Accountancy as Computational Casuistics

Accountancy as Computational Casuistics

James Franklin

(Business & Professional Ethics Journal 17 (4) (Winter, 1998): 21-37; repr. in Australian Accounting Review 9 (2) (July, 1999): 36-43; Eureka Street 9 (1) (Jan/Feb, 1999): 2, 43-6; winner of Eureka Street's Ethics Essay Prize)

Abstract: If a company's share price rises when it sacks workers, or when it makes money from polluting the environment, it would seem that the accounting is not being done correctly. Real costs are not being paid. People's ethical claims, which in a smaller-scale case would be legally enforceable, are not being measured in such circumstances. This results from a mismatch between the applied ethics tradition and the practice of the accounting profession. Applied ethics has mostly avoided quantification of rights, while accounting practice has embraced quantification, but has been excessively conservative about what may be counted. The two traditions can be combined, by using some of the ideas economists have devised to quantify difficult-to-measure costs and benefits in environmental accounting.

When BHP managed to close the Newcastle steelworks, its share price surged, to the benefit especially of the directors who made the decision.1 There has to be a suspicion that capitalism is pulling its usual trick of distributing the profits to itself and the costs to someone else. That means that the accountancy is being done wrongly. That in turn means that there is an obligation to discover how to do it right.

There are plenty of other cases where costs are distributed to people against their will, and where they have no legal or other recourse, because of a combination of difficulty in measuring the loss, and the lack of a legal regime to sheet home losses to those causing them more or less indirectly. US buyers of oil do not pay the cost of sending the USS Enterprise to the Gulf to protect the source of the oil; that cost is not ``internalised'', but paid by the State.2 Financiers insist on their rights to global mobility of capital and the freedom to invest where they like, but those in the third world who lose their livelihood as a result cannot insist on any right to global mobility of labour; nor are they compensated for their not having the right to camp on Rupert Murdoch's lawn.3 Or -- to take an example that may appeal to a different part of the political spectrum -- the benefits accruing to small and isolated nations from the United States' role as global policeman are largely unmeasured and unpaid for.

Now, whose business is it to study such issues? Prima facie it is a problem for applied ethics, or some related discipline. But at present, issues of that kind fall down the cracks between disciplines. Law is not applicable, since there is no legal regime permitting those suffering disadvantage of this kind to sue. Applied ethics itself, which has developed from philosophy with some input from law, has inherited those disciplines' phobia about quantification, and hence is in no position to handle the usually economic nature of the rights and losses involved. Economists study such matters, but typically in a ``big picture'' way, and not from the point of view of inquiring how the individuals affected might be able to do something to recover their losses. Accountants have a good awareness of the nature of small-scale quantified gains and losses, but normally restrict themselves to costs that an entity will have to pay, not ones it merely ought to pay.

The problems can only be attacked by a fusion of the relevant parts of all these disciplines. Applied ethicists must embrace quantification, and create a ``computational casuistics'', while accountants must measure not only the obligations that the present legal situation places on entities, but those that morality requires. They must create a ``moral accountancy'' -- which will be the same thing as computational casuistics. (The name ``casuistics'' is taken from the art of casuistry, the application of moral principles to particular cases, on which there were many books for confessors in the period 1350 to 1650.4

This has been done before, and recalling a few historical points may help suggest how to restart progress. Aristotle's discussion of money and prices occurs in the middle of his treatment of justice, in which he goes into some mathematical detail on the different ways of calculating just outcomes in different cases. In the case of a partnership, for example, it is just to distribute the profits in proportion to the stakes invested, while when there is a matter of compensation for wrong, only the amount of the loss arising is to be calculated. He goes on to say that the advantage of money is that it allows all such things to be compared.5 In the middle ages, the scholastics developed Aristotle's ideas, and caused them to have meaning in the courts. In those days, they thought that everything had a just price, normally the price determined by the market. Selling something to an unsuspecting buyer for substantially more than the just price was wrong, and that moral thought was backed up by legal sanction. In ancient and medieval Roman law, one could ask a court to nullify a contract of sale if the price had been in error ``beyond half the just price''.6 Many subtle and powerful ideas were developed on how to find the just prices of futures contracts, annuities and insurances, leading eventually to the moral-legal problem whose solution created the mathematical theory of probability: what is the just division of the stake in an interrupted game of chance?7 One of the solvers was Pascal, who in his other writings dealt casuistry, the application of morality to particular cases, a blow from which it has only recovered with the rise of applied ethics in the last thirty years.

In the meantime, there have been successive waves of Calvinism, positivism, Marxism, utilitarianism, modernism, postmodernism and so on, all of which have tended to drive apart quantitative and ethical reasoning, and indeed, discouraged reasoning about detailed ethical cases at all. Of the major modern ethical traditions, only utilitarianism approved of calculation, and that was calculation of pleasures rather than of something specifically ethical, such as rights; in any case, the requirement to calculate was generally taken to be one of utilitarianism's weak points. Modern applied ethics has revived casuistry, but not its willingness to get involved with numbers.

