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International accounting regulation by the united nations a

  1. 1. International accounting regulation 593 International accounting regulation by the United Nations: a power perspective Sheikh F. Rahman Swinburne Graduate School of Management,Swinburne University of Technology, Hawthorn, Victoria, Australia Introduction The use of power perspectives in the political analysis of accounting regulation is a comparatively recent phenomenon. Nevertheless, accounting researchers appear to have accepted the notion that accounting standard setting and regulation reflects a social and political process (see, as examples, Booth and Cocks, 1990, 1991; Choi and Bavishi, 1982; Choi and Mueller, 1978, 1984; Gerboth, 1973, 1982; Hope and Briggs, 1982; Hope and Gray, 1982; Horngren, 1972, 1973, 1976; Hussein and Ketz, 1980; Kelly-Newton, 1980; Selto and Grove, 1983). However, while much of the relevant literature has been successful in identifying the critical research issues, establishing the political nature of the process, and identifying essential “actors” and “lobbyists”, they have failed to employ any rigorous integrated theoretical framework of the political process. Hussein and Ketz (1980) and Hope and Gray (1982) pose two noteworthy exceptions. The former used an elitist model of power to test the hypothesis that the “Big Eight” (now “Big Six”) accounting firms in the USA were the ruling elites of the Financial Accounting Standards Board (FASB). They discovered that the “Big Eight” have no monopoly power over the FASB and therefore concluded that accounting standard setting process was pluralistic[1]. Hope and Gray (1982) go further and attempted to apply Dahl’s pluralist power framework to analyse the accounting policy making process of the (UK) Accounting Standards Committee (ASC). Specifically, they examined the lobbying behaviour of outside pressure groups and the impact these parties had on the ASC’s policy decisions regarding Research and Development (R&D) expenditures. They concluded that a substantial shift in the ASC’s position on R&D was caused by the exercise of power by specific pressure groups. A limitation of Hope and Gray (1982), however, is that the authors did not analyse the behaviour of actual participants in the decision-making process whilst the decisions were being made. This is in fact an explicit requirement of Dahl’s methodology of power. Moreover, they questionably assumed that the The author gratefully acknowledges the helpful comments by Peter Booth, Bob Scapens, James Guthrie, Tony Hope, Rob Gray, Jill McKinnon, Stewart Clegg, Stewart Jones and two anonymous reviewers of the paper. Accounting, Auditing & Accountability Journal, Vol. 11 No. 5, 1998, pp. 593-623, © MCB University Press, 0951-3574 Submitted July 1993 Revised August 1997 Accepted December 1997
  2. 2. AAAJ 11,5 594 ASC and its members were value neutral and objective. For example, they assumed that the ASC did not exercise influence on peers and that pressures on the ASC emanated from forces outside this organization (Hope and Gray, 1982). Thus, notwithstanding some significant findings, their research has left a noticeable gap in the study of power in accounting regulation. It is also noteworthy that Hussein and Ketz (1980) and Hope and Gray (1982) have examined the standard setting process at a national level. At an international level the political process, and the modelling of power relationships is complicated because of the involvement of transnational corporations (TNCs). These entities have caused much controversy on the international stage (Barnett and Mueller, 1974; Bhagwati, 1967, 1969), particularly in respect of their financial reporting practices, the conflicting interests of various nation states (Capithorne, 1971; Kussi, 1979; Mueller and Morgenstern, 1974), and the sheer number of international bodies (e.g. the IASC, the OECD, UN) with varying constituency and diverse objectives, engaged in their regulation (Gray et al., 1981). While the issue has been largely neglected in the literature, efforts to regulate standard setting at an international level have been significant. A number of international organizations, such as the OECD, the IASC and the UN Commission for Transnational Corporations have been involved in the standard-setting process for a significant period of time. The political character and importance of accounting standard-setting for TNCs has also been widely acknowledged (Gray et al., 1981; Stamp, 1978, 1979), but there is little or no available research which has formally examined the process by employing a rigorous political methodology. The purpose of the present study is to develop the existing power literature by examining the political nature of the standard setting process at an international level through the use of an explicit model of power. The international arena for TNC standard setting: background issues Specifically, this paper examines