Article On Accounting Fraud

Critical Perspectives on Accounting 16 (2005) 613639
Accounting for crime

Cheryl R. Lehman , Fahrettin Okcabol
Department of Accounting, Taxation and Legal Studies in Business, Hofstra University, Hempstead, NY 11549, USA Department of Business, Management and Accounting, University of Maryland Eastern Shore, Princess Anne, MD 21853, USA Received 20 October 2002; received in revised form 1 August 2003; accepted 28 August 2003
Abstract The major aim of this paper is to explore how crime has been re-presented in the late 20th century. The work is part of broad critical accounting research. Accounting and issues regarding fraud are part of our complex social fabric: including issues of regulation, governance, economic crises, poverty, race, youth, politics, and class. We examine how crime is infused with these issues by revealing the statistics and strategies of managing crime outside the walls of Wall Streetin prisonsand inside the walls of Wall Streetwhite-collar crime. In revealing how the state, the media, and accounting have managed crime, we support the lineage of others who see crime as a social phenomena and as a social construction. We conclude in accepting the importance of assessing the power of institutions including accountingin creating reality and reconstructing the frailties and errors of humans. As we reect on the resilience of accounting to maintain its role in the regulatory apparatus of business, and on the lack of signicant change in power relations and in the distribution of wealth, it behooves accounting activists to work both within its terrain, and also with broader social movements in global justice. 2003 Elsevier Ltd. All rights reserved.
Keywords: Accounting; White collar crime; Social construction
Corresponding author. Tel.: +1-516-463-6986. E-mail address: Cheryl.R.Lehman@Hofstra.edu (C.R. Lehman).
1045-2354/$ see front matter 2003 Elsevier Ltd. All rights reserved. doi:10.1016/j.cpa.2003.08.003
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C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639
The notion that poverty causes crime is a slander on the poor. Adapted from H.L. Mencken (18601956) It is now widely agreed that corruption, wherever in the world it is occurring, is one of the greatest challenges societies face as we enter the third millenium. International Anti-Corruption Council (1999) Oscar Wilde once said that it is an outrage for reformers to spend time asking what can be done to ease the lot of the poor, or to make the poor bear their conditions with greater dignity, when the only remedy is to abolish the condition of poverty itself. Hall et al. (1978, p. x)
1. Introduction The scrutiny imposed on nancial reporting practice, and the contentious debates related to The Accounting Industry, in Congress, the SEC, the courts, the business community, and academia suggest it must have some signicance and import. And, as investments and capital ows have an increasingly global range, accounting practice can presumably have a sphere of inuence reaching across the globe in economic, and thus most assuredly, in social well being. But the practices of accounting are fragile, and rely on a complex system of legitimacy, reliability, and trust. What are the implications when crime and fraud inltrate nancial reporting? How does accounting participate in Crime Debates?. Accounting practice has always been concerned with fraud, and has always been effected by nancial collapses, management transgressions, and misstatements by corporate ofcers. One might speculate that an essential premise behind the audit of publicly held corporations, is that . . . managers cheat. If left to their own devices, managers may manipulate nancial statements in a plethora of ways, such as: inating earnings (Equity Funding, 19631973); padding company books with non-existent inventory (Saxon Industries, 19681981); speculating with company securities (ESM Government Securities, Inc., 19771984); deceiving the auditors (ZZZZ Best, 19831988); and manipulating inventory counts and values (Phar-Mor, 19861992) (see Bayou and Reinstein, 2001 for details). Most recently, we are witness to the dramatic and devastating collapse of Enron, at one time the 7th largest US corporation. Accused of a multitude of criminal, nancial, accounting, and management abuses, including overstating earnings, hiding debt from its nancial statements, and manipulating employee investments, the company eventually lost up to 90% of its value (19962001). Enrons downfall coincided with an unprecedented collapse of their auditor, Arthur Andersen, in the unique position of being the rst major accounting rm to be indicted for a criminal chargeobstruction of justice (Eichenwald, 2002a, 2002b, 2002c). After 89 years, Arthur Andersen ceased operations as auditor of public companies on 30 August 2002 (Glater, 2002; we return to the Enron case in Section 5 of the paper). These transgressions fall under the social category of white-collar crime. In this paper, we contrast the articulation or discourse regarding white-collar crime with the
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discourse regarding non-white-collar crime, and explore the social signicance regarding the difference.1 Fraud, corruption, and criminal activity take many formsfrom the petty to the grand. How good and bad is portrayed in society is a fascinating and complex issue. From Robin Hood to Wyatt Earp, from Billy the Kid to Bonnie and Clyde, from Harriet Tubman to Patty Hearst (see, e.g. Sifakis, 2001; Becker, 1968) the nuances of criminality and a romanticism of heroes and villains has been nurtured. Novelists, storytellers, Hollywood, the media, the Department of Justice, state police records, and academia have all endeavored to create fairytales, myths, movies, statistics, and even names to describe crime, such as white-collar crime. Contemporary issues of crime exemplify this complicated literary and romantic tradition, infused with social, political and nancial nuances. Hall, Critcher, Jefferson, Clarke, and Roberts in their landmark, Policing the Crises (1978) assert that crime is managed: for example, crime statistics are underreported in some decades and highlighted in others, to assure the public of safety (in the former) or to shock them (in the later), as part of a complicated political process by re-constructing meaning and imbued with social practices. Their analysis contributes to a long research tradition of re-interpreting history, and illuminating the participation of the state and the media, as well as the power of villains and heroes. DuBoff and Hermans (1980) fascinating and powerful rebuke of Alfred Chandlers view of the efciency of trusts revealed instead the quest for monopoly control and power by the Rockefellers and Morgans, and their manipulation of institutions. Many researchers have offered similar re-constructions of history (e.g. Baritz, 1960; Galambos, 1975; Hunt, 1980; Hurst, 1970; Kolko, 1963; McCraw, 1975). These researchers have re-written the laypersons understanding of business practices, to illustrate the intersection of social, political and economic issues, or the intersection of crime and the economy, themes we explore in this research. So too in accounting there are challenges to the conventional viewin which accountings linkages to its social and political environment are seen as separate. Accounting research, practice, education, and theory intersect with political and social issues; with this enlightened view the meaning and message of accounting must be re-constructed.2 A conventional view of fraudulent business practices and accounting would be limited to assessing whether nancial statements are prepared according to Generally Accepted Accounting Practice (GAAP in the US, or their counterpart in other countries). Debates regarding fraud would revolve around departures from fairly present in US GAAP or true and fair in the UK and the European Union, and traditional debates are concerned, for example, with how
White-collar crime is ordinarily associated with white-collar employeesworkers with professional jobs (managers, lawyers, accountants, investment bankers) requiring a white collar or formal attire, in contrast to blue collar employeesworkers who are associated as semi-skilled or as manual laborers. Thus, these terms are imbued with social-class and gender, and in a society where racial discrimination is prevalent these terms also denote complex racial dynamics. It is our intent to examine these dynamics in this work. 2 See, for example, Arnold (1999), Arrington and Puxty (1991), Briloff (2003), Broadbent et al. (2001), Chua (1986), Cooper (1992), Cooper and Sherer (1984), Dillard and Nehmer (1990), Gallhofer et al. (2001), Hammond and Oakes (1992), Hammond and Streeter (1994), Kirkham and Loft (1993), Lehman (1992), Neimark (1994), Neu (1992), Oakes and Hammond (1993), Okcabol (2002), Parker (1986), Tinker (1991), Tinker and Gray (2002), Tinker et al. (1991), and Williams (1980).