There are two main issues, or difficulties, with implementing any project that involves quantifying rights and making the answer have effect. The first concerns the possibility of measuring rights. Does it make sense to quantify rights with sufficient accuracy to make intelligible the demand that they should be recognised by a legally-backed system of accounting? Secondly, is it at all practicable to create a legal regime that would enforce those rights? The natural scepticism one feels about both these matters is, it will be argued, unfounded. The technology to measure rights largely exists already in accountancy and environmental economics, while the international legal regime that is currently developing has the means to enforce any measurable right. It needs some more work, but only more of the same kind of thing that is happening already.

Doubts about the possibility of measurement of certain kinds of rights are perhaps best assuaged by considering the one area where there has been a fairly determined effort to quantify moral rights for which there was at present no supporting legal regime. This is the field of ``environmental accounting'', studied mostly by economists (as it has no legal significance, it has not been of interest to most accountants and lawyers). It began with the recognition that National Accounts, such as the Gross Domestic Product, were measures of economic activity that failed to take into account certain goods, and hence were mismeasures of progress. For example, depletion of a scarce natural resource counts as a positive item in the GDP. Thus the costs to future generations of unrestricted economic growth in the present were not measured. To use GDP as a measure of the Good is thus an instance of ``Great Leap Forward'' pricing, the name taken from the response of the Chinese peasants to the Great Helmsman's demand that they increase the production of iron (they melted down their tools).

Economists attempted to devise a system of national accounts that would take into account environmental goods, as well as, for example, the health of populations, so that there would be a measure of whether economic ``progress'' was actually improving the lot of humanity.8

Accountants have been rather behind in this field, but as legal requirements to disclose costs of cleanup have increased, there has been a certain amount of work.9

This is not to say that the economists have measured fairly. Environmentalists have not been keen to recognise all the benefits of normal economic activity. One needs also to measure the benefits to future generations of unrestricted economic growth in present, such as expensive taxpayer-funded medical research with cures for the future, and the discrediting of Stalinist regimes. A focus on just one kind of good, that of the environment, leads to distortions as bad as those that gave rise to the demand for environmental accounting in the first place. All relevant goods must be quantified, if there is to be any plausibly rational attempt to calculate and balance rights.

Cost-benefit analysis has made a concerted effort at weighing all considerations relevant to such decisions as major infrastructure projects. There have been some reasonable ethical objections to some details of its methododology, which can weight the preferences of the poor less than those of the rich,10 but the vigorous attempts in the field to weigh all considerations are admirable.

These intellectual ferments have largely passed accountancy by. While it may be admitted that the subject matter of accounting is ``equities'', that is, rights or titles,11 the profession has traditionally adopted a conservative attitude to what may be quantified for display on a balance sheet. There has been a strong preference for recording tangible and saleable assets, for example, with a good deal of emphasis on what they cost and what they could now be sold for. But that attitude has tended to erode as modern business has created a demand for information on the true financial position of entities. There is regular criticism of accounting standards whenever a giant corporation goes under shortly after reporting a healthy profit, as happened regularly in the 1980s.12 While the principles of measurement in accountancy are controversial, the recent tendency has been to avoid artificial rules and to look for the expected future economic benefit arising from the assets an entity controls.13 ``Expected'' has approximately the usual meaning it has in mathematical probability theory.

Some of what is now becoming standard comes close to the quantification of a moral obligation. For example, if a company is engaged in open-cut mining, and has an established policy of site restoration to a higher standard than that required by law, it must make provision on its balance sheet for that ``constructive obligation'' as soon as the mining is undertaken. Failure to restore the site to the higher standard ``would cause unacceptable damage to the entity's reputation and its relationship with the community in which it operates''; it is going to have to restore the site, so must disclose its present obligation to do so.14

Further clarifications may be made by replying to various obvious objections to the project.


1. `BHP's decision lifts markets', Sydney Morning Herald 30/4/97, p. 32; `BHP unions set for fight ... while chiefs quit in style', Sun-Herald 4/5/97, p. 29.

2. H.M. Hubbard, `The real cost of energy', Scientific American 264 (4) (Apr, 1991): 18-23.

3. J. Seabrook, `A global market for all', New Statesman 26/6/98, pp. 25-7.

4. A.R. Jonsen & S. Toulmin, The Abuse of Casuistry: A History of Moral Reasoning (Berkeley, 1988); E. Leites, ed, Conscience and Casuistry in Early Modern Europe (N.Y., 1988); J.F. Keenan & T.A. Shannon, eds, The Context of Casuistry (Washington, DC, 1993).)

