Assuming that the state needs resources to provide the public with adequate services and that accountants can help the state collect revenues, it follows that the relationship between the state and the accountancy profession should be simple and straightforward. However, recent scandals and events have shown that accountants’ interests and needs do not always coincide with those of the state and its citizens, which raises questions about the effects that such “divergences” may have on accountancy’s claims of being a profession.
As MacDonald (1995) pointed out, capitalism has had a profound impact on both modern professions and the state, affecting their respective structures and scopes, which is why its effects on the accountancy profession should be analysed in order to identify the reasons that have made the relationship between accountants and the state increasingly complex and contradictory. However, in spite of the impact that the rise of capitalism and other phenomena, including globalisation, have had on the accountancy profession, the term “professionalism” is still associated with certain scopes, traits and ethical standards which have remained unvaried since the 11th century, when the first Christian-inspired universities were established in Italy, France, England and Spain. (Sokolowski, R., 2006)
This essay will analyse the aforementioned phenomena, as well as various theories concerning both the accountancy profession and the state, in order to identify their respective interests and the causes of their occasional divergences. Then, a series of examples will be presented to illustrate how the complex relationship between accountants and the state can affect accountants’ professionalism and society. Finally, the theories and cases analysed in the previous sections will be summarised and specific conclusions will be drawn regarding the relationship between accountants and the state and its impact on accountancy’s claim of being a profession.
STATE AND ACCOUNTANCY: THESES AND THEORIES
In order to gain a deeper understanding of the relationship between the state and accountants, their respective needs and interests should be identified first. Several thinkers and philosophers have attempted to define the term “state”, illustrating its organisational structure and scopes. According to Marxists, for example, the state represents the needs and interests of the ruling class (Offe, C. and Ronge, V., 1975); micro-foundational models, on the other hand, place more importance on the individuals and organisations that occupy positions within the state, as their interests and needs coincide with those of the state. (Little, D., 1998, p.123)
Even though there are many other theories which recommend different approaches to the study of state formation, it cannot be denied that because of their own nature, all states share a fundamental need/interest: revenue acquisition.
As Ghosh and Ghosh (2008) pointed out, states have certain responsibilities towards their citizens and would not be able to meet their expectations without revenues. Therefore, they need resources to ensure their citizens’ well-being and to provide them with services, support and infrastructure without which it would be impossible to live a good life. The amount of resources that a state can collect depends on a number of variables, including its fiscal position and its tax effort, which indicates how much tax a country can expect to collect given its economic situation.
According to Adams (1993), the main reason why modern tax systems are not always effective, cause confusion and allow experts to take advantage of their weaknesses is that most politicians, citizens and even those who have spent their entire lives studying taxation ignore their history. Moreover, Adams (1993) argues that taxes have shaped the history of most civilisations, as without them numerous significant events would have never taken place and many empires would have never existed. As Burg (2013) observed, when a king, an oligarchic government and/or a democratic state impose the right kind of taxes, great nations and empires can easily be built and progress can be achieved. In spite of its apparent archaic nature, this concept can be applied to all modern states and was cleverly summarised by Oliver Wendell Holmes, whose maxim “taxes are what we pay for a civilized society” (Moeller, G. M., 2006) is still very popular. However, when a state’s need for revenue translates into unfair and unjust tax systems which do not take into consideration real economic indicators, rebellions and tax evasion are almost unavoidable. (Burg, D. F., 2013)
Therefore, it could be argued that taxes can have either positive or negative effects on societies and that even though severe tax revolts have been replaced by more democratic communication methods, tax avoidance and evasion have remained the most common forms of resistance to taxation since 3000 B.C. (Bedesky, B., 2008)
Even though all governments see tax evasion and avoidance as issues that need to be tackled through effective strategies, a combination of recent phenomena has prompted EU member states, the United Kingdom and the United States, as well as other countries, to step up their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013; Saunders, L., 2013)
Globalisation and the 2008 financial crisis are among the aforementioned phenomena which have encouraged governments to pay more attention to illicit accounting practices, as recent events have clearly revealed that these can contribute to triggering international financial crises and causing market failures, whilst depriving states of revenues which could be used to provide citizens with social goods. In fact, as a result of globalisation, trade barriers have been reduced and are still being eroded, which has increased the risk of financial contagion. (Freixas, X. and Rochet, J.C., 2008) That is why international regulatory bodies have been trying to identify the exact causes of the 2006 subprime mortgage crisis and the 2008 financial crisis, in order to prevent future global crises. As Freixas and Rochet (2008) pointed out, although it is almost impossible to predict and avoid all future crises, regulatory bodies certainly play a fundamental role in strengthening financial markets and setting regulations aimed at discouraging those who operate within the financial industry, such as bankers, advisors, accountants etc., from engaging in illicit and/or unethical practices that may damage other parties.
