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Critical Perspectives on Accounting xxx (2014) xxxxxx

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Critical Perspectives on Accounting

j o u r n a l h o m e p a g e : w w w. e l s e v i e r. c o m / l o c a t e / c p

The dangerous dynamics of modern capitalism:

From static to IFRS futuristic accounting
Jacques Richard
University Paris Dauphine, France


Article history:
In this article, we utilize accounting history to demonstrate that modern capitalist
Received 9 January 2012
accounting has evolved similarly in four prominent countries (France, Germany, Great
Received in revised form 4 March 2014
Britain and the United States) and that this evolution has been in a dangerous direction.
Accepted 19 March 2014
Available online xxx Using the Classic Continental European Accounting Theory lens, we show that, since the
industrial revolution, capitalist nancial accounting and capital calculation have
Keywords: progressed through the same three main stages: static, dynamic and futuristic. We also
Accounting and capitalism maintain that this process has permitted an unbridled acceleration of prot recognition,
History of capitalism which contributes signicantly to nancial crises manifestations.
History and stages of capitalist accounting 2014 Elsevier Ltd. All rights reserved.
Accounting and nancial crises
Accounting mentalities
Capital calculation
Calculative rationality

1. Introduction: main purposes and originality of the study

Our rst objective in this article is to demonstrate that to date, in spite of some variations in timing, capitalist nancial
accounting1 evolution in four prominent capitalist countries (France, Germany, Great Britain and the United States) has
undergone the same three main broad development stages since 1800, a time when the industrial revolution was
generally considered to have saturated these countries. The three stages are to employ terminology based partially
on Classic Continental European Accounting Theory static, dynamic, and futuristic. The static stage dominates the
industry throughout a large portion of the 19th century; the dynamic stage throughout a substantial part of the 20th
century; and the futuristic stage is currently in full expansion.
Our second aim in this study is to conrm the existence of a clear trend in nancial accounting evolution. We will
demonstrate that, in theory as well as practice, an accelerative process is present with respect to prot recognition.
Specically, as a result of accounting measures being modied at certain points in history, capitalists recognize prots at
an increasingly rapid pace following their initial investment, which, in turn, increases their eagerness to capture the fruits
of those investments as soon as possible.
We attribute this evolution pattern mainly to a change in the mode of investment nancing. While self-nancing,
broadly speaking, dominated the scene throughout the 19th century, nancing through capital markets and debt
prevailed in the
20th. Of course, we discuss this nancing transformation in the course of this article. The fact that self-nancing2 was
overwhelmingly popular with entrepreneurs in the 19th century is linked to many factors (see after) that evolved with

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We dene nancial accounting as a publicly regulated accounting system that is primarily devoted to prot measurement to be distributed among
capitalists. In this article, we will not treat cost (management) or tax accounting systems except if it is required for the purpose of the study.
In a broad conception self-nancing includes private contributions made by the founders of rms.
1045-2354/ 2014 Elsevier Ltd. All rights reserved.

Please cite this article in press as: Richard J. The dangerous dynamics of modern capitalism: From static to IFRS
futuristic accounting. Crit Perspect Account (2014),
2 J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx

capitalisms rapid development and provoked signicant transformations within accounting. We use the main lessons of this
part of the study to address two nal questions: is there any relationship between the evolution of capitalist accounting
and the Global Financial Crisis, and what could be the next stage of development?
A wide assortment of studies on national nancial accounting systems development exist; for example those by
Edwards (1989) and Bryer (2000a,b) in England, Lemarchand (1993) in France, Schneider (1997) in Germany, and Chateld
(1977) and Bryer (2012a,b) in the United States. However, our study is innovative for three main reasons. First, we have an
international scope, attempting to compare historical nancial accounting and capitalism development in four
prominent countries. Second, we propose a novel analysis of capitalist accounting development stages, one that differs
signicantly from Bryer (2000a,b) and Macintosh et al. (2000). Third, we present a plausible direction for capitalist
accounting evolution and attempt to explain it through the issue of modes of nancing.

2. Denitions and theoretical underpinnings

Our study deals with the comparative history of capitalist nancial accounting from 1800 to the present. But what is
capitalist accounting and why limit the study to the post-1800 period?
It is commonly known that a myriad of denitions for capitalism exist. Authors like Schumpeter (1942) simply
associated capitalism with the private property of the production means, while others incorporated other terms. We begin
with the French Bordas Encyclopedie (1994, tome 2860) denition and dene capitalism as an economic system in which
owners or production managers reap prots as the result of employing salaried workers, who are free to sell their skills
within a labor market.
Undeniably, this system originated much earlier than 1800. In fact, it can be observed as early as the 13th century, with
the appearance of big markets, a strong development of big merchants governing some labor force. Merchants were
motivated by a prot-seeking mentality (Febvre, 1952, 287), thus able to obtain prot primarily through unequal
exchanges (Braudel, 1985, 57).
As early as the beginning of the 17th century, an afuent capitalist farmer named Loder calculated a systematic
depreciation of his horses to measure his prot (Yamey, 1964). Later in that century, as shown by Lemarchand (1993) and
Bryer (2000b), large merchant companies, such as the East India Company, demonstrated socialized capitalism features.
Still, it was not until the industrial revolution that this economic system manifested in other branches of activity and seeing
large rms with a sizeable number of employees and associated capitalists became commonplace. In this study, we
observe capitalist accounting at capitalisms mature stage, specically following the debut of the industrial revolution. In
order to take account of the disparities in capitalisms maturity in the four countries studied, we establish 18003 as the
rst year of our study. For all periods studied, we focus generally on large rms in order to be able to effectively compare
the leading accounting technologies at the time. For example, in the case of France, we use Schneider, one of the most
signicant French companies. This rm, created in 1836, has been one of top French industrial gems from its
establishment through today.
The comparison is not only across time, but also among different rms. However, this poses a particular challenge. In
order to compare different rms with potentially different accounting systems, we needed to classify their accounting
systems using a common description of their development stages.
One possibility was to use a classication of nancial accounting development based on a Baudrillardrian perspective,
as suggested by Macintosh et al. (2000). These authors distinguish four main stages throughout history. The rst stage,
during the feudal era, when accounting was based on cash ows and liquidation proceeds, is considered to provide a
faithful representation of the real material referent (physical and social reality). The second stage, occurring from the
Renaissance through the industrial revolution, involves an accounting that already contradicts reality by utilizing
processes of ctitious liquidations. The third stage, referred to as the order of production, took place from the end of the
industrial revolution until the 1950s. Historical cost accounting (HCA) mainly represents this era and income was
increasingly calculated based on arbitrary and articial rules of allocation within the frame of a going concern hypothesis.
Finally, the fourth stage, from the
1960s to the present, involves a system of accounting based on discounted future cash ows that provides information
without any reference to the real world in the context of a hyper-real economy.
The key takeaway from this evolution is that accounting has strayed from reality and plunged into a system of income
and capital arbitrariness (Macintosh et al., 2000, 40). We chose not to use this particular conceptual framework for four
main reasons. First, we disagree with the timing of the stages; as presented later, the second stage occurs in the 19th
century and the third in the 20th. Second, the hypothesis that a realistic cash ow is based on feudal accounting rather
than an articial HCA seems to be highly debatable. Third, the absence of ties connecting accounting with reality during
the simulation era

At this time the industrial revolution has commenced in all four countries analyzed: see notably More (2000, 2) and Fleischman and Macve (2002, 2) for
England, Braudel (1985) and Gervais (2000) for France and Kiesewetter (1989) for Germany.
Normally, in cash ow based-feudal accounting, all purchases, notably investments, are registered as expenses, which represents a loss. If a rm
purchases a building or merchandize, they do not exist at all in the accounts! Is this aligned with reality? Clearly not, because there is a tangible object:
the building or inventory. This is the reason why, as shown by Lemarchand (1993, 175), in 1781, the administrator of the Forges dAllevard is obliged to
deduct the expenditures for construction of furnaces from the expenses in order to have a more realistic income for the period. This is the beginning of an
evolution from feudal accounting to historical cost accounting. Contrary to Macintosh et al.s assertion (2000, 20), feudal cash ow accounting has no
evident ties with liquidation valuation methods of medieval merchants. On the contrary, it has many similarities with HCA, which is a type of modied
cash ow accounting. Lemarchand (1993, 326) and Richard (2012a) defend this opinion.
J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx 3

(fourth stage) is questionable. Even in this period fair value accounting mandates the reporting of all real cash ows so
that there is still an association with concrete gures. It is this connection with reality that forces fair value accounting, as we
will show, to abandon dreams of future prots in certain contexts, especially in times of crises. Fourth and foremost,
according to us, the main characteristic of the evolution of nancial accounting is not growing arbitrariness but
acceleration in the recognition of prots.
Another potential comparative approach is Bryers classication of capitalist accounting types. Bryer relies on a
conception of accounting evolution based on the works of Marx (see notably 2005). One of his primary goals is to explain
the differences between feudal accounting and modern accounting and articulate the transition between these two
different methods (2000a, 133). He insists that the obsessions of modern accounting emerged over a much longer
transition period [than believed by many authors] with the presence of intermediate forms. Furthermore, he contends
that the modern obsessions with protability and accountability did not suddenly appear in the 19th century, but instead
in the middle of the
17th (2000a, 133; 2004). He uses Webers general idea that modern capitalism has a calculative mentality embodied in the
economic culture of capitalist enterprises. But, for the purposes of his study, he reinterpreted the Weberian conception
along Marxs ideas of the feudal and capitalist production modes that embody distinctive economic cultures or
calculative mentalities (2000a, 135). By means of this theoretical support, Bryer concludes that the transition to modern
capitalism is characterized by the succession of three phases distinguished by three distinct calculative
mentalities with their corresponding accounting signatures.
The rst phase, occurring in the 16th and part of the 17th centuries, is the pure feudal mentality which emphasizes
the calculation of a consumable surplus, meaning a cash surplus (receipts minus expenditures). This corresponds to a
pre- capitalist type of accounting. The second phase, appearing towards the middle of the 17th century, is the
capitalistic mentality that uses a ratio to compare the feudal consumable surplus with the opening capital. The third
phase corresponds to a modern capitalist mentality prevailing in the 19th century, but appeared in some companies much
earlier. It implies a comparison of capitalist prot (revenues less expenses) with capital employed (2000a, 136). For
Bryer, capitalist accounting, which corresponds to a fully-developed (socialized) capitalist system, is fundamentally a
double-entry accrual accounting whose valuations rules are based on Marxist economic theory and serves to measure
the return on capital employed. He attempts to demonstrate that modern historical cost accounting practice largely
conrms this model.
On the contrary, Bryer considers the FASBs and the IASBs accounting models, based on neoclassical economic
conceptions, to be pathological conceptions of accounting that are not harmonious with normal capitalist production
management process rules and nancial capital conservation. Excluding this pathological accounting type from the
reasoning, we consider Bryers classication of private accounting systems for signaturing the development of a capitalist
mentality to be a dual one: it fundamentally contrasts cash-ow based feudal accounting with modern historical (or
replacement) accrual cost accounting.
For four main reasons, explained in detail in the Appendix (see hereunder), we selected another theoretical
classication system that is based on Classic Continental European (nancial) Accounting Theory (hereafter CCEAT),
whose origins are notably linked to the works of its famous German founding fathers, such as Herman Veit Simon
(1896), Schmalenbach (1919) and Schmidt (1921).6 According to this theory, four main nancial accounting theories
types lead to modern capitalism development post-1800: the liquidation-static (or patrimonial) theory initiated by
Napoleonic lawyers, the dynamic (or historical cost) theory defended by Schmalenbach, Schmidts organic (or
replacement cost) theory, and the going concern static (or futuristic) theory initiated by Simon (Oberbrickmann, 1990;
Richard, 2005c). As we consider the historical cost and replacement cost theories to belong to the same family of cost
value accounting and also that it is preferable to avoid to use the term static when speaking of futuristic accounting,
we concentrate our modern capitalist nancial accounting debate on three main accounting theories: the static, dynamic,
and futuristic (or actuarial or economic value) theories. Thus we will deal with a troika to explain accounting practices
Specically, we consider three main stages in modern capitalist nancial accounting development, while focusing on
large companies that use double entry accounting (DEB). These companies calculate prot by deducting expenses
(notably raw materials, wages and depreciation expenses) from their revenues. This is a strict accrual accounting type and
not a cash ow- based prot and loss statement. The concept of prot varies, however, between the static, dynamic, and
futuristic models, because the underlying valuation principles differ. These differing prot concepts are the basis of
decisions concerning dividend distributions and, hence, fund retention notably for the conservation (or non-conservation)
of nancial capital. In each of the three main models, the part of the prot that is not distributed has traditionally been
added to previous capital, forming equity capital. Of course, according to this view, equity is measured differently among
the three main modern accounting

For a similar interpretation of Bryers conception see Chiapello (2007, 275).
Today, as far as the four countries under study are concerned, CCEAT is typically represented and used by the Frankfurter school in Germany, notably
Moxter (1984) and Hommel and Schmitz (2013) and, in France, by Richard (1996) and Biondi (2003). This theory is not used by American and English
scholars of the second half of the 20th century with the marking exception of Forrester (1993).
Financial accountants have almost always refused replacement cost accounting (RCA) although it is a logical accounting especially in periods of rising
prices. The main reason is because RCA implies a revaluation of the capital to be maintained and an increase of depreciations that promote a diminution
of distributable prots as compared with HCA. Thus, in this article we focus the debate on the battle between historical cost and exit market values
(or economic values).
The static stage will be divided into two sub-stages but this does not change our basic classication.
4 J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx

types, but the reasoning is the same. Normally, the prot of the period is compared to sales (sales protability) and
equity (return on equity). Such are the prot and protability concepts or their equivalents that we consider. We address
their specic valuation basis during our description of the different models and modern capitalist accounting stages.