5. Aristotle, Nicomachean Ethics bk 5 chs 3-4.

6. Justinian's Code 4.44.2; J.W. Baldwin, `The medieval theories of the just price', Transactions of the American Philosophical Society 49 (1959), part 4, repr. in Pre-Capitalist Economic Thought (N.Y., 1972), at pp. 18, 23; J. Gordley, The Philosophical Origins of Modern Contract Doctrine (Oxford, 1991), pp. 65-7; a similar modern case in Taylor v. Johnson (1983) 151 CLR 422.

7. E. Coumet, `La théorie du hasard est-elle née par hasard?', Annales 25 (1970): 574-598.

8. UNSTAT, c 1993, Handbook for Integrated Environmental and Economic Acctg M. Young, `Natural resource accounting: some Australian experiences and observations', in E. Lutz, ed, Toward Improved Accounting for the Environment (Washington, DC, 1993), pp. 177-83; Australian Bureau of Statistics, `Natural resource and environmental accounting in the national accounts', in Australian National Accounts: National Income and Expenditure OECD, Environment and Economics: A Survey of OECD Work (Paris, 1992); J.A. Dixon, L.F. Scura, R.A. Carpenter & P.B. Sherman, Economic Analysis of Environmental Impacts (London, 1986).

9. Journal of Accounting & Public Policy special issue 16 (2) (Summer, 1997); R. Gray, J. Bebbington & D. Walters, Accounting and the Environment: Green Accounting (London, 1993). K.F. Herbohn, R. Peterson & J.L. Herbohn, `Accounting for forestry assets: current practice and future directions', Australian Accounting Review 8 (1998): 54-66; F. Micallef & G. Peirson, `Financial reporting of cultural, heritage, scientific and community collections', Australian Accounting Review 7 (1) (May, 1997): 31-7.

10. D. Copp, `The justice and rationale of cost-benefit analysis', Theory and Decision 23 (1987): 65-87; D.C. Hubin, `The moral justification of benefit/cost analysis', Economics and Philosophy 10 (1994): 169-93.

11. L. Goldberg, A Philosophy of Accounting (Melbourne, 1939), p. 41.

12. F.L. Clarke, G.W. Dean & K.G. Oliver, Corporate Collapse: Regulatory, Accounting and Ethical Failure (Cambridge, 1997).

13. G. Hampton & T. Bishop, `Measurement and the Australian conceptual framework', Australian Accounting Review 8 (1998): 42-53.

14. Australian Accounting Research Foundation, Exposure Draft 88: Provisions and Contingencies (December, 1997), p. 54.

15. A. Edgar et al. The Ethical QALY: Ethical Issues in Health Care Resource Allocation (Surrey, 1998); A.M.D. Porter, `Measurement: health economics', in The Ethics of Resource Allocation in Health Care ed. K.M. Boyd (Edinburgh, 1979), pp. 101-29; cf. J. Richardson, `The accountant as triage master: an economist's perspective on voluntary euthanasia and the value of life debate', Bioethics 1 (1987): 226-40; A. Bowling, Measuring Health: A Review of Quality of Life Measurement Scales (Milton Keynes, 1991).

16. J.W. Jones-Lee, The Value of Life: An Economic Analysis (London, 1976); criticism in P. Dorman, Markets and Mortality: Economics, Dangerous Work and the Value of Human Life (Cambridge, 1996).

17. D.A. McI. Kemp, The Quantum of Damages in Personal Injury and Fatal Accident Claims (4th ed, London, 1975); H. Luntz, Assessment of Damages for Personal Injury and Death (2nd ed, Sydney, 1983); on matters of principle, J.W. Chapman, ed, Compensatory Justice (N.Y., 1991).

18. K.W. Chauvin & M. Hirschey, `Goodwill, profitability and the market value of the firm', Journal of Accounting and Public Policy 13 (1994): 159-80; I. Morley, `Debating goodwill', British Dental Journal 176 (11) (11/6/94): 409-10.

19. C. Leadbeater, `Time to let the bean-counters go', New Statesman 17/4/98, pp. 30-1; on valuing ``brand strength'': G.V. Smith & R.L. Parr, Valuation of Intellectual Property and Intangible Assets (2nd ed, N.Y., 1994), pp. 289-96.

20. R.E. Goodin, Motivating Political Morality (Oxford, 1992), p. 24. The same point arises from the extensive work on modelling

21. J.M. Guttman, `Rational actors, tit-for-tat types, and the evolution of cooperation', Journal of Economic Behavior and Organization 29 (1996): 27-56, and many articles in Games and Economic Behavior.