the efforts and involvement of the United Nations in TNC accounting regulation since the inception of the issue in the 1970s. The UN Charter offers equal voting rights to each member nation. The UN General Assembly (GA) and its principal organ, e.g. the ECOSOC (Economic and Social Council), operate on the basis of one-nation one-vote, with decision making by simple majority (UN Charter, Article 61). The UN Security Council is an exception to this rule where five large military powers possess “veto” rights. In the late 1970s and 1980s, an overwhelming majority of member nations attempted to persuade the UN to prescribe financial disclosure rules for TNCs (as a part of the broader UN Code of Conduct for TNCs). These “change seeking” nations demanded that the UN implement binding regulations via national legislation. The driving force behind increased regulation of TNCs related to a number of alleged culpable financial and commercial practices perpetrated by these entities across national borders[2]. Another major spur for
  3. 3. International accounting regulation 595 international action on TNCs flowed from the publication of a US Senate Sub committee report (in 1971) which confirmed the alleged involvement of one of the largest multinationals in destabilising the democratic government of Salvador Allende of Chile[3]. In the July 1972 meeting of the ECOSOC[4], the Chilean representative demanded that the UN should commission a high ranking independent expert group to conduct a comprehensive investigation of all supranational corporations. Simultaneous pressures from other developing nations and support from many developed nations (e.g. Canada, Sweden, USSR) resulted in the ECOSOC convening a “Group of Eminent Persons” (GEPs) to study the role of TNCs and their impact on economic development and international relations, particularly to developing countries. This event formally demarks the beginning of efforts by the UN to initiate regulations over the accounting practices of TNCs. In contrast, a small number of developed nations have attempted to defend the status quo and provided considerable support to the corporate anti- disclosure lobbies. These nations have resisted all attempts to introduce any significant positive accounting regulation on reporting by the TNCs. It is noteworthy that despite intensive UN negotiations over an 18-year period, the change-seeking nations did not succeed in carrying or imposing their accounting reform agenda. Surprisingly, the heavily outnumbered minority defenders of the status quo prevailed in the decision-making process. The apparent failure of an overwhelming majority of member nations, belonging to an ostensibly democratically constituted organization (i.e. the UN), to effect a desired change presents an interesting paradox which deserves serious examination. Model of power to explain failed UN attempts to regulate TNCs An attempt is made in this paper to explain the paradoxical nature of failed UN attempts to regulate TNCs by invoking a political model of power. Furthermore, the present study attempts to systematically analyse the behaviour of internal participants and outside pressure groups in the decision-making process while the deliberations were in progress. The most significant problem in applying a model of power, particularly in accounting investigations, is that the concept of power still remains elusive and controversial in the political science literature. There are a number of competing theories and concepts of power vying for supremacy. Some political theorists (for example, Dahl, 1957, 1958, 1961, 1966; Polsby, 1960, 1963, 1968; Wolfinger, 1971) describe power as the winning over opposition, or a “zero-sum” game. While others (e.g. Giddens, 1968, 1979, 1981, 1984; Parsons, 1957, 1963) view power as serving collective goals or a “positive-sum” game. Some researchers (Dahl, 1966, 1968; Polsby, 1960) emphasise actions and behaviours of persons or groups and decision outcomes for researching power, while others (Bachrach and Baratz, 1962, 1963; Clegg, 1989; Giddens, 1968, 1984; Lukes, 1974) emphasise social and political systems and structures as appropriate starting points for studying power. The approaches to the study of power, thus, reflect
