019, 2021). Such an application of Spotlight Accounting in an external accounting context enables society to hold individual actors to account for their activities, and to spotlight information about an individual actor’s activities or impact that are not normally disclosed. However, the external application of Spotlight Accounting is unlikely to transform the intrinsic AAG behaviours of actors because SIGs continue to rely on actor information that is developed and released by actors, based on traditional notions of accounting. A detailed analysis of the limitations

Spotlight Accounting in the context of accounting, accountability and governance  377 associated with the application of Spotlight Accounting in an external accounting context is provided by Perkiss et al. (2021).

Source: Authors.

Figure 17.1

Spotlight Accounting as a concept and a practice

The Spotlight Accounting concept, and its application in practice, places each actor at the centre of society (Figure 17.1). It achieves this placement by explicitly recognizing that actors are part of society at large, and that society is both directly and indirectly impacted by all actor activities. The porous boundary between an actor and society denotes an individual actor’s impact on numerous closely aligned, as well as distantly associated, SIGs, and the influence of such groups on the individual actor. Within this setting, Spotlight Accounting represents a framework that describes the interactions between individual actors and society through the well-established mechanisms of AAG. While the Spotlight Accounting concept and practice(s) may influence all AAG activities of an actor, the impact of the Spotlight Accounting concept is likely to be greatest for governance activities and exhibit diminishing impact as governance activities are translated into accountability and accounting activities. This diminishing impact occurs because governance activities underpin all decisions that are made by an actor, and for which an actor is held to account (Governance Institute of Australia, 2022). Accountability and accounting activities, on the other hand, represent individual facets

378  Handbook of accounting, accountability and governance of the governance activities of individual actors. The impact of an application of the Spotlight Accounting concept in these contexts is consequently more limited than in its holistic application to all governance activities. The impact of Spotlight Accounting as a practice is likely to be greatest when applied to accounting activities, as well as the associated financial and non-financial disclosure activities undertaken by an actor. The impact of Spotlight Accounting practice in this area is likely to be substantial because accounting, and its associated disclosure activities, are likely to be most visible to SIGs, and society at large. The triangular depiction of Spotlight Accounting in Figure 17.1 represents the transformative impact of this concept and practice on an actor’s activities. Specifically, Figure 17.1 highlights that the application of Spotlight Accounting in an external AAG context is likely to have little impact on intrinsic actor behaviours. However, Spotlight Accounting practices may also be implemented through joint activities between individual actors and SIGs, denoted though activities occurring along – and on either side of – the porous boundary between the actor and society within the Spotlight Accounting triangle in Figure 17.1. Such activities are likely to influence intrinsic actor activities, and they share commonalities with the application of Spotlight Accounting as a concept. The application of Spotlight Accounting as a concept is likely to be driven by actors and involve the active participation of SIGs in designing, implementation and disclosure of an actor’s AAG activities. Such an application of Spotlight Accounting can be made in a variety of contexts, and is likely to permanently transform actor behaviours, as well as interactions between an individual actor and their SIGs. The resulting impacts are likely to be permanent and substantive because the reasons why an actor undertakes AAG activities changes fundamentally. In practice, this may mean that an actor requires their agents to explicitly design, implement and report on AAG activities to serve the interests of SIGs, or that co-design activities and decision making and reporting structures with SIGs. The Concept of Spotlight Accounting The conceptual basis upon which accountants undertake AAG activities has the potential to transform society because concepts impose a lens through which professional accountants, and society at large, view problems, activities and information (Jollands & Quinn, 2017). The application of a particular lens consequently impacts the language that is used to describe and communicate the work of accountants (Pallot, 1992), and enables all members of society to offer surface support to particular ideas, while effectively re-asserting the application of dominant economic ideas (Boyce, 2000; Jollands & Quinn, 2017). By outlining the conceptual principles of Spotlight Accounting, this section introduces the framework within which Spotlight Accounting is applied, and guides actors, accountants and SIGs in its practical application. The framework-level considerations discussed in this section are critically important to support the practical application of Spotlight Accounting because although the concept and practice can be applied in numerous contexts and circumstances, all applications should align with a basic set of principles. Spotlight Accounting shares the general participatory and democratic nature of social accounting (Brown, 2009). As a result, SIGs and actors are seen as equal partners in all AAG activities. This positioning of SIGs as important participants in an actor’s process and decision-making structures differs substantially from the traditional consultative positioning

Spotlight Accounting in the context of accounting, accountability and governance  379 of society (or stakeholders) within the work of accountants (for example, Nicholls, 2018). In addition to positioning the needs, expectations and perceptions of society as being equal to those of actors, Spotlight Accounting also asserts that actors have stewardship obligations for all resources that are impacted by their activities, and are accountable for their actions to society at large (see Objective One). As a result, Spotlight Accounting effectively aligns the AAG expectations levelled against actors with the notions underpinning the public interest (Cochran, 1974; Killian & O’Regan, 2020). In requiring actors to discharge their AAG obligations in the public interest, Spotlight Accounting recognizes that society consists of a multitude of interest groups, each with their own special or private interests. The summative integration of the needs, expectations and perceptions of these groups into an actor’s activities aligns an actor’s practices with the public interest. While such an alignment may take a variety of forms in practice, examples include the alignment of an actor’s conceptualization of success with an actor’s impact on SIGs, or society at large, rather than more narrowly defined benefits to stakeholder groups. Figure 17.2 contrasts the interactions between actors and society within Spotlight Accounting (Panel 1) with those of traditional accounting concepts (Panel 2). Spotlight Accounting also draws on the work of Dillard and Vinnari (2019), who argue that traditional and monologic forms of accounting do not support a pluralistic view of accountability and lead to disclosure sclerosis. Dillard and Vinnari (2019) further contend that improved accountability requires the transfer of power within AAG activities from actors to SIGs, or society at large, to ensure that actors prioritize, and discharge reporting obligations aligned with, the interests of a wide cross-section of society. Similar to other forms of dialogic and participatory accounting (see, for example, Bebbington et al., 2007; Brown, 2009), Spotlight Accounting is able to support democratic interaction and societal change by empowering SIGs to demand influence on an actor’s AAG activities (Perkiss et al., 2021). The integration of the needs, expectations and perceptions of SIGs into an actor’s AAG activities does not imply that individual actors should integrate the entirety of all societal viewpoints into their activities. Instead, Spotlight Accounting aims to create new visibilities (Perkiss et al., 2019) by illuminating those activities and impacts of the actor that, in the eyes of society, are most relevant to the individual actor’s SIGs. Traditional accounting concepts have generally located the authority to make decisions about how societal viewpoints are integrated into actor activities within the actor’s organization itself (Brennan & Merkl-Davies, 2018). This has resulted in an accounting landscape constructed to meet the needs of actors (Perkiss et al., 2021), rather than the needs of society. Within Spotlight Accounting, the authority to make decisions about which needs, expectations and perceptions of SIGs should influence actor activities is shared by actors and SIGs. Employing purposefully designed and context-specific collaborative processes to co-locate the authority to decide what societal viewpoints are most relevant for a particular actor’s organization with the actor and SIGs supports a holistic and pluralistic transition of the work of actors towards greater accountability (Brown, 2009; Godowski et al., 2020; Perkiss et al., 2019). Spotlight Accounting leads to greater accountability by actors because SIGs are provided a voice, and a vote, when actors set behavioural expectations, design and implement oversight mechanisms, and create and discharge reporting obligations. However, the application of the Spotlight Accounting concept, from a reporting perspective, does not necessarily result in more information being provided to SIGs. Instead, Spotlight Accounting enables a dialogue between actors and SIGs to shift from the reporting of information, towards the design and

Figure 17.2

Source: Authors.

Principles of Spotlight Accounting and traditional accounting

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Spotlight Accounting in the context of accounting, accountability and governance  381 implementation of AAG activities. Such dialogues are critically important to attain dialogic accountability, as envisioned by Dillard and Vinnari (2019). The application of Spotlight Accounting as a conceptual mechanism to influence the design and implementation of AAG activities has thus far remained aspirational. However, there are numerous organizational and social contexts in which the application of the Spotlight Accounting concept would be beneficial, and the practice of Spotlight Accounting has already been employed successfully in an external accounting context (Perkiss et al., 2019, 2021). The Practice of Spotlight Accounting The application of Spotlight Accounting as a practice has the potential to influence some, or all, of the activities within an actor’s AAG processes, as well as the reporting of the impact of these activities. Spotlight Accounting practice has this potential because it requires the social and moral foundations of accounting (Carnegie et al., 2021, 2022) that are most relevant to SIGs to be explicitly integrated into an actor’s activities. Influencing an actor’s AAG activities, as well as their reporting, has important implications for SIGs because society and actors collaboratively determine how reality is constructed and reflected (Hines, 1988; Parker, 2008). AAG activities generally involve activities related to evaluating, implementing, reporting and controlling (Parker, 2008). The application of Spotlight Accounting as a process in internal accounting contexts supports these activities by providing a mechanism through which SIGs work with actors to collaboratively establish expectations and requirements that are then employed by the actor. In effect, Spotlight Accounting allows SIGs to collaboratively determine the lens through which an individual actor’s organization views and enacts its AAG obligations, as well as the activities and reporting structures that enable the actor to demonstrate the discharge of these obligations. Spotlight Accounting can also be used as an external accounting practice. When applied in an external accounting context, Spotlight Accounting enables SIGs to supplement actor-generated AAG activities and reporting by establishing and implementing additional reporting and disclosure activities – comparable to the work that would be undertaken to establish a shadow account (Thomson et al., 2015; Perkiss et al., 2019, 2021). Externally focused Spotlight Accounting practices recognize that actors themselves have traditionally been responsible for identifying and meeting the needs, expectations and perceptions of SIGs, and that this is associated with a propensity to establish activities and reporting that accrue benefits to actors and their principals. External Spotlight Accounting practices allow SIGs to systematically review work undertaken by an actor in a variety of contextually appropriate shared forums, and to establish external activities and reporting that supplement actor-driven processes. It is hoped that the supplementary activities undertaken by SIGs improve the extent to which the AAG expectations of society at large are discharged. Spotlight Accounting practices provide an arena for meaningful dialogue and engagement (see Brown, 2009; Dillard & Vinnari, 2019) in both internal and external accounting contexts. Perkiss et al. (2021) identified several principles underpinning the practical application of Spotlight Accounting in a CSR or social and environmental reporting context. While this prior work is context specific, it is possible to distil one general principle and three supporting principles from it. The general principle of Spotlight Accounting practice requires actors and SIGs to agree upon the focus, scope and materiality of information through which actors are held to account by the public. While the intention underpinning this principle is similar to those of

382  Handbook of accounting, accountability and governance the Spotlight Accounting concept, in practice clear decisions on three supporting principles are likely to be required. Drawing on Perkiss et al. (2021), the application of Spotlight Accounting in practice requires the following three supporting principles to be met: (1) that the accountability to be discharged through the provision of information is clear; (2) that the measurement framework (or metric) to be used in providing information is clear; and (3) that the information provision mechanism and format is clear. If these principles are employed by actors and SIGs to guide their interactions, a range of reporting challenges (see, for example, Bayerlein & Davidson, 2012, 2014; Miles & Ringham, 2019) are likely to be reduced substantially because an actor’s activities are clearly and directly aligned with the information needs, expectations and perceptions of SIGs. The application of these principles nhancees reporting and assist actors and SIGs to overcome accountability challenges (Perkiss et al., 2021). However, some challenges within traditional reporting mechanisms, such as enabling comparability through access to consistent and comparable data (Hazelton & Perkiss, 2018), may persist even after Spotlight Accounting practices are implemented (Perkiss et al., 2021). This is the case because Spotlight Accounting practice focuses on the provision of context-specific information that addresses the needs, expectations and perceptions of SIGs for a particular actor. As a result, individual Spotlight Accounting practices, including actor-specific AAG activities and reporting, may be established for each actor to spotlight (Perkiss et al., 2019) particularly relevant actor activities or information. This focus preferences an actor’s responsiveness to the needs, expectations and perceptions of the relevant SIGs, instead of enabling between actor/industry/jurisdiction comparison. It is also possible, however, that SIGs and actors agree that, within their particular context, comparability represents a key requirement to enable the discharge of accountability by an actor. In such instances, the application of Spotlight Accounting principles should result in the establishment of clear metrics and reporting formats to assist in enabling comparability (Perkiss et al., 2019). Regardless of the focus or context in which the practice of Spotlight Accounting is employed, the ability of SIGs to have a voice in the design and application of AAG activities, as well as the discharge of reporting obligations against such activities, underpins all of its practical applications.

SPOTLIGHT ACCOUNTING IN ITS ORGANIZATIONAL AND SOCIAL CONTEXT This chapter is premised on the understanding that AAG operate within the boundary of responsible management. In such a setting, interactions between individuals and groups extend beyond formal agency and stakeholder relationships, and the provision of information aims to discharge accountabilities that go beyond formal requirements. Spotlight Accounting provides a language and process through which the power dynamics and responsibilities that have traditionally underpinned the work of accountants are refocused. Spotlight Accounting achieves this outcome because it enables an actor’s AAG activities to be explicitly designed to meet the needs, expectations and perceptions of SIGs. In addition, SIGs are empowered to co-create structures and activities that meet their context-specific needs.

Spotlight Accounting in the context of accounting, accountability and governance  383 Each SIG exhibits a nested set of needs, expectations and perceptions (views) (Figure 17.3). A conceptual application of Spotlight Accounting enables SIGs to have a voice in the design and implementation of an actor’s governance mechanisms, as well as its underpinning accountability, accounting and disclosure activities. This outcome is achieved because Spotlight Accounting enables actors to involve SIGs in the creation of the intentions that underpin each actor’s decision making. In addition, Spotlight Accounting also requires each actor to implement conceptually appropriate and SIG informed governance mechanisms that appropriately discharge the objectives of Spotlight Accounting. Once an actor’s governance activities adequately reflect the needs, expectations and perceptions of their SIGs, the implementation of the Spotlight Accounting concept across an actor’s remaining process ensures that accountability, accounting and disclosure activities are aligned with the views of SIGs. Conceptualizing the influence of SIGs on actors as a top-down (governance > accountability > accounting > disclosure) process effectively reverses traditional stakeholder engagement models in accounting. Accounting has traditionally required actors to meet the information needs of stakeholders through disclosure. Once disclosure requirements are identified, actors become responsible for identifying and implementing accounting > accountability > governance mechanisms that enable the creation and disclosure of the required information. This process reflects a bottom-up stakeholder engagement approach that severely limits the opportunities of SIGs to have transformative impacts on actors. The practice of Spotlight Accounting, which Perkiss et al. (2019) have described as illuminating a particular point of view from multiple directions, also enables SIGs to influence governance, accountability, accounting and disclosure activities directly, and independently of each other (Figure 17.3). This is the case because the SIGs have a voice, and are able to enact external accounting activities themselves, to ensure their needs, expectations and perceptions are adequately met. Any changes in an actor’s internal activities that are created from such direct influences are likely to align the actor’s specific practices with the needs, expectations or perceptions of their SIGs because activities are specifically designed for this purpose. However, the likelihood of a systematic change within the actor’s wider AAG activities is limited, unless direct practical Spotlight Accounting impacts are used to trigger a larger conceptual review of the actor’s activities (also see Bovens, 2007). Such a holistic review would, in practice, result in a conceptual application of Spotlight Accounting to all aspects of an actor’s activities, and require the actor and their SIGs to co-create an appropriate set of governance, accountability and accounting activities. Spotlight Accounting Supports Good Governance Spotlight Accounting, and particularly its application as a concept, enables SIGs to systematically influence the governance activities of actors. Spotlight Accounting achieves this outcome by positioning the need, expectations and perceptions of SIGs as the foundation of an actor’s decision-making structures. In practice, SIGs can be invited into shared governance arrangements, in which SIGs have a voice as well as a vote. Successful examples of shared governance arrangements, such as in higher education (Taylor, 2013; see also Chapter 11 of this Handbook), health care (Cristofoli et al., 2014) or professional bodies, demonstrate that such arrangements can assist in addressing complex societal problems, as well as the management complex of organizational structures. However, the management of shared governance models is also regarded as complex (Cristofoli et al., 2014), and the application of Spotlight

Figure 17.3

Source: Authors.

Influence of Spotlight Accounting on accounting, accountability and governance

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Spotlight Accounting in the context of accounting, accountability and governance  385 Accounting principles is likely to increase these complexities further due to the need to integrate SIGs, rather than more clearly defined and organized stakeholder groups, into shared governance arrangements. Within currently prevailing organizational structures, the widespread short-term adoption of shared governance arrangements appears unlikely. In such a situation the Spotlight Accounting concept could also be operationalized by explicitly requiring decision makers within existing governance structures to be guided by the needs, expectations and perceptions of SIGs, and to be accountable for their actions to society at large. While such an implementation of the Spotlight Accounting concept would not necessarily align with the systematic top-down processes outlined in Figure 17.3, an ex post impact on existing governance structures should, in turn, permeate through an actor’s accountability, accounting and disclosure system, and over time result in systematic ex ante changes to governance structures. Spotlight Accounting Supports Effective Discharge of Accountability Accountability is nested within governance, and Spotlight Accounting allows for accountability to be influenced by governance activities (concept) as well as through direct interactions between SIGs and an actor (practice). The discursive properties of Spotlight Accounting (Perkiss et al., 2021) position accountability as the focus of an actor’s accounting system (Dillard & Vinnari, 2019). From an actor’s perspective, the discharge of accountability within Spotlight Accounting requires the provision of financial and non-financial accounts (Bebbington et al., 2007; Cho et al., 2018; Gray et al., 1996; Gray, 2002; Thomson et al., 2015) to society that genuinely address the needs, expectations and perceptions of SIGs. Genuine alignment between an actor’s AAG activities and the views of SIGs is critically important if an actor is to be held responsible for their actions. The original notion of accountability, being the process through which an actor is held to account (Mulgan, 2000), has over time morphed into an elusive concept, partly because it means different things to different people (Bovens, 2007), and partly because different styles and forms of accountability have developed over time. In addition, an actor may discharge their varying accountabilities through formal, and potentially enforceable, as well as informal accounting and disclosure arrangements. Within Spotlight Accounting, the definition of accountability is aligned with the notion of public accountability (Bovens, 2007) and represents the heart of an actor’s AAG obligations. As a result, accountability is enabled by, but distinctly different from, an actor’s accounting and disclosure activities. Spotlight Accounting, and its application as a concept or practice, does not require the adoption of a particular process. Instead, the term accountability is used to refer to “any mechanism that makes powerful institutions responsive to their particular publics” (Mulgan, 2003, p. 8). Spotlight Accounting utilizes the term accountability in the broadest possible sense, encompassing all situations where an actor engages with SIGs in a transparent, fair and equitable way (Bovens, 2007). However, Spotlight Accounting practice also recognizes the use of a narrower – operational – definition of accountability, where an actor discharges their obligations to explain and justify their actions or activities (Bovens, 2007; Mulgan, 2000). Regardless of the definition of accountability employed, Spotlight Accounting requires an actor to engage in social interaction and exchange (Mulgan, 2000) that will allow SIGs to interrogate and question an actor’s activities, to pass judgement on the conduct of an actor and to impose formal and informal consequences on an actor (Bovens, 2007; Brown, 2009; Thomson et al., 2015).

386  Handbook of accounting, accountability and governance The use of Spotlight Accounting as a lens through which accountability is viewed re-focuses this part of an actor’s activities towards its broarder intentions, and supports a transition of decision-making power from an individual actor to their SIGs (Dillard & Vinnari, 2019). Traditionally, the power to make decisions is held by select groups within, or closely aligned with, an actor’s organization (Brown, 2009). Such an aggregation of decision-making power limits the ability of SIGs to have a voice in the design and implementation of accountability mechanisms that discharge an actor’s obligations to society at large. Spotlight Accounting breaks down these power concentrations through the proactive involvement of SIGs in an actor’s activities. Spotlight Accounting also ensures that an actor discharges their accountability obligations to society at large (Objective Two), and that an actor recognizes their stewardship and accountability obligations beyond the resources under their direct control (Objective One). Spotlight Accounting achieves these objectives by requiring an actor to share control over the design and implementation of accountability activities with all interested SIGs. However, accountability as an activity is, by its nature, a retrospective process of reporting, interrogating and judging of an actor’s activities. The use of Spotlight Accounting as a concept is able to transition an actor’s accountability activities into a proactive environment, where the framework in which ex post accountability processes unfold is collaboratively and ex ante determined between an actor and their SIGs. Spotlight Accounting Maximizes the Impact of Accounting and Disclosure Activities The Spotlight Accounting concept positions an actor’s accounting and disclosure activities as enablers of AAG because they represent the information collation and dissemination mechanisms that enable an actor to be held to account. However, in the Spotlight Accounting process, accounting and disclosure also serves as a starting point for the dialogic engagement between SIGs and an actor. The accounting and disclosure activities of an actor provide this opportunity because they extend further into society than an actor’s other AAG activities (Figures 17.1 and 17.3). This extension into society is reflected by the substantial impact of accounting information, and its disclosure, on decision-making processes across SIGs. Regardless of the way or context in which Spotlight Accounting is applied, the accounting processes and information disclosures through which an actor discharges their accountability to society is likely to be highly variable, complex and rarely purely financial (Nicholls, 2018). An important practical challenge for Spotlight Accounting in the accounting and disclosure context relates to the unit of measurement through which information is collated and communicated to SIGs (Perkiss et al., 2021). For an actor, difficulties arise because the measurement of impacts on society regularly fails to adhere to standardized units of measurement (Nicholls, 2018). For example, the certification of ethical or organic products across an actor’s supply chain, or the ability for an actor to uphold, monitor and report on human rights standards across their organization and supply chains is likely to require contextually appropriate assessment processes and units of measurement in which such assessments are conducted. Identifying appropriate processes, standards and measurements, and communicating the appropriateness of the employed processes, standards and measurements to SIGs, is difficult at best. For SIGs, these difficulties extend even further, because although individualized units of measurement, agreed upon between SIGs and an actor, are likely to be an effective tool to communicate complex contextualized information, such individualization has a substantial negative impact on the comparability of information between actors.

Spotlight Accounting in the context of accounting, accountability and governance  387 Within this complex environment, SIGs must determine the relative importance of comparability between actors, when engaging with an individual actor, as well as groups of actors. If comparability is judged to be less important than individualized units of measurement, a range of challenges is likely to arise (see, for example, Perkiss et al., 2019, 2021). Examples of such challenges include the possibility that individual SIGs misunderstand the definition of disclosure items when making comparisons between different actors, as well as the potentially substantial resources that are required to transform disclosures into standardized measurement scales. These challenges notwithstanding, qualitative social science, including social accounting, are established disciplines with the ability to ensure that the “new” accounts required by Spotlight Accounting are not unsubstantiated anecdotes, but carefully researched accounts and disclosures that provide important information for the discharge of an actor’s AAG obligations.

THE POTENTIAL OF SPOTLIGHT ACCOUNTING IN PRACTICE Spotlight Accounting is able to address a range of AAG challenges in a variety of contexts. However, Spotlight Accounting is likely to be most impactful in contexts where traditional accounting conceptualizations and practices have struggled to meaningfully connect the activities of an actor with the needs, expectations and perceptions of SIGs. This section discusses the benefits that are expected to arise from an application of Spotlight Accounting in two, non-traditional, accounting contexts: (1) Indigenous accounting and (2) CSR. The Potential of the Spotlight Accounting Concept in Indigenous Accounting The use of Western accounting concepts, as well as the implementation of accounting activities for Indigenous people, is linked to a range of disempowering (Lombardi, 2016), and even catastrophic (Neu, 2000), outcomes for Indigenous communities. Without wanting to review the extensive literature on this subject (see, for example, Lombardi, 2016; McDonald-Kerr & Boyce, 2020; Scobie et al., 2023), it is important to note that key issues in Indigenous accounting contexts relate to the fact that accounting is usually done for, rather than done by (Buhr, 2011) or with Indigenous people, and that Western accounting concepts and language are often irreconcilably divorced from Indigenous value systems (Greer & Patel, 2000). The extensive and multifocal challenges applicable to Indigenous accounting require both Indigenous and non-Indigenous accountants to find mechanisms that “represent complex multi-dimensional realities through metaphorical constructs that are limited and incomplete” (Morgan, 1986, p. 480). Spotlight Accounting provides accountants, actors and SIGs with a framework in which AAG activities are targeted towards identifying the relevant SIGs and meeting the contextualized needs of those SIGs. In the context of Indigenous accounting, a variety of SIGs, both directly connected to an actor that works with, or works for the benefit of, Indigenous people, as well as loosely connected SIGs, are likely to be present. SIGs in this context may include Indigenous people connected to an actor, Indigenous people and communities not connected to an actor, an actor’s business partners, funding bodies and organizations, government bodies and other groups within society at large. The top-down application of the Spotlight Accounting concept allows the governance > accountability > accounting > disclosure activities of an actor to be refocused, with the con-

388  Handbook of accounting, accountability and governance textual needs, expectations and perceptions of SIGs at the heart of an actor’s activities. Such an application should, in practice, result in the establishment of governance mechanisms, and accountability focus areas, that are based on Indigenous knowledge and cultural heritage contexts (see, for example, Finau & Scobie, 2022) in which the actor’s work is based. However, it is important to note that even within an Indigenous context, actors may rely on non-Indigenous frameworks because the appropriateness of an actor’s AAG activities is, regardless of context, dependent on the needs, expectations and perceptions of SIGs. Accountants, both Indigenous and non-Indigenous, play a critical role in the application of the Spotlight Accounting concept in an Indigenous accounting context because they must ensure that an actor’s value systems, decisions and activities are based on the contextualized need of SIGs, including Indigenous SIGs. In complex settings, such as Indigenous contexts, this means that accountants must understand, and be skilled at exploring, the multitude of insights that arise from any given situation. In addition, an actor must themselves be cognisant of the relevance and appropriateness of value systems, as well as the actions that underpin accounting activities, but also be sensitive to the impacts that arise from narrowing the scope of their work (Morgan, 1988). The Spotlight Accounting concept contributes to addressing these challenges by focusing the attention of an actor and their accountants on contextually important accountability processes. Within the Indigenous accounting context, this may include the application of Indigenous accounting processes that have been in place long before colonization (for a detailed analysis, see Lombardi, 2016), if such processes are most relevant and appropriate to address the needs, expectations and perceptions of SIGs. The Potential of External Spotlight Accounting Practice for Corporate Sustainability Reporting CSR assists SIGs in holding an actor to account for their social and environmental practices and impacts (Adams & Zutshi, 2004; Cho et al., 2018; Landrum & Ohsowski, 2018; Reynolds & Yuthas, 2008), and this should ultimately lead to improvements in the social and environmental activities of an actor (Burritt & Schaltegger, 2010). Specifically, CSR aims to hold an actor accountable for their actions by enabling SIGs to assess the sustainability of an actor’s actions (Adams & Zutshi, 2004). CSR achieves its aims through the provision of information about the environmental and social activities and impacts of an actor (Cho et al., 2018). An actor may ultimately improve their social and environmental practices to ensure that their AAG activities are closely aligned with the expectations of SIGs, and that this alignment is well reflected in their CSR information (Burritt & Schaltegger, 2010). However, the practical impact of CSR on an actor’s social and environmental behaviours has thus far been limited (see, for example, Christ et al., 2019 on modern slavery). Limitations arise because an actor may face institutional pressures to minimize disclosures, or to produce low-quality narrative disclosures, which undermines the practical usefulness of these reports (Christ et al., 2019). Key challenges limiting the impact of CSR are its foundation in traditional accounting concepts, as well as the application of associated values and assumptions (Bebbington et al., 2007). Traditional accounting concepts are monologic in nature, meaning they are created for, and by, an actor, informed by capitalist assumptions, and presented as “a true and fair view” of an actor’s activities via financial reporting (Brown, 2009, p. 316). The monologic notions underpinning traditional accounting concepts limit the pluralistic properties of CSR and hamper the attainment of true forms of accountability (Dillard & Brown, 2012; Dillard

Spotlight Accounting in the context of accounting, accountability and governance  389 & Vinnari, 2019; Vinnari & Dillard, 2016). In fact, traditional – financial accounting-based – CSR practices often present a biased view because an actor is able to undertake actions, and provide information about these actions, that they self-select as meeting the needs, expectations and perceptions of SIGs (Burritt & Schaltegger, 2010; van der Laan, 2009). While an actor may not deliberately provide SIGs with misleading information, the level of control that an actor exerts over their CSR practices provides numerous opportunities for opportunistic or manipulative behaviours (Godowski et al., 2020; Morales & Sponem, 2017). More recent developments in accounting and CSR, such as the Global Reporting Initiative (GRI), have aimed to minimize an actor’s ability to influence information presented to society by establishing a framework of quantitative and qualitative indicators, which is informed by SIGs’ information needs. However, reporting against the GRI, as well as other accounting frameworks, continues to locate accounting activity and disclosure decisions with the actor, thus failing to address a range of information and power asymmetry challenges that underpin non-statutory accountability obligations. Prior literature has highlighted that a closer engagement and dialogue between SIGs and an actor is required to further enhance the quality and impact of CSR (Aleksandrov et al., 2018; Dillard & Vinnari, 2019). Spotlight Accounting practices are well suited to address this challenge because an actor is supported in the discharge of their accountability obligations to society, and CSR information developed through Spotlight Accounting extends beyond the managerial focus (Bebbington et al., 2007; Brennan & Merkl-Davies, 2018) of traditional CSR. In its most basic application, Spotlight Accounting can be used to establish non-actor produced external accounts (Thomson et al., 2015) that allow SIGs to supplement CSR with society-driven and generated information (Perkiss et al., 2019, 2021). The main feature that is common across all external accounts is that they are constructed by someone other than the accountable actor (Gray et al., 2014; Thomson et al., 2015). The creation of external accounts is a social accounting technique in which numerous accounting processes can be employed (Brown, 2009). External accounting encourages broad participation from SIGs and comes in different forms with varying characteristics, including the provision of both quantitative and qualitative information. The application of Spotlight Accounting practices in the construction of external CSR allows SIGs to determine the most appropriate focus, content, measurement and disclosure mechanism for CSR information in a given context. In addition, it enables SIGs to challenge – or counter – an actor’s representations where information provided by the actor does not sufficiently discharge their societal accountability (Perkiss et al., 2021). External accounts established through the application of Spotlight Accounting practices are not mutually exclusive of other social accounting methods (Perkiss et al., 2019), such as systematic and dialogic accounting (Thomson et al., 2015), and their overarching intention is the re-location of influence over accounting and accountability activities from an actor to SIGs. Applying Spotlight Accounting in external accounting practice requires the establishment of a hybrid forum (Perkiss et al., 2019) or responsibility network (Dillard & Vinnari, 2019) where pluralistic engagement – within and between SIGs, as well as between SIGs and an actor – can take place (Callon et al., 2001; Godowski et al., 2020). In a previous application of Spotlight Accounting in CSR (for details, see, for instance, Perkiss et al., 2020, 2021; Wersun et al., 2019), the WikiRate online platform (WikiRate, 2021) was utilized as a crowdsourced hybrid forum in which all members of society were invited to act as “citizen accountants” (Bebbington et al., 2007) to establish the information needs of SIGs, and to collect, collate and

390  Handbook of accounting, accountability and governance analyse data through dialogue and engagement around an actor’s CSR activities. In practice, the WikiRate online platform, which hosts and organizes environmental and sustainability information for thousands of actors (WikiRate, 2021), allowed citizen accountants to jointly establish a series of external accounts that shone a spotlight on areas that were identified by SIGs themselves. As outlined in Figure 17.4, the operationalization of the Spotlight Accounting process through a hybrid forum is likely to support the discharge of an actor’s accountability obligations and create positive long-term impacts on governance. The application of the Spotlight Accounting process in an external accounting environment, and the associated co-location of accountability, accounting and disclosure decisions with SIGs and an actor, has become achievable because of the saturation of technological devices and Internet access in society within the last decade. Advances in technology and communication have enabled the creation of crowdsourced, and user-managed, hybrid forums outside of accounting (including product review websites, social media networks, etc.) to influence, supplement or replace actor-generated information narratives. The Spotlight Accounting process can be implemented through the application of similar principles within an accounting context to locate control over an actor’s accounting, accountability and ultimately governance activities in a space shared between SIGs and an actor. However, it is important to note that the Spotlight Accounting process does not require the application of any particular technology or engagement mechanism to achieve its intentions. Instead, the use of any technology or engagement mechanism that allows SIGs and an actor to come together to set expectations, collect and analyse information, and make decisions will support the implementation of Spotlight Accounting by providing a greater voice to society, and ultimately lead to improvements in AAG (also see Reynolds & Yuthas, 2008; van der Laan, 2009).

SPOTLIGHT ACCOUNTING CHALLENGES While Spotlight Accounting has the potential to re-define the relationship between SIGs and actors across all realms of AAG, it must be acknowledged that no concept or practice is able to fully represent the complexity and texture of an individual actor’s real-world interactions with, and impacts on, society (see also Morgan, 1986). Spotlight Accounting is no exception to this rule. The key difference between the application of Spotlight Accounting as a concept or practice lies in the immediate intentions underpinning the participating parties’, actors’ and SIGs’ dialogic engagement. As a concept, Spotlight Accounting aims to influence structural aspects within an individual actor’s organization, with the ultimate view to improve the relationship between SIGs and an actor through a top-down process. The use of Spotlight Accounting as a process aims to achieve similar aims, but commences from a bottom-up position, where disclosure and accounting questions are addressed first, and more structural AAG considerations follow. In both instances, the application of Spotlight Accounting is operationalized by individuals, and the commitment of these individuals to the principles of open and constructive engagements across SIGs, as well as between SIGs and each individual actor, is critically important for its success. Through an analysis of the objectives, principles and potential application of the Spotlight Accounting concept, three important challenges can be identified. First, Spotlight Accounting, like all accounting frameworks and methods, relies on human accountants to translate con-

Figure 17.4

Source: Authors.

Spotlight Accounting as an external accounting process

Spotlight Accounting in the context of accounting, accountability and governance  391

392  Handbook of accounting, accountability and governance cepts into practice. Given that “human agency and the limitations imposed by perspective are fundamental in the generation of knowledge” (Morgan, 1988, p. 480), it is possible that accountants inadvertently preference the needs, expectations and perceptions of some SIGs, while marginalizing the views of others. As a result, the success or failure of Spotlight Accounting as a concept is likely to be highly dependent on the ability of accountants to act as impartial brokers within and between SIGs, as well as between SIGs and each individual actor. The personal attitudes and professional history accountants bring to this new role cannot, and should not, be eliminated. However, a stronger focus on interpersonal skills, as well as professional values and attitudes in accounting and business education (see also Bayerlein, 2015; Bayerlein & Timpson, 2017), is likely to be required in the future. The Spotlight Accounting concept itself supports accountants acting as impartial brokers because it explicitly creates an environment for pluralism and equal engagement between each actor and society, where previously marginalized voices are valued, and traditionally dominant perspectives are reviewed. Spotlight Accounting achieves this outcome by positioning the development of principles that underpin an actor’s AAG activities, as well as the design and implementation of such activities, as a responsibility that is shared between SIGs and each individual actor. A second challenge for the application of the Spotlight Accounting concept relates to the potential proliferation of conflicting needs, expectations and perceptions of SIGs, and the potential inability of an actor to discriminate between these demands, both effectively and transparently (see also Bovens, 2007). It is possible that SIGs are unable to form a consensus on an individual actor’s key accountabilities towards society, and this may consequently result in a proliferation of the number and nature of demands made towards an actor. SIGs may, because of their differing relationship with each actor, or differing views about societal needs, be genuinely unable to agree on a common set of needs, expectations or perceptions with which an actor may be asked to engage. Furthermore, it is possible that some SIGs may be driven by ulterior motives, for example dissemination of biased information that distorts the credibility of the Spotlight or actor’s image (Perkiss et al., 2019; Thomson et al., 2015). In either case, the accountant, in their role as impartial broker, must assist SIGs and individual actors to come to a joint agreement on the requirements that are levelled against an actor. Importantly, the application of the Spotlight Accounting concept or practice does not imply that an actor should uncritically accommodate all demands from SIGs. Instead, Spotlight Accounting encapsulates the ability for an actor and their accountants to collaboratively agree with SIGs on a set of key AAG principles and obligations. It is this collaboratively agreed-upon set of principles and obligations which is levelled against an actor, and monitored and judged by SIGs. While Spotlight Accounting recognizes, and mediates, this challenge, it is acknowledged that the attainment of a collaboratively agreed-upon set of principles and obligations may be difficult in practice. A third challenge for the Spotlight Accounting concept and practice relates to the level of (measurement) uncertainty associated with the information through which an actor may discharge complex non-financial AAG principles and obligations. It is likely that the information which is most valuable and impactful for SIGs is also associated with a substantial degree of uncertainty (Nicholls, 2018). Such an uncertainty creates challenges from a measurement, disclosure and assurance perspective. While Spotlight Accounting does not directly address concerns related to the uncertainty of information, it is important to note that this challenge also extends to other non-traditional as well as non-financial accounting activities. Within Spotlight Accounting, it appears likely that concerns about (measurement) uncertainly can be

Spotlight Accounting in the context of accounting, accountability and governance  393 partially addressed through the establishment of clear and definite expectations (Perkiss et al., 2021), which can be employed in both internal and external Spotlight Accounting contexts. Beyond the specific challenges outlined above, it is also possible that the Spotlight Accounting participants – SIGs, individual actors and accountants – will fail to utilize the concept and process to its full potential. Participants may, for example, bring expectations associated with traditional financial accounting and reporting activities into the Spotlight Accounting frame. In such a case, the application of Spotlight Accounting as a concept or practice is unlikely to have a transformative effect, because Spotlight Accounting would, in a worst-case scenario, be reduced to a stakeholder engagement activity in which actors retain their traditional focus on leading and implementing AAG decisions, rather than re-locating such decisions into a space that is shared by SIGs and actors.

CONCLUSION This chapter has examined the objectives and principles of Spotlight Accounting, with the aim to extend the initial Spotlight Accounting idea identified by Perkiss and colleagues (2019, 2021) to AAG areas beyond its original application in CSR. The chapter focused on a theoretical exploration of the Spotlight Accounting concept and practice, while also providing guidance on its potential application in a range of contexts. Spotlight Accounting, which was introduced to the literature in 2019, sits within a long-standing literature related to social accounting. Spotlight Accounting addresses a range of barriers in traditional accounting concepts and processes because it relocates the decision-making authority for an actor’s AAG activities into a space that is shared by SIGs and individual actors. Spotlight Accounting posits that AAG activities are not value-judgement-free, and it positions the accountant as an impartial broker charged with mediating between the needs, expectations and perceptions of SIGs and the views of each individual actor. Implicit within Spotlight Accounting is the argument that the complex, and often non-financial, accountability obligations of actors cannot be discharged through standardized measures. Instead, Spotlight Accounting aims to illuminate those aspects of each actor’s AAG activities that are contextually most important to ensure that each individual actor discharges its accountability obligations to society meaningfully and effectively (Perkiss et al., 2019). Spotlight Accounting argues that contextualized measures of societal impact are likely to be most successful in providing society at large with the information that is required to comprehensively judge the activities and societal impacts of each individual actor. The concept of Spotlight Accounting also impacts the language used to describe an actor’s AAG activities. Spotlight Accounting achieves this impact because it re-focuses accountability dialogues away from the provision of information, and towards the implementation of appropriate structures and processes that discharge an individual actor’s accountability obligations in a way that is most meaningful to their SIGs and society at large. Spotlight Accounting also has the potential to result in a re-imagining of the AAG relationships between individual actors and their SIGs. The impact of Spotlight Accounting for the accounting profession is likely to be substantial because the concept and practice calls for a transition away from the profession’s historical focus on measuring, processing, verifying and communicating financial and non-financial information, and towards a future where accountants act as moderators of the social and moral demands that society places on individual actors.

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Spotlight Accounting in the context of accounting, accountability and governance  397 Scobie, M., Lee, B. and Smyth, S. (2023), “Grounded accountability and Indigenous self-determination”, Critical Perspectives on Accounting, Vol. 92, article 102198. Taylor, M. (2013), “Shared governance in the modern university”, Higher Education Quarterly, Vol. 67 No. 1, pp. 80–94. Thomson, I., Dey, C. and Russell, S. (2015), “Activism, arenas and accounts in conflicts over tobacco control”, Accounting, Auditing & Accountability Journal, Vol. 28 No. 5, pp. 809–845. van der Laan, S. (2009), “The role of theory in explaining motivation for corporate social disclosures: voluntary disclosures vs ‘solicited’ disclosures”, Australasian Accounting, Business and Finance Journal, Vol. 3 No. 4, pp. 15–29. Vinnari, E. and Dillard, J. (2016), “(ANT)agonistics: pluralistic politicization of, and by, accounting and its technologies”, Critical Perspectives on Accounting, Vol. 39, pp. 25–44. Wan, C., Shen, G.Q. and Choi, S. (2021), “Underlying relationships between public urban green spaces and social cohesion: a systematic literature review”, City, Culture and Society, Vol. 24, article 100383. Wersun, A., Dean, B., Mills, R., Perkiss, S., Acosta, P., Anastasiadis, S., … Bayerlein, L. (2019), “An exploration of student learning for sustainability through the WikiRate student engagement project”, International Journal of Management Education, Vol. 17 No. 3, article 100313. WikiRate (2021), website. Available at: https://​wikirate​.org.

18. Accounting, governing, and the historical construction of the “governing subject” Ann-Christine Frandsen and Keith Hoskin

OVERVIEW This chapter draws on Michel Foucault’s “bottom-up” conceptualizing of “governmentality” to think the “governing subject” as initiator of, and passage point for, the “thinking and acting” of governing, beginning around 3300 bce in Mesopotamia and continuing down to today. It proposes that accounting as the historically earliest writing-form enabled the governing subject to become thinkable as enactor of forms of accounting-based, mathematically regularized, and centripetal coordination of humans and resources, thus also rendering the “governed subject” thinkable. We identify two major subsequent transformations in our ways of thinking the governing subject. First, “governance” emerges from the 1600s as a term designating the “art of good governing” and so the “ethical governing subject”. Second, intensified forms of centripetal coordination and accountability are invented from around 1800, as what Foucault called “governmental management” and Alfred Chandler termed “administrative coordination”. We end by considering how one recent and distinctive version of such a subject, the governing subject of corporate governance, may draw on dimensions of each historical construct in seeking to deliver a corporate governance that is both practicable and credible.

