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Artifacts and Institutions of Financial Accounting.


Financial accounting plays an important role in supporting the global economic and financial markets and is responsible for communicating the reality of the financial existence of a particular organization so that society can assess the allocation of resources (Gaffikin, 2006; Hines, 1987, 1991). Financial reporting is in turn dependent upon the existence of financial accounting rules and regulations which are espoused through accounting standards. The underlying principle is that financial accounting is intrinsically linked with capital markets in which economic reality dictates the actions of investors and thus the behavior of individuals can be explained objectively from the notion of homoeconomicus (Watts & Zimmerman, 1978, 1979). This general perception has in some aspects been moderated by the recognition that bounded rationality and satisficing behavior have a role in shaping the beliefs, habits and desires of economic actors (Simon, 1976). From a social constructivist view financial accounting can be explained as a social construct (Laing & Perrin, 2011). The issues underpinning this argument were expressed by Hines (1987) in the following manner:
"... what we consider to be 'objective', what we consider to be
'rational', the way we think, the way we act, our theories, the way our
society is structured--it's not real in the way we think it is. It's
all just an idea, isn't it?" (Hines, 1987, 257).

Financial accounting has been referred to as the language of business because of it's role in communicating complex concepts pertaining to economic events that occur in the course of conducting business (Gaffikin, 1993). In effect it emerged due to the need by humans to record their possessions and results of economic activities. From the perspectives of sociological and anthropological discourse in the accounting literature financial accounting has been regarded as a basic form of social and human interaction (Mouck, 2004a; Yusoff & Lehman, 2009) contributing to the evolution of human communication and commerce. To achieve this role as a language it involves the use of abstract theoretical constructs that are reliant upon external artifacts in which information may be stored. In this way it becomes a powerful cognitive aid to make sense of any complicated business event, situation or system of ideas. In addition to this use of artifacts financial accounting is concerned with the existence of a variety of socially constructed institutions. In this sense the institutions relate not only to the terminology that has arisen in the financial accounting arena but also the various forms of business organizations that exist within society.

The notion of artifacts and institutions can be compared with the concept of signs or sign systems constructed under the auspices of semiotics. Semiotics is therefore concerned with the study of signs as well as sign systems and the way in which such signs are interpreted or considered to communicate meaning (Eco, 1979; Yusoff & Lehman, 2009). The delineation between signs and sign systems provides a basis for better explaining or categorizing and differentiating between artifacts and institutions within the context of financial accounting.

This paper explores the interplay between these artifacts and institutions from a financial accounting perspective and the implications they have in the financial reports that are produced. The production of financial accounting reports is not undertaken in a vacuum and the role of the artifacts and institutions inherent in financial accounting play an important role in communicating to the public the reality of an organisation's financial performance. More to the point in communicating reality the financial accounting artifacts and institutions can be claimed to be responsible for creating a form of reality (Hines, 1987). In much the same way as a painting or a photo can present a realistic depiction of some person, place or thing accounting is used to present a quantified representation of economic reality (Mouck, 2004a). However, just as a painting of an apple is not an apple but rather a representation of an apple the financial accounting reports are merely a representation of economic activity (Gaffikin, 1992). There is however a difference between an artist or photographer who is providing a representation of a physical object and an accountant who is producing a representation of an artifact such as ownership (assets) and obligations (liabilities) all within the confines of monetary valuations as part of the financial accounting paradigm (Gaffikin, 1992; Mouck, 2004a).


According to Sunder (2003) artifacts comprise elements, each with its own inherent properties and these are governed by natural laws. In turn natural law governs the inner and outer environments of the artifacts, and also the interface between the two. Of course, in the accounting domain there are no natural laws as it is not a naturally occurring phenomena. Some important concepts in the debate concerning the assumptions underpinning financial accounting can be traced to confusion about the roles of the inner and outer environments of an artifact. In essence financial accounting consists of artifacts created by humans as part of the social evolution and an intentional design. The various rules of financial accounting as promulgated by the various accounting bodies in the guise of accounting standards in effect define the inner environment. The outer artifacts are the terms which have become part of the vocabulary of the business world. Specifically, terms such as assets, liability, owner's equity, revenue and expense (Mouck, 2004a). In deed whilst these things such as assets, liability, owner's equity, revenue and expense are essential elements of financial accounting it has been acknowledged that they have no empirical referents in the real world (Mattessich, 1991). The use of these terms by accountants creates the artifacts that in turn represent reality (Archer, 1998; Hines, 1988). As the language of business accounting has a unique role in the sense that economic reality does not exist independently of the accounting language that communicates the specific reality (Hines, 1988; Mouck, 2004b). Language is the means by which an understanding of an otherwise symbolic representation becomes accepted in the collective consciousness of society (Searle, 1995; Mouck, 2004b).


As humans we live in an existing institutional environment that addresses the complexity of social reality. In this context, institutions are defined as the rules both explicit and implicit, which provide structure to human social interactions (Searle, 1995). As a consequence, institutions may be identified as being either formal or informal (North 1990). For example, formal institutions would be the constitution of a country, its legal system, and more generally religions. In contrast, informal institutions would be the customs, values and codes of behavior that may exist. A point worth noting is that formal institutions may be derived from the accepted customs and codes of behavior. In financial accounting the informal institutions are the doctrines and conventions that underpin the behavior in the accounting process. A further point to be noted is that informal institutions may alter over time and this could occur as a result of the influence exerted by formal institutions. In financial accounting some notable institutions are assets, liabilities, revenues and expenses.