However, it should be noted that similarly to lawyers, doctors and other professional categories, bankers, advisors and accountants are professionals whose duties, ethical standards, required qualities and responsibilities are clearly stated in detailed codes of conduct. As Duska et al. (2011) observed, because accountancy firms play an important role in helping both individuals and businesses to avoid taxes, thus reducing states’ revenues, their relationship with the state is often defined as “contradictory”.
In fact, accountants and accountancy firms are a fundamental part of capitalist societies, as their services and knowledge of tax systems allow governments to collect taxes and to continue operating. In this regard, Marx and Engels (2013) argued that taxes are used by the ruling class to make it impossible for peasants to meet their obligations, so that they will have to abandon their traditional activities and seek help from capitalists, whose main purposes is to exploit workers. (Elster, J., 1985) With regards to the professional categories whose job is to help the ruling class to collect taxes and to maintain its position in society, Marx and Engels (2013) saw them as a different kind of exploiters, as accountants and tax collectors can also be underpaid; in spite of that, Marxist thinkers have always seen these professional categories as servants of the capital who have obtained their “professional status” as a reward for helping capitalists to ensure the survival and continuity of capitalist societies. (Elster, J., 1985) At the same time, however, accountancy firms are often caught offering tax avoidance and evasion schemes aimed at helping their clients pay less taxes through complex financial manoeuvres which are made possible by tax systems’ weaknesses and loopholes. In order to determine whether such manoeuvres endanger accountancy’s claim of being a profession, the traits, qualities, ethical standards and requirements associated with professional bodies, should be identified and the term “professionalism” should be analysed.
With regards to the origins of professions, Spencer (2009) observed that the earliest professions developed thanks to primitive people’s knowledge and that their evolution was made possible by various historical events. In the 16th century, lawyers, priests, teachers and doctors represented the main professional bodies, however, with the advent of the industrial revolution new professions emerged, including accountants and engineers. (Cheetham, G., 2005) Even though the origins of accounting can be traced back to early civilisations, accountancy started being recognised as a profession thanks to the changes brought about by the industrial revolution, which increased the overall demand for accountants’ services. (Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a number of requirements, follow numerous rules and operate in accordance with the law and accounting regulations, which are updated periodically, mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised by knowledge, training, devotion to certain ideals and affiliation. However, nowadays most occupations can be defined as “professions”, which is why Durkheim (1973) explained that French and Italian sociologists had to start referring to them as “professions liberales”, “libere professioni” in order to distinguish real professions from ordinary occupations. (Durkheim, 1973; Sciulli, D., 2009) According to Durkheim (1973), devotion to public good is one of the fundamental characteristics of professions and, judging from modern codes of conduct, it is evident that regulatory bodies still require professionals to operate in such a way not to harm anyone, taking into consideration the needs and interests of all those parties that may be affected by their decisions and actions. In order to gain a deeper understanding of accountants’ ethical standards and required conduct, Allen (2010) compared the standards set by the International Standards Board of Accounts with those set by the American Institute of Certified Public Accountants. Her analysis revealed that in spite of a few formal and structural differences, both codes stress the importance of principles like integrity, confidentiality, due care, independence, transparency and truthful, accurate reporting of both financial and non-financial information. From a strictly ethical point of view, then, it could be argued that accountants’ activities can affect numerous stakeholders, which is why they should avoid engaging in any practice which might have a negative impact on others. In view of these observations, it follows that accountants and accountancy firms that help their clients to pay less taxes, thus depriving the state of useful resources, do not operate in accordance with the aforementioned standards of professionalism. In this regard, Toynbee (2012) observed that governments should increase their efforts to fight big accountancy firms, as these are the ones that deprive states of revenues which could be used to provide citizens with more social goods and services. Therefore, considering that the state needs revenues to survive and meet citizens’ expectations and that accountants can help the state to collect taxes whilst complying with strict ethical standards, it follows that the state and the accountancy profession should co-operate. Moreover, as MacDonald (1995) correctly pointed out, states and modern professions need each other, as modern professions like engineering and accountancy have emerged as a result of state formation, which is also a fundamental condition of professional independence and autonomy.
In regard to the relationship between the state and the accountancy profession, Hopwood (1985) observed that in the United Kingdom, the accountancy profession developed as a result of the state’s interventionist policies, thanks to which individuals and businesses’ demand for accountants’ services increased.
