Significance Of Accounting Profession
ACCT 2081 - Financial Accounting
University of Cincinnati
May 25, 2023
Introduction
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
Assuming that the state needs resources to provide the public with adequate
services and that accountants can help the state collect revenues, it follows
that the relationship between the state and the accountancy profession
should be simple and straightforward. However, recent scandals and events
have shown that accountants’ interests and needs do not always coincide
with those of the state and its citizens, which raises questions about the
effects that such “divergences” may have on accountancy’s claims of being
a profession. As MacDonald (1995) pointed out, capitalism has had a
profound impact on both modern professions and the state, affecting their
respective structures and scopes, which is why its effects on the accountancy
profession should be analysed in order to identify the reasons that have made
the relationship between accountants and the state increasingly complex and
contradictory. However, in spite of the impact that the rise of capitalism and
other phenomena, including globalisation, have had on the accountancy
profession, the term “professionalism” is still associated with certain scopes,
traits and ethical standards which have remained unvaried since the 11th
century, when the first Christian-inspired universities were established in
Italy, France, England and Spain. (Sokolowski, R., 2006) This essay will
analyse the aforementioned phenomena, as well as various theories
concerning both the accountancy profession and the state, in order to
identify their respective interests and the causes of their occasional
divergences. Then, a series of examples will be presented to illustrate how
the complex relationship between accountants and the state can affect
accountants’ professionalism and society. Finally, the theories and cases
analysed in the previous sections will be summarised and specific
conclusions will be drawn regarding the relationship between accountants
and the state and its impact on accountancy’s claim of being a profession.
State and Accountancy: Theses and Theories In order to gain a deeper
understanding of the relationship between the state and accountants, their
respective needs and interests should be identified first. Several thinkers and
philosophers have attempted to define the term “state”, illustrating its
organisational structure and scopes. According to Marxists, for example, the
state represents the needs and interests of the ruling class (Offe, C. and
Ronge, V., 1975); micro-foundational models, on the other hand, place more
importance on the individuals and organisations that occupy positions
within the state, as their interests and needs coincide with those of the state.
(Little, D., 1998, p.123) Even though there are many other theories which
recommend different approaches to the study of state formation, it cannot
be denied that because of their own nature, all states share a fundamental
need/interest: revenue acquisition. As Ghosh and Ghosh (2008) pointed out,
states have certain responsibilities towards their citizens and would not be
able to meet their expectations without revenues. Therefore, they need
resources to ensure their citizens’ well-being and to provide them with
services, support and infrastructure without which it would be impossible to
live a good life. The amount of resources that a state can collect depends on
a number of variables, including its fiscal position and its tax effort, which
indicates how much tax a country can expect to collect given its economic
situation. According to Adams (1993), the main reason why modern tax
systems are not always effective, cause confusion and allow experts to take
advantage of their weaknesses is that most politicians, citizens and even
those who have spent their entire lives studying taxation ignore their history.
Moreover, Adams (1993) argues that taxes have shaped the history of most
civilisations, as without them numerous significant events would have never
taken place and many empires would have never existed. As Burg (2013)
observed, when a king, an oligarchic government and/or a democratic state
impose the right kind of taxes, great nations and empires can easily be built
and progress can be achieved. In spite of its apparent archaic nature, this
concept can be applied to all modern states and was cleverly summarised by
Oliver Wendell Holmes, whose maxim “taxes are what we pay for a
civilized society” (Moeller, G. M., 2006) is still very popular. However,
when a state’s need for revenue translates into unfair and unjust tax systems
which do not take into consideration real economic indicators, rebellions
and tax evasion are almost unavoidable. (Burg, D. F., 2013) Therefore, it
could be argued that taxes can have either positive or negative effects on
societies and that even though severe tax revolts have been replaced by more
democratic communication methods, tax avoidance and evasion have
remained the most common forms of resistance to taxation since 3000 B.C.