INTRODUCTION It must be possible to do the history of the state on the basis of men’s actual practice, on the basis of what they do and how they think. (Foucault, 2007, p. 358)

In this chapter we make the case that accounting as the earliest-known writing-form enables the formation of a new human construct, the “governing subject”, and so launches the history of the state and all other governed entities. The first form of this subject is an enactor of forms of accounting-based, mathematically regularized, and centripetal coordination of humans and resources. It therefore renders thinkable, as its reciprocal, the “governed subject”. We enter a first form of a world of “governability” that we still inhabit today. We shall begin with the historical question of when and how this first form of “governing” emerges out of accounting, as our way into the more conceptual issue of how successive forms of “governing”, down to today, may in general be understood as outcomes of similarly major transformations in human thinking and acting. Our answer to the historical question is in one respect not new. For perhaps the most studied transformation in human thinking and acting is the invention of writing; and as one of the great historians of orality and literacy, Walter Ong, proposed, “writing restructures consciousness” (Ong, 2012, p. 72). Yet in another respect our answer is perhaps more unfamiliar. For our argument (for example, Bassnett et al., 2018) is 398

Accounting, governing, and the historical construction of the “governing subject”  399 that the form of writing which produces this transformation is not that narrative form of writing based on the template of linear-flow speech, whose first-known examples date to around 2600 bce. Instead, the writing that transforms our consciousness and makes governing thinkable is the first writing system, developed centuries earlier: the proto-cuneiform writing of accounting. This system combined visible signs, both linguistic and numerical, to “name and count” objects of interest (Ezzamel & Hoskin, 2002). Its earliest examples are mainly found in the ancient Mesopotamian site of Uruk and date from c. 3300–3000 bce. This writing was a systemically new form of “languaging act”; it “said” different things from those said in oral cultures, and it said them differently. And it would continue to do so when joined by the later-developed narrative form of writing, as the latter follows the “template”, so to speak, of speech. At the same time, there is further form of restructuring consciousness, at the level of learning to read this first writing. For it required a rote learning of the arbitrary and initially meaningless visible signs that made up accounting statements, a learning necessarily absent from oral cultures (Robson, 2002). And in undergoing this process there is a form of “learning to learn” or “deutero-learning” (Bateson, 1972): namely, that writing confers different and special knowledge: a learning to learn that will accompany the learning of all subsequent writing systems, narrative or non-narrative. This was, therefore, consciousness restructured in two profound ways. In this chapter we therefore approach the issues of governing and governance as questions that can be helpfully analysed by addressing how we humans became subjects who think and act within frames of “governability” that enable us both to govern and be governed in historically specific but changeable ways. To do so, we take up and extend the challenge posed in our opening quotation from Foucault, to undertake the history of the state, but also of other “governable” entities including the modern corporate one, on the basis of what humans do and how they think. Furthermore, we do so by continuing down a path that Foucault initiated: the study of what he named the history of “governmentality” (Foucault, 2007, p. 108). Governmentality for Foucault is more than just a study of “the development of real governmental practice”. It studies “the art of governing, that is to say the reasoned way of governing best and, at the same time, reflection on the best possible way of governing” (Foucault, 2008, p. 2, emphases added). It therefore studies the interplays of thinking and enacting governing: reason and reflection, but also the strategies and tactics that will have as a major concern the production of human subjects who in their thinking and acting will accept being “governable”. And accounting will, we argue, always have a major role in this process, not least since it is the first and still most potent way of rendering such subjects accountable. Such a line of argument is not new, being first developed in one of the foundational articles that launched “critical accounting” research: Miller and O’Leary’s “Accounting and the Construction of the Governable Person” (1987). Drawing on Foucault’s Discipline and Punish (1977), they analysed how in the nineteenth century the individual moved from being “memorable” to being the “calculable” subject, who then becomes governable in a new way through the introduction of accounting innovations such as standard costing and extensions of new forms of what the great economist Thorstein Veblen called “scholastic accountancy” (Veblen, 1918, pp. 77–78), such as IQ testing. We expand on these pioneering approaches in two respects. First, we approach governability as a reciprocal process, where making some subjects governable in the sense of “able to be governed” entails making others “able to govern”; that is, “govern-able”. There is always

400  Handbook of accounting, accountability and governance in other words a “give and take” to governability; and as part of that give and take, both the governing and governed “subject” may be either an individual or a collective, or a mix of both. Second, in our approach governability only reaches a particularly modern level of intensity and scope in the 19th century. For accounting had already in Mesopotamia co-constructed the first versions of the governable and the govern-able. At the same time, we very much retain Foucault’s distinctive approach to conceptualizing power, which is not as a form of “direction” but of “indirection”. As he puts it: “[W]hat defines a relationship of power is that it is a mode of action which does not act directly and immediately on others. Instead, it acts upon their actions” (Foucault, 1982, p. 789, emphases added). That also requires, as a form of indirection, a power relationship which requires “that ‘the other’ (the one over whom power is exercised) be thoroughly recognized and maintained to the end as a person who acts”. This for us is a crucial point. Power is neither imposed unilaterally nor derives from a “violence … as its last resource”; but nor is there a simple “consent of the governed” (1982, pp. 788–789). Therefore, the relation of governing to governed subject is not a divide but a shared milieu, where governable and govern-able characteristics are common to and reciprocal between both. In our next section we present the case for seeing accounting as the first form of writing and in that capacity as what launched governing as thinking and acting in Mesopotamia. Indeed, centuries before narrative writing, Uruk arguably became both the “first mathematical state” (Høyrup, 2009, p. 25) and first manifestation of governability. In the following section we turn to consider the medieval emergence of the term “governance” and its subsequent conceptual differentiation from “government” in the 1600s as a term for “good government”. This leads, we suggest, to the emergence of an “ethico-legal” form of governing subject. We then consider how governing begins to overlap with managing and becomes increasingly centripetal, particularly from around 1800, as a new disciplining of conduct allied to the learning of new knowledge disciplines remakes humans as “doubly disciplinary” subjects. Foucault (2007, p. 108) describes the new governing as “governmental management”, and we suggest that his approach converges conceptually and chronologically with Chandler’s (1977) analysis of a new centripetal “administrative coordination” as what from the 1830s begins to produce modern managing, managers, and business enterprises. Finally, we explore how these various historical-conceptual insights into governing/being governed contribute to shaping the thinking and acting of the governing subject of corporate governance, perhaps as “ethical and doubly disciplinary subject”. We conclude with a reflection on the potential value of this bottom-up form of analysis in re-thinking the limits of governing, governance, and indeed governmentality.

ACCOUNTING, WRITING AND THE BIRTH OF THE “GOVERNING SUBJECT”: AN INTRODUCTORY, BOTTOM-UP ANALYSIS So how did accounting, as first writing, restructure human consciousness in a way that made governability thinkable? This occurs, we argue, as those who learn to read, write, and think via this accounting discover how to become govern-able and act on the actions of others so long as those others accept being governable. Key to this is that accounting is a distinct form of writing which, since it only names and counts, says things differently and says different things firstly from speech and subsequently

Accounting, governing, and the historical construction of the “governing subject”  401 also from narrative writing. Historians who study narrative writing now define that as “glottographic” (that is, a writing of what “the tongue”, in Greek “glotta”, produces). In response, scholars studying accounting as first writing, and the similar forms of statement form that it generated – word lists for memorizing, tabular layouts, diagrams illustrating geometrical relations, and now many more – have designated all these as “non-glottographic” writing (Hyman, 2006).1 At the same time, we stress that accounting-as-writing is not the first manifestation of the naming-and-counting format. That begins in the earlier “clay token” accounting dating back to perhaps 8000 bce (Schmandt-Besserat, 1992). On that basis, Ezzamel and Hoskin (2002) have argued that clay-token and clay-tablet forms of accounting both develop key characteristics to be found in all subsequent accounting forms, so that a “baseline understanding of accounting” can be set out as follows: First, that accounting is a practice of entering in a visible format a record (an account) of items and/ or activities. Secondly, that any account involves particular kinds of signs which both name and count the items and activities recorded. Thirdly, that the practice of producing an account is always a form of valuing. (Ezzamel & Hoskin, 2002, p. 355, original emphasis)

Clay tokens meet that baseline as follows. The naming is achieved through the moulding of tokens into different shapes that constitute different three-dimensional visible signs. The counting is done through adding or subtracting tokens in a (1, 1, 1) process. The total number of each token shape counted and stored at a given moment enables a numericized value statement to be made for each item named. This in itself was a huge breakthrough in human ways of “languaging”. It differs from older systems like tally sticks, which counted objects by making notches in the stick, but where the naming of the object counted was oral. In contrast, the naming, counting, and storing of “token sets” potentially provided a running record of quantities of objects, and so of their rate of increase or decrease. This constituted the development of a first form of “accounting memory” even before writing: a factor which presumably contributed to the spread of token use over the following millennia across the Middle East. Other changes ensued before writing. One was a shift in the naming of objects from around 4000 bce, where objects began to be named in mathematized forms. The first case was perhaps grain, which became named as a mathematically regularized volume of grain: specifically that contained in “a poorly made open bowl … [made] by the million, [but] always with approximately the same capacity of roughly 2 litres of grain” (Nissen, 1985, p. 350). Amounts of oil, beer, and so on then also became counted using jars with a similar capacity. Finally, around 3500 bce, clay tokens were impressed on and then enclosed in clay envelopes, at which point some envelopes incorporated signs produced by making an impression in the damp clay with a stamp or cylinder seal (the earliest of which date to c. 6500 bce). This added a further kind of naming, that of the one or more human subjects centrally involved in the accounting event in question. Therefore, accounting as a writing of naming-and-counting statements was not accounting’s beginning but one more step in an evolving practice that already exhibited Ezzamel and Hoskin’s (2002) “baseline understanding of accounting”. But there were, nevertheless, significant differences with the transition to writing, and these, we suggest, are what would transform thinking and acting to the point where governing and governability became both thinkable and enactable.

402  Handbook of accounting, accountability and governance Three differences were particularly significant. First, with writing, the naming-and-counting statements became expressed through two separate sets of signifiers, one linguistic and the other numerical, which allowed more flexibility and complexity in the naming and counting of the objects accounted for. Second, the tablet format enabled the construction and retention of archives of accounting statements, which enabled the scale, scope, and quality of “accounting memory” to be vastly extended. Third, the principle of abstract mathematical regularization extended to the naming and counting of categories such as time, space, weights, and measures on a “metaphysical” rather than physical basis. The Mesopotamian calendar abandoned the variability of both solar and lunar calendars. Using a sexagesimal (base 60) system, the year became divided into 12 (2 × 2 × 3) months of 30 (2 × 3 × 5) days, with each month having three 10-day (2 × 5) weeks, and the residual five or six days of the year designating a festival time. Space became similarly regularized, using a “rod” roughly 6 metres in length to measure the length and breadth of fields and the dimensions of buildings (Høyrup, 2009, p. 22). Finally, Sumerian weights and measures became “divided into sexagesimal denominations convenient for distributing on the basis of the 30-day administrative month as rations to the workforce” (Hudson, 2004, p. 4). For Høyrup (2009, p. 25), Uruk becomes the first “mathematical state”, where both “taxation and allocation of resources … were made according to mathematically determined rules”. In this new form of indirection, therefore, the array of written mathematical regularizations began to generate a new kind of centripetal dynamic as they acted on the actions of both those literate in accounting and the non-literate alike. More generally, space, time, and valuing constituted a new mathematically regularized “triad” of terms framing thinking and acting, which we have described in the past as a “space-time-value machine” (for example, Frandsen, 2009): a machine which rendered it increasingly difficult not to think and act in and through its terms, even if resisting them. Regularized valuing arguably began with the clay-token system’s simple (1, 1, 1) counting system, making thinkable the assumption that there were uniform “accounting value units”, an assumption under which we still operate in our accounting metrologies today. With accounting-as-writing, such uniform units quickly became the means of naming and counting both the value of the work performed by subjects and the recompense to be received. One surviving table of rewards (see Table 18.1) contains carefully gradated and regularized food and drink rations for elite post-holders – including a source of potential dissension in the arguably over-generous portions for the Chief Vizier’s son (Johnson, 2015, pp. 111–112). So as subjects lived and worked within this system, the thinking and acting of governing developed three distinctive new features.

Accounting, governing, and the historical construction of the “governing subject”  403 Table 18.1

Ration assignments for a feast for elite-level governing subjects

Job title

Portions of

Portions of (beer, bread)

“Provincial Governor”

(30, 30)

“Assistant to Chief Vizier”

(30, 30)

“Chief Vizier’s Son”

(20, 20)

“Royal Scribe (1)”

(30, 30)

“Royal Scribe (2)”

(5, 5)

“Rider-Royal Messenger (1)”

(60, 70)

“Rider-Royal Messenger (2)”

(30, 30)

“Butcher (1)”

(5, 5)

“Butcher (2)”

(2, 2)

Source: Based on Johnson (2015, pp. 111–112).

First, accounting-as-writing provided accurate (or potentially accurate) series of records of events up to a given present, thereby enabling a govern-able subject, through appropriate reflection on those records, to formulate both diagnoses of the present and prognoses of possible futures. Second, the records as archives enabled the use of past performance across a mathematized period to form the basis for valuing future performance over each such period as norms or targets. In both cases, the written record of what had been done, once interpreted by the govern-able governing subject, became the basis for pre-scribing what ought to be done. Third, as we have already emphasized, the statements articulated by means of accounting-as-writing differed fundamentally, both in content and in form, from those makeable by humans living in wholly oral cultures. At the level of content, the historical anthropologist Jerrold Cooper sums up the difference as follows: Livestock or ration accounts, land management records, lexical texts, labels identifying funerary offerings, offering lists, divination records, and commemorative stelai have no oral counterparts. Rather they represent the extension of language use into areas where spoken language cannot do the job. (Cooper, 2004, p. 83, emphasis added)

At the level of form, written accounting statements, along with all the types of lists and records to which Cooper refers, had no verbs. But that did not mean that they had no syntax. Instead, Peter Damerow, one of the decipherers of proto-cuneiform, notes the absence of verbs, only then to point out that this accounting, being concerned purely with being “a successful means of presenting knowledge and transmitting it”, developed “non-linguistic structures of syntax” (Damerow, 2006, p. 9, emphasis added). This it did by adding a pictorial device to these otherwise written or “scriptorial” texts: the line (Ingold, 2007). Lines drew horizontal and vertical boundaries separating off each accounting statement, as can be seen in Figure 18.1, a tablet dating to around 3100–2900 bce, which is an administrative record, probably of barley distribution, containing naming and counting signs and also a cylinder seal impression (largely concealed beneath the accounting statements on the tablet surface pictured) of a male figure with four dogs and two wild boars in a wood.

404  Handbook of accounting, accountability and governance  

Source: The Metropolitan Museum of Art, New York (medium: clay; period: Jemdet Nasr; culture: Sumerian; geography: Mesopotamia, probably from Uruk (modern Warka). Accession number: 1988.433.1).

Figure 18.1

Proto-cuneiform tablet with seal impressions (obverse only): administrative account of barley distribution with cylinder seal impression of a male figure, hunting dogs, and boars, c. 3100–2900 bce

The structure and key accounting content can be seen more clearly in Figure 18.2, which is a schematic rendering of the tablet in Figure 18.1 rotated 90 degrees anti-clockwise. There are four line-bounded spaces, each of which forms what Sumerian scholars call a “case”, which here are set out in two columns. The top two cases in the left-hand column contain the accounting statements. In each case the object accounted for, probably barley as noted, is named by using a pictograph of an ear of corn. Immediately to the left of each pictograph, the two circular impressions are the counting signs designating the amount of grain recorded as having been distributed (the same in each case).

Accounting, governing, and the historical construction of the “governing subject”  405  

Source: The Metropolitan Museum of Art, New York (medium: clay; period: Jemdet Nasr; culture: Sumerian; geography: Mesopotamia, probably from Uruk (modern Warka). Accession number: 1988.433.1).

Figure 18.2

Schematic drawing of tablet and cylinder seal. Top: Schematic drawing of proto-cuneiform tablet obverse view depicted in Figure 18.1, rotated 90 degrees anti-clockwise. Bottom: Composite view of whole impression made by rolling cylinder seal in soft clay (drawn from impression on tablet reverse side, plus those on edges and obverse)

406  Handbook of accounting, accountability and governance  

Figure 18.2 also makes manifest another significant difference between the new accounting-as-writing and speech which Damerow identifies: namely that speech transmits “knowledge represented by language … sequentially. In contrast, proto-cuneiform texts are mostly organized in hierarchies” (Damerow, 2006, p. 4, emphasis added); and it is the lines that construct the syntactical divisions which make the hierarchizing visible. Finally, Figure 18.2 also provides a second schematic reconstruction below the first, this time of the whole cylinder seal impression rolled out across both sides and the edges of the clay tablet reproduced in Figure 18.1. The reconstructed impression, read as a whole, conveys pictorially a supplementary but crucial message concerning “good government”. First the male figure is the ruler/governing subject. He walks calmly, followed by two of his hunting dogs on leads, which walk obediently behind him; meanwhile the other two dogs, off the leash, race towards two wild boars to drive them away. The supplementary pictorial message is that the ruler is a wise ruler and so the “good shepherd” both of the territory of the state and of its people. At the same time, there is perhaps a more accounting-specific message: that this tablet, like all tablets, flows upwards to the ruler as ultimate principal; and that this is only possible through the repeated production of accounts by all the different types and levels of governing subjects working on the ruler’s behalf, constituting the communication networks between the state’s peripheries and its centre: that is, those subjects who are govern-able precisely because of their proficiency in writing and reading the accounts, lists, and tables that constitute the only writing of this first literate era. In such ways accounting-as-writing set in motion the restructuring of consciousness for all who participated in this first form of literate, governable world. So long as both the governing and the governed were disposed to accept the mathematical regularizations of the space-time-value machine, then “governability” was obtained. But even the most govern-able high-flyers never escaped from once having been governable as well. That initial pedagogic trial of total immersion in rote learning (Robson, 2002; Delnero, 2015) ensured that. Students only progressed once they had demonstrated perfect knowledge of the arbitrary and initially meaningless signs. They learned the naming ones from the “lexical texts” that Cooper refers to above; with the counting ones, they had not only to learn the forms of the different signs but also the differing values attributed to them in the 13 different metrologies used in proto-cuneiform accounting (Nissen et al., 1993, pp. 28–29). Only when they had mastered those “basics” plus the line-based syntax system could they learn to produce well-formed accounting statements displaying accurate naming and correct counting. So success was achieved by starting from a position of total ignorance, while taking a leap of faith that accepting having to be totally governable would eventually lead to becoming govern-able, through making a previously unconceivable “writerly” sense of both the world and one’s self. At the same time, those initial struggles would often recede, erased by the delights of power. That is reflected in two invocations by Mesopotamian scribes that open Jacques Derrida’s Of Grammatology (Derrida, 1976, p. 3). First, we have: “The one who will shine in the science of writing will shine like the sun: a scribe”: which signals the exceptionalism of the fully literate. Second, we have: “O Samas [Sun God], by your light you scan the totality of lands as if they were cuneiform signs”. Here the writerly nature of governing is revealed as an exclusive attribute of gods and scribes. Both are writerly subjects, scanning and knowing the whole territory

Accounting, governing, and the historical construction of the “governing subject”  407 of the state and exercising “governmental reason” through mastery of the range of signs and statements making up literate expertise. The first great extension to that range, and so to the complexity of the forms taken by governmental rationality, was the addition of glottographic writing to the mix. For instance, laws and the rule of law became possible, since laws require verbs to specify what is legal or illegal, and to issue “illocutory” commands of the “Thou shalt” and “Thou shalt not” varieties. Similarly, precisely worded contracts became possible, as a mix of narrative and non-narrative statements: for example, terms and conditions spelled out in narrative, plus accounting-based non-narrative statements recording amounts loaned, amounts and timing of repayments, plus details such as interest or late payment penalties. At the same time, the non-narrative statement form of the table was perfected around 2000 bce (Robson, 2004). Robson notes how familiar features developed early. For instance: “Headed tables have columnar headings”; “formal tables” (the majority surviving) have “both horizontal and vertical rulings to separate categories of information”, and also “two axes of organization”. Along the horizontal axis “types of numerical information are categorized”, while vertically “data is attributed to different individuals or areas” (Robson, 2004, p. 116, all emphases in original). So beyond the “proto-cuneiform” era, non-glottographic statements continue to be organized, in Damerow’s term, “hierarchically”, and to proliferate in their use and utility. At the same time, accounting’s naming-and-counting simplicity remained its strength, as it reduced the “noise” of the world’s complexity to written, silent forms of scanning that world by means of mathematically regularized accounting statements. But such noise reduction leads to generalized forms of reductionism: including, on the one hand, such consequences as the dangerous promise of a silent but illusory “transparency” (Quattrone, 2022), but on the other a prototypical version of one of the most widespread contemporary forms of rationally thinking the world and our actions: modelling. We have one final question before we end this section. Is there any evidence for or against the possibility that governability may have occurred before the transition to accounting-as-writing? There is at least evidence for one community using token accounting to coordinate activity from around 6200 bce: Tell Sabi Abyad, a large village destroyed by fire and excavated in the 1990s. Graeber and Wengrow (2021, pp. 420–421) have recently pointed out that not only do large numbers of clay tokens survive at the site; large granaries and warehouses are also preserved. But, they continue, the way of life of the community shows no evidence of operating with any consistent distinction between some who govern and others who are governed. There is no “large residence, rich burials or other signs of personal status”; instead, there is a “uniformity” to life, with dwellings “roughly equal in size, quality and surviving contents”, in a set-up where tasks such as sowing, harvesting and threshing “would have required the cooperation of multiple households” (Graeber & Wengrow, 2021, p. 421). This is therefore a very different form of “indirection”, and one with no surviving signs of a “governmental reasoning”. So for us accounting-as-writing remains the first restructuring of consciousness, and what makes governability both thinkable, and brings about the “birth” of the first constructs of govern-able and governable subject. To pursue this thesis further, the next two sections consider two major historical moments of further transformation in the definition and self-understanding of governing and governed subject.

408  Handbook of accounting, accountability and governance

FROM GOVERNMENT TO GOVERNANCE: AN ETHICO-LEGAL TURN? Wise Princes ought not to be admired for their Government, but Governance. (T. Stanley, History of Philosophy, 1656, quoted in Oxford English Dictionary (3rd edn, online version, modified Dec 2022), Entry for ‘Governance’, Section 2a)

We begin with this quotation from Stanley’s 1656 History of Philosophy, since it appears in the current Oxford English Dictionary entry on “governance”, and it is – even though the quotations listed date back before 1300 ce – the earliest quotation cited where an author makes this kind of ethical distinction between government and governance. This distinction marks, we suggest, an important moment of conceptual change. We also present it for a second reason, however. For Stanley’s observation falls within the general historical period, often called the “early modern”, where Foucault sees a historically new genre of “advice literature” appearing that focuses in a new way on the theme of “good” governing. This genre begins, he suggests (Foucault, 2007, pp. 89–101), in texts reacting against Machiavelli’s distinctive realpolitik advice on how to govern in his treatise The Prince (Machiavelli, 1532/2014). What it develops instead is a new focus on governing understood as an “art” that is concerned with the “right disposition of things”, but where things also include men (Foucault, 2007, p. 96, emphasis added). Here a tradition of governing being based in law remains, but increasingly the focus on achieving a “right disposition” moves governing towards “employing tactics rather laws” or indeed “employing laws as tactics” (Foucault, 2007, p. 99). Stanley’s distinction between governance and government is therefore, we suggest, part of a more general shift in our vocabulary of “governing” terms and meanings. This is a theme already developed in a pioneering article by Shah and Napier on this “emergence of governance” (2019, pp. 339–346). They show how, from this era down into the 19th century, governance is widely used in relation to “local government and ‘public interest’ entities such as almshouses, schools and hospitals” (Shah & Napier, 2019, p. 340). However, there is no reference to any “corporate governance”, a term that appears only in the mid-20th century, first with an emphasis on “stakeholder democracy” and then increasingly on “shareholder rights” (Shah & Napier, 2019, p. 341). At the same time, Shah and Napier recognize how conceptions of the governing subject define the construct as potentially multiple and collective: schools have a principal but also governors; shareholders become “collective” owners, while a board undertakes a preponderance of governing on their behalf, leading to today’s small collectives exercising governance. Meanwhile, of course, many businesses continue to have just one boss, whether formally or de facto. Shah and Napier also remind us of the significance of the etymological roots of the different terms for “governing”, noting how corporate governance textbooks may remark on how “governor” as a term “ultimately derives from the classical Latin word gubernator, originally meaning a steersman or pilot, controlling the direction of a ship” (Shah & Napier, 2019, p. 342). We would just add that gubernator is itself a borrowing from a closely related ancient Greek word, kubernētēs; and both languages have terms equivalent to “government” – Latin gubernatio (Lewis & Short, 1969) and Greek kubernēsis (Liddell & Scott, 1996). However, neither Greek nor Latin generates a separate term equivalent to “governance”. That distinction seems to appear only in post-medieval English and in the French “gouvern-

Accounting, governing, and the historical construction of the “governing subject”  409 ance”; and we suggest that it is precisely because of its emergence as a separate word-form that governance then develops its ethical difference from government. Now, we do not suggest that the governing subject in Mesopotamia or other ancient states had no ethical dimension, given that the metaphor of the “good shepherd” was seemingly already operative in the cylinder seal impression discussed above. Further, Foucault also underlines the prevalence of claims by ancient rulers to “ethicality” through a range of ancient metaphors (Foucault, 2007, pp. 122–130). The kubernētēs as resourceful ship’s captain will often “designate the activity of the person who is the head of the city-state” (Foucault, 2007, p. 122); and the good shepherd metaphor is particularly widespread “in Egypt, [and] … the Assyrian and Babylonian monarchies” (Foucault, 2007, pp. 123–124). Interestingly, in Hebrew texts “[t]he term is reserved for God” on the whole, which perhaps, he suggests, is how Christian theology develops “pastoral power” as a mode of governing that persists both in and beyond religious settings to today (Foucault, 2007, p. 126). At least one voice stands out, however, against the shepherd metaphor: Plato in his dialogue The Statesman. Here the true defender of the city (or polis) is the “weaver”, who solves more complex problems than can be resolved by the shepherd’s focus purely on the flock. In fact, the weaver arguably develops a version of the right disposition of men and things. For he draws things together through an interweaving of the warp and weft of governmental reason. The result is a “magnificent fabric” that envelops “the entire population of the state, both slaves and free men” (Foucault, 2007, p. 146). In that respect Stanley in 1656 is arguably just giving a new kind of voice to an implicit contrast between governance and government that had long been there. However, we envision a significant shift here at the level of thinking and acting that underlies this new form of governing subject. And we suggest again that, as in Mesopotamia, this emerges following a major pedagogic change in both what one learned and how one learned to think and act as governing subject. The innovation here was “inquiry”, initially developed as a new form of critical reading to enable scholars to identify and resolve important textual contradictions. Inquiry (in Latin inquisitio) was seemingly first proposed in around 1130 ce by the monastic scholar Peter Abelard. But then, as the art historian Erwin Panofsky argues in his brilliant Gothic Architecture and Scholasticism (1957), inquiry quickly spread throughout the cathedral schools round Paris and from 1200 ce in the new University of Paris. A set three-stage method was swiftly developed, Panofsky observes. First, collect all relevant cases of “doubtful” readings. Second, organize them under discrete headings and cross-reference all related passages. Third, resolve all doubts through critical reading and correction of all identified contradictions. So starting from initial doubt, inquiry/inquisitio became the means to establishing truth (veritas): but in the form of truth as non-contradiction. Panofsky describes the spread of this form of “inquiry” within and beyond the scholarly world. The Gothic cathedral architects began to incorporate messages promoting theological non-contradiction into their cathedral designs. From around 1230, the Catholic Church began its inquisitorial investigations into heresy, in which suspects were questioned orally twice, months apart but with their answers transcribed each time: contradictions found in the transcripts were then pursued further. Panofsky sees this as a pedagogic and epistemological shift in thinking so profound that he names it a new “mental habit” which then spread across the medieval literate world – a habit which Pierre Bourdieu, in translating Panofsky’s book into French, would rename as “habitus”.2 Independently, Foucault then also named “inquiry” as a transformation in thinking

410  Handbook of accounting, accountability and governance and acting which, after emerging as a legal procedure in both Roman and Carolingian law, then becomes in this period a “rather characteristic form of truth in our societies” (Foucault, 2001, p. 4). He also suggests that it became “primarily a governmental process, an administrative technique, a management method” (2001, p. 48). Hoskin and Macve (2016) follow up on that suggestion by observing how the accounting breakthrough into double-entry bookkeeping is based precisely on this principle of non-contradiction, plus the adoption of precisely the three-stage procedure mapped out by Panofsky: in this case “first all relevant transactions (and only those) must be entered into the books … second the entries must all be posted twice with cross-referencing, and must be nested at the appropriate level within the set of books … and finally the doubled entries must tally with each other, and with the whole population of entries” (Hoskin & Macve, 2016, p. 240). But how does inquiry produce not just governing but governance? Perhaps the best demonstration is one of the most studied episodes in the governing of what emerged by the 1600s as the “administrative state”: the inquiry-based form of pursuing truth by resolving contradictions developed by Jean-Baptiste Colbert as principal minister to Louis XIV from 1661 until his death in 1683. Louis had of course inherited the throne in 1643 aged four, and he was then schooled as a youth in the art of governing as a right disposition of both men and things. From the age of 14 he was the recipient of three pedagogical texts written between 1651 and 1658 on governing as just such an art by his tutor, La Mothe le Vayer. As Foucault (2007, pp. 93–94) remarks, the first concerned the government of oneself, part of morality, the second the governing of family, part of economy, and the third “the science of governing well” the state. Taken as a whole, the texts seek to “answer the question of how to introduce economy – that is to say, the proper way of managing individuals, goods and wealth … into the management of the state” (Foucault, 2007, pp. 94–95, emphasis added). Now Louis was a reluctant student. But this interweaving of the economic and the political is precisely what Colbert implements on his behalf through governing on the basis of detailed and extensive information. As Jacob Soll (2009) shows, Colbert as “Information Master” managed both Louis and the state; and his first major achievement was to develop a classically inquisitorial approach in order to rectify the state’s finances. For this Colbert assembled a team of intendants who reported exclusively to him by means of daily standard-format memoranda. He charged them with scouring the archives in France and beyond to collect all evidence that might indicate a royal right to properties and assets currently owned by others – particularly aristocrats and the Church. He then had his intendants send him all the tens of thousands of volumes they found, which were then catalogued and stored in a vast personal library. Finally, he employed scholars and scribes to undertake the systematic cross-referencing and critical scrutiny of this huge informational archive, and the fruits of their research enabled him to identify multiple examples of questionable ownership. A scrupulous use of legal process (in a striking example of Foucault’s “employing law as tactics”) then enabled him to transfer all such properties and assets to the ownership of the king, and restore the much-depleted finances of the state. Colbert also employed inquiry for a “forensic accounting” into the royal tax revenue accounts, drawing on the double-entry bookkeeping he had learned as the son of a merchant banking family. The outcome was again to expose extensive diversion of revenues to the accounts of the king’s tax farmers (Soll, 2009, pp. 61–64; Hoskin & Macve, 2016,

Accounting, governing, and the historical construction of the “governing subject”  411 pp. 241–242). But our particular point is that Colbert did not see his inquisitorial approach just as a legal or legalistic strategy. It was also an ethical inquiry aiming to correct serious forms of wrongdoing that had undermined both the king and the good governance of the state, as largely restored by Colbert himself. His searching after truth through inquiry therefore constructed both the King and himself as ethico-legal subjects who, echoing Stanley’s 1656 phrase, “ought not to be admired for their Government, but Governance”. Of course, governing the administrative state entailed more than just inquiry. Of particular significance was the extension from the 1500s in the availability and use of a whole new wave of non-glottographic statement forms building on accounts, lists, tables, and diagrams and leading in the 1600s to establishing new knowledge fields such as statistics. The invention of moveable-type printing also meant that an endemic problem in manuscript copying, the mis-transcribing of numbers, was largely eradicated. So for the first time, carefully proof-read information could be printed and circulated in multiple identical copies. Walter Ong, therefore, argues that we enter a world of “typographic space”, where a pedagogue like the 16th-century Peter Ramus presented textbook material “in printed dichotomized outlines or charts that showed exactly how the material was organized in itself and in the mind” (Ong, 2012, p. 132). Malcolm Hyman, who as noted above coined the term “non-glottographic”, points out that the use of such statements becomes increasingly sophisticated, as charts, figures, statistical tables, and later graphs, along with “tables of sines and cosines, architectural plans … coins and bank-notes … [and] sophisticated computer programs – reflect highly sophisticated intellectual activity” (Hyman, 2006, p. 245). Governing as the right disposition of things and people accordingly came to be conducted more and more through new forms of making naming and statements that circulated in increasingly readable formats, leading to our modern artfully designed forms of “envisioning information”, as the title of Edward Tufte’s pioneering book put it (Tufte, 1990).

FOUCAULT AND GOVERNMENTAL MANAGEMENT/CHANDLER AND ADMINISTRATIVE COORDINATION: A MATRIX OF HISTORICAL-CONCEPTUAL CONNECTIONS? Our argument here is that there is a matrix of both historical and conceptual connections between the work of Foucault on modern forms of disciplinarity and governmental reason, and that of Chandler on the “administrative coordination” that he sees as enabling the invention of the “modern business enterprise”. Exploring this matrix of connections can, we also suggest, help us to better understand the dynamics and forms of governing and governance today, where management has progressed from having the important but secondary role to governing laid out by La Mothe le Vayer and implemented by Colbert. So how may Foucault’s and Chandler’s thinking interplay and overlap in new ways, as we suggest? To answer this, we begin with three of Foucault’s key works: Discipline and Punish (Foucault, 1977) on disciplinarity, and the first two lecture series on governmentality, Security, Territory, Population (Foucault, 2007) and The Birth of Biopolitics (Foucault, 2008). We then progress to examine Chandler’s key work, The Visible Hand: The Managerial Revolution in American Business (Chandler, 1977). Historically the connection is that both prominent scholars locate the initial innovations they discuss in the early to mid-19th century, and then engage with what are innovations in

412  Handbook of accounting, accountability and governance ways of thinking and acting that remake the modes of governing/managing they investigate. Conceptually, they both approach transformations from the bottom up, analysing for instance how small-scale beginnings lead to radical re-makings of governing/managing subjects. For Chandler the key new subjects were the “middle managers” (Chandler, 1977, p. 3) who worked constantly with “accounting and statistical information” (p. 1) within centripetally structured hierarchies as “managers who supervised the work of other managers and in turn reported to senior executives who were themselves salaried managers” (p. 3). For Foucault, it is the doubly disciplinary subject who engages in what he then calls a new form of “governmental management” (Foucault, 2007, pp. 107–108), that is exercised through apparatuses of security, which operate, he suggests, largely through interplays of accounting with statistics. Therefore, each of these scholars singles out management and accounting, or even management-via-accounting, as an integral feature of modern governing/managing. This is perhaps not a surprise in Chandler’s case, but arguably reveals Foucault in an unfamiliar guise, not just as student of discipline and power–knowledge relations but, more specifically, as “theorist and historian of management and accounting” as such (Hoskin, 2017, p. 33). But let us begin by summarizing Foucault’s analyses of disciplinarity and governmental management, and then comparing them with what Chandler says about administrative coordination and the modern business enterprise. In Discipline and Punish Foucault analyses the emergence from around 1800 of a disciplinarity that is a “double disciplining”: a detailed “disciplining” of conduct, combined with immersion in new knowledge “disciplines”. The interplay of these twin forms is what for Foucault constitutes new power–knowledge relations; and one technique above all epitomizes their interplay: examination. As he puts it: “The superimposition of the power relations and the knowledge relations assumes in the examination all its visible brilliance” (Foucault, 1977, p. 185). This for us is significant in that the era of modern governability is therefore launched through a shift in our thinking and acting that, as with inquiry, begins with a fundamental change both in pedagogy, how we learn, and epistemology, the knowledge forms and content that we learn. The pedagogic change is to the first-known forms of numerically graded examination, which appear in slightly different forms from the 1770s in elite higher educational settings in England, France, and Germany (Hoskin, 1993). The shift in knowledge form and content is towards what develops as a new ecosystem of knowledge “disciplines”, which proliferate into sub-disciplinary, multi-disciplinary and now transdisciplinary versions. Interestingly Foucault also treats the rise of examination from 1800 as a new “form of search for truth” comparable to the medieval rise of inquiry, in that there develop “rather curious and particular forms of analysis that I shall call examination” cultivated in nascent disciplines such as sociology and criminology (Foucault, 2001, p. 5, emphasis in original). One consequence that Foucault then points out is that the formation of individuality shifts from “historico-ritual mechanisms” to “scientifico-disciplinary” ones, in which “the normal took over from the ancestral, and measurement from status, thus substituting for the individuality of the memorable man, that of the calculable man” (Foucault, 1977, p. 193): that very human subject, female and male, who Miller and O’Leary (1987) realized was newly governable. But one deeper reason for such consequences is that the adoption of numerical grading marks the moment when a first modern form of non-financial accounting value unit is introduced to evaluate the acts and selves of both the individual and the mathematized collectives, which become named as “populations”.

Accounting, governing, and the historical construction of the “governing subject”  413 Both behavioural conduct and academic performance fall in a field “between good and bad marks, good and bad points” (Foucault, 1977, p. 180). We internalize and enact a new way of thinking of ourselves and others, where success and failure are measured through a “continuous calculation of plus and minus points”, differentiating us as “good” or “bad” subjects (p. 181). We thereby enter a hitherto-unfamiliar world of “competition”, where our grades are both an absolute measure of our individual worth and a relative or ordinal measure of where we stand in the distributions of the “populations” that numerically graded examining produces. So day by day we live ever further inside Thorstein Veblen’s “comprehensive system of scholastic accountancy” (Veblen, 1918, p. 103). But how does this analysis of double disciplinarity translate into governmental management? Essentially, we see Foucault in his 1978 and 1979 lecture series building on but extending the disciplinarity work. “Population” is retained but now as “the end and instrument of government” (Foucault, 2007, p. 105). And populations do not for the most part live only within the enclosed and artificial space of institutions – for example, schools, factories, prisons – which were the focus of Discipline and Punish. Instead, they occupy a territory which will be a mix of the natural and the artificial, a kind of space where a population may live “variously” (Foucault, 2007, pp. 19–22), pursuing as they do both interests and desires. In such a world governing increasingly “works on probabilities” (Foucault, 2007, p. 19): another extension of calculability. Governing, therefore, requires whole relays of governing subjects charged with managing limited spheres of activity, but managing the population as a “whole” by means of a layered managing of these limited parts. In this governmentality work the population as ultimate collective is, therefore, in the way Foucault proposed in “The Subject and Power” (Foucault, 1982, p. 789), very much “recognized and maintained as a person who acts”: but also as one who thinks. The population with its interests is as a collective self “the subject of needs and aspirations” (Foucault, 2007, p. 105); and so it constantly experiences “desire” (p. 73). Managing becomes a managing of desire – “one gives it free play” but “within a certain limit” – thus producing a “both spontaneous and regulated play of desire” (p. 73). This is therefore once again “the birth of an art, or anyway of absolutely new tactics and techniques” (p. 106). It is also a further new diagrammatic form of governmental reason in which, he says, “we have a triangle: sovereignty, discipline and governmental management” (p. 107). In this triangle, the first leg, sovereignty, is a necessary presence, but no longer as unquestionable basis from which to “deduce an art of government” (Foucault, 2007, p. 106); instead, it is constantly questionable, but still indispensable as a concept. The second leg, discipline, “was never more important or more valued than when … managing the population”, which discipline now did both at the collective level and down to “managing it in depth, in all its fine points and details” (2007, p. 107). Here disciplinary knowledge functions as the constant counterweight to the disciplining of conduct. But it is now the third leg, governmental management, that dominates. Governmental management subsumes the constructs of sovereignty and discipline through having “population as its main target, and apparatuses (dispositifs) of security as its essential mechanisms” (Foucault, 2007, p. 108). So “dispositions” now become “dispositifs”. And what we then find is that the example that Foucault gives of a dispositif of security at the opening of his first series of governmentality lectures (Foucault, 2007, pp. 3–8) is a form of accounting, specifically the practice of cost–benefit analysis and decision-making.

414  Handbook of accounting, accountability and governance The process begins by naming some issue for governmental intervention – his example is “theft” – and then turning that object into a cost object. The cost of theft is ascertained and then profiled against the cost of suppressing it or allowing it to continue. That depends on the quality and availability of statistical information, but as Ian Hacking has observed, from 1800 there was “an avalanche of printed numbers”, increasingly in the form of “social statistics” (Hacking, 1982, p. 287). This is, therefore, a new form of managementally governed state, run by whole phalanxes of newly empowered governing subjects, formed through being “informed”, and managing increasingly directly by means of accounting. As Foucault puts it: The apparatus (dispositif) of security inserts the phenomenon in question, namely theft, within a series of events … the reactions of power to this phenomenon are inserted in a calculation of cost … [and] one establishes an average considered as optimal … and … a bandwidth of the acceptable. (Foucault, 2007, p. 6)

But one should then add, the ultimate decision will vary, for the govern-able subjects involved must first deliberate over the set of choices within the “bandwidth of the acceptable”. The decision then reached may be based on the exercise of governmental reason, but that will also entail an interplay between two versions of the term “disposition”: the “objective” considerations relating to the optimal “disposition” of men and things, and the “subjective” ones made up of the personal “dispositions” of the govern-able and governing subjects involved. Thus, we conclude that there are close connections between Foucault’s disciplinarity and governmentality work. Both approaches address the same underlying problematic: the distinctiveness historically of modern disciplinary forms of knowing and of exercising power. But in the governmentality work the leading role is decidedly played by a “governmental management” that is frequently a management-via-accounting. And so, whereas in Foucault’s Discipline and Punish the emphasis is on the way in which non-financial accounting value units insinuate themselves by means of graded examination deep inside our modes of thinking, acting and valuing, accounting has an additional explicit “cost”, “financial”, or “business” valuation type of role within the governmentality work. The comparisons with Chandler’s work may therefore now be more visible than they have typically been, and in particular with Chandler’s analysis of the initial genesis from the 1830s of modern management in the new entity form, the “modern business enterprise” (Chandler, 1977). This is not, we emphasize, a theoretical affinity. Chandler’s theoretical attachment to institutionalism has no apparent connection to Foucault’s “critical history of thought”, analysing ways of thinking and acting from the bottom up. Nevertheless, his analysis of what differentiates modern business management from earlier management forms has, we suggest, direct conceptual parallels to Foucault’s disciplinary and governmental approaches. For Chandler also zeroes in on modern management as something distinctive and different. The “Introduction” to The Visible Hand begins with him specifying two interlocking and reciprocal new developments which together constitute “administrative coordination”. First, there is a new form of structuring a business entity, the line-and-staff set up for connecting and coordinating activity in systems run by “a hierarchy of middle and top salaried managers” (Chandler, 1977, p. 3). This is an intensively centripetal structuring compared with prior patterns of coordination, where “principal–agent” relations frequently turned into “agent as principal” ones, whether in ancient states, long-distance merchant ventures, or in factory settings. In the latter case, the pattern was often inside contracting with the contractor managing their

Accounting, governing, and the historical construction of the “governing subject”  415 own hand-picked labour force, even in technologically advanced firms like the Boulton and Watt works where James Watt’s steam engines were built (see Fleischman et al., 1995; Toms & Fleischman, 2015). A modern business becomes instead diagrammatically structured (as in the Organization Chart). Distinct lines of activity are laid out, each with its separate system of line reporting, which is undertaken in the staff office or function attached to each business unit. Second, alongside the new structure there is a new processual system, a form of “knowledge process” (and knowledge processing), operated by the staff functions located in each unit and across all. As noted above, it is “accounting and statistical information” (Chandler, 1977, p. 1) that is relayed up and down, but now resulting in constant evaluations of the performance to date of each and all, plus prescriptions and targets for performance to come, plus strategic decisions by top managers as the governing subjects evaluating the future disposition of all resources, financial, human and material (Chandler, 1977, pp. 1–5). “Strategizing” becomes not just a practice of generals but a discourse of managerially govern-able subjects everywhere. So both authors single out a new structuring of entities as hierarchical but also as administratively coordinated; and hierarchical forms then become sites for the continuous circulation of naming-and-counting forms of knowledge-based “truth”. But perhaps most interestingly, what Chandler sees as the outcome of this administrative coordination is as subversive of received contemporary economic wisdom as any Foucauldian critique of double disciplinarity or governmental reason. For the outcome of “administrative coordination” is the triumph of the modern business enterprise in virtually every major sector of national and then global economies, resulting in the inverse of markets exhibiting “perfect competition”. Instead, we experience oligopoly markets resulting in “imperfect competition and misallocation of resources” (Chandler, 1977, p. 4). Accordingly, we read both scholars as engaging in overlapping forms of bottom-up analysis. Processually, accounting takes new forms (the concerns with cost of processes including the process of labour activity rather than just of objects produced); but it also gains a purchase beyond old conceptual boundaries with the emergence and internalization of non-financial accounting value units. Mixing financial and non-financial valuing, we articulate concepts and discourses such as the three Es (Economy, Efficiency, Effectiveness). We engage in forms of accounting that go beyond the ways of thinking and acting by means of accounting in earlier eras since they now cover and manage each individual and whole populations. Meanwhile, at the structural level, there is a level of centripetalism not easily generated before, not least through the new connectivity established across non-glottographic statement forms, as accounting’s naming-and-counting truth-claims can be newly aligned and combined with those of statistics, tables, and graphs (conveying mainly processual content) and with multiple new “diagrams of power” (beginning from but not ending with the depicting of organizational structures). Finally, Chandler’s recognition of the paradoxical outcomes of centripetalism (oligopoly, misallocation of resources, imperfect competition) as counter to “economic reason” is on our reading closely aligned with Foucault’s recognition that there is always some form of “governmental reason” related to a given form of governmental practice, but there are always centrifugal counter-conducts that each such form of reason produces.