2.1. Methodology and sources

The rst issue we address is the geographical scope. Should the study rely on one or two advanced countries with the
risk, especially in the case of sparse and contradictory documentation, of drawing hasty conclusions? In order to avoid this
kind of problem, we decided to evaluate four great powers that have largely dominated the economy since 1800.
A second more difcult challenge was identifying modern capitalist accounting succession stages. Should our evaluation
rely on a statistical sample of businesses of various sizes, activities, and socialization types of the capital? With this
approach, we would have little chance of properly understanding the situation, especially for 19th century England and
the United States, where there is no strict regulation of accounting practices and thus a diverse range of methods
practiced. Another very different approach would be to focus on the largest rms, with the rationale that these companies
represent the most advanced among capitalist rms. This was our choice, but it does not solve every problem. For example,
in France, in the rst part of the 19th century, as shown by Lemarchand (1993), one can nd static as well as dynamic
model representation among big businesses, and even some remnants of the old cash ow accounting. Facing this kind of
problem, Bryer favored reliance on an accounting model that should correspond to the norm for modern socialized
accounting. However, focusing on selected exceptions, which are anticipating a new capitalist accounting order, there is a
risk that the sample may not correspond to the practices of the majority of big businesses during that period. In order to
avoid that risk, we considered it is necessary to use several classication criteria.
First, we considered any existing regulations (laws on accounting) at the time. We assumed that these rules
were representative of the interests of large companies. Accounting rules thus presumably corresponded to accounting
norms preferred by big businesses and, if they did not, would soon be modied as shown, for example, by the case of
German Prussian railways and big Joint Stock companies (Richard, 2012a). In this respect, we viewed any modication to
accounting rules as a strong indication of change in large rms accounting mentality. Second, we took legal cases, in the
absence of laws, into account. Third, we found theoretical literature of the time in accounting and economics instructive.
Fourth, we relied on archival research concerning large rm accounts. Fifth, we took the prevailing economic mentalities
into account in order to explain accounting system choices and their respective evolutions over time. This last element
deserves some specic remarks.
Max Weber (1921) elaborated on the economic mentalities concept. An economic mentality is a form of calculative
reasoning that results from a complex of different factors, such as economic, judicial, social, religious, and moral. For
example, the renowned prudence and particular reluctance to indebtedness largely prevailing in accounting in 19th
century Germany, France and England, as described by Moxter (1984), Lemarchand (1993) and Maltby (2000), can be
considered the result of interrelated economic, social, legal, religious, and other moral and cultural factors present at the
time. Specically, these include economic factors, such as the relative underdevelopment of the banking system; social
factors such as personal contacts that were the source of most external nancing, implying a substantial borrower
commitment; legal factors such as the dominant inuence of unlimited liability and the severity of bankruptcy laws;
religious factors such as the Protestant attitude favoring accumulation of goods rather than consummation; and moral
and cultural factors such as the legendary
Victorian prudence, as analyzed by Maltby, or the education differences between merchants and nanciers as described by
Lemarchand. Weber largely insisted on the importance of religious factors, notably the role played by Protestantism.
However, the question of the origin of mentalities is a very complex one which cannot be exclusively limited to religious
factors. Furthermore, the theory lacks systematic studies to support its conclusions.
With these limitations in mind, we characterized the nancial accounting evolution in France, Germany, Great Britain
and the United States from 1800 to the present.

3. First stage: pure static accounting (18001850)9

Though Britain played a leading role in early modern accounting development, we begin with France and Germany,
pure static accounting characteristics may be more thoroughly explained in these countries. Contrary to England, lawyers
in these countries regulated accounting legislation, which enabled us to discern the nature and motives of this class of

3.1. Static accounting in France and Germany

At the beginning of the 19th century, Napoleonic commercial lawyers inuenced French accounting law. As shown by
Richard (2005a), the basic view of lawyers, such as Delaporte (1808), Vincens (1821), Molinier (1846) and Bedarride
(1854), was that the balance sheet must give an indication of the rms ability to reimburse its debts in case of failure. For
this reason,

As already stated the static stage continues after 1850 until the 1870s but with some secondary change. Thus we sometimes use references from the
second static period if they are necessary to better explain the rst period.
We use Germany as a simplication: before 1871 there is only a Confederation of German States.
J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx 5

there is a balance sheet example in the Commercial Code of 1807 with assets valued at their price (Lemarchand, 1993).
The following year, J.B. Delaporte explained and conrmed this concept. He claries that it is preferable that the
accounting system reect not only the situation of the merchant but also his personal wealth, as it is one more
guarantee for his creditors (1808, 117118). Unlike cost-based inventory, the goal here is to measure owner wealth, so as
to verify his ability to meet his commercial obligations, hence the reason why personal property must be taken into
consideration. It also justies a valuation system based on market exit prices and not initial purchase costs. As
underlined by Delaporte (1808,
122): the fair estimation of the goods must be made not on the basis of the purchase cost [underlined by the author] but on
the basis of what they can truly be worth, implying that the value of some goods could rise while others could diminish
with market exit price uctuations. This conception, which included the registration of potential prots as well as
potential losses, is in line with that of a prominent economist of the time, Say. According to this world-renowned author
whose Traite de conomie politique was published in English in 1821 and whose thought dominated on both sides
of the Atlantic (Tapinos, 1972, XLIII), capital value is the sum of the exchangeable value of each element of productive
capital a fact derived from his denition of value. In his treatise, Say, very interestingly, drives a parallel between his
capital value concept and business accounting practice. For him the majority of merchants and manufacturers may
know by means of an inventory. . . all the values they possess each time they want to, and whether their capital has
increased or decreased (1803, p. 106). Thus, for Say, in accordance with the Napoleonic legislators, capital value was the
sum of the exchangeable value of all productive capital items evaluated separately to determine their ctitious market
value (exchangeable exit value).
In this German Code of Commerce, similar to that of France, the term value (Werth) is used Such a concept, backed by
dominant lawyers and economists, soon inuenced accounting regulation writers of the young Union of German States
(Moxter, 1982): the Commercial Code of the German States. Published in 1857, the Code states in article 29 that every
merchant must provide information about the value of his properties as well as the ratio of his fortune to his debts by
means of an annual inventory (Richard, 2001, 29).
but never dened. However, the preliminary works show that it is not a question of cost but of exchange or
true value wahres Werth (Oberbrickmann, 1990, 38). This kind of valuation was reinforced in 1873 by a decision of
the Supreme Court of the Empire (ROHG) specifying that value at the time of inventory must correspond with the
general exchange value (allgemeiner Verkehrswert) obtained in the frame of a ctitious sale on a normal market
(Richard, 2005a; Hommel and Schmitz, 2013). To clarify, this asset valuation at their market value has nothing to do with
the market value of the rm as an entity. Rather, contrary to the modern economic value, the underlying valuation
hypothesis is not one of rm synergy but of its failure. This is the reason it seems to be normal, along the classical
German doctrine as initiated by Schmalenbach (1908, 1919), to speak of a static theory of balance (from the Latin stare
meaning to stop). The lawyers Anschutz von Vo ldendorff and Ring also promoted these static views (Richard, 2005a).
From this general principle, a whole series of secondary principles was conceived the most important one being that
assets were to be valued on the basis of their potential market value in order to be able to compare them with the debt
amount to be reimbursed.
Valuation, based on current market value, had disastrous consequences for many investment types. First of all, the
majority of intangible investments having no market, such as foundations as well as organization and research costs,
were immediately registered as expenses.11 If they appeared on the balance sheet, static lawyers considered them
ctitious assets. But even tangible assets, such as machines, generally suffered massive impairment losses very soon
after their purchase, especially if they were specialized ones. Essentially, only items such as land, buildings, goods, and of
course cash retained their total or substantial value after being entered onto the balance sheet.
Consequently, with this accounting method, an investment generally began with massive losses or, at best, low prots.
It regularly took some time for future sales to offset these initial losses and only once the breakeven point was reached
was it possible to distribute dividend payments. As a French economist said, with regard to this valuation type, the rst
years of business activity seem to be weighed down by enormous losses but, he adds, these hardly amusing gures are
truthful (Courcelle-Seneuil, 1872, 272). In fact, throughout and even following the whole static accounting period, most
French and German business owner-managers readily supported this kind of apparently scandalous situation. Some of
them even went so far as to exaggerate the already massive initial impairment losses. For example, Didier, one of the
directors of the large rm Forges de Cha tillon et Commentry, sought a severe balance sheet and recommended to
entirely scrap the xed assets value in order to register them as assets at a virtually symbolic price only for memory
(1885, 136). His company had already applied this rule by 1865 and was registering their materials in their accounts at
scrap prices (Lemarchand, 1993,
569). This example is not an exception. Germain, the director of Cre dit Lyonnais, inuenced by the Commentary
forge practices, also sought massive depreciations (Bouvier, 1961, 232). Fabre (2008) showed that, throughout the 19th
century, Schneider, one of the symbols of French capitalism, systematically wrote off most of its xed assets as immediate
expenses. This practice was not the result of single entry or cash accounting, as Schneider used double entry accounting
and accruals. One explanation for this is the application of the static accounting view. For example, intangibles such as
notary fees were

Bastide (1903, 35) quotes a decision of 1858 (Paris Dec 1858 D59 1.137) specifying that there is a ctitious dividend distribution case if the prot is
calculated by treating the foundation and administration costs as assets.
Guthrie (1883) said that for specialized machinery a depreciation of 50% would probably not be sufcient to represent the true value at the end of the
rst year.
6 J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx

considered by one of Schneiders managers in 183639 as ctitious assets without any worth. Fabre (2008, 344348)
showed that, for tangible xed assets, Schneider took their true value into account, meaning their liquidation value,
which implies both severe depreciations and balance sheets. Labardin and Fabre (2011) concluded that, at that time,
Schneiders accounting was based on liquidation values. Lemarchand (1993, second part) showed similar cases
concerning large French companies. Fridenson (1972, 53) stressed the fact that Renault, before 1914, used to depreciate
every year the whole of his xed assets to nance investments. In Germany, Rosendorff (1917, 6) also quoted
numerous examples of large corporations like AEG and Brown Boveri which, until the end of the 19th century, continued
to have severe balance sheets according to prudent business practices. Simon (1903, 41112) agreed with Rosendorffs
views, approving this practice in support of capital conservation. This does not mean that other practices, such as cash
ow accounting13 and accrual cost accounting, were not present. It means only that prudent static accounting was a
very commonplace practice of large companies at that time which was no longer or rarely found in the second part of the
20th century. In this respect, contrary to Webers claim, religion does not seem to play a signicant role. Of course the
Schlumbergers, practicing Protestants, were very prudent (Lemarchand, 1993, 431) but the Catholic Schneiders did not
signicantly differ from them (Fabre, 2008), as they are both considered Statics.
Those are the main features of a view that clearly dominated related literature at the time (Moxter, 1984, 29). To
conclude this point, one remark must be emphasized: all the rms taken as examples here, even if they were family-run,
were the
giants of the period; they were also the most socialized rms, being opened to numerous small investors already, as in the
Schneider case (Fabre, 2008, 314, 319). The conclusion is then apparent: static accounting dominated the scene throughout
the 19th century even within the most advanced, socialized capitalist rms.

3.2. The case of Britain: the debate about static accounting

Historians, such as Edwards (1989), showed that some English rms around 1800, like Carron (1769), Soho, Boulton
and Watt (1790), and Charlton Mills (1810) used revolutionary depreciation types, distributing machine costs over their
period of use (Edwards, 1989, p. 84). But Edwards (like Pollard, 1965, 242) deems this depreciation type an exception at the
time and that
it was not until the 20th century, however, that it achieved supremacy (1989, 90). Many English accounting historians
stress that, during the rst half of the 19th century, many rms registered the entirety of their investments as an expense
without reporting any assets on the balance sheet. It is notably this practice that was applied by Dowlais Iron Company,
the worlds largest foundry in 1849 (Pollard, 1964, 239). Pollard also shows that this accounting style persisted for a long
time in England with rms such as Dalcoath Mine, whose balance sheet for 1872 shows no trace of xed capital as assets.
Furthermore, Arnold and Mac Cartney (2006, 16, 22) acknowledged that, in the early 19th century, accounting practices
for canals were often immediate capital write-offs. Edwards observed that, in England, an additional practice existed that
consisted of calculating depreciation on the basis of the difference between xed assets valuations at two different dates
(1989, 124). Pollard afrms that this approach was the most common and he provides several examples in his work,
including Trumans brewery, John Marshall, The Carron Co, Broadbent, and the Mona mine (1965, 236). These two types of
similar practices correspond to what we call the static stage in a larger sense, characterized by a strong mistrust for the
value of xed assets.15 This is proof of the existence of such a stage of accounting in England during the 19th century. In
contrast, during accountings second evolution stage in the 20th century, it is very difcult to nd such a model of
nancial accounting for big companies.
However, Bryer (1993) contested the description made by Edwards, Pollard, and Brief. First, he claimed that there is
no evidence that the early accounting literature advocated economic income accounting or that it was practiced (1993,
653). He also argued that lawyers at the time clearly favored cost valuation (1998, 57) and quoted Lardner (1850) as an
example of literature in favor of this practice. In practice, he deemed that the rms quoted by Edwards did not register
values but rather cash, in the form of single-entry bookkeeping (1993, 655). Concerning the lawyers, he quoted a series of
cases in the
1860s that advocated writing off unproductive expenses and linked these decisions to a cost accounting approach based
on the Marxian economic model (1998, 6370). In conclusion, Bryer insisted on the prevalence of cost-based accounting
from as early as the mid-19th century. Contrary to Brief (1976, 1993) and Edwards (1989) who claimed to have observed a
distinct change from economic valuation18 to cost-based accrual accounting in the 1880s, Bryer found no evidence that
the early