  4. 4. AAAJ 11,5 596 the prevalence of two theoretical and methodological frameworks: the structural theories (Clegg, 1989; Giddens, 1968, 1979, 1981, 1984; Lukes, 1974; Parsons, 1957, 1963) and the action (or coercion) theories (Bachrach and Baratz, 1962, 1963; Dahl, 1961, 1966, 1968; Frey, 1971; Merelman, 1968; Polsby, 1960, 1963, 1968; Wolfinger, 1971). Dahl’s (1957) work is emphasised in the present study, not only because his work constitutes a landmark in the analysis of power (Clegg, 1989, p. 11), but because his decisionist methodology is most appropriate to the events, objectives and empirical research data examined in this study. Dahl (1957) defines power as something (some resources, possessions, or advantage) a person (say A) has over another individual (say B) “to the extent that A can get B to do something (some action or inaction) that B would not otherwise do” (p. 203). It is noteworthy that Dahl espoused the intellectual position of behaviourism in the analysis of power. His focus is on observable behaviour – the results of action. Dahl’s model of power refutes any reference to the intentions the actors or agents might have. Power is seen to be exercised by one party (A) when the results of actions, decision, and actual behaviour show that A was able to get B to do certain things which B would not otherwise have done. The very notion that “B might not otherwise have done” indicates a disagreement and conflict of interest between A and B. Also, such conflict should be “overt” (i.e. observable) about some issues on which some action (or decision) is taken. According to this action-oriented episodic concept of power (Clegg, 1989) the focus of interest is the group decision-making process. Here, attempts are made to win over conflicts or to overcome oppositions to ensure that one’s objectives are embodied in the decisions made in the organization. An organization is perceived as an ongoing process of human interaction producing a stream of outcomes in the pursuit of certain objectives (Abell, 1975, p. 120). Power can usefully be studied through an examination of the decision-making process, focusing upon issues over which there is a “manifest” conflict of interest. Dahl’s emphasis on “conflict” and “decision” originates from his deliberate attempt to distinguish between “potential” and “actual” power – or more specifically between its “possession” and its “exercise”. The exercise of power is central to Dahl’s theory. This should be contrasted with the “élitist” theory of power (Hunter, 1953; Mills, 1956), which is concerned with identifying who has power or who are “reputedly powerful” (Lukes, 1974). According to the élitist model, political power is concentrated in the hands of a few “élites”, who almost inevitably succeed in “getting their way” on all important issues. Conflicts (if any) are “always” managed by the élites in such a way that they produce outcomes favourable to their interests. Distribution of power, in this model, is static and stable over time and across space and issues (Whitt, 1979). This postulate of élite power is emphatically rejected by Dahl (1958) and Polsby (1960, 1963). They argued that everyone has a certain amount of potential power and almost an equal chance of influencing decision making. The study by Hussein and Ketz (1980) corroborates this view of pluralism.
  5. 5. International accounting regulation 597 Hence, authors such as Dahl and Polsby have acquired the title “pluralists”. To theorists such as Dahl it is the actual deployment and exercise of (or lack of) that potential power in the decision process which makes a difference. The empirical attention in this pluralist research is on issues, conflicts and decision outcomes. As power is revealed by participation in decision making it can be analysed only after “careful examination of a series of concrete decisions” (Bachrach and Baratz, 1970, p.6). This examination of decisions involves a careful observation and analysis of the behaviour of participants in the decision-making process. Observable changes in behaviour, shifts in policy and position with respect to others provide important empirical evidence. The researchers’ concerns (Dahl, 1961, p. 113), therefore, are: (1) to select for study a number of “key” decisions[5]; (2) to identify the people or groups who took active part in the decision- making process; (3) to obtain a full account of their actual behaviour while the policy conflict was being resolved; and (4) to analyse and determine the specific outcomes of the conflict as embodied in the decision(s) taken. The specific application of Dahl’s methodology in the context of empirical evidences of UN efforts to regulate TNCs is explored in greater detail at a later stage in this paper. UN efforts to regulate TNCs: structure of regulation and chronology of events This section briefly explains the composition, powers and jurisdiction of relevant UN administrative appendages that are usually available for resolving international economic and social issues. This is followed by a brief chronology of events leading to attempted efforts by the UN to regulate TNCs since the 1970s. A discussion of these issues provides relevant detail necessary for understanding the political nature of activities within the UN and for applying Dahl’s methodology of power. The ECOSOC took the initiative in the accounting regulation of TNCs because under the UN structure the ECOSOC is the principal organ which is responsible for handling issues of economic and social importance. During the 1970s and 1980s the ECOSOC had set up a number of bodies within the UN structure to handle regulatory matters relating to TNCs. Figure 1 displays the relevant machinery within the UN system that was directly involved in the area of regulating the TNCs. As displayed in Figure 1, the establishment of the Commission for Transnational Corporations in 1975 was central to many subsequent regulatory developments. The Commission for TNCs had established a number of consecutive accounting expert groups in order to set reporting and disclosure standards for TNCs[6]. The recommendations of these groups could have been