At the same time, however, numerous accountancy firms have started operating as actual companies, which must beat the competition and generate profit in order to survive. As a result of that, many accountancy firms’ needs and interests no longer coincide with those of the state, which is why the relationship between the state and accountants has become complex and contradictory, even though logic dictates that they should co-operate in order to allow each other to survive and function, as well as to benefit society. As Wyatt (2004) observed, during the past few years the accounting profession has been criticised on several occasions by the media, mainly as a result of its strong involvement in illicit practices which have had negative effects on various stakeholders, including the clients they tried to “assist”. In fact, there have been many scandals which have caused accountancy firms to be fined, wealthy individuals to be arrested, banks and large companies to fail and governments to be deprived of significant revenues, among other things. (Wyatt, A. R., 2004)
In order to gain a deeper understanding of the current state-accountancy profession relationship and evaluate the impact of its contradictoriness on accountancy’s claim of being a profession, the following section will analyse some of the scandals mentioned by Wyatt (2004), evaluating their causes and effects on society and the accountancy profession.
ACCOUNTANCY AS A PROFESSION: SOME EVIDENCE
The theories and considerations illustrated in the previous section clearly indicate that the relationship between the state and the accountancy profession is complex and at times contradictory. This statement is confirmed and supported by the wide range of tax evasion and avoidance services offered by accountancy firms, thanks to many large companies have been able to either evade or avoid taxes, thus increasing their profits and depriving the state of a portion of its revenues that it needs for its own survival and to meet social demands. The past few years have witnessed several accounting scandals which have raised questions about accountancy firms’ role in society and claims of professionalism. As Markham (2006) pointed out, the Enron scandal is one of the most popular ones.
Enron was an American energy corporation whose financial statements had been manipulated through a series of fraudulent accounting practices whose purpose was to make its financial position appear much stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in just a few years Enron became a large energy-trading firm whose operations involved financial contracts, metals and a wide range of commodities. (Fox, L., 2004)
As Healey and Palepu (2003) pointed out, in 2001 things started to change at Enron and some of those changes should be addressed as the main causes of the company’s fall. According to their analysis, in August 2001 the company’s CEO resigned and Sherron Watkins took his place; after analysing the company’s accounting, Watkins wrote a letter in which she expressed her concerns about Enron’s financial statements and financial position. Arthur Andersen, one of the largest accounting firms in the United States and Enron’s auditor, contacted one of the company’s senior partners to encourage them to destroy the documents that were not going to be used. Although at the end of the first quarter of 2001, Enron’s books reported an estimated annual income of $240 billion, in October of the same year the company had to announce nonrecurring charges of over $1 billion and an accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006) After five weeks, the company had to file for bankruptcy, thus disappointing millions of American citizens who thought that Enron would have freed the United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to Enron’s fall, the Enron scandal is often referred to as one of the biggest accounting frauds in American history. (Collins, D., 2006)
As Markham (2006) observed, Andersen’s reputation had already been compromised by previous accounting problems and its objectivity had been questioned when it was discovered that in 2000, it earned over $50 million in consulting and audit fees thanks to Enron. (Solomon, J., 2007)
Because Andersen had always guaranteed that its audits were performed in compliance with GAAP (Generally Accepted Accounting Standards), Enron’s bankruptcy indicated that Andersen had either made a series of accounting mistakes or had willingly engaged in fraudulent and illicit practices in view of the significant fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M. and Palepu, K. G., 2003) The second hypothesis was confirmed by one of Enron’s accountants who explained that certain loopholes in accounting literature and standards had been exploited to report untruthful financial information. (McLean, B. and Elkind, P., 2004)
Although the Enron scandal and its legal implications caused Andersen to lose most of its clients and disappear, Solomon (2007) argued that its negative effects extended to the entire accountancy profession, whose credibility and reputation were significantly damaged, as well as to other stakeholders. In fact, as a result of the Enron scandal, both Enron and Andersen’s employees lost their jobs, shareholders lost a significant portion of their funds, energy buyers cancelled their contracts, creditors lost around $11 billion, rating agencies became very critical and started penalising even the most solid energy companies and the government could not deregulate the energy industry as it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the aforementioned negative effects, it can be inferred that Andersen’s fraudulent accounting practices affected numerous stakeholders, including the government, and that its decision to pursue its interests regardless of their impact on society, the energy industry and the state, led to a general loss of confidence in the accounting profession. (Solomon, J., 2007)
Even though the Enron scandal and similar cases are usually discussed and criticised by the media for a long time because of their severe effects on the entire economy, there are many large companies whose tax avoidance strategies also have a very negative impact on society and the state, which they deprive of significant revenues every year. A recent report by the UK Commons Public Accounts Committee (PAC) revealed that Internet services provider Google, e-commerce company Amazon and coffeehouse chain Starbucks are among the aforementioned companies, as they have been caught taking advantage of weaknesses in national and international accounting standards to reduce their taxable income. (Syal, R. and Wintour, P., 2012) According to Margaret Hodge, chair of the PAC, companies that use tax avoidance and evasion strategies like Google, Amazon and Starbucks damage honest taxpaying individuals and businesses, as well as the state, seeing as the economic recession has caused corporate tax revenues to fall, thus depriving the state of fundamental resources. (Syal, R. and Wintour, P., 2012)