If we combine the cases of cash ow and static accounting as representatives of very prudent accounting behavior we can nd at least 15 examples
of very large companies using these accounting methods in Lemarchands work (1993, second part, chapter 5).
Lemarchand (1993, 379, 417) has also analyzed the statutes of 229 authorized Joint Stock Companies from 1819 to 1866. He found that if the lump sum
(dynamic) depreciation dominated slightly until 1840, the valuation (static) one is overwhelming dominant afterwards. Of course this does not indicate
what was actually practiced.
Generally, in rms using the so-called cash ow accounting, only xed assets are registered as immediate expenses, and not current assets, which can
be clearly attributed to a mistrust for xed assets. This can be seen as an extreme case of static accounting. In many cases it is not easy to distinguish
static from cash accounting, because rms may have mixed practices (see note 14).
Bryer (1993) also quotes Mather in 1876, Murray and Guthrie in 1883 and Matheson in 1884 as authors defending a type of historical cost accounting.
But all these authors belong to the following stage of capitalism at the end of the nineteenth century. Thus we did not take them into account.
We excluded the case Davidson v. Gilles (1879) that belongs to the next stage (see below) from our reasoning for the same reason specied earlier, in
one of the footnotes.
The reference to economic income is astonishing if economic income is considered as the modern discounted value of future cash ows. We think that,
in the sense taken by Brief and Edwards, economic value accounting is equivalent to the static accountings market value.
J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx 7

accounting literature advocated economic income accounting or that it was practiced (1993, 654). In this sense, in terms
of valuation,19 Bryer observed no fundamental change or debate in the 19th century.
His assertions, however, can be challenged. In practice, it has not been demonstrated that in Britain, all large
companies showing balance sheets with current assets and few xed assets must be categorized as a type of feudal surplus
management or cash ow accounting. And even if that were the case, it remains that this practice has nothing to do with
a cost-based accounting. Rather, it can be considered as evidence of a variety of very prudent accounting with
consequences similar to those of static accounting. Edwards and Brief contradict Bryer on this point.
Concerning the legal cases, relying on Marxist theory to explain the prudent attitude of lawyers is highly debatable.
With respect to the doctrine, the reference to Lardner (1850) is contestable. Lardner spoke of railway accounting, an
exception in the business world during that period. Instead of citing Mather, Murray, Guthrie, and Matheson, all dynamic
approach defenders (from the 1870s onward), Bryer could have quoted other authors who defended a static approach
notably, Roby, Knox, Stacey, Bourne, More or Best (Ding et al., 2008). Pixley, although writing at the beginning of the
dynamic period and often considered as a cost valuation defender, remains marked by the static stance: he wanted
depreciation to be charged until an asset has been reduced to an amount representing its value (1881, 146) and
demanded that suspense accounts corresponding to preliminary expenses be written off very rapidly (1881, 120). Even
later Dicksee, who chooses the dynamic approach for practical reasons, said that, in theory, assets should be valued
according to their worth and not their cost (1892, 120). We conclude that there is sufcient evidence to presume that
until at least the 1870s, the static atmosphere governed big businesses in Britain. This point is also defended by
Littleton (1966) and Paton et Littleton (1940,
99): whereas the balance sheet was formerly regarded primarily as a statement of nancial condition for credit purposes,
the present tendency is to view this statement as vitally linked to the processes of periodic income measurement. This is
also in line with the social and economic context of the period (see Hoppit, 1987; Parker, 1965).

3.3. Origins of static ideology in Europe

Whether in England, France or Germany,22 the static ideology has its origins in the work of lawyers. Most of them
received an education based on Roman law, especially, as in the case of commercial lawyers, on Roman Company law. The
inuence of this type of law endured throughout the entire 19th century and even afterwards. For example, in France,
Fremery in 1833 as well as Thaller in 1904 rely on the Roman liquidation theory to introduce accounting law (Richard,
2005b). This theory states that it is not possible to calculate and distribute any prot before a company has been actually
liquidated. Such a conception endured a long time among lawyers in Germany and England (Schneider, 1995, 129). The
concept was not completely eradicated from legal cases until the decisions of 1810 in France and of 1870 in England
(Mills v. Northwestern, quoted by Weiner, 1928, 463). This radical concept is visibly at odds with capitalism, even with the
earlier capitalism of the industrial revolution! But this concept has come to life again in a milder form. It rst inspired
insolvency conceptions, notably in Italy in the 15th century by those defended by the school of Genoese commercialists like
Straccha, and in England by those inspired by famous statute of Queen Elizabeth I. The latter, published in 1570, provides
the following denition of insolvency: a person is insolvent when the present fair sale value of his assets is less than
the amount that will be required to pay his probable liability on his existing debts as they become absolute and
mature (Weiner, 1928, 463). It seems that this insolvency denition gave English and Napoleonic commercial lawyers
the idea to reconcile Roman law principles with the realities of capitalism. To enable the distribution of some dividends
prior to the actual liquidation of the company they simulated liquidation each year. As such, they replaced the real nal
liquidation with a series of partial ctitious liquidations, as proposed by Bastide (1903, 32).
This ingenious system inspired 19th century lawyers of practically all over the world, especially in England, Germany,
France and the United States, (Brief, 1961; Edwards, 1989, 110.116; Littleton, 1966). So indirectly, in using this ctitious
liquidation theory, 19th century lawyers were the successors of the Roman jurisconsults (Barth, 1953, 144). As we have

Feudal and cash ow accounting do not come into account here as they do not require valuation.
There are three main reasons. First, cases such as Turquand v. Marshall (1869) explicitly resort to the liquidation theory to explain their position.
Their argumentation begins with if the company had been wound-up (Bryer, 1998, 67). The fact that this expression is used clearly shows the inuence
of the legal philosophy of liquidation. Second, as we will show later, these expenses are treated as assets during the dynamic stage, whether or not
they are productive. Third, most of the cases quoted by Bryer in favor of a Marxist cost accounting approach are associated with the following
stage (from
1870 onwards). The rare cases in favor of a systematic depreciation of xed assets are ambiguous in nature. For example, even toward the end of the
static period Binney v. Ince Hall Coal (1866) takes into account the value of the productive capital consumed which can concern both static and dynamic
theory; this also applies to the Stringer case (1869), as quoted by Best (1885).
Lardner was perfectly aware of the conict between cost based (dynamic) depreciation and marketable (static) depreciation (1850, 117). He clearly
favored dynamic depreciation because marketable value is determined by causes over which the company has no control, and quite independent of the
use and abuse of their property (1850, 119). But his remarkable analysis was limited for two reasons. First, it only applied to railways. Second, even in
this sector of activity, it only concerned some types of permanent assets and not the other long term assets, notably the rolling stock (1850, 115). To
nd a generalization of Lardners conception one must wait for the dynamic revolution in the 1870s (see hereafter).
The United States has played a minor role in static accounting development. At the time, in this country, English practice and law cases had strong
inuence there. This is the reason why there are few developments attributed to this country.
Lemarchand (1993, 28, 326), relying primarily on de Roover, shows that the conception of pseudo-liquidation balance sheets was already observed in
14th century Tuscan accounting traditions . He also nds this patrimonial approach in the 17th century with the double-entry accounting case of
Compagnie des Indes (1993, 291).
8 J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx

shown, this concept also inuenced economists, notably Say, who declared that inventory is only a ctitious liquidation
(1828, t1, 291). Thus, no contradiction exists between the static and economic theory of the time: both correspond to a
measure of wealth based on capital realization with market prices as asset value estimation.24 To conclude, in the rst half
of the 19th century it was a common practice to base asset valuation on market prices, even in very large
However, the static accounting theory often assumed losses or tiny results at the beginning of the investment cycle.
This point raises the question of its acceptability.

3.4. How was static accounting accepted by the capitalists?

Throughout the pure static accounting era, owner-managers or to take account of their industrious spirit
owner- undertaker-managers generally exercised power in large rms. In the absence of trade unions, the only real
counter-power originated from lenders and particularly bankers, who were considered to be formidable people (Bouvier,
1961). As Hilaire (1986) showed, commercial and criminal laws were very severe when entrepreneurs did not pay their
debts: failure to do so could lead to imprisonment and even death, in the case of fraudulent bankruptcy. More generally
speaking, commercial law was essentially conceived to defend the interests of creditors (Hilaire, 1986, 325; Spoerer,
2008). This explains the preference towards a certain type of company: the company with unlimited liability.26 It means
that, when ventures failed, the capitalists personal goods as well as remaining capital will be liquidated to pay off
business debts. The origin of this focus on unlimited liability is tied to a perception of honor and morale that inuenced
capitalist actions, notably in Britain: Like Sir Walter Scott, they may be willing to slave for the rest of their lives in order to
be exonerated from their business debts (Gower, 1979, 216). Maltby (2000) and Edwards (1989) identied a moral
aversion towards debt. There was a great concern with liquidations and with creditors being regarded as the principal
users of a company. This may explain why, during this period, the balance sheet was often regarded as a measure of
maximum resources available to meet creditors claims (Edwards, 1989, 116). Hence, most capitalists refrained from
turning to indebtedness. Fabre (2008) illustrated this fact using the rm Schneider: from its foundation in 1836 to 1939,
this leader of French capitalism has essentially no long term debt, and only occasional and small- sized short-term debt.
The same holds true for Saint Gobain, another French corporate giant of the time (Daviet, 1983). If debt was practically
excluded as a long term source of nancing there could be some increases of capital that would be raised through
private placement but generally not on stock markets.28 Hence, the sole regular means of rm nancing was self-
nancing, the characteristic mode of nancing in the 19th century (Le vy-Leboyer, 1964, 462; Fridenson, 1972, 301;
1983; Fleischman and Parker, 1991, 369; Lemarchand, 1993, 53029; Wilson, 1995; Hautcoeur, 1996; Plessis,
This self-nancing focus provides an explanation for the acceptance of daunting static accounting by the 19th century
capitalists. When there is an obsession with avoiding dividend distribution in order to allow for self-nancing, the static
accounting type, with its front-loaded heavy losses or small incomes, is a sort of benediction for owner-managers and a
30 31
powerful method to refuse or delay massive short-term dividend distribution to restless shareholders when they exist,
notably in times necessitating investments. As said by Didier, the accountant of a large company, here the dividends are
high and they class expenditures as assets; there they give no dividends and class expenditures as losses. Thus, he
recommended the second option, in line with static accounting. This view can also be observed in the practices of other
companies, such as the Manufacture de Coton dAnnecy, where low dividends for hasty shareholders were justied by the
necessity to nance investments without having to turn to debt (Lemarchand, 1993, 531).
Finally, under the reign of static accounting and its variations, a kind of unspoken alliance existed between creditors and
owner-managers against short-term investors, as they shared an interest in postponing distributable prot registration.

4. Second stage: prudent static accounting (18501870)

Around 18501870, capitalism experienced its rst profound evolution with the rise of big railway companies and the
development of Joint Stock Companies in traditional industry. The amount of capital invested was so signicant that the

The price is the measure of the value of things and their value is the measure of their usefulness (Say, 1803, 51). This conception inuenced
American stock market valuers until the 1930s (Burk, 1988).
Bryer underlined that bad depreciation (not in line with cost-based accounting) is practiced mainly by small rms (1993, 676).
In Britain the 1844 Act did not confer limited liability to shareholders (Napier, 1995, 264).
Lemarchand (1993, 429) and Rosendorff (1917, 18) provided many examples of the legendary prudence of owner-managers in France and Germany.
For example, De Wendel was not a listed company on the stock market prior to 1908 (Hannah, 2007, 420).
See notably the declarations of Schlumberger in 1829: Never take foreign capitals.
In the case of Schneider dividend distributions frequently represented the whole of distributable prot and comparisons of these dividends (prots)
were made with the capital invested by the shareholders (see for example the report presented to the shareholders in 1896). But distributable prots
were calculated on the basis of static accounting allowing for a very rapid self-renancing of investments.
In the same vein, Edwards (1989, 110): Financial stability and long-term rather than short-term prot maximization were the main priorities. In these
circumstances, it was perfectly natural for the accountant to favor values and prot gures which were on the low side as opposed to optimistic,
particularly with the threat of litigation lingering in the background.
Sometimes the pure principles of static accounting were thrown away in order to make a wild and systematic registration as losses of every xed
asset; this kind of extreme accounting could be either considered as a deformation of static accounting as well as a return to some kind of cash ow
J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx 9

owner-managers alone could not provide the necessary funds. Therefore, they were obliged to seek, much more largely
than before, the help of small capitalists, who did not make long-term investments, rather served as short-term funds
providers. These short-term investors sought to make a safe investment that provided regular dividends and,
consequently, when prots suffered, they resold their shares without hesitation. They had the mentality of lenders and
wanted to play with shares so as to benet from all the advantages without supporting the risks. And here there is a clash
with static accounting!
Obviously static accounting is wholly at odds with the demands of these short-term investors. First and foremost, the
principle of unlimited responsibility is incompatible with their creditor mentality. Second, the initial losses or low incomes
that characterize static accounting angered them, as Nikitin showed (1992) in the case of the Saint Gobain shareholders,
especially since the leaets distributed announcing the increase in the issue of shares portrayed a marvellous world of
regularly distributed prots and dividends. These two main problems were resolved in different ways in the second half of
the 19th century in continental Europe, England, and America.

4.1. The case of France and Germany

In mid-19th century France, a series of laws were published allowing all companies to be easily created as a Joint Stock
Company or transformed into that type of company (laws of 1856 and 1867). Praquin (2003) showed that this
fundamental change in the responsibility of capitalists did not happen without difculties, notably on the part of
lawyers. A very vivid debate arose between modern lawyers, who saw the economic growth possibilities with the
rise of limited liability companies, and the ancients, who stigmatized the rise of irresponsibility and even the
destruction of capitalism.
One point was especially debated: how to conciliate recognition of potential prots permitted in pure static accounting
along with the new found unaccountability of capitalists? In the previous stage, if potential prots were distributed to the
detriment of capital, it was possible to recuperate them in case of bankruptcy by repossessing the capitalists personal
assets. On the contrary, during this period of limited liability, this was no longer possible. This kind of dilemma
materialized in
1862 with the famous Mires case. Mires, a businessman, recorded potential prots in his accounts and distributed them as
dividends, thus rendering him incapable of reimbursing his creditors at the time of his companys collapse. In a period
marked by numerous scandals, French commercial lawyers gradually understood that it was no longer possible to practice
both limited liability and potential prots recognition. So, they proposed compromise: they would not contest the
principle of limited liability but, in compensation, they would prohibit the distribution of potential prots. It is in this
context that the Mires jurisprudence (Cass 28 June 1862, Sirey 1, 645) became the inspiration for one of the most
famous accounting principles: the principle of prudence, according to which recognizing potential losses was still
obligatory, while recording potential distributable prots was prohibited.34 A few years later, this fundamental principle
was incorporated into the French Joint Stock Company Law of 1867. This decision, by French lawyers, inuenced their
German counterparts (Richard,
2005b). In 1870, a new article, 239a, was introduced into the 1857 German Code for joint-stock companies. The updated
version stated that the organization and administrative costs should be preferably registered as immediate losses for their
total amount. This indication of traditional static views signals the reinforcement of prudence in a new context. But it
was not until 1884, at a time of a new era for accounting theory (see after), that a new law for Joint Stock Companies
indicated, in its article 262, that henceforth, assets were to be valued at the lower of cost or market value (Hommel and
Schmitz, 2013,
334). Thus, beginning in France, the era of the famous Lower of Cost or Market Principle legally appeared in Continental
Europe. Initially, this was absolutely not a step towards some historical cost approach but a transformation of the pure
static theory to account for a new situation caused by the growing limited liability of capitalists.