(Bedesky, B., 2008) Even though all governments see tax evasion and
avoidance as issues that need to be tackled through effective strategies, a
combination of recent phenomena has prompted EU member states, the
United Kingdom and the United States, as well as other countries, to step up
their efforts to fight fiscal fraud. (Robinson, F., 2013; BBC News, 2013;
Saunders, L., 2013) Globalisation and the 2008 financial crisis are among
the aforementioned phenomena which have encouraged governments to pay
more attention to illicit accounting practices, as recent events have clearly
revealed that these can contribute to triggering international financial crises
and causing market failures, whilst depriving states of revenues which could
be used to provide citizens with social goods. In fact, as a result of
globalisation, trade barriers have been reduced and are still being eroded,
which has increased the risk of financial contagion. (Freixas, X. and Rochet,
J.C., 2008) That is why international regulatory bodies have been trying to
identify the exact causes of the 2006 subprime mortgage crisis and the 2008
financial crisis, in order to prevent future global crises. As Freixas and
Rochet (2008) pointed out, although it is almost impossible to predict and
avoid all future crises, regulatory bodies certainly play a fundamental role
in strengthening financial markets and setting regulations aimed at
discouraging those who operate within the financial industry, such as
bankers, advisors, accountants etc., from engaging in illicit and/or unethical
practices that may damage other parties. However, it should be noted that
similarly to lawyers, doctors and other professional categories, bankers,
advisors and accountants are professionals whose duties, ethical standards,
required qualities and responsibilities are clearly stated in detailed codes of
conduct. As Duska et al. (2011) observed, because accountancy firms play
an important role in helping both individuals and businesses to avoid taxes,
thus reducing states’ revenues, their relationship with the state is often
defined as “contradictory”. In fact, accountants and accountancy firms are a
fundamental part of capitalist societies, as their services and knowledge of
tax systems allow governments to collect taxes and to continue operating.
In this regard, Marx and Engels (2013) argued that taxes are used by the
ruling class to make it impossible for peasants to meet their obligations, so
that they will have to abandon their traditional activities and seek help from
capitalists, whose main purposes is to exploit workers. (Elster, J., 1985)
With regards to the professional categories whose job is to help the ruling
class to collect taxes and to maintain its position in society, Marx and Engels
(2013) saw them as a different kind of exploiters, as accountants and tax
collectors can also be underpaid; in spite of that, Marxist thinkers have
always seen these professional categories as servants of the capital who have
obtained their “professional status” as a reward for helping capitalists to
ensure the survival and continuity of capitalist societies. (Elster, J., 1985)
At the same time, however, accountancy firms are often caught offering tax
avoidance and evasion schemes aimed at helping their clients pay less taxes
through complex financial manoeuvres which are made possible by tax
systems’ weaknesses and loopholes. In order to determine whether such
manoeuvres endanger accountancy’s claim of being a profession, the traits,
qualities, ethical standards and requirements associated with professional
bodies, should be identified and the term “professionalism” should be
analysed. With regards to the origins of professions, Spencer (2009)
observed that the earliest professions developed thanks to primitive people’s
knowledge and that their evolution was made possible by various historical
events. In the 16th century, lawyers, priests, teachers and doctors
represented the main professional bodies, however, with the advent of the
industrial revolution new professions emerged, including accountants and
engineers. (Cheetham, G., 2005) Even though the origins of accounting can
be traced back to early civilisations, accountancy started being recognised
as a profession thanks to the changes brought about by the industrial
revolution, which increased the overall demand for accountants’ services.