  6. 6. AAAJ 11,5 598 Figure 1. The ECOSOC and relevant UN bodies involved in the regulation of accounting and reporting by trans- national corporations UN General Assembly 159 members (1990) Economic and Social Council (ECOSOC) 54 members UN Commission for Transnational Corporations 48 members Centre for Transnational Corporations (CTC) The Secretariat of the Commission for TNCs Intergovernmental Group on Code of Conduct for TNCs January 1977-1988 Group of Experts on International Standards of Accounting and Reporting (GEISAR) (1976-1977): Report Published: October 1977 The Ad-hoc Intergovernmental Group of Experts on International Standards of Accounting and Reporting (The Ad-hoc Group) 1979-1982 Report Published: March 1984 Intergovernmental Group of Experts on International Standards of Accounting and Reporting (ISAR Group) 1983-1993 Report Published – annually UN Commission for Transnational Corporations Dissolved 1975 1977- 1993 1976-1977 1979-1982 1983-1993
  7. 7. International accounting regulation 599 ratified by the Commission and passed on to the ECOSOC for implementation by member governments via legislative or other appropriate measures. But the Commission on TNCs found it difficult to make a decision and the process had to be repeated. The chronology, including a brief account of significant events is presented below. Convening the group of eminent persons As mentioned earlier, the ECOSOC had appointed a 20-member group of eminent persons (GEPs) in 1972 to investigate the matters related to TNCs. The appointment of the GEPs is considered to be the most significant event instigated by the UN in the (attempted) regulation of TNCs. While the nations represented in the group were elected by the ECOSOC, the UN Secretary General personally selected the members to form the group[7]. The group consisted of 20 eminent individuals taken from various geographical areas and diverse professional backgrounds. Their countries of origin were: Algeria, Argentina, Brazil, Canada, Chile, France, West Germany, India, Indonesia, Ivory Coast, Japan, The Netherlands, Sweden, Switzerland, Tanzania, UK, USA, USSR, and Yugoslavia[8]. The GEPs conducted its own investigations and deliberations including two public hearings[9] of CEOs of Multinationals, government and trade union officials, and academics. The GEPs’ report confirmed, inter alia, the view that there was a serious lack of financial and non-financial information necessary to effectively assess the commercial and operating affairs of TNCs (UN, 1974, p. 55)[10]. The GEPs emphasised the pressing need for a uniform and comparable accounting system and disclosure requirements for TNCs, irrespective of national origin, which would disclose necessary economic and social information to interested parties (UN, 1974, p. 95). The GEPs recommended that a Commission for Transnational Corporations and an Information and Research Centre on TNCs be established under the ECOSOC. The GEPs also recommended that an expert group on international accounting be convened by the Commission for TNCs to formulate an international system of standardised accounting and reporting for TNCs (UN, 1974, p. 95). The group’s report (UN, 1974) was the source of many subsequent structural changes within the UN concerning the regulation of TNCs. For example, The UN Commission on TNCs was established in 1975 with the status of a standing intergovernmental body of the ECOSOC. The Commission consisted of 48 members elected (on a three-yearly rotation basis) by the ECOSOC on the basis of predetermined geographical and eco-political allocations (that mirror the UN membership), such as: Africa: 12; Asia: 11; Latin America: ten; Developed market economy countries of Western Europe, North America and Oceanic: ten; and Socialist countries of Eastern Europe: five[11]. The first UN group of accounting experts (the “GEISAR”) The Commission on TNCs immediately (1976) convened a group of experts on international accounting and charged it with the responsibility of formulating