416  Handbook of accounting, accountability and governance

THINKING THE PREDICAMENT OF THE GOVERNING SUBJECT OF CORPORATE GOVERNANCE: SOME HISTORICALLY INFORMED REFLECTIONS If there is one key idea to take away from our general Foucault-based analysis, it is our argument throughout this chapter that accounting and pedagogic practices are intertwined at the heart of governing and governance, ever since the “birth” of the govern-able and governable subject. With our diachronic analysis, we have made the argument that this “birth” results from accounting’s emergence from 3300 bce in Mesopotamia. We have set out the case for accounting constituting the first form of writing, and introducing the new form of rote learning that is the basis of learning any writing system, but which is also the initial means through which we “learn to learn” writing’s significance as new “truth form”, different from speech. Accounting, along with the non-glottographic form of making statements it initiated, was therefore central and essential to the first writerly “restructuring of consciousness”, which remains perhaps the greatest discontinuity in thinking and acting in human experience. Its mathematically regularized naming-and-counting statements were precisely what was required to make thinkable the first forms of governing and of the state. Conceptually and historically, we have kept our focus on how governing and governed subjects are reciprocally connected, continuing, as we do, to work with Foucault’s analysis of power as relational, so that in any power relation “the other” must be “thoroughly recognized and maintained to the end as a person who acts” (Foucault, 1982, p. 789). We have also stressed how even the most able-to-govern subject, in exercising power as indirection, must accept being governable as well, as the very condition of learning how to “act on the actions of others” (Foucault, 1982, p. 789). Having stated that, we have also sought to demonstrate two subsequent major shifts in which accounting and pedagogy have interplayed to remake our thinking and acting as govern-able and governable subjects. First, we analysed the emergence of governance as something differentiable from governing, in a world where learning to learn under inquiry/inquisitio had led to the pursuit of truth through resolving contradictions, with accounting in its double-entry format as one manifestation of that. Here the art of governing emerged as the “right disposition of things and men”, entailing governing one’s self (developing one’s ethical disposition) along with the right disposition of one’s estate and its resources (a management via accounting). This mode of governing was exemplified in Colbert’s “ethico-legal” approach, deploying archival evidence and the law as tactics to restore to Louis XIV lands, assets, and, in the investigation of his tax collectors, revenue streams “wrongfully” held by others. Second, we traced the transformation in our thinking and acting engineered as we now learn to learn under numerically graded examination in a mass-literate world, where twin forms of financial and non-financial accounting define and mark our “truth” and where we learn to aspire to becoming “doubly disciplinary” subjects, well disciplined in conduct and expert in multiple knowledge disciplines. Here governing and managing construct newly convergent and centripetal dynamics, both as Foucault’s governmental management and Chandler’s administrative coordination. From small beginnings we construct states run in the manner of, or even by, CEOs. Modern business entities become more powerful than many states. Our experience may lead us as subjects to become “calculable” but also constantly calculating. Finally, there is now no quality that is not in principle quantifiable so long as it is appropriately

Accounting, governing, and the historical construction of the “governing subject”  417 named: from “intelligence” in the 19th century to the “two degrees climate change” target of today. We are therefore so multiply nameable and countable that we are, each and all, accountable like never before: not just for past acts but also for future ones named as targets. So we live a new paradox: on the one hand, “Goodhart’s Law” tells us that every measure that becomes a target becomes a bad measure; on the other, one outcome of living under the multiple modern forms of accounting and accountability is that neither gender nor ethnicity is the almost-total bar to progression towards governing and govern-able status that they were before the era of double disciplinarity. Your grades speak your truth. So how then can this form of “diachronic” analysis of governing and governable subjects be of value in considering the “predicament” of, but also the opportunities opened up for, that relatively recent addition to “the population of governing subjects”, the governing subject of corporate governance? We call it “relatively recent” since, as Shah and Napier (2019) observe, governance obtained its new lease of conceptual life only three decades ago, beginning with the government-commissioned response to the series of financial reporting scandals affecting the London Stock Exchange from the late 1980s: the Report of the Committee on the Financial Aspects of Corporate Governance, chaired by Sir Adrian Cadbury (Cadbury, 1992), often abbreviated as the Cadbury Report. The subsequent adoption and/or adaptation of its procedures both in the UK and globally, as scandals and collapses have continued to recur, is arguably testament to the strategic nous and tactical acumen of the approach to corporate governance that the Cadbury Committee laid out. From the perspective developed here, the genius of the Report is that it comprehended two key things simultaneously. (We use the term “comprehended” here first in the literal sense that the Report brought together these two things; whether the Committee also understood them in the way set out here, we cannot say.) The first was the importance of focusing on the “financial aspects” of corporate governance, which implicitly put an emphasis on the knowledge form that we have argued from the start is, in all three historical manifestations discussed here, constitutive of governing entities from the state to the corporate enterprise: accounting. The second was creating the space for this new form of govern-able subject to potentially think and enact “top-level governing” in the form of an “ethical” as well as legal governance of the corporate entity. Corporate entities may choose to approach the corporate governance function as needing less to be “total quality” and more “fit for purpose” in the engineers’ sense of “just good enough”. But any such decision takes place within a top-level governing environment where there will always be different forms of governing being performed simultaneously by different governing subjects, collective and/or individual. All are, therefore, enmeshed in the same double-aspect game of having to accept, some of the time, being governable in order, at other times, to be govern-able. This applies as much to the governance function as to any other top-level form of governing. This governing subject, whether collective or individual at a given time, will frequently be having to accept being “governable” as the entity confronts the multiple priorities of day-to-day and strategic managing. However, it is equally in the interests of all that, in line with the particular ethico-legal framing of a given set of corporate governance requirements, this governing subject be, when required, able-to-govern so as to meet ethical as well as legal requirements of the role, wherever on the spectrum between total quality and fit for purpose an entity chooses to place itself.

418  Handbook of accounting, accountability and governance In this respect, we envision the Cadbury Report as having grasped, whether explicitly or not, just how crucial is the role of the governing subject of corporate governance in delivering good governance on an ongoing basis. We see it as having also created an initially small but potentially expanding space for the adept governing subject to enable corporate governance to become a collective commitment, perhaps of an entity’s board, perhaps of some emergent external, or perhaps multi-corporate-entity collective. For insofar as both Cadbury, and other governance codes since, have implicitly or explicitly encouraged the governing subjects of governance towards a personal disposition in favour of an ethico-legal stance, it becomes at least thinkable for variously formed collective governing subjects to articulate such dispositions too: one consideration here being that corporate entities today have a manifest commitment to excellence, as an excellence to be achieved typically through a systematic disposition of men and things by means of double disciplinarity. In other words, govern-able subjects all should demonstrate their own manifest commitment to well-disciplined conduct, at the same time as they today “curate” distinctive mixes of disciplinary or transdisciplinary expertise as hopefully optimal configurations of the governmental-managemental mix. But at the same time, it would be prudent to recognize just how central accounting continues to be to the disciplining of conduct, the deployment of expertise, and the measurement of success/failure in both. Even strategic management does not escape being some form of management-via-accounting, as we see from both Chandler’s analysis of administrative coordination and Foucault’s of the dispositif of security. In the context of corporate governance, therefore, accounting continues to function as a necessary technical means to establishing the health or otherwise of the large corporate entity. But our diachronic analysis suggests how it may simultaneously have more subterranean but lasting effects shaping or remaking the limits of what is thinkable as governance. And it is in this regard that we see the full genius in the Cadbury Committee’s approach. For what they in effect managed to design is a construct of the governing subject that as govern-able subject needs to incorporate expertise in accounting, but always as part of a multior even transdisciplinary overall expertise. Meanwhile, as governable subject one must maintain some commitment to accepting for oneself, as one requires from others, appropriate forms of accountability. And now, as an extension of the parameters of governance, there is the construct of climate governance as metagovernance, understood as “the combination of market, hierarchical and network governance” (Charnock & Hoskin, 2020, p. 1731). Of course, this is one more renaming of what needs to be counted. But it also expresses a recognition that good governance of the planet can be conducted only beyond the confines of any single corporate entity, while still leaving the door open for their participation. This is perhaps to think in terms of more inclusive frameworks requiring the enrolment of increasing numbers of transdisciplinary govern-able but governable subjects practising a more expansive art of governance as metagovernance. And insofar as ours is indeed a doubly disciplinary world, we suggest that this new subject form is best named as a new version of the “ethico-legal” subject: namely, the “ethico-legal and doubly disciplinary subject”. A similar proposal is made in a 2015 article on the topic of the prevention of corruption, where the authors propose that what such prevention requires is “constructing the disciplined and ethical subject” (Neu et al., 2015, emphasis added). Interestingly, their proposal is then largely cashed out through forms of accounting, critical inquiry, and examination, but requiring for its completion a more fundamental reshaping of thinking and acting.

Accounting, governing, and the historical construction of the “governing subject”  419 First they argue for a primary focus on “internal controls and monitoring practices”. But they then look towards such controls and practices as having a potential to “shape the ethics and moral behaviours of organizational actors” – particularly if effective “luminous arrangements” are also put in place to enable a “generation and circulation” of rigorous “inspection traces” as the way of identifying what critical steps might be needed either to stop or avoid corruption in future (Neu et al., 2015, p. 50). On our reading, this approach is in practice doubly disciplinary, in the sense that its reshaping of conduct towards the ethical requires not just a change in disciplined acting but a change to more flexibly disciplinary forms of knowing and thinking. But then perhaps this kind of approach to governing better moves us towards thinking forms of meta-disciplinary knowing, which is beyond the categorization of knowledges as disciplinary. In part we argue this as an extension of our argument that writing comes in two forms, the glottographic and non-glottographic, and the fact that nearly all disciplines combine versions of both statement forms in articulating their multiple and conflicting truth-claims. The implication we draw is that the more disciplines move in this direction, the more they render the traditional boundaries and self-definitions of knowledge as “disciplinary” porous and questionable. Governing subjects and forms of governance may of course not follow such a meta-disciplinary path. The interplay between thinking governance as reflective and reasoned art and implementing particular modes of enacting it will always retain the capacity to surprise. This is why we have chosen to focus here on the “thinking and acting” subject and the importance of taking account of the “disposition” of that subject as an integral aspect of becoming both govern-able and governable. In seeking to engage in effective corporate governance or indeed metagovernance, the subject must be ready to “will”, or “be disposed towards”, being ethical, along with bringing the law to bear, whether as tactic or legal sanction. It is here that Foucault’s concept of the dispositif (as in the apparatus/dispositif of security) may, we suggest, be usefully extended. We referred to how in Mesopotamia a first form of mathematically regularized space-time-value “machine” became integral to our thinking and acting (Frandsen, 2009). The forms of mathematical regularization of all three have only intensified in subsequent eras and become ever-more integral aspects of our “dispositions”. We suggest therefore that what we live within and through now is better named, given its intensively centripetal form, a mathematically regularized “space-time-value dispositif”: where our personal “disposition” towards accepting such centripetalism is as integral to its success as the external ways in which it disposes and imposes itself around us.

CONCLUDING COMMENTS In conclusion, we would add that through our diachronic lens we have shown how accounting and accountability have been embedded in human thinking and acting in different patterns of interaction for over five millennia. We have suggested that a huge centripetal intensification in both took place about two centuries ago. That has undoubtedly generated more intense involvement of governed but also governing subjects both in thinking and enacting centrifugalisms. One final issue that then arises is what lies beyond “governability”. Or what happens when the governed choose for whatever reasons not to remain within its confines? That is a question posed both for those early literate cultures where governing first became thinkable and for our high-literate cultures today in James Scott’s The Art of Not Being

420  Handbook of accounting, accountability and governance Governed (Scott, 2009). He points out first that not being governed was an option pursued by perhaps over 50 per cent of humans from the Mesopotamian era to as late as 1600. By retreating either into the mountains or onto the seas, enduring and successful “ungoverned” ways of life were pursued for millennia. But ultimately the growth of intensively centripetal state forms plus increased ease of access to even remote locations began to shrink the numbers living beyond the state to the point where, by the 1950s, the possibility of not being governed by living in non-state communities had virtually ended (although piracy of course continues). At the same time, this does not mean that we now inhabit a world where “not being governed” is absent and not thinkable. The idea has arguably become instead an option to be exercised within developed states, for instance in the rejection of “politics-as-usual”. So the art of governing as “indirection” may have to recognize that the art of not being governed now confronts it within its own territory. It now poses a direct challenge to the dispositions of populations of desiring subjects to continue living under the centripetal power of today’s space-time-value dispositif. But perhaps recognizing that challenge may spur a more sustained critical examining not just of how we become govern-able and governable subjects but also how we learn to learn to become such subjects, across our academic, professional, and familial “pedagogic” settings, through our successive immersions in rote learning, inquiry, and examination.

NOTES 1. In focusing on accounting’s emergence as writing in Mesopotamia, we are not suggesting that this is its sole origin. On the contrary, accounting also emerges in ancient Egypt in the same general era, where it helps build a more centralized state than in Mesopotamia, but again, before the development of glottographic writing. The discussion of accounting and the construction of the Egyptian state in Ezzamel and Hoskin (2002) is greatly extended and deepened in Ezzamel’s ground-breaking book, Accounting and Order (2012). 2. Bourdieu produced his translation of and commentary on Panofsky’s book as part of his submission for his doctoral degree, and clearly already saw “habitus” as a term with a more generic purchase then Panofsky’s more historically specific idea (Bourdieu, 1967).

REFERENCES Bassnett, S., Frandsen, A.-C. and Hoskin, K. (2018), “The unspeakable truth of accounting: on the genesis and consequences of the first ‘non-glottographic’ statement form”, Accounting, Auditing & Accountability Journal, Vol. 31 No. 7, pp. 2083–2107. Bateson, G. (1972), Steps to an Ecology of Mind. Jason Aronson, Inc., London. Bourdieu, P. (1967), “‘Postface’ à E. Panofsky”, Architecture Gothique et Pensée Scholastique. Editions de Minuit, Paris. Cadbury, A. (1992), Report of the Committee on the Financial Aspects of Corporate Governance. Gee & Co., London. Chandler, A. (1977), The Visible Hand: The Managerial Revolution in American Business. Belknap Press, Cambridge, MA. Charnock, R. and Hoskin, K. (2020), “SDG 13 and the entwining of climate and sustainability metagovernance: an archaeological-genealogical analysis of goal-based climate governance”, Accounting, Auditing & Accountability Journal, Vol. 33 No. 7, pp. 1731–1759.

Accounting, governing, and the historical construction of the “governing subject”  421 Cooper, J. (2004), “Babylonian beginnings: the origin of the cuneiform writing system in comparative perspective”. Houston, S. (ed.), The First Writing: Script Invention as History and Process. Cambridge University Press, Cambridge, pp. 71–99. Damerow, P. (2006), “The origins of writing as a problem of historical epistemology”, Cuneiform Digital Library Journal, Vol. 1, pp. 1–10. Delnero, P. (2015), “Scholarship and inquiry in early Mesopotamia”, Journal of Ancient Near Eastern History, Vol. 2 No. 2, pp. 109–144. Derrida, J. (1976), Of Grammatology. Johns Hopkins University Press, London. Ezzamel, M. (2012), Accounting and Order. Routledge, New York. Ezzamel, M. and Hoskin, K. (2002), “Retheorizing accounting: writing and money with evidence from Mesopotamia and ancient Egypt”, Critical Perspectives on Accounting, Vol. 13 No. 3, pp. 333–367. Fleischman, R.K., Hoskin, K.W. and Macve, R.H., (1995), “The Boulton & Watt case: the crux of alternative approaches to accounting history?”, Accounting and Business Research, Vol. 25 No. 99, pp. 162–176. Foucault, M. (1977), Discipline and Punish. Allen Lane, London. Foucault, M. (1982), “The subject and power”, Critical Inquiry, Vol. 8 No. 4, pp. 777–795. Foucault, M. (2001), “Truth as juridical forms”. Faubion, J. (ed.), Power: Essential Works of Foucault 1954–1984, Vol. 3. Penguin, London, pp. 1–89. Foucault, M. (2007), Security, Territory, Population: Lectures at the Collège de France, 1977–1978. Palgrave Macmillan, London. Foucault, M. (2008), The Birth of Biopolitics: Lectures at the Collège de France, 1978–1979. Palgrave Macmillan, London. Frandsen, A.-C. (2009), “From psoriasis to a number and back”, Information and Organization, Vol. 19 No. 2, pp. 103–129. Graeber, D. and Wengrow, D. (2021), The Dawn of Everything: A New History of Humanity. Penguin, London. Hacking, I. (1982), “Biopower and the avalanche of printed numbers”, Humanities in Society, Vol. 5, pp. 279–295. Hoskin, K. (1993), “Education and the genesis of disciplinarity: the unexpected reversal”. Messer-Davidow, E., Shumway, D.R. and Sylvan, D. (eds), Knowledges: Historical and Critical Studies in Disciplinarity. University of Virginia Press, Charlottesville, VA, pp. 271–304. Hoskin, K. (2017), “Getting to the surface of things: Foucault as theorist and historian of management and accounting”. McKinlay, A. and Pezet, E. (eds), Foucault and Managerial Governmentality: Rethinking the Management of Populations, Organizations and Individuals. Routledge, Abingdon, pp. 33–53. Hoskin, K. and Macve, R. (2016), “‘L’État c’est moi’ – ou quoi? On the interrela­tions of accounting, managing and governing in the French ‘administrative monarchy’”, Accounting History Review, Vol. 26 No. 3, pp. 219–257. Høyrup, J. (2009), “State ‘justice’, scribal culture and mathematics in ancient Mesopotamia”, Sartoniana, Vol. 22, pp. 13–45. Hudson, M. (2004), “Introduction, the role of accounting in civilization’s economic takeoff”. Hudson, M. and Wunsch, C. (eds), Creating Economic Order: Record-Keeping, Standardization and the Development of Accounting in the Ancient Near East. CDL Press, Bethesda, MD, pp. 1–22. Hyman, M. (2006), “Of glyphs and glottography”, Language and Communication, Vol. 26 No. 3–4, pp. 231–249. Ingold, T. (2007), Lines: A Brief History. Routledge, London. Johnson, J. (2015), “Iteration, citation and citationality in the Mesopotamian scholastic dialogue The Class Reunion”. Cancik-Kirschbaum, E. and Traninger, A. (eds), Wissen in Bewegung: Institution – Iteration – Transfer. Harrassowitz Verlag, Wiesbaden, pp. 105–132. Lewis, C. and Short, C. (1969), A Latin Dictionary. Clarendon Press, Oxford. Liddell, H. and Scott, R. (1996), A Greek-English Lexicon. Revised and augmented throughout by H. Stuart Jones and others, Clarendon Press, Oxford. Machiavelli, N. (1532/2014), The Prince. Penguin, London. Miller, P. and O’Leary, T. (1987), “Accounting and the construction of the governable person”, Accounting, Organizations and Society, Vol. 12 No. 3, pp. 235–265.

422  Handbook of accounting, accountability and governance Neu, D., Everett, J. and Rahaman, A. (2015), “Preventing corruption within government procurement: constructing the disciplined and ethical subject”, Critical Perspectives on Accounting, Vol. 28, pp. 49–61. Nissen, H.J. (1985), “The emergence of writing in the ancient Near East”, Interdisciplinary Science Reviews, Vol. 10 No. 4, pp. 349–361. Nissen, H., Damerow, P. and Englund, R. (1993), Archaic Bookkeeping: Early Writing and Techniques of Economic Administration in the Ancient Near East. University of Chicago Press, Chicago, IL. Ong, W.J. (2012), Orality and Literacy: The Technologizing of the Word. 3rd edn, Routledge, New York. Oxford English Dictionary Web-based Version (2015), Oxford University Press. 3rd edn, most recently modified December 2022. Panofsky, E. (1957), Gothic Architecture and Scholasticism. World Publishing Co., New York. Quattrone, P. (2022), “Seeking transparency makes one blind: how to rethink disclosure, account for nature and make corporations sustainable”, Accounting, Auditing & Accountability Journal, Vol. 35 No. 2, pp. 547–566. Robson, E. (2002), “More than metrology: mathematics education in an Old Babylonian scribal school”. Imhausen, A. and Steele, H. (eds), Under One Sky: Mathematics and Astronomy in the Ancient Near East. Ugarit-Verlag, Münster, pp. 325–365. Robson, E. (2004), “Accounting for change: the development of tabular book-keeping in early Mesopotamia”. Hudson, M. and Wunsch, C. (eds), Creating Economic Order: Record-Keeping, Standardization and the Development of Accounting in the Ancient Near East. CDL Press, Bethesda, MD, pp. 107–144. Schmandt-Besserat, D. (1992), Before Writing: From Counting to Cuneiform. University of Texas Press, Austin, TX. Scott, J. (2009), The Art of Not Being Governed: An Anarchist History of Upland Southeast Asia. Yale University Press, New Haven, CT. Shah, N. and Napier, C. (2019), “Governors and directors: competing models of corporate governance, Accounting History, Vol. 24 No. 3, pp. 338–355. Soll, J. (2009), The Information Master: Jean-Baptiste Colbert’s Secret State Intelligence System. University of Michigan Press, Ann Arbor, MI. Toms, J.S. and Fleischman, R.K. (2015), “Accounting fundamentals and accounting change: Boulton & Watt and the Springfield Armory”, Accounting, Organizations and Society, Vol. 41, pp. 1–20. Tufte, E.R. (1990), Envisioning Information. Graphics Press, Cheshire, CT. Veblen, T. (1918), The Higher Learning in America: A Memorandum on the Conduct of Universities by Businessmen. B.W. Huebsch, New York.

PART V WHAT LIES AHEAD FOR ACCOUNTING, ACCOUNTABILITY AND GOVERNANCE?

19. Opportunities for deficient accountability through IFRS group accounting requirements Matthew Egan, Kaiying Ji and Ronita Ram

OVERVIEW Large multi-national corporations commonly comprise many separate legal entities, which commonly also present a complexity of intragroup relationships. The related accounting requirements offered through the International Accounting Standards Board (IASB) are equally complicated, resulting in financial statements for an artificial “group” which provide little transparency into the workings or risks of individual legal entities within that construct. This chapter utilizes various investigative mechanisms to question the utility of group accounting. Our approach includes empirical scrutiny of some recent large group annual reports, along with three deeper case studies of recent corporate failings and collapses. Our results suggest a range of common non-compliances and deficiencies in group-related accounting standards, which collectively reflect and enable evasion of effective accountability. Key deficiencies identified include allowing risks and critical transactions to be hidden within highly aggregated disclosures and allowing for limited disclosures of related party transactions and goodwill impairment. We call on accounting standard setters, regulators, academics and financial statement users to engage meaningfully with both the technical and political challenges reflected in these deficiencies.

INTRODUCTION Multi-national “groups” of corporations are commonly complex, with parent companies often controlling a multitude of wholly owned, partly owned and cross-owned separate legal entities. A range of factors motivate this complexity, including the desire to isolate distinct divisions and areas of risk, geographical diversity and the nuances of differing legal, tax and foreign investment requirements. The accounting requirements of the IASB standards1 are equally complex. These requirements differentiate fundamentally based on the extent of control or influence the parent has over each investment. If an assessment is made that the investor has control2 of a particular investment (regardless of the percentage of shares held), the financial statements of that entity must be consolidated “in full”, to form that third accounting entity commonly called the “group” (IFRS 10). If the investee is a “joint operation”, the investor must recognize its share of all assets, liabilities, revenue and expenses jointly held by the venturers (IFRS 11). If the parent only has some “power to participate”, the investment must be accounted for using the equity method (IAS 28). If none of these measures of influence apply, the investment will probably be accounted for as a “held for trading” financial instrument, requiring measurement at fair value (IFRS 9). 424

Opportunities for deficient accountability through IFRS group accounting  425 The outcome is financial statements that present information for little more than one entity: the group. Aside from some limited information provided within the notes to the accounts, group accounts provide no insight into the performance and position of individual legal entities within that artificial accounting construct (Clarke & Dean, 1993, 2007). The long-established accounting conventions of group accounting as currently specified through a collective of financial reporting standards (IFRS 3, 8, 9, 10, 11, 12 and IAS 24, 28 and 36)3 (hereafter “accounting standards”) certainly provide a neat solution, by aggregating a group of controlled/significantly influenced entities and removing all of the “noise” of intragroup transactions. However, the critical assumption here is that aggregation is meaningful to the identified users of those financial statements (Clarke & Dean, 2007). In considering “users”, we focus fundamentally here on those three user groups identified by the IFRS conceptual framework, specifically investors, lenders and creditors. Here we argue that while all these users may find some value in information about this single aggregated entity, all should also be able to access detailed insight into the performance, liquidity and solvency of all individual legal entities within the group.4 This therefore leads to the following question which we aspire to answer in this chapter: How effective are group accounts in providing accountability to all identified financial statement users (investors, lenders and creditors)? This chapter proceeds as follows. The next section explains the requirements of IFRS 3, 8, 9, 10, 11 and 12 and IAS 24, 28 and 36, and identifies key issues of concern with these group accounting requirements. We then present a literature review that explores insights into accountability and the effectiveness of group financial reports. After explaining our methodology, we then address the above research question in two phases. Firstly, we develop a checklist of key group-related disclosure requirements which we then draw on to consider the effectiveness of recent financial reporting from several large UK listed groups. In other words, our interest is to consider where groups are failing to adequately address group-related disclosure requirements. In phase 2 we turn our attention to the accounting standards themselves, and we ask how deficiencies within the nine standards of interest here contributed to the recent failures of three high-profile corporate groups; Songcheng Performance Development Ltd in China, Smiles Inclusive Limited in Australia and Thomas Cook Group plc in the UK. Our focus in this second phase is to consider how shortcomings within group-related accounting standards facilitate poor accountability, and ultimately corporate failure. Lastly, we provide some conclusions where we argue that these long-established group accounting practices were never specifically designed to meet user needs. Importantly, while these accounting standards offer clever and simplified requirements for the presentation of financial information for entities subject to complex group relationships, they can enable multi-national groups to evade effective accountability to all three identified user categories (investors, lenders and creditors). Group accounting commonly misleads and misinforms, and it plays a direct and instrumental role in corporate failure (Clarke & Dean, 1993, 2007). Given this unsurprising connection, this issue continues to demand attention both within and beyond the accounting profession.

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BACKGROUND AND KEY ISSUES OF CONCERN We identify nine accounting standards as collectively providing key directives related to group accounting. These standards are IFRS 3, 8, 9, 10, 11 and 12 and IAS 24, 28 and 36. IFRS 3 and 10, and IAS 28, focus on the core accounting requirements for entities having investments in subsidiaries, and associates and joint ventures. IFRS 9 (financial instruments), IFRS 11 (joint operations) and IAS 36 (impairment of purchased goodwill) provide some related measurement and recognition guidance. IFRS 8, IFRS 12 and IAS 24 focus on related disclosure issues. In this section we present an imaginary group (the H Ltd group) by way of illustration, to elucidate the complexities of engaging with these nine accounting standards. We imagine that H Ltd holds investments in four other entities; 100 per cent of the shares in A Ltd, 45 per cent of the shares in B Ltd, a 50 per cent holding in “C”, an operation controlled jointly with another 50 per cent partner, and 1 per cent of the shares of HSBC (The Hongkong and Shanghai Banking Corporation). Compliance with IFRS requires professional judgements to be made about the nature of each of these investments. While consideration is to be given to the size of those holdings, the fundamental concern in these judgements is qualitative aspects of each relationship, and in particular, the ability to control or at least participate in, decisions of each investee’s governing body. For each of these four investments, H Ltd would start with IFRS 10, and would undoubtedly conclude that it has control of A Ltd. H Ltd would therefore be required to aggregate A Ltd and H Ltd on a line-by-line basis5 and, in so doing, present consolidated financial statements as group accounts or statements. H Ltd may also conclude that it has control of B Ltd. As noted, the fundamental consideration is whether H Ltd has the current ability to direct B Ltd. The fact that H Ltd is only a minority shareholder may not dissuade that judgement. If so, B Ltd would need to be consolidated on a line-by-line basis along with A Ltd. Furthermore, like A Ltd, that consolidation would be undertaken “in full”, regardless of the fact that H Ltd only holds 45 per cent of B Ltd. However, as that shareholding is less than 100 per cent, a “non-controlling interest” would also have to be recognized, to account for the equity not attributable to H Ltd. Alternatively, H Ltd may conclude, in accordance with IAS 28, that it only has some “power to participate” in the decisions of B Ltd’s governing body. In this case, H Ltd would adopt equity accounting (see IAS 28) for its investment in B Ltd. Here, the line item “Investment in B Ltd”, would remain within the H Ltd group accounts, and be revalued based on movements in the equity of B Ltd since acquisition. C would probably be assessed to be a joint operation, and so under IAS 11, would be proportionally consolidated into the H Ltd group accounts. All line items within the H Ltd group statements would, therefore, now include 100 per cent of H Ltd’s balances, 100 per cent of A Ltd’s balances and 50 per cent of C’s balances. Assuming that B Ltd is judged to be an “associate”, that investment would remain within the group’s assets, and be revalued based on post-acquisition movements in equity. The investment in HSBC would undoubtedly be assessed to be neither controlled nor significantly influenced, and so it would also continue to be recognized within the group’s assets. Unlike B Ltd, however, the shares in HSBC would probably be measured at fair value in accordance with IFRS 9. We can reflect, therefore, that the financial statements of the H Ltd group will provide no insight into the distinct performance, position or cash flow of either H Ltd, A Ltd or C. The value of the investment in B Ltd and HSBC, and the performance of those investments, will be evident on those statements, assuming there are no other investments that are equity accounted, or held for trading. If there were, all those investments would be aggregated, such

Opportunities for deficient accountability through IFRS group accounting  427 that the performance and position of individual investees would not be separately distinguishable. An overview of our imaginary H Ltd group, and the accounting requirements for each investment, is presented in Figure 19.1.

Source: Authors.

Figure 19.1

Overview of the accounting requirements for the illustrative H Ltd group

Related disclosures will provide some complementary information within the notes to the accounts. A listing of all subsidiaries may be provided (depending on how the group interprets IFRS 12). A “segment disclosure” as required by IFRS 8 provides some useful dissection of the performance and position of the group. However, identified “operating segments” are unlikely to be the same as any separate legal entity within the group. In some cases (including the UK and Australia), local corporations law also requires presentation of the performance and position of the parent (commonly also disclosed within the notes to the financial statements). Australia also offers parent entities an opportunity to enter into a Deed of Cross Guarantee with any 100 per cent-owned subsidiaries.6 Where this option is taken, a note to the accounts is required to provide aggregated insight into the performance and position of that “closed group”. However, that aggregated disclosure also provides no insight into the performance or position of any single legal entity. We conclude, therefore, that insight provided within group accounts into the performance, position and cash flows of individual legal entities within a group is limited at best.

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LITERATURE INSIGHTS – IMPACTS OF GROUP ACCOUNTING REQUIREMENTS ON ACCOUNTABILITY AND DECISION MAKING The objective of this study is to explore shortcomings within nine key group-related IASB accounting standards (IFRS 3, 8, 9, 10, 11 and 12 and IAS 24, 28 and 36). In this section we explore extant arguments about the merits and shortcomings of three of these standards: IFRS 3 and 10, and IAS 28. Limited insight is provided in the applicable literature into concerns regarding the other six accounting standards of interest here. Therefore, rather than also presenting a literature review on those standards, we will use the case examples explored in phase two of this study to add to our collective insights into the shortcomings of all nine of these group-related accounting standards. Consolidation and the Aggregation of “Subsidiaries” – IAS 3 and 10 Ontologically we draw here from the perspective of Raymond J. Chambers, who argued from the 1960s that financial accounting standards and the entities that apply them should avail information that is both useful for decision making (Whittington, 2021), and that provides effective accountability. Here we respond to Hopwood’s (1987, p. 213) concern that accounting in practice is commonly used to support “social power both within and without the organisation”, by considering the specific context of group accounting. Group accounting is interesting given that two of its core taken-for-granted pillars have remained relatively unchanged through most of the 20th century; the aggregation of all subsidiary assets, liabilities, revenues and expenses on a line-by-line basis; and the elimination of intragroup transactions.7 Walker (1976) reminds us these consolidation practices were only originally adopted as something of an accidental “convenience”, and were intended to provide no more than a supplement to the financial statements of the parent or holding entity. However, consolidation has since become widely accepted as obviating any need for supplementary parent financial statements. Consolidated financial statements “became accepted as a means of corporate reporting well before a rationale for their use had been worked out” (Walker, 1976, p. 113). Here we respond by posing two questions: (1) What is the apparent “glamour” that, particularly, popularizes aggregation? and (2) How has this core taken-for-granted pillar of financial accounting contributed again and again to a deception of financial statement decision makers? We draw on the notion of accountability to help in exploring these shortcomings of group accounting. Normatively, accountability can be viewed “as a perceptual lens that can be used to observe and understand behaviour in, and of, organizations” (Hall et al., 2007, p. 412). Accountability might be seen as an obligation to “provide an account for the actions for which one is held responsible” (Gray et al., 1997, p. 334). Patton (1992) suggests that financial reporting has become the core outlet for organizational accountability initiatives. In practice, however, Roberts (1991) supports Hopwood’s (1987) concerns about the central role of accounting, in maintaining power structures, through its focus on “hierarchical” forms of accountability. Accounting elevates control of the other, above any concern for dialogic engagement, and so becomes “the image of events that count. It becomes the mirror through which others must view, judge and compare individual and group performance” (Roberts, 1991, p. 363, emphasis in original). While Coy et al. (2001) suggest somewhat hopefully that a “feeling” of accountees “out there” may spur organizations to offer a variety of communica-

Opportunities for deficient accountability through IFRS group accounting  429 tions to address perceived accountability needs, it is apparent that the aggregation presented within group accounting reproduces these existing facades of power (Hopwood, 1987; Roberts, 1991). These arguments explain the persisting dominance of group accounting, and the appeal of aggregation, particularly in corporate reporting practices. Drawing from Hopwood (1987) and Roberts (1991), van Zijl and Maroun (2017) consider the dominating impact of contemporary approaches to group accounting on organizational discourse. The authors argue that related accounting standards (specifically IFRS 10 and IFRS 12) effect a “sophisticated legitimisation process” to create “a valid expectation of enhanced financial reporting practices on the part of users” (van Zijl & Maroun, 2017, p. 43). However, rather than achieving that expectation, van Zijl and Maroun (2017) argue these accounting standards have become complicit in a “continuous flow” of recent corporate failures. They state “paradoxically, rather than result[ing] in the development of alternate bases of accounting, financial crises appear to result in the proliferation of ever more complex standards being issued” (van Zijl & Maroun, 2017, p. 55). Clarke et al. (2014) also express concerns about group accounting, arguing it provides a pretence of accountability through its suggestion of a cohesive group. In practice, with geographical diversity, and diverse management and board structures, Walker (1976, p. 114) suggests such cohesion is, at best, “very weak”. While cohesiveness might have been a reasonable expectation in the early 20th century when groups mostly just comprised wholly owned subsidiaries operating within single industries and geographical regions, “consolidated statements no longer depict the resources which are equitably owned by a homogeneous group of shareholders” (Walker, 1976, p. 77). Heald and Georgiou (2000, p. 164) conclude that through aggregation, group accounts effectively provide accountability to none; the “unique and complex nature of [intragroup] relationships” that exist and transactions, therefore, “deserve full disclosure in the Notes”. In the context of public sector consolidation, Walker (2009) observes that through aggregation, accountability for the assets and liabilities of each entity within the group is diminished or completely absent. Walker (1976, p. 101) further argues that while consolidated financial statements provide a useful “overview of resource utilisation”, and may, in turn, “convey warnings or allay fears” (Walker, 1976, p. 112), both preparers and users of consolidated financial statements are commonly confused about what they represent. Walker (1976, p. 94, emphasis in original) concludes, “the publication of information about subsidiaries’ earnings would be far more useful than the publication of group income data”. Francis (1986) concurs that the key impact of financial aggregation is lost information and, accordingly, group financial statements should be complemented by separate financial statements for both the parent as well as all subsidiaries; such statements are not an effective substitute for parent-only statements. For Pendlebury (1980, p. 115), “users of group accounts are not going to be satisfied by crude consolidation data alone. Some degree of disaggregation [of both the group’s statement of financial position and profit and loss statement] would seem required”. Clarke et al. (2002 and 2014) support these views, arguing that group financial statements “confuse and delude, especially where corporations are experiencing financial distress” (Clarke et al., 2002, p. 58). The “legal (and hence financial) substance is that the assets and liabilities included in the consolidated balance sheet are those resources owned and amounts owed by the constituent companies, whereas the form is that they are presented to be assets and liabilities of the mythical group” (Clarke et al., 2002, p. 60). Clarke et al. (2014, p. 122) summarize neatly the view that consolidated financial statements:

430  Handbook of accounting, accountability and governance [A]re based upon fiction [of the group as a cohesive entity], unrealistic assumptions [that legal entities within the group will support each other’s debts], contain items and balances not found in any of the related companies said to form the economic group [for example, goodwill], and fail to respect the separate legal entity principles fundamental to the centuries-old corporate form.

Nobes (2014) also analyses the scope of consolidation over a century and across several jurisdictions, observing significant variation, and suggesting further scope for clarifying the meanings of “control” and “power”. Some non-compliance with these subjective and core questions in relation to group accounting is also suggested by this author. Non-compliance with accounting standards and other requirements, however, is not a new issue. Other arguments in the literature support the utility of group accounting, arguing that it can be an effective construct for both accountability and users’ decision-making needs. Niskanen et al. (1998) argue that group accounting takes the interdependencies of entities within the group into account, and so the accounting outcome (an aggregation of all controlled entities, with all intragroup transactions eliminated) is more value relevant (able to summarize the group’s value) than parent-only financial statements. Concurring with this argument, Muller (2011) goes further, questioning the necessity of also publishing parent entity financial statements. Harris et al. (1994) also find evidence that consolidated financial information is more value relevant than unconsolidated (presumably parent-only) financial statements. However, these conclusions hinge on whether effective intragroup cross-guarantees are in place. Where effective, intragroup cross-guarantee agreements may contribute to the meaningfulness of group financial statements, particularly where creditors of subsidiaries cannot obtain access to the separate financial statements of a subsidiary (Walker et al., 1982). Walker (1976) dissents, however, with these supportive arguments, suggesting that cross-guarantee arrangements more commonly mislead. A cross-guarantee can generally “only be exercised upon default – in which event the claims under these guarantees will rank according to their seniority relative to other claims against the guarantor” (Walker, 1976, p. 109). Clarke et al. (2002, p. 60) also express concerns that cross-guarantee arrangements provide “a false sense of security to creditors” and “have rarely been crystallised”. We end this literature review by noting that none of the studies presented here attempt to reconcile the critical conclusions offered by some, with the more supportive arguments presented by others. We suggest, therefore, that while group accounting may indeed have value relevance for some identified user groups (investors, lenders and creditors) (Muller, 2011; Niskanen et al., 1998), the separate financial statements of all distinct legal entities within a group also have important value. This is particularly the case for creditors, whose needs seem to be ignored by the supportive studies cited here. By contrast, the more critical arguments presented here suggest that group accounting fails creditors, by failing to provide information on the liquidity of the specific entities with which they trade. Furthermore, we question Niskanen et al.’s (1998) argument that group accounting is meaningful to investors. While the notion of control (central to the notion of the “group”) may have some meaning for investors, we argue that insights into performance, position and risks within a group are important to a broad range of users, including broader groups not identified in the IFRS conceptual framework, such as community and environmental concerns.

Opportunities for deficient accountability through IFRS group accounting  431 Equity Accounting of “Associates” and “Joint Ventures” – IAS 28 Walker (1976, p. 84) argues that while the information produced through restating investment balances under the equity accounting method is “an advance on cost-based valuations”, it is “necessarily as faulty as the data produced in conventional balance sheets. They are the product of adding and subtracting money numbers which supposedly represent quite different properties – even though those properties are not strictly additive”. Brennan (2015) also critiques equity accounting, arguing little information of any utility is provided, and can be misleading where, for example, a low share of net assets is recorded despite the fact that a significant portion of the holding company’s activities might be conducted through that entity. Nobes (2005, p. 31) argues that the 20 per cent threshold is “rough and ready” and an “arbitrary rule” which leads to manipulations of the size of holdings. The underlying “rogue” principle is vague and not found in the conceptual framework, and so “doesn’t meet [the] definition of asset”. Nobes (2005, p. 31) observes that this vague principle allows the investor to take credit for income that has “not been received in cash and could not be successfully demanded”.