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pension accounting practice or accounting-for-stock options depart from ofcial standards and principles. But accounting practice is a contested terrain in its role as a social force. Accounting and issues regarding fraud and crime are part of a broad social fabric: including issues of regulation, governance, economic crises, poverty, race, youth, politics, and class. The major aim of this paper is to examine how crime in the late 20th century is infused with these issues. Above we described numerous nancial collapses and management transgressions described as white-collar crimevery few resulting in signicant imprisonment. Charles Keating, a major protagonist in the demise of Lincoln Savings and Loans during the late 1980srequiring a government bailout estimated at over $1 billionhas served 51/2 years in a privileged prison (Collingwood, 1994). Ivan Boesky, a main player in the 1970s1980s insider trading and takeover frauds served 3 years (Eichenwald, 2002c), and Michael Milliken, one of the commanders of the takeover wars of the 1980s is a private citizen after spending 2 years in jail (Isa, 1996). During this same periodthe last three decadesthe number of state prisoners rose 500%. And among the 1.3 million people in state and federal prisons, 33% are black men age 20 through 29 years old (or 9.7% of the total black men in that age group, compared with 2.9% of Hispanic men and 1.1% of non-Hispanic white men) (Buttereld, 2001a). (We return to these statistics in Sections 3 and 4). Are we witnessing racial proling, incarceration rates skewed by race, youth, and class while limited penalties are imposed for elite, white-collar crime? Has the United States developed a prison industrial complexa set of bureaucratic, political, and economic interests that encourage increased spending on imprisonment, regardless of the actual need? (Schlosser, 1998). How has crime been managed?. In addition to the above queries, we ask other questions. What image regarding whitecollar crime is promoted in accounting? What issues regarding crime should be explored? In accountings defense of property and management is accounting complicit in the criminalization and victimization of the poor? How is accounting practice implicated in crime management? In limiting the range of what is considered acceptable accounting practice and research regarding crime, who is protected and who is harmed?. We examine these issues by revealing the statistics and strategies of managing crime outside the walls of Wall Streetin prisonsand inside the walls of Wall Streetwhite-collar crime. In the following section, we cover a range of issues as to how the state, the media, and accounting have managed crime. We reveal crime as a social phenomena and as a social construction, concluding the importance of assessing the power of institutions (including accounting) in creating reality and reconstructing issues of crime as part of a social and economic milieu. Section 3 reviews the relationship between increases in incarceration rates and shifting economic and social realities, and shifting methods and ideologies in order to manage crises. Section 4 presents more on the statistics, prots, budget strains, and race issues regarding prisons. Section 5, Dj vu concludes that we have been here before: business failures, accounting complicity, clarion calls for regulation and business ethics, and a management of accounting legitimizationthey have all manifested before. In concluding, in Section 6 with our Implications, we reect on the resilience of accounting to maintain its role in the regulatory apparatus of business, and on the lack of signicant
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change in power relations and in the distribution of wealth. Recognizing this resilience, it behooves accounting activists to work both within its terrain, and also with broader social movements in global justice.3
2. Managing crime Although many scholars have enhanced our knowledge regarding the intersection of the state, the media, and crime, one of the nest expositions may be found in Hall, Critcher, Jefferson, Clarke, and Roberts, Policing the Crises: Mugging, the State, and Law and Order (1978). We rely, liberally, on their insights. Although mugging in British society in the 1970s is the specic theme of their analysis, it is the notion of mugging as a social phenomenaas a social construction rather than a particular form of crimethat is their major contribution. How and why, they ask, did themes of race, crime, class, and youth served as an articulator of unique crises in Britain in the 1970s? Such questions complement ours: How and why is the articulation and the media image of crime in the 1990s part of a crises in the US, manifesting in and infused with, issues of race, crime, class, and youth? How have prevailing images of crime been a part of created belief systems, which manifest in other social phenomenaignoring the interests of some, and protecting the interests of others? These phenomena include racial proling, incarceration rates skewed by race and youth, limited penalties imposed on elite white-collar crime, etc. As the US experiences it economic booms and busts in the late 1990s and early 21st century, what changes occur in crime management?. How crime is portrayed and reacted to is an ideological conduit: in the case of mugging in the UK it was part of a construction of an authoritarian consensus, a conservative backlash, a slow build up towards a soft law-and-order society (Hall et al., 1978, p. viii). We pose similar questions raised by Hall et al.: how is a law-and-order ideology constructed in the US? What social forces stand to benet from it? What role does the state play in its construction? Specically, how is crime, when related to white-collar crime portrayed and reacted to, i.e. socially constructed, in ways that differ from nonwhite-collar crime? How does this construction relate to the specic economic and social crises, or milieu, of the US in the 1990s and rst years of the twenty-rst century? We, thus need to link the state, the media, and economic strains as part of our framework. Economic crises are distinctive features of contemporary capitalist social systems, and within these societiessuch as the UK and the UScomplex conicts and contradictions emerge along with these economic crises. The managing of these crises is imposed by an array of social practicesaccounting, ideological, budgetary, regulatory, and so onthat emerge, shift, and change, and are always in ux. Why they present themselves in particular forms at particular times is the challenge of our analysis.
3 This paper is part of a broad critical accounting research project, and has an inherently ambitious agenda enhancing our understanding of the interconnections regarding culture, accounting conict of interest, economic crises, the media, racism, etc. We provide our qualication here: this paper inevitably cannot do full justice to all of the issues in sufcient detail, but it offers a contribution to the accounting literature on these crucial themes.
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2.1. Ideology and social conict Ideology should not be conceptualized as an illusion or false consciousness, because such a view ignores the rich socio-historical importance and creative process manifest in ideology. We value Althussers (1971) concept of ideologyas the social cement necessary, illuminating, and the way in which we relate to our world in a socially signicant way, because it interprets and mediates what individuals experience (Althusser, 1971; Laclau, 1977). It is only through ideology that conscious subjects live (Giddens, 1979), not mere false beliefs. Thus, ideology is not passive but active, a changing and re-invented part of social practice, enmeshed on its own in the reproduction of society, shaping expectations and possibilities and incorporated into language, culture, and tradition. We rely on the rich tradition within Marxism which uses the term ideology in a sociological way: to refer to the vehiclesthe forms of signicationthrough which people make sense of the social reality that they live and create day to day, and through which the continuance of prevailing systems of domination are both reproduced and sanctioned (Neimark, 1994, p. 90, referencing Eagleton, 1991). 2.2. Creating and maintaining knowledge The power of the media, professional bodies, educational institutions, and the state to contribute to the creation of reality has been codied by many. Chomsky (1992) uses the term the state propaganda apparatus to describe the process by which reality is created, or by which indoctrination occurs. In the US, the process relies on a privatized system, including the media and the broad participation of the educated population, who essentially control educational apparatuses (Chomsky, 1992). These groups create systems of beliefs undermining independent thought and preventing understanding and analysis of institutional structures and their functions; they may even be quite unaware of this social role of their activities. These experts of legitimation using a term by Gramsci (1971), are the ones who labor to make what people in power do seem legitimate, [they] are mainly the privileged educated elites. The journalists, the academics, the teachers, the public relations specialists, this whole category of people have a kind of an institutional task, and that is to create the system of beliefs which will ensure the effective engineering of consent (Chomsky, 1992, pp. 6667). State power and the media have the same effect: to perceive issues, and to suppress, control and shape them in the interest of private ownership of the economy, and to discourage dissent, to silence the voices of the unempowered, and to privilege what is known. The power of the media and other institutions in constructing reality is referred to as Manufacturing Consent in Edward Hermans book with Chomsky (Manufacturing Consent: The Political Economy of the Mass Media, 1988). Under conditions of inequality and concentrated power, including in democratic countries, the public must be convinced of the soundness of existing institutions. State policies must be seen as reasonable, rationale, preferable, and proper. The forces that insure control over the media where media organizations are under private control and where formal censorship is absent include: concentrated ownership and prot orientation of dominant mass media rms; advertising as the primary source of income of the mass media; dependence of the media on information provided by government, business, and experts funded by primary sources of power; and pressure placed