  8. 8. AAAJ 11,5 600 international accounting and reporting standards for TNCs. This expert group is known as the UN Group of Experts on International Standards of Accounting and Reporting (also known as the “GEISAR”). This expert group consisted of 14 members of diverse nationality and profession[12]. The countries represented in the group were selected by the Commission on TNCs but the members were selected and appointed personally by the UN Secretary General. The members in the group acted and deliberated in their individual capacity (as opposed to government nominees of respective countries)[13].The countries represented were: Algeria, Argentina, Brazil, France, West Germany, India, Iran, Japan, The Netherlands, Philippines, Poland, Sweden, Tanzania and the USA[14]. After two years of deliberations (during 1976-1977) in four sessions, this group unanimously recommended a list of minimum items of disclosure for TNCs (UN, 1977), which required, among others, the following from the TNCs: (1) Consolidated group financial statements for the enterprise as a whole. Such statements should include all undertakings (incorporated or not) under the group’s control irrespective of their legal form and ownership. (2) Separate financial statements for the parent company and for each individual subsidiary company to be published at each subsidiary level, and not at the group headquarters level. (3) Disclosure of quantified data on related party transactions not eliminated in consolidation. (4) Use of “equity method” in accounting for associated companies. (5) Disclosure of segmental data by Line-of-Business and Geographical regions by all TNCs. (6) Disclosure of the identity of all subsidiaries and associated companies of transnational group in the group financial reports and identity of parent company by each subsidiary. (7) Disclosure of relevant non-financial information in specified areas such as labour and employment, production, investment programs, organizational structure and environmental measures both at the subsidiary and the group level. (8) Publication of a statement of sources and application of funds, which should be given the same status as the balance sheet and income statement. Of special far-reaching significance to the TNCs was the requirement to include all affiliates in consolidated reports for the group of entities as a whole and the publication (of such a report) at each subsidiary level in addition to reports for the subsidiary itself. The requirements for segmental reporting and non- financial disclosure were also formidable[15]. These recommendations were unanimously adopted and were supposed to be implemented by the ECOSOC after ratification by the Commission on TNCs.
  9. 9. International accounting regulation 601 Indeed, the UN Secretary General (Kurt Waldheim) had envisaged its implementation through an intergovernmental agreement and legislative measures and recommended that the UN should start work in that area. (UN, 1977, p. 17). The turning point The Commission on TNCs, considered the report of the GEISAR and the recommendations of the UN Secretary General at its fourth session (16-27 May, 1978). However, it failed to endorse the report despite fervent debate on various issues[16]. The developing nations supported the report and they had an absolute majority in the Commission. Surprisingly, the report failed to gain approval from the Commission. Instead, the Commission on TNCs recommended that the ECOSOC establish a new “intergovernmental” group to work towards an international agreement in the field of standards of accounting and reporting. Unlike the GEISAR, the new group was to be composed of experts nominated by the respective governments of the countries selected by the ECOSOC[17]. The new 34-member Ad hoc Intergovernmental Group of Experts on International Standards of Accounting and Reporting (also called the Ad hoc IWGEISAR or simply the “Ad hoc Group”) was established in 1979. The following countries were selected by the ECOSOC: Algeria, Argentina, Brazil, Canada, Cyprus, China, Dominican Republic, Egypt, France, Federal Republic of Germany, India, Iran, Italy, Japan, Liberia, Libya, Mexico, Morocco, Nigeria, Norway, Pakistan, Panama, Peru, Philippines, Poland, Swaziland, Switzerland, Tunisia, Uganda, UK, Ireland and the USA[18]. According to the mandate set out in the ECOSOC resolution 1979/44 the terms of reference of the Ad hoc Intergovernmental Group were to: (1) review the 1977 report of the GEISAR; (2) consult with other international accountancy bodies (implying the IASC) and other interest groups (e.g. the ICC/IOE) on matters relating to development of international standards of accounting and reporting; (3) formulate priorities of information needs of home and host countries, particularly those of developing countries; and (4) submit its report to the Commission on TNCs on further steps to be taken in the field of international standards of accounting and reporting. It is significant that the terms of reference of the new Ad hoc Group placed more emphasis on “reviewing” papers and works of other bodies, consulting with interest groups, and “formulating priorities”, rather than formulating standards for accounting and reporting by TNCs which was the focus of the GEISAR report and indeed the principal objective of the United Nation’s involvement in this area. As will be seen later, this change of policy direction by the UN was a major turning point which shaped the future outcomes on the TNC issue at the UN.
