The field of accountancy and the term "aeeounting" can be defined as a profession.
Whilst the word accounting, in its simplest form is defined as "the process of recording, summarising, communicating and analysing the financial transactions of a business"
(Johal and Viekerstaff, 2012: 2), a further explanation of advanced accounting cites that it is handled by qualified accountants who possess designations such as CPA (Certified Public Accountant) in the United States (US), or CA (Chartered Accountant) in Canada and the United Kingdom (UK). All accounting designations are the culmination of years of study and rigorous examinations, combined with a minimum number of years of practical accounting experience. There are regulatory bodies that set aeeounting standards and the people that work for these regulatory bodies are accountants themselves with recognised professional qualifications. In terms of the profession of accounting, there are basic accounting principles that have been followed by accountants for many years and were well understood and accepted by practising accountants. In summary, the major prineiples applied by accountants historically were:
• prudence;
• accruals;
• going concern;
• eonsistency;
• substance over form, and
• separate determination.
The principles above were originally set out in Statement of Standard Accounting Practice (SSAP) 2 Disclosure o f Accounting Policies and in the Companies Act (1985).
However, Finaneial Reporting Standard (FRS) 18 Accounting Policies has since
replaced SSAP 2. Financial Reporting Standard 18 Accounting Policies has been mandatory sinee 2001 (Chopping, 2010) and sets out the principles to be followed in selecting accounting policies and the disclosures needed to help users to understand the accounting policies adopted and how they have been applied (Accounting Standards Board, 2000). FRS 18 in particular defines accounting policies and estimation techniques used in implementing those policies which should also be consistent with aeeounting standards. A business must also consider the appropriateness of aeeounting policies to its particular circumstances against the objectives of relevance, reliability, comparability and understandability. The objective of FRS 18 is that all material items are categorised and conform with giving a true and fair view, that the policies adopted are reviewed regularly to ensure they remain appropriate and that the financial statements and the information diselosed enables users to understand the aeeounting policies adopted and how they have been implemented (Aeeounting Standards Board, 2000). Accounting policies are coneemed with;
i) Recognising,
ii) Selecting measurement bases for, and
iii) Presenting assets, liabilities, gains, losses and changes to shareholders' funds.
The accounting policies do not include estimation techniques but sueh techniques are doeumented within FRS 18 to implement the measurement aspects of accounting policies. Estimation techniques include methods of depreeiation and estimating the proportion of trade debts that will not be reeovered whilst measurement bases can be adopted to accommodate historical cost systems (Accounting Standards Board, 2000).
Put simply, accounting policies determine which facts about a business are to be presented in financial statements, and how those facts are to be presented whilst estimation teehniques are used to establish what those facts are. Within FRS 18 are two concepts which have a particularly prominent role in this particular standard. These are the concepts of going concern and accruals, defined in FRS 18 below;
"The going eoncem assumption determines the perspective from which the objectives and eonstraints set out in the FRS should be viewed, particularly with regard to measurement. The accruals concept lies at the heart of the definitions of assets, liabilities, gains and losses and changes to shareholders' funds and both notions play an important role in the reeognition of those items" (ASB, 2000; 60).
Chopping (2010) appears highly critical of FRS 18 and the concept of going concern and states that FRS 18 continues to differ from the Statement o f Principles making no attempt to provide anything approaching a theory of accounting and is solely intended to provide guidance on some basic ideas that should be used in preparation of financial statements. Furthermore, the standard itself makes little attempt to justify the use of these eoncepts and that in direct relation to going eoncem there is no strict definition offered, nor does it address this issue in terms of concepts or principles (Chopping, 2010). International Generally Accepted Aeeounting Principles (GAAP) (2005) also outlines that there is no guidance in the standard concerning what impact there should be on the financial statements if it is determined that the going concern basis is not appropriate and that, accordingly, entities will need to consider carefully their individual circumstances to arrive at an appropriate basis. This argument is mirrored in the literature relating to this topic. Indeed, the going eoncem assumption is one of the most difficult and complex decisions faced by the auditing profession (Louwers, 1998).