4.2. The case of England and the United States

Contrary to continental Europe, no laws were published in England or the United States in the 19th century pertaining
to the lower of cost or market principle, but practice and case law evolved in the direction of prudence, in an
environment marked by bankruptcies (Parker, 1965). In England, in 1862, Sawyer referred to the recognized principle that
stock should be valued at cost (unless depreciated in value) and that no prot should be reported unless realized
(Parker, 1965, 158). Later, Best (1885) proclaimed the birth of a sort of prudent accounting by quoting the 1869 Stringer
case, whose verdict pronounced that assets such as preliminary expenses with no realizable value must be considered in
the balance sheet as ctitious assets. In a more general way, Edwards (1989) called attention to the development of the
lower of cost or market approach during that period.

There are now two main denitions of the prudence principle (conservatism): the European continental one, derived from the Mires case, and the
IFRS one according to which assets and liabilities valuation must occur with caution. The latter denies the continental view and is not really a prudent
approach (see after). To avoid confusion we will name it the so-called IFRS rule of prudence.
In line with German approach, it is possible to split the prudence principle into two principles: the realization principle (registration of a real
and the imparity principle (registration of potential losses).
Many lawyers like Vavasseur (1883) admitted the registration of assets at a fair market value higher than cost under the condition that the
corresponding potential prot will be frozen thanks to a special reserve on the liabilities side. This position has nothing to do with a pure historical
cost accounting.
This practice is however authorized in Table A if some plausible reasons are given.
10 J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx

According to Weiner, in certain states in the United States, notably the South and West, a very cautious
conception dominated that favored valuation at entry cost. These states were inuenced by the Elizabethan
denition of ctitious dividends as dened by the 1855 Companies Act, which mandated that the concerned companies
incorporate a special clause in their statutes stating that any dividend distribution rendering them insolvent should be
considered as a ctitious one. In order to verify this situation, liquidation asset value was compared with pending debts
(Weiner, 1926, 464). Furthermore, since 1867, this concept has been linked to the National Bankruptcy Act, which denes
insolvency as the excess of liabilities over the value of assets (Weiner, 1926, 464).37 Clearly these facts concerned certain
States. In a more general way, May (1946, 110) stated that
the lower of cost or market rule was well-established by the time he had entered the profession in 1892.38

4.3. Conclusion on the second stage: the difcult preservation of static accounting

By the 1860s, the capitalist world began to accept its prot calculations according to the prudence principle. This static
accounting variant was certainly less advantageous for capitalists who tended to enjoy high, regularly distributed prots,
and inferior to the former pure static stage in that potential prots could no longer be registered. It was the cost, however,
for limited liability. Thus, static accounting continued to dominate the scene. Nevertheless, the concession to limited
liability was a kind of Trojan horse, as it allowed a new breed of capitalists to appear, who caused signicant concerns
for the capitalist-entrepreneurs.

5. Third stage: dynamic accounting (18702000)

It is always difcult to separate historical periods in a clear-cut manner. It seems that the dynamic accounting concept39
dominated the 20th century, especially in the latter half.
However, as reported by Bryer (1993), who describes a late nineteenth century revolution in nancial accounting, the
economic and intellectual bases of this new conception of accounting appeared in the 1870s.40

5.1. The cases of France and Germany

The very origins of the dynamic stage in continental Europe date back to 184050. At the time of railway company
development, the representatives of these companies, pressured by their small, impatient shareholders, wanted to establish
special laws for the valuation of assets to mitigate the ruinous effects of static accounting (Lemarchand, 1993, 5212).
However, these measures concern only a specic sector of activity. The beginning of a larger and frontal attack commenced
towards the 1870s in France, and particularly in Germany, at a time when big joint-stock companies were beginning to
rely on stock markets for their nancing, which meant a rise in the number and power of small restless shareholders.41 In
France, for example, Nikitin (1992, 230242) showed that between 1872 and 1880 the small shareholders of the Saint-
Gobain Company criticized the use of extraordinary depreciation methods (from a static point of view) as detrimental
to their dividends: they demanded that these depreciations be replaced with ordinary ones. There are other cases in
France, but it was in Germany that a nationwide and systematic movement of revolt, conrmed by theoretical and
legal literature, occurred a revolt which later strongly inuenced France and the Anglo-Saxon world.
At the beginning of the 1870s, German accounting legislation (Novelle of 11/6/1870) was static in nature and applied
in a standard way to all companies, including railway companies. In light of this, some bright lawyers and
managers, representing the interests of impatient shareholders of big joint stock companies, began a erce struggle
against static legislation, defending a new accounting concept better aligned with their clients interests. Notably,
according to Richard (2005a, 2012a), accounts of this new concept appeared in articles and documents written by
Scheele (1873), Keyssner (1875), Von Strombeck (1878) and Schefer (1879) in which they argued that the asset valuation
at market value along static principles disproportionately favored creditor interests and resulted in excessive volatility in
company prots. They believed that creditors should also take risks and that their protection should rely on companies
protability and not on a particular accounting method. They demanded a protection of shareholder dividends through
the creation of specic legislation, and proposed a certain type of balance sheet whose characteristics enable more stable
prots and dividends. They called this particular balance sheet the operating balance sheet. On the operating balance
sheet, xed assets, as they are destined to be used rather than sold, are no longer valued at market price but rather at a
diminished value of their historical cost, for those subject to depreciation. These authors refer to this scheduled
manner of value loss as planned depreciation a

Two cases that rely on insolvency tests occurred in 1886 and 1903 (Weiner, 1928, 464).
Interestingly, as shown by Burk (1988, 47), in the USA, the pure static accounting model dominated the scene until the 1930s, in matters of stock
on capital market valuation. This is more proof of the powerful inuence this kind of accounting and economic conception had.
For a more global presentation of the nature of dynamic accounting see Biondi (2003).
Littleton (1966) also speaks of a change during the second half of the 19th century (p. 226).
This rise coincides with the emergence of the neo classical school of economics mainly represented by Jevons, Menger and Walras. These scholars
developed a specic economic theory to defend the interests of these small hurried shareholders which inuenced accounting later (see hereafter the
futuristic accounting).
In France, as underlined by Lemarchand (1993, p. 384, 437), Brochant in 1824 and Monginot were remarkable forerunners. As early as 1854,
proposed to abandon the liquidation hypothesis in favor of a going-concern hypothesis.
J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx 11

distribution of the assets cost over its period of use. They also recommended registering intangible expenditures as assets
to be regularly depreciated over a predetermined period. Hence, the volatility of prots as a result of price uctuations
would be minimized and the reporting of heavy losses at the beginning of the investment avoided. On the contrary,
circulating assets would be valued according to the lower of cost or market principle.
Eventually, their struggle paid off in the form of concrete legislation. In 1884, the new law on Joint Stock Companies
contained an article 261a 3 stipulating that xed assets and other assets not destined to be sold but used for operation
may be valued at their cost without taking into account any impairment, provided there will be a planned depreciation
that takes into account their wear and tear. This unique law ultimately ended the absolute reign of the static theory.
Henceforth, these German lawyers imposed a new regulated accounting theory, based on the xed asset continuity
hypothesis, also known as the going-concern principle. This new theory and accompanying law appeared to be the
turning point between two eras. The new theory seems to have served as a compromise for restless shareholders. On one
hand they, inevitably, had to settle for net realized prots and recognize the planned depreciation principle. On the other,
they could obtain earlier and more regular dividend payments. One striking point of this victory of impatient
shareholders was that it was obtained with the help of modern owner-managers or pure managers who, due to their need
for fresh nancing, made the decision to support the demands of this new shareholder type (Richard, 2012a).
Thus, at the end of the 19th century, following a debate of accounting theories, Germany was the rst country in the
world in which an accounting revolution for hurried investors was transformed into law (Richard, 2012a). The
theoretical fundamentals exposed by these forerunners (Schneider, 1974), were later developed by illustrious German
theoreticians, notably Simon and Schmalenbach. Simons book entitled Balances of J.S companies (1886) may be
considered as the worlds rst work of accounting theory promoting a kind of economic value (in todays sense) in
accounting (Moxter, 1984; Richard, 2005a). But for lack of concrete solution for valuation Simon was obliged to prioritize
cost valuation (Richard, 2005c; Hommel and Schmitz, 2013). Schmalenbach (1908, 1919) contributed more efciently than
Simon conceiving a denition of depreciation that promoted the historical cost approach.43 These works, as shown by
Richard (2005a) and Biondi (2013), inuenced many scholars and lawyers in France such as Vavasseur (1884),
Charpentier (1906), Faragi (1906), Neymarck (1911), Magnin (1912), and Amiaud (1920), and in the United States,
notably, Hateld and Littleton (see after). In 1885, French lawyers resolved that it is not contrary to the laws on
inventory to depreciate the preliminary organization costs over several years so as not to overburden the rst year (Trib.
Civ. Nantes, June 20, 1885, R.S, 1885, 609). This would be the rst judicial breach of the static rule. In another case, in 1909
(Rouen, 10/3/Sirey, 1912), lawyers admitted that xed assets should not be valued with respect to their liquidation value
but their operating value.
But we must wait until the mid-20th century to observe these fundamental proposals largely applied to many types of
rms throughout continental Europe. It is for this reason that we classied this accounting types reign as taking place in
20th century, albeit it was born in the 1870s.

5.2. The rise of dynamic accounting in Great Britain

At the end of the 19th century, Dicksee argued that even if in theory, all assets must be assessed at their market exit
value, practice recommends distinguishing permanent assets, valued at cost without taking into account price
uctuation, from
oating assets, which he suggested, though they should be valued at their price, must out of prudence be valued at their
cost (1892, 120122).44 The eminent author recommends determining the expense for xed assets through utilizing
lump- sum depreciation rates expressed as a percentage of their purchase cost without taking into account price
uctuations (1892,
126129). Finally, concerning the preliminary expenses, which, according to him, appeared in the balance sheet of almost
every young company,45 he proposed a sort of middle ground solution inspired by certain existing practices: to classify
them in the balance sheet as an asset and depreciate them over three to ve years (1892, 1334). At about the same time,
Cooper (1888) demonstrated that for the accounts of Companies Act companies, the principles did not come from the
Companies Act, but instead from practice of partnership and also from general business practices.
Dicksee and Coopers observations reect dynamic accounting practices character as well as its clash with the spirit of
the law in Great Britain at the end of the 19th century, practices for which the goal was to avoid initial losses in the joint-
stock companies. Certainly, as shown by Brief (1976) and Ding et al. (2008), a spirited debate still ourished at the time
between defenders of the static concept, such as Best (1885), Wade (1886)46 and Cooper (1888), and those preaching a
47 48 49
more modern concept, including Mather (1876), Guthrie (1883), Bogle (1889) and Dicksee. Dynamic solution
supporters were

He named HCA dynamic accounting on behalf of the prevalence of the going concern principle.
Dicksee, along with Garke and Fells, continued to promote the static prudence principle for current assets (Parker, 1965).
Dicksee makes it clear that the new law on registered companies requires no obligation to pass these expenditures immediately in expenses (1892,
This author continues by saying, in a Roman fashion, that income is a fruit and that a suspense account, it means a registration as an asset of some
intangible expenditure like foundation costs without any market value, is an ugly item.
According to him, manufacturers and traders do not take out a contract for a business premises and establish a special factory in a short period; he is
clearly in favor of a going concern philosophy.
Bogle (1889) attacked the static theory. Specically, he emphasized that sale value should not be taken into account, as a business is conducted on
the principle of being a continuous and permanent concern and thus should be minimally exposed to the price uctuations from such a valuation.
Pixley seems to have a complex position. Even after the turn of the century, he defended secret reserve accumulation (1911, 27).
12 J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx

growing in number and, by the end of the 19th century, there was a general consensus concerning the historical cost
convention and systematic depreciation (Napier, 1995, 26970). Bryer (1993) described this evolution in detail. It seems
clear that in the late 1870s and early 1880s, dynamic accounting is widely understood to be a distinct and superior
conceptual framework and that, contrary to Watts and Zimmermann, its theoretical framework preceded the tax law of
1878 (Bryer, 1993, 6547). Due to the strong rise in the role of stock markets in Britain after 1885 (Bryer, 1993, 665; Toms,
2010, 36), it is no wonder that dynamic accounting became the dominant type of accounting throughout a large part of
20th century.50