  10. 10. AAAJ 11,5 602 In short, it is quite clear that from the time of the formation of this group, the United Nations has been effectively reduced to a discussion forum rather than an international accounting standard setting body. Dahl’s analytical framework The previous section has presented a brief account of events and outcomes relevant to the attempts by the UN to regulate the TNCs. The political nature of the process and outcomes is obvious. What is not immediately understandable is the apparent failure of the majority view to prevail in the voting and decision- making process. A more rigorous political analysis is, therefore, necessary to understand this paradox. A systematic study of power is essential in a political analysis because very often political outcomes cannot be explained via democratic values alone (Hope and Gray, 1982). Emphasising the study of power in political analysis Dahl (1968) puts forward an obvious question: In a political system where nearly every adult may vote but where knowledge, wealth, social position, access to officials, and other resources are unequally distributed, who actually govern(s)? (p. 1). As a source of power, Dahl puts voting strength in a subordinate position to that of some material possessions. In his study of community power Dahl (1957) dispels the myth of voting powers and draws attention to the study of other earthly possessions as more effective sources of power. Expanding the parameters of Dahl’s query to include the international community as a whole and the UN, in particular, the question may be paraphrased and put as: In an international community (e.g. the UN) where nearly every independent nation may vote but where technology (i.e. knowledge), capital (i.e. wealth), international position (military and diplomatic), access to international organizations (e.g. the Word Bank, the IMF etc.) and other resources are unequally distributed, who actually govern(s)? The UN, being the largest international democratic organization, presents a unique opportunity to address the above question. In fact, the case of accounting regulation replicates power struggle issues which have existed within the UN in its other regulatory endeavours (such as, the UNCTAD, UNCLOS, Laws Against Corrupt Business Practices, UN Nutrition Standards for Artificial Baby Foods etc). The application of Dahl’s methodology (Dahl, 1961, p. 113), requires the researcher: (1) to select for study a number of “key” decisions[19]; (2) to identify the people or groups who took active part in the decision- making process; (3) to obtain a full account of their actual behaviour while the policy conflict was being resolved; and (4) to analyse and determine the specific outcomes of the conflict as embodied in the decision(s) taken.
  11. 11. International accounting regulation 603 At an operational level the research methodology starts with selecting some key decisions and determining for each decision, which participant(s) had initiated alternatives that were finally adopted, which participant(s) had vetoed alternatives initiated by others, and which participant(s) had proposed alternatives that were turned down. These outcomes can then be tabulated as individual (or group) “successes” or “defeats”. The participants with the greatest proportion of successes out of the total number of successes are then considered to be the most influential (Polsby, 1963, p. 113). In this action oriented (decisionist) model, power is defined most crudely and simply as the ability to prevail in conflict situations to overcome obstacles (Deutsch, 1966). Hence, an attempt is made to study specific outcomes in order to ascertain who actually prevails in decision making. The theory entails identifying who prevails in decision making, which is the best way to determine which individuals and/or groups are more powerful because direct conflict between actors presents a situation most closely approximating an experimental test of their capacities to affect outcomes (Polsby, 1963). The extent and method of exercising power is assessed by observing and studying behaviour of persons (or groups) in the decision making. The frequency and the method with which a person (or group) successfully initiates an important policy over the opposition of others, or vetoes policies initiated by others, gives a rough test of the person’s (or group’s) overt or covert influence in decision making (Dahl, 1961, p. 66). To analyse power, actual behaviour of participants may be studied either at first hand or by restructuring behaviour from records, documents, informants, bulletins, reports, press releases, and other appropriate sources (Polsby, 1963, p. 121). The UN power blocs and the structure of the playing field As far as a political inquiry on accounting policy making by the UN is concerned the essential empirical variables under Dahl’s methodology are the disclosure issues, parties and groups participating in the deliberations, conflicts, compromises and/or dominations which took place in the UN international accounting bodies. Theoretically, each member nation of the UN has equal voting rights and has complete independence in voting. However, an essential characteristic of decision making at the various economic and social committees of the UN has been the clustering of members around suitable economic and political groups or caucuses. In a bargaining situation, these caucuses do largely hold together, argue in the same line and vote en bloc on a particular issue (Kaufman, 1980). These caucuses are appropriately called UN “power blocs”. Figure 2 represents the relationship among these power blocs within the UN system. As shown in Figure 2, three such prominent “power blocs” were active and visible at the time of the accounting group’s work. They were:
  12. 12. AAAJ 11,5 604 (1) The “Group of 77”[20] – representing all the developing nations of the UN plus China and (the then) Yugoslavia. In voting terms this group held roughly about 75 per cent of the votes. (2) The “Group-B” – representing the developed market economy nations of Western Europe plus Australia, Canada, Japan, New Zealand and the USA. This group had about 20 per cent of total membership. (3) The “Group-D” – representing the socialist bloc nations of Eastern Europe plus the Soviet Union. This group commanded about 5 per cent of total votes. This structure of the empirical reality has had significant influence over the research method employed in this study. Successive steps taken in conducting the inquiry included: first, selecting important accounting disclosure issues (i.e. issues which have been contested or over which conflicts of interests were visible); second, to identify the member nations and the contesting clusters of nations participating in the debate. The actions and reactions of each group were then traced back to reconstruct the behaviour of the national delegates or group leaders while the issues were being resolved. These behaviours were also Figure 2. Global cleavages and UN power blocs (up to 1990) The “Group of 77” Developing Nations 119 (1990) The “Group-B” Developed Market Economy Nations 33 (1990) The “Group-D” Socialist nations of Eastern Europe 7 (1990) Military, Economic and Political Interaction Political and Economic Interaction Political and Military Contests Total UN membership: In 1990 – 159 In 1993 – 181
  13. 13. International accounting regulation 605 critically examined to check if they did/did not reflect the preference positions of some outside pressure groups. The reasons and rationales forwarded by each contesting group are also analysed to ascertain which arguments did prevail, how and why. The outcomes of the debate were then tabulated and compared with individual group objectives to exhibit (Table I) the relative rate of success or failure, which reflects the relative strength of the groups. In this way, an integration of action and structural methodologies of power is attempted in this analysis. Signs of visible conflicts of interests The United Nation’s attempts to regulate the conduct of TNCs in general and accounting disclosure in particular, activated a variety of lobby groups such as the TNCs and their associates, the international trade unions, environmental groups and many national governments. Signs of disagreement and dissent were visible within the (1972) Group of Eminent Persons (GEPs). The GEPs, however, had followed a majority rule in resolving issues and making decisions. The comments of the dissenting minority were published in the appendix of the GEPs’ report (See, UN, 1974). Sessions of the subsequently formed GEISAR indicated no serious disagreement or conflicts within the group. There was a sense of seriousness and continuity of purpose in the group. The fact that the chairperson of the GEPs[21] was also the chairperson of the GEISAR may have helped to maintain the link and focus on set objectives. However, in the same period that the UN was resolving these issues, other intergovernmental and professional groups had been active in forming parallel regulatory regimes to challenge the UN’s actions (see, for example, Benson, 1978). The IASC (International Accounting Standards Committee) was established in June 1973 as a caucus of professional accounting bodies and it started challenging the UN’s authority with the rapid production of international accounting standards (26 standards in the first 13 months). The United Nation’s position was further undermined by the OECD, which reflected the official political position of the industrially developed OECD nations participating in the UN debates (Rahman, 1991). The OECD had set up a Commission on International Investment and Multinational Enterprises (CIME) in February 1975 which produced a set of guidelines in 1976 for the Multinational Enterprises (MNEs) operating in OECD countries. These OECD guidelines (OEDC, 1976) were voluntary and were a signal to the UN of the type of rules the OECD would like to see emerging from the UN (Levy, 1984). However, the most serious conflict and direct confrontation with the UN position commenced after the GEISAR report was published in 1977. The responses of the TNCs and their lobbying fronts, namely, the ICC (International Chamber of Commerce) and the IOE (International Organization of Employers) were sharp and hostile. These interest groups never welcomed the United Nation’s involvement in accounting standard setting. Soon after the GEISAR report was published the ICC and the IOE joined forces to form a working party