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on the media for negative positions regarding the state (Herman and Chomsky, 1988). The major media institutions and the state can manage the news, by virtue of their resources and outreach. They can decide to privilege certain issues and neglect others, based on their own values and agenda (Herman and Chomsky, 1988). While there is general agreement (by researchers on both the left and right side of the political spectrum) regarding the mediating and conict-resolving role of the states apparatuses, Gramsis work enhances ones understanding of the states critical role in social reproduction, illustrating how social and political life is disciplined by class and productive relations, in order to reproduce the conditions necessary for the valorization and realization of capital. The social democratic state accomplishes this task through its cultural apparatus to obtain ideological conformity and cohesion, for example through social contracts, wage and price controls, immigration policies, environmental legislation, etc. Cultural leadership or hegemony is achieved not by force in social democracies, but through the states role in organizing consent through its policies regarding the media, education, local governments, etc. Pivotal to this cultural hegemony is the various branches of the media, ranging from popular forms of art and fashion to the variants found in business and academia. Included in cultural and ideological conditions are business education and research. These business practices represent primarily symbolic forms of social interactions. In this sense they are social discourses that shape social beliefs and thereby predicate the manner in which social members engage society (this is important as we seek to identify the effects of marginalizing some themes over otherssuch as white-collar and non-white-collar crime). Knowledge in accounting is policed through institutions limiting access to ideas, thus restricting the dissemination of valid claims challenging the status-quo. Accounting knowledge is controlled through an interplay of economic, social, and political factors (Tinker and Puxty, 1995). Within the accounting profession, Tinker (2001) asserts: The AAAs (American Accounting Associations) allegiancesto traditional education, research, and professional valuesare being transformed as the institution is assimilated into market processes (p. 120). Tinker points to the allegiances of large accounting rms with academic and professional bodies with the resultant production of knowledge, ideas, education, and research that is biased in beneting Big 5 interests, resulting in partisanship that exacerbates the silencing of signicant viewpoints criticizing these rms. Mitchell et al. (2001), reecting on accounting policy, also recognize an established body of literature illuminating how governments, professional bodies, and major organizations are actively engaged in creating reality or policing knowledge (see also, Barsamian, 2000; Chomsky, 1989; Gilroy, 2000; Mitchell et al., 1998; Said, 1994; Sikka, 2000; Tinker, 2000; Tinker and Puxty, 1995). We posit that the state and the media, including the institution of accounting, have re-constituted issues of crime as part of an important fabrication allowing certain interests to be fostered and others to be silenced. The media do not simply and transparently report events which are naturally newsworthy in themselves. News is the end-product of a complex process which begins with a systematic sorting and selecting of events and topics according to a socially constructed set of categories (Hall et al., 1978, p. 53). In the case of mugging, Hall et al. observe, Strictly speaking, the facts about the crimes which both police and the media were describing as novel were not new; what was new was the way the label helped to break up and recategorise the general eld of crimethe ideological
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frame which it laid across the eld of social vision (ibid.). Thus, we look toward the state, the media, the law, and accounting, to assess knowledge production regarding crime. 3. Media myths and why incarceration? Popular perceptions about crime have blurred the boundaries between fact and politically expedient myth. The myth is that the United States is besieged, on a scale never before encountered, by a pathologically criminal underclass. The fact is that we are not (Abramsky, 1999, p. 30). Abramsky offers a number of statistics: murder rates have been falling in the mid-1990s; murder rates are lower today than they were more than 20 years ago; and in some cities murder rates are lower than in the nineteenth century. Non-violent property crime rates are generally lower in the United States than in Britain and they are comparable to many European countries. Yet, horror stories (Abramskys words) have led to calls for longer prison sentences, for the abolition of parole, and for the increasingly punitive treatment of prisoners. These observances resonate with Hall et al. that the state and the media present . . . a new construction of the social reality of crime . . . a widespread belief about the alarming rate of crime in general, and with a common perception that this rising crime was also becoming more violent (Hall et al., 1978, p. 29). Marc Mauer, the assistant director of the Sentencing Project, and advocate group based in Washington, DC, asserts, Fifty years ago rehabilitation was a primary goal of the system [but not now, and] . . . . The number going through the system dwarf that in any other period in U.S. history and virtually any other country as well (in Abramsky, 1999, p. 30). 3.1. The many facets of Why? Theories regarding shifting economic and social realities and the management of economic crises such as those by Wright (1975) and Mandel (1975) offer signicant insights. They observed long waves in economic booms and slumps, explaining a natural tendency for capitalist countries to experience cycles of changing pressures on economic production, realization of prot, nancial expansion, ination, employment opportunities, and the management of state and federal budgets, to name a few. Periodic economic crises emerge from the contradictions inherent in the process of capital accumulation, and in the process of extraction of prots. And, economic crises have transitions, from one conguration of constraints, conicts, pressures, and contradictions, to different emergent ones. The problems are manifest in the problem of realizing surplus value, the falling rate of prot, the contradictory role of the state, and the competition between different forms of capital (nancial, industrial, among industries and nation-states). Crises must be managed. In a non-deterministic manner, but in complicated and subtle ways, owners of the political economy see that moderate wealth and income for the masses ensures political stability (Barsamian, 2000). Recognizing this mix of interests, motivations, power, stability, crises management, economic necessity, and ideology, Egbal Ahmad notes, Thats what the New Deal was about . . . Franklin D. Roosevelt was one of the nest capitalists around. What he understood was that a modicum of safety, of security, of distributive justice and the stimulation of hope in people is necessary for stability (Egbal Ahmad, quoted in Barsamian, 2000, p. 64).
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The contradictions in capitalist social systems affect and reect a variety of social conicts, and responses to them have the potential to create other crises. The welfare state of the US and the UK at various points in the 20th century is illustrative. The states support of workers, for example, through unemployment and social security benets is initially benecial to corporations that might otherwise have to incur these costs directly (for example, through corporate benet packages to employees). However, as the state becomes increasingly obligated to make these payments, the state competes with business for funds, driving up the cost of capital, and taxation to business. Another example, particularly relevant to the management of crime and prisons, is the inherent contradictions regarding the reserve army of labor (unemployment). Unemployment holds down wage rates and thus the cost of production. Yet the lack of wage income can impede the business imperative of realization of prots because of a lack of marketconsumersfor the goods produced. Marxist analysis refers to purposeful unemployment and low wage pressure as a distinctive feature of capitalist systems, to insure this reserve army of labor. This refers to a class of low wage, insecure, less skilled, less educated (schooled), and frequently racial/ethnic/ religious minority category of workers whose wages signicantly under-represent their real contribution to society. For the extraction of a surplus by capital (the category of owners of capital) low wages are a facilitating mechanism. We propose that in the period of US economic upward economic expansion of the late 1980s and 1990s, a prison population expansion was part of a complicated economic and ideological manifestation of this reserve army. Minority and low-skilled workers not considered employable were kept out of the formal labor market, becoming part of a protable prison building force in the economy. Western and Beckett (2000) suggest that one of the reasons Americas unemployment statistics look so good in comparison with those of other industrial democracies, is that 1.6 million mainly low-skilled workersprecisely the group least likely to nd work in a high-tech economyhave been incarcerated and are thus not considered part of the labor force. Rendering such a large group of people invisible, the authors claimed, creates a numerical mirage in which unemployment statistics are as much as two percent below the real unemployment level, and which has been made possible only by what Beckett terms an American intervention in the economy (the growth of the prison system) comparable nancially to Western Europes unemployment benet and welfare programs (in Abramsky, 1999, p. 34). Social programs more favored in Western Europe regarding unemployment were discredited in the US in the 1990s, and as we discuss below the surge in a prison building was a US alternative to the social benets policies. Mass imprisonment is what the urban scholar Mike Davis terms carceral Keysnesianismusing prison building and maintenance as an enormous public-works program to shore up an economy in which blue-collar jobs have been exported to the Third World (Davis, 1998). The United States has developed a prison industrial complex states Schlosser (1998), a set of bureaucratic, political, and economic interests that encourage increased spending on imprisonment, regardless of the actual need. This prison industrial complex is not a conspiracy but a conuence of special interests that has given prison construction a seemingly unstoppable momentum, under which politicians use the fear of crime to gain votes; where prisons have become a cornerstone of economic development in impoverished rural areas; and where private companies regard the roughly $35 billion spent each year on corrections not as a burden on American taxpayers but as a lucrative market (Schlosser,
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1998). (We provide, in the Section, Prisons in the Late 20th Century details of the prison expansion process.) The prisonindustrial complex is not only a set of interest groups and institutions. It is also a state of mind (Schlosser, 1998). 3.2. Evolving states of mind The decade of Kennedy and Johnson in the mid-1960s and mid-1970s (in the US) is a contested terrain for many historians. It represents for some the ultimate in government proigation and extravagance, leading to an inevitable scal crises of the state. For others, there was the potential of a Great Society, epitomized by the emergence of the Civil Rights Movement, the War on Poverty, the Womens Movement, the Environmental Moment, and so on. The 1980s marked a disquiet with, and discredit of, the liberalism, civil rights movement, and welfare state of the Kennedy and Johnson administrations. Faludis 1991 testimonies and statistics in Backlash: The Undeclared War Against American Women reveal the media and ideological backlash against feminism as part of revisionist politics. In the 1980s, new policies were sought: the state spending of its surplus (both on the federal and state levels) would not be to build extensively on a support system in the inner cities. Schools, infrastructures, job training programs, head start programs, low income housing, and a variety of services for the poor would be cautiously maintained and not widely expanded and the War on Poverty and programs to combat racism would be under-funded. The state was no longer sanctioned to improve inner cities if that spending was discredited as throwing away good peoples money on the bad. In the US the notable conservative backlash moved previously held center political views to the right, and re-presented policies ensuring a kinder and gentler nation. This included associating prisons as the law. Franklin Zimring, Professor of Law at the University of California at Berkeley, suggests that the explosive growth of prisons, more than efforts by the police, or changes in the law, or tougher sentences by judges, has been the most dominant characteristic of the American criminal justice system in the last three decades (Buttereld, 2001a). The media contributed to this strategy by revealing that society was under siege, that there was an onslaught of criminals in these inner cities. The drug economy in the inner cities was real. Observing how it was portrayed in the mass mediafrequently in racist, demoralizing, and frightening imagesis what we propose as the social constructive aspect of criminality at work. Contrasting observations of inner city life abound, including spokespersons with insider views and inner city voices of popular cultureSpike Lee, Jill Scott, Chris Rock, Marvin Gaye, Stevie Wonder, Curtis Mayeld, India Arie, Puff Daddy, 2 Pac, Nikka Costa, Erykah Badu, and an array of prolic, insightful, and controversial young rappers. The latter hold alternative views of social forces, revealing the reality of racial stereotypes, racial proling, drug abuse, and violence. Representing their world not as victims, these alternative interpreters of social and economic experiences reveal a backlash against poverty and racism. Their work addresses the effects and images of a society separated by race, class, and opportunity, specifying in word and song the difference between how white-collar and non-white-collar crime is tolerated, sanctioned, ignored, and rationalized. Accountings allegiances in these social conicts are manifest in its own messages, discourses, and journal articles, i.e. in a range of discursive practices revealed to its supporters