5.3. The rise of dynamic accounting in the United States

Hateld (1909) was the rst great dynamic accounting theoretician in the United States and also reected the
inuence of this accounting type in practice. The author, as presented by Zeff (2000), was greatly inuenced by German
and French authors, notably Simon. He asserted that inventory valuation should be on the basis of the assets value to
the current holders as a going concern (1909, 81). From this general principle, he concluded that the proper value of
assets is that which they have to the holding concern, and not that which they may have to other parties, whether
these persons are ordinary customers or those who might bid for the assets at a liquidation sale. He fully recognized
that corporations choosing this valuation represent the interests of the stockholders rather than those of the creditors
(81). But, as he said, if all assets were listed at their value during a forced liquidation, no balance sheet would show
solvency and valuation on such a basis would, therefore, be absurd (81).52
On this basis, Hateld distinguished, in line with German and French authors,53 xed and current assets. For the former,
he asserted that changes in market value may be ignored (83) on the grounds that such changes did not affect the value
to the going concern. Accordingly, xed assets were to be valued at their cost minus a predetermined depreciation,
with depreciation considered as a process of cost allotment over a period of use (p. 122). It is worthwhile to note that
Hateld accepted the consideration of organization costs as a xed asset. After having stressed that registering such
expenditures as expenses would likely reduce the capital, he reasoned that these expenditures were proper assets just as
are real estate, machinery, or the stock-in-trade (78). He also noted that, in practice, it often acted in the same way,
although depreciation for operational assets was too rapid for a prudent approach (79).
Concerning goodwill, Hateld defends the dynamic position that the most satisfactory solution to write off goodwill is in
proportion to the number of years gured in its valuation (p. 117). In 1909, obviously inuenced by going-concern
principles as theorized by Simon (1886) and Schmalenbach (1908), he was comparatively in advance of other American
authors of his time (Zeff, 2000). It was necessary to wait until 1970 to see his proposal fullled in the United States.
With respect to current assets, Hateld proposed that they be registered at the selling price as if they were to be sold,
but he nonetheless recognized that the dominant practice was in favor of the static lower of cost or market principle.
After Hateld, dynamic accounting acceptance advanced steadily in the United States. Paton (1922) conrmed its
status as dynamic although not fundamentally innovating. The culminating point was the 1940 publication of a
monograph by Paton and Littleton: An introduction to corporate accounting standards. This work gave a more
theoretical basis to the practice. In line with Schmalenbach, Paton and Littleton alleged that accountings main goal was
not to communicate the liquidation value of the entity (9) or its stock market value (116), but rather to measure its
periodic income (123). Periodic income was dened as the realized income established on the basis of actual, not
anticipated, sales (35). The valuation of assets not destined for sale should be terminated and using the cost principle for
them maintained, even if it meant that more information on value was furnished via notes to the balance sheet (63, 125). In
a later work, Paton insisted on the danger that fair value (to adopt a current expression) represented: Accountants usually
agree that while appreciation is undoubtedly a matter of importance, it is not income, or, at the most it is only
unrealized income. He also took the position that appreciation should not be recognized in term of explicit book
entries except in reorganization or other special circumstances. He further added that appreciation does not
represent an effective addition to current purchasing power, capable of being used as a basis for dividends [stressed by the
author] or other disbursements (1943, 157).55 Thus, clearly, these American authors defended the realization principle
(recognition only of real prots), a principle also endorsed by the American Institutes Special Committee on Cooperation
with Stock Exchanges Report, dated 22 September 1932 (Parker,
1965). This principle was largely accepted in practice (Gilman, 1937 quoted by Parker, 1965).

The famous Lee v. Neuchatel case appears to be an anticipation of the next stage not followed by practice. Bryer (1998) described it as an anomaly
and showed that auditors strongly criticized it.
As early as 1907, Sprague, in his Philosophy of accounts, also contributed to the debate on valuation for liquidation or going concern with a clear
choice in favor of the latter (64). But a systematic analysis of the consequences of this preference to assets classication is noticeably absent from his
With these offensive assertions, Hateld indirectly recognized the prior importance of static accounting.
Zeff (2000, 1836) showed that Hateld could read German and that the years 19001901 spent in Europe were pivotal to his development. There is
a clear connection between Schefer, Simon and Hateld (Richard, 2005c).
The innovative aspect of Paton is the focus on the business entity (1922, 473). But this principle was never conrmed in practice: it is more proof of
weakness of the managerial thesis. Paton frequently changed his opinion about valuation (Parker, 1965).
Concerning plant appreciation he said that in general accounting insists that appreciation is not realized income and the fact that estimated
appreciation of plants, however well attested, should not be credited to the current income accounts is almost universally agreed. With respect to
long- term holdings Paton (1943, p. 463) stated that according to the usual opinion, market values have little place on the books of the long-term
J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx 13

Concerning the denition of assets, the position and even the formulation of Paton and Littleton were quite the same
as those Schmalenbach proposed in 1919.56 For them, assets were balances of unamortized costs or cost accumulation
in suspense (11, 14). The authors completely rejected the static hypothesis of rm liquidation. More precisely, they
favored the going concern principle (9) in spite of the fact, as they honestly recognized, that bankruptcy rather than
continued prosperity lies in the near future (22). Consequently, the authors considered all expenditures likely to lead to
future services to be admitted assets, including organization expenditures (32), costs of raising capital (9) and
even advertising campaigns, under the condition that they were treated as deferred charges (92). All these assets,
including acquired goodwill (92), were progressively depreciated with respect to the matching principle (15).
Consequently, contrary to the static method, depreciation was not a valuation process (17). To conclude their main
proposals, Paton and Littleton were theoretically against the imparity principle58 that breaks matching (81), but they
seem to have permitted it in practice (127). What is the political goal of these two American defenders of dynamic
accounting? Through this accounting type, they thought that they could satisfy the interests of managers as well as those
of owners-operators and even absentee owners (1). In particular, they insisted on the fact that it furnished a sound guide to
the administration of revenue funds, particularly as to dividend policy (89).
Apparently, according to them, this type of dynamic accounting was accepted by American businessmen of the time (6).
It was conrmed in 1953 by Accounting Research Bulletin 43.

5.4. The worldwide dominance of dynamic accounting in the 20th century

The principle of dynamic accounting increasingly marked 20th century accounting all over the world until the 2000s,
with only some differences in timing among the various countries. However, this evolution has been progressive. Prior to
1930s and even later, in a context of permissive regulation, many large rms in the four countries, especially Germany,
continued to practice severe xed asset depreciation in a fashion similar to their 19th century counterparts and wrote off
intangibles very rapidly.59 As a matter of fact, they sometimes did it with quite another intention: to accumulate hidden
reserves in periods of economic booms in order to use these reserves to conceal losses in difcult times, allowing for the
continued regular payment of dividends. Cases of such manipulatory practices include Britains famous Royal Mail case in
1931 as well as similar cases in Germany (Simon, 1903; Rosendorff, 1917; Spoerer Mark, 1998) and France (Lemarchand,
1993). These manipulations triggered animosity towards any type of extraordinary depreciation by two main actors in
particular: rst of all from the tax administration, a new important player in the debate and, second, from impatient
shareholders. Both actors required the use of planned (ordinary) dynamic depreciations. In Germany, the tax lawyer
Wilmowski promoted dynamic depreciation as early as 1891. Then, in the rst decades of the 19th century, the Teilwert
doctrine required that, for tax purposes, xed asset depreciation occur in the going concern principle framework and not
liquidation (Moxter, 1984, 10215). A similar situation was to be found in France a general tax instruction of January 1,
1928 prioritized depreciation calculated along a plan and demanded specic explanation and evidence for extraordinary
depreciation (Prospert, 1934, 1846). The same circumstances also characterized Great Britain, where there was a strong
tax administration trend recommending using standardized depreciation rates. Furthermore, taxpayers had to
convincing reasons if they used other depreciation types (Report of the Royal Commission, 1920). Accounting practice
was the rst to follow these recommendations.
Thereafter, commercial and penal law conrmed dynamic valuation. For example, in France the De cret loi du 8 aou
1935 prohibited asset undervaluation. Later, in the European Union, the fourth directive of 1978 reafrmed the cost
valuation principle of unrealized assets (art. 311c) and the planned depreciation principle in the context of going
concern for xed assets (art, 35 1cbb).61 In Great Britain, the CA 198081 clearly conrmed the dynamic procedures
traditionally favored by 20th century accountants (Edwards, 1989, 1867). In France, the 1982 Plan Comptable
possessed a dynamic accounting mentality (Richard, 2005a). In Germany, the asset valuation principle, according to
the going concern hypothesis (Fortfu hrungswerte), was introduced in 1985 in the Commercial Code (now
Abs1N 2 HGB). From this moment on, extraordinary depreciation for joint-stock companies could be reported only as
part of a continual loss of value (now 279, abs1 HGB). Thus, the climate had totally changed against the defenders of
the old views.

The connection between Littleton and the German scholars defenders of the historical cost approach has been clearly shown by Biondi (2013).
Suspense accounts was typically an expression used by Schmalenbach as early as 1919 to design assets in HCA.
Imparity is used in the German accounting tradition to express the lower of cost or market rule.
Canning (1929, 43), taking the case of the General Electric Company, underlines that goodwill, organization expenses and development expenses
were rapidly written off. In France, in the 192030s, Schneider went on practicing static accounting while Air Liquide, which relied on stock market
nancing, practiced dynamic accounting (Fabre, 2008, 456). In the same vein Fridenson (1972, 277) contrasted Renault with a prudent accounting for self-
nancing to Peugeot which is obliged to make benets appear. Due to the fact that it has shares and bonds on the stock markets.
On the contrary, the CTRA of 1878 spoke in a static way of diminished value to determine wear and tear.
Impairment beyond regular depreciation is possible only if it reects a continual decrease in value.
Impairment for xed assets is possible only within the scope of the going concern principle and is rarely seen in practice: most of the time only
planned depreciation is practiced (Richard, 2005a, 103).
14 J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx

It is not possible in this short article to offer all the details of the progression towards dynamic accounting in all four
countries studied (see notably Richard, 2005a for France and Hommel and Schmitz, 2013 for Germany). As such, we
focused primarily on the case of the United States to show how dynamic accounting has ultimately prevailed there. Let us
take as a reference the famous textbook written by Kieso and Weygandt (1998). In this book, they state that
depreciation is not a matter of valuation but a means of cost allocation (546) and that the general accounting standard of
lower of cost or market for inventories does not apply to property, plant, and equipment (1998, 557).63 Concerning
organization costs they say that
these items are usually charged to an account called organization costs and may be carried as an asset on the balance
sheet as expenditures that will benet the company over its life.
With respect to the goodwill principle, since the 1970s, goodwill was to be amortized over a period not to surpass
40 years. This was, contrary to the common practice of scrapping it immediately or over a very short-term period, a
practice that prevailed at the beginning of the century (Ding et al., 2008).
It seems to be clear that during the second part of the 20th century, dynamic accounting with depreciation conceived
as an allocation of costs progressively dominated the scene in the United States65 and other countries under study. In all
four countries, the realization principle was applied, implying a xed asset cost evaluation. The dynamic planned
depreciation has predominated since then for tangible assets as well as some major intangible ones like goodwill (Ding
et al., 2008; Richard, 2005a).

5.5. The origins of dynamic accounting

German lawyers laid the rst stones of dynamic accounting theory in the early 1870s in an attempt to solve various
aws of capitalism. Their theories culminated in specic legislation from as early as 1884 (Richard, 2012a).
However, the practice and even teaching of this accounting type has even earlier roots. In England, examples of dynamic
accounting appeared for management control, even in industrial rms, as early as the 1770s. With respect to
educational instruction, several important books recounting the dynamic practice were published in as early as the 1800s.
For example, in France, Lemarchand showed that in 1825, de Cazaux is one of the rst to recommend the use of lump-sum
coefcients for the depreciation of xed tangible assets [in the eld of agriculture], while the others are still reasoning in
terms of valuation. This depreciation was passed, as a management tool, in agricultural product costs and then included
in the selling price,
allowing for the renewal of agricultural tools. (1993, 451).
This method was used later by modern German lawyers in nancial accounting to eliminate the horrible static
accounting and enable a new class of stock market capitalists to receive more regular dividends!

5.6. The consequences of dynamic accounting on the prots of capitalists

Since the end of the 19th century, small restless shareholders have succeeded in wholly or partially eliminating two
main traditional capitalist principles. First, they eliminated the unlimited liability principle and, as a result, are no longer
nancially responsible for more than the value of their stake in the rm, even if they take debt in an ill-considered
manner. Second, they have essentially eliminated the static valuation principle and ctitious liquidation value (which
now applies only to current assets). On account of this evolution they can not only sleep without having to consider the
possibility of a future company failure, but can normally enjoy relatively regular prots and, hence, dividends from the
very beginning of their investment.
These two major successes of small restless shareholders serve as a testimony of their growing inuence during the
20th century.69 However, in the dynamic accounting framework, these impatient shareholders must accept a
planned depreciation of xed assets and cannot register and distribute potential prots. Although dynamic accounting is
based on the idea of rm longevity, it remains anchored in the present. It also acknowledges the idea of end-of-life of xed
assets, albeit in the long term. The impatient shareholders of the 20th century are then still forced to admit the burden of
realities. They have

Kieso and Weygandt provide this assertion in spite of the publication of FAS 121 in 1995 requiring the impairment of xed assets.
These costs are amortized over an arbitrary period of time (maximum 40 years), since the life of the corporation is indeterminate. However the
amortization period is frequently short (510 years) because of the assumption that the early years of a business benet most from organization costs. In
addition, because income tax regulations require the amortization of organization costs over a period of at least 5 years, some nd it convenient to use
the same period for accounting purposes (600).
Interestingly, as Kieso and Weygandt underline, todays American lawyers, like their static stage ancestors, continue to prefer the usage of values: the
law, it is true, often appears to ignore the concept of continuity; hence the stress on values and valuations rather than cost (1998, 10).
For current assets the general rule is to determine value on the basis of the lower of cost or market (see Parker, 1965, quoting notably English and
American sources).
However Anglo-Saxon historians, notably Brief (1993), attribute the paternity of the theorization of dynamic accounting to Dicksee and his
American adaptor Montgomery.
Without going back to Vetruvius (Chateld, 1977, 96), Yamey (1964, 15) quotes a source according to which, as early as 1610, the farmer Loder includes
a depreciation of his horses in the cost of the products.
As early as the beginning of the 20th century the question of the reality of the power of the restless shareholders is posed. Berle and Means (1932),
with their managerial thesis, considered absentee owners to have no real power face to the managers. On the contrary Rathenau (1917) deemed that
absentee owners were going to progressively assume power over managers (see hereafter).
J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx 15

reached a sort of compromise with owner-managers who still hold enough inuence to ensure the conservation of the
nancial capital. However, this situation will not last.