Despite such difficulties, it is one of the most important accounting concepts as all entities must fulfil the going eoncem assumption to remain in business. As such, it is fundamental in historical basis accmal accounting systems. Operationally, the going eoncem assumption means that an entity is expected to continue in operation for the foreseeable future and will be able to realise assets and discharge liabilities in the normal course of business (Martin, 2000).
A number of studies have attempted to evaluate going eoncem by using multi
discriminant analysis to analyse the assessment of business entities as going concems (see for example Altman and McGough, 1974; Koh and Killough, 1990; Mutchler, 1985; Zmijewski, 1984) and more recently data mining techniques (applying neural networks and decision tree analysis) to prediet going eoncem (see for example Koh and Low, 2004; Martens, Bruynseels, Baesens, Willekens and Vanthienen, 2008). Whilst a detailed review of these papers is beyond the scope of this chapter, and indeed the thesis, there is one further paper that does relate to the importance of accounting policies and the principle of going eoncem. Kleinman and Anandarajan (1999) analysed the usefulness of off-balance sheet variables as predictors of auditors' going eoncem opinions and their findings are particularly insightful as the approval of going eoncem still rests with the auditor who will base decisions on a number of pieces of qualitative information despite what the financial data suggests. For example, a company can have extremely poor financial perfonuance in relation to absolute figures and ratios but may
still have the ability to generate significant revenue or may be in a period or debt restructuring which allows it to fulfil the going concern opinion. An example such as this reflects the subjectivity involved in accounting theory and practice despite it being a recognised profession with professional governing bodies. The rest of the chapter will now explore some of the issues present in accounting with reference to the basics of accounting policies and providing a true and fair view. Firstly, it is important to note that from a sporting perspective, literature written directly in relation to accounting policies and professional sport remains rare. However, the fact remains that any changes to accounting policies and the regulatory framework will directly impact on the business performance of professional team sports. Indeed, in the UK, all companies, including professional sports teams, are required to produce financial statements consistent with the regulatory framework in place. However, there has previously been, and still remains, problems with the way in which financial performance is reported in professional team sports which is linked to the inconsistencies in accounting policies and the contested nature of the framework that will be diseussed in this chapter. By way an example, there is an interesting quote by a fonner president of the Major League Baseball (MLB) team Toronto Blue Jays:
"Under generally accepted accounting principles I can turn a $4million profit into a $2million loss, and I can get every national accounting firm to agree with me"(Howard and Crompton, 2002: 150).
It must also be noted that this is not an isolated case and that it is also not a scenario that is exclusively confined to professional team sports. Indeed, the true and fair view concept that has been the over-riding requirement in the UK since 1947 was partly formulated following the 'Royal Mail Steam Packet Company' case (Hastings 1962;
cited in Alexander, 1999). In this scenario, the published aceounts for Royal Mail in 1926 showed a profit of £430,000. The internal accounts for the same year showed a loss of around £300,000 and the difference was achieved by crediting the profit and loss balance with £750,000 out of secret tax reserves (published accounts at this time did not prescribe a profit and loss account). In this instance, the auditor (and the chairman) was accused of producing a fraudulent balance sheet (Alexander, 1999). In response to this, the auditor's line of defence was simple:
"The defence must necessarily turn upon the one question, whether or not the words used by (the auditor) were well recognised in accountancy circles and were sufficient to give notice of the manner in which the trading loss had been turned into an apparent profit. Whether or not this accountancy practice was to
be commended was, in our view, wholly immaterial. The charge we had to meet was a charge of dishonesty, and if it could be shown that (the auditor) had merely adopted the customary practice, it would be very difficult to accuse him of dishonesty" (Hastings, 1962: cited in Alexander, 1999: 242).
Subsequently, the auditor was found not guilty as expert accounting witnesses testified that, at the time, such wording was customary practice (Alexander, 1999) and the wording of the quote is very similar to the Zimbalist example of the MLB team. As such, the inconsistencies surrounding accounting frameworks and concepts are laid bare here in two examples that are many years apart in terms of time proving that very little has ehanged in the sense that the nature of financial reporting is still widely contested.