North (1990) suggested that many of the issues faced by financial accounting involve institutions which are inherently political in nature. North (1990) ascribed to the notion that social reality, and this would include financial accounting, was largely structured by institutional rules. From this perspective the ideas and terminology of financial accounting, and the reports derived from it, are not limited to the use of descriptions and explanations of objects, properties and relationships that can be claimed to exist independently of their existence but rather can actually change their meaning regardless of their existence in the real world (Gaffikin, 1992).

Financial accounting is concerned with keeping a record of real things, in so far as they relate to economic events and transactions, in the real world of the business environment (Sterling & Jones, 1976; Gaffikin, 1992; Hines, 1987). From the perspective of financial accounting the real things refer to items such as land, buildings, money (cash), which are considered to be assets. Clearly some of the real things do exist in the real world independently of the perceptions, thoughts and descriptions of them. For example, trees, rivers, mountains and land exist regardless of how we perceive them (Gaffikin, 1992; Hines, 1987). Conversely, there are things which exist only as a result of institutional practices. For example, money, contracts, companies and marriages these are social constructed and only exist because of institutional practices. Note these institutions may vary from country to country due to the differences that occur in social, cultural or political influences.

The concept of recording and maintaining a record of assets would never have been necessary if it were not for the institutions of ownership, property and property rights. In essence no one would be interested in recording things owned if the institution of ownership did not exist.

The very idea of creating accounts receivable would not be necessary if the institutional practice of providing credit had not been developed in society. In addition, prepayments would not exist without the institutions of money and exchange. In essence the existence of assets as assets is dependent upon a nexus of socially created concepts and institutional practices.

Liabilities would not exist without the institutional practice of borrowing and lending money. The practice of borrowing and lending are very much dependent upon the institutions of ownership and property.

The institutional practice of exchanging goods and or services eventually gave rise to the institution of money. This was an important development in the history of financial accounting because it meant that assets and liabilities could be recorded in terms of a common unit of measurement (ie money). This evident in what is known as the monetary convention a specific financial accounting institution which is essential to supporting the basic accounting equation--assets equal liabilities plus owner's equity. Once this formula could be operationalised through the application of a common unit of measurement then the financial accounts could be translated into what we know as the balance sheet.

Money is a quintessential general social institution that relies on the acceptance and belief of its value in order to be accepted by society as a whole (Searle, 1995). However, the institution of money could not have evolved without the prior development of the institutions of ownership, property and exchange. For without these supporting social institutions there would be no notion of money as a medium representing purchasing power.

The income statement is an artifact itself that is imbedded with other financial accounting artifacts and is dependent upon a complex nexus of social institutions and institutional practices. Revenues are generally defined as inflows of assets which have been exchanged for goods and or services. Expenses are generally defined as outflows of assets or the incurring of liabilities in order to generate revenues. In the income statement the difference between revenues and expenses is net income and net income is a contribution to the measurement of wealth. In the balance sheet the measurement of wealth is the difference between assets and liabilities, hence the link to the basic accounting equation.

Accounting entities are a specific institution within the financial accounting paradigm and depend on the generic social institutions of ownership, property and property rights that underpin the very nature of business activity. The entity convention is an institution that goes beyond the legal view of a business entity and extends the anthropomorphic status to all forms of business entities. The basic forms of accounting entities such as proprietorship, and partnership also require the existence of the institution of contracting to accommodate business activities. For the more complex form of accounting entity such as a corporation their very existence is dependent upon the institutions of government and legal systems. For only within the context of these social institutions is it possible to accommodate the existence of transferable shares of ownership in a corporation that are separate and distinct from the individual who owns them and yet also carry with them a legally limited liability for the actions of the corporation. These social institutions are responsible for constructing the "rights, responsibilities, obligations, duties, privileges, entitlements, penalties, authorizations, permissions...'" (Searle 1995, 100) that are an essential part of the business world. This abstract and complex concept is not a naturally occurring phenomena and could hardly be defined as a real thing were it not for the institutions which make it possible.

Having briefly discussed the various issues pertaining to artifacts and institutions in general and as they relate to financial accounting the next step is to bring this together and present a pictorial representation for further debate and elucidation. Figure 1 is the culmination of the ideas as they relate to the financial accounting construct.

The nexus between artifacts and institutions, that are so essential to financial accounting, are also linked to the issues of power, social authority, social obligations, social sanctions, and are for the most part constrained by the culture of the society in which they exist. Accounting is not a naturally occurring phenomena but rather a social construct and accordingly the very basis for the acceptance of the artifacts in financial accounting will inevitably be subject to the influences of the formal and informal institutions.

This paper is intended to provide a basic starting point for future development and to serve to inform future research. Whilst this paper has focused on financial accounting it should be noted that management accounting consists of very different artifacts and institutions which could be explored in a future exposition.


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Gregory Kenneth Laing

School of Business

Faculty of Arts, Business & Law

University of the Sunshine Coast


Ronald William Perrin

Faculty of Business

University of Wollongong
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Author:Laing, Gregory Kenneth; Perrin, Ronald William
Publication:Journal of New Business Ideas and Trends
Date:Mar 1, 2018
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