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and critics alike. Accounting journals, articles and educational resources all re-present struggles over the distribution of wealth as part of the states symbolic, cultural and hegemonic force, as envisioned by Gramsci (1971). As we have indicated, Gramsci recognized the states central role in organizing economic, social and political life by forming allegiances and alliances and replacing open conict with a sense of order, or harmony, or authoritarianism, or unity. In other words, using a range of organizing ideologies the state responds to the contradictions and crises of a particular era. Accounting forms part of these state apparatuses of ideological persuasion, contrasting the conventional and expedient view of accounting as a passive data provider, dedicated to unbiased reporting. Rather, accounting contributes to the states organization of cultural hegemony. We need to recognize accountings force in ideological practices as part of the state (but also unique) in creating social cohesion, allegiances, and forms of cooperation. For example, the early 1960s social movements witnessed accounting considerations of social audits (even though limited in their effects); while the 1980s critique and backlash against the Great Society coincided with an accounting discourse critiquing state intervention in accounting affairs, and a support for professional independence and professional reviews (see Lehman, 1992; Lehman and Tinker, 1987; Tinker et al., 1987). Accounting is part of the broad social fabric of hegemony of consent and hegemony of authoritativeness observed by Hall et al. (1978) as the means by which social conict is managed (accountings participation in creating social reality is expanded upon in Section 5). Integration among regulatory institutions (such as accounting, the law) and the media creates unexpected alliances in the US regarding white-collar crime and black youth crime, illustrating Hall et al.s assertion that The law remains one of the central coercive institutions of the capitalist state; and it is coupled in the most fundamental way with the structure of crime, with the way crime is perceived, and in the way crime forces those who are subordinated in society to shelter beneath a hegemonic order (1978, p. 177). The complex ideologies of crime provide the basis, in certain moments, for cross-class alliances in support of authority (1978, p. 177). The move toward privatizing prisons represents a strange alliance: the intersection of the free market with democracy and its concepts of freedom.
4. Prisons in the late 20th century Visitor: Youre on Death Row and you write, draw, educate yourself and help others . . . Why??? Inmate: Because Im Human Fortune News (2000), front cover The number of state prisoners rose 500% over the last three decades, growing each year in the 1990s as crime dropped. The total number of people incarcerated in state and federal prisons, local jails and juvenile detention centers was 2,017,686 at the end of 2000 (Buttereld, 2001a). The Justice Department reported in a release August 12, 2001, that the number of inmates in state prisons fell modestly in the second half of 2001, the rst such decline since the nations prison boom began in 1972, a decline attributed by experts to several factors: the continuing decline in crime, which began in 1992; new attitudes about
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offering drug offenders treatment instead of locking them up; and a greater willingness by parole ofcers to help parolees instead of sending them back to prisons for minor infractions (Buttereld, 2001a). If a decline continues, it could benet state budgets because prisons have been the fastest growing item of state spending over the last 20 years. In a number of states, including California, spending on prisons has depleted money for state colleges and universities (Buttereld, 2001a). But a decline in the number of inmates could be bad news for private prison companies, whose stock prices depend on a steadily growing number of inmates, and for some prison guard unions, such as the California Correctional Peace Ofcers Association. The association has been the biggest contributor to a number of California politicians and the most powerful force in the state pushing for tougher sentencing laws (Buttereld, 2001a). (This is not to deny the importance of jobs and security for working people in general, but rather to illustrate the dilemmas imposed within the prison system.) Buttereld (2001b) notes that in a reversal of the 20-year trend toward ever-tougher criminal laws, a number of states have quietly rolled back some of their most stringent anticrime measures, including those imposing mandatory minimum sentences and forbidding early parole. The new laws reect a political climate that has changed markedly as crime has fallen, the cost of running prisons has exploded, and the economy has slowed, according to state legislators and criminal justice experts (Sack, 2001). After a two-decade boom in prison construction that quadrupled the number of inmates, states now spend a total of $30 billion a year to operate their prisons, according to the Bureau of Justice Statistics. And with voters saying they are more concerned about issues like education than street violence, state legislators are nding they must cut the growth in prison inmates to satisfy the demand for new services and to balance their budget (Buttereld, 2001b). I think these new laws are pretty signicant, with legislators taking politically risky steps that would have been unthinkable even a couple of years ago said Michael Jacobson, a former corrections commissioner for New York City who is now a professor at John Jay College of Criminal Justice. According to Jacobson, When the spigot stops, you are forced to look at the items that have grown the most, an inevitably, in every state, it is corrections (Buttereld, 2001b). Perhaps the most surprising change has come in Louisiana, which has the highest incarceration rate in the nation and has long had a reputation for brutal prison conditions and wide racial disparities in who is sentenced to prison. The situation in Louisiana has reached a point, said State Senator Donald R. Cravins that we had half the population in prison, and the other half watching them (an exaggeration but poignant), while the state spent $600 million a year on corrections and was facing a budget decit. We were pouring money into a bottomless pit, but we could not address the real causes of crime like the lack of early childhood education, a particular problem in Louisiana, which has the lowest per capita income in the nation (Buttereld, 2001b). With the number of inmates in states either stabilizing or dropping, New York has frozen hiring at 36 prisons across the state. The change threatens the livelihood of thousands. Many of the children of laid off paper-mill workers and struggling dairy farmers chose a booming eld that offered a steady salary, a pension, and health insurancebecoming corrections ofcers. Across upstate New York, shrinking rural communities and their leg-
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islators clamored and competed for prisons, a seemingly recession-proof industry. But the boom times are coming to a jarring end (Rohde, 2001). Regions and towns that have based their whole economies on prisons are going to be confronted with some really serious problems, said Michael Jacobson, a professor of criminology at John Jay College of Criminal Justice. This is going to be a problem for the governor and Legislature. In the same way towns lobbied to open prisons, they are going to lobby against closing them (Rohde, 2001). Prison growth is assailed by critics as a shortsighted use of state resources and defended by supporters as necessary for public safety. New Yorks sprawling 70-facility $2.4 billion-a-year prison system pours hundreds of millions of dollars into the upstate economy each year. Groups that criticized explosive prison growth in the past are using the slowdown to again call for change. Jennifer Wynn, director of the Prison Visiting Project for the Correctional Association of New York, questioned the wisdom of making prisons such a large economic force in upstate New York. Suggesting that rural upstate communities have relied on prisonersmostly poor people of color from New York Cityto fuel the economy. Maybe its time to invest in more positive and sustainable industries than warehousing people (Rohde, 2001). We turn next to describe the make-up of the prison population. 4.1. Race and prisons According to a Justice Department report of August, 2001, among the 1.3 million people in state and federal prisons 33% (428,000) are black men age 20 through 29 years old, or 9.7% of the total black men in that age group. That compares with 2.9% of Hispanic men and 1.1% of non-Hispanic white men in that age group who were in prison (Buttereld, 2001a). Blacks account for 12.3% of the US population in the 2000 census, while Hispanics made up 12.5% (White accounts for 75.1%; Asian 3.6%; these do not add to 100% do to overlaps; see www.census.gov). The racial disparities are more pronounced than they appear in these gures, according to Alfred Blumstein, a professor of criminology at Carnegie Mellon University and one of the nations most respected experts on prisons. The even greater over-representation of blacks in prisons is partly a result of the tougher sentences for crack cocaine that for powdered cocaine. Powdered cocaine is more commonly dealt by whites and crack cocaine is more commonly dealt by blacks. But the discrepancies also reect differences in prior arrest records and some level of racism, he suggests (Buttereld, 2001a). State Representative Michael Lawlor, who is chairman of the Connecticut House judiciary committee, says one advantage of rolling back stringent anti-crime measures would be to reduce huge racial disparities in who goes to prison. Nine out of 10 people in jail and prison in Connecticut for drug offenses are black or Hispanic, but half of those arrested on drug charges are white (Buttereld, 2001b). Governor George E. Pataki, a Republican with a tough-on-crime record, has promised to soften New Yorks most severe tough-on-crime laws: the mandatory sentences for drug offenses passed in the 1970s. The main reason is that Mr. Pataki is running for re-election next year and has been trying to make inroads among black and Hispanic voters (Buttereld, 2001b).