(Belkaoui, A. R., 2004) As a professional body, accountants must satisfy a
number of requirements, follow numerous rules and operate in accordance
with the law and accounting regulations, which are updated periodically,
mainly in response to market failures. (Freixas, X. and Rochet, J.C., 2008)
As Sciulli (2009) pointed out, professions have always been characterised
by knowledge, training, devotion to certain ideals and affiliation. However,
nowadays most occupations can be defined as “professions”, which is why
Durkheim (1973) explained that French and Italian sociologists had to start
referring to them as “professions liberales”, “libere professioni” in order to
distinguish real professions from ordinary occupations. (Durkheim, 1973;
Sciulli, D., 2009) According to Durkheim (1973), devotion to public good
is one of the fundamental characteristics of professions and, judging from
modern codes of conduct, it is evident that regulatory bodies still require
professionals to operate in such a way not to harm anyone, taking into
consideration the needs and interests of all those parties that may be affected
by their decisions and actions. In order to gain a deeper understanding of
accountants’ ethical standards and required conduct, Allen (2010) compared
the standards set by the International Standards Board of Accounts with
those set by the American Institute of Certified Public Accountants. Her
analysis revealed that in spite of a few formal and structural differences,
both codes stress the importance of principles like integrity, confidentiality,
due care, independence, transparency and truthful, accurate reporting of
both financial and non-financial information. From a strictly ethical point of
view, then, it could be argued that accountants’ activities can affect
numerous stakeholders, which is why they should avoid engaging in any
practice which might have a negative impact on others. In view of these
observations, it follows that accountants and accountancy firms that help
their clients to pay less taxes, thus depriving the state of useful resources,
do not operate in accordance with the aforementioned standards of
professionalism. In this regard, Toynbee (2012) observed that governments
should increase their efforts to fight big accountancy firms, as these are the
ones that deprive states of revenues which could be used to provide citizens
with more social goods and services. Therefore, considering that the state
needs revenues to survive and meet citizens’ expectations and that
accountants can help the state to collect taxes whilst complying with strict
ethical standards, it follows that the state and the accountancy profession
should co-operate. Moreover, as MacDonald (1995) correctly pointed out,
states and modern professions need each other, as modern professions like
engineering and accountancy have emerged as a result of state formation,
which is also a fundamental condition of professional independence and
autonomy. In regard to the relationship between the state and the
accountancy profession, Hopwood (1985) observed that in the United
Kingdom, the accountancy profession developed as a result of the state’s
interventionist policies, thanks to which individuals and businesses’ demand
for accountants’ services increased. At the same time, however, numerous
accountancy firms have started operating as actual companies, which must
beat the competition and generate profit in order to survive. As a result of
that, many accountancy firms’ needs and interests no longer coincide with
those of the state, which is why the relationship between the state and
accountants has become complex and contradictory, even though logic
dictates that they should co-operate in order to allow each other to survive
and function, as well as to benefit society. As Wyatt (2004) observed, during
the past few years the accounting profession has been criticised on several
occasions by the media, mainly as a result of its strong involvement in illicit
practices which have had negative effects on various stakeholders, including
the clients they tried to “assist”. In fact, there have been many scandals
which have caused accountancy firms to be fined, wealthy individuals to be
arrested, banks and large companies to fail and governments to be deprived
of significant revenues, among other things. (Wyatt, A. R., 2004) In order
to gain a deeper understanding of the current state-accountancy profession
relationship and evaluate the impact of its contradictoriness on
accountancy’s claim of being a profession, the following section will
analyse some of the scandals mentioned by Wyatt (2004), evaluating their
causes and effects on society and the accountancy profession. Accountancy
as a Arofession: Some Evidence The theories and considerations illustrated
in the previous section clearly indicate that the relationship between the state
and the accountancy profession is complex and at times contradictory. This
statement is confirmed and supported by the wide range of tax evasion and
avoidance services offered by accountancy firms, thanks to many large
companies have been able to either evade or avoid taxes, thus increasing
their profits and depriving the state of a portion of its revenues that it needs
for its own survival and to meet social demands. The past few years have
witnessed several accounting scandals which have raised questions about
accountancy firms’ role in society and claims of professionalism. As
Markham (2006) pointed out, the Enron scandal is one of the most popular
ones. Enron was an American energy corporation whose financial
statements had been manipulated through a series of fraudulent accounting
practices whose purpose was to make its financial position appear much
stronger than it actually was. (Markham, J. W., 2006) Founded in 1985, in
just a few years Enron became a large energy-trading firm whose operations
involved financial contracts, metals and a wide range of commodities. (Fox,
L., 2004) As Healey and Palepu (2003) pointed out, in 2001 things started
to change at Enron and some of those changes should be addressed as the
main causes of the company’s fall. According to their analysis, in August
2001 the company’s CEO resigned and Sherron Watkins took his place;
after analysing the company’s accounting, Watkins wrote a letter in which
she expressed her concerns about Enron’s financial statements and financial
position. Arthur Andersen, one of the largest accounting firms in the United
States and Enron’s auditor, contacted one of the company’s senior partners
to encourage them to destroy the documents that were not going to be used.