METHODOLOGY This two-phased study starts with a systematic evaluation of compliance with group accounting requirements within a selection of annual reports from major listed UK groups. That is followed with a critical evaluation of how group accounting requirements contributed to three recent high-profile corporate failures. In selecting our sample of groups in phase one, we first sorted groups listed on the London Stock Exchange by GICS (Global Industry Classification Standard) sector. Those groups were then sorted by size, according to closing market capitalizations as at 31 December 2020. The largest group in each GICS sector was selected as a sample group if its financial year 2020 Annual Report was available and its Annual Report was prepared in accordance with IFRS.8 We target the largest group in each sector because they are likely to have more complex group structures, cover more comprehensive commercial issues and are likely to be of interest to a broader group of users. This resulted in a sample of 11 groups as presented in Table 19.1. Table 19.1

The 11 groups reviewed in phase one

Company name

GICS sector

Gazprom PJSC

Energy

MMC Norilsk Nickel PJSC

Materials

Mitsubishi Electric Corp

Industrials

Flutter Entertainment PLC

Consumer discretionary

Magnit PJSC

Consumer staples

GlaxoSmithKline PLC

Health care

HSBC Holdings PLC

Financials

Halma PLC

Information technology

Vodafone Group PLC

Communication services

National Grid PLC

Utilities

LSR Group PJSC

Real estate

432  Handbook of accounting, accountability and governance In undertaking phase one, we drew from our literature review, focusing on seven key group-related disclosure questions (as determined through a summarization of key IFRS requirements). The first phase of this study systematically evaluated compliance of the sample firms’ group-related disclosures against the following IFRS requirements, to identify areas of disclosure of concern from an accountability perspective: 1. 2. 3. 4. 5. 6. 7.

Are details of investment in subsidiaries (that is, names and percentages of shares held), joint arrangements, associates and unconsolidated structured entities provided? (IFRS 12) Are details of any changes in the risks associated with interests in subsidiaries provided? (IFRS 3, 12) Are details of any movements in goodwill provided, including goodwill allocation to cash-generating units, discount rates, recoverable amounts? (IAS 36) How detailed are related party transaction notes? Do they disclose the nature and amounts of all intragroup transactions? (IAS 24) Is information about the performance and position of the parent provided? (UK Company Law) Is information about the performance and position of the subsidiaries provided?9 Does the segment note disclose external and internal revenues, profit or loss and total assets and liabilities of each segment (IFRS 8 para. 23–24)? Does the segment disclosure provide any insight into the performance and position of subsidiaries? (IFRS 8)10

To address the above stated phase one questions, an equal weighted checklist was established, as presented in Appendix 1. Appendix 1 elaborates on the seven questions above, presenting the detailed related disclosure requirements of each related accounting standard. Two of the authors then applied that checking by independently reviewing our 11 selected annual reports for these checklist items. An assessment of either full disclosure (FD), partial disclosure (PD), non-disclosure (ND) or not applicable (NA) was made, and the results were compared, discussed and resolved between the authors. In phase two of our study, we then focused on three large high-profile case study groups to consider how related accounting concerns might have contributed to their failures or collapse. The case study groups selected are Songcheng Performance Development Ltd in China, Smiles Inclusive Limited in Australia and Thomas Cook Group plc in the UK. The selection of these three groups was effectively subjective. Each of the three authors has good working knowledge of current corporate financial reporting controversies and failings in respectively, Australia, China and the UK. Each considered known recent high-profile corporate failures within these jurisdictions and offered arguments about why an exploration of the financial reporting of these groups might present useful insights into deficiencies in reporting against group accounting standards. Our focus was on groups that we knew, from significant media attention, to have grown quickly in recent years. Our final three cases were selected because of both the high-profile nature of their failures, and the likelihood that deficiencies in group accounting might have contributed to those failures. Having determined our three cases, we then reviewed relevant annual reports from the periods when key acquisitions of concern occurred, to the point of their subsequent failures. In doing so, we were able to address our research question by considering how limitations in group accounting requirements contributed to the provision of ineffective accountability to users.

Opportunities for deficient accountability through IFRS group accounting  433

A REVIEW OF THE 2020 GROUP FINANCIAL STATEMENTS OF THE LARGEST LISTED UK GROUPS In this section we review the 2020 group financial statements of the largest group in each GICS sector on the London Stock Exchange (as shown in Table 19.1) to investigate shortcomings in how key group-related disclosure requirements are presented in practice. Table 19.2 presents an overview of our results. Table 19.2 Questions

Compliance with key group-related disclosure requirements Ref. standard

Disclosure items

% Full

% Partial

%

checked (see

disclosure

disclosure

Non-disclosure applicable

% Not

Appendix 1) Q1

IFRS 12

7

54.5%

0.0%

41.6%

3.9%

Q2

IFRS 12 and 3

3

60.7%

18.3%

21%

0.0%

Q3

IAS 36

13

36.4%

0.7%

18.9%

44.1%

Q4

IAS 24

6

42.4%

7.6%

25.8%

24.2%

Q5

Corporations law

1

45.0%

0.0%

55.0%

0.0%

Q6

Corporations law

1

0.0%

0.0%

100.0%

0.0%

Q7

IFRS 8

8

75.0%

2.3%

22.7%

0.0%

Our findings indicate: 1. 2. 3.

4.

5.

Only 54.5 per cent of the sample groups disclosed full details of their investment in subsidiaries, joint arrangements and associates, including names and percentage of shares held. Over 40 per cent of the groups failed to disclose any of this detail. Only 60.7 per cent of the groups disclosed details of any acquisition or disposal of subsidiaries, and the consequential changes in risks associated with interest in those subsidiaries. Disclosures relating to goodwill impairment appear to be a key area of concern. In all, a mere 36.4 per cent of the groups provided full details of movements in goodwill, definitions of their cash-generating units (CGUs), explanations of how goodwill has been allocated to CGUs, impairment models used, assumptions used in estimating recoverable amounts, events and circumstances resulting in impairment losses, or amounts of any losses recognized. Of significant concern, 18.9 per cent of the groups impaired goodwill in the period, yet failed to disclose any related detail. In short, little to no information was provided for users to even assess whether the group should have been impairing goodwill, let alone assessing the accuracy of any losses recognized. Related party disclosures appeared to be more comprehensive in many cases; a minority of 42.4 per cent of the groups appeared to provide all information as required. Nonetheless, approximately half provided only brief and blunt related disclosures. In many instances, the groups claimed there were no related party transactions in the current period. While 45 per cent provided information about the financial performance and position of the parent entity, none provided insight into the performance and position of subsidiaries within the group.

434  Handbook of accounting, accountability and governance 6.

Segment disclosures seem to be the least concerning issue from our checklist, with 75 per cent of the groups achieving apparently full disclosure. Notwithstanding this level of disclosure, decision making regarding the determination of operating segments remained opaque. It is unlikely that any operating segments equated to individual subsidiaries in those groups. Consequently, these notes showed a disregard for users’ interests in learning the financial performance and position of any subsidiaries within the group.

In summary, our insights suggest that significant detail required by group-related accounting standards is commonly not provided. A number of obvious accountability issues arise from this analysis. In particular, financial statement preparers provide very little insight into the detail of investments in subsidiaries, associates and joint ventures, and joint operations. Information provided within consolidated financial reports remains highly aggregated, with little insight into eliminated intragroup transactions, or the performance and position of subsidiaries. While some groups provide information on related party transactions, related disclosures are usually limited, reading more like a formality than suggesting interest in providing anything useful for decision making. Segment disclosures commonly provide a reasonable dissection of the group into meaningful operating segments. However, IFRS 8 provides reporting entities flexibility in both determining the segments to be reported, as well as in deciding on whether to disclose key line items, including segment assets and liabilities. Disclosures in relation to goodwill impairment testing is another key issue of concern. Users are often unable to assess whether there is any indication of goodwill impairment, the reasonableness of assumptions utilized in calculating recoverable amounts or how any impairment losses have been estimated. In short, group-related disclosure requirements allow for disclosures that provide little value to any users seeking to assess risks within a group. Table 19.3 summarizes these concerns. Table 19.3 IFRS standard

Key accountability issues identified Providing core requirements to Shortcomings for users account for:

IFRS 3, 10, 12

Subsidiaries

● No insight into the financial performance and position of subsidiaries

IFRS 28

Associates and joint ventures

● No insight into eliminated intragroup transactions

IFRS 11

Joint operations

● Net assets of entities acquired were often not provided

IAS 24

Related party transactions

● No insight into eliminated intragroup transactions

IFRS 8

Segment reporting

● Unlikely to provide insight into the financial performance and posi-

IAS 36

Impairment of assets

● Inadequate disclosures regarding goodwill impairment

tion of any legal entities within the group

CONTEMPORARY EVIDENCE OF GROUP ACCOUNTABILITY FAILURES In this section we explore three recent and significant corporate failures, and question how group accounting requirements themselves contributed to obfuscating and limiting the utility of related disclosures. Our three cases are Songcheng Performance Development Ltd in China, Smiles Inclusive Ltd in Australia and Thomas Cook Group plc in the UK. In this final section

Opportunities for deficient accountability through IFRS group accounting  435 we draw out key learnings regarding suggested deficiencies in related group accounting standards. Songcheng Performance Development Ltd Songcheng Performance Development Ltd (SPD) is one of China’s largest theme park operators, and is listed on the Shenzheng Stock Exchange. As at 31 December 2020, the group showed consolidated total assets of RMB9.2 billion. This case highlights two key concerns with respect to group accounting. First, group accounting standards do not require any explanation for the reasonableness of considerations paid in acquisition. In SPD’s instance, a significant payment for one of its investments subsequently necessitated recognition of a substantial impairment loss. Our concern here is that related accounting standards require no explanations where significant premiums are paid to acquire investments. Second, the limited disclosures provided suggest SPD reclassified that substantial investment from a subsidiary to an associate shortly before that write-off occurred, enabling the corporation to disclose little information regarding those consequential impairment losses. This case highlights deficiencies in the existing accounting standards that allow reporting to avoid justifying the reasonableness of premium paid in acquisitions, and to minimize discloses regarding subsequent impairment losses. SPD’s goodwill balances reduced significantly from RMB2.787 billion as at 31 December 2019, to a mere RMB28 million by 31 December 2020. Little explanation for this significant decrease was provided. “Goodwill impairment” losses of RMB34 million were disclosed within the 2020 Annual Report, which fails to explain what happened to the other RMB2.725 billion of SPD’s 2019 goodwill balances. Elsewhere in its 2019 Annual Report, SPD also disclosed an impairment loss of RMB1.91 billion on its long-term equity investments. In diving deeper into the group’s 2020 quarterly reports, we discover that SPD’s “Investments in Joint Ventures and Associates” had increased from RMB1.055 billion at the end of the first quarter of 2020 to RMB3.436 billion by the end of the third quarter (Songcheng Performance Development Ltd, 2020). The disclosures provided suggest that a large part of this increase was a reclassification of their investment in Six Rooms Holdings (SR), from a subsidiary to an associate entity. One of the apparent advantages for SPD in undertaking this reclassification is that the goodwill associated with this investment was now able to be “hidden” within the carrying value of that investment (in accordance with the requirements of IAS 28). When SPD originally acquired 100 per cent of the shares of SR in 2015, the fair value of the net identifiable assets of SR was recorded at RMB38 million. However, the consideration SPD paid was RMB2.614 billion, amounting to a premium of over 60 times the fair value (Songcheng Performance Development Ltd, 2015). Through a subsequent complex restructure and share transfer arrangement, SPD’s holdings in SR were reduced to just 39.53 per cent, justifying that 2020 reclassification from a subsidiary to an associate. No information was provided within SPD’s annual reports explaining why this complex restructuring and reclassification was undertaken. We argue on the basis of a lack of other disclosure in respect to reclassifying SR from a subsidiary to an associate that SPD was able to avoid disclosing the significant impairment losses incurred in 2020, as “goodwill impairment”. Nevertheless, SPD’s other impairment loss of RMB1.91 billion on investments in associates recognized in 2020 still led to a consolidated annual loss of RMB1.752 billion. By the end of trading on 23 April 2021 (the day the 2020 Annual Report was released), SPD’s share price had a single-day

436  Handbook of accounting, accountability and governance drop of 4.03 per cent. SPD’s share price then continued to drop for another three consecutive months, closing at RMB12.67 per share on 30 July 2021 (an approximate 42 per cent decrease from 23 April 2021). Smiles Inclusive Limited Smiles Inclusive Limited (Smiles) was listed on the Australian Stock Exchange in 2018 and planned to raise sufficient finance to acquire an initial 52 dental practices across Australia. However, by 10 November 2020, voluntary administrators had been appointed to wind up the group because of its inability to repay $12 million in debt to its bank. Legal counsel Cabral Douglas represented the group’s shareholders, claiming damages in excess of $100 million. They argued that the case was “one of the biggest, and certainly the swiftest corporate collapses in modern Australian history” (Ogg et al., 2021). This case raises two key concerns for group accounting. First, it suggests that the aggregation of profits and net assets as required by group accounting standards results in enlarged and therefore potentially more attractive financial measurements, and so encourages mass acquisition strategies and, second, it highlights limitations in the utility of disclosures regarding related party transactions. Smiles began with a market capitalization of $57.9 million in 2018, and was liquidated less than three years later, with a market capitalization of less than $6 million. It is apparent that various operational and governance matters led to the sudden demise of this originally exciting investment prospect. Of key concern, Smiles launched a rapid and ambitious mass acquisition strategy from the outset. As stated in its 2018 Annual Report (Smiles Inclusive Ltd, 2018), the company’s growth strategy was to increase revenue by “optimising practice operations, generating cost efficiencies through scale, increased purchasing power and improved management”. The group reported that between 20 April 2018 and 29 May 2018 it acquired 100 per cent of either the business assets or shares of 52 dental practices (Smiles Inclusive Ltd, 2018). Like SPD’s acquisition of Six Rooms in China, the total consideration transferred was significantly greater than the fair value of the identifiable net assets acquired. The Smiles 2018 Annual Report disclosed consideration of $63.3 million, resulting in the recognition of $60.439 million goodwill – a premium of over 21 times the fair value. In the subsequent year, the group reported a statutory loss after tax of $31 million, and an impairment of goodwill of $28.5 million. While its former CEO, Mike Timoney, explained that key contributing problems included undisclosed legal proceedings (Ogg et al., 2021), the auditors were not convinced that the company remained a going concern. The 2019 Auditor’s Report argued that Smiles was “critically dependent” on achieving a number of assumptions in order to continue to operate. Despite three further rounds of effort to raise funding, Smiles remained heavily insolvent. It is apparent that there was also extraordinary turmoil within the management and governance teams of the Smiles group. The founding CEO, Mike Timoney, who had extensive experience building successful dental companies such as Totally Teeth and Dental Partners, surprisingly announced his resignation on 28 February 2019 (Ogg et al., 2021). This was not long after Smiles’ former Chief Financial Officer, Paul Innes, announced his resignation in December 2018. Shortly after Timoney departed on 14 April 2019, the group commenced legal proceedings against him, alleging serious misconduct. Little information is provided to help us understand the details of these legal proceedings, or to understand the details of related shareholder grievances. An investigation of the Group’s 2018 Annual Report reveals a number of concerning transactions with key management personnel totalling over $1.77

Opportunities for deficient accountability through IFRS group accounting  437 million, including property leasing expenses ($12,273), “consulting expenses” ($158,158) and “management fee recharge” ($1,600,583). These amounts are of particular concern, when compared to the group’s 2018 revenue of $7.211 million, and the total comprehensive loss of $4.987 million. Surprisingly, nothing more was explained in these related party disclosures regarding the nature of these transactions, or the amounts expended and reported. Thomas Cook Group Plc Prior to its collapse in 2019, Thomas Cook Group plc (TC) was one of the largest tour operators and low-cost holiday package enterprises in the world. This 178-year-old UK-based group owned, operated and managed several travel agencies, tour operators, aircraft fleet, cruise ships and resort properties. At the time of its collapse in 2019, 21,000 employees lost their jobs and 600,000 customers were left stranded in their travels or out of pocket on planned vacations (BBC, 2019). This significant corporate failure raises many questions regarding how warning signs were missed and whether the group’s collapse could have been avoided. Here we focus on questioning the enormously high premium paid for the acquisition of MyTravel (MT) in 2007, and we question why huge impairment losses relating to MT were not booked until 11 years after this acquisition. We argue that group accounting requirements contributed to masking areas of risk and poor management. Specifically, group accounting standards currently fail to require groups like TC to justify the reasonableness of premiums paid for acquisitions and allow unreasonable delays in the impairment of intangible assets. TC’s 2007 Annual Report revealed that the group paid a very high premium for MT. A consideration of £2,251.4 million was paid for an entity with a net deficiency of assets of £144.9 million, resulted in recognition of goodwill on acquisition of £2,396.3 million. Other than stating that the goodwill acquired included “fair value of the synergies expected to arise following the combination and the fair value of the expertise of the acquired entity’s workforce” (Thomas Cook Group plc, 2007, p. 94), no real justification for that huge premium was provided. While IFRS 3 (B64 (e)) requires an entity to provide “qualitative description of the factors that make up the goodwill recognized, such as expected synergies from combining operations of the acquiree and the acquirer”, TC’s 2007 related disclosures failed to provide any meaningful information about those expected synergies. Instead, TC took the opportunity to also disclose that the acquisition of MT contributed £48 million towards group profit in 2007 (Thomas Cook Group plc, 2007). Furthermore, the unaudited sections of TC’s 2007 Annual Report speculatively elaborated that the group was on track to achieve those expected synergies from MT within a period of 24 to 30 months. In short, a very positive picture of the acquisition was provided within the 2007 Annual Report. In contrast, a media release from 2007 noted that MT had not made a profit for the last six years. Nothing of this (then) recent track record was disclosed within this 2007 Annual Report. Arguably this deeper context should have been included in the Annual Report as well, to better enable users to assess risks involved in the acquisition of the heavily indebted MT group. Several years later, MT’s poor financial legacies were beginning to impact on TC. According to one former senior TC executive: The company’s debt problems began with the MyTravel merger … we were told we’re carrying this debt from a deal that was done many years ago and now we’ve got this baggage around our necks …

438  Handbook of accounting, accountability and governance what that means is we have to sell about 2,000 holidays to even pay a very small piece of that debt back. What we’re doing is essentially working to pay back the interest. (BBC, 2019)

Several attempts were made to deal with the group’s debt problems, but these did not seem enough to turn the group around. By 2012, TC had to be bailed out by its financial institutions. By 2019, the TC group was again having difficulty with rising debt. The 2019 half-yearly report noted a half-year loss of £1.4 billion. “A large proportion of the loss related to [TC’s] decision to write off the value of My Travel … [this] led to a £1.1bn loss being wiped from [TC’s] books” (Manning, 2019). This time, the TC group sought a bail-out arrangement from the UK government. The government declined to assist, and the TC group went into liquation in September 2019. Shortcomings in the Accounting Standards Highlighted by These Three Cases Each of the SPD, Smiles and TC cases reveal several limitations regarding the disclosure requirements of group accounting. We now highlight four key accountability concerns that emerge from these cases. First, we argue that the requirement to aggregate controlled entities under IFRS10 encourages aggressive acquisition strategies. While an aggregated group may look prosperous in size and growth, its users are usually blinded to a range of complications, risks and challenges within the group. Second, we also argue that in all three cases, group accounting standards proved to be deficient, specifically for failing to require disclosures about the nature of significant acquisitions, and why huge premiums were paid. Third, we further argue that reporting entities commonly provide limited related party transaction disclosures. IAS 24 fails in particular to require better insight into key acquisition transactions, including insight into the key beneficiaries. Fourth, our cases demonstrate that reporting entities may be motivated to reclassify investments from subsidiaries to associates to benefit from reduced related disclosure requirements. All these issues reflect failings of effective accountability for actions that are of critical concern to key user groups (Gray et al., 1997). Aggregation It would seem that Smiles’ rapid acquisition and expansion strategy contributed to its early collapse. Through aggregation, users of Smiles’ financial statements were left unaware of the details of much of the group’s legal proceedings, and the potential liabilities faced by some subsidiaries. Similarly, users dependent on published audited financial statements were uninformed about the parent’s insolvency problems. Furthermore, given that Smiles’ parent was simply an investment vehicle, it did not have significant revenues of its own with external parties. However, while we cannot verify this from the financial statements, it is likely that the Smiles parent entity would have charged significant management fees to its subsidiaries. These would, of course, have then been eliminated on consolidation. We argue that, in this case, knowledge of such transactions would have been important to users, to assist in assessing the fairness and potential risks associated with such intragroup transactions. Here, the aggregation and elimination features of consolidation encourage mass acquisition strategies, with little apparent concern for the financial position and performance of individual targeted entities. These group accounting requirements enable ambitious entrepreneurs to bypass effective accountability, by enabling presentation of a cohesive group where there is none (Clarke et al., 2014), and by concealing important and risky transactions within these groups.

Opportunities for deficient accountability through IFRS group accounting  439 Inadequate disclosures regarding significant acquisitions All three cases again suggest a bypassing of effective accountability, in their failings to provide sufficient disclosures regarding dubious acquisitions, the amounts of goodwill subsequently recognized and the details of impairment losses requiring recognition shortly thereafter. Neither SPD, Smiles, nor TC disclosed any explanations at the time of their concerning acquisitions regarding why significant premiums on acquisition were required or the synergies expected to arise from these acquisitions. Without such information, users were offered no insight into the factors motivating these acquisitions. Therefore, we can do no more than speculate on what might have motivated these disadvantageous transactions. Perhaps in the case of Smiles, exorbitant premiums were paid to enable the deals to be executed quickly (52 acquisitions within 40 days). Perhaps the beneficiaries (the vendors) were related in some manner to the executives of Smiles. In the case of TC, a huge premium was paid for an investment that seemed, in retrospect, to be highly unpromising. Is it possible that the beneficiaries in this TC case were also related parties? What we can observe is that the TC CEO was paid a £5 million bonus at this time, which was apparently related to the MT acquisition. Our concerns here are in connection with IFRS 3, which apparently allows groups to avoid providing critical useful information regarding expected synergies, avoid justifying huge premiums paid on acquisition and, indeed, avoid providing any insights into who were the beneficiaries of such premiums. IFRS 3 (B64–B66) goes some way to address these questions, requiring reporting entities to disclose a range of matters in any new business combinations undertaken within an accounting period, including qualitative descriptions of the factors that make up any goodwill recognized. Clearly, however, these requirements were not specific enough to drive disclosures by SPD, Smiles or TC to outline the key information we propose here. Perplexingly, huge overpayments for business acquisitions like this are not isolated to SPD, Smiles or TC. Sirower (2007) argues outrageous premiums are often paid on the hope of rapid synergistic development. Sirower (2007) furthermore indicates that such synergies commonly fail to realize. In this respect, we add to the contribution of van Zijl and Maroun (2017), by observing that group accounting itself also contributes to corporate failure, by enabling entities to provide little justification or explanation of premiums paid on business acquisitions. With the unreasonably large premiums paid in these three case examples, it is not surprising that significant impairment losses were required to be reported upon soon thereafter. In the case of Smiles, apart from some mandatory but superficial disclosure of goodwill impairment testing assumptions and impairment losses recognized at CGU level, there was no disclosure provided about why particular Smiles CGUs needed impairment, how impairment losses were determined or which dental practices were associated with which CGU. In the case of TC, impairment of goodwill was delayed until 11 years after its acquisition of MT. It was only in 2019 that the TC group booked its first massive £1.04 billion write-off. Why were there no impairment losses recorded before this? Apparently, the TC group finally came under pressure from their auditors on this issue in 2018, when the group’s audit committee discussed increasing the information provided on the group’s huge goodwill balances (Thomas Cook Group plc, 2018, p. 79). We therefore speculate that this “dressing up” up of TC’s financial statements from 2007 to 2018 enabled the CEOs to negotiate several bonuses through this period. The TC case highlights our concern that subjectivity in impairment testing effectively allows exploitation by unscrupulous operators. Here we suggest that a range of remediations are required to demand better accountability from groups, including both ongoing attention

440  Handbook of accounting, accountability and governance to professional and business ethics, and more specific and mandatory questions that directors must engage with, regarding when impairment should be recognized. We also question the current potential offered within IAS 38, to allow goodwill an indefinite life. Former approaches to amortization at least ensured smooth and progressive write-off over (approximately) the period during which synergies from such transactions might be expected to decline or dry up. In its 2019/2020 Annual Review of Corporate Reporting, the Financial Reporting Council (FRC) of the UK raised similar related concerns (FRC, 2020). This Annual Review notes that while IAS 36 requires CGUs to be no greater than operating segments, greater aggregation of operating segments is evident in practice. Furthermore, the FRC argues that in some cases where impairment losses are recognized, it has been shown that groups choose not to disclose the recoverable amount of impaired assets, or the events and circumstances that led to impairment. Similarly, in Australia, the Australian Securities and Investment Commission (ASIC) issued Report 648, Audit Inspection Report for 2018–19 (ASIC, 2019), identified poor practices in assessing impairment indicators, utilizing impairment models, identifying CGUs and appropriately estimating the fair values for each CGU. In summary, disclosure requirements regarding business acquisitions are generally superficial, allowing reporting entities to provide no accountability for the often significant premiums paid. The TC case illustrates, in our view, a rather extreme example of how such information would be of importance to users. Such disclosures could have helped users to assess risks involved, and to gain insight into whether such transactions were really in their best interests (or someone else’s). To better address accountability, related accounting standards should require clear explanations for significant premiums paid in acquisitions and should also require clear dissection of subsequent impairment losses. Inconsistent approaches to impairment testing raise questions about whether directors are more concerned with their own bank balances than with ensuring provision of true and fair financial statements. While there is merit in an impairment approach, we also argue that goodwill should have a limited useful life, and that parameters ought to be established for progressive and minimal expensing towards that deadline. Inadequate related party transaction notes While SPD provided some useful disclosures within their 2015 related party disclosure note (the year of their acquisition of Six Rooms), those disclosures did not explain the motivations for that evidently dubious acquisition. Smiles would undoubtedly also argue that they were compliant with the requirement within IAS 24 (Related Party Disclosures). Nonetheless, the information Smiles disclosed within its 2018 related party note provided no insight into whether their significant “consultation” and “management” fees were at fair value, whether those significant payments were in the best interests of users (particularly investors), or who indeed were those related parties. Again, these deficiencies reflect failures to provide effective accountability for critical actions of concerns to users (Gray et al., 1997). We also question whether some or all of the vendors of the dental practices acquired by Smiles may have been related parties. Perhaps the payment of significant premiums on acquisition reflects greater concern for the interests of the vendors of those entities than for providing effective accountability to Smiles’ users (particularly investors). In short, IAS 24 allows superficial disclosures which, in practice, commonly read more like a formality, and suggest little interest in effective accountability. Further to the general concerns Clarke et al. (2014) raise about group accounting, and the specific suggestion from

Opportunities for deficient accountability through IFRS group accounting  441 Heald and Georgiou (2000) that intragroup relationships deserve full explanation within the notes to the accounts, we suggest that the definition of “related party transaction” in IAS 24 could be expanded to clearly capture vendors of businesses acquired, and could clearly require explanation of how considerations negotiated are also in the best interests of users. For the ultimate shareholders of SPD, Smiles and TC, these deficiencies misled them into allowing management to proceed with acquisitions which were clearly disadvantageous to those users. Minimizing disclosure through reclassification SPD was probably motivated, at least in part, to reclassify its investment in SR from a subsidiary to an associate, to minimize the accountability provided regarding this declining business operation. While both the Financial Accounting Standards Board (FASB) and the IASB have emphasized that comparability enhances the usefulness of financial information for decision makers (FASB, 2013), an extensive body of literature suggests that reporting entities fear disclosure, and will seek to diminish comparability, especially when proprietary costs are high (see, for example, Verrecchia, 1983; Imhof et al., 2022). The many examples provided in this study support these arguments, indicating a reluctance in practice to provide effective accountability. We suggest that better accounting standards can go a long way towards driving more effective accountability responses. Management is also likely to seek opacity when agency costs are high (see, for example, Ettredge et al., 2006; Beyer et al., 2010). Goodwill impairment provides a key example. Goodwill and any goodwill impairment losses must be reported as separate line items within consolidated financial statements. However, related disclosures might reveal critical information about management failings, which might then increase both proprietary and agency costs. These arguments would seem to explain why only 36.4 per cent of the sample firms examined earlier in the chapter disclosed full details of goodwill impairments. By contrast, less proprietary information is generally revealed through the disclosure requirements relating to impairment of equity investments. Furthermore, while goodwill impairment is usually seen as a failure to deliver expected synergies at acquisition, impairment of equity investments is less likely to be seen as reflecting on the parent’s performance. The limited disclosure requirements of IAS 28 presented the management of SPD an opportunity to minimize reputational damage, by reclassifying their Six Rooms subsidiary to an associate.

CONCLUDING COMMENTS In this chapter, we use evidence drawn from three case studies to question whether group accounting standards are sufficiently robust to drive effective accountability, particularly for the three financial statement user groups identified in the IFRS conceptual framework (investors, lenders and creditors). Here we focus on nine key group-related IFRS accounting standards, arguing that while these standards appear to offer neat reporting solutions for complex multi-national groups, they also enable inadequate accountability, through enabling inadequate insight into important workings and risks within that construct. Importantly, group accounting allows almost no insight into the financial performance and position of individual legal entities within the group, or into critical transactions undertaken between entities in that group. We therefore support arguments that have been made for decades, yet continue to be ignored, despite persisting and breath-taking cycles of corporate collapse. We argue that appli-

442  Handbook of accounting, accountability and governance cable accounting standards must be developed to at least complement aggregation processes with the provision of clear insight into the performance and position of all legal entities within a group (Francis, 1986; Walker, 1976). In so doing, better accountability might be provided, not only to the three user groups identified in the IFRS conceptual framework but also to others including community and environmental groups. In the first phase of our study, we empirically examined recent annual reports from several large reporting entities in the UK. This phase revealed that many important group-related disclosure requirements are commonly missing from reports that claim to comply with these standards. These non-compliances have important implications for accountability, and for user decision making. Specifically, many disclosure requirements regarding the details of investments and associated risks and returns, related party transactions and assumptions and consequences of goodwill impairment testing would appear to be commonly not complied with. The second phase of our study explored related accounting concerns for three recent cases of corporate failure (SPD, SIL and TC). These three cases support the concerns raised in phase one. These scenarios reveal several important deficiencies in the nine key group-related accounting standards identified herein. In specific terms, we add to existing clarion calls for better accountability through group accounting (Francis, 1986; van Zijl & Maroun, 2017; Walker, 1976), by raising four key concerns. First, the aggregation feature of group accounting encourages reporting entities to implement aggressive acquisition strategies, and to hide risks and challenges within the group. Second, inadequate disclosure requirements regarding significant acquisitions, overpayment of premiums in acquisitions and the ultimate beneficiaries of acquisitions enable reporting entities to evade critical accountability for transactions which may not be in the best interests of shareholders. Third, related party disclosures do little to make up for these deficiencies. Finally, the reclassification of investments from subsidiaries to associates provides opportunity to minimize accountability for assets at risk of impairment. Our study suggests several possibilities for fruitful further research. Future studies might seek to interview users, concentrating on questioning how deficiencies in group accountability affect decision making, and how users therefore potentially seek to complement group accounting information with other data. Our study has also concentrated on considering the shortcomings of IFRS 3 and 10, and IAS 28, with some consideration also of deficiencies in IAS 24. Further research might seek to provide more insight into the impacts, merits and shortcomings of related accounting standards including IFRS 8, 9, 11, 12 and IAS 36. The four key group-related accounting standard deficiencies identified herein reinforce and exacerbate the non-compliance concerns identified in the first phase of our study. Taking these four issues together, we argue that current group-related accounting standards provide significant opportunity for unscrupulous operators to evade effective accountability to all identified user groups including investors, lenders and creditors. While financial reporting continues to reinforce facades of power through its “hierarchical” approach to accountability (Roberts, 1991), we argue that better disaggregation of key financial performance and position details by legal entity, and better insight into important transactions relating to business acquisitions, can improve the accountability that these reports are able to provide. We end by calling on accounting standard setters, regulators, reporting entities, academics and financial statement users to now engage meaningfully with these concerns. A central argument we form is that unscrupulous entrepreneurs are naturally inclined to seek circumvention of effective accountability, and so much of the responsibility for driving better accountability

Opportunities for deficient accountability through IFRS group accounting  443 seems to fall to the standard setters. However, the changes we propose are not simply of a technical form. Weak accounting standards and poor reporting practices have an important impact in supporting existing power structures, and so attempts to change accounting standards and corporate reporting practices will also have complex political implications. Future studies and endeavours in this field should therefore give equal consideration to both these technical and political implications. In this manner, we hope that incremental improvement in accountability can be availed for those that matter most: all users dependent on related financial information, including investors, lenders and creditors, as well as other user groups not identified in the conceptual framework, including community and environmental groups.

NOTES 1. The abbreviation IFRS stands for International Financial Reporting Standard, issued by the IASB. The predecessor body of the IASB, the International Accounting Standards Committee (IASC), issued International Accounting Standards, abbreviated as IAS. 2. According to IFRS 10, para. 6, “An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee”. 3. These accounting standards are identified as follows: IFRS 3 – Business Combinations, IFRS 8 – Operating Segments, IFRS 9 – Financial Instruments, IFRS 10 – Consolidated Financial Statements, IFRS 11 – Joint Arrangements, IFRS 12 – Disclosure of Interests in Other Entities, IAS 24 – Related Party Disclosures, IAS 28 – Investments in Associates and Joint Ventures and IAS 36 – Impairment of Assets. 4. Clearly, the key solution for a user concerned about a specific entity within a group would be to obtain and examine those individual financial statements. However, financial statements for separate entities within a group may not always be produced (for example, in the case of a subsidiary included within a cross-guarantee agreement in Australia), or may not be readily accessible (for example, in the case of a private entity). Our question, therefore, focuses specifically on the effectiveness of group accounts themselves, in broadly addressing the financial accounting information needs of investors, lenders and creditors. 5. AASB10 para. B86 requires the combining of “financial statements of the parent and its subsidiaries line by line by adding together like items of assets, liabilities, equity, income and expenses”. 6. See “ASIC Corporations (Wholly-owned Companies) Instrument 2016/785”, available at: www​ .legislation​.gov​.au/​Details/​F2020C01108 (last accessed 12 July 2021). 7. These requirements are now encapsulated within the requirements of IFRS 3 and 10. 8. Market and company data was downloaded from www​.londonstockexchange​.com and Compustat Global – Fundamentals Annual Database for the analysis. 9. There is no provision within IFRS to require the disclosure of the financial performance and position of subsidiaries. Nonetheless, we identify that such information is of potential utility to users. Accordingly, we are keen to question whether leading groups might provide related insight. 10. IFRS 8 defines “operating segment” as a component of the group that engages in business activities and for which the performance is regularly reported to the “Chief Operating Decision Maker”. While an operating segment is unlikely to equate to an individual subsidiary, we have identified that the performance of subsidiaries is of potential utility to users, and so we are keen to question whether segment disclosures from leading groups might provide some related insight.

444  Handbook of accounting, accountability and governance

REFERENCES Australian Securities and Investments Commission (ASIC) (2019), “Audit inspection report for 2018–19”, available at: https://​asic​.gov​.au/​regulatory​-resources/​find​-a​-document/​reports/​rep​-648​ -audit​-inspection​-report​-for​-2018​-19 (last accessed 12 July 2021). Beyer, A., Cohen, D.A., Lys, T.Z. and Walther, B.R. (2010), “The financial reporting environment: review of the recent literature”, Journal of Accounting and Economics, Vol. 50 No. 2, pp. 296–343. Brennan, N.M. (2015), “Consolidated financial statements”. Wiley Encyclopedia of Management, Wiley, online, available at: https://​onlinelibrary​.wiley​.com/​doi/​10​.1002/​9781118785317​.weom010014 (last accessed 14 July 2021). British Broadcasting Corporation (BBC) (2019), “Thomas Cook used its auditors to justify £5m bonus”, 22 October, available at: www​.bbc​.co​.uk/​news/​business​-50099288 (last accessed 12 July 2021). Clarke, F. and Dean, G. (1993), “Law and accounting: the separate legal entity principle and consolidation accounting”, Australian Business Law Review, Vol. 24 No. 4, pp. 246–269. Clarke, F. and Dean, G. (2007), Indecent Disclosure: Gilding the Corporate Lily. Cambridge University Press, New York. Clarke, F., Dean, G. and Egan, M. (2014), The Unaccountable and Ungovernable Corporation: Companies’ Use-By Dates Close In. Routledge, Abingdon. Clarke, F., Dean, G. and Houghton, E. (2002), “Revitalising group accounting: improving accountability”, Australian Accounting Review, Vol. 12 No. 3, pp. 58–72. Coy, D., Fischer, M. and Gordon, T. (2001), “Public accountability: a new paradigm for college and university annual reports”, Critical Perspectives on Accounting, Vol. 12 No. 1, pp. 1–31. Ettredge, M.L., Kwon, S.Y., Smith, D.B. and Stone, M.S. (2006), “The effect of SFAS no. 131 on the cross-segment variability of profits reported by multiple segment firms”, Review of Accounting Studies, Vol. 11 No. 1, pp. 91–117. Financial Accounting Standards Board (FASB) (2013), International Convergence of Accounting Standards: An Overview. FASB, Norwalk, CT. Financial Reporting Council (FRC) (2020), Annual Review of Corporate Reporting 2019/20, FRC, London. Available at: www​.frc​.org​.uk/​getattachment/​d20135f8​-c888​-4300​-a4ad​-4ea0c17c1269/​2020​ -Annual​-Review​-of​-CRR​.pdf (last accessed 12 July 2021). Francis, J.R. (1986), “Debt reporting by parent companies: parent-only versus consolidated statements”, Journal of Business Finance & Accounting, Vol. 13 No. 3, pp. 393–403. Gray, R., Dey, C., Owen, D., Evans, R. and Zadek, S. (1997), “Struggling with the praxis of social accounting: stakeholders, accountability, audits and procedures”, Accounting, Auditing & Accountability Journal, Vol. 10 No. 3, pp. 325–364. Hall, A.T., Bowen, M.G., Ferris, G.R., Royle, M.T. and Fitzgibbons, D.E. (2007), “The accountability lens: a new way to view management issues”, Business Horizons, Vol. 50 No. 5, pp. 405–413. Harris, T.S., Lang, M. and Moller, H.P. (1994), “The value relevance of German accounting measures: an empirical analysis”, Journal of Accounting Research, Vol. 32 No. 2, pp. 187–209. Heald, D. and Georgiou, G. (2000), “Consolidation principles and practices for the UK government sector”, Accounting and Business Research, Vol. 30 No. 2, pp. 153–167. Hopwood, A.G. (1987), “The archeology of accounting systems”, Accounting, Organizations and Society, Vol. 12 No. 3, pp. 207–234. Imhof, M.J., Seavey, S.E. and Watanabe, O.V. (2022), “Competition, proprietary costs of financial reporting, and financial statement comparability”, Journal of Accounting, Auditing & Finance, Vol. 37 No. 1, pp. 114–142. Manning, J. (2019), “What went wrong with Thomas Cook? Why the high street travel giant collapsed”, Business Live, 23 September, available at: www​.business​-live​.co​.uk/​enterprise/​thomas​-cook​-collapse​ -finance​-happened​-16964473 (last accessed 13 July 2021). Muller, V.O. (2011), “Value relevance of consolidated versus parent company financial statements: evidence from the largest three European capital markets”, Accounting and Management Information Systems, Vol. 10 No. 3, pp. 326–350. Niskanen, J., Kinnunen, J. and Kasanen, E. (1998), “A note on the information content of parent company versus consolidated earnings in Finland”, European Accounting Review, Vol. 7 No. 1, pp. 31–40.

Opportunities for deficient accountability through IFRS group accounting  445 Nobes, C.W. (2005), “Rules-based standards and the lack of principles in accounting”, Accounting Horizons, Vol. 19 No. 1, pp. 25–34. Nobes, C.W. (2014), “The development of national and transnational regulation on the scope of consolidation”, Accounting, Auditing & Accountability Journal, Vol. 27 No. 6, pp. 995–1025. Ogg, M., Simmons, D. and Jansen, C. (2021), “How Smiles Inclusive was turned upside down: a timeline of decay”, Business News Australia, 3 February, available at: www​.b​usinessnew​saustralia​.com/​ articles/​how​-smiles​-inclusive​-was​-turned​-upside​-down​-a​-timeline​-of​-decay​.html (last accessed 13 July 2021). Patton, J.M. (1992), “Accountability and governmental financial reporting”, Financial Accountability and Management, Vol. 8 No. 3, pp. 165–180. Pendlebury, M.W. (1980), “The application of information theory to accounting for groups of companies”, Journal of Business Finance & Accounting, Vol. 7 No. 1, pp. 105–117. Roberts, J. (1991), “The possibilities of accountability”, Accounting, Organizations and Society, Vol. 16 No. 4, pp. 355–368. Sirower, M.L. (2007), The Synergy Trap: How Companies Lose the Acquisition Game. Free Press, New York. Smiles Inclusive Ltd (2018), 2017/18 Annual Report, available at: www​.asx​.com​.au/​asxpdf/​20181022/​ pdf/​43zgkv952bp7v8​.pdf (last accessed 12 July 2021). Songcheng Performance Development Ltd (2015), 2015 Annual Report, available at: https://​gg​.cfi​.cn/​ DetailsInfo2​.aspx​?dm​=​gpdm​&​type​=​cb​&​id​=​520507252917 (last accessed 12 July 2021). Songcheng Performance Development Ltd (2020), 2020 Third Quarter Financial Report, available at: https://​gg​.cfi​.cn/​detailsinfo2​.aspx​?dm​=​gpdm​&​type​=​cb​&​id​=​657231161187 (last accessed 12 July 2021). Thomas Cook Group plc (2007), Annual Report and Accounts 2007, available at: www​.annualreports​ .com/​HostedData/​AnnualReportArchive/​T/​LSE​_TCG​_2007​.pdf (last accessed 12 July 2021). Thomas Cook Group plc (2018), Annual Report and Accounts 2018, available at: www​.annualreports​ .com/​HostedData/​AnnualReports/​PDF/​LSE​_TCG​_2018​.pdf (last accessed 12 July 2021). van Zijl, W. and Maroun, W. (2017), “Discipline and punish: exploring the application of IFRS 10 and IFRS 12”, Critical Perspectives on Accounting, Vol. 44, pp. 42–58. Verrecchia, R.E. (1983), “Discretionary disclosure”, Journal of Accounting and Economics, Vol. 5 No. 3, pp. 179–194. Walker, R.G. (1976), “An evaluation of the information conveyed by consolidated statements”, Abacus, Vol. 12 No. 2, pp. 77–115. Walker, R.G. (2009), “Public sector consolidated statements: an assessment”, Abacus, Vol. 45 No. 2, pp. 171–220. Walker, R.G., Wilkins, T. and Zimmer, I. (1982), “The effect of consolidated statements on loan officers assessments of ability to repay”, Australian Journal of Management, Vol. 7 No. 2, pp. 179–95. Whittington, G. (2021), “Reflections on Chambers’ odyssey”, Accounting History, Vol. 26 No. 2, pp. 322–331.