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4.2. Racial proling and race Evidencing the concern with racial proling, Public Broadcasting Systems sponsored a forum Is Racial Proling Real? (Public Broadcasting System, 2001). Ben Wattenberg, facilitator of the program stated From California to Cincinnati, to New Jersey, police department are being confronted with the incendiary topic of racial proling. David Cole, Professor of Law at Georgetown University Law Center, asserts that In terms of the evidence, the evidence is astoundingly one-sided, that is, there have now been probably 1520 studies of racial proling and every one of them has found that African Americans and Latinos are disproportionately stopped and searched (Public Broadcasting System, July 19, 2001). Cases led in 1997 and 1999 in New Jersey prompted Attorney General Peter Verniero to release a report admitting to the practice of racial proling by New Jersey State Police, admitting to the unconstitutional practice (American Civil Liberties Union, 2001). According to a survey by The Washington Post, The Henry F. Kaiser Family Foundation and Harvard University, More than half of all African American men report that they have been the victims of racial proling by police some time in their lives (Washington Post, 2001). More than a third of all blacks interviewed said that they have been rejected for a job or failed to win a promotion because of their race. One in ve Latinos and Asians also said that they had been discriminated against in the workplace because of their race or ethnicity. President Bush told Congress in February (2001) that it is wrong, and we must end it but to date, his Administration has failed to act (Washington Post, 2001). The Federal Investigation of New York Citys street crime unit, which began after the 1999 shooting of Amodou Diallo, has found ofcers engage in racial proling. Mayor Giuliani responded with a furious attack on the motivation behind the investigation and its methodology, denying the prosecutors ndings that blacks and Hispanics were disproportionately singled out (Fortune News, 2000, p. 6). The importance of race as a primary factor in distinguishing among the rights and privileges in US history is undeniable (Morrison, 1992; West, 1993). The instances and manifestations of discrimination based on race are ubiquitous. It is impossible to do justice to these all. We rely on Bells (1987) And We Are Not Saved: The Elusive Quest of Racial Justice for a brief illumination. Bell writes, Jeremiahs lament that we are not saved echoes down through the ages and gives appropriate voice to present concerns of those who . . . pledged publicly that the progeny of Americas slaves would at last be Free by 1963 . . . Not even the most skeptical of that convention [in 1959] could have foreseen that, less than three decades later, that achievement would be so eroded as to bring us once again into fateful and frightful coincidence with Jeremiahs lament (Bell, 1987, p. 3). Recognizing that most of what can be said about racial issues in the US has been said, and likely more than once, Bell concludes that while full racial equality may some day be achieved, it will not be in our time. Library shelves creak under the weight of serious studies on racial issues (Bell, 1987, p. 4). Throughout Americas history, racial issues have been high among, if not central to, the countrys most important concerns. At no time has race slipped far down the list of the most crucial matters facing both the nations top policy makers and its most humble citizens . . . . On the agenda of unnished business, Americas continuing commitment to white domination looms especially large for those citizens of
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color whose lives are little less circumscribed than were those of their slave forebears (Bell, 1987, p. 4). Knowing that racism is more than a pejorative hurled in powerless frustration at an omnipotent evil, Bell quotes Charles Lawrence, Racism in America is much more complex than either the conscious conspiracy of a power elite or the simple delusion of a few ignorant bigots. It is part of our common historical experience and, therefore, a part of our culture. It arises from the assumptions we have learned to make about the world, ourselves, and others as well as from the patterns of our fundamental social activities (Bell, 1987, pp. 45). Gilroy provocatively provides testimony to the power of culture and its infusion with issues of race, reality construction, and the quest for prot, in his book, Against Race: Imagining Political Culture Beyond the Color Line (2000). He writes, It is impossible to deny that we are living through a profound transformation in the way the idea of race is understood and acted upon (Gilroy, 2000, p. 11). Concerned with the power of raciology, Gilroy asserts that we must engage the pressure and demands of multicultural social and political life, noting this mixture of concerns is part of the answer tentatively offered . . . to the authoritarian and antidemocratic sentiments and styles that have recurred in twentieth-century ultranationalism (p. 6). Gilroy suggests that race-thinking is a powerful, seductive, and destructive force, a form of fascism, making a spectacle of our identities and differences. The media and commodity culture of the 1960sand especially the 1980s rise of hip-hop and other militanciessacriced the contributions of black culture, in order to serve the interests of prot and corporations, and new technologies. The triumph of the image spells death to the nest promises of modern democracy, reducing people to mere symbols. Gilroys hope is that race will be denounced as a political language, and he champions instead a new humanism and a new moral vision for what was once called anti-racism. Culture, racism, prot, the media, the commodication of identities, crime, incarceration, and economic crises, are all linked. How does white-collar crime illustrate the complexity of this social fabric? We turn to this issue in the next section, Section 5, Dj vu.
5. Dj vu There are many linkages between white-collar crime, culture, accounting conict of interest, and our social fabric. As previous sections illustrate, in capitalist societies the quest for prot and economic crises drive businesses (people) into an array of practicessome socially productive, and others socially unacceptable and labeled fraudulent, unethical and criminal. There is an inevitable social construction of crime, and the management of white-collar crime which includes calls for regulation, calls for business ethics, and the participation of Congress, the SEC, accounting rms, analysts, academics, and the media in presenting these issues. In the management of these frauds there are calls to constrain them, but something broader is taking place, which is our interest in revealing. How are these frauds and crimes re-presented, i.e. how is the articulation of white-collar crime and what is to be done about them part of ideological crime-management? They form ideological management, because this is part of the necessary state apparatus of intervention to assure consensus, cohesion, legitimacy, and is ultimately symbolic: they do not change the inherent nature of power relations and conicts of interest in capitalist society.