22. L.L. Axline, `The bottom line on ethics', Journal of Accountancy 170 (1990): 87-91.

23. P. Costello, `Restoring confidence in corporate morality', Quadrant 34 (9) (Sept, 1990): 20-22; J. Hyde, `Trust, politics and business', Quadrant 37 (4) (Apr, 1993): 43-50; `Big business elders crusade for higher ethics', Sydney Morning Herald 26/5/90, p. 6.

24. S.S. Shapiro, Wayward Capitalists (New Haven, 1984).

25. L.E. Trakman, The Law Merchant: The Evolution of Commercial Law (Littleton, Colorado, 1983).

26. A.C. Pigou, The Economics of Welfare (4th ed, London, 1932), part 2, ch. 9; W.J. Baumol, Welfare Economics and the Theory of the State (London, 1965).

27. Clarke, Dean & Oliver, esp p. 179.

28. G. Brennan, `Commercial law and morality', Melbourne University Law Review 17 (1989): 100-6, at p. 101; see also G. Brennan, `The purpose and scope of judicial review', Australian Bar Review 2 (1986): 93-113, at pp. 104-5; P. Finn, `Commerce, the common law and morality', Melbourne University Law Review 17 (1989): 87-99.

29. `ASC wins Adsteam appeal', SMH 29/8/96, p. 25, also 9/4/97, p. 29; Clarke, Dean & Oliver, Corporate Collapse ch. 12.

30. `Victoria sues KPMG for $1bn over Tricon audit', SMH 2/6/92, p. 31.

C. Ryan & K. McClymont, `Alan Bond: the untold story', SMH 4/8/92, pp. 35, 38; comment in M. Walsh, `Morality wanes the more the law waxes', SMH 4/8/92, p. 29; R.G. Walker, `Window-dressing at Bond Corp', Australian Business 24/2/88, pp. 95-6; R. Gibson et al. `Bond: a commentary on accounting issues discussed', Accounting History 2 (2) (1990): 135-42; R.G. Walker, `A feeling of deja vu: controversies in accounting and auditing regulation in Australia', Critical Perspectives on Accounting 4 (1993): 97-109; Clarke, Dean & Oliver, ch. 13.

32. Clarke, Dean & Oliver, pp. 234-5; further in `Southern Cross sues former auditor', SMH 19/9/95, p. 29; `AWA auditor to pay $12.2m in damages', SMH 8/4/93, pp. 29, 34; `Court orders Deloitte and Corrs to pay $1.8m', SMH 21/7/97, p. 41; on Westpac's 1991 accounts, E. Carew, Westpac: The Bank That Broke the Bank (Sydney, 1997), ch. 12; legal discussion in B. Feldthusen, Economic Negligence (3rd ed, Scarborough, Ont, 1994), pp. 117-24; G.R. Masel, Professional Negligence of Lawyers, Accountants, Bankers and Brokers (2nd ed, North Ryde, 1989), ch. 4; B. Chapman, `Limited auditors' liability: economic analysis and the theory of tort law', Canadian Business Law Journal 20 (1992): 180-214.

33. See Mr Justice Bryson, `Statutory interpretation: an Australian judicial perspective', Statute Law Review 13 (1992): 187-208.

34. `Interpreting statutes -- a new challenge to accountants and lawyers', The Chartered Accountant in Australia 52 (2) (Aug. 1981): 42-3; M.L. Perez, `Wielding the axe on Australia's tax laws', Australian Business Law Review 20 (1992): 362-71.

35. Australian Accounting Standard, AAS 6 (Australian Accounting Standards, Students Edition (1982), p. 1051).)

36. R.H. Parker, P. Wolnizer & C. Nobes, Readings in True and Fair (N.Y., 1996).

37. W. McGregor, `True and fair view -- an accounting anachronism', Australian Accountant Feb, 1992, pp. 68-71.

38. H.H. Glass, M.H. McHugh & F.M. Douglas, The Liability of Employers in Damages for Personal Injury (2nd ed, Sydney, 1979); J. Munkman, Employer's Liability at Common Law (11th ed, London, 1990); P.W.J. Bartrip & S.B. Burman, The Wounded Soldiers of Industry: Industrial Compensation Policy 1833-1897 (Oxford, 1987), chs 1, 4.

39. J.M. Feinman, Economic Negligence: Liability of Professionals and Businesses to Third Parties for Economic Loss (Boston, 1995); V.P. Goldberg, `Recovery for economic loss following the Exxon Valdez oil spill', Journal of Legal Studies 23 (1994): 1-39; K. Hogg, `Negligence and economic loss in England, Australia, Canada and New Zealand', International and Comparative Law Quarterly 43 (1994): 116-41.

40. See Anns v. Merton London Borough Council [1978] Appeal Cases 728 at 751-2, 757-8.

41. M. Sagoff, The Economy of the Earth: Philosophy, Law and the Environment (Cambridge, 1990).