446  Handbook of accounting, accountability and governance

APPENDIX 1 Table 19A.1 References

Disclosure checklist Disclosure items

IFRS12

Question

FD

PD

ND

NA

 

 

 

 

 

IFRS12:7

Significant judgements and assumptions

Q1

91%

0%

9%

0%

IFRS12:10

Interests in subsidiaries

 

 

 

 

 

 

The composition of the group

Q1

100%

0%

0%

0%

 

The interest of non-controlling interests in group activities

Q1

91%

0%

0%

9%

 

The nature and extent of any significant restrictions on ability Q1

36%

0%

64%

0%

73%

0%

27%

0%

and cash flows to access or use assets, or settle liabilities  

The nature of, and any changes in, risks associated with

Q2

interests in consolidated structured entities  

The consequences of losing control of a subsidiary

Q2

64%

0%

36%

0%

IFRS10:31

Interests in unconsolidated subsidiaries

Q1

0%

0%

100%

0%

IFRS12:20

Interests in joint arrangements and associates

Q1

64%

0%

18%

18%

IFRS12:24

Interests in unconsolidated structured entities

Q1

0%

0%

100%

0%

IAS36

 

 

 

 

 

 

IAS36.126

Disclosure by class of assets:

 

 

 

 

 

 

● impairment losses recognized in profit or loss

Q3

55%

0%

9%

36%

 

● impairment losses reversed in profit or loss

Q3

0%

0%

0%

100%

 

● impairment losses recognized in comprehensive income

Q3

0%

0%

64%

36%

 

● impairment losses recognized in other comprehensive

Q3

0%

0%

18%

82%

 

● impairment losses on revalued assets reversed in other

Q3

0%

0%

0%

100%

income comprehensive income IAS36.130

If an individual impairment reversal is material, disclose:

 

 

 

 

 

 

● events and circumstances resulting in the impairment

Q3

36%

0%

27%

36%

 

● amount of the loss or reversal

Q3

45%

0%

9%

45%

 

● individual asset: nature and segment to which it relates

Q3

64%

0%

18%

18%

 

● cash-generating unit: description, amount of impairment

Q3

73%

0%

18%

9%

Q3

9%

0%

18%

73%

Q3

73%

0%

18%

9%

Q3

36%

9%

27%

27%

Q3

82%

0%

18%

0%

loss (reversal) by class of assets and segment  

● valuation techniques used to measure fair value less costs of disposal

 

● if recoverable amount has been determined on the basis of value in use, disclose the discount rate

IAS36.131

● if impairment losses recognized (reversed) are material, disclose main classes of assets affected

IAS36.134-135 ● disclose detailed information about the estimates used to measure recoverable amounts IAS24

 

 

 

 

 

 

IAS24.16

Relationships between parents and subsidiaries

Q4

73%

9%

18%

0%

IAS24.17

Management compensation

Q4

55%

36%

9%

0%

IAS24.18-19

Related party transactions:

 

 

 

 

 

 

● amounts

Q4

55%

0%

45%

0%

 

● amounts of outstanding balances

Q4

73%

0%

27%

0%

 

● provisions for doubtful debts

Q4

0%

0%

27%

73%

 

● bad or doubtful debts recognized during the period

Q4

0%

0%

27%

73%

Opportunities for deficient accountability through IFRS group accounting  447 References

Disclosure items

Question

FD

PD

ND

NA

IFRS8

 

 

 

 

 

 

IFRS8.22

General information about operating segments

Q7

91%

0%

9%

0%

IFRS8.21(b)

Information about the profit or loss for each reportable

Q7

91%

0%

9%

0%

Q7

73%

9%

18%

0%

Q7

73%

0%

27%

0%

Q7

91%

0%

9%

0%

and 23

segment

IFRS8.23-24

A measure of total assets and total liabilities for each reportable segment

IFRS8.27

An explanation of the measurements of segment profit or loss, segment assets and segment liabilities

FRS8.21(b)

Reconciliations of the totals of segment revenues, reported

and 28

segment profit or loss, segment assets, segment liabilities and

IFRS8.32

Some entity-wide disclosures

Q7

100%

0%

0%

0%

IFRS8.33

Analyses of revenues and certain non-current assets by

Q7

73%

9%

18%

0%

IFRS8.34

Information about transactions with major customers

Q7

9%

0%

91%

0%

IFRS3

 

 

 

 

 

 

other material items

geographical area

IFRS3.59

Information about entities acquired

Q2

45%

55%

0%

0%

Other

Information about parent’s performance and position

Q5

45%

0%

55%

0%

 

Information about subsidiary performance and position

Q6

0%

0%

100%

0%

Note: The questions shown in the table indicate the seven questions as determined in our methodology section.

20. COVID-19 and accounting, accountability and governance Meredith Tharapos, Brendan O’Connell, Nicola Beatson and Paul de Lange

OVERVIEW This chapter synthesizes and critiques recent studies examining the impact of the COVID-19 pandemic on accounting, accountability and governance, and categorizes them according to different organization-types and common themes. Our analysis highlights how traditional approaches to accounting, accountability and governance have been challenged by the global pandemic at different levels. This chapter also reflects on the lessons learned, and which continue to be learned, and provides possible suggestions to improve the preparedness of organizations and society to manage future crises. Studies published to date examining the impact of the pandemic emphasize the importance of values, culture and institutional contexts in shaping accounting, accountability and governance. Analysis of these studies indicates that further research is needed to increase understanding of the interplay between these elements. Collectively, these studies highlight the importance of continually questioning and re-evaluating underlying accounting, accountability and governance practices, as the pandemic has shown that they may suddenly shift, become contested and give rise to conflicts and ambiguities.

INTRODUCTION There are times when there is a major disruption that suddenly implies what worked so far is not going to work anymore and you need a new playbook. (Retsef Levi, quoted in Stackpole, 2021)

The above statement made by Professor Retsef Levi, Professor of Operations Management in the Sloan School of Management at Massachusetts Institute of Technology, encapsulates the profound impact on business and society flowing from the COVID-19 pandemic. In this chapter, we examine the effect of the pandemic on organizations of various forms with a focus on accounting, accountability and governance aspects. Through a comprehensive examination of recently published papers in the area, we document how organizations have reacted. Some of these reactions such as greater surveillance-style oversight of staff are not ideal and may have long-term adverse implications for businesses including reduced employee morale and higher staff turnover. Others, such as embracing new technologies to provide flexible and better-informed decision-making, may enhance the sustainability of businesses. Whatever responses have been made, these studies provide clear evidence that the pandemic has laid bare the lack of forward planning and crisis preparation apparent within many organizations. This reflects a failure of accountability and governance that cannot be repeated going forward. 448

COVID-19 and accounting, accountability and governance  449 Organizations need to better prepare for and manage future crises in a world characterized by ever-changing economic, technological and geo-political disruptions. This chapter is structured as follows. It commences with the research method and includes an explanation as to why the researchers are justified in examining the impact of the COVID-19 pandemic on accounting, accountability and governance and how the articles were sourced for this chapter. It then reviews numerous recent studies that have examined the impact of the pandemic on the accounting, accountability and governance of organizations (see, for example, Delfino & van der Kolk, 2021; Passetti et al., 2021). Next, our chapter sets the scene going forward by exploring ways to enhance accounting systems so that they possess the relevant capabilities to cope with future, unexpected events and crises. For example, the failure to effectively measure and monitor business risks and to adequately employ technologies to manage the crisis have been exposed, so suggestions are made for the strengthening of these areas. Finally, we consider whether the new surveillance regimes, and the budgetary and accountability practices which have become legitimated and accepted during the pandemic, will remain as the “new normal” or be replaced by new calculative and accountability practices (Leoni et al., 2021) for the way we “measure, or perform our accounting, affects the outcomes” (Haynes, 2020, p. 637).

RESEARCH METHOD Since the COVID-19 outbreak began in early 2020, there have been numerous studies examining its impact on accounting, accountability and governance with a focus on management of the pandemic. This chapter encompasses a critical review of these articles (published at the time of writing of 28 February 2022). To identify the studies for inclusion in this chapter, searches were conducted using Google Scholar for those published in accounting academic journals containing the words “accounting”, “accountability” or “governance” with the word “COVID-19” or “Covid”. Identified studies were then downloaded and manually examined to ensure the search words were reflective of the article’s content. Studies were excluded if they did not relate to an organizational or government context. For example, studies with a learning and teaching focus examining the impacts of COVID-19 on delivery modes, curricula, assessment and student experience (see, for example, Fogarty, 2020; Sangster et al., 2020; Beatson et al., 2021; O’Connell, 2022; Tharapos, 2022) were excluded from our review. It should be highlighted that studies that mentioned the word, “Covid” but focussed on areas that were largely unrelated to accounting, accountability and governance issues were ignored. A total of 30 studies meeting the above criteria were identified, 19 of which are published in Accounting, Auditing & Accountability Journal. The remainder are published in Critical Perspectives on Accounting (4), Journal of Accounting & Organizational Change (2), British Accounting Review (1), International Journal of Accounting & Information Management (1), Journal of Public Budgeting, Accounting & Financial Management (1), Pacific Accounting Review (1) and Accounting Forum (1). The identified studies examined different types of entities including: business (see, for example, Delfino & van der Kolk, 2021; Passetti et al., 2021; Velayutham et al., 2021); governments (see, for example, Haynes, 2020; Ahmad et al., 2021; Ahrens & Ferry, 2021; de Villiers & Molinari, 2022); hospitals (see, for example, Huber et al., 2021); universities (Carnegie et al., 2022a, 2022b); and charities (see, for example, Kober & Thambar, 2021). There have also been studies undertaken examining the effectiveness of

450  Handbook of accounting, accountability and governance organizations’ risk management and associated disclosures (see, for example, Abhayawansa & Adams, 2022; Brennan et al., 2022; Carnegie et al., 2022a, 2022b; Crovini et al., 2022). The identified studies were then classified according to the type of entity examined in the study (businesses, governments, hospitals and charities), or into the risk management category if that was the focus of the study. Studies examining environmental or social risks were also classified into the risk management category (see, for example, Parker, 2020).

LITERATURE REVIEW The COVID-19 pandemic, which originated in late 2019 and began to impact the world from January 2020 onwards, is shaping as one of the most pivotal events of this century. Not since the so-called Spanish flu epidemic of 1918–20 has there been a pandemic that has generated such a broad impact globally. It has changed the way we live and work and has permeated all areas of society, either directly or indirectly. The impact has not only been accounted for in health terms such as hospitalizations and death rates, but also in economic terms. For example, estimates indicate that the pandemic reduced global economic growth in 2020 by around 3.2 per cent. Global trade was estimated to have fallen by 5.3 per cent in the same period (US Congressional Research Service, 2021). However, the Organisation for Economic Co-operation and Development (OECD) reported that global gross domestic product (GDP) rebounded 5.6 per cent in 2021 and predicted that “global growth would move along at a brisk pace of 4.5% in 2022, moderating to 3.2% in 2023” (OECD, 2021, p. 1). Notwithstanding these growth predictions by the OECD, the economic situation remains highly fluid for most countries and regions. In particular, the prolonged nature of the pandemic has affected the global economy beyond traditional measures and with potentially long-lasting repercussions. There are continuing risks to a sustained global recovery posed by a resurgence of infections and inflationary pressures “associated with pent-up consumer demand fuelled by an increase in personal savings” and “disruptions to labour markets, production and supply-chain bottlenecks, disruptions in global energy markets, and shipping and transportation constraints” (US Congressional Research Service, 2021, p. 2). Turning to the business sector, uncertainty about the length and depth of the COVID-19 pandemic induced crisis and its related economic effects continue to influence perceptions of risk and volatility in financial markets and corporate decision-making. Many business sectors continue to report adverse impacts of the pandemic such as subdued consumer demand due to ongoing restrictions, labour shortages and supply bottlenecks (McKinsey & Company, 2022). The COVID-19 pandemic is a major global crisis that has exacerbated pre-existing social, economic, ethical and governance problems while generating new challenges for accounting, accountability and governance mechanisms (Rinaldi, 2022). It is, therefore, critical that researchers examine how businesses have responded to these challenges, along with the relative effectiveness and other impacts of these initiatives, so that their findings can guide future decision-making and businesses can leverage the important lessons learned. At the time of writing, there has been little empirical work conducted examining the effectiveness of organizations’ management of the pandemic or governance structures and processes in relation to the crisis, an observation also noted by Rinaldi (2022). This reflects the time lag in reporting relative comparisons of organizational performance using various

COVID-19 and accounting, accountability and governance  451 measures such as profitability, risk management and disruption to supply chains. The following section provides an overview of the studies identified in our review and highlights their key findings and contribution to accounting, accountability and governance scholarship. We conclude the literature review with a discussion of the emergent common and salient themes identified in our review. A key commencing point is to recognize that well before the advent of the COVID-19 pandemic, there was a growing body of research examining the role of accounting in the context of natural disasters and large-scale catastrophes (see, for example, Lai et al., 2014; Taylor et al., 2014; Sargiacomo, 2015; Perkiss & Moerman, 2017; Sargiacomo et al., 2021). This genre of research should not be ignored in any evaluation of accounting, accountability and governance issues both during and following COVID-19. What is evident from this growing body of scholarship is that organizations, governments and communities are, for the most part, inadequately prepared to deal with significant disasters and crises. Consequently, responses to crises tend to be reactive, rather than pre-emptive, in nature. It is also apparent from this literature that management control systems are critical in supporting organizational responses to the crisis, because they enable coordinated responses, help reshape operational practices to successfully navigate the crises and assist in the identification of key indicators and results (Leoni et al., 2021). The following sections present an overview of the literature examining the impacts of COVID-19 according to the categories identified in our review. Studies on the Impacts of COVID-19 on Businesses This section commences with a critical review of two studies (Delfino & van der Kolk, 2021; Safari et al., 2022) that explored the response of Big 4 international accounting firms to the pandemic. It then analyses other studies (Passetti et al., 2021; Velayutham et al., 2021) that focussed on the challenges manufacturing or service firms experienced in managing their management control (MC) systems and supply chains during the crisis. This is followed by a discussion of Salterio (2020), who provides a historical analysis of the pandemic drawing on lessons learned from the Spanish flu pandemic of 1918–20 and their implications for contemporary businesses extrapolated to the current pandemic. The section concludes with an examination of the impact of the pandemic (Elmarzouky et al., 2021), together with the impact of social media posts pertaining to the pandemic (Lazzini et al., 2022), on stock prices. Delfino and van der Kolk (2021) carried out a field study of changes in MC practices in professional service firms in Italy by conducting interviews with employees of these firms. Their main findings were somewhat concerning. They found as a response to the shift to remote working, firm managers made various MC-related changes that were perceived as being designed by management to increase surveillance of employees. These included increased frequency of online meetings and use of technologies to monitor employees from a distance. Interviewees felt that the additional meetings were largely unproductive and could easily have been avoided. Junior employees, in particular, perceived that some of the meetings were intended to “monitor” them. For example, one employee indicated that she had a scheduled meeting with her manager every weekday morning at 9.00 am. Employees reacted to this by endeavouring to ensure that they were noticed by their superiors, for instance by working overtime. Such practices raise questions about employers’ trust of their employees and an inherent scepticism about whether productivity can be maintained in a virtual environment. Delfino and van der Kolk (2021) also found evidence suggesting

452  Handbook of accounting, accountability and governance the presence of increased stress levels among employees, changed perceptions of hierarchies and a weakened sense of relatedness with others in the organization. On a more positive note, Delfino and van der Kolk (2021) reported that the majority of the interviewees indicated that they had experienced increased autonomy during lockdown, which can be important to many employees. Overall, these findings have several accounting and control implications, including how environmental changes can translate to MC changes at lower levels of organizations, and how such changes can adversely impact employee behaviour and motivation. Clearly, many employers were struggling and/or unwilling to devise a MC system that appropriately incorporated the virtual environment flowing from COVID-19 restrictions. However, managers who provided more autonomy to their employees and, thereby, employed less stringent measures of MC, were likely to have team members who appeared to be more motivated. Safari et al. (2022) offered insights into the response of a Big 4 international professional accounting services firm to the COVID-19 crisis vis-à-vis moral considerations. The authors adopted a qualitative approach that involved an interpretative textual analysis of the COVID-19 responses of the Big 4 firm examined in the study. Their study presented two vignettes in which they problematized aspects of the actions and ethical-social contribution of the firm which was heavily impacted by the global pandemic. Their study’s findings reveal examples of depersonalization and dehumanization, in addition to excessive distancing between the “doing” actors and individuals who bore the consequences of those actions. These approaches have been found to numb moral impulse and encourage immoral treatment of employees and others. Their vignettes indicated that these tactics led to dehumanizing employees into resources that perform “value-add” tasks for the organization, consonant with neoliberal ideologies. They also revealed that the firm’s accounting staff were treated fundamentally as business costs. In their interpretation, this created the context for the swift shedding of jobs without the need to sufficiently address the calamitous consequences for people and society. Drawing on accounting delineation debates, the paper called for societal dialogues about reshaping the “official” accountings of events. From an accountability perspective, the study’s findings raise worrying concerns about the narrowness of stakeholder definitions within the leadership of the accounting Big 4. Employees are an important stakeholder in these firms, yet their interests were heavily subjugated to those of partners who were more focussed on maintaining their profit shares than on looking after the welfare of their employees during the COVID-19 crisis. This goes against a proposal for a broader definition of accounting as “a technical, social and moral practice concerned with the sustainable utilisation of resources and proper accountability to stakeholders to enable the flourishing of organisations, people and nature” (Carnegie et al., 2021a, 2021b). Another study, however, provides an interesting counterpoint to Delfino and van der Kolk (2021) and Safari et al. (2022). Passetti et al. (2021) conducted video interviews with top and middle-level managers from a large food retail cooperative operating in Italy who were directly involved in handling the response to the COVID-19 crisis. Their study aim was to analyse how MC support an organization’s response to the COVID-19 pandemic lockdown. The researchers drew on the distinction between organic and mechanistic MC (Chenhall, 2003; Ylinen & Gullkvist, 2014). Mechanistic controls “rely on formal rules, standardized operating procedures and routines. Organic systems are more flexible, responsive, involve fewer rules and standardized procedures and tend to be richer in data” (Chenhall, 2003, pp. 131–132).

COVID-19 and accounting, accountability and governance  453 Passetti et al. (2021) found that both organic and mechanistic MC mechanisms were employed in their case study and these enabled an immediate response to, and management of, the crisis. The controls evolved rapidly, as individual managers and specialized teams used existing controls, in addition to newly designed and implemented controls, to deal with unplanned events. There was no opportunity, however, for a general re-design of the entire control system because the different control mechanisms evolved and were used within various organizational units to rapidly respond to different needs. In the organization studied in Passetti et al. (2021), the use of various types of controls supported employees’ health and safety coordination, a tight monitoring of financial performance and social interventions in support of the local community. At an organizational level, the MCs facilitated a tight internal coordination of, and gave visibility to, the occupational health and safety objectives, supported the redefinition of different operational practices and monitored the financial and pandemic-related results. At a social level, the MCs facilitated the implementation of several actions for the local community through direct collaboration with non-profit associations and municipalities. Financial results were compared with previous financial goals and targets. The personnel controls were less mobilized, as most of these controls were not a direct response to the pandemic, except for online COVID-19-related training activities. As Passetti et al. (2021) focussed on management perspectives of the MC systems, however, there was no material consideration of employee surveillance or monitoring. The only monitoring that was mentioned by interviewees was that in relation to various measures of organizational performance against pre-set goals. From an accountability perspective, this study found that MC systems rapidly evolved to deal with challenges created due to the COVID-19 crisis. This enabled the organization to adapt and respond to the constantly changing conditions. Velayutham et al. (2021) had an entirely different focus in their study of MC systems to the two previously discussed studies. They undertook a case study of Fisher and Paykel Healthcare to examine the disruptive effects of COVID-19 on supply chains and the role of accounting information in managing disrupted supply chains. These disruptions were especially salient for the selected organization in the study, as they faced an unprecedented rise in demand for their acute respiratory medical devices. Velayutham et al. (2021) also made recommendations for better accounting disclosures and accounting research for supply chains of firms, such as identification of risks and uncertainties, and the associated impact and the use of accounting-integrated supply-chain systems in short- and long-term planning. The study’s key findings pointed to the COVID-19 pandemic affecting Fisher and Paykel Healthcare from both the supply-side (upstream) and demand-side (downstream) perspectives. On the supply side, the pandemic disrupted the supply of raw materials used in the manufacture of respiratory devices and the costs of importing such materials. On the demand side, it disrupted market logistics and customer demand. Both these aspects subsequently affected production. The study found that the COVID-19 crisis exposed the organization’s lack of supply-chain visibility and adequate planning and preparedness in the short, medium and long term. Looking at the role of accounting information in managing the Fisher and Paykel Healthcare supply chains more deeply, the study showed that MCs should be used by managers and shareholders to increase visibility across the supply chain and assist in planning and preparation for future disruptions. An important contribution of Velayutham et al. (2021) was to create awareness of how accounting can play an informational role during a crisis by notifying managers and shareholders of the risks and uncertainties created by unprecedented external shocks

454  Handbook of accounting, accountability and governance and their potential impacts on the supply chain of firms. Managers and shareholders can also use accounting information to develop more agile, resilient and robust supply chains to better withstand future disruptions. Salterio (2020) adopted an evidence-based research synthesis to draw on historical economic evidence about the Spanish flu of 1918–20 and various pandemic econometric models that could be used to quantify the potential effects of the COVID-19 pandemic in the early stages of the North American shutdown. He examined the effect of the pandemic on economic GDP at both a global and national level. The study focussed on exploring how accounting can be mobilized to assist managers in organizational planning in responding to pandemics. The planning and budgeting process was identified as forming an important arm of organizational accountability and governance. Salterio (2020, p. 570) posited that “a deeper understanding of the Spanish flu by government policy makers, particularly in the US, the UK and Sweden, could have reduced the severity of the international impacts of COVID-19”. The author stressed that organizations and managers should assume that the COVID-19 pandemic will continue to have implications for up to three years, rather than rely on vague hopes and assurances that it will be solved within the short term. Elmarzouky et al. (2021) investigated whether COVID-19-related information was associated with a higher level of performance disclosure in the annual reports of all non-financial firms included in the UK Financial Times Stock Exchange (FTSE) all-share index. They also examined the moderating effect of corporate governance on the relationship between COVID-19 and performance disclosure using three governance mechanisms: board size, board independence and gender diversity. Their findings showed a significant positive association between the level of COVID-19 disclosure and performance disclosure in annual reports. They also found that board independence and gender diversity played a crucial role in the relationship between COVID-19 disclosure and firm performance disclosure. Interestingly, the authors did not find any moderating effect of board size in enhancing the relationship between COVID-19 and performance disclosure. Elmarzouky et al. (2021) argued that attention should be paid to governance mechanisms to enhance response to a COVID-19-like shock, and performance disclosure in organizations’ annual reports. Lazzini et al. (2022) analysed the relationship between social media and stock market trends during the first phase of the COVID-19 pandemic. They found a significant relationship between tweets on a particular day and the closing price of the London stock exchange index known as the “FTSE MIB” during the first phase of the COVID-19 epidemic. The authors concluded that in an emergency, social media, as an expression of users’ feelings and emotions, can generate a state of hyperreality whereby fear and anxiety become the predominant feelings of market participants. The study also confirmed the role of social media in predicting stock market volatility. This study has important implications from an accountability perspective, as organizations need to understand and fully appreciate the power of social media to move markets. Accordingly, during times of crisis, organizations need to provide up-to-date and timely disclosures of the impact of the crisis on their operations and financials, or risk their stock price being subjected to increasing volatility as markets become unstable and speculation becomes commonplace and a concern. This risk is exacerbated by social media which allows users to publish and share messages without any filter and mediation, resulting in a hyperreality generated by highly subjective elements.

COVID-19 and accounting, accountability and governance  455 Studies on the Impacts of COVID-19 on Governments This section commences with four studies focussed on the UK government. The first by Ahmad et al. (2021) examined how government targets could be set and operationalized using governance mechanisms. The second by Heald and Hodges (2020) analysed the impact of the COVID-19 pandemic on UK government finances. The third by Ahrens and Ferry (2021) explored the accounting and accountability practices of the UK government’s response to COVID-19. The fourth by Haynes (2020) offers a critique of the UK government’s response to the COVID-19 pandemic and highlights some of the egregious inequalities exposed within UK society by the crisis. The next three studies examined the communication strategies employed by various governments. De Villiers and Molinari (2022) examined the communication strategies of the New Zealand prime minister. Bui et al. (2022) explored the critical role of rhetoric in developing and justifying the New Zealand government’s COVID-19 lockdown strategy. Landi et al. (2022) investigated the use of social media by health agencies during the COVID-19 outbreak in Italy, the UK and New Zealand. The section concludes with two studies examining how accounting systems and information were used during a pandemic. First, Parisi and Bekier (2022) explored the role of performance management systems as technologies of governing to evaluate and manage the effects of the COVID-19 pandemic in six cities in Europe. Second, Antonelli et al. (2022) examined how accounting data was used by the Italian government to justify measures during the pandemic that restricted personal freedoms. Ahmad et al. (2021) drew upon various UK government policy documents and other publicly available materials to explore how regimes of governing practices were linked to the underlying policy rationalities of the UK government’s COVID-19 testing policies. These testing policies provided a means for governing at a distance, including how targets could be set and operationalized. Virus testing was viewed as a classification scheme adopted by the government as an accounting technology integral to the pandemic response strategy. In essence, testing performed four key roles for government: it helped enforce compliance; it enabled monitoring and control of communities; it provided a form of performance measurement; and it enabled analysis and presentation of outcomes for interventions. Their research revealed that COVID-19 testing performed the dual role of inscription for the government’s performance and classification for the pandemic risks. Such roles guided two major aspects of the government’s COVID-19 response strategy: (1) the day-to-day individual and community-based risk assessments and health (safety) interventions; and (2) the country’s diagnostic infrastructure (capacity) to respond more effectively to pandemics. During COVID-19’s early phases, it appears that the testing’s inscription role was shaped by political considerations more than science. Ahmad et al. (2021) showed that accounting for COVID-19 infections, transmission and prevalence was assisted through testing systems, and this enabled the government to coordinate responses to physically distanced locations. In addition, they found that accounting for COVID-19 through testing also influenced investment decisions in health (particularly diagnostic capacity) and scientific research. The authors argued that the inclination towards economic and fiscal concerns might jeopardize the capacity for effective pandemic (and other emergencies) preparedness and hence undermine the necessary public health response, with implications for the economy.

456  Handbook of accounting, accountability and governance Heald and Hodges (2020) analysed the impact of the COVID-19 pandemic on UK government finances and, in so doing, considered four modes of government accounting: (1) financial reporting; (2) statistical accounting; (3) budgeting; and (4) fiscal sustainability reporting. The authors noted, with concern, the dramatic effect of the pandemic on UK government finances and debt levels. They also highlighted the tensions in strategic public policies that have fiscal implications. These included the tension between public well-being and economic recovery, and tensions between national, devolved and local responses in both public health and financial support. Their findings showed that statistical accounting dominated government attention during the pandemic “because of reporting speed and issues of international comparability and the market credibility of government” (Heald & Hodges, 2020, p. 793). These statistics were produced by a government agency and covered areas such as expenditure and mortality rates from COVID-19. In a governance and accountability sense, the reliance on statistics showed that they were used as a primary mechanism to justify and legitimate to constituents, government actions during the pandemic. Ahrens and Ferry (2021) explored the accounting and accountability practices of the UK government’s response to COVID-19, focussing on the first wave of the pandemic up to late 2020. The authors’ examination of government accounting and accountability practices was based on an analysis of the news media and official reports from government departments, Parliament select committees and the National Audit Office, among others. Their examination of government accounting and accountability practices applied Foucault’s notion of apparatuses of security (Foucault, 2007). This notion has as its essence his concept of “governmentality”, which means power emanates not only from the hierarchical, top-down power of the state but also from forms of social control inside disciplinary institutions such as schools and hospitals (Foucault, 2007). The ultimate aim of government as expressed by Foucault (2007) is the maintenance of a well-ordered and happy society. The government’s means to this end is its “apparatuses of security”; that is, to create a scenario where the techniques used provide society with a sense of economic, political and cultural well-being. Ahrens and Ferry (2021) suggested that an apparatus of security perspective constitutes COVID-19 as a primary object of governing which the state deals with through accounting, economic and statistical calculative practices (including from epidemiologists and healthcare specialists). Their research shows that an important role for accounting is in the process of enabling the government to gauge the extent of the crisis and produce calculations to underpin its response, a process Foucault called “normalization”. The authors’ findings suggest that, conceptually, accountability should be added to the object–subject element of Foucault’s apparatuses of security because of its significance for governments’ ability to pursue crisis objectives that require popular assent. The authors stated that an implication of their study is that policymakers must ensure that the COVID-19 response is underpinned by accountability that covers financial, value-for-money and fairness aspects. To not achieve these outcomes threatens the loss of community support. It is also imperative that an audit of value for money and fairness takes place to maintain accountability. Haynes (2020), in her critique of the UK government’s response to the COVID-19 pandemic, suggested that their lack of planning for the economic impact of the disease resulted in the implementation of hastily devised interventions. Furthermore, according to Haynes (2020), the UK government’s lack of technology development resulted in a failure of calculative practices to track and trace the virus and their lack of leadership resulted in mixed messages about the seriousness of the virus and expected behaviour being communicated to the public.

COVID-19 and accounting, accountability and governance  457 Of particular concern was the study’s evidence demonstrating the widening of inequalities in respect of income, disability, race and gender due to the COVID-19 pandemic with potentially lasting effects. The implications from this study are that robust accounting data is essential in understanding the impact of the pandemic and associated inequalities. In particular, Haynes (2020, p. 640) states that: Supporting decision-makers and activists with appropriate data to counter poverty, age, racial, gendered and dis/ableist discrimination, inequality and lack of care is, therefore, an important driver for accounting metrics and research. Within organizations, accounting metrics, and the profession more broadly, can aid holding businesses and organizations to account for the care they offer to their employees: paying a living wage, supporting inclusivity, offering flexible working hours and methods, moving away from unwarranted short-term, zero-hours contracts which fuel poverty and precarity. Understanding the role of accounting in exacerbating, perpetuating and challenging experiences of inequality and the role of care is also essential if such inequalities are to be addressed.

In another study, de Villiers and Molinari (2022) undertook a different approach to the previous studies in their examination of the communication strategies of New Zealand prime minister, Jacinda Ardern, during the COVID-19 pandemic to extract lessons for organizations. Drawing on legitimacy theory, their study contrasted Ardern’s communications with those of the president of the United States, Donald Trump. The authors’ findings show that clear, consistent and credible communications, backed up by open access to the numerical data that underlie the decisions, ensured that these decisions were seen as legitimate, enabling citizens/ stakeholders to perceive that their leaders were accountable. This approach also enhanced community support for the necessity of measures taken. The authors contrast this approach with that of the then US president, which they characterized as attempting to withhold information, blaming others, refusing to acknowledge that there were problems and avoiding addressing problems, leading to nonconformance by citizens/stakeholders. An implication from this study is that business leaders could apply these lessons to the management of crises in their specific organizations to ensure “buy-in” from employees and other stakeholders. The de Villiers and Molinari (2022) study contends that leaders and organizations who follow these communication strategies can then emerge in a stronger position than before the crisis. Bui et al. (2022) explored the critical role of rhetoric in developing and justifying the New Zealand government’s COVID-19 lockdown strategy. The authors analysed government documents and media releases before, during and after the lockdown from March to June 2020 to reconstruct the government’s rationale. Their major findings identified that by emphasizing a sense of urgency, need to act and a rationale steeped in the gravity of the situation and public health priorities, the government was able to obtain widespread support for its actions. This support was initially reinforced by selective use of health-based measures such as declining infection rates. However, support for the rhetoric wavered post-lockdown as an absence of credible and impactful measures of performance became apparent to the public. Specifically, the post-lockdown disclosure of the numbers of daily new infections, rather than testing or contact tracing performance, offered little insight into the government’s ability to prevent community transmission. On the other hand, however, the numbers helped reassure the public that matters were under control. The authors considered the absence of robust health-based logos (measures that assist in appeals to reason) and the economic costs of the lockdown to justify the government response to be concerning.

458  Handbook of accounting, accountability and governance A key implication of Bui et al. (2022) is the unsustainability of rhetoric in the absence of reliable financial and non-financial information. For governments to maintain widespread support for unpopular decisions, such as the introduction and continued persistence of lockdowns, they need to continue to provide ongoing evidence of the effectiveness of such preventative measures in protecting public health. Governments also need to employ measures to limit the associated economic fallout. Landi et al. (2022) investigated why and how public health agencies employed social media during the COVID-19 outbreak to foster public engagement and dialogic accounting. The authors analysed the official Facebook pages of the leading public agencies for health crisis in Italy, the UK and New Zealand. They collected data on the number of posts, popularity, commitment and followers before and during the outbreak. The authors also performed a content analysis to identify the topics covered by the posts. Their findings provided evidence of social media being extensively used as a public engagement tool in all three countries under analysis, but because of legitimacy threats and resource scarcity, it was used in New Zealand only as a dialogic accounting tool. Their findings suggest that the use of official social media channels by public administration can be beneficial in reducing “fake news” during a health crisis when emotions run high and conflicts may be strengthened by fear and anxiety, and exposure to misinformation can compromise crisis management. A contribution of Landi et al. (2022) is that it was one of the first studies to examine the nature and role of social media as an accountability tool during global public health crises. The power of social media to form and reshape views and become a mechanism for governments to effectively discharge their accountability to the public is apparent among the findings of this study. In particular, the authors highlighted how social media can be a forceful mechanism to engage stakeholders in a context where fear and anxiety may otherwise flourish. Social media can be employed by government agencies to counter misinformation from questionable sources and help govern the flow of information that influences the accountability relationship between these agencies and the public. Parisi and Bekier (2022), based on fieldwork performed in six European cities involved in a large European project at the time, explored the role of performance management systems as technologies of governing to evaluate and manage the effects of the COVID-19 pandemic. Specifically, the authors explored the role of key performance indicators (KPIs) as technologies of government guiding these cities during the period of the COVID-19 pandemic, and how these technologies and practices of governing gave rise to specific forms of visibility by making specific aspects of the pandemic calculable. The study’s findings illustrated how the KPIs created to translate the European and the cities’ programmes also played a similar role in the assessment of the ongoing COVID-19 crisis. In fact, both sets of KPIs rendered certain characteristics of COVID-19 visible and subject to assessment and evaluation, such as their impact on budgets and health expenditure. This enhanced visibility made the influence of the COVID-19 pandemic calculable and governable, and so helped identify distinctive possibilities for intervention. From an accounting and accountability perspective, the main contribution of Parisi and Bekier (2022) was to highlight the power of accounting to influence the specific areas of the crisis to receive the most attention, such as financial impacts, sometimes at the expense of other areas of concern or even alarm such as social influences. Further work is needed to explore how social and other effects might be incorporated into KPIs.

COVID-19 and accounting, accountability and governance  459 Antonelli et al. (2022) examined how accounting and accounting experts provided important contributions to the Italian government’s strategy to address the COVID-19 emergency in 2020, especially in terms of implementing new rules of conduct and providing justification for penetrating interventions in the life of individuals. The authors concluded that the accounting data provided essential contributions to the government’s strategy that “sought to spread disquiet and uncertainty in the population to ensure compliance with the strict rules in place, thereby sustaining the management of the country under a state of exception” (Antonelli et al., 2022, p. 120). The major implication of this study is how accounting information may be used to provide justification for measures that are promoted as provisional, but which have enduring effects such as restricting people’s individual rights and creating a permanent state of exception that significantly increases government prerogatives. As such, this would constitute an over-reach of government powers and breach government accountability to its citizens. For example, it may result in a permanent state of exception where individual rights are suppressed, or it may mean that the usual checks and balances and protections of civil rights which characterize a democracy are withdrawn in view of the spreading pandemic. Studies on the Impacts of COVID-19 on Hospitals and Charities This section discusses two studies that examined the role of accounting in hospitals and a food relief charity in facilitating their response to the COVID-19 crisis. Huber et al. (2021) studied the role of accounting in the management of the COVID-19 pandemic in five German hospitals. They focussed on accounting’s role in organizing activity with their key research question stated as: “What role does accounting play in making the COVID-19-crisis actionable and plannable within organisations?” (Huber et al., 2021, p. 1447). The researchers employed an ethnographic approach that included three rounds of interviews, observations of meetings and document analyses. Huber et al. (2021) found that actors repeatedly used a central set of indicators or KPIs (for example, the number of beds for COVID-19 patients) when adapting a healthcare infrastructure to the pandemic. Accounting figures, statistics and numbers allowed actors to problematize prior configurations, organize processes to make uncertainty plannable and virtualize changes to resume treating non-COVID-19 patients. Hence, accounting played a limited, yet important role in the hospitals’ management of the early phases of the COVID-19 crisis. During the initial months of the pandemic, an indicator (the number of COVID-19 beds in use) was used to problematize an already existing infrastructure for care, calling into question standard operating procedures and the physical layout of hospital operations. During the height of the first wave, this indicator was further elaborated into a set of indicators. The hospitals used this set of indicators to transform the uncertain and ambiguous situation of a pandemic into plannable actions, specifically concerning staff and materials. These measures allowed the hospitals to advance their staff planning procedures and find new solutions for procuring materials. In the final months of the first wave, a KPI, the number of hospital beds being used by COVID-19 patients, was used to virtualize the emergency configurations to facilitate a gradual return to “normal”, while also maintaining the capacity to manage future waves of admissions of COVID-19 patients. An implication of the Huber et al. (2021) study for accountability is to show how a relatively stable infrastructure can be changed rather quickly, not through governmental intervention, but at the local organizational level based on a selection of indicators. The authors also demonstrated how accounting impacts

460  Handbook of accounting, accountability and governance an organization at the local level before taking on the economizing function emphasized in previous literature. Kober and Thambar (2021) explored the role of accounting in managing a food relief charity’s financial resilience during the COVID-19 crisis. The authors applied a financial resilience framework (Barbera et al., 2017), which identified four dimensions: environmental conditions (economic, institutional and social factors that impact an organization’s perceived vulnerability and its capacity to cope with a crisis), perceived vulnerability (internal factors such as financial reserves and debt levels, and external factors such as reliance on donations), its anticipatory capacities (availability of tools and capabilities that enable organizations to better identify and manage their vulnerabilities and recognize potential shocks before they arise) and its coping capacity (organizations’ buffering, adaptive and transformative capacities). The study’s results showed how accounting practices such as budgeting, forecasting and performance reporting were integral to the organization’s anticipatory and coping capacities and, therefore, provided financial resilience to navigate the pandemic crisis. They also demonstrated the importance of having accounting practices established prior to a crisis and accounting information forming part of managers’ discussions. Finally, they established that financial reserves play a critical buffering capacity role in the event of short- to medium-term operating losses being incurred by an organization. An important accountability implication of their study is the importance of keenly documenting the various roles of accounting to facilitate managers’ understanding of the impacts of a crisis, the management of uncertainties and, ultimately, to assist in envisaging and constructing alternative realities that enable an organization to successfully navigate a path forward. Studies Examining Organizations’ Risk Management and Their Disclosures This section begins with a discussion of five studies examining the disclosures of organizations in relation to the impacts of COVID-19 on their businesses. Carnegie et al. (2022a) examined the COVID-19 pandemic risk disclosures of Australian public universities. Crovini et al. (2022) focussed on examining how accountability and risk reporting practices could be tailored during and after a global pandemic. Brennan et al. (2022) assessed the quality of the COVID-19 profit warnings of companies. Abhayawansa and Adams (2022) evaluated adequacy of climate- and pandemic-related risk reporting in three industries that were both significantly impacted by the COVID-19 pandemic and at risk from climate change. Ahmad et al. (2022) examined how the narratives of non-governmental organizations portrayed the vulnerability of workers in global clothing supply chains during the COVID-19 crisis. The next five studies examined the linkages between the planet and COVID-19. Cho et al. (2022) explored the interconnected nature of the planetary ecosystem and the COVID-19 pandemic. Larrinaga and Garcia-Torea (2022) conducted an ecological critique of accounting, contending that the conceptual separation between nature and society renders accounting for the circular economy and the COVID-19 pandemic problematic. Tregidga and Laine (2022) considered the implications of the environmental crisis and the COVID-19 crisis for environmental accounting, while Zharfpeykan and Ng (2021) reflected on the responses of the Global Reporting Initiative (GRI) to the pandemic and the applicability of the GRI framework to COVID-19 and, more generally, crisis situations. Finally, Parker (2020) examined the interplay between offices and corporate social responsibility.