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Among the range of activities possible, this section presents what we consider to be prevalent, consistently used, resilient, effective, and interrelated forms of management of the crises. We have been here before in their basic form, although the specic characteristics may be different than previously, we experience them as dj vu. The four forms of managing white-collar crime that we illustrate here are rst, the call for regulation: of the business community and of the accounting profession, through various recommendations and by a range of protagonists. The second is a suggestion that the problem is the conict of consulting and the conict of interest inherent in accounting rms offering both audit and consulting services, as characterized as the fox guarding the hens (this claim is already inherent in the audit process whereby auditors are paid by the same managers they scrutinize). The third is the call for ethics and discussions regarding business ethics and ethical instruction to the business community and in universities. The fourth is the rhetoric regarding the numbers: if accounting got the numbers a little better, these transgressions could be prevented, ameliorated, and society would be okay. We illustrate the general concepts with the specic case of Enron. In the period beginning October 2001, when warnings regarding Enrons demise were heightened by news of the SECs inquiry into the company, through April 2002, over 750 articles on Enron appeared in the New York Times alone. 5.1. Dj vu 1: regulation Regulation has been a quasi-solution to intra-capital disputes many times in our past. In the late nineteenth and early twentieth century, monopolies, trusts, and tycoons were restrained by antitrust acts. Research reveals that these acts were promoted by business itself as a means of preserving a semblance of legitimacy of the business community, lubricating the machinery necessary for capitalism (Galambos, 1975; Kolko, 1963). Hurst (1970) evidences that accounting practices justied the corporate entity in the early 1900s by legitimizing corporate power and maintaining investor and public condence. The really effective pressures for shareholder information grew out of concern for maintaining condence in the market for corporate securities, rather than for the legitimacy of the internal government of the corporation (Hurst, 1970, p. 91). Merino and Neimark (1982) conclude that the passage of securities regulation in the US in the 1930s was an example of this symbolic legislationa means of restoring investor condence and preserving the status quo. Their work reveals that the major protagonists in the formation of the regulations were banking, investment, and nancial institutions requiring legitimacy to ensure access to capital ows. Merino and Mayper (2001) remark: the passage of securities regulation in the 1930s must be examined as a response to a moral crises of capitalism, generated by the immoral behavior of the capitalist elite (p. 501). Regulation is ultimately symbolic (i.e. not expected to result in signicant changes in distribution of economic resources) (Merino and Mayper, 2001, p. 502). In the current post-Enron milieu, similar regulatory, but ultimately symbolic recommendations have appeared in, literally, thousands of articles. By February 2002, regulators, legislators and the Financial Accounting Standards Board were proposing changes in ways companies do business and report their nances, including closing loophole[s] that Enron used to hide hundreds of millions of dollars of debt and inate it prots (Norris and Kahn, 2002). The Financial Accounting Standards Board is considering forcing companies to in-
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clude in nancial statements results of partnerships like those that Enron was able to hide for years; in separate developments, the Securities and Exchange Commission is proposing rules that would require companies to provide quicker and more comprehensive information about their nances, insider stock sales and critical accounting decisions; if enacted [these] changes would overhaul some Wall Street practices in place since [the] Depression (Norris and Kahn, 2002). As Congress considered legislative responses to the collapse of Enron, President Bush unveiled proposals in March 2002 to protect investors better through faster and more complete disclosure of important nancial information, improved auditing standards and new requirements for executives, but the plan did not go as far as proposals already suggested by many lawmakers and even some administration ofcials. The plan reects the longstanding hostility of the president and his advisers to trial lawyers and lawsuits in general and has little in the way of new methods of recourse for investors and few new enforcement powers for regulators (Oppell, 2002a). Missing from the presidents proposals were tough measures that had recently been suggested by Paul H. ONeill, the Treasury secretary, including lowering the standard for punishing executives to negligence, instead of recklessness. Many of the presidents proposals have been discussed by SEC Chair Harvey I. Pitt, including improving the quality of detail in quarterly corporate nancial lings, speeding the disclosure of material corporate developments, and creating a regulatory board, overseen by the SEC, to govern the accounting industry (Henriques and Eichenwald, 2002; Oppell, 2002a). Senate Democrats tried to draw sharp contrast with President Bushs response, by proposing laws that would increase criminal penalties for certain corporate wrongdoings and give state attorneys general new powers to sue companies (Oppell, 2002b). The Senate majority leader, Tom Daschle said Mr. Bushs proposals offered only the illusion of reform and lacked any kind of new punishment for corporate fraud, even the kind of fraud that cost thousands of people their life savings or their retirement security (Oppell, 2002b). Proposals by House Democrats to change the current audit systems in order to prevent Enron-like disasters include limiting the length of time an individual accounting rm can audit a company (Spinner, 2002; Strope, 2002). A March 2002 Business Week poll is illustrative of the current focus and proliferation of concerns regarding white-collar crime reforms and auditor independence. Opinions of nancial executives were surveyed regarding suggested reforms. These include: new disciplinary boards, regular rotation for auditors, barring corporations from hiring their audit rms for non-audit work, better policing of auditors, government mandated auditor rotation, and tougher discipline and penalties for ofcers, directors, and auditors who mislead the public (Weber and Byrnes, 2002). A majority of the polled supported most of the reforms, with 88% of the managers polled supporting more stringent penalties for misleading the public. Spurred by the unprecedented losses and strict control by Enron of employee pension plans, pension reform legislation has proliferated. The evaporation of Enron employees retirement nest egg has produced a swifter political reaction than any other aspect of the scandal. Politicians recognize that the estimated $1.2 billion in retirement money lost by Enron employees has frightened many of the 42 million Americans with 401(k) plans, and are competing to propose measures that protect the nearly $2 trillion in those plans (Leonhardt, 2002). Enron employees were encouraged to have a large portion of their holdings in com-
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pany stock rather than consider a more diversied (and less risky) portfolio. Employees were not permitted to sell Enron stock until age 50 and inadequate notication was given regarding a blackout period caused by a change in pension plan administration. During this period employees were not permitted to sell Enron stock, yet top Enron executives were. In a six week period during which Enrons problems were escalating, employees lost an estimated $1 billion (stock investor loses have been estimated at $63 billion) (Spinner, 2002). The House of Representative reform bill passed in March 2002 was largely based on President Bushs recommendations, with Democrats calling for further protections for employees, claiming that the House and Bush plans are insufcient and contain conicts of interests detrimental to employees (Spinner, 2002; Strope, 2002). In the spirit of the contradictions revealed in these complexities, it should be noted that calls for regulation occur under certain circumstances, are debated in contradictory manners by a variety of protagonists, and form the crime management ideology we assert takes place. Thus, media images and clarion calls for reform and regulation are likely to emerge in the wake of the Enron crises, but we note that resistance to them was virulent prior to the melt down of Enron and the accounting professions loss of legitimacy. The power of auditing rms to exert inuence on the process of regulation through lobbying, and political contributions has been documented, and lamented by Arthur Levitt Jr. former chair of the Securities and Exchange Commission (Labaton, 2002b). When Levitt sought conict-of-interest rules on the accounting industry 2 years ago, he was hit by a barrage of high-powered lobbying, including calls from 10 or 11 senators. The senators, whom he did not identify, warned that if he did not relent on the new regulations, the agencys appropriations could be cut, he said . . . I have never been subjected to a more intensive and venal lobbying campaign (Labaton, 2002b). Since 1990, the accounting industry has contributed more than $53 million to congressional and presidential candidates. Congressional aides and some experts say signicant oversight and toughened enforcement of accounting rms will not happen because of the accounting industrys political muscle. Its just whimsical, said James D. Cox, a law professor at Duke University who has written a text-book on accounting and legal issues. There will be a lot of posturing about how bad Enron and Andersen are. But at the end of the day, if we cant get campaign reform, its hard to believe we get tighter standards (Labaton, 2002b). We regard calls for regulation as symbolic legislationa means of restoring investor condence and preserving the status quo, and that among the major protagonists in the formation of the regulations are accounting, banking, investment, and nancial institutions requiring legitimacy to ensure access to capital ows. These responses and contradictions appear in the consulting as the culprit issue as well as we indicate next. 5.2. Dj vu 2: consulting as the culprit Seventeen years ago, the American Institute of Certied Public Accountants (AICPA) issued On the Quality of Independent Audits. This 1985 publication was prefaced with the following. For the second time in less than a decade, the Subcommittee on Oversight and Investigations of the House Committee on Energy and Commerce is conducting hearings on the performance of the public accounting profession. In their 1985 testimony to the US House of Representatives, the AICPA acknowledged that concerns over providing