With reference to the sporting example, many of the creative accounting examples have been linked to the valuation of player contracts. It is around this subject where most of the literature lies in relation to accounting policies and professional team sports (see for example, Amir and Livne, 2005; Forker, 2005; Morrow, 2006; Pavlovic, Milacic and Ljumovic, 2014; Rowbottom, 2002). A number of these papers are discussed in more detail in the ensuing literature review chapter (see section 3.3.1; p.50) but it is clear that the introduction of FRS 10 - Goodwill and Intangible Assets - in 1998 has since become one of the single most important changes to the world of sport business as it meant that the capitalization of transfer fees is now mandatory for English football clubs.
Previously, some clubs began to develop ways of including the eosts and purchases of players without valuing them on the balance sheet, despite the fact that they were valuable assets, though this was done internally and without direction from the Accounting Standards Board (ASB). The introduction of FRS 10 provided consistency in the area of intangible assets and comparisons between the financial results of professional sports teams can be now be undertaken with greater eonfidence (Wilson, 2011).
It is also important to note, however, that the same ineonsistencies found in the setting of accounting standards is also true for the discussion around FRS 10 and valuing the contracts of football players. Indeed, Pavlovie, Milacic and Ljumovic (2014) conclude their paper by stating that controversies surrounding the accounting treatment of the transfer fee are the consequence of numerous uncertainties that are present in the football industry. These include uncertainties as to whether or not a player will be alienated before the end of the contract, what his sell-on transfer fee would be, and whether the player makes a contribution to the sporting and financial results and/or
success of the club. As a result of these uncertainties, Pavlovic, Milacic and Ljumovic (2014) argue that all accounting policies therefore have their weaknesses.
One of the ways in which the regulators have tried to resolve some of the weaknesses is through the production of an agreed coneeptual framework. However, this framework has also been critiqued within the literature surrounding this topic. International GAAP (2005) state that, in general terms, a conceptual framework is a statement of generally accepted theoretical principles which form the frame of reference for a particular field of enquiry. In terms of financial reporting, these theoretical principles provide the basis for both the development of new reporting practices and the evaluation of existing ones.
Since the emphasis of financial reporting is on the provision of information that is useful in making business and economic decisions, a conceptual framework will form the theoretical basis for determining which events should be accounted for, how they should be measured and how they should be communicated to the user. Therefore, a conceptual framework for financial reporting must be substantially practieal in its application (International GAAP, 2005). CIMA (1999) also provides a definition of what a conceptual framework is;
"A eonceptual framework is a constitution, a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function and limits of financial accounting and statements."(CIMA, 1999: 585).
However, the concept of a conceptual framework has also been contested in the literature surrounding this topic. In one early paper, Hines (1991) labels the Financial Accounting Standards Board (FASB's) conceptual framework as a 'functional failure'.
The work of Hines (1991) suggests that the reason for the problems encountered by the FASB in its conceptual framework project (and those encountered in other coneeptual framework projects), is that the FASB conceptual framework is elaborated around a highly problematic conception of the relationship between finaneial aeeounting and economic reality. The view of Hines that the meaning and significance of conceptual framework projects is not so much functional and technical, but rather social and cultural is shared by a number of other authors (see for example, Boland, 1989; Burrell, 1987; Hopwood, 1990; Miller and O'Leary, 1987; Richardson, 1987; Tinker, 1988;
Willmott, 1986). All of these authors argue that financial accounting practices are implicated in the construetion and reproduction of the social world. Furthermore, it would seem to follow, that conceptual framework projects similarly play a part in the
process of the social construction of reality (see for example, Booth and Cocks, 1989;
Hines, 1989).