6. Fourth stage: futuristic accounting (2000 onwards)

In the last thirty years of the 20th century, a new kind of capitalist accounting emerged in the United States.71 First, we
present its intellectual roots; describe its introduction into the American accounting standards second; analyze the reasons
for its emergence third; fourth, show that one of the main actor for this accounting revolution were the pension funds as
stock market participants; fth explain the reasons why these stock market participants have succeeded in this
revolution; and nally summarize the dangerous character of this new accounting type.

6.1. The intellectual roots of the new accounting

In the second half of the 20th century and especially after the 1970s, signicantly more literature was published
promoting another accounting model based on a different asset and debt valuation. Most of these publications, as shown
by Chabrak (2011), emerged from the so-called Chicago School and were chiey nanced by large rms seeking a free
stock market society. Among the ow of publications defending this new perspective is the well-known 1981 book
written by W. Beaver in which he proposed an accounting revolution in order to put an end to the practice of the
former traditional dynamic accounting. According to this new theory, nancial accounting must aim to reect the
theoretical sale value of goods and rms, also referred to as their fair value (FV). This fair value accounting (FVA) has
nothing to do with the market price used by the Statics to evaluate a rms prot in the 19th century. It is not a value
corresponding to the market price of the assets evaluated individually from a perspective of a ctitious liquidation, but
the value of the assets or rather rms72 from the perspective of their usage.73 Hence, both static valuation at ctitious
liquidation prices and dynamic cost valuation are generally dismissed because they are incapable with evaluating the
value of the rm or assets. Only a fair (economic) value based on the going concern assumption can adequately do that.
From a theoretical standpoint, a rms value or an assets value is calculated by discounting the net cash ows resulting
from its future productions and services (essentially net operating cash ows).
But the propagation of this new accounting theory in the second part of 20th century must not mislead: its
theoretical foundations have existed since the end of the 19th century in the works of the founders of neoclassical
economics, such as Walras, Jevons and Menger. These economists had already shown how to calculate the discounted
value of capital. Their valuation theory was developed and popularized by Fisher (1906, 1930). According to him, capital
value had nothing to do with the past (its cost). Rather, it depended on the future or, more specically, on future services
rendered by this capital (Fisher, 1930, 5253). This concept had a rapid impact on the ideology of stock market players and
fostered the change from a static-based stock valuation to a futuristic one (Burk, 1998, 58).

6.2. The American accounting revolution and its expansion

Young (2006) showed that, in the United States, the rst serious proposals for a new accounting model based on future
cash ows appeared in the 1960s when the AAA (1966), under pressure from the Big 8 rms, initiated A Statement of
Basic Accounting Theory (ASOBAT) and also when the AICPA (1971) formed a research group under the leadership of Sorter.
Later, in the 1970s, after the APB had been replaced by the FASB, the latter produced SFAC1 (1978), which asserts that
users of nancial accounting are mainly interested in the potential wealth they may receive at some future moment
through dividend payments. This philosophy was upheld by the FASB in the 1980s with Concepts Statements (CS) No. 5
(FASB, 1984) and No. 6 (FASB, 1985). But it is only in the 1990s that the fair value concept and its use were actually
introduced in American

As early as 1850, Lardner remarkably identied the conict between the classes of owner-managers (proprietors) and small restless shareholders:
the class of proprietors have less regard to the amount of present dividends than the permanent value of the stock, and they chiey expect from the
directors of the railway a due regard to the efcient maintenance of the permanent way and the movable stock out of revenue. On the other hand,
the latter class, and especially the speculators, care nothing for the permanent value of the concern, and look only to the present amount of dividend
While Britain was in the lead with its capitalism development in the second stage, it fell behind in the third and the United States took over.
The emphasis on rms is justied by the fact that, generally, FVA concerns assets representing rms as a whole (like shares and goodwill) or fractions
of rms that could be managed as autonomous rms or activities (like cash ow generating units or agricultural activities).
The recent IFRS 13 denes fair value (for an asset) as the price that would be received to sell an asset (exit price) in an orderly transaction
market participants at the measurement date. A market is considered to exist if transactions for the asset take place with sufcient frequency and
volume to provide pricing information on an ongoing basis. Apparently a similarity exists here with the fair value accounting model proposed by the
Napoleonic lawyers. But IFRS 13 says that in case of little, if any, market activity it can be resorted to an income approach by converting future amounts
(cash ows or income and expenses) to a single current (discounted) amount, reecting current market expectations about future amounts. Here the
difference with static valuation is clear. For Statics, in the absence or weakness of market, the fair market value is nil or very low. On the contrary, in the
case of IFRS, a kind of value in use takes place of the market value to save the rm from registering unacceptable losses. To complete the situation IFRS 13
stipulates that in cases when the value in use cannot be obtained the rm may have recourse to a cost based valuation. This implies another
valuation theory.
16 J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx

practice with a whole series of standards (Financial Accounting Standards FAS) concerning the nancial instruments:
107 (1991), FAS 115 (1993), FAS 119 (1994), FAS 125 (1996) and FAS 133 (1998).
After the turn of the 21th century, this revolution materialized in other accounting standards not concerning nancial
instruments with the adoption of SFAS 141 and 142 (FASB, 2001a and FASB, 2001b), set to supersede APB Opinions No. 16
17 (AICPA, 1970a and AICPA, 1970b). Under these new standards, goodwill, whether acquired individually or in a business
combination, is no longer amortized, but submitted to an impairment test in which the fair value of goodwill in a
reporting unit is compared to the carrying amount of that goodwill (FASB, 2001b, Section 20).
What are the conceptual consequences of a shift to such a model based on fair value? There are two primary reforms
with respect to the former dynamic model. The rst is the possibility or even obligation to register potential prots
generated by existing assets.74 This rst change implies the elimination of the realization rule, which can be considered, in
a larger sense, as an element of the prudence principle. The second, as shown by Toms (2010, 13), is the
disappearance of a planned (dynamic) systematic depreciation of xed assets concept, another prudence element in a
larger sense. With the fair value model, the goal is not to determine the amount of money set aside each year in order to
replace the production capacity of tangible assets, but to check the veracity of the forecasts of ows of goods that can be
produced by the tangible assets. These two changes will have as a consequence the retention of funds and the distribution
of dividends, normally tied to the concept of nancial prot, based on anticipations of future sales and results. This is
futuristic accounting.
This futuristic accounting expanded internationally following the adoption in March 2004 of the standard IFRS 3 (IASB,
2004b) which replaced IAS 22 (IASC, 1993), as well as the revised standard IAS 38 (IASB, 2004a). Yet this new nancial
accounting concept takes some time to dominate the world scene: it was not until 2005 that most groups located in the
European Union had to apply the IFRS for their consolidated accounts: this is why we claim that futuristic accounting
really began its world domination after the turn of the 21th century.

6.3. The reasons for the fair value accounting revolution

The reasons for fair value accounting evolution are not easy to discern. Before developing our own interpretation, we
present a thesis proposed by Power.
Power (2010) thinks that the success of Fair Value Accounting (FVA) should be attributed to ve main factors (1) the
improved reliability of a valuation system based on the market as ultimate auditor, (2) the emergence of nancial
economics as a dominant cultural and technical authority, (3) derivative development and the fact that their historical
cost, if such existed, was widely agreed to be irrelevant to their value over time, (4) the de-legalization of the balance
sheet as a result of a progressive asset-liability emphasis which implies the use of fair value valuation outside the
scope of lawyers, and (5) the necessary professionalization that accounting standard setters face regarding complex
problems of valuation and which provides the possibility for calculative idealists (like the defenders of fair value) to
take the power from calculative pragmatists, who are more tolerant towards mixed accounting measurement
We recognize that these elements may have played a role in fair value accountings emergence as a quasi philosophical
principle at the center of accounting. But we do not think that that they convey the whole picture. Young (2006) showed
that all proposals for accounting reforms made in the United States in the 1960s and 1970s were based on socially
constructed ideas of user behavior and not on the actual ideas of esh-and-blood users. This does not imply that
American reformers, such as the FASB, did not take into account the interests of some of these esh-and-blood users. An
accounting system does not fall from the sky: on the contrary, it must be conceived to correspond to the tangible needs of
the dominant social forces at the time. In this respect, we hypothesize that the practical side of discounted value
theory was the development of stock markets in the second half of the 20th century. There is a connection between
this practical development and advocacy for the value theory for accounting by neoclassical economists. Both stock
markets practice and Fishers theory rely on expectations of future benets, the sole difference being that stock markets
indicate a real social value, while Fisher promotes a theoretical value. We believe that economic value and fair value
develop in response to\stock market players needs whose fundamental job is to play with anticipated gures and reap
anticipated prots. Concerning prots, Power, like the FVA defenders, focused on information problems, mainly
information on asset value, especially derivatives. But shareholders do not eat information: they eat dividends,
more precisely short term dividends and eventually refunds of capital. Our thesis is that the change to fair value valuation
has been caused mainly by a trivial question of dividends, not of information. In the 19th century, lawyers such as von
Strombeck stated openly that the motivation for a change in accounting practices towards HCA was necessary to
distribute higher dividends at a more regular frequency to appease companies restless shareholders (Richard, 2012a).
Today, the IASB justies the appearance of the IFRS as a necessity to improve the information available to investors (see
notably the preface of IFRS 9). This proclamation appears suspicious for two main reasons. The rst one is that if it were
purely an information problem, it would not be necessary to change the whole dynamic accounts system; a mere
remark on fair value in the notes would have sufced. The second is that

The registration of potential losses is not a novelty as long as the prudence principle was somewhat maintained in the scope of dynamic accounting
This assertion is a rebuttal to an opinion expressed by Hoogervorst: according to the IASB chairman, the concept of prudence is still alive in the IFRS in
spite of the fact that it did not appear in the 2010 Framework (FEE conference of 10/9/2012 in Brussels).
J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx 17

information is not an objective in itself for shareholders. As it is recognized by the IASB, information is used to make
decisions, notably to determine distributable prots and dividends (IFRS Preface, 2005f). Given these elements, we
believe that there are more pertinent and material issues to address beyond the IFRSs euphemistic reference to more
information. How can we seriously believe that the invention of the futuristic accounting system in a time of nancial
capitalism exacerbation could have no relation to more pragmatic problems? Why this insistence on the part of the IASB to
change the heart of the accounting system and refuse a simpler modication of additional information in the notes? We
hypothesize that the goal is the same as it was in the late19th century during the dynamic revolution: hasty shareholders
also want to get earlier and bigger dividends. But who are these late 20th century impatient shareholders? Are they
identical to their predecessors?

6.4. The role played by pension funds stock market players in the accounting revolution

Up to the 1970s we have seen small impatient shareholder inuence on accounting increase. Generally, these small
investors act alone without help from professional advisers. We will call them restless individual shareholders (RIS
hereafter). After 1970, two other restless shareholder types rose in importance in the USA. First, due to the massive and
growing inequality in the distribution of wealth, a new category of very rich individual shareholders played the stock
markets and took control in general assemblies of companies with the opportunity to benet from professional adviser
knowledge. We will call them restless individual professional shareholders (RIPS hereafter). Of course their inuence is
stronger than the traditional RIS. But, second, the most interesting change came from the rise of restless organized
professional shareholders (ROPS hereafter) acting in a collective way: pension plan stock market players. As explained by
Lazonick and OSullivan (hereafter LS), in the 1970s, due to international competition, the American economy turned
towards a more nancial approach with a focus on short-term gains (LS, 2000, 1516). One of the main goals of this new
policy was to lower the cost of nancing and there was a further belief that it could be achieved by a progressive
deregulation of the banking sector in favor of savings and loans institutions as well as a rapid development of pension (and
mutual) funds (Lordon, 2000, 27). This switch to a new form of (nancial) capitalism was not merely a product of
globalization, but also the result of decisions by American authorities. Among the results of the reforms the rise of
pension funds has enormous consequences. A major effect was a dramatic increase in stock market players and the
dissemination of a stock market player mentality over a large portion of salaried people. The fact that these new
shareholders were former salaried people did not prevent them from rapidly acquiring stock market players habits
notably the ability to switch swiftly from one investment to another in order to optimize their incomes. If we consider
this fact alone, we can say that there is no signicant change with the situation of the restless shareholders of the rst
part of the 20th century except for a generalization of their circumstance. But, contrary to their ancient fellows who
were obliged to act individually, the new pension fund players may now act as organized and professional players,
notably thanks to the help of fund administrators and technical advisers. Their collective action provides them much
greater power than their predecessors. This power lies not only in the possibility to sell massively and cause a brutal stock
market drop that could endanger the company, but also to x dividend distribution rules. Indeed, Lordon (2000, 56) found
that, thanks to their rising power, pension funds stock market players have imposed the cost of capital concept as a
normal management rule of American rms. It requires that a minimum but, very high dividend (generally not least
than 12% and often 15% of the capital), must be paid independently of a rms situation.77
Lordon also pointed out that this coup de force represented the possibility for them to impose a kind of guaranteed
minimum shareholder income (2000, 57). The consequences of this new rule of dividend game are immense. Owing to the
fact that, generally, the (economic) return on assets (ROA) of companies is generally much lower than 15% or even 12%,
American rms have been compelled to nd extraordinary means to get a return on investment (ROI) equal to 15% and to
distribute dividends on behalf of this rule. These rms used four primary means to accomplish this. First, they reduced the
wages and number of salaried people, who became an adjustment variable of the game ; in fact, downsizing became
quite a popular endeavor. Second, they renounced self-nancing. Third they used the famous leverage effect
meaning the preference of nancing by debt rather than by equities; and fourth, which specically concerns our
subject matter, encouraged (or at least consented to), by all means, a change in accounting rules so as to take account of
potential prots in determining accounting net income. Fair value accounting was actually the good response of the
FASB. Thus, pensions funds market players, helped by RIS and RIPS, not only incited American rms to focus on short term
management (everyone knows that, with a discount rate of 15%, long term investment are generally eliminated) but they
were instrumental in the growing reliance on debt and, probably, in accounting standards shift in favor of fair value
In the light of these drastic consequences, one wonders how RIS, RISP and ROSP gained so much power. Here, the
debate between Berle and Means and Rathenau at the beginning of the 20th century confronts us. Are the decisions taken by