COVID-19 and accounting, accountability and governance  461 Carnegie et al. (2022a) focussed on COVID-19 pandemic risk disclosures in a sample of annual reports of Australian public universities, specifically the eight public universities domiciled in the State of Victoria. They argued that as these universities generally relied heavily on fee-paying onshore overseas students, which were significantly impacted by international border closures, leading to cash flow difficulties and the risk of deficits. The analysis of the risk disclosures of this sample of public universities was essential to understanding the COVID-19 crisis and the implications for future organizational change. The authors found that disclosures associated with COVID-19 were minimal and generally of low quality. These low-information-content disclosures contrasted with media reports pointing to significant income loss and substantial cost-cutting, including employee redundancies, which were generally aggressively applied. The researchers also highlighted that financial and social risk disclosures about income from fee-paying onshore overseas students were virtually non-existent. They concluded that universities were either unaware of, or reluctant to discuss, the potential financial shocks that stemmed from the crisis and to identify the staff and student impacts, which tended to be unfavourable. A key implication of the Carnegie et al. (2022a) findings for accountability is evidence of universities’ lack of transparency concerning material risks. Financial reporting and other disclosures are a key element of robust governance of organizations. This study identified public universities in Victoria as appearing to have abrogated this important obligation to their stakeholders in confronting the financial crisis. Alternatively, Carnegie et al. (2022b) explored the severe financial and social risks related to COVID-19, along with their immediate impacts and the likely future impacts. These authors considered “how many of these risks are the inevitable consequence of the ‘accountingisation’ of Australian public universities” (Carnegie et al., 2022b, p. 1783). Crovini et al. (2022), in essence, was a conceptual paper focussed upon examining how accountability and risk reporting practices could be tailored during and after a global pandemic. The authors contended that the critical challenge is to decompose the pandemic into its components to recognize and assess its effect on previously identified risk categories; for example, employee risks such as large-scale staff absences due to COVID-19 illness, and compliance risks such as potential breaches of occupational health and safety laws flowing from misunderstandings about rule changes. They argued that this assists in facilitating a better understanding by users of the principal risks that an entity is exposed to, and the changing priorities brought about by the COVID-19 outbreak. The authors also contended that, in times of an evolving crisis, dynamic accountability is critical. Essentially, this means organizations need to closely monitor developments and the resulting information needs of stakeholders. Often, this requires timely and frequent disclosures to maintain legitimacy. Crovini et al. (2022) identified that to match their accountability in uncertain times, organizations need to address their stakeholders’ new and changing information needs. Ad hoc disclosures, and the linking of risk management and reporting to their business models, improves the risk recognition and assessment practices and the meaningfulness of the disclosed information. The authors also highlighted possibilities for moving risk reporting towards becoming more accountability-based reporting whereby it is designed to fulfil the information needs of relevant stakeholders and responsibility networks. The authors argued that effective disclosure can be designed through dialogue with interested groups. The Crovini et al. (2022) study has important implications for improving organizational accountability. It requires organizations to adjust their risk management and reporting pro-

462  Handbook of accounting, accountability and governance cesses. Engaging more regularly with stakeholders, involving them in the risk recognition process and disclosing ad hoc information by means of several channels in a timely and adequate manner are also necessary. For the latter to be possible, an enhanced and ongoing risk recognition and assessment process is required. More specifically, these adjustments require organizations to replace risk reporting based on the published annual report, with an engagement in an evolving dialogue with groups of stakeholders. For example, stakeholders could identify what disclosures are relevant for their needs, relay this to the organization on a timely basis, which then discloses this information when and where it is needed through social media or other dedicated and flexible channels. Risk reporting undertaken in this fashion provides an opportunity to engage with, and legitimize, the organization’s actions with stakeholders, and to respond to wider public concerns through improved accountability. Brennan et al. (2022) developed an analytical framework for assessing the quality of the COVID-19 profit warnings of companies. Drawing on a sample of 160 profit-warning documents, they found that “companies regress to silence when investors most need guidance” (Brennan et al., 2022, p. 2), with low levels of disclosures and use of cautious and ambiguous language apparent. The authors contended that these results reflect minimal regulatory guidance about this form of corporate reporting. The Brennan et al. (2022) findings have important implications for accounting and accountability. A major purpose of corporate reporting is to reduce information asymmetry between managers and investors. Investors require immediacy and, therefore, profit warnings are a critical means of communication. This was particularly the case during the COVID-19 crisis due to the increased uncertainty and risk the pandemic posed. Accordingly, to discharge their accountability appropriately, management must explain the assumptions made and the risks and sensitivities involved. Concerning accounting, the speed with which the COVID-19 crisis impacted organizations meant that there was little regulatory guidance available as to how best to convey these impacts and risks to investors. The content of profit warnings is currently largely unregulated, and due consideration is needed to reform this area to improve the timing and nature of such corporate disclosures. Abhayawansa and Adams (2022) evaluated the non-financial frameworks of large, international companies with respect to risk reporting. Their analysis focussed on the adequacy of climate- and pandemic-related risk reporting in three industries that were significantly impacted by the COVID-19 pandemic and at risk from climate change: namely, the airline, hotel and cruise industries. The authors argued that pandemic and climate risks are related in several key ways. First, both are concerned with biodiversity loss and the possible emergence of new zoonotic infectious diseases in humans. Second, both are physical shocks that result in a range of socioeconomic impacts. Third, both are systemic risks in that they generate a series of effects that create severe instability in existing systems. Abhayawansa and Adams (2022, p. 710) found that risk reporting in relation to pandemics and climate change was “woefully inadequate”, with very little consideration given to risks associated with pandemics. The authors argued that the COVID-19 pandemic highlighted organizations’ lack of preparedness for global risks of a substantive nature, including ways in which their impact could be mitigated. They therefore called for businesses to shift their “focus from ‘creating value for the organisation’ to simultaneously ‘creating value for the organisation, environment and society’, thus, elevating their environmental, social and governance (ESG) performance” (Abhayawansa & Adams, 2022, p. 711). The authors argued

COVID-19 and accounting, accountability and governance  463 that the disclosure of ESG risks is an integral aspect of organizational accountability and stewardship, and a major way of reducing uncertainty and information asymmetry in the capital markets. They also argued that disclosure of ESG risks also facilitates the management of long-term investment risks and enables governance practices to be scrutinized by all stakeholders, including the public. Adams and Abhayawansa (2022) also called for intensified efforts as businesses rebuild to incorporate ESG considerations in relation to accounting, accountability and governance. The authors argued that meaningful management and mitigation of climate and pandemic risks requires a “systems thinking” approach and a redefining of the concept of materiality for non-financial frameworks, for only then will organizations adequately consider ESG risks and their long-term effects on society and the environment, and consequently on the longevity of organizations. Similar to Adams and Abhayawansa (2022), Ahmad et al. (2022) adopted an ESG disclosures perspective and examined how the narratives of non-governmental organizations (NGOs) portrayed the vulnerability of workers in global clothing supply chains during the COVID-19 crisis. Their research analysed the rhetoric in global clothing retailers’ and NGOs’ narratives during the first seven months of 2020. The authors found that retailers employed rhetorical strategies during this period to legitimize irresponsible actions, while NGOs embraced forms of counter-rhetoric in an attempt to delegitimize the retailers’ logic, stressing the role of neoliberalism in the purported worsening of the situation. Their analysis of NGO narratives and persuasive arguments during the COVID-19 pandemic revealed fundamental flaws which allowed global retailers to diffuse the social responsibility practices they had adopted via disclosures, social audits and codes of conduct. Ahmad et al. (2022) concluded that, during the pandemic, neoliberalism had taken a new turn by disregarding all kinds of social responsibility practices, and that retailers were irresponsible and exploited the vulnerability of workers in global supply chains and elsewhere. The implications of this study for accountability are that despite many efforts to render fashion retailers more accountable to society at large, they continue to use rhetoric to escape full accountability for their actions in exploiting workers from developing nations. Cho et al. (2022), in their analysis of the interconnected nature of the planetary ecosystem and the COVID-19 pandemic, called for further academic research in four interrelated but distinct areas: (1) the adoption of a systems thinking approach; (2) the use of science-based targets to inform goal setting; (3) rethinking existing accountability mechanisms; and (4) the incorporation of broader and more holistic educational approaches. Of particular interest for this chapter were the comments made about the current accounting and accountability mechanisms employed in economic stimulus programmes, which the authors argued were inadequate because they tended to lack effective oversight and control over the activities being mobilized, and were generally subordinated to economic goals. They also stated that traditional environmental accounting approaches were of limited value in achieving major long-term sustainability change. As an example of this limited value, they cited the European Union Green Deal as being an imperfect response to environmental crises because of its purported lack of accountability mechanisms. Larrinaga and Garcia-Torea (2022), in an ecological critique of accounting, contended that the conceptual separation between nature and society renders accounting for the circular economy and the COVID-19 pandemic problematic. The authors suggested that a critical account of the COVID-19 pandemic needs to include accounting representations in the con-

464  Handbook of accounting, accountability and governance struction of narratives about the virus. In particular, these authors suggested that “calculations of the costs caused by COVID-19 need to be connected to the ecological value of viruses to illustrate how the social and the biological worlds are inextricably connected” (Larrinaga & Garcia-Torea, 2022, p. 1). They called for researchers to adopt critical perspectives on accounting to actively participate in debates about how accounting technologies such as valuations and risk assessments inform narratives about resource usage and waste, and the “significant implications on how we conceive the relationship between humanity and the environment” (Larrinaga & Garcia-Torea, 2022, p. 1); for example, the approach to monetary valuations of the social cost of CO2 emissions. Tregidga and Laine (2022) argued that the environment is in crisis and raised concerns about the sustainability of the planet. They contended that the COVID-19 pandemic has created a context within which to consider what it means to respond to a crisis and how the environment might feature in any post-COVID recovery initiatives. The authors suggested that in an attempt to overcome the problems with short-term conventional accounting, constructing environmental accounting as accounting for the long term “potentially contributes to the construction of the environment as [it lacks urgency] and potentially enables its marginalisation” (Tregidga & Laine, 2022, p. 1). The key implication of this study is that for accounting to realise its potential as a “constitutive force, capable of participating in transforming preferences, decisions and behaviour in organizations and societies, environmental accounting needs to be about the short-term … if it is to recognize the urgent nature of the environmental crisis” (Tregidga & Laine, 2022, p. 1). Zharfpeykan and Ng (2021) reflected on the responses of the GRI to the pandemic and the applicability of the GRI framework to COVID-19 and, more generally, crisis situations. Using institutional, stakeholder and legitimacy theory, they assessed the GRI and the GRI framework from a business-as-usual perspective and a crisis perspective. These authors noted that the GRI framework, along with sustainability reports in general, provide guidance for reporting in uncertain environments and are an avenue for organizations to manage complexity. They also communicate to the stakeholders actions that have been taken to promote their interests. Zharfpeykan and Ng (2021) also highlighted gaps in GRI frameworks when reporting in crises situations as the GRI framework tends to frame economic, environmental and social issues as incremental problems rather than as more instant crises requiring urgent responses. In particular, the authors noted the absence or limited measures of organizational flexibility in managing uncertainty in relation to suppliers, customers and employees. Stakeholder theory finds these areas to be largely passively reported. Materiality and legitimacy theory question the ability of the GRI framework to manage two concurrent crises, namely climate change and COVID-19, in the current global environment. Based on their findings, Zharfpeykan and Ng (2021) called for reporting to be motivated by the needs of the vulnerable rather than powerful stakeholders and to drive proactive change. By proactive change, the authors meant initiatives and actions designed to improve future performance. They contrasted this with what they term passive reporting, which encapsulate reports solely on the organization’s current level of performance, and only indirectly encourages the firm to take further action. Our final paper with a risk management theme focussed on the interplay between offices and corporate social responsibility. Parker (2020) critically assessed the implications of the post-COVID-19 environment for office location, design and functioning. He focussed on associated efficiency and cost-control agendas in the context of government and community expectations regarding the discharge of corporate social responsibility. His study was analyti-

COVID-19 and accounting, accountability and governance  465 cal and drew on publicly available literature, documents and Web sources to inform his critical assessment. His key findings were that organizations face a challenge in balancing employee and public health and safety against capital expenditure and operation cost commitments to COVID-19 transmission prevention. He argued that the occupational health and safety element of corporate social responsibility suddenly achieved major strategic priority and profile for organizations and their offices. Overall, this collection of recent contributions to the literature reflected how the pandemic has, in some cases, brought about stronger and new emerging forms of engagement with stakeholders, and a widening in the contents, forms and discourses of accountability. In particular, they demonstrate the need to acknowledge and further explore the increasing role played by social media and digitalization in the accounting arena. These studies also highlight the need to rediscover the importance of assessing and reporting risk, which may become central to the accounting disclosure policies and strategies employed by the public and private sectors, not-for-profit and other social enterprises, and which may have significant operational, social and financial impacts if not coordinated and managed effectively. They also highlight the delicate balance between financial consideration and corporate social responsibility.

LOOKING FORWARD The prior research examining COVID-19 reviewed in this chapter has shown that organizations, businesses, governments and communities are largely unprepared to deal with significant large-scale disruptions and their responses tend to be reactive and adaptive, rather than anticipatory or transformational (Leoni et al., 2021). MC mechanisms were generally found to have played a critical role in supporting organizational responses to the crisis as they facilitated internal coordination, helped redefine operational practices and gave visibility to objectives and results (Passetti et al., 2021). However, accounting as a control and monitoring tool was found to be inadequate in areas such as supply chains (Velayutham et al., 2021). Prior studies also stressed the prominence of values, culture and institutional contexts in shaping accounting and accountability and the need to continue to explore the interplay between these elements and accounting and accountability systems (Leoni et al., 2021). Findings also showed a lack of comprehensive, high-quality disclosures around the impact of COVID-19 on operations and finances in some organizations and governments (Brennan et al., 2022; Carnegie et al., 2022a, 2022b) or even depict efforts that may obfuscate the real impacts in some cases (de Villiers & Molinari, 2022; Safari et al., 2022). In studies focussed on social media communications, some government agencies were found to have been able to employ social media successfully to keep the public informed and engaged in dealing with the crisis (Landi et al., 2022). We now draw some lessons from the various COVID-19 related prior studies published to date, to inform accounting, accountability and governance practices and processes going forward. The lessons and ways forward are grouped into five main categories: preparation and planning; effective communication with stakeholders during times of crisis; changes to MC systems during times of crisis; the changing work landscape; and the social, moral and sustainability aspects of accounting, accountability and governance.

466  Handbook of accounting, accountability and governance Preparation and Planning A key element to enable organizations to fulfil their accountability obligations is to strive to predict possible adverse scenarios and plan, where possible, ways to minimize their impacts to ensure the viability and sustainability of their operations. Based on the evidence presented in some of the above studies, several organizations failed in this area. For example, Carnegie et al. (2022a, 2022b) highlighted the vulnerability of Australian public universities to the heavy loss of fee revenue from international students as the international border to Australia closed in the first quarter of 2020. Several universities did not possess adequate buffers of financial reserves to continue their operations as before, resulting in mass redundancies and other forms of cost-cutting. These have impacted universities as a whole, and business schools in particular, with the accounting discipline potentially the most heavily impacted because of its heavy reliance on international student enrolments (O’Connell et al., 2023). The detrimental effect of these cost-cutting measures remains and presents a salient lesson that organizations need to conduct robust scenario forecasting, crisis management planning and adequate risk management disclosure. Diversification of revenue sources and possessing sufficient buffers for adverse events are also critical. It would seem that many universities were forced into severe cost-cutting because their planning and strategy formulation were grossly inadequate. Similar scenarios have also played out in the private sector as described in Safari et al. (2022), where Big 4 accounting firms laid off employees in the early to mid-part of 2020 to preserve partners’ profits. Effective Communication with Stakeholders During Times of Crisis Some studies (see, for example, Safari et al., 2022) pointed to the use of accounting and disclosures to justify or to hide inappropriate corporate actions. Going forward in time, this suggests that more needs to be done to ensure disclosures are not only relevant but also free from bias. Several of the papers addressed in this chapter highlight concerns with the quality, nature and extent of disclosures made by organizations during the COVID-19 crisis. For example, Ahmad et al. (2022) and Abhayawansa and Adams (2022) provided examples drawn from the private sector and de Villiers and Molinari (2022) from the government sector. These findings highlight the need for organizations to adopt improved accountability during times of crises to all stakeholders, not just the powerful ones in terms of influence, through the provision of high-quality and timely disclosures. The inadequate disclosures during the COVID-19 crisis highlighted in this chapter also have implications for standard-setters and regulatory agencies. A review of the current guidance on disclosures pertaining to significant events and/or profit warnings is urgently required to enable stakeholders to have a deeper and more timely understanding of the financial and other implications flowing from a crisis. Such lessons ought to be regarded as “silver linings” in the dark clouds of COVID-19. Not all of the evidence in the studies on COVID-19-related communication discussed in this chapter was adverse. Landi et al. (2022) showed that social media was effectively used by some government health agencies and others to provide up-to-date and detailed disclosures pertaining to the pandemic. This demonstrates that organizations, more broadly, can use social media as a dynamic and effective tool to keep stakeholders better informed about develop-

COVID-19 and accounting, accountability and governance  467 ments in the future, and to enhance public support for the introduction of important measures designed to preserve public health and the public interest, more generally. Similarly, several studies point to the role of accounting numbers and/or indicators in supporting government responses to the pandemic and the rising tension between health and economic well-being policies over time in many jurisdictions (see, for instance, Haynes, 2020; Heald & Hodges, 2020). Initially, governmental priorities in most jurisdictions were primarily focussed on protecting public health and safety, but the focus then shifted to re-establishing and reigniting economic imperatives, albeit at differing points in time. For all governments involved in the studies addressed herein, accounting and accountability mechanisms were vital in informing public policy and the development of responses initiated during the pandemic. Looking ahead, governments and their leaders need to be cognizant of the need for a clear, unambiguous and timely messaging to ensure that trust and public support is maintained, and that society does not become fractured, as was the experience in some countries. Changes to MC Systems During Times of Crisis Specific studies (see, for example, Huber et al., 2021) showed that accounting data helped to facilitate an appropriate allocation of resources based on the evidence provided to areas of need within hospitals and the medical system more broadly defined during the crisis. This provides an important lesson about the power of accounting to positively influence government and other agencies. In contrast to studies showing the positive influence of MC systems during the COVID-19 crisis, other studies such as Delfino and van der Kolk (2021) illustrated sub-optimal outcomes resulting from changes to organizations and their MC systems due to COVID-19. In particular, the perverse use of remote working technologies for surveillance of employees (Delfino & van der Kolk, 2021) is a lesson in relation to accountability that can be learned going forward. Changing Work Landscape Some of the studies reviewed in this chapter show that the COVID-19 crisis changed the world of work in a broad and dramatic fashion. Many of the changes are unlikely to be reversed, and these changes have implications for accounting, accountability and governance. For example, how do organizations provide a work environment that is safe, reliable, equitable and in sync with the expectations of stakeholders when a virtual or hybrid working environment suddenly becomes the new normal? How do organizations more appropriately and respectively deal with pressing needs to make unpopular decisions such as staff reductions, including retrenchments and other forms of cost-cutting, to maintain the sustainability of their organization? The evidence presented by Safari et al. (2022) in relation to large accounting firms, and Carnegie et al. (2022a, 2022b) in relation to public universities, to counter reduced work opportunities and revenue streams by rapidly cutting costs through mass retrenchments does not seem to be an ideal way to respond from a moral or an accountability perspective. It should also be recognized that remote and hybrid working environments can provide opportunities for the organization and its employees to thrive if managed well. Remote and hybrid working environments can result in improved employee satisfaction and increased efficiencies as staff are no longer required to undertake long commutes to work on a daily basis. Similarly, providing a work environment where staff feel valued and secure can provide

468  Handbook of accounting, accountability and governance positive outcomes not only for staff morale but also for productivity. These employee and efficiency measures, where generally favourable, are consistent with an organization discharging its accountability obligations satisfactorily. Social, Moral and Sustainability Aspects of Accounting, Accountability and Governance As noted earlier in this chapter, Carnegie et al. (2021a, 2021b) proposed a broader definition of accounting as a technical, social and moral practice. Yet many organizations in published studies examining the impacts of the COVID-19 pandemic appear to have overlooked the moral aspects when implementing approaches to deal with the pandemic. An exception would be Ahmad et al. (2022) who, in their examination of global clothing retailers’ responsibility to vulnerable workers in the COVID-19 world, concluded that disclosures on workers’ conditions during the pandemic period “exposes retailers’ lack of moral standing” (Ahmad et al., 2022, p. 221). Another exception was Safari et al. (2022) who, in revealing examples of depersonalization and dehumanization of employees of a Big 4 international firm, argued that the firm’s tactics “numb moral impulse and can encourage immoral treatment of employees and others” (Safari et al., 2022, p. 141). Looking ahead, there is significant scope for researchers to closely examine the moral dimensions of business decision-making in the post-COVID-19 world. An important aspect of accountability is to ensure that actions consider the interests of a broad range of stakeholders including suppliers, employees and the general public. It is therefore important that researchers call to account businesses and industries exhibiting abuses of social and/or moral obligations. For example, Australian public universities laid off an estimated 35,000 employees in 2021 (almost 20 per cent of their workforce) because of the effects of COVID-19, which was more than any other non-agriculture sector in the economy (Australia Institute Centre for Future Work, 2021). Yet subsequent events suggest that the financial impact of the pandemic on the higher education sector may have been less severe than previously anticipated (Ross, 2021; Campus Morning Mail, 2022). This raises important questions in relation to accountability, such as: what alternative measures could management have taken to avoid such a large social cost? Were financial systems and forecasts as robust as they could have been? What moral obligations do universities have to report significant risk exposures? There is also much scope for future studies to closely examine issues flowing from the COVID-19 crisis in relation to sustainability. Only a small number of related studies published to date have considered sustainability issues. For instance, Abhayawansa and Adams (2022), in evaluating the adequacy of climate- and pandemic-related risk reporting in three industries especially impacted by COVID-19, found that there was a focus on “financial materiality” or a narrow “investor perspective” that ignored broader interests in disclosures made (p. 730). This is concerning from an accounting and accountability perspective and warrants further investigation. Ahmad et al. (2022) provided “evidence of how a lack of transparency by retailers and irresponsible disengagement from global supply chains were prevalent during the early months of the pandemic” and concluded that “there are ample opportunities for future critical and interdisciplinary accounting research in relation to different accountability and transparency topics evolving out of COVID-19” (Ahmad et al., 2022, p. 215). The examples provided by these authors included exploring the new and evolving tensions around the accountability

COVID-19 and accounting, accountability and governance  469 of retailers and their regulators, and how the performance measurements, accountability and transparency of many businesses appeared to shift during the crisis. Beyond the suggestions for further research provided in these two studies, future studies that seek to evaluate organizations’ decision-making during the COVID-19 pandemic against their declared environmental sustainability goals such as investment in carbon-intensive industries given the global moves towards net zero would be beneficial. The well-documented advent of supply-chain bottlenecks emanating from the COVID-19 crisis also needs to be examined in light of its potential impact on diverse stakeholders and society in general.

CONCLUDING COMMENTS The majority of studies examining accounting, accountability and governance in connection with the COVID-19 pandemic reviewed in this chapter tended to focus on accounting and accountability rather than governance aspects. However, as further empirical studies emerge, we expect that more of these will examine governance structures and mechanisms. The collection of studies reviewed in this chapter all appear to point to the need for scholars and practitioners alike to accept that instability and continuous change, and the “routine” nature of exceptional shocks may need to be brought to the forefront when designing, using, exploring and understanding calculative practices post-COVID-19. Moreover, our analysis reveals that there is significant scope for future studies to closely examine the social, moral and sustainability dimensions of business decision-making following the COVID-19 crisis. Systems of governance and accountability must evolve to avoid adverse consequences for diverse stakeholders and to avert sub-optimal strategic responses to future crises. Research has highlighted the importance of values, culture and institutional contexts in shaping accounting and accountability (Tharapos et al., 2019). Studies also highlight the need to continue exploring the interplay between these elements and accounting and accountability systems at the organizational, national and global levels. These studies further reveal the paramount importance of understanding the cultural characteristics of the contexts in which organizations are embedded, as these can contribute to the success or failure of accounting and accountability practices. In order to understand how accounting may have assisted in the management of the pandemic, future research must investigate the complex interrelationships and interdependencies between accounting, accountability and governance, and those of society, during and after the COVID-19 crisis (Rinaldi, 2022). Finally, recent research emphasizes the need to redefine the boundaries of accounting and accountability mechanisms to capture the increasing level of complexity and interconnectedness between human action and the natural ecosystem as traditional approaches have proven to be inadequate during the COVID-19 pandemic. Incorporating a range of perspectives from a variety of stakeholders, including the more vulnerable in society as well as the natural environment, is essential for developing a more holistic narrative of accounting, systems thinking accountability mechanisms, and reliable and ethical governance processes. Together, these approaches will drive meaningful and proactive change in the unstable and complex period post-pandemic while dealing more effectively with the effects of climate change.

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REFERENCES Abhayawansa, S. and Adams, C. (2022), “Towards a conceptual framework for non-financial reporting inclusive of pandemic and climate risk reporting”, Meditari Accountancy Research, Vol. 30 No. 3, pp. 710–738. Adams, C.A. and Abhayawansa, S. (2022), “Connecting the COVID-19 pandemic, environmental, social and governance (ESG) investing and calls for ‘harmonisation’ of sustainability reporting”, Critical Perspectives on Accounting, Vol. 82, article 102309. Ahmad, S., Connolly, C. and Demirag, I. (2021), “Testing times: governing a pandemic with numbers”, Accounting, Auditing & Accountability Journal, Vol. 34 No. 6, pp. 1362–1375. Ahmad, N., Haque, S. and Islam, M.A. (2022), “COVID-19 and global clothing retailers’ responsibility to vulnerable workers: NGO counter-rhetoric”, Accounting, Auditing & Accountability Journal, Vol. 35 No. 1, pp. 216–228. Ahrens, T. and Ferry, L. (2021), “Accounting and accountability practices in times of crisis: a Foucauldian perspective on the UK government’s response to COVID-19 for England”, Accounting, Auditing & Accountability Journal, Vol. 34 No. 6, pp. 1332–1344. Antonelli, V., Bigoni, M., Funnell, W. and Cafaro, E.M. (2022), “Accounting for biosecurity in Italy under COVID-19 lockdown”, Accounting, Auditing & Accountability Journal, Vol. 35 No. 1, pp. 120–130. Australia Institute Centre for Future Work (2021), An Avoidable Catastrophe: Pandemic Job Losses in Higher Education and Their Consequences, available at: https://​d3n8a8pro7vhmx​.cloudfront​.net/​ theausinstitute/​pages/​3830/​attachments/​original/​1631479548/​An​_Avoidable​_Catastrophe​_FINAL​ .pdf​?1631479548 (last accessed 23 February 2022). Barbera, C., Jones, M., Korac, S., Saliterer, I. and Steccolini, I. (2017), “Government financial resilience under austerity in Austria, England and Italy: how do local governments cope with financial shocks?”, Public Administration, Vol. 93 No. 3, pp. 670–697. Beatson, N., de Lange, P., O’Connell, B., Tharapos, M. and Smith, J.K. (2021), “Factors impacting on accounting academics’ motivation and capacity to adapt in challenging times”, Accounting Research Journal, Vol. 34 No. 2, pp. 184–195. Brennan, N.M., Edgar, V.C. and Power, S.B. (2022), “COVID-19 profit warnings: delivering bad news in a time of crisis”, British Accounting Review, Vol. 54 No. 2, article 101054. Bui, B., Moses, O. and Dumay, J. (2022), “The rhetoric of New Zealand’s COVID-19 response”, Accounting, Auditing & Accountability Journal, Vol. 35 No. 1, pp. 186–198. Campus Morning Mail (2022), “International student numbers: 2020 wasn’t bad everywhere”, 15 February, available at: https://​campusmorningmail​.com​.au/​news/​international​-student​-numbers​-2020​ -wasnt​-bad​-everywhere/​?utm​_source​=​sendgrid​.com​&​utm​_medium​=​email​&​utm​_campaign​=​website (last accessed 23 February 2022). Carnegie, G., Parker, L. and Tsahuridu, E. (2021a), “It’s 2020: what is accounting today?”, Australian Accounting Review, Vol. 31 No. 1, pp. 65–73. Carnegie, G., Parker, L. and Tsahuridu, E. (2021b), “Redefining accounting for tomorrow”, Knowledge Gateway, International Federation of Accountants (IFAC), New York, 6 April, available at: www​ .ifac​.org/​knowledge​-gateway/​preparing​-future​-ready​-professionals/​discussion/​redefining​-accounting​ -tomorrow (last accessed 30 October 2022). Carnegie, G.D., Guthrie, J. and Martin-Sardesai, A. (2022a), “Public universities and impacts of COVID-19 in Australia: risk disclosures and organisational change”, Accounting, Auditing & Accountability Journal, Vol. 35 No. 1, pp. 65–73. Carnegie, G.D., Martin-Sardesai, A., Marini, L. and Guthrie, J. (2022b), “‘Taming the black elephant’: assessing and managing the impacts of COVID-19 on public universities in Australia”, Meditari Accountancy Research, Vol. 30 No. 6, pp. 1783–1808. Chenhall, R.H. (2003), “Management control systems design within its organizational context: findings from contingency-based research and directions for the future”, Accounting, Organizations and Society, Vol. 28 No. 2–3, pp. 127–168. Cho, C.H., Senn, J. and Sobkowiak, M. (2022), “Sustainability at stake during COVID-19: exploring the role of accounting in addressing environmental crises”, Critical Perspectives on Accounting, Vol. 82, article 102327.

COVID-19 and accounting, accountability and governance  471 Crovini, C., Schaper, S. and Simoni, L. (2022), “Dynamic accountability and the role of risk reporting during a global pandemic”, Accounting, Auditing & Accountability Journal, Vol. 35 No. 1, pp. 169–185. Delfino, G.F. and van der Kolk, B. (2021), “Remote working, management control changes and employee responses during the COVID-19 crisis”, Accounting, Auditing & Accountability Journal, Vol. 34 No. 6, pp. 1376–1387. de Villiers, C. and Molinari, M. (2022), “How to communicate and use accounting to ensure buy-in from stakeholders: lessons for organizations from governments’ COVID-19 strategies”, Accounting, Auditing & Accountability Journal, Vol. 35 No. 1, pp. 20–34. Elmarzouky, M., Albitar, K. and Hussainey, K. (2021), “Covid-19 and performance disclosure: does governance matter?”, International Journal of Accounting & Information Management, Vol. 29 No. 5, pp. 776–792. Fogarty, T.J. (2020), “Accounting education in the post-COVID world: looking into the Mirror of Erised”, Accounting Education, Vol. 29 No. 6, pp. 563–571. Foucault, M. (2007), Security, Territory, Population: Lectures at the Collège de France, 1977–78. Palgrave Macmillan, London. Haynes, K. (2020), “Structural inequalities exposed by COVID-19 in the UK: the need for an accounting for care”, Journal of Accounting & Organizational Change, Vol. 16 No. 4, pp. 637–642. Heald, D. and Hodges, R. (2020), “The accounting, budgeting and fiscal impact of COVID-19 on the United Kingdom”, Journal of Public Budgeting, Accounting & Financial Management, Vol. 32 No. 5, pp. 785–795. Huber, C., Gerhardt, N. and Reilley, J.T. (2021), “Organizing care during the COVID-19 pandemic: the role of accounting in German hospitals”, Accounting, Auditing & Accountability Journal, Vol. 34 No. 6, pp. 1445–1456. Kober, R. and Thambar, P.J. (2021), “Coping with COVID-19: the role of accounting in shaping charities’ financial resilience”, Accounting, Auditing & Accountability Journal, Vol. 34 No. 6, pp. 1416–1429. Lai, A., Leoni, G. and Stacchezzini, R. (2014), “The socializing effects of accounting in flood recovery”, Critical Perspectives on Accounting, Vol. 25 No. 7, pp. 579–603. Landi, S., Costantini, A., Fasan, M. and Bonazzi, M. (2022), “Public engagement and dialogic accounting through social media during COVID-19 crisis: a missed opportunity?”, Accounting, Auditing & Accountability Journal, Vol. 35 No. 1, pp. 35–47. Larrinaga, C. and Garcia-Torea, N. (2022), “An ecological critique of accounting: the circular economy and COVID-19”, Critical Perspectives on Accounting, Vol. 82, article 102320. Lazzini, A., Lazzini, S., Balluchi, F. and Mazza, M. (2022), “Emotions, moods and hyperreality: social media and the stock market during the first phase of COVID-19 pandemic”, Accounting, Auditing & Accountability Journal, Vol. 35 No. 1, pp. 199–215. Leoni, G., Lai, A., Stacchezzini, R., Steccolini, I., Brammer, S., Linnenluecke, M. and Demirag, I. (2021), “Accounting, management and accountability in times of crisis: lessons from the COVID-19 pandemic”, Accounting, Auditing & Accountability Journal, Vol. 34 No. 6, pp. 1305–1319. McKinsey & Company (2022), “COVID-19: implications for business”, available at: www​.mckinsey​ .com/​business​-functions/​risk​-and​-resilience/​our​-insights/​covid​-19​-implications​-for​-business (last accessed 23 February 2022). O’Connell, B.T. (2022), “‘He who pays the piper calls the tune’: university key performance indicators post COVID-19”, Accounting Education, Vol. 31 No. 6, pp. 629–639. O’Connell, B., Tharapos, M., de Lange, P. and Beatson, N. (2023), “Revitalising the enterprise university post-COVID 19: a focus on business schools”, Meditari Accountancy Research, Vol. 31 No. 1, pp. 141–166. Organisation for Economic Co-operation and Development (OECD) (2021), OECD Economic Outlook. OECD, Paris, available at: www​ .oecd​ .org/​ economic​ -outlook/​ #key​ -resources (last accessed 23 February 2022). Parisi, C. and Bekier, J. (2022), “Assessing and managing the impact of COVID-19: a study of six European cities participating in a circular economy project”, Accounting, Auditing & Accountability Journal, Vol. 35 No. 1, pp. 97–107. Parker, L.D. (2020), “The COVID-19 office in transition: cost, efficiency and the social responsibility business case”, Accounting, Auditing & Accountability Journal, Vol. 33 No. 8, pp. 1943–1967.

472  Handbook of accounting, accountability and governance Passetti, E.E., Battaglia, M., Bianchi, L. and Annesi, N. (2021), “Coping with the COVID-19 pandemic: the technical, moral and facilitating role of management control”, Accounting, Auditing & Accountability Journal, Vol. 34 No. 6, pp. 1430–1444. Perkiss, S. and Moerman, L. (2017), “Hurricane Katrina: exploring justice and fairness as a sociology of common good(s)”, Critical Perspectives on Accounting, Vol. 67–68, article 102022. Rinaldi, L. (2022), “Accounting and the COVID-19 pandemic two years on: insights, gaps, and an agenda for future research”, Accounting Forum, ahead-of-print https://​doi​.org/​10​.1080/​01559982​ .2022​.2045418 (last accessed 10 July 2023). Ross, J. (2021), “Australian universities ‘turn around’ Covid year finances”, Times Higher Education, 25 February, available at: www​.​timeshighe​reducation​.com/​news/​melbourne​-back​-black​-following​ -turnaround (last accessed 24 February 2022). Safari, M., Tsahuridu, E. and Lowe, A. (2022), “Big4 responses to the COVID-19 crisis: an examination of Bauman’s moral impulse”, Accounting, Auditing & Accountability Journal, Vol. 35 No. 1, pp. 131–145. Salterio, S.E. (2020), “Accounting for the unaccountable: coping with COVID”, Journal of Accounting & Organizational Change, Vol. 16 No. 4, pp. 557–578. Sangster, A., Stoner, G. and Flood, B. (2020), “Insights into accounting education in a COVID-19 world”, Accounting Education, Vol. 29 No. 5, pp. 431–562. Sargiacomo, M. (2015), “Earthquakes, exceptional government, and extraordinary accounting”, Accounting, Organizations and Society, Vol. 42 No. 1, pp. 67–89. Sargiacomo, M., Servalli, S., Potito, S., D’Andreamatteo, A. and Gitto, A. (2021), “Accounting for natural disasters from a historical perspective: a literature review and research agenda”, Accounting History, Vol. 26 No. 2, pp. 179–204. Stackpole, B. (2021), “4 ways to boost enterprise resilience with systems thinking”, available at: https://​ mitsloan​.mit​.edu/​ideas​-made​-to​-matter/​4​-ways​-to​-boost​-enterprise​-resilience​-systems​-thinking (last accessed 30 October 2022). Taylor, D., Tharapos, M. and Sidaway, S. (2014), “Downward accountability for a natural disaster recovery effort: evidence and issues from Australia’s Black Saturday”, Critical Perspectives on Accounting, Vol. 25 No. 7, pp. 633–651. Tharapos, M. (2022), “Opportunity in an uncertain future: reconceptualising accounting education for the post-COVID-19 world”, Accounting Education, Vol. 31 No. 6, pp. 640–651. Tharapos, M., O’Connell, B.T., Dellaportas, S. and Basioudis, I. (2019), “Are accounting academics culturally intelligent? An empirical investigation”, British Accounting Review, Vol. 51 No. 2, pp. 111–129. Tregidga, H. and Laine, M. (2022), “On crisis and emergency: is it time to rethink long-term environmental accounting?”, Critical Perspectives on Accounting, Vol. 82, article 102311. US Congressional Research Service (2021), “Global economic effects of COVID-19: updated November 10, 2021”, available at: https://​sgp​.fas​.org/​crs/​row/​R46270​.pdf (last accessed 23 February 2022). Velayutham, A., Rahman, A.R., Narayan, A. and Wang, M. (2021), “Pandemic turned into pandemonium: the effect on supply chains and the role of accounting information”, Accounting, Auditing & Accountability Journal, Vol. 34 No. 6, pp. 1404–1415. Ylinen, M. and Gullkvist, B. (2014), “The effects of organic and mechanistic control in exploratory and exploitative innovations”, Management Accounting Research, Vol. 25 No. 1, pp. 93–112. Zharfpeykan, R. and Ng, F. (2021), “COVID-19 and sustainability reporting: what are the roles of reporting frameworks in a crisis?”, Pacific Accounting Review, Vol. 33 No. 2, pp. 189–198.

21. Prospects for accounting, accountability and governance Christopher J. Napier and Garry D. Carnegie

OVERVIEW The Handbook of Accounting, Accountability and Governance demonstrates how these three bodies of practice are interwoven. Accountability is a fundamental attribute of humanity, and both accounting and governance have developed to make accountability possible. However, accounting has come under challenge as an excessively “technical” activity that fails to address many of the important aspects of organizational performance by favouring what can be measured (however problematically) in terms of money. Governance has moved from an idea of “good government” to a corporate governance model predicated on a shareholder primacy view of the corporate enterprise. This model is increasingly drawn on outside the corporate sector, even in circumstances where the core assumptions of modern corporate governance do not apply. The chapter calls for more qualitative research in accounting, accountability and governance, for example opening up the “black box” of the corporate board through research that investigates how accountability and governance actually work in practice. The chapter also calls for collaborative research that seeks new ways of accounting for the broader impacts of organizations on society and on the environment.

INTRODUCTION The contributors to this Handbook have shown how accounting, accountability and governance are intertwined. As we expressed the key relationships in our Introduction (p. 1), “accounting performs accountability, accountability nurtures governance, governance presumes accounting”. This puts accountability in the foreground. In Chapter 2 and Chapter 18 of this Handbook, the respective authors (Lai, Leoni and Stacchezzini; Frandsen and Hoskin) brought out the extent to which accountability has been a fundamental human phenomenon throughout history. The belief that God will hold all humans accountable for their acts and omissions is central to the great monotheistic religions, not just to Islam (as Almulhim, Alomair and Napier point out in Chapter 15 of this Handbook) but also to Judaism and Christianity (Joannidès de Latour, 2017). Indeed, James Aho, a sociologist of religion, claimed that the confessional practices of medieval Catholicism helped to stimulate the emergence and development of double-entry bookkeeping (Aho, 2005) and therefore underpin modern accounting. To philosopher Judith Butler, “giving an account of oneself” arises not just in response to external coercion, in a context where the likely outcome of accountability is some form of penalty, but as a way of creating ourselves as “self-narrating beings” (Butler, 2005, p. 11). This implies that accountability is not necessarily punitive, and that “the response to the demand to give an account of oneself is a matter of fathoming at once the formation of the subject (self, 473

474  Handbook of accounting, accountability and governance ego, moi, first-person perspective) and its relation to responsibility” (Butler, 2005, p. 155). For a person to refuse to provide an account may be to challenge the authority of those demanding such an account, but it may also be a denial of responsibility for one’s actions and omissions to a broader society. To Butler (2005), accountability is the counterpart of morality. The emergence of corporate governance as a concept in the 1970s (Shah & Napier, 2019) was originally an attempt to make corporations more accountable to wider groups of stakeholders, and hence to emphasize the moral role of the corporation. However, corporate governance became captured by the “law and economics” school (see, for example, Black, 2003; Hayden & Bodie, 2021), which tended to privilege private contracting over regulation, and regarded shareholders as the key stakeholders in companies. This was exacerbated by the Cadbury Report (Cadbury Committee, 1992), with its stress on the “financial” aspects of corporate governance. If, as Frandsen and Hoskin suggest in Chapter 18 of this Handbook, governance is good government, then corporate governance must be good management and direction. But good for whom? Several of the contributors to this Handbook have questioned this narrowing of the scope of corporate governance, and the danger of applying a financially based model of accountability to owners within sectors such as higher education (Parker and Kaifala – Chapter 11 of this Handbook), the public sector more generally (Liguori and Kelly – Chapter 12 of this Handbook), not-for-profit settings (Goddard – Chapter 13 of this Handbook) and a growing array of hybrid organizations (Bracci and Pencle – Chapter 14 of this Handbook). Adding to a focus on the moral dimensions of accountability and governance has been a growing awareness of the moral dimension of accounting. Many contributors to this Handbook referred to the new definition of accounting offered by Carnegie et al. (2021a, p. 21; see also Carnegie et al., 2021b): Accounting is a technical, social and moral practice concerned with the sustainable utilisation of resources and proper accountability to stakeholders to enable the flourishing of organisations, people and nature.

This definition, proposed for discussion and debate, clearly ties accounting to accountability. The authors of the chapters in Part II of this Handbook look at different aspects of accounting, audit and assurance, including the developing field of social and environmental accounting (Atkins and McBride – Chapter 8 of this Handbook). However, as Atkins and McBride observe, developments in the social and environmental accounting field over the last 15 years have been ambivalent in terms of advancing accountability to a wider group of stakeholders. The emergence of “environmental, social and governance” (ESG) as a term encompassing different aspects of corporate activity has, at the same time, stressed their importance but tended to incorporate them into traditional frameworks of corporate accountability to shareholders (see also Solomon,1 2021, Chapter 10). In this closing chapter, we first consider prospects for accounting and accountability. We then turn to governance, particularly the rise (and possible capture) of ESG. This is followed by some suggestions for future research into the linkages between accounting, accountability and governance. We conclude with some general comments about the central role of accounting, accountability and governance not just in the context of companies but more widely.