By way of an example to illustrate this relationship between financial accounting and economic reality, it is worth considering the objectives of financial reporting as defined within the conceptual framework. As previously stated, the conceptual framework states that the principal objective of financial accounting is to provide useful information for decision making. Furthermore, the framework provides useful information that is relevant and reliable, and such reliability embraces representational faithfulness, verifiability and neutrality (Hines, 1991). It is argued, by Hines (1991), that the ontologieal assumption underpinning the conceptual framework is that the relationship between financial accounting and economic reality is a unidirectional, reflecting or faithfully reproducing relationship. That is, economic reality exists objectively, intersubjectively, concretely and independently of financial accounting practices and financial accounting reflects, mirrors, represents, or measures this pre-existent reality (Hines, 1991). One of the main arguments here is that accounts, and the numbers contained within them, can be arithmetically manipulated.
Indeed, this is one of the main concems discussed in many papers that discuss the legitimacy of financial reporting. Suchman (1995), for example, discusses legitimacy in the context of organisational legitimacy, rather than practices. Suchman argues that the capacity of accounting practices to link social values to economic actions makes those actions legitimate (Richardson, 1987) and thus confirms legitimacy on organisations within which values are enacted. In this sense, the questions underlying the acceptance of fair value accounting or any other single basis as the principle basis for financial reporting is not just whether fair value has legitimaey as a practice but who and what is legitimised in this process (Mitchell, Agle and Wood, 1997). Following Suchman (1995), a practice may be seen to possess full legitimacy once it is institutionalised - taken for granted - which in Scott's (2008) term implies a high degree of eognitive cultural acceptance, where any other practice becomes 'literally unthinkable', the possibility of dissent submerged. Georgiou and Jack (2011) argue that no accounting basis has ever yet reached this level of cognitive legitimacy.
Power (2010) offers a similar thought in relation to the legitimacy of financial reporting.
The sociology of reliability to emerge from these arguments suggests that subjectivity and uncertainty can be transformed into acceptable via strategies whieh appeal to
broader values in the institutional environment which even opponents must accept.
Accounting 'estimates' can acquire authority when they come to be embedded in taken for granted routines - hence the significance of the International Valuation Standards Council (IVSC) and similar bodies. So long as a sufficient consensus holds, and asset markets are orderly and generally liquid, then the circle which links models and markets is virtuous and broadly performative (Power, 2010). In this way fair values, for all their fictionality and apparent intellectual incoherence (Ravenscroft and Williams, 2009) could define what it is to be reliable at a point in time.
Elsewhere, Nobes (1998) expands on this argument and notes that previous writers have suggested a number of other reasons for international differences in financial reporting.
Many of these factors appear to be vague but two factors do stand out as explanations for financial reporting differences across the world (Nobes and Roberts, 2000). These are colonial influences and corporate financing. Most countries exhibit accounting systems imposed by or copied from other influential countries. Thus, colonial or cultural influence overwhelms all other faetors, sometimes leading to apparently inappropriate financial reporting (Nobes and Roberts, 2000). In a more recent paper, Nobes (2006) offers further comment on this when offering suggested reasons for the differences between the German and UK national 'accounting systems'. Nobes (2006) states that such differences may be attributed to differences in financing systems, legal systems and tax systems in Germany and the UK. Zysman (1983) proposes three types of financing system: capital market (e.g. UK, US), credit-based governmental (e.g.
France and Japan), and credit-based financial institutional (e.g. Germany). Nobes (1988) proposes two types: shareholder 'outsiders' (e.g. UK, US) and bank/state/family 'insiders' (e.g. Germany, France). More recent research (e.g. Franks and Meyer, 2001) is consistent with a continued but less pronouneed diehotomy. Nobes (1998) suggests that, unless a country is culturally dominated by another, its financing system is the main driver of its financial reporting system. Furthermore, there is now academic evidence to support this elaim (see for example, Sellhom and Gomik-Tomaszewski, 2005; Tarca, Moy and Morris, 2005; Xioa, Weetman and Sun, 2004). It is clear that there have been reservations, certainly in aeademic circles, surrounding the production of a conceptual framework for accounting. Of greater importance, however, is the discussion surrounding fair value accounting (FVA) which replaced historical cost accounting (HCA) in 2005.