Keynes named them rentiers and already stigmatized their wicked inuence on economics.
See notably the examples given by Brealey and Myers (2003, Chapter 2).
This action will have the consequence whereby a large number of American salaried people resorted to debt to maintain their way of living. Banks
which were themselves pushed by their restless shareholders to make money at any price pushed them into it (Jorion, 2011).
To boost the return on investment the classical way consists of substituting debts (with the lowest interest rate possible) with equity, notably self-
The author of these lines has no knowledge of a movement of resistance to FVA from big American rms in order to maintain HCA. This observation is
also valid for the Big Four whose positions are generally in line with their clients and payers. Pension funds also have not engaged a battle in defense
of HCA.
18 J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx

funds really in line with their pension funds members (Rathenaus investors thesis) or with the interests of the fund
managers (Berle and Means managerial thesis)? In our view Rathenau is right. As Lordon (2000, 40) underlined, there is a
double competition. Not only are rms and their managers obliged to compete in order to retain their hurried
shareholders, but pension fund managers must also compete to retain their restless pension stock players against other
pension plans. Thus, pension fund players have the effective power over administrators like their predecessors of the rst
part of the 20th century had over managers. But their impact on the economy is much greater, because they are unied
and helped by technicians devoted to stock management.
This evolution towards the emergence and victory of RISP and ROSP has taken a long time. Even if the stock markets
rapidly developed in the late 19th century and rst part of the 20th, it did not destroy completely the former governance
type that relied on self-nancing and some limited long term credit, especially in continental Europe and Britain. Under
these conditions, stock market investors could not take the lead and force their view on management. Due to the stock
market crash of 1929 and the ensuing Keynesian period, it is only with the development of nancial capitalism in the
197080s and the growing reliance on stock markets that RISP and ROSP began to assume a dominant position and
require a new, short-term oriented management type (Saboly, 2003; Aglietta and Re be rioux, 2004; Davis, 2009). It
is only in such circumstances that the issue of accounting for the stock market value of the rm became a priority.

6.5. Reasons for the victory of professional and organized restless shareholders

If there was a demand in the 197080s for a new accounting type on the part of RISP and ROSP, there is no obvious
reason explaining why their wish could be so easily satised. Concerning this point, it seems to us that the technical
arguments developed by Power, albeit important, do not sufciently explain the victory of FVA. A rst crucial element
is that this victory is not always so evident: there are some important countries that resisted the IASB steamroller. This
resistance was particularly blatant in France owing to two main factors. First, France is now characterized by a dualistic
situation. The IFRS (and fair value) were applied to consolidated accounts (because of a decision taken by the European
Union), but not to individual accounts which are ofcially the basis for dividend distribution. Second, the President of
the French Accounting Standard Board (ANC) openly marked his distance to the fair value accounting (FVA) and declared
that he would maintain the dualistic accounting situation in France.82 Obviously, this resistance by the French
Accounting Standard Board shows that the pressure of nancial economics, the necessity to rely on valuation professionals,
83 84
the focus on the balance sheet and its de-legalisation, have not been sufcient elements to completely change the
situation in France. The historical cost system remains an important basis for determining nancial accounting results
there. To explain this fact, we must mention another crucial factor for the success or failure of the FVA: the type of
governance used in the accounting standard boards of different countries. France is a country where, since World War II,
accounting affairs have been entrusted to a kind of parliament representative of the Society. It does not mean that there
are no experts involved. It means only that these experts represent very different stakeholders. For example, contrary to an
expert representing the big four and expressing their wish for full fair value we nd another expert representing a trade
union, demonstrating that fair value is not sound for valuing net nancial income and arguing in favor of HCA. All these
experts are professionals with equal knowledge of accounting affairs (including economic valuation), but they represent
different social forces with different interests. Consequently, the question, regarding FVAs victory or defeat, is not only a
technical one, but also and foremost a social and political one: how a society organizes the institutions in charge of an
accounting system. In France, up to now, in spite of some evolution (Colasse and Standish, 1998) and recent pressures to
change this situation, there are some ways to counteract the power of FVA proponents. In other countries, where the
big international businesses and the accounting professions establishment, notably the Big Four, dominate the scene on
accounting boards and standard-setting authorities, fair value has had far fewer difculties in penetrating the whole
accounting standards and practice sphere.85 Today, a social and political accounting battle is raging in France. Recently, an
expert representing one of the Big Four resigned from the French Accounting Board and publicly explained that this
resignation resulted from some positions taken by the board president against the IFRS.

The same situation is valid for Germany (Burbi, 2013). The fact that France and Germany did not ofcially use IFRS and fair value for individual
accounts and dividend distribution does not impair this study for two main reasons. First, higher results in consolidated accounts can trigger higher
distributions of dividends in individual accounts because dividend distribution is frequently inuenced by prot levels shown in consolidated accounts
(see notably Eric Loiselet Le dividende propose par Sano ne nous parat pas responsable; Tribune Entreprise et Marche s. Les Echos 02/05/2013).
Secondly, more and more countries, especially in Europe, use fair value accounting in individual accounts for the distribution of dividends (Burbi, 2013), a
trend which conrms our thesis which, although based on the consideration of accounting evolution in four main countries, has vocation to be
understood and considered in a larger scope.
See notably Les Petites Afches N? 44 Mars 2011.
Already in the 1920s, Walb contested that HCA would be based on a primacy of prot and loss statement over balance sheet (Hommel and Schmitz,
2013, 345). It can be inferred that todays strong belief that FVA implies a leading role of the balance sheet may also been questioned.
There is no need to comment on the assertion according to which fair value accounting would permit an objective valuation of assets: Suzuki
remarkably showed the subjective character of this kind of valuation in the case of IAS 41.
In many developing countries IFRS are adopted under the pressure of big international nancial institutions. The switch to IFRS is a precondition to
getting credit (see notably Bouraoui (2007) and Suzuki (2012).
See the declarations made by C. Lopater in the Les Echos newspaper (15/10/2013): Pourquoi je de missionne de lAutorite des normes
(Why I resign from the French Accounting Standard Board).
J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx 19

After this shattering declaration several French business schools scholars with foundations or diplomas nanced by the big
four have refused to participate in conferences organized by the French Accounting Board president.87 Such is the harsh
reality of the IFRS battle in France. In many cases in other countries, the HCA lost the battle not for technical reasons,
rather for political and governance reasons, because only a small part of society was associated with the decisions on
accounting policy.

6.6. The dangerous character of fair value accounting

If this type of accounting can be appropriately adopted to calculate the prot for a rms dividend distribution in the
ideal circumstance of certainty, opposingly, in a realistic context of uncertainty, it cannot be a satisfactory accounting
method to guarantee the conservation of capital. Its inadequacy lies in the fact that potential gains may be distributed in
optimistic times, only to be faced with insufcient funds in the next unforeseeable crisis period.89 In the eld of
economics, Neumayer (1999, 25) shows in this regard that the maximization of the net discounted value evaluated on the
basis of the HicksKaldor model, a variant of the Fisherian model which inspired the IFRS, may be contradictory
to nancial sustainability. In addition, Suzuki (2012) shows how the application of fair value to biological assets in the
frame of IFRS 41 is at odds with a sustainable management of palm plantation companies.
This situation is further aggravated by high discount rates usage, a traditional behavior observed in todays nancial
management, which fosters the pursuit of short-term prots at the expense of long-term maturing investments. This
major governance problem, resulting from nancially-oriented governance methods, is not new. In the 1930s, Keynes,
referring to stock markets, warned that human nature desires quick results, there is a peculiar zest in making money
quickly, and remote gains are discounted at a very high rate (1936, 157). It is this nancial management philosophy,
which was gaining ground at the turn of the 20th century in the nancial accounting eld and later dominated the
scene in the 1970s. This progressive seizure of accounting by nance is synonymous with the loss of the sense of reality
(in the sense of realized results). It is in line with traditional behavior observed on stock markets, meaning that players
will wager in the hope of rapidly earning a fortune and consume their anticipated gains prior to their realization. The
lone difference is that stock markets deal directly only with private players, whereas accounting, which calculates added
value for all stakeholders, deals with the entire population.

7. Lessons from the history and consequences for the present crisis and the future of capitalism

The historical analysis of the development of modern nancial capitalist accounting offers not only the possibility to
observe the nature of capitalism in the past, but also enables us to glean some conclusions to better understand the
present economic crisis as well as more accurately anticipate future developments of capitalism.

7.1. The six major lessons from the past

The rst lesson is that very substantial evolutions have occurred concerning the measurement of capital and prots in
nancial accounting over a relatively short period of two hundred years. In each stage, the goal has been to make a prot;
the manner in which prot is earned, however, depends on which type of capitalism dominates. Thus, the concept of prot
and its valuation90 are constantly evolving in the era of modern capitalism.
Second, in spite of differences in timing and secondary phenomena,91 all four countries under study here have gone
through three very similar main stages. This conrms the fact that, contrary to Schneiders thesis, there is a kind of
general pattern to capitalist nancial accountings evolution. Arnold (2005) showed that, today, World Trade Organization

This notorious fact crudely reveals the lack of independence of scholars of these schools. In the same sense see Suzuki (2012).
For the case of Germany see Richard (2002).
Normally, in matter of nancial accounting standards, a positive income may be entirely distributed as a fruit from capital, the latter being conserved.
If this income incorporates potential gains it means that the latter may be distributed. Some defenders of FVA argue that it is the role of national lawyers to
say if potential gains can be distributed. We view this position inadmissible because it negates the responsibility of international standard setters all the
more so since, in many countries, IFRS are considered as the sole accounting rule.
The nature of expenses in private capitalism remains practically unchanged over the period: prot is always fundamentally the difference between
(revenues) and expenses, mainly represented by raw materials, services, wages, depreciation, interests and taxes. Of course, as Richard (1980) and
Phong and Richard (2011) showed, in state capitalism like in the Soviet Union and todays China or Vietnam, the nature of some items is somewhat
different. But since wages remain a component of these expenses there is no fundamental difference concerning the accounting treatment of the
laborers: they remain considered as a wages earning people like in private capitalism.
In some time periods, special features unique to national accounting methods may sporadically appear. A good example is given by the French
accounting system. In de Gaulles time, a unique prot and loss structure was practiced that was organized along the concept of added value (Richard,
2013). But this unique feature is a secondary element in the context of our study. The fact that added value could be easily calculated did not make this
concept one of income for French capitalist rms: net income was calculated on the same basis as in other capitalist countries. Today, under the IFRS
standards, added value is no longer calculated in French consolidated statements. The same observations hold true for Great Britain. Burchell et al. (1985)
showed that value- added has had for some time, in a specic socio-political context, mild success in the United Kingdom. But we believe that this
sporadic and/or secondary focus on added value, in the same way as in France, is an epiphenomenon in the frame of this long-range study.
Schneider (1995) defended the idea of the evolution of accounting as contingent spontaneous order.
Braudel speaks of Dynamique du capitalisme (1985).
20 J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx

in collaboration with representatives of many big multinationals and their allies, notably the IASB, organized the market to
give preference to accounting and auditing service solutions that are the most accepted by nancial capitalism. The
harmonization of accounting and auditing services is not a wonder of the market, but a conscious construction to address
the needs of big multinationals. Such an international institutional scheme did not exist in the 19th century or in the rst
part of the 20th. Therefore, it might seem strange to observe, as we did, a similar global evolution of nancial accounting as
early as the beginning of the 19th century. In fact, lawyers played a role equivalent to that of the IASB or WTO in defending
upper capitalist class interests. The Napoleonic lawyers in France are a good example of lawyers with this particular role.
These lawyers, as shown by Moxter (1982), albeit working for a French national cause, had international inuence,
especially in Germany, but also in numerous other countries.94 The reverse situation took place about one century later
when German lawyers, promoters of historical cost system theoretical foundations, strongly inuenced their French
colleagues. Ever since the industrial revolution, big capitalist company owners have always managed to nd lawyers to
interpret their accounting wishes and promote them on an international level through the channel of books or
reviews. These modern national lawyers and, later, invisible colleges of researchers (Hopwood and Schreuder,
1984, 3) were in fact, due to their international background, the promoters of the propagation of the best international
capitalist accounting practices or, more specically, the practices corresponding to the evolution state of big companies. This
fact serves to explain the isomorphism of the evolution of different national accounting systems that probably could be
observed in many other countries beyond this study. But it does not explain the nature of its direction. This last point
leads us to the following lesson.
Third, the capitalist system has sustained an accounting theories and practices evolution that increases global nancial
prots and makes them appear more rapidly.96 The global prot has been increased by eliminating, for some assets, the
static and dynamic depreciations. For example, in France, in 2005, the removal of the systematic depreciation of goodwill
alone enabled the big French groups to increase the quantity of their reported prots by more than 20% (Boukari and
Prot timing has been completely modied so shareholders can acquire them as soon as possible after their initial
investments.98 In the 19th century, many owner-managers often had to wait a rather long period for their initial losses,
reported using static accounting methods, to be compensated. A number of them became somewhat obsessed with
reducing their prots in these investment periods. In the 20th century, the new capitalist stock market players had to
wait for the appearance of real sales and deduct planned depreciations of xed assets. In the 21th century these
constraints were relieved, in part. Now, these capitalists can, notably for nancial and biological assets, discount the
future. Thus, a pattern of growing anticipation for prot dividends exists (Fig. 1). This pattern can be illustrated by the
different incomes (along different accounting theories) obtained from the same investment over three periods (Richard,
As underlined by Jorion (2011, 175), this accounting pattern could be considered one of the causes of the 20072008
nancial crisis, because fair value accounting provided an extremely premature and optimistic economic representation
and promoted the distribution of ctitious dividends based on pure expectations.100
Fourth, the primary explanation of this evolution lies principally in mode of nancing changes. The 19th century
owner- undertaker-managers were obsessed with self-nancing. The nancial capitalists of the late 20th and early 21st
century were obsessed with dividend distribution and reliance on capital markets and debts. Those of the mid-20th
century incorporated nancing strategies that were somewhere in middle of these two extremes.
Fifth, the profound explanation of this evolution lies in a complex intricacy of cultural, legal, and economic changes.
Culturally, the 19th century family business owner-manager was afraid of being dependent on others. He also greatly feared
bankruptcy, which was considered shameful at the time. Severe penalties in legislation reinforced bankruptcy fears.
Regarding the economic context, the banking sector was underdeveloped, thereby restricting options other than self-
nancing. But with the development of nance-based capitalism, especially towards the end of the 20th century, the
importance of undertaking investments in a competitive environment required the family owner-managers to accept a new
category of capitalists external investors seeking short-term and regularly distributed prots. Stock market
development and banking activity fostered this change, a process that accelerated during the 20th century and
culminated with nancial capitalism and pension funds. At the end of the process, the family owner-manager capitalist is
just residue of a past time.
The sixth and nal lesson is that, contrary to the dominant opinion of the defenders of the managerial revolution
concept initiated by Berle and Means (1932), managers have not played a dominant role in this evolution. They have
been an instrument (generally well-paid for their services) of the growing power of restless shareholders (RIS, RIPS and
ROPS). The