Prospects for accounting, accountability and governance  475

THE END OF ACCOUNTING? In 2016, Baruch Lev and Feng Gu published a book with the provocative title The End of Accounting (Lev & Gu, 2016). Their thesis is that: [D]espite all of regulators’ efforts to improve accounting and corporate transparency, financial information no longer reflects the factors – so important to investors – that create corporate value and confer on businesses the vaunted sustained competitive advantage. (Lev & Gu, 2016, p. xiii)

This book refers neither to accountability nor to governance in its index, but the authors’ theme is that current corporate financial reporting is simply inadequate to allow boards of directors to oversee the management of companies and for investors to make well-informed decisions. Their solutions to the problem that they identify may be rather muddled. They propose the inclusion of intangibles as assets in statements of financial position, but they argue that there is too much estimation in financial statements, so intangible assets should be measured at “cost” rather than any expenditure on creating and enhancing intangibles being written off in the income statement as incurred. Showing intangibles as assets rather than writing off costs each year, they suggest, “restore[s] the income statement to the status of a meaningful indicator of operating results” (Lev & Gu, 2016, p. 215). In the authors’ view, this would provide corporate performance measures that would be more useful for investors. Although Lev and Gu (2016) are critical of contemporary financial reporting practice, they demonstrate the fixation that financial reporting is about providing information to help investors make forecasts of future corporate cash flows. In Chapter 5 of this Handbook, Pelger explores how accounting standard-setters have wrestled with trying to reconcile the decision-usefulness paradigm for financial reporting with the stewardship paradigm. The traditional motivation for corporate reporting is to provide information on how directors exercise stewardship over corporate resources. Making sure that directors oversee the proper management, control and protection of these resources is the core purpose of corporate governance. Broader conceptions of corporate social responsibility may suggest that directors owe duties to more than just shareholders, although company law may be slow to insist on such duties. In the UK, for example, the duties of directors were formalized in section 172 (1) of the Companies Act 2006, requiring directors to “promote the success of the company for the benefit of its members [in most cases, this means the shareholders] as a whole”. Directors must “have regard” to the interests of various stakeholders other than shareholders, but this does not make directors legally accountable to such stakeholders. In British law, accountability (which is primarily financial) is still focused on shareholders. Larger companies are required to include a “section 172 (1) statement” in their Strategic Report, explaining how the directors have “had regard” to wider stakeholders’ interests, but this is not in itself a statement of accountability to these stakeholders. Indeed, the statement may paradoxically reassure shareholders that directors are not threatening shareholder value by taking the interests of other stakeholders too seriously. The stewardship paradigm of financial reporting has inspired the “accountingization” (Power & Laughlin, 1992) of many disparate organizations, where the preparation of financial statements of assets and liabilities and of revenues and expenses on the corporate model has been seen as the main way of holding governing bodies and managers accountable for the use of resources. A good example of this is the long-standing controversy over the inclusion of

476  Handbook of accounting, accountability and governance “heritage items” as assets, at cost-based measures or even at current valuations, in the financial statements of public not-for-profit cultural institutions, as if it is impossible to hold someone accountable without the use of (financial) accounts (Carnegie & Kudo, 2022; Carnegie et al., 2022; Ferri et al., 2021). The challenge for accounting is to come up with new and more effective ways of enabling accountability that go beyond reducing “priceless” objects to monetary measures to be managed and subjected to incongruous audit. In Chapters 16 (Himick and Vinnari) and 17 (Bayerlein and Perkiss) of this Handbook, different approaches to accountability are discussed. Counter accounts descend from “social audit” (see, for example, Medawar, 1976), and originally aimed to challenge the financial focus of reporting by many organizations. How companies had an impact on broader individuals and groups, making such individuals and groups de facto stakeholders, would be revealed, often in a way that criticized corporate practices. Although counter accounts do not in themselves lead to formal sanctions against companies (or, less commonly, to formal benefits), they are argued to provide a form of discipline in that companies may wish to reduce any adverse effect of critical publicity by changing their practices. However, if directors simply “brazen it out”, perhaps explicitly appealing to the need to maximize shareholder value, there is little that “counter accountants” can do to change corporate policy. Perhaps the impact of counter accounts is more long term, as recurring external criticism of a range of entities may help to motivate regulatory change. This may take the form of more “accounting” in the broader sense of corporate disclosure, but may go further, mandating preferred operational practices and forbidding activities that are socially disliked. A limitation with counter accounts and Spotlight Accounting is that they are, at present, undertaken from outside the organization, and to a large extent rely on disclosures made by the organization itself. Although the increasing use of stand-alone sustainability reports (SASRs) by large enterprises (Usmani et al., 2020), providing information on social and environmental matters, may be seen as a form of internal counter-accounting, the information is still coming from the enterprise, and SASRs are an integral part of managerial disclosure strategies. As Usmani et al. (2020) document, the content and presentation of SASRs is often driven by the desire of CEOs to be able to claim a top disclosure rating from external agencies rather than to communicate a recognition of broader social and environmental accountability. If external stakeholders will continue to rely on information provided by organizations, making sure that such information is trustworthy will continue to be a central problem. In Chapter 7 of this Handbook, Carrera, Trombetta and Wilford observe that practices of assurance have evolved and expanded in response to social and economic changes. Providing assurance for a SASR has some similarities with auditing the financial statements of a company, but there may be differences in that the entity providing assurance for a SASR (who need not be a qualified company auditor) often needs to probe into the company’s motives for undertaking, or refraining from, various actions. This is something that the financial auditor rarely needs to engage in. Many years ago, Power (1997) discussed attempts by the accountancy profession to capture the emerging market in environmental audit, identifying the extent to which accounting firms needed to acquire, or at worst simulate, relevant knowledge and competence in the field. With the currently observable diversity of assurance providers for SASRs (Usmani et al., 2020), the accountancy profession has not succeeded in “cornering” the sustainability market. It may be that, rather than hoping, as Bayerlein and Perkiss do in Chapter 17 of this Handbook, that the accounting profession will move away from an emphasis on measurement, verification

Prospects for accounting, accountability and governance  477 and communication towards moderating the demands of society towards organizations, we need new providers of trustworthy assurance to allow organizations to be held accountable to broader stakeholder groups within society. This may require some form of public accountability service to escape from the challenge that the costs of assurance are currently paid for by the very entities that are supposed to be held accountable for their actions and omissions. Even within the existing accounting and reporting model, pressures to aggregate vast amounts of data may make it difficult for external stakeholders to hold companies and their directors and managers accountable at any level of detail. In Chapter 19 of this Handbook, Egan, Ji and Ram discuss how group accounting, involving the consolidation of the financial statements of a parent and all its subsidiaries, often leads to important information about the risks relating to specific subsidiaries not being made available in the group financial statements, either at all or at a level of detail that would enable accountability. Ironically, one of the important reasons for requiring group accounts was to enhance accountability by making it more difficult for directors of parent companies to hide risky assets and liabilities in controlled entities (that were often exempt from publishing their own financial statements) and to manipulate reported profits by drawing on the reserves of such entities (Napier, 2010). Perhaps parent companies pay mere lip service to the use of complex group structures and controlled entities through publishing long lists of subsidiaries, associates and joint ventures whose detailed financial statements are difficult, if not impossible, for stakeholders to access. Discussions of the “end” of accounting may, as Lev and Gu (2016) do, call for changes in an existing financial reporting model, but they may also raise the issue of what the “end” of accounting is in the sense of its central purpose or purposes. Accounting has always been embedded in relationships of accountability, providing for the rendering of accounts and holding “accountees” responsible. As accounting is central to the process of accountability, it cannot avoid being both a social and a moral practice (Carnegie et al., 2021a, 2021b; see also Carnegie et al., 2023). But accounting remains a technical practice of representing what individuals and organizations have achieved, where they stand and where they are going. This representation need not be limited to what can be measured specifically in monetary terms. Achieving alternative modes of representation will overcome the danger of reductionism of complex phenomena to apparently simple information. Finally, the constitutive power of accounting (Hines, 1988; Morgan, 1988) must not be overlooked – the accounting techniques available at any time both enable certain modes of accountability and inhibit others, constructing how we view organizations within the world. This puts limits, that may be difficult to perceive and therefore evaluate, on possibilities or directions for governance.

REINVENTING GOVERNANCE – OLD WINE IN NEW BOTTLES? As Cuomo and Zattoni point out in Chapter 3 of this Handbook, tensions exist between regulating corporate governance through law and employing codes of governance that may have less enforceability. Traditionally, corporate law provided a framework for the control of companies by boards of directors chosen by corporate owners, with statutory duties often ratcheted up by case law (particularly in “common law” countries such as the UK and USA). Corporate law changes slowly, and the series of governance codes following Cadbury in 1992 tried to encourage more immediate response to challenges to governance prompted by corporate scandals. The “comply or explain” approach of Cadbury meant that directors seeking a relatively

478  Handbook of accounting, accountability and governance easy life could adopt board structures and procedures favoured by a governance code and “tick the boxes”, while the minority of companies that wanted to maintain an alternative governance model (often involving an executive chairman rather than a dual-leadership structure with different people as chair and as CEO) were able to explain why they had deviated from the code. More recently, in many countries, compliance with a governance code by at least listed companies is often mandated through securities legislation, and many codes have moved towards an approach of “apply and explain”. Cheffins and Reddy (2022) have looked back at the last 30 years since the Cadbury Report and have argued that governance codes have outlived their usefulness. They suggest that many codes have grown out of control as new requirements and expectations have been added, and they recommend that the key requirements should be incorporated in general capital market regulation rather than being set out in codes that may not be so amenable to enforcement. However, these authors are writing from a “law and economics” perspective where the role of corporate governance is to ensure that directors manage and control the company in the interests of shareholders. From such a perspective, any acknowledgement in a governance code of other stakeholders would be inappropriate. A danger with governance codes is that they encourage superficial compliance. A typical corporate board for a listed company may consist of seven to nine directors, of whom the CEO and the chief financial officer (CFO) are the only executive directors, the remainder being non-executives with varying degrees of independence. The board has an audit, nomination and remuneration committee, which meet four to six times a year. Separation of chair and CEO may be achieved on paper, but in emerging economies, the board chairman may be the founder of the company and the CEO may be the founder’s son (or in a few cases the founder’s daughter). Non-executives are likely to be the chairman’s friends and are therefore not independent in substance.2 Ironically, for governance researchers, as boards become more homogeneous, they become less useful as explanations of variation in measures such as corporate performance and transparency.3 The importance of governance gained a significant boost in 2004, when a report sponsored by the United Nations, Who Cares Wins (United Nations Global Compact, 2004), introduced the term “environmental, social and governance” (ESG) as important issues that investors should take on board when making their investment decisions. The report suggested that both legislators and regulators should consider encouraging or even requiring more ESG disclosure in corporate annual reports and other widespread forms of communication, and the report encouraged rating agencies and index providers to “establish consistent standards and frameworks in relation to environmental, social and governance factors” (United Nations Global Compact, 2004, p. iv). The overall motivation for the report’s recommendations was to encourage a more embedded approach to corporate sustainability, although this was seen as something that investors should be demanding rather than a goal that corporate directors should be aiming for in any event (the report mentions “Board structure and accountability” and “Accounting and disclosure practices” as “Corporate governance issues” (United Nations Global Compact, 2004, p. 6) but does not expand on these passing references). Nonetheless, the examination of ESG disclosures has taken off as a major research field, with Google Scholar (accessed 29 May 2023) listing over 7,000 publications containing the term “ESG disclosure”. Many of these studies use indices of ESG disclosure produced by index providers, and an illustrative recent study is the investigation by Aluchna et al. (2023) of how “ESG performance” of Polish listed companies has changed following the introduction of

Prospects for accounting, accountability and governance  479 the European Union’s Non-Financial Reporting Directive (2014/95/EU). The authors suggest that the coming into effect of the Directive led companies to disclose more information about their social and environmental activities, but did not have a comparable impact on governance disclosures, possibly because corporate governance for Polish companies is subject to the Commercial Companies Code of 2000, so companies were already required to make extensive disclosures in this area. Assessing ESG disclosure or performance (the two are closely related in that it is difficult to assess performance without appropriate information being disclosed) depends on the methods adopted by index providers. Eccles et al. (2020) compare the approaches to developing assessments of ESG by two leading organizations (KLD and Innovest). KLD “intentionally did not provide an aggregate score for companies” (Eccles et al., 2020, p. 580), preferring to report their findings using ordinal scales for various dimensions of ESG activities. This organization specifically considered the impact of companies on society in general rather than the financial impact for investors of ESG activities. Innovest, on the other hand, developed a quantitative index for ESG whose purpose was “financial from the beginning” (Eccles et al., 2020, p. 588). The authors conclude that capital markets were initially unsophisticated regarding ESG, so a holistic quantitative index may have been more immediately understandable, but that more investors now appreciate that it is necessary to understand the environmental and social impact of companies in a more nuanced way that goes beyond financialized performance measurements. The involvement of the United Nations in advancing corporate governance reflects the extent to which governance is fundamentally a political concept. As long ago as the early 1970s, the United Nations Centre on Transnational Corporations (UNCTC) attempted to situate the largest international businesses within a framework of “global governance” (Hamdani & Ruffing, 2015). This initiative emerged against the background of the initial interest in corporate governance as a way of enhancing accountability by large corporations to the public (Shah & Napier, 2019), and it is interesting that the UNCTC was abolished in 1992, the year of the Cadbury Report, as corporate governance was increasingly turning its back on broader accountabilities. However, the link between accountability and global governance has been emphasized by Rached (2016), who observes that accountability is often talked about in political settings but that it is “intriguing and chameleonic” (Rached, 2016, p. 318).4 Contributors to this Handbook have usually focused on accountability by companies and their directors and senior managers, with those chapters considering entities outside the corporate sector often stressing accountability for financial and operational performance rather than policy. A reassertion of the political basis of governance may provide a framework for a more conscious consideration of how businesses can be held accountable for how they advance or retard the development of human rights (see, for example, McPhail, 2022), but it may require legislative initiatives that introduce on an incremental basis new corporate reporting requirements for environmental and social impacts (Adel et al., 2019). Much conventional thinking relating to the governance of large companies sees investors as homogeneous, but an issue that is pervasive in emerging economies, and by no means unknown in more developed markets, is that many companies are under the control of block shareholders. These are often members of founding families or providers of venture capital, and in some countries the state may be a significant investor. This means that minority investors are in a weak position, creating risks of “expropriation of the minority” (Claessens et al., 1999). This can take the form of directors, nominated by controlling shareholders, adopting

480  Handbook of accounting, accountability and governance policies that favour the interests of the controlling shareholders at the expense of the minority shareholders. In emerging economies, governance codes derived from those in more developed economies may end up reinforcing the power of controlling shareholders. In more developed economies, companies listed on junior markets will often have controlling or dominant block shareholders, and the system adopted on the UK’s Alternative Investment Market of Nominated Advisers (NOMADs) adds an extra component to the corporate governance structure of such companies, as Shah points out in Chapter 9 of this Handbook. Several contributors suggest enlarging corporate governance by bringing in advocates for broader stakeholder groups, particularly in countries where the external auditor owes a legal duty only to the existing shareholders collectively, rather than more broadly to capital market participants, let alone other stakeholders. Because so much early thinking about corporate governance took place in countries such as the UK and USA, where the standard model of a unitary board of directors applies, Brennan and Kirwan (Chapter 4 of this Handbook) concentrate on such unitary boards in their analysis of how boards of directors are central to corporate governance. They acknowledge that the two-tier board found in countries such as Germany, with a supervisory board that often includes representatives of broader stakeholder groups and a management board responsible for operations, may be an alternative model worth considering. Although, in countries such as the UK, large listed companies are increasingly establishing an “executive committee” made up of senior managers, and providing details of the committee in their annual report, such committees do not have a legal status and so is not formally part of the corporate governance structure. The importance of corporate culture on the effectiveness of executive committees has been stressed by Wilson (2021), the CFO of a large UK listed company, who notes that boards of directors are often remote from the day-to-day operations of companies, leaving the CEO as having great influence over not only senior managers (who may be members of an executive committee) but also the organization as a whole. As Arun, Ashraf, Jayasinghe and Soobaroyen conclude (Chapter 10 of this Handbook), “one size does not fit all” when it comes to accountability and governance practices. Simply adopting existing governance codes may satisfy transnational bodies such as the World Bank, but the homogeneous governance structures that applying such codes so often lead to reduce the scope for experimentation. These authors address the importance of state regulation in providing an appropriate framework within which companies and other organizations can try out new ideas about governance and provide accountability that goes beyond the shareholder focus of governance since the Cadbury Report. As we discuss in the next section of this chapter, researchers can collaborate with practitioners to explore how governance can be enhanced. If this does not take place, we are likely to find corporate governance continuing to stress accountability to the providers of finance rather than to wider stakeholders.

SOME FUTURE RESEARCH DIRECTIONS All the contributors to this Handbook have suggested areas for possible future research in accounting, accountability and governance, relevant to their specific areas of interest. In this section, we provide a general overview of these suggestions, dealing mainly with the types of research that may be undertaken. Much research to date has been quantitative, and has tended to be influenced by economic theories, including agency theory. This theory, as applied by

Prospects for accounting, accountability and governance  481 Jensen and Meckling (1976) to analyse the issue of separation of ownership and control in the large business enterprise, locates governance mechanisms within the “nexus of contracts” between corporate owners and the managers that are appointed to run the business. Agency theory assumes conflict of interest, and its assumption that directors and managers will act in their own interests unless incentives and constraints limit their scope for “opportunistic” behaviour may ironically provide a rationalization for corporate managers to behave in the way the theory predicts (Styhre, 2016). Qualitative researchers in the areas of governance and accountability often use some form of stakeholder theory (Freeman, 1984; see also Solomon, 2021, pp. 13–17), which can encourage both a “normative” and a “positive” approach to theory use. The normative approach provides an argument to justify why companies should be responsible and therefore accountable to wider types of stakeholder, not just to corporate owners, as posited by agency theory. The positive, or instrumental, approach investigates which stakeholders have in fact the power to hold companies and their managers accountable, and for what. Stakeholders who have both the power and legitimacy to demand accountability (referred to by Mitchell et al., 1997, in their model of stakeholder salience as the “dominant” and “distinctive” stakeholders – see also Wood et al., 2021) may in practice determine how organizations envision and perform accountability. Expansion of theoretical frameworks for studies of accounting, accountability and governance could benefit from greater awareness and understanding of governance as a political concept. Ansell and Torfing (2022) introduce 10 theoretical perspectives, some of which overlap with aspects of governance addressed in this Handbook, such as “organization theory” and “public management theory”. Although corporate governance is not a priority for their collection of theories,5 there may be insights into the expansion of theoretical perspectives for students of accountability and governance in a more organizational setting. The popularity of agency theory for quantitative research means that researchers tend to use accessible data. Some of this may need to be hand-collected from corporate annual reports and other source documents, but increasingly researchers use disclosure (and even performance) indices compiled by commercial entities. This raises two issues in particular. First, do these indices measure what they claim to be measuring? If information about how a company performs in terms of ESG activities, for example, is drawn entirely from disclosures in annual reports, it may then be impossible to identify relevant corporate activities that are not specifically disclosed. Second, how can researchers, and external users more generally, be confident that the underlying data being used by the compilers of databases, and the computation of measures such as disclosure indices, are accurate? A third issue about the use of quantitative data, identified by Wood et al. (2021), is that, because of the internet and social media, stakeholder engagement can take place within a much smaller period of time than in the past, when engagement was often tied to the annual cycle of corporate reporting, and may also involve less formal mechanisms, such as online reviews and rankings (Jeacle & Carter, 2011; Jeacle, 2017). Awarding “stars” to provide a rating of a book, restaurant, hotel, interaction with the public face of an organization or even corporate governance structures (Beekes et al., 2015)6 is a quick but superficial way of assessing “performance”. If those assessed are able and willing to respond to reviews, it could be presented as a form of dialogic accountability (Dillard & Vinnari, 2019). However, rankings, whether represented as numbers of stars or other symbols or as positions in “league tables”, can ultimately distort organizational behaviour. This may

482  Handbook of accounting, accountability and governance lead to “gaming” the rating system to present organizations in a false light, as well as resulting in reduced accountability to some key stakeholders.7 Researchers should not just observe such phenomena but also theorize why they should happen. Academic researchers have tended to be “consumers” of ESG and other disclosure and accountability indices, but an important role of research is to cross-check, verify and critique such indices and work towards developing new ways of assessing organizational practices of accountability and governance. A problem faced by researchers, who are inevitably outside the organization, is getting a clear understanding of what accountability and governance practices are actually in place or even claimed to be in place. Relying on externally published information may not provide insights into whether mechanisms used by organizations are working as intended or even working at all. Researchers can, for example, observe who are the members of a company’s audit committee and how many times they meet, and can increasingly study more “narrative” disclosures of the main items that the committee is reported to have discussed, but some researchers will apply reductive analytical methods that strip the rich narrative data of their key content. As Brennan and Merkl-Davies (2022, p. 197) note, “qualitative content analysis allows a richer investigation that focuses on the deeper meaning of the text”. In a discussion of research into the accounting phenomenon referred to as “earnings management”,8 Brennan (2021, p. 1) refers to the “‘black box’ of the boardroom”. She notes that much research in the accounting, accountability and governance literature treats the actual workings of the board of directors as a “black box” – although relationships between accounting and governance variables, such as reported profits and board membership, are hypothesized and tested, these often do not go beyond statistical associations. For example, research finding that the number or percentage of female directors on corporate boards is positively associated with proxies for corporate social responsibility (for example, Landry et al., 2016) may unconsciously employ gender stereotypes (De Anca & Gabaldon, 2014) because researchers find it difficult to gain access to the boardroom to observe how directors of different genders interact in reaching decisions about accounting, accountability and governance. Brennan (2021) identifies a range of methods, including field studies, interviews of directors and managers, video recording of board meetings, ethnographic approaches and observation, both passive and participant (examples of the last approach are offered by Parker, 2007, 2008). Because it is relatively easier to access information from public sources such as corporate reports, relatively little is known about accountability within the organization. In Chapter 6 of this Handbook, Major, Conceição and Clegg discuss how management accounting control systems often embed relationships of accountability. Researching the factors that enable effective accountability inside the organization will continue to be a key research theme. An important aspect of governance research aims to go beyond the focus on boards of directors by investigating how far systems of internal control are embedded in overall corporate governance structures. How do directors get to know about what is going on in their organizations without being overloaded with information or confused by extensive details? Research on “internal governance” (Acharya et al., 2011) is not just about monitoring the actions of the CEO by other senior managers but should involve investigations of governance and accountability in action at all levels of an organization. Accounting, accountability and governance researchers need to be aware of external changes and pressures that may impact on practices in these interlocking areas. In Chapter 20 of this Handbook, Tharapos, O’Connell, Beatson and de Lange address the impact of the COVID-19 pandemic on accounting, accountability and governance. Despite the pandemic

Prospects for accounting, accountability and governance  483 being a relatively recent event, a substantial literature has already developed on this topic, but further research that can benefit from a longer time perspective would be illuminating and useful. Both rapid and longer-term research on new emerging issues that are likely to affect governance and accountability and call for innovative accounting practices will be important in the future. Such emerging issues provide strong opportunities for researchers to work with practitioners and stakeholder groups to identify and develop ways of measuring and reporting key data that will allow stakeholders to hold organizations accountable in new contexts.

CONCLUSIONS AND PROSPECTS In Chapter 1 of this Handbook, we stressed the importance of regarding accounting, accountability and governance as interlinked rather than as separate. In this chapter, we have couched accountability as fundamental to being human. Both accounting and governance can be regarded as practices that facilitate accountability. Accountability involves the provision by an “accountor” of information about the accountor’s activities, which will enable an “accountee” to hold the accountor responsible for their activities and grant rewards or impose penalties.9 The nature of information relevant for accountability differs depending on the purpose for which accountability is being facilitated. The contributors to this Handbook mainly come from backgrounds in accounting, finance or broader organization studies, and this has provided a rather different view of accounting, accountability and governance from those likely to be provided by lawyers and students of politics. A significant critique of corporate governance from a lawyers’ perspective has been provided by Lund and Pollman (2021), who have identified what they call the “corporate governance machine”. This is the complex system made up of “law, institutions, and culture that orients corporate decisionmaking toward shareholders” (Lund & Pollman, 2021, p. 2565). These authors note how the “machine”, by emphasizing shareholder primacy, has “captured” the concept of corporate social responsibility (CSR) under the ESG label. At the same time, CSR activities that could be justified as increasing shareholder value were encouraged, while accountability for such activities was still firmly focused on the responsibilities of boards of directors to shareholders rather than to other stakeholders who might benefit from, or suffer the absence of, CSR activities.10 Lund and Pollman (2021) warn that the “machine” will inhibit innovation in corporate governance and lead to “one-size-fits-all” structures. Although they do not mention this specifically, there is also the issue, referred to by several of the contributors to this Handbook, of corporate governance structures becoming dominant outside the corporate sector for public sector and not-for-profit entities. They conclude that: As shifts in understanding occur regarding the merits of various ESG initiatives and better metrics develop for measuring these benefits, a greater level of stakeholder interests can be reconciled with pursuing long-term shareholder value. (Lund & Pollman, 2021, p. 2631)

Within the field of accounting research, there have long been calls for “broader scope accountability” (Parker, 1996; Parker & Narayanan, 2023). This would expand organizational accountability to wider stakeholders, but the comments of Lund and Pollman (2021) quoted earlier provide a warning of the challenges faced by attempts to seek a broader scope for accountability. Advocates of a broader scope may feel that they must act as a resistance

484  Handbook of accounting, accountability and governance movement to the hegemony of the shareholder primacy-based corporate governance machine or may risk the danger of being co-opted into a system of values that they consider alien. In the introduction to this chapter, we mentioned the centrality of accountability to the major monotheistic religions. There is evidence (Montenegro, 2017) that the quality of corporate financial reporting is associated to the level of religious faith in specific areas, with companies headquartered in less religious areas more likely to engage in earnings management. As fewer people around the world maintain a religious faith,11 will this mean that accountability is considered less important? Or will we instead witness a refocusing of accountability so that it is directed to society rather than to God? Accountability implies the acceptance that an accountor has a duty or responsibility towards an accountee, so any weakening in the social significance of accountability will inevitably dilute senses of duty, care and responsibility, to the detriment of society as a whole. The contributors to this Handbook have frequently taken part in debates on the future of accounting, accountability and governance, both within the academic community and more widely, and they are committed to improving society. They are aware that accounting is not just about measuring things in terms of money, but that new ways of accounting (narrative as well as quantitative) need to be developed to make it possible for stakeholders to have the most appropriate information for accountability to be exercised. Although advocates of shareholder-centric views of governance and accountability will continue to attempt to capture new initiatives, we should not give up hope that governance structures and accounting methods will develop in ways that enhance rather than limit accountability, leading to the flourishing of individuals, organizations, society and the planet. We argue that this is not the “end of accounting” but we call for an end to conceiving accounting as “purely technical” (Carnegie & Napier, 2012, p. 353).12 Accounting operates in the arena of society and the natural world; it needs to be studied in, and made suitable for, the organizational and social contexts on which it impacts. Accounting is a multidimensional technical, social and moral practice, interconnected with accountability and governance, as accounting performs accountability, while governance presumes accounting. Accounting needs to be released from its traditional conceptualization as a mere benign, technical practice so that it can serve the worthy mission of shaping a better world.

NOTES 1. Jill Solomon is now known as Jill Atkins. 2. A mixed-methods study in Saudi Arabia (Almulhim, 2014) brings out these phenomena: the quantitative study showed only limited variation in board size, constitution, structure and activities, but the qualitative study found that several Saudi listed companies satisfied governance requirements only on paper, with “independent” non-executive directors often drawn from the business and social circles of the chairman of the board, and family members often serving as executive directors. 3. An example of this issue is the study of the relationship between corporate governance and corporate transparency in Japan by Aman et al. (2021), which notes the lack of variation across time with respect to certain corporate governance variables, which makes the use of specific statistical analyses impractical. 4. Curiously, Rached (2016) does not cite Sinclair (1995), who first described accountability as a chameleon. 5. In their introduction to the book, Ansell and Torfing (2022) mention “corporate governance” a mere three times out of over 250 references to “governance”.

Prospects for accounting, accountability and governance  485 6. Beekes et al. (2015) discuss ratings of the corporate governance structures of Australian listed companies provided by an agency called Horwath. This agency awarded between one star (for companies with very poor corporate governance) and five stars (for companies with outstanding corporate governance). 7. Carnegie (2022) has made this point in connection with global university rankings, suggesting that, at least in the case of Australian universities, rankings may be “potentially corrupting”, directing universities away from a mission to act in the public interest and to serve broad stakeholder groups, towards “a self-interested corporate culture”. 8. This refers to the use of both real commercial practices (such as encouraging customers to buy goods and services in an earlier accounting period) and accounting choices (such as underestimating the allowance necessary for rebates and discounts due to customers) that allow companies to report higher (in rare situations, lower) profits than would be reported under “normal” commercial and accounting choices (Healy & Wahlen, 1999). 9. The words “accountor” and “accountee” were seemingly introduced by Stewart (1984), who conceptualized a five-step “ladder of accountability”, with accountability for probity and legality at the bottom, accountability for process as the second step, accountability for performance at the third step, accountability for programmes at the fourth step and policy accountability at the top step. Although this model was developed for public sector organizations, it provides insights into accountability in other contexts. 10. Gillan et al. (2021) review research into the relationship between CSR/ERG disclosures and financial measures of risk, performance and value, and conclude that there is overall a positive relationship, while variations across companies in the level of CSR/ESG are often associated with factors related to geographical location, characteristics of directors and CEO, and the structure of corporate ownership. 11. The 2021 census revealed that about 37 per cent of the population of England and Wales reported that they had no religion, up from about 25 per cent in 2011 (“Less than half of England and Wales population Christian, Census 2021 shows”, see www​.bbc​.co​.uk/​news/​uk​-63792408 (last accessed 6 July 2023). 12. According to Carnegie and Napier (2012, pp. 353–354), accounting is accordingly viewed as “the arena of accountants rather than policy makers or indeed of society more generally”.

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Prospects for accounting, accountability and governance  487 Hines, R.D. (1988), “Financial accounting: in communicating reality, we construct reality”, Accounting, Organizations and Society, Vol. 13 No. 3, pp. 251–261. Jeacle, I. (2017), “Constructing audit society in the virtual world: the case of the online reviewer”, Accounting, Auditing & Accountability Journal, Vol. 30 No. 1, pp. 18–37. Jeacle, I. and Carter, C. (2011), “In TripAdvisor we trust: rankings, calculative regimes and abstract systems”, Accounting, Organizations and Society, Vol. 36 No. 4–5, pp. 293–309. Jensen, M.C. and Meckling, W.H. (1976), “Theory of the firm: managerial behavior, agency costs and ownership structure”, Journal of Financial Economics, Vol. 3 No. 4, pp. 205–260. Joannidès de Latour, V. (2017), Accounting, Capitalism and the Revealed Religions: A Study of Christianity, Judaism and Islam. Palgrave Macmillan, Basingstoke. Landry, E.E., Bernardi, R.A. and Bosco, S.M. (2016), “Recognition for sustained corporate social responsibility: female directors make a difference”, Corporate Social Responsibility and Environmental Management, Vol. 23 No. 1, pp. 27–36. Lev, B. and Gu, F. (2016), The End of Accounting and the Path Forward for Investors and Managers. Wiley, Hoboken, NJ. Lund, D.S. and Pollman, E. (2021), “The corporate governance machine”, Columbia Law Review, Vol. 121 No. 8, pp. 2563–2634. McPhail, K. (2022), “From stakeholder to rightsholder: the UNCPs, SDG and new paradigms for corporate accountability”, Accounting and Management Review, Vol. 26 No. 1, pp. 111–131. Medawar, C. (1976), “The social audit: a political view”, Accounting, Organizations and Society, Vol. 1 No. 4, pp. 389–394. Mitchell, R.K., Agle, B.R. and Wood, D.J. (1997), “Toward a theory of stakeholder identification and salience: defining the principle of who and what really counts”, Academy of Management Review, Vol. 22 No. 4, pp. 853–886. Montenegro, T.M. (2017), “Religiosity and corporate financial reporting: evidence from a European country”, Journal of Management, Spirituality & Religion, Vol. 14 No. 1, pp. 48–80. Morgan, G. (1988), “Accounting as reality construction: towards a new epistemology for accounting practice”, Accounting, Organizations and Society, Vol. 13 No. 5, pp. 477–485. Napier, C. (2010), “United Kingdom”. Previts, G., Walton, P. and Wolnizer, P. (eds), A Global History of Accounting, Financial Reporting and Public Policy, Vol. 1, Emerald, Bingley, pp. 247–273. Parker, L.D. (1996), “Broad scope accountability the reporting priority”, Australian Accounting Review, Vol. 6 No. 11, pp. 3–15. Parker, L.D. (2007), “Internal governance in the nonprofit boardroom: a participant observer study”, Corporate Governance: An International Review, Vol. 15 No. 5, pp. 923–934. Parker, L.D. (2008), “Boardroom operational and financial control: an insider view”, British Journal of Management, Vol. 19 No. 1, pp. 65–88. Parker, L. and Narayanan, V. (2023), “Readdressing accountability for occupational health and safety in a pandemic era”, Meditari Accountancy Research, Vol. 31 No. 1, pp. 78–100. Power, M. (1997), “Expertise and the construction of relevance: accountants and environmental audit”, Accounting, Organizations and Society, Vol. 22 No. 2, pp. 123–146. Power, M. and Laughlin, R. (1992), “Critical theory and accounting”, Critical Management Studies, Vol. 21 No. 5, pp. 441–465. Rached, D.H. (2016), “The concept(s) of accountability: form in search of substance”, Leiden Journal of International Law, Vol. 29 No. 2, pp. 317–342. Shah, N. and Napier, C.J. (2019), “Governors and directors: competing models of corporate governance”, Accounting History, Vol. 24 No. 3, pp. 338–355. Sinclair, A. (1995), “The chameleon of accountability: forms and discourses”, Accounting, Organizations and Society, Vol. 20 No. 2–3, pp. 219–237. Solomon, J. (2021), Corporate Governance and Accountability. 5th edn, Wiley, Hoboken, NJ. Stewart, J.D. (1984), “The role of information in public accountability”. Hopwood, A. and Tomkins, C. (eds), Issues in Public Sector Accounting. Philip Allan, Oxford, pp. 13–34. Styhre, A. (2016), Corporate Governance, the Firm and Investor Capitalism: Legal-Political and Economic Views. Edward Elgar, Cheltenham, UK and Northampton, MA, USA. United Nations Global Compact (2004), Who Cares Wins: Connecting Financial Markets to a Changing World. United Nations, New York.

488  Handbook of accounting, accountability and governance Usmani, M., Davison, J. and Napier, C.J. (2020), “The production of stand-alone sustainability reports: visual impression management, legitimacy and ‘functional stupidity’”, Accounting Forum, Vol. 44 No. 4, pp. 315–343. Wilson, J. (2021), “‘Preparers and the financial reporting system’: a practitioner view”, Accounting and Business Research, Vol. 51 No. 5, pp. 508–510. Wood, D.J., Mitchell, R.K., Agle, B.R. and Bryan, L.M. (2021), “Stakeholder identification and salience after 20 years: progress, problems, and prospects”, Business & Society, Vol. 60 No. 1, pp. 196–245.

Index

AAG see accounting, accountability and governance (AAG) accountability and accounting 170, 172, 175, 176 “accountability-based accounting” 264, 274, 317, 319 “accounting-based accountability” 80, 82, 274, 317 historical perspective 99–100, 101–2, 104, 111 limitations of latter in achieving former in NGOs 289 literature on 105–10, 111 meanings of 78 in AIM companies 200–202, 208–9 audit, assurance and internal control as mechanisms of 144–60 of auditors 153–5 calls for “broader scope” 483–4 centrality to major monotheistic religions 473, 484 citizen-led 265–7, 270 and codes of corporate governance 49–53, 62–5 social and environmental 179, 188 and corporate governance 135–6 and counter accounts 357–60, 363–4, 365 as counterpart of morality 474 definitions 18–19, 21, 78–9, 81, 170, 171, 249, 261, 284, 315, 357–9, 385 downward/beneficiary 133, 284, 287, 288–9, 291, 301, 302, 303, 305 in emerging economies 216, 218, 219, 220–223, 226, 227, 229 environmental and social concerns in 129, 130, 132 ethic of 173 evolution to more stakeholder-oriented approach 169, 178 as fundamental human phenomenon throughout history 473 as “giving an account of oneself” 473–4 grassroots 247–8, 303 grounded 290, 304 and historical construction of governing subject 398–420 holistic 259, 263–5, 273–4, 285, 288, 301, 303, 338, 358, 379

in hybrid organizations 131, 132, 137, 308, 315–19, 325 impact of group accounting requirements on aggregation 438 inadequate disclosures 439–40 inadequate related party transaction notes 440–441 issues identified 434 literature insights 428–31, 432 minimizing disclosure through reclassification 441 recommendations for future 442–3 research questions 425 standards driving effective, but enabling inadequate 441–2 Islamic 335–9, 343, 344 nature of 170 objective approach 285, 289 performance 133, 259, 261, 262–3 political 246, 249, 250 in public organizations 133–4, 137 role of financial reporting academic evidence 105–8 context and overview 99–101 historical perspective 101–2 standard-setting perspectives of 102–5, 113 study conclusions 111–12 study discussion 109–11 role of management accounting and control in 120–123, 128, 129, 132, 134 of social institutions 134–5, 137 and society 484 to stakeholders 16, 18, 20, 33, 77, 82, 135–6, 160, 172, 174, 179, 199, 241, 322, 371, 452, 474 subjective approach 285–6, 291–2 support for effective discharge of 385–6 theoretical framework 172 “through” 144, 145, 147, 150, 153, 160 unintended consequences of NGO-led 222 university, in developing economies 237–41, 244–52 “for what” 144, 145, 147, 151, 152, 153, 155, 160 “to whom” 144, 145, 147, 149, 151, 152, 153, 155, 160

489

490  Handbook of accounting, accountability and governance see also accounting, accountability and governance (AAG); dialogic accountability; moral practice: accountability as; social accountability; social and environmental accountability; social practice: accountability as “accountability dilemma” 315 accounting and accountability 170, 172, 175, 176 “accountability-based accounting” 264, 274, 317, 319 “accounting-based accountability” 80, 82, 274, 317 historical perspective 99–100, 101–2, 104, 111 limitations of former in achieving latter in NGOs 289 literature on 105–10, 111 meanings of 78 in AIM companies 205–7 boards of directors’ responsibility for 71, 82–3, 86, 87, 92–3 breakthrough into double-entry bookkeeping 410 as constitutive of governing entities from state to corporate enterprise 417 definitions American Accounting Association 19 American Institute of Accountants 19 Carnegie, Parker and Tsurahidu’s new 20, 41, 82, 135–6, 160, 174, 322, 452, 468, 474 providing insights into social and environmental accountability 174 dispositif of security as form of 413–14 as earliest known-writing form 398–9, 416, 420 emancipatory 171, 175 as embedded in human thinking and acting 419 in emerging economies 217, 218–20, 221, 224–6, 227–8, 229 end of 475–7, 484 engaging in new forms of 415 extinction 168, 182, 184 “forensic” 410–411 holistic 372, 374, 378, 383, 469 in hybrid organizations 308, 315, 319–25 Islamic 334–5, 338, 342–3, 344 management-via-accounting 412, 414, 416, 418 maximization of activities 386–7 and modern governing/managing 412 non-financial value units 402, 414, 415

social and environmental 168–9, 171, 172–3, 177, 179–80, 184, 185, 187, 188 and society 484 traditional 80, 82, 274, 310, 317, 351, 370, 373, 375–6, 379, 380, 383, 388–9, 392, 393, 463, 469, 484 writing, and birth of governing subject 400–407, 416 see also accounting, accountability and governance (AAG); counter accounts; dialogic accounting; moral practice: accounting as; social practice: accounting as; Spotlight Accounting and SIGs accounting, accountability and governance (AAG) academic approaches dichotomy 281 blending social and environmental matters with financial measures 168 calls for more qualitative research in 473 and COVID-19 context and overview 448–9 future research avenues 469 lesson learned 465–9 literature review 450–465 research method 449–50 in emerging economies in development context 215, 216, 228–9 direct financial investment, global value chains and corruption 217–20, 229 NGOs 220–223, 229 technical infrastructure 223–8, 229 future research avenues in AIM and other junior markets context 209–10 in COVID-19 context 469 in historical context 41–2 in hybrid organizations context 325 in Islamic context 343–4 in MACS context 135 in NGOs context 294 overview 480–483 in hybrid organizations 306, 307–8, 310, 324, 325 inter-relations context and overview 14–15 elements 17–20 facilitation, provision of information, and centrality to humanity 483 historical intertwining 33–40 interconnection points 20–21 performance, nurturing and presumption 1–3, 72, 473, 484 prior literature 15–17

Index  491 and qualitative studies 35 Islamic 332, 342, 343–4 as necessary essentials 10, 71, 483 and NGOs approaches to 283–6 in emerging economies 220–223, 229 empirical research 286–7, 301–5 future research avenues 294 overview in diverse contexts and sectors 6 future of 7–8 mechanisms 4–5 new perspectives 7 past and present perspectives 3–4 previous research relating to AIM and issues of 197–200, 209 recommendations for future 484 social and moral aspects of 468–9 Spotlight Accounting and SIGs challenges 390, 392–3 concept and practice of 371, 372, 376–82, 393 identifying and inculcating objectives 375–6 organizational and social context 382–7 overview 369, 372–4 potential in practice 387–90 and sustainability aspects of 468–9 call for more research 41 understanding interplay between elements as essential for 14, 71 see also accountability; accounting; governance accounting disclosures see disclosure accounting history recent research on governance theme 38–40 relevance of 37–8 accounting information area of future research 112 constraint on 137 disclosure across SIGs 370, 386 focus on past activity 126–7 and group accounts 442, 443 historic 101 importance of disclosure of relevant and reliable 14, 71 link with stewardship 109–10, 112 pluralism of 374 providing tool to fulfil accountability responsibilities of accountor 99–100 reporting to public 370 role during COVID-19 453–4, 459, 460 role in informing investors’ decision-making 113

for small-cap companies 198 social movement gaining access to 363 stewardship versus valuation 105–6, 108, 114 use of GAAP as minimum for disclosure of 201 viewed as economic good 170 accounting research calls for “broader scope accountability” 483–4 and corporate governance 41, 119, 121, 122, 129, 131, 134 counter accounts, studies 352–7 critical 41, 350, 399 cross-disciplinary 34 debate on inter-relations between accounting, governance and accountability 33, 34–6 in emerging economies 228 on environmental accountability 174 as focused often on large listed companies 209 future avenues in relation to accountability and transparency topics evolving from COVID-19 468 long history of decision-usefulness and stewardship/accountability in 108 and NGO accountability 282, 286, 287, 293–4 recommendations for improved, for supply chains 453 and setting of “time” 37 accounting standard-setters as key players in field of financial reporting 99 perspectives on accountability roles of financial reporting 102–5 responsibility for driving better accountability 442–3 and stewardship analytical studies 105–6 and decision usefulness 102–3 effect on financial reporting if taken into consideration 109 empirical studies 106–8 gap between IASB’s views and academic evidence 100–101 reframing financial reporting’s roles in terms of valuation and 111 reluctance to provide stronger role for 104 accounting standards compliance 225, 252, 424, 430, 431–2, 433–4, 442 counter accounts breaking free from 349

492  Handbook of accounting, accountability and governance in emerging economies 225, 229 in group accounting context cases 426–7, 435–8 consolidation and aggregation of subsidiaries 428–30 disclosure checklist 446–7 equity accounting of associates and joint ventures 431 future research avenues 443 introduction to 424–5 methodology 431–2 recommendations for future 441–3 results of study 424, 434–5, 441 shortcomings highlighted 438–41, 442 relevance to accountability 19 social and environmental 217 and stewardship 105, 109 Accounting Standards Board (ASB) 103 Africa see Sierra Leone; South Africa agency theory 31–2, 200–201, 480–481 AIM see Alternative Investment Market (AIM) Alternative Investment Market (AIM) accountability in 200–202, 208–9 accounting and audit 205–7 background to 197–200 context and overview 196–7 future research avenues 209–10 governance of 200–204 research 207–8, 210 use of NOMADs 196, 203, 204, 205, 208, 209, 480 as most established junior stock market 196 previous research into 207–9 apparatus (dispositif) of security 413–14, 418, 419, 420, 456 assurance context and overview 144–5 definition 145–6 empirical research on 153–7 explosion onto scene 152–3 historical expansion of concept 147–53 of non-financial information 155–7 practices evolving in response to social and economic changes 476 purpose to create trust 145 recommendations for future 187, 476–7 as subset of audit 161 and sustainability 152–3, 155, 156, 157, 160, 476 taxonomy for understanding 157–60 as umbrella of audit and internal control 145–7 see also combined assurance (CA) audit in AIM companies 205–7

assurance as umbrella of 145–7 and assurance services, conceptual hierarchy 147 dominating pre-1950s era 148–9 emerging complexity in assurance agency relationship 155–6 empirical research on 153–5 giving way to assurance 152–3 internal control from 1950s to 1990s 149–51 and “interpretative assurance model” 157 power shift for 159 provision of assurance 156–7 under scrutiny, post-1990s 151–2 as subset of assurance 161 in taxonomy for understanding assurance 157–8 traditional focus on assurance of financial reports 145, 199, 224 see also external audit; internal audit audit committees for AIM company transparency 199 in Australian context 202 as commonplace 3 composition 51, 84 cross-national differences in scope of responsibilities 58 financial reporting role 84, 85, 86–7 as NGO area of future research 294 qualitative content analysis of 482 role in assurance process 157 of Thomas Cook Group plc 439 triangular versus dual relationships 153–4 beneficiary accountability see downward/ beneficiary accountability benefit corporations (B-Corps) 309, 311, 317 biodiversity 168, 174, 176, 177, 178, 179, 180, 182, 183–4, 353, 462 black box of audit firms 154 of boards of directors 34, 35, 92, 226, 473 block shareholders 197, 199, 201, 208, 209, 479–80 board authority limitations 91 boardroom diversity definition 179 boards of directors accountability components of 201 context 78–9 in corporate governance framework 31 held to account 80 holding to account 79–80 and NGOs 284, 287, 294 “as objects of” 79 and QCA code 202