Although at the end of the first quarter of 2001, Enron’s books reported an
estimated annual income of $240 billion, in October of the same year the
company had to announce nonrecurring charges of over $1 billion and an
accounting inconvenience which has cost $1.2 billion. (Collins, D., 2006)
After five weeks, the company had to file for bankruptcy, thus disappointing
millions of American citizens who thought that Enron would have freed the
United States from its need for coal and foreign petrol. (Collins, D., 2006)
Because of the unethical accounting practices that have contributed to
Enron’s fall, the Enron scandal is often referred to as one of the biggest
accounting frauds in American history. (Collins, D., 2006) As Markham
(2006) observed, Andersen’s reputation had already been compromised by
previous accounting problems and its objectivity had been questioned when
it was discovered that in 2000, it earned over $50 million in consulting and
audit fees thanks to Enron. (Solomon, J., 2007) Because Andersen had
always guaranteed that its audits were performed in compliance with GAAP
(Generally Accepted Accounting Standards), Enron’s bankruptcy indicated
that Andersen had either made a series of accounting mistakes or had
willingly engaged in fraudulent and illicit practices in view of the significant
fees and revenues generated by Enron. (Solomon, J., 2007; Healey, P. M.
and Palepu, K. G., 2003) The second hypothesis was confirmed by one of
Enron’s accountants who explained that certain loopholes in accounting
literature and standards had been exploited to report untruthful financial
information. (McLean, B. and Elkind, P., 2004) Although the Enron scandal
and its legal implications caused Andersen to lose most of its clients and
disappear, Solomon (2007) argued that its negative effects extended to the
entire accountancy profession, whose credibility and reputation were
significantly damaged, as well as to other stakeholders. In fact, as a result
of the Enron scandal, both Enron and Andersen’s employees lost their jobs,
shareholders lost a significant portion of their funds, energy buyers
cancelled their contracts, creditors lost around $11 billion, rating agencies
became very critical and started penalising even the most solid energy
companies and the government could not deregulate the energy industry as
it had been planned. (Phillips, D. W. and Saft, M. D., 2002) In view of the
aforementioned negative effects, it can be inferred that Andersen’s
fraudulent accounting practices affected numerous stakeholders, including
the government, and that its decision to pursue its interests regardless of
their impact on society, the energy industry and the state, led to a general
loss of confidence in the accounting profession. (Solomon, J., 2007) Even
though the Enron scandal and similar cases are usually discussed and
criticised by the media for a long time because of their severe effects on the
entire economy, there are many large companies whose tax avoidance
strategies also have a very negative impact on society and the state, which
they deprive of significant revenues every year. A recent report by the UK
Commons Public Accounts Committee (PAC) revealed that Internet
services provider Google, e commerce company Amazon and coffeehouse
chain Starbucks are among the aforementioned companies, as they have
been caught taking advantage of weaknesses in national and international
accounting standards to reduce their taxable income. (Syal, R. and Wintour,
P., 2012) According to Margaret Hodge, chair of the PAC, companies that
use tax avoidance and evasion strategies like Google, Amazon and
Starbucks damage honest taxpaying individuals and businesses, as well as
the state, seeing as the economic recession has caused corporate tax
revenues to fall, thus depriving the state of fundamental resources. (Syal, R.
and Wintour, P., 2012) Ernst & Young, one of the “Big Four” accountancy
firms, audits some of the world’s largest companies, including Google,
Amazon, Coca Cola and Apple and has been criticised on several occasions
for its tax avoidance schemes. (Ernst & Young, 2011) Although
investigations have revealed that Ernst & Young’s services enable several
large companies to pay less than they should through legal entities, tax
shelters and other strategies, Ernst & Young and other accountancy firms
accuse the state of expecting them not to protect their clients’ interests.