Napoleonic lawyers played a major role in the foundation of accounting regulation in many countries (Walton, 1995, 9).
The Italian case is particularly interesting. The vivid debate between the Static Besta (1880) advocates, and the Dynamic Zappa (1937) advocates,
obviously had much to do with our capitalist accounting evolution thesis. But it is not possible to comment on it seriously in this limited space.
Conversely the capitalists have continuously succeeded in postponing the appearance of taxable prots. We may qualify their pleasure with this double
process of anticipating nancial prots and postponing taxable prots as an accounting orgasm.
The study was conducted during a growth period. The fact that now impairments have to be theoretically recognized in crisis period does not change
our assertion for two reasons: rst, these impairments were also passed in the past, especially in the prudent static time and, second, there is always
some temptation to forget some impairment in economically rough times in order to avoid excessive losses.
Previously Richard (1996) showed this evolution in a theoretical manner.
See Rowlan (1938) for an early warning by an accountant about the eccentricities of futuristic accounting, quoted by Miller (1998).
The rst assertion (the too optimistic representation) is obvious. The second one (the ctitious dividend distribution) is probable but must be
conrmed by specic studies that are beyond the scope of this article.
J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx 21

The Impact of accounting theories on income


800 prudent static

400 dynamic

1 2 3


prudent static static dynamic actuarial

Fig. 1. The impact of accounting theories on income.

latter are clearly the real initiators and main beneciaries of the accounting principles evolution towards higher prots
earned as early as possible in a process that will destruct the economy (Jorion, 2011, 2512). The mistake made by Berle
and Means was to believe that small restless shareholders would not have any control on the rms if they did not
actively participate in management or the general assemblies. It is true that they may not necessarily want to participate,
but not that they have no control. These shareholders can vote with their feet by selling their shares and, in case of
perpetual unsatisfactory business performance, use their rights to express their dissatisfaction and trigger a board
change. In that sense, Rathenau (1917) was correct where Berle and Means were not.

7.2. The consequences of past evolution for capitalism of the present and future

Our thesis is that, in spite of private capitalisms apparent economic successes, there is a growing fragility in this
production mode that could explain the gravity of todays nancial crisis.
Nineteenth century family business owners had a very strong economic and nancial position. They could manage
their rms without major risk because they relied on self-nancing. If there had been stress tests101 at the time, they
would have been considered to be excellent capitalists. Morally, the owners earned peoples respect, because they
risked their own capital and were generally fully responsible for their actions in a company with unlimited liability.
Managerially, they had a constant direct eye on the business market and adhered to the capital conservation principle
with severe depreciation rules.
Presently, at the end of a long process of destruction, all these characteristics have all but disappeared: debt nancing is
a major nancing type, equity is minimized in order to benet from the leverage effect and systematic depreciation rules
are going to be eliminated.
Limited liability, golden parachutes and state support in case of big bankruptcy are common patterns. Absentee and
impatient owners are the rule. Professional and organized restless shareholders have even succeeded in getting a kind of
minimal dividend guarantee to shift business risk onto salaried peoples shoulders. As pointed by Lordon (2000, 59) this is
against the spirit of traditional capitalism and contributes to capitalisms loss of legitimacy.
It seems that such an evolution could not happen without consequences for the capitalist production mode. This
system has progressively eliminated or at minimum reduced its security rules. The main economic crises marking our
history were undoubtedly connected to problems of excess debts and a lack of accountability. This is the product of the
evolution we have described over a period of 200 years. Merino and Neimark (1982) showed that, in response to the
1929 crisis, American legislators chose to privilege the mass participation of small shareholders, in the hopes that, through
shareholder democracy, they would exercise a real control on the rms against managers. The same philosophy prevailed
following the Enron scandal and subprime mortgage crisis with an attempt to raise the corporations accountability to
shareholders. These attempts are inspired by Berle and Means philosophy according to which todays small shareholders
have limited powers. But, contrary to their objective of improving the situation, promoting these shareholders
actually accentuated the crises since it accelerates stock market development. By denition, stock market players play a
(dangerous) game based on discounting dividend expectations. It is very dangerous to favor these kinds of players, who
transform capitalism in such a way that
capital development of a country becomes a by-product of the activities of a casino (Keynes 1936, 159). This is all the
more dangerous today, since they have much more power than their remote counterparts in the assemblies of limited
companies. Specically, they can impact the fate of millions of people with very small amounts of invested capital.102 But
they rule in a very different context.

As a matter of fact, static accounting was a kind of stress test.
As shown by Aglietta and Re be rioux (2004), the capital issued on stock markets remains a minor source of nancing but nevertheless awards
power. This contradiction is all the more blatant when one takes account of the practice of capital pay backs which grew during the nancial capitalism
22 J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx

The contrast between the power inherited from their ancestors and the disappearance of the other traditional features of
traditional conservative capitalism is striking. It seems evident, in this respect, that the last sub-prime crisis opened
many peoples eyes. The shocking display of irresponsible managers and capitalists of bankrupt banks beneting from
state support and the massive golden parachutes has been largely publicized and commented in the media. It
reinforced a sentiment of the injustice within the system for a lot of people. It is a fundamental element of fragility, a
much more important element than the other factors of fragility because it concerns the legitimacy of capitalism today.
Each crisis is a powerful eye-opener to the illegitimate feature of todays nancial capitalism.
Bryer says that big family-owners, such as Schneider in the 19th century, were semi-capitalists because they did not
apply Marxist accounting, a cost-based accounting type. On the contrary, it could be argued that these family owners
were full capitalists because they respected the rules of self-nancing, registered very prudent depreciations and were
fully accountable for their business performance and possible failure. If we accept Bryers idea of a pathological
capitalism, a type of destructive capitalism would have begun much earlier than at the end of the 20th century.
Specically, it would have begun with the rst big socialization of capitalism, represented by the massive arrival of
impatient, irresponsible shareholders near the end of the 19th century. But again, this pathology idea is not our
concept. For us, there is no pathological capitalism, only a system inevitably condemned by its growing illegitimacy.
This fragility will accelerate as a result of another new element. In the 19th century, natural capital was not scarce and
could be easily exploited. Now, with the environmental crisis, it will become increasingly more difcult to privilege
(ctitious) prot distribution at the expense of the conservation of natural capital: the happy times of exploiting nature
without limits may eventually be doomed. In a light of massive environmental problems, many criticisms have been
raised concerning the present conception of accounting and its underlying economics. About thirty years ago, Merino and
Neimark were already criticizing corporations accountability as favoring shareholders and they proposed a
modication to the corporate governance approach that would support employment and protect the environment (1982,
50). Many proposals of new conceptions for accounting, notably environmental accounting systems, have since emerged
(see for example Gray and Bebbington, 2003; Richard, 2012b; Rambaud and Richard, 2013). These have the potential to
serve as the basis for new accounting mentalities.

8. General conclusion: accounting and capitalism

Chiapello (2007) rightly emphasized the importance of accounting for the development of Marxs and Webers
conceptions of the transition from feudalism to capitalism. These two illustrious German researchers have made the
concept of the accountants capital a key element of modern capitalism.103 However, as a result of a lack of historical
distance, they were not able to see that modern capitalism has incorporated capital calculation in very different ways. In
the same way that double-entry bookkeeping is insufcient for characterizing modern capitalism, calculations with
capital and return on capital are insufcient for characterizing the diversity of modern capitalism. In its rst stage in the
19th century, modern capitalism was very prudent. Following these beginnings, it made the long march towards
recklessness. With the appearance of IFRS capitalist accounting, modern capitalism looks as if it has reached its supreme
stage of recklessness. This situation is potentially unsustainable for three principal reasons. First, the trend towards
eliminating systematic depreciation and recognizing potential prots in nancial accounting are the best way to induce
the destruction of nancial capital. Second, the limitations associated with the traditional accounting concept of capital
(in the sense of a resource to be conserved), notably the exclusion of human and natural capital from this systematic
conservation of capital, will likely render the continued conservation of nancial capital impossible in the future.
Third, the monopolization of power over rms by shareholders, who dominate employees, will become progressively
more unbearable, especially in the context of a growing illegitimacy of these shareholders. Keynes (1936, 376) proposed a
gradual and mild euthanasia of rentiers to solve the economic problems of capitalism. It appears now that the
solution is necessarily a more radical one in form of a new environmental accounting system based on a drastic
redenition of prot and power, in the frame of a new democratic governance of rms.

Appendix. Explanation of our choice in favor of Classical European Continental Accounting Theory

We have not chosen the Bryers approach for four main reasons.
First, while we do not deny the importance of feudal cash ow accounting during the transition period to modern
accounting, we are not interested in this accounting approach as we consider the mature stages of the development of
capitalism (after 1800) to have taken place at a time when this type of cash ow accounting was in decline. As shown by
Lemarchand (1993) in France, a country not particularly advanced with its industrial revolution compared with England, the use
of cash ow accounting and cash ow surplus as a means for measuring performance largely disappeared after the 1850s. It
was mainly restricted between
1800 and 1850 to the mining industry, which was generally controlled by the gentry. It has also been shown that, in the case of

Weber (1921, 111) considered calculation on the basis of capital (Kapitalrechnung) to be a fundamental element of the last step to capitalist
transformation (letzer Schritt zur kapitalistischen Umwandlung).
J. Richard / Critical Perspectives on Accounting xxx (2014) xxxxxx 23

Germany, cash ow accounting largely disappeared in the rst half of the 19th century (Richard, 2012a). Thus, feudal surplus and
cash ow accounting are excluded from our study.
The second reason is that our theoretical background is not in the Marxist accounting theory, but rather the CCEAT. As we
said, to the difference of Bryers theory, that mainly opposes a kind of Marxist interpretation of cost based accounting to a cash
ow feudal accounting, the CCEAT takes account of the static accounting type to interpret the development of nancial
accounting. The CCEAT is based on historical facts: as shown by Lemarchand (1993, 325326), on the basis of ample archival
material, there was a permanent opposition between a patrimonial [static] conception of accounting and a more dynamic one
in France throughout the 19th century. One more important point that cannot be developed here is that even concerning cost
based accounting there are some important differences between Schmidts theory of replacement cost accounting and the
Marxist theory of accounting as presented by Bryer.
The third reason is that we do not consider the FASBs or the IASBs accounting models in the same way as Bryer does. We are in
agreement with him that these models are based on totally different theoretical tenets than HCA and tend to destroy one of the
main tasks of traditional accounting: the systematic conservation of the nancial capital. But this is not a reason for us to
consider these models as pathological ones as compared to the non-pathological capitalist accounting, conceived along the
Marxist conception of accounting. When human beings are ill or dying this is not considered a pathological phenomenon. On the
contrary, it is a normal occurrence. We have shown in the last part of this article that todays futuristic accounting is condemned
to death. But this terminal stage is not a pathological one. It is only the last necessary stage of the complex ternary process
of modern capitalist accounting and nancial capitalist production mode.
The fourth and last reason for divergence is that we consider nancial accounting development to be within the overall scope
of capitalist accounting development. Today, the big national and multinational corporations generally have three differentiated
types of accounting: nancial, managerial, and tax accounting. Financial accounting fundamentally serves for dividend
distribution, tax accounting is used to determine the amount of tax payments, and managerial accounting is used for other types
of decision-making notably for determining the cost of products and controlling salaried people. As a result of distinct
evaluation rules, these three types of accounting each correspond to a distinct, unique reported prot. Our thesis is that in the
pre-capitalist era (pre-1800) this triadic system did not exist globally, and the companies of that era generally used
monistic systems of accounting (Richard, 1980). The most advanced systems of this period were even based on an historical
cost approach. But, with the socialization of accounting (increasingly more small impatient shareholders implicated in the
business) and the development of taxation, the monistic system became unbearable for socialized capitalist rms. In response
to impatient shareholders, large capitalist rms have separated nancial accounting from the objective, as has been shown, of
either avoiding the appearance of early prots (in the 19th century) or, on the contrary, of anticipating the maximum reported
prot (in the 20th century). Owing to accommodating tax authorities, a special form of accounting was created whose
valuation rules generally postpone the appearance of prots for tax purposes. The remaining third system, the managerial
one, mostly founded on a cost basis, will notably enable the rm to measure the cost of its products and functions. This
triadic system is the norm today and can be considered as an optimum from the point of view of the big multinational rms
(not speaking from transfer prices). Bryer thinks that any nancial accounting that does not rely on a (Marxist) cost-based
valuation is a pre-capitalist one. But it seems possible to consider a monistic system as a pre-capitalist one and that modern
capitalism is marked by separated accounting systems, notably a nancial accounting system whose specic valuation rules
are dictated by the question of dividends.


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