Ernst & Young, one of the “Big Four” accountancy firms, audits some of the world’s largest companies, including Google, Amazon, Coca-Cola and Apple and has been criticised on several occasions for its tax avoidance schemes. (Ernst & Young, 2011) Although investigations have revealed that Ernst & Young’s services enable several large companies to pay less than they should through legal entities, tax shelters and other strategies, Ernst & Young and other accountancy firms accuse the state of expecting them not to protect their clients’ interests. Moreover, as a result of politicians’ negative comments on Starbucks’ immoral tax avoiding accounting practices, the American coffeehouse chain announced that it was considering cancelling its planned investments in Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that when the state embarks on a campaign to stigmatise all those businesses and individuals that simply want to protect their interests, investors may not see Britain, or any other country, as an attractive investment destination and this may have a negative impact not only on the entire economy, but also on society. Therefore, it is evident that the relationship between the state and accountancy firms is characterised by numerous contradictions, as even though they need each other to survive and remain operational, their interests do not always coincide and sometimes they even conflict. Moreover, because of the said contradictions, the state loses a significant portion of its tax revenue every year and has to use a part of its resources to fight illegal and unethical accounting practices, while accountancy firms endanger their claims of professionalism, as not only do their strategic manoeuvres allow the tax evasion industry to keep growing, thus damaging honest taxpayers, they can also cause businesses to fail, investors to lose their funds, people to lose their jobs, investors to seek alternative investment destinations etc.
SUMMARY AND CONCLUSION
Various theories and events have been analysed to gain a deeper understanding of the relationship between accountants and the state and to identify the reasons behind its complexity. This was done by comparing the needs and interests of both accountants and the state, in order to determine why they don’t always coincide. From a micro-foundational viewpoint, the needs of the state reflect those of the individuals who are part of it and occupy certain position within it. From a Marxist point of view, on the other hand, the needs of the state coincide with those of the ruling class, which imposes and needs tax revenues in order to promote capitalism and exploit workers. However, in spite of the different needs and interests that each country may have, tax revenue is something without which no state could survive, as taxes allow it to remain operational and meet public demand, providing citizens with social goods and services. Ghosh and Ghosh (2008) With regards to accountants, both the development and the evolution of the accountancy profession were analysed from different perspectives, including sociological and ethical ones.
First of all, Herbert (1986) observed that the origins of the accountancy profession can be traced back to early civilisations and that numerous historical events have allowed it to evolve. However, accountancy as a real profession emerged as a result of the Industrial Revolution, which increased the demand for accountants’ services. In this regard, MacDonald (1995) argues that states and modern professions need each other, as modern professions like engineering and accountancy owe their existence and professional status to state formation, which is also a fundamental condition of professional independence and autonomy. Therefore, logic would dictate that the state and accountants should co-operate, as they share common interests and need each other to survive and remain operational. Moreover, as members of a professional body, accountants are required to comply with strict national and international codes of conduct which stress the importance of integrity, confidentiality, due care, independence, transparency and truthful, accurate reporting of both financial and non-financial information etc. (Allen, C. 2010)
In spite of that, a series of recent events suggests that accountancy firms have started operating as actual businesses, which pursue their own interests rather than those of the state, helping their clients to evade or avoid taxes and to communicating untruthful financial and non-financial information, among other things. The Enron scandal, for instance, was partly caused by Andersen’s illicit accounting practices and untruthful audits, thanks to which Enron’s financial position seemed much stronger than it actually was. As a result of that, shareholders and a wide range of stakeholders were affected, as investors lost their funds, the energy industry was severely damaged and the state had to deal with the consequences of Enron’s bankruptcy. (Markham, J. W., 2006)
Moreover, accountancy firms’ tax avoidance and evasion services deprive the state of a significant portion of its tax revenue ever year, allowing numerous large companies, including Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and Wintour, P., 2012)
One the aforementioned accountancy firms is Ernst & Young, one of the Big Four, which has been accused on several occasions of using unethical and illegal strategies, such as legal entities, tax shelters etc. to enable its clients to pay less taxes. Considering that all the illicit accounting practices analysed in this essay, including untruthful reporting of financial information, tax avoidance and evasion, have a negative impact not only on the state, but also on society, it can be inferred that those accountancy firms whose interests and needs contrast with those of the state risk endangering their claims of professionalism. In fact, as Durkheim (2013) observed, professionals should be devoted to public good and operate in such a way not to harm anyone. Therefore, in order for the accountancy profession to maintain its professional status, it is crucial that accountants should re-align their interests with those of the state and comply with the aforementioned principles, which are also supported by the International Standards Board of Accounts.