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Management Advisory Services to audit clients had been raised a number of times in recent years (AICPA, 1985). Management Advisory Services (MAS, currently referred to as consulting services) had been under scrutiny for its potential for impairing auditor independence but the AICPA referred to studies nding no evidence that MAS had been a cause of audit failure, or had resulted in an impairment of independence, and thus there should be no restrictions on these services. Prohibitions against providing audit and consulting services were never implemented in the 1980s, and by 2001, according to a survey by the U.S. Securities and Exchange Commission the accounting industry was earning $2.69 from non-audit work for every $1 earned from audit services (Bilello, 2002; Financial Times, 2002). The rhetoric in the battle between the Big 5 accounting rms (Arthur Andersen, Deloitte Touche Tohmatsu, Ernst and Young, KPMG, and Pricewaterhouse Coopers) and the Securities and Exchange Commission (SEC), over the latters proposal that public auditors should not provide non-audit services to the same clients (because of conict of interest issues) has been bitter. Greed and arrogance have diverted the accounting profession from its mission of providing sound nancial reports for its shareholders claimed SEC former Chair, Levitt, in 2000 (McNamee and Byrnes, 2002, p. 166). SEC Chair Levitt recognized a wave of auditing failure which he claimed has cost investors $88 billion in the past 7 years (McNamee and Byrnes, 2002, p. 156), and he noted that in the 3-year period of 1997 through 1999, 362 companies restated their nancial reports, perhaps a consequence of audit impairment and compromises due to potential conict of interestaccounting consulting work and nancial ties were compromising audits. On June 27, 2000, the SEC voted unanimously to issue a proposed rule that would bar accountants from providing a range of consulting services to clients that they audit. Levitt also proposed strengthening the public oversight of accountants with a strong intention of sending the profession back to its roots as vigorous guardians of investor interest (McNamee and Byrnes, 2002). With revenue from consulting services averaging 51% of their revenue, three of the Big Five rmsDeloitte Touche Tohmatsu, KPMG, and Arthur Andersenvociferously protested the SEC actions, suggesting that lacking the proof, the government is unnecessarily and unfairly meddling in their affairs (Donock, 2000). In disputing SEC Chair Arthur Levitts argument to curb consulting work for audit clients, Kenneth Lay, Chair of Enron wrote to Levitt in 2000 that In addition to their traditional nancial statement related work, the independent auditors procedures at Enron have been extended to include specic audits and reporting on critical control processes. This arrangement . . . has been extremely valuable (Farrell, 2001). The defeat of the proposals in 2000 allowed, for example, Andersen to bill Enron $27 million for consulting services while also billing $25 million for audits (Labaton, 2002b). But after the Enron debacle, Paul A. Volcker, Chair of the Independent Oversight Board, and former chair of the Federal Reserve, called on Arthur Andersen to separate auditing from consulting and to assure that conicts of interest do not harm the quality of audits (Norris, 2002). Do we want reform, or do we not? That is the issue that we want to put on the table (Norris, 2002). Mr. Volcker would separate the consultants from the accountants in Andersen, As this reorganization is completed, there will be no partner interlocks, no revenue or prot sharing, and no cross subsidies between the auditing and consulting partnerships (Norris, 2002).
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In response, Deloitte Touche Tohmatsu are separating consulting from audit practices, a reversal of the rms prior stance of maintaining that it provided better services to clients through the synergy of its connected auditing and consulting business (Los Angeles Times, 2002; Meyer, 2002). Four of the other Big Five accounting rms announced their support of proposals preventing them from providing technology consulting and internal audit services to clients they externally audit, a previously strongly opposed legislation (McNamee and Byrnes, 2002). Responding to growing criticism of accounting practices stemming from the collapse of Enron, Harvey L. Pitt, chair of the Securities an Exchange Commission proposed that outside experts police the accounting industry, instead of the current practice of Peer Review (Labaton, 2002a). Although Mr. Pitt proposed that changes in the oversight rules and disclosure requirements were essential, he dismissed suggestions that he take steps to keep auditors from performing other work for the same clients. Illustrating the complexity of these issues, Mr. Pitts comments are a signicantly broad indictment of the profession. He claims, Auditor independence is not the cause of the problems that we are witnessing. The system has enough aws in it that cry out for repair. And it would be easy for some people to convince you that the entire problem is a question of auditor independence and ignore the much bigger issues of the quality of our disclosures, the penetrability or impenetrability of nancial reports, and how audits are structured and performed (Labaton, 2002a). Hence, a record number of accounting and nancial reporting cases have been opened: Following the implosion of Enron last winter, the agency received a record number of tips from corporate insiders and investors about accounting and nancial reporting violations at other companies (Labaton, 2002c). Levitt casts the Enron story as the story of the ninetiesa battle between public and private interests that is being fought at a time when there is more corporate money in politics than ever before. This is about corporate greed . . . two decades of erosion of business ethics (Mayer, 2002). This concern for ethics is our next consideration. 5.3. Dj vu 3ethics In addition to a call for greater scrutiny and regulation, there has been the moral equivalent of mea-culpaa call for ethics, which has an historical precedence as well. In the 1980s, the American Assembly of Collegiate Schools of Business (AACSB) and the Corporate Council on the Liberal Arts stressed the importance of an ethical component in business and accounting education. This clarion call came during previous shock-waves regarding questionable business practices. General Dynamics had been suspended from bidding on new contracts with the U.S. Department of Defense due to alleged fraudsuch as submitting $640 million in false claims on nuclear submarine contracts. E.F. Hutton had been charged with extensive check fraud (check kiting), and Texaco was charged with knowingly interfering with Penzoils acquisition of Getty. In requiring Texaco to pay over $10 billion to the plaintiffs, Texas Judge Solomon Casseb, Jr. stressed Texaco has misjudged the importance of integrityat least in appearancewithin the business community. Fraud within E.S.M. Government Securities Inc. set the Ohio banking system reeling in the mid 1980s, and scandals in investment banking, piranha-like takeovers, and greenmail disputes thrust rms like Drexel Burnham Lambert, Shearson Lehman Brothers, Phillips Petroleum, CBS Inc.,
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and TWA, into controversial limelight in the media (Lehman, 1988). While some considered takeovers as a positive form of natural market regulation, Harold Wilson, former Chair of the Securities and Exchange Commission, claimed takeover activities are a major disaster for shareholder democracy (Financial Times, 1985). It was in this contentious environment, similar to the post-Enron era, that greater advocacy appeared for business ethics (as now), and for universities to include ethics and codes of conduct education in business schools. Business Ethics New Appeal (Lewin, 1983) described academias increased interest in business ethics, as evidenced by a proliferation of articles, new texts, and new courses. Yet during this same period, surveys of literature and accounting curriculum revealed the promotion of individualism, competitive behavior, material acquisitiveness, and social Darwinism in business (Lehman, 1988). The Enron collapse is emblematic of a problem that is far more imbedded, more intractable and, alas, far more universal than the board failures and malfeasance of a single company . . . . The hard part inheres in the very nature and design of large-scale organizations, whose ethos and leadership too often create mindless and complacent cultures with vacant sentry boxes. Unless the leadership and the social architecture of these behemoths change, I can promise you Congressional regulations will get tighter, the Securities and Exchange Commission more vigilantand the problems worse. The basic problem in most organizations today, both public and private, is that they work to block transparency . . . . But a culture of honesty, like a healthy balance sheet, is on ongoing effort. It requires sustained attention and constant vigilance (Bennis, 2002). The recent call promoting ethics by industry leaders have many interpretations, and we refer to one as ensuring survival, but little change, to the economic system. Promoting ethics constrains the system as an informal control over egregious business practices, disciplining the untamed market place in which all participants are affected by the negative consequences of competition. Scandals and frauds and the resultant loss of investor condence create precarious and volatile markets. At some point the effect of individualism and unbridled competition becomes overwhelmingly detrimental, rather than purposeful to the system, jeopardizing its survival. A belief in the system and the ethical nature of its stewards (managers, accountants, auditors, regulators, investment bankers, consultants, etc.) is critical, as is a belief in the numbers. 5.4. Dj vu 4: fact is ction: the numbers lie Months prior to the public revelations of Enrons problems, Bethany McLean of Fortune magazine became the rst journalist to highlight hard questions about Enrons balance sheet. The most startling fact she revealed was the absence of crucial information in the companys nancial reports. How exactly does Enron make its money? she wrote (Barringer, 2002). Ms. McLean is among a few nancial reporters who have written corporate nancial reports, having worked for an investment banking division of Goldman, Sachs. She would review the books of companies being offered for sale and describe their virtues and faults. I learned, she said that numbers can lie. She also had an epiphany about accounting and its potential for abuse. When you come out of a liberal arts background she said, you want to know why something is the way it is. In accounting, there is no reason why. There is