Moreover, as a result of politicians’ negative comments on Starbucks’
immoral tax avoiding accounting practices, the American coffeehouse chain
announced that it was considering cancelling its planned investments in
Britain. (Ahmed, K., 2013) Starbucks’ announcement made it clear that
when the state embarks on a campaign to stigmatise all those businesses and
individuals that simply want to protect their interests, investors may not see
Britain, or any other country, as an attractive investment destination and this
may have a negative impact not only on the entire economy, but also on
society. Therefore, it is evident that the relationship between the state and
accountancy firms is characterised by numerous contradictions, as even
though they need each other to survive and remain operational, their
interests do not always coincide and sometimes they even conflict.
Moreover, because of the said contradictions, the state loses a significant
portion of its tax revenue every year and has to use a part of its resources to
fight illegal and unethical accounting practices, while accountancy firms
endanger their claims of professionalism, as not only do their strategic
manoeuvres allow the tax evasion industry to keep growing, thus damaging
honest taxpayers, they can also cause businesses to fail, investors to lose
their funds, people to lose their jobs, investors to seek alternative investment
destinations etc. Summary and Conclusion Various theories and events have
been analysed to gain a deeper understanding of the relationship between
accountants and the state and to identify the reasons behind its complexity.
This was done by comparing the needs and interests of both accountants and
the state, in order to determine why they don’t always coincide. From a
micro-foundational viewpoint, the needs of the state reflect those of the
individuals who are part of it and occupy certain position within it. From a
Marxist point of view, on the other hand, the needs of the state coincide with
those of the ruling class, which imposes and needs tax revenues in order to
promote capitalism and exploit workers. However, in spite of the different
needs and interests that each country may have, tax revenue is something
without which no state could survive, as taxes allow it to remain operational
and meet public demand, providing citizens with social goods and services.
Ghosh and Ghosh (2008) With regards to accountants, both the development
and the evolution of the accountancy profession were analysed from
different perspectives, including sociological and ethical ones. First of all,
Herbert (1986) observed that the origins of the accountancy profession can
be traced back to early civilisations and that numerous historical events have
allowed it to evolve. However, accountancy as a real profession emerged as
a result of the Industrial Revolution, which increased the demand for
accountants’ services. In this regard, MacDonald (1995) argues that states
and modern professions need each other, as modern professions like
engineering and accountancy owe their existence and professional status to
state formation, which is also a fundamental condition of professional
independence and autonomy. Therefore, logic would dictate that the state
and accountants should co-operate, as they share common interests and need
each other to survive and remain operational. Moreover, as members of a
professional body, accountants are required to comply with strict national
and international codes of conduct which stress the importance of integrity,
confidentiality, due care, independence, transparency and truthful, accurate
reporting of both financial and non-financial information etc. (Allen, C.
2010) In spite of that, a series of recent events suggests that accountancy
firms have started operating as actual businesses, which pursue their own
interests rather than those of the state, helping their clients to evade or avoid
taxes and to communicating untruthful financial and non-financial
information, among other things. The Enron scandal, for instance, was
partly caused by Andersen’s illicit accounting practices and untruthful
audits, thanks to which Enron’s financial position seemed much stronger
than it actually was. As a result of that, shareholders and a wide range of
stakeholders were affected, as investors lost their funds, the energy industry
was severely damaged and the state had to deal with the consequences of
Enron’s bankruptcy. (Markham, J. W., 2006) Moreover, accountancy firms’
tax avoidance and evasion services deprive the state of a significant portion
of its tax revenue ever year, allowing numerous large companies, including
Google, Amazon and Starbucks, to reduce their tax bills. (Syal, R. and
Wintour, P., 2012) One the aforementioned accountancy firms is Ernst &
Young, one of the Big Four, which has been accused on several occasions
of using unethical and illegal strategies, such as legal entities, tax shelters
etc. to enable its clients to pay less taxes. Considering that all the illicit
accounting practices analysed in this essay, including untruthful reporting
of financial information, tax avoidance and evasion, have a negative impact
not only on the state, but also on society, it can be inferred that those
accountancy firms whose interests and needs contrast with those of the state
risk endangering their claims of professionalism. In fact, as Durkheim
(2013) observed, professionals should be devoted to public good and
operate in such a way not to harm anyone. Therefore, in order for the
accountancy profession to maintain its professional status, it is crucial that
accountants should re-align their interests with those of the state and comply
with the aforementioned principles, which are also supported by the
International Standards Board of Accounts