Index  493 as traditional mechanism of 3 in universities of developing economies 240, 249 and agency theory 32 and AIM companies 197, 201–3, 208, 209–10 and audits 206 black box of 34, 35, 92, 226, 473, 482 codes of corporate governance and accountability 62–5 and compliance with UK code 55 “comply or explain” approach 201–3, 477–8 cross-national comparisons 57 directors 49–53 in emerging economies 226 and gender diversity 57 in social and environmental accountability 179, 188 context and overview 71 corporate and financial reporting 80–87, 92–3, 475 and counter accounts 362 future research agenda 92–3 governance 72–4 in governance definition 121, 123 and governing subject 408, 418 historic 30 in hybrid organizations’ governance 313, 314 internal control as effected by 146 of Islamic organizations 338, 339–42, 343–4 and MACS 123–4 as instrument of “socialization” of 127–8, 136 and NOMAD system 205 paradoxes absence of challenge 91–2 context 87–8 diagrammatic representations 90 independence 88 information asymmetry 89 limitations of authority 91 responsibility 89 processes 64, 72–3, 78–80, 82–3, 85–6, 92 in qualitative and quantitative streams of research 34–6 responsibilities 74–8, 483 size, and COVID-19 454 viewed as central to corporate governance 480 bookkeeping as accountability tool 113, 150, 338 audits as closely related to 148 double-entry accounting’s breakthrough into 410

Italian 175 medieval Catholicism stimulating development of 473 single-entry 39 Cadbury, A. 17, 72, 73–4, 417 Cadbury Committee 4, 17, 49, 53, 65, 72–3, 81, 200, 417, 418, 474 Cadbury Report (1992) 50–51, 53, 57, 62, 65, 73, 122, 134, 150, 151, 179, 200, 201, 203, 209, 417, 418, 474, 477–8, 479, 480 Centre for Social and Environmental Accounting Research (CSEAR) 169 challenge, absence of 91–2 Chandler, A. 398, 400, 411–12, 414–15, 416, 418 citizen-led accountability 265–7, 270 climate change 7, 112, 137, 168, 173, 180, 183, 325, 417, 462, 464, 469 Climate Disclosure Standards Board (CDSB) 183, 184, 185 co-production and accounting systems 272 definition 265 for development of emerging economies 222–3 service-user participation as part of 265–6 codes of corporate governance and absence of challenge 91 and accountability 49–53, 62–5, 178 in AIM companies 201–3 “apply and explain” approach 52, 54, 56, 226, 478 codes of good governance 50, 56, 63, 64–5 compliance 40, 52, 55, 56, 59–60, 61, 62, 63–4, 202–3, 226, 478 “comply or explain” approach 51–2, 55–6, 60, 61, 63, 150, 201–3, 206, 209, 226, 340, 477–8 in emerging economies 51–2, 226, 239 global diffusion of 52 influential Cadbury Report (1992) 53 UK Stewardship Codes 53–4 Islamic 339 literature review country-level studies on 55–9 firm-level studies on 59–62 method 54 as non-binding and voluntary in nature 52 overview 50–53 Quoted Company Alliance 201–2, 209 role in social and environmental accountability 179, 188 South African 51–2, 56, 199, 226 study conclusions 62–5

494  Handbook of accounting, accountability and governance UK 4, 60, 74, 77, 93, 196, 197, 206 see also Cadbury Report (1992) combined assurance (CA) 144, 157, 160 companies under control of block shareholders in emerging economies 197, 199, 201, 208, 209, 479–80 definition of purpose of 75 compliance of academic staff in Sierra Leone 247, 249, 250–251 with accounting standards in developing economies 252 with group-related disclosure requirements 433–4 IFRS 424, 430, 442 low, in Bangladesh 225 non-compliance 424, 430, 442 systematic evaluation 431–2 AIM companies 202–3, 205, 206 with best governance practices, growing need for 32 budgetary 262, 267 with codes of corporate governance AIM companies 202–3 and board accountability 63–4 and board effectiveness 55 explanations for deviation 61 and firm performance 62, 63 flexibility in 52 governance often interpreted as exercise in 40 non-compliance 56 in South Africa 226 statements at international level 60 statements at national level 59–60 superficial 478 with COVID-19 regulations 455, 459, 461 of hybrid organizations 312–13, 320 and internal control 84–5, 146, 151 and MACS 122, 123, 125, 133, 137 reports emphasizing need for 122 with Shariah 332, 333, 334, 335, 339, 341, 343 in universities in developed economies 252 voluntary, for public-sector sustainability reporting 259, 268 contract theory 145–6, 158–60 control process 36, 121–2, 155, 323 corporate boards and audit reforms 92 compliance and governance codes 478 female directors on 482 historic 30 and MACS 123

in quantitative stream of research 34 see also boards of directors corporate collapse 53, 83, 122, 198, 200, 203, 356, 436, 437, 438, 441 corporate governance and accountability 19, 78, 135–6 codes of governance 49–53, 63–4, 178, 179, 188 advent of 28–31, 474 boards of directors as central to 480 core purpose of 475 definitions 17–18, 30–31, 72–4, 123, 130, 200, 312 development of studies in 32 different models of 19 effective 18, 19, 30, 121, 122, 419 first guidelines for improving American 50 as inspiring critical accounting research 41 involvement of United Nations in advancing 479 Islamic 339–42, 343–4 large diversity of types of shareholders in 75 from “law and economics” perspective 474, 478 “machine” 483–4 “more stakeholder-oriented” perspective 151–2 narrowed scope of 474 paradoxes of 88–92 in qualitative and quantitative research streams 35–6 role of external and internal auditors 86–7 role of MACS 119–20, 122, 123, 125, 129–37 boilerplate statements 85 and sustainability assurance 155 thinking predicament of governing subject of 416–19 see also codes of corporate governance; governance corporate reporting agenda for future research 92–3 appeal of aggregation 429 changes in 178, 443 and consolidated financial statements 428 in COVID-19 context 462 directors’ responsibility for 81–6 on environmental and social impacts 479 exposure of problems of 122 focusing on ESG issues 172 as at heart of corporate accountability 80 and integrated reporting 157, 159 objective of 81 purpose to reduce information asymmetry 462

Index  495 research questions 93 reverse takeover by management accounting 126 shortcomings in 350, 360 and stakeholder engagement 481 and sustainability reporting 110–111, 112 traditional motivation for 475 traditional, reviewed as corporate governance mechanism 71 and Value Reporting Foundation 184 corporate social reporting 171 corporate social responsibility (CSR) assurance 156–7 in broader approach to governance 119 different meanings given to 158 and duties of directors 475 and ESG 483, 485 female directors on boards as positively associated with proxies for 482 and IFIs 339, 340 interplay between offices and, in post-COVID-19 environment 464–5 “machine” capturing concept of 483 and management accounting and control 129–31, 137 reporting and counter accounts 350, 355, 359–60 Spotlight Accounting applied within context of 359–60, 373–4, 381 studies on 227 corporate sustainability reporting 388–90 corporations accountability of 31, 169, 171, 172, 175, 177, 355, 474, 479 accounting impacting on 269 benefit 309, 311, 317 in concept of governance 121 corporate governance approach to 18, 31, 73, 74 and counter accounts 356 in emerging economies 215, 216, 218, 219–20, 228–9 and governance mechanisms 5 group financial statements as often confusing for 429 listed on AIM 177, 203 municipal 310 NGOs differing from for-profit 282 as object of analysis 36 as often comprising many separate legal identities 424 origin of limited liability 161 and pre-1950s financial audits 148–9 problems faced by shareholders in 29 publicly held 29

purpose of 62–3, 74–8 SLAPPS often brought by 366 strategic use of media accounts 354 and studies of governance 31–2 treatment as legal persons 92 corruption of concern in NGO sector 294 in developing economies 244, 247, 248 in emerging economies 220, 221, 224, 229 prevention of 418–19 counter accounts contra-governing 351, 352 critiques of 362–3, 476 definitions 350–351 dialogic 351, 352 future research avenues 363–5 as newer form of accounts 182 overview and context 349–50, 476 partisan 351–2 as possible saviour 363–5 relation to accountability 357–60, 363–4, 365 relation to governance 360–362, 364–5 as studies 355–7 studies of 352–5 systematic 351 country-level studies on codes of corporate governance adoption, development or diffusion 56 consequences of transnational codes 58–9 convergence and divergence of codes 58, 63 cross-national comparisons of codes 57–8 mechanisms for implementation 55–6 specific national codes 56–7 COVID-19 future research avenues 469 lessons learned changes to MC systems 467 changing work landscape 467–8 effective communication with stakeholders 466–7 preparation and planning 466 social, moral and sustainability aspects of AAG 468–9 literature review context 450–451 impacts on businesses 451–4 impacts on governments 455–9 impacts on hospitals and charities 459–60 risk management and disclosures 460–465 overview and context 448–9 research method 449–50 culture emergence in NGO accountability 290

496  Handbook of accounting, accountability and governance prominence in shaping accounting and accountability 465 decision-making citizen participation in 265–7 economic, superseding accountability in corporate reporting 81 impacts of group accounting requirements on 428–30 MACS supporting processes of 121, 125, 136 SIGs and Spotlight Accounting 378–9, 383, 386, 393 of standard-setters 102, 104, 109 decision usefulness 5, 19, 81, 100, 102–4, 108, 109, 113–14, 172, 179, 475 developing economies corruption 244, 247, 248 NPM initiatives 283 Southern NGOs based in 281 see also Sierra Leone development in emerging economies discourse on 215–16, 228–9 environmental law and MNCs 219 localization through NGOs 221 of technical infrastructure of AAG in 223–8 unintended consequences of NGO-led 222–3 infrastructure sector 217 DFI see direct foreign investment (DFI) dialogic accountability 34, 259, 264, 265, 266, 273, 274, 303, 316, 317, 359, 381, 481 dialogic accounting 264, 265, 270, 272, 274, 317, 350, 351–2, 359, 369, 373–4, 379, 389, 458 dialogic engagement 173, 175, 267, 369, 386, 390, 428 dialogic performance measurement 270, 271 direct foreign investment (DFI) 215, 216, 217–18, 229 directors accountability 76–8 as “computing models of corporate governance” 19 going concern statements 82, 86 historic 30 letter of representation 85–6 in qualitative and quantitative streams of research 35–6 relationship with external and internal audit 86–7 responsibility for financial reporting 81–6 responsibility for non-financial reporting 87

statement on internal controls 84–5 see also boards of directors disclosure AIM companies 201–2, 204–5, 206, 208, 209, 210 anti-bribery 289–90, 294, 303 belief in accounting’s ability to enhance accountability by means of increased 172 board accountability consisting of accurate 201 boilerplate 85, 206 climate change, as mandatory 177 counter accounts 354, 356, 357, 476 COVID-19 implications of inadequate 466–7 moral aspects of 468 and organizations’ risk management 460–465, 466 and performance 454, 457 “disclosure sclerosis” 261, 379 environmental 227 ESG 172, 478–9, 482 financial collapses leading to focus on 200 financial reporting as 16 group-related 424, 425, 426, 427, 429, 432, 433–4, 435, 438–41, 442, 443, 446–7 Islamic banks’ social and environmental 334 and management accounting 122, 124, 126, 136 maximizing impact of activities 386–7 of national codes of corporate governance 52, 201–2 NOMADS reducing 204–5 of non-financial information 153, 155, 158, 317 “selective” 354 and shadow accounts 351 Spotlight Accounting and SIGs 375, 378, 379, 381, 383, 385, 386–7, 388, 389, 390, 392, 476 sustainability 184–5, 187, 268, 270, 325 “timely and accurate” 31 traditional accounting-based accountability 80 use of quantitative data 481 downward/beneficiary accountability 133, 284, 287, 288–9, 291, 301, 302, 303, 305 dynamic materiality 174, 183, 188 economic context 242–3 emerging economies board components 478 and codes of corporate governance 55, 61, 226, 480

Index  497 companies under control of block shareholders 479–80 corruption 220, 221, 224, 229 development discourse 215–16, 228–9 DFI in 215, 216, 217–18, 229 global value chains 216, 219–20 NGOs in 216–17, 220–223, 229 technical infrastructure in 223–8, 229 enterprise governance framework 122–4 enterprise risk management (ERM) 124–6 environmental practices 130, 259, 268–70, 388 environmental, social and governance (ESG) and academic research 478–9, 481–2 assessing disclosure 479 audit’s crucial role in 187 disclosure of risks 462 emergence of term 474, 478 investor engagement 180–181, 188 “machine” capturing CSR under label of 483 origins 172 performance 462, 478–9 prioritization of issues 183–4 report encouraging more disclosure 478 reporting 180, 184–5 strong interest in 178 equity accounting 426, 431 ERM see enterprise risk management (ERM) ESG see environmental, social and governance (ESG) ethic of accountability 173 events as driver of social and environmental accountability 182–3 giving further impetus to debate on good governance 62–3 expectations gap 83–4, 91, 151 external accounts 351–2, 365, 373, 376, 389–90 external audit as accountability mechanism 3, 199 and accounting 19 and AIM companies 207 as assurance engagement 146 audit committee’s tasks regarding 206 Cadbury Committee’s focus on 200 directors’ relationship with 86–7, 93 interaction with audit committee 84 letters of representation 85 and NGO research agenda 293–4 role in ESG domain 187 shareholders’ appointment of 83 triangular versus dual relationships 153–4 external social audit 181, 182 extinction accounting 168, 182, 184 extinction crises 168 extinction of species 173, 183

fair-value accounting 108, 110, 114, 343 Financial Accounting Standards Board (FASB) 100, 102–4, 107, 109–10, 111, 441 financial information and accountability 135, 317, 443 and accounting standards 425 and agency theory 200–201 audit associated with certification of 144 comparability enhancing usefulness of 441 consolidated versus unconsolidated 430 contract theory or social theory approach 157 corporate reports for communicating 77 and end of accounting 475 entities underpinning communication and assurance of 224 faithful representation as qualitative characteristic of 110 and MACS 127, 128 management accounting and control for 121 provision of, as purpose of conventional accounting 351 provision of assurance for 156 unsustainability of rhetoric in absence of reliable 458 financial reporting accountability role academic evidence 105–8 context and overview 99–101 as end game of 81 as at heart of corporate accountability 80 historical perspective 101–2 reinforcing facades of power 442 standard-setting perspectives of 102–5, 113 study conclusions 111–12 study discussion 109–11 viewed as core outlet for organizational accountability 428 for AIM companies 199, 205–6 and assurance 146, 155 auditors as experts in 157 in Cadbury Report’s terms of reference 50–51, 122, 200 conceptual frameworks 99, 100, 102–5, 107, 109–11, 113–14 and counter accounts 356 criticisms of 475–6 definition 16 directors’ responsibility for 81–6 fraudulent 150 future research agenda 92–3 governance role 99, 100, 104, 107, 111–12 government 258 of innovative small firms 199 and internal control 151, 153, 155

498  Handbook of accounting, accountability and governance as key element of robust governance 461 as means to an end 80 as mechanism of transparency 36 need for change to existing model 477 objectives of 5, 99, 100, 102–4, 109, 113, 114 as primary focus of traditional accounting research 119 and religious faith 484 research questions 93 scandals 122, 417 stewardship paradigm of 475–6 and traditional accounting concepts 388 in US Sarbanes-Oxley Act 122 valuation role of 100, 107–8, 112 Financial Reporting Council see UK Financial Reporting Council (FRC) firm-level studies on codes of corporate governance code compliance and firm performance 62, 63 compliance statements at international level 60 compliance statements at national level 59–60 explanations for deviation from codes 61 Foucault, M. 37, 40, 131, 291, 294, 304, 398, 399, 400, 408, 409–10, 411–14, 415, 416, 418, 419, 456 funding AIM bio-pharma sector 199–200 government higher education 238, 239–40, 241, 251 hybrid organizations 131–2, 306, 307–8, 309, 316 Indigenous people 387 Islamic 332, 333 NGOs 222, 282, 287, 289, 293, 294, 301, 303, 305 gaming 263–4, 271, 481–2 global environments 239 Global Reporting Initiative (GRI) 21, 184–5, 227, 268, 269, 270, 355–6, 389, 460, 464 global value chains 216, 219–20 going concern directors’ statement on 82, 86 Smiles Inclusive Limited 436 good governance accountability determined through stakeholders’ observable actions 252 as essential to development of 31 call for Nigerian universities to adopt 239 codes of 50, 56, 63, 64–5

conformance and performance as dimensions of 123 debate on, stimulating proliferation of codes 62–3 definition 72 effectiveness as criterion relevant to 73 effectiveness of NOMAD system in ensuring 205 of financial resources 284 and governing subject 418 human relationships as key to 74, 86 importance in charities 134 management accounting and control for 121 need for stakeholder accountability to be set as objective of 179 NGOs in Global South 221 of planet 418 Prophet Muhammad’s principles of 339 and responsibility of directors for accounting 71 risk management as cornerstone of 125 Spotlight Accounting supporting 383, 385 as term applied and understood in accounting profession 2 Goodhart’s Law 417 governance of AIM companies 200–204 research 207–8, 210 use of NOMADs 197, 203, 204–5, 208, 209 audit, assurance and internal control as mechanisms of 144–60 and counter accounts 360–362, 364–5 definitions 17–18, 26, 74, 121, 123, 178 in emerging economies 216, 218, 219, 220–221, 226, 229 from government to 408–11 grassroots 247–8 holistic 168, 179, 180 of hybrid organizations 131–2, 137, 311–14, 324–5 localization through NGOs 221 medieval emergence of term 408 metaphors 72, 73 performance 259–60, 271–3 as political practice 26–8, 30 as receiving increasing attention across public, voluntary and charity organizations 170 reinventing 477–80 relationship-based 245 role of financial reporting 99, 100, 104, 107, 111–12 role of management accounting and control in 120–126

Index  499 and social and environmental accountability 168, 172, 175, 178, 179, 188 towards more stakeholder-orientated approach 169, 178 university, in developing economies 237–52 governance by numbers 2, 17, 19 governance codes see codes of corporate governance governing subject acceptance of being “governable” 417 and accountability 418 birth of 398, 400–407, 416 conceptions defining construct as multiple and collective 408 definition 408 “ethico-legal” form emergence of 400 personal disposition in favour of 418 turn to 408–11 govern-able 399–400, 403, 406, 407, 414, 415, 416, 417–18, 419, 420 governing requiring whole relays of 413–14 importance in delivering good governance 418 overview 398 predicament of, historically informed reflections on 416–19 ration assignments for feast for elite-level 403 in schematic drawing of tablet and cylinder seal 405, 406 strategic decisions by top managers as 415 government impact of COVID-19 on 455–9 in Sierra Leone government grants 248–9, 251 historical context 241–2 policy implementation 240–241 political accountability 246, 249, 250 and university governance 239–40, 244 ultimate aim of 456 and university governance and accountability in developed and developing economies 251–2 governmental management as centripetal coordination and accountability 398 and disciplinarity 412–14, 418 as form of new governing 400 governing and managing 416 governmentality accounting as device of 40 connections with disciplinarity 414 Foucault’s work on 128, 131, 294, 398, 399, 411, 413, 414, 456

and MACS 128, 131, 135 meaning of 456 as studying the art of governing 399 of top managers 128 in universities 250–251 use of theory 291, 294, 303 as valuable research subject 40 governors as “computing models of corporate governance” 19 in conceptions of governing subject 408 historic 30, 403 of self 131 terminology 408 grassroots accountability and governance 247–8 greenwashing 174, 177, 187, 188, 227 grounded accountability 290, 304 group accounting accounting standards cases 426–7, 435–8 compliance 424, 426, 430, 431–2, 433–4, 442 consolidation and aggregation of subsidiaries 428–30 disclosure checklist 446–7 equity accounting of associates and joint ventures 431 future research avenues 443 introduction to 424–5 methodology 431–2 recommendations for future 441–3 results of study 424, 434–5, 441 shortcomings highlighted 438–41, 442 aggregation feature of 425, 428–30, 436, 438, 440, 442 background and issues of concern 426–7 consolidation and aggregation of subsidiaries 428–30, 438 in H Ltd 426 disclosure and accountability deficiencies 424 aggregated 427, 429 checklist 446–7 compliance with requirements 433–4, 442 goodwill impairment 433, 434 IFRS and IAS focus on 426 inadequate, regarding significant acquisitions 439–40, 442 minimizing through reclassification 441 related party 433, 434, 436–7, 438, 440–441, 442 research interest 425 research questions 432

500  Handbook of accounting, accountability and governance segment 427, 432, 434, 443 shortcomings related to cases 438–41 Smiles Inclusive Limited 436–7 Songcheng Performance Development Ltd 435 Thomas Cook Group Ltd 437 equity accounting of associates and joint ventures 431 evidence of group accountability failures 434–41 impacts of requirements on accountability and decision-making 428–31 methodology 431–2 overview 424 review of group financial statements of largest listed UK groups 433–4 study conclusions and future research avenues 441–3 higher education (HE) in developed economies 237 financial impact of COVID-19 468 governance and accountability in see Sierra Leone history of governance advent of corporate governance 28–31 context and overview 25–6 increasing relevance in social sciences 31–3 inter-relations with accounting and accountability 33–4 debate in different accounting streams of research 34–6 recent research in accounting history on governance theme 38–40 relevance of historical settings 37–8 as political and social practice 26–8 study conclusions and future research avenues 40–42 holistic accountability see accountability: holistic holistic accounting see accounting: holistic holistic governance see governance: holistic hybrid forum 389–90 hybrid organizations accountability in 131, 132, 137, 315–19 conceptual view 308 future research avenues 325 input–output representation 318 technologies 315, 316 accounting in 315, 319–24 conceptual view 308 dual relationship 322 future research avenues 325 role of 321, 324–5 technologies 319–20, 323 in broader approach to governance 119

and chains of command 33 as challenging boundaries 136 context and overview 306–7 definitions, characteristics, typologies 307–10, 314 demand for 6 examples of manifestation 309 governance of 311–14, 324–5 MACS in 131–2, 137 role of regulators 223 hybrid working environments 467–8 IFIs see Islamic financial institutions (IFIs) independence auditor 149, 151 board and COVID-19 disclosure 454 lack of 226 negatively associated with performance 207 collegiality trumping 92 definition 84 Islamic 339, 340 of NGOs 290 paradox of 88 Indigenous accounting 387–8 information asymmetry assumptions around removal of 375 combined assurance statements helping to reduce 157 in contract theory approach 158 corporate reporting to reduce 462 disclosure of ESG risks to reduce 463 paradox of 89 performance expectations gap 91 separation of ownership and control of companies leading to 83 institutional donors 287–8, 293 institutional investors as accountability mechanism 3 as driver of social and environmental accountability 172, 179–81, 185 passive role of 62 proliferation of governance codes aimed at 50, 52–3, 63 shareholder empowerment role 56 and UK Stewardship Code 53–4, 203 integrated reporting aims 159, 269 approaches to 159–60 and ESG 180, 184 as expanding practice 156 increase in social and environmental reporting through 187 and integrated thinking 178, 179

Index  501 and “interpretative assurance model” 157 as model for SER 227 as shareholder-driven approach to reporting 178 and sustainable value 269–70 internal audit as accountability mechanism 199 as accounting mechanism 4 audit committee overseeing 84, 206 directors’ relationship with 86–7 and NGO research agenda 293–4 relationship with internal control 146–7, 160 internal control from 1950s to 1990s 149–51 accounting maintaining adequate systems of 19 as aspect of fraud prevention 153–4 assurance as umbrella of 145–7, 160 Cadbury Committee emphasizing 200 and “comply or explain” approach 203 definitions 149–51, 153 directors’ statement on 84–5 in ERM frameworks 125 governance research on 482 importance of Sarbanes-Oxley Act 155 and internal audit 87 MACS ensuring 125, 136 as method of management communication 127 regulation of 151–2 reports calling for adequate implementation of 122 robust, and integrity of financial statements 83 International Accounting Standards Board (IASB) 81, 99, 100–101, 103–4, 107, 108, 109–11, 113–14, 228, 335, 351, 418, 424, 428, 441, 443 International Accounting Standards (IAS) 205–6, 237, 252, 424–5, 426, 428, 431, 432, 433, 434, 435, 438, 440–441, 442, 443, 446 International Financial Reporting Standard (IFRS) 82, 103, 104, 105, 107, 108, 110–111, 112, 113, 114, 185, 198–9, 205, 206, 224–5, 229, 325, 335, 342–3, 424–43, 446–7 International Sustainability Standards Board (ISSB) 111, 184, 185, 325 “interpretative assurance” 157, 160 Islam context and overview 332–3 future research avenues 343–4 Islamic accountability 335–9, 343, 344 Islamic accounting 334–5, 338, 342–3, 344 Islamic corporate governance conventional 339–40, 343–4

Shariah 340–342, 343 principles of 332–3, 334, 335–6, 338, 339, 340, 341, 342, 343 riba (interest on loans) 333 waqf (not-for-profit entities) 332, 334, 339, 342 Islamic financial institutions (IFIs) 332, 333, 334, 335, 339, 340–342, 343 joint ventures 89, 90, 426, 431, 434, 435, 477 junior stock markets 6, 196–7, 200, 201, 209–10, 480 see also Alternative Investment Market (AIM) knowledge-intensive public organizations (KIPOs) 310 legal frameworks 177–8, 181 legitimacy and accounting 320, 321 and assurance providers 158 centrality of, for NGO accountability 289–90, 292, 301, 303, 304 and citizen involvement 267 corporate organizations and counter accounts 354 during COVID-19 457, 458, 461, 464 and governance 33, 314 hybrid organizations 303, 307, 314, 316, 320 of information disclosure 209 MACS granting to public organizations 133, 136 of national stock exchange 63 sustainability initiatives as tool to enhance 268 in sustainability reports 130, 156 legitimacy theory 158, 260, 303, 457, 464 local adaptation 241 local environments 239 localization through NGOs 248–9 MACS see management accounting and control systems (MACS) management accountants activities in ERM frameworks 125 educational challenges for 126–7, 136 importance of 124 opportunity to “socialize” the board 127, 136 management accounting and control context and overview 119–20 and corporate social responsibility 129–31 embedded in organizational practices 127, 128

502  Handbook of accounting, accountability and governance as governmental device seeking to subordinate managers and workers 128 in hybrid organizations 131–2 proposed new paradigm for 126 role in accountability and governance 120–126 used to support governance and accountability in the past 134–5 management accounting and control systems (MACS) accountability and governance 120–122 context and overview 119–20 and enterprise governance framework 122–4 and enterprise risk management 124–6, 136 as instrument of “socialization” of the board 127–8, 136 and management accountants 127, 136 role in corporate governance 129–35 corporate social responsibility 129–31, 137 hybrid organizations 131–2, 137 public sector organizations 132–4, 137 social institutions 134–5, 137 management control (MC) changes to, during times of crisis 467 critical role of 465 impacts of COVID-19 451–3 moral aspects of AAG 468–9 moral practice accountability as 1, 21, 25, 30, 41, 290–291 accounting as 1, 2, 9, 10, 19–20, 21, 25, 30, 41, 82, 135–6, 160, 174, 290–291, 320, 322–3, 371, 452, 468, 474, 477, 484 governance as 1, 21, 25, 30, 41 multinational corporations see corporations municipal corporations (MCs) 310 New Public Management (NPM) effect on public sector 132 government financial reporting associated with 258 move towards public governance 261–2 NGO legitimacy related to 289 practitioner approached influenced by 281, 283 prominence of accountability and performance in public sector 260, 262, 283 and public sector organizations 259, 271 reforms seeking change towards public accountability 133 Western-derived philosophies as endemic in university missions and strategies 238

NGOs (non-governmental organizations) and AAG approaches to 283–6 in emerging economies 220–223, 229 empirical research 287–8, 301–5 future research avenues 292–4 thematic analysis 287–92 as axis of global development 215 biodiversity as hot topic for 174 centrality of legitimacy 289–90, 292, 301, 303, 304 context and overview 281–2 and counter accounts 356, 357, 358, 361 during COVID-19 463 definitions 281–2 direct financial assistance to 215–16 dominance of institutional donors and regulators 287–8 downward/beneficiary accountability 284, 287, 288–9, 291, 301, 302, 303, 305 as driver of social and environmental accountability 182 emergence of culture and values 290 in emerging economies context 220–221 growing scepticism of 216–17 localization of development and governance through 221 need for state’s role in influencing 229 positive examples 223 unintended consequences of NGO-led development and accountability 222–3 funding 222, 282, 287, 289, 293, 294, 301, 305 importance of moral dimension 290–291 limitations of accounting in achieving accountability 289 origin 281–2 use and role of prior theory 291–2 nominated advisors (NOMADs) 196, 198, 199, 203, 204–5, 208, 480 non-financial information and accountability 135, 317 assurance of 144, 152–3, 155–9 contract theory or social theory approach 157–8 counter accounts 351 disclosure of 158, 317 and MACS 127, 128 management accounting and control 121 new forms of accounting with focus on 21 unsustainability of rhetoric in absence of reliable 458 non-financial reporting

Index  503 aka sustainability reporting 21 directors’ responsibility for 87 EU’s Directive 478–9 and integrated reports 156 as opportunity to reduce information asymmetry 158 operating segments 427, 434, 440, 443, 447 organizational context accounting in 1, 9, 484 audit committees 84 Spotlight Accounting and SIGs in 382–7 weak, and NGOs in emerging economies 222 organizations direction, management and ownership of 90 risk management and disclosures during COVID-19 460–465, 466 see also hybrid organizations; public sector organizations performance accountability 133, 259, 261, 262–3 performance governance 259–60, 271–3 performance measurement citizen participation in 265 debates and struggles over design and operation of 289, 302 as device to control subordinates 127 holistic approach to accountable 263–5 and hybrid organizations 132, 320, 322–3, 324–5 importance of dialogic engagement 267 least-used measures 268–9 as part of accounting 20 in public sector 258, 260–262 focus on performance accountability 262–3 role in promoting learning 274 “three Es” influencing design of systems 133 towards performance governance 271–2 use of diagnostic systems 130 virus testing as form of 455 personal accountability 20, 79, 249, 250, 336 policy implementation 240–241, 265 political accountability 246, 249, 250 political-economic context 242–3 political practice, governance as 26–8, 30 political-socio context 242, 261 power and accountability 30, 171 of accounting 39, 458, 467, 477 of boards of directors 89, 91 conceptualization 400 of controlling shareholders 479–80 of corporations 169 of counter accounts 349

decision-making 386 emanation of 456 exercise of 73, 416 of management accounting and control 128, 129 of NGOs 216, 217, 221, 229, 289 “to participate” 424, 426 “pastoral” 409 of SLAPPs 366 of social media 454, 458 of stakeholders 284, 288, 303, 481 within universities 240, 245, 257 principal–agent conflict between owner and managers 105, 113, 200, 206 principal–agent models 105, 197, 284 principal–agent perspective on accountability/stewardship 100, 105, 112, 114, 284, 315 performance measures seen from 264 principal–agent relationship 35, 100, 200, 221, 317, 414–15 principal–agent theory 113, 206, 260, 315 professional space of assurance providers 161 audit profession 151, 152 auditors occupying new 156 comprising different roles and levels of hegemony 158 new competition in 145 potential power shifts in 159 professional accountants 148–9, 150, 154 professional assurance 153, 155 professional auditors 148, 150, 157 professional domains in 155–7 professionalism 154 “winners” of competition in 160 public sector accountability context and overview 258–60 future recommendations for 273–4 integrating environmental and social sustainability practices 268–70 and performance measurement 260–263 holistic approach to accountable 263–5 strengthening citizen-led accountability 265–7 towards performance governance 271–3 public sector organizations accountability in 259–61, 263, 265, 266, 268, 271, 274, 485 hybridization of 315–16 knowledge intensive 309 MACS in governance of 132–4, 137 managerial trap 271 purpose of 264–5 social primacy 313

504  Handbook of accounting, accountability and governance sustainability reporting in 259, 268–9, 270 qualitative research calls for more in AAG 473 in governance and accountability 473, 481 limited presence of governance in 35 Quoted Company Alliance (QCA) 201–2, 209 regulation of AIM companies disclosure levels 202 financial misconduct and secrecy 200 flexible and lighter touch approach to 209, 210 as future research avenue 210 role of NOMADs 204–5, 209 in US, Asia and Italy 197 dominance over accounting and accountability 287–8 in emerging economies 218–19, 224, 225–6, 229 in junior stock markets 196 NGOs 222, 223 rule-based, for US stock exchange listing 197 “soft” mechanisms of 196 for UK stock exchange listing compliance with codes 202 London Stock Exchange 204 voluntary self-regulation 197 relationship-based governance 245 resourcing failure by governments to supply universities 240, 248–9 strong financial imperative in universities 238 responsibility paradox 89 risk management and boards of directors 84–5 and disclosures planning for 466 studies on 460–465 and integrity of financial statements 83 and MACS 136 role of management accounting in 126–7 see also enterprise risk management (ERM) Sarbanes-Oxley Act (2002) 49, 122, 151, 155 SASRs see stand-alone sustainability reports (SASRs) SER see social and environmental reporting (SER) shadow accounts 182, 351, 356–7, 359, 363, 365, 381 shareholder view of the firm 75, 76–7 Shariah

accounting 334, 343 compliance 335, 341 governance 340–342, 343 overview 332 principles 333, 336, 339–40, 342–3 scholars 332, 341–2, 343 Shariah supervisory boards (SSBs) 332, 333, 334, 338–9, 340–342, 343, 344 Sierra Leone accountability relationships 249–51 and Africa economic context 242–3 higher education context 243–4 historical context 241–2 socio-political context 242 context and overview 237–8 prior research perspective 238–9 global and local environments 239 government and governance 239–40 local adaptation 241 policy implementation 240–241 university governance and accountability 244–5 future of 251 governance structure 257 grassroots 247–8 legislation and issues covered 256 political accountability 246 relationship-based governance 245 unaccountable resourcing 248–9 SIGs (societal interest groups) definition 371 distinction with traditional stakeholder groups 371 identification of 372 overview 369 see also Spotlight Accounting and SIGs silent accounts 182, 351, 359, 363, 365 SLAPPs (Strategic Law Suits Against Public Participation) 358–9, 366 Smiles Inclusive Limited 432, 436–7, 438–9, 440–441 social accountability 176, 183, 221, 223, 261, 266, 267, 273, 343 social and environmental accountability context and overview 168–9 defining 171–4 discharge of 175–7 disciplinary boundary 170 drivers codes of corporate governance 179, 188 events 182–3 institutional investors 172, 179–81, 185 legal frameworks 177–8, 181 NGOs, social audit and society 181–2

Index  505 and outcomes 186 issues prioritized 183–4 nature of 5 need for 169 new definitions of accounting providing insights into evolution and future trajectory of 174 paradigm shift debate 185–8 scholarship on 268 and state priorities 227 Value Reporting Foundation 184–5 social and environmental reporting (SER) 172, 179–80, 181, 184, 187, 227, 332, 343, 360, 381 social aspects of AAG 468–9 social audit activism by “external” 181 counter accounts descending from 476 as driver of social and environmental accountability 181–2 external, definition 181 social context accounting in 1, 9, 484 of Sierra Leone 242 Spotlight Accounting in 382–7 social, ethical and environmental (SEE) issues 172, 180 social institutions examples of 119–20 expansions of governance and accountability mechanisms to 121 lack of, in emerging economies 215 MACS in governance of 134–5, 137 performance–governance approach 272 social practice accountability as 1, 21, 25, 30, 41, 170 accounting as 1, 2, 9, 10, 19–20, 21, 25, 30, 33, 38, 41, 82, 135–6, 160, 174, 320, 322–3, 371, 452, 468, 474, 477, 484 governance as 1, 21, 25, 26–8, 30, 33, 34, 40–41 social sciences increasing relevance of governance in 31–3 qualitative 387 social spaces 20, 291 social sustainability practices 259, 268–70 society accountability and accounting 484 appearing in titles of accounting and accountability books 16 as driver of social and environmental accountability 181–2 Islamic 334, 336–8, 342, 344 and SIGs 371–2, 375, 376, 381, 385–6, 389, 390, 392, 393

and Spotlight Accounting 375, 376–81, 385–6, 390, 392, 393 socio-political context public accountability 261 in Sierra Leone 242 Songcheng Performance Development Ltd 432, 435–6, 438, 439, 440–441 South Africa assurance combined 157 CSR 156 Biological Diversity Protocol 183–4 codes of corporate governance 51–2, 56, 199, 226 convergence of sustainability reporting frameworks 184 corporate governance principles 179 corporate social responsibility 129 integrated reporting 156–7, 178, 179 King Reports 51–2, 56, 129, 151, 156, 178, 179 as major recipient of DFI 218 microfinance NGO 302, 303 morality and ethics 176 SER practices 227 stakeholder-oriented perspective 151 universities 238–9 Spotlight Accounting and SIGs accounting framework aligned with dialogic 374 as external accounting process 391 introduction to 378–81 measurement 382 reliance on human accountants 390, 392 targeting of AAG activities 387–8 application 371 challenges 390, 392–3 concept and practice 371, 372, 376–82, 393 in external accounting context 376–7, 381, 383, 389–90, 391 limitations 376–7, 388, 476 objectives 375–6 in organizational and social context 382–3 influence on AAG 384 maximizing impact of accounting and disclosure activities 386–7 supporting effective discharge of accountability 385–6 supporting good governance 383, 385 overview 369, 372–4 potential for corporate sustainability reporting 388–90 in Indigenous accounting 387–8

506  Handbook of accounting, accountability and governance principles of 376, 378, 380, 381–2, 385, 390, 392 stakeholder engagement bottom-up approach 383 versus dialogic approach to accountability 264, 265 as driver of social and environmental accountability 173, 182 contrasting view 269 questioning around impact 182 shorter time frame required for 481 and Spotlight Accounting 393 stakeholder view of the firm 75–6, 79, 87 stakeholders accountability as crucial to company relationships with 171 as “accountability to whom” 152, 154 in definition of accounting 160 effective communication with during times of crisis 466–7 and integrated reporting 159 non-financial, providing non-financial information to 152 perception of professional domains 159 possibility of ESG benefiting 172 in taxonomy for understanding assurance 158 stand-alone sustainability reports (SASRs) 476 stewardship ambiguity of term and concept 104 codes 52, 53–4, 55–6, 57–8, 63, 65, 197, 203 “custodial” 101 and decision usefulness 81, 102–4, 108, 113–14, 475 definition 375 and disclosure of ESG risks 463 and fair-value accounting 108, 110, 114 historical perspectives 101–2, 114 Islamic 335, 336 paradigm of financial reporting 475–6 potential MACS role 122 principal-agent view 100, 112 relationship with accountability 81, 100, 176, 261 reliable and verifiable accounting information 109–10 role in financial reporting standard-setting 100–101, 110, 113 in Spotlight Accounting 375, 376, 379, 386 standard-setting perspectives on 102–5, 109 and valuation 104, 105–7, 108, 111, 113–14 view as “living law” of accounting 100, 101–2 stewardship theory 74, 375 strategic governance 120, 123–4, 126–8, 136 sustainability

accounts of and for 182 aspects of AAG 468–9 call for more research on AAG in 41 and corporate purpose 76 and COVID-19 468–9 disclosure standards 184, 185 evolution of terminology 172 as future research avenue 274 performance-governance approach 271, 272 of planet, concerns over 464 potential of MACS 129, 137 and public sector 263, 264 as receiving increasing attention across public, voluntary and charity organizations 170 social and environmental practices 259, 268–70 stakeholders wish for involvement in 133 traditional environmental accounting approaches of limited value in achieving long-term change in 463 understanding interplay between AAG elements as essential for 14, 71 Sustainability Accounting Standards Board (SASB) 183, 184–5 sustainability assurance 153, 155, 156, 157, 160 sustainability reporting and assurance explosion 152–3, 156 convergence of frameworks 184, 188 corporate 388–90 versus CSR 130 GRI-based 185, 355, 464 IFRS moving into field of 110–111 new forms of accounting arising from 21 and NGOs 305 public sector 259, 268–9, 270 recent research on assurance of 157 relative newness 185 separate 187 stand-alone reports 476 and stewardship 112 sustainable goals 325 sustainable investment 181 technical infrastructure 223–8, 229 Thomas Cook Group Ltd 432, 437–8, 439–40, 441 trust in ability of stock markets 199 and accounting 39 and act of holding accountable 173 in auditing profession 84 community based on 289, 301 in decision-making process 273 in directors 77, 79

Index  507 of employees by employers 451 as eroded by neoliberal policies 270 in government lack of, in emerging economies 221 in pandemic context 467 between HE and state 240, 241 investors, in companies 49 Islamic 7, 335–6 organizations’ responsibility for 122 as paradox of corporate governance 88 and public accountability 261 purpose of assurance 145 societal 160, 267 of stakeholders, NGOs gaining 288, 304 in stewards 100, 101, 112 UK Corporate Governance Code (2018) 4, 60, 74, 77, 93, 196, 197, 206 see also Cadbury Report (1992) UK Financial Reporting Council (FRC) 50, 52, 53–4, 64, 74, 77, 84, 197, 206–7, 440 UK Stewardship Code 52, 53–4, 55–6, 57, 65, 197, 203

university governance and accountability in developed and developing economies 237, 251–2 future of 251–2 prior research on 238–41 Sierra Leone context 243–51, 256–7 university rankings 20, 485 valuation and stewardship 104, 105–7, 108, 111, 113–14 valuation decisions 99, 100, 102, 103–4, 108, 113–14 valuation usefulness 99, 100, 103, 104–7, 108, 112, 114 Value Reporting Foundation 183, 184–5 values emergence in NGO accountability 290 prominence in shaping accounting and accountability 465 verification 88, 109–10, 111, 123, 145, 146, 148, 149, 157, 476–7, 482 waqf (not-for-profit entities) 332, 334, 339, 342