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no fundamental truth underlying it. Its just based on rules. These rules create an incentive to get around rules she said. This means getting way from any accounting portraying the fundamental reality of a company (Barringer, 2002). Analysts lament the nature of accountings subjectivity in the current environment, and its deleterious effects. Scrutiny of off-balance-sheet (OBS) transactions and accounting gimmicky has increased . . . . Have no doubt: Enrons demise has shaken the nancial community, resulting in skittish equity markets that appear to respond daily to the mere suggestion of infractions in corporate reporting policies with a heightened level of volatility. Protection of auditor independence is also at stake. There is a need now, more than ever, for nancial statement users to delve into company reports to ferret out accounting smoke and mirrors . . . to pause and reexamine the corporate reporting policies of companies around which rumors may swirl (Napolitano et al., 2002, p. 1). The desire for better numbers is revealed in the authors assertion that The United States retains the blueprint for the most conservative and highest quality GAAP framework and regulatory statues in the world. Nonetheless, there are areas in our accounting model that lack the level of transparency needed to assess accurately the fair value of a rm . . . . It is essential for analysts and investors to minimize the torpedoes in nancial reports by identifying companies that use liberal corporate reporting policies and OBS arrangements to either mask weakness in operating fundamentals (Napolitano et al., 2002, abstract). But, if the numbers can lie, can accounting really deliver the true nature of what prevails? Critiquing David Solomons quest for faithful representation in accounting, Tinker (1991) recognizes the subjectivity and partisanship of accounting, and that it is never neutral in issues of social justice. The diversity of conicting social interests invested in accounting suggests it inevitably takes sides in such conicts. Numbers are informed by a choice; in seeking faithful representation one ignores the choice of sides: a choice that must be socially reective and critically self-conscious (Tinker, 1991). Similarly, Everett et al. (2002) point to the myth making aspect of the accounting profession, an important and frequently under-developed aspect of accounting practice, teaching, and research. They provide an historical perspective on the development of ideas regarding independence and objectivity and its part in the ethical discourse in accountancy, focusing on the Canadian Chartered Accounting Profession, 19112000. They illustrate that terminology and discourse are a process of creating rationales and myths with no one history or truth; history is socially constructed and subjective. The notion of accounting objectivity is a characteristic used by the accounting profession to establish its legitimacy, ethical high ground, and unique contribution to society. And, as the profession has created unrealistic aims, given its inherent conict in social practices, they speculate that there will be new contradictions, that will continue to emerge as the profession creates myths to legitimize itself (this phenomena has been referred to as the expectations gap in previous manifestations4 ). The ambiguities of accounting, and the exibility of what it should deliver as truth, has served the complicated social systems in which it operates quite well.
4 The search for objectivity in accounting has permeated its practice for its entire existence, as has a critique of this philosophy. Accountings subjectivity, social construction, mutability, and transformations have been researched by many (see, e.g. research noted in footnote 1).
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6. Implications Far from being a radical idea, Berenson states in the New York Times, that the biggest casualty of Enrons collapse will be the loss of investor condence. Enron may have collapsed, but the market for esoteric accounting is still booming. And that is bad news . . . If investors cannot believe the gures put out by public companies, they will be much less willing to risk their money on stocks (Berenson, 2002). Yet, Berenson fails to reveal the complexity of symbolism, social and business practices, and reality creation when he states, Accounting, ordinarily a pillar of capitalism, was misused to prop up prots (Berenson, 2002). In actuality, accounting and business, and capitalism itself, has worked; it has been resilient; and it has successfully created myth if, despite of evidence to the contrary, there has been a strong belief in the objectivity of accounting. We have been here before: the SEC acts in the 1930s, the replacement of the Accounting Standards Board in the 1970s, the 1980s Dingell Commission investigations of audit quality, and the clarion call for business ethics in the merger mania, takeover, and corruption years of the 1980s. These mirror the rhetoric of todaydebates assessing independence, questions of integrity and public interests, and the indictment by no less than SEC Chair Harvey Pitt, quoted previously who has declared that the system cries out for repair, given the much bigger issues of the quality of our disclosures, the penetrability or impenetrability of nancial reports, and how audits are structured and performed (Labaton, 2002a). Dj vu manifests in the frequent laments of our day. The reection of our past in todays mirror, in the investigations into Enrons collapse (or World Coms, or Arthur Andersens, or some other pillar of capitalism) is clear. Investigators will seek to pinpoint whether the same kinds of fraudulent acts that were at the foundation of the savings and loans scandals of the late 1980s and early 1990s occurred at Enron, too. These include false valuation of assets, bogus deals between related parties, and millions of dollars pocketed by participants along the way (Eichenwald, 2002a). Our work is concerned with how well consent has been manufactured, and how well reality has been constructed to generate a belief in corporate enterprises in the past. The state, the media, the business community, and the accounting profession have contributed to, and indeed succeeded, in portraying faithfulness, objectivity, integrity, reliability, and fairness in a world that aunts under capitalism many of these characteristics, but has the ability to obscure that reality. At the same time, a re-presentation of the criminal justice systems injustices have remained under examined. Accounting failures and business failures also have included the markings of the failures of free markets worldwide: continued global poverty, questionable privatization of public enterprises and public goods, and greater divides between so-called rst and third world nations. In her study of globalization, Rosenberg remarks, It is often said that globalization is a force of nature, as unstoppable and difcult to contain as a storm. This is untrue and misleading . . . . Today it would be more likely for globalization to be sabotaged by its own inequities, as disillusioned nations withdraw from a system they see as indifferent or harmful to the poor (Rosenberg, 2002). There will be new crises of investor and public condence, and skepticism of the integrity and wisdom of Wall Street and global enterprises in general due to the current collapses. White-collar crime will appear less tolerated and will more prominently be declared as
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wrong. Our work demonstrates far from being a philosophical shift, or a desire for philanthropic good, the stance is one of preservation. The powerful concern is for survival, as even former SEC Chair Levitt stated, When the public loses condence in our markets, or when the reliability of the numbers is diminished, the whole system is jeopardized (McNamee et al., 2000, p. 158). In accountings defense of private enterprise and in obscuring the winners and losers regarding all nancial activity, accounting contributes to victimizing outsiders and those most vulnerable. The profession is ultimately and symbolically responsible, in its raison detre, for punishing predators and violators of duciary duty. Our work provides a stark contrast between white-collar crime punishment and that of the general prison population. The criminal justice system reects and amplies the failure of our society to address a wide range of social issues: poverty, homelessness, addiction, and racism with a concurrent ignorance among the wider community of the root causes of incarceration. Accounting and business rhetoric is part of the fabrication that equity and justice is manifest. Our paper illustrates that in accounting practice, in the media, in the management of consent, in white-collar crime, and among the incarcerated in our prisons, justice is not blind. If, as Dostoevski wrote, the degree of civilization in a society can be judged by entering its prisons, our civilization is indeed troubled.
Acknowledgements The authors would like to gratefully acknowledge the input and encouragement from the anonymous reviewers, and from Professor Theresa Hammond, Professor Prem Sikka, and Professor Tony Tinker.
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Critical Perspectives on Accounting 16 (2005) 613639

Accounting for crime

Corresponding author. Tel.: +1-516-463-6986. E-mail address: Cheryl.R.Lehman@Hofstra.edu (C.R. Lehman).

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

C.R. Lehman, F. Okcabol / Critical Perspectives on Accounting 16 (2005) 613639

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