  14. 14. AAAJ 11,5 606 to coordinate the opposition of all TNCs to the UN Proposals (Stamp, 1979). The joint ICC/IOE Working Party eventually delivered a lengthy protest against the UN proposals (ICC, 1978) prior to the fourth session of the Commission on TNCs (16-26 May 1978)[22]. Furthermore, mounting opposition from the TNCs and other outside pressure groups had definite bearings on the attitude and positions taken by many government delegations participating at various UN committees. The UN Commission on TNCs had considered the report of the GEISAR against the background controversies and oppositions discussed above. At the commission’s debate (1978), the delegates from the Western developed “Group- B” countries expressed the view that the group of experts placed too much emphasis on “international standards of accounting” and paid inadequate attention to “harmonisation of accounting rules and principles”. Delegates from the “Group of 77”, developing countries, on the other hand, considered it more practicable to start with the identification of what was to be reported before consideration of harmonisation of accounting principles. They argued that harmonisation was extremely difficult to achieve even in regional groups although it should continue to be a long-term objective of the UN. The “Group- 77” nations also demanded the GEISAR report be approved by the Commission[23]. The situation described above presents a classic case of contrast between the “possession” and “exercise” of power. The “Group-77” developing nations “possessed” the voting power, which if they decided to exercise properly, would have resulted in the GEISAR report being endorsed by the Commission. Subsequent events at the new intergovernmental accounting group presents even more direct conflicts on all agenda issues discussed and forced the matter to a turning point. Conflicts within the Ad hoc Intergovernmental Group The “Group D” socialist bloc nations traditionally supported the “Group of 77” positions in all UN debates. It was observed, however, that the Group D nations deliberately abstained from the Ad hoc Group’s debate. Group D’s position was that the UN accounting standards should apply to Western TNCs only and not on TNCs emerging from socialist nations. But the “Group B” insisted on their inclusion into the rules. The socialist block nations, thus, chose to abstain from all UN debates (Carty, 1982). As a result, it was a direct two-way negotiation between the two principal opposing power blocs, namely the “Group of 77” (the developing nations) and the “Group B” (developed market economy nations). In general, the discussions within this group were highly political, with two major power blocs basically seeking different aims and objectives. The “Group- B” nations, who were dubious of the UN’s competence in accounting standard setting matters, took the view that the UN was not the place for setting accounting standards – a task which could better be performed by other agencies, such as the OECD and the IASC. Hence, “Group-B”, nations sought to limit the scope of accounting standards proposed by the (1977) GEISAR and to
  15. 15. International accounting regulation 607 ensure that recommendations were relegated to mere guidelines of best practice rather than assuming a mandatory character. “Group-77” nations, on the other hand, attempted to make the proposed UN accounting requirements mandatory with appropriate governmental backing. The “Group-77” also desired the UN assume a status of permanent standard setting body (Carty, 1982). The “Group- 77” delegations claimed that given the global network of operations, marketing and financing strategies of the TNCs, the traditional accounting and reporting systems needed to be significantly improved and modified in order to ensure adequate levels of accountability (Wang, 1978). It was clear from the nature of the ensuing debates that there were serious differences of opinion and conflict of interest between the two power blocs. The Ad hoc Intergovernmental Group published its interim report in 1981 and its recommendations reflected a wide divergence of views on many fundamental accounting issues, such as segmentation of data, treatment of depreciation, classification of assets and liabilities, and valuation of assets and foreign currency[24]. Not surprisingly, therefore, the final report of the group (UN, 1984) was inconclusive. As previously stated, the report shows a split between issues which were resolved and issues left unresolved. Most of the issues raised by the TNCs were resolved in accordance with their demands. However, issues raised by the host developing nations were left unresolved. In fact, the Ad hoc Group abandoned the spirit of the 1977 GEISAR report, significantly reduced the minimum items of disclosure recommended in 1977 and thus created a stalemate between the two competing power blocs. The group suggested, among the issues resolved, that: (1) comparability of information provided by TNCs was an important issue; (2) any reporting requirements for the TNCs be equally applicable to national enterprises; (3) costs of providing information should be commensurate to the benefits to be derived therefrom; (4) maintaining business confidentiality in sensitive areas is important for TNCs; and (5) international harmonisation should be the long-term objective of the UN. As for the disclosure of information by the TNCs, the group suggested that the TNCs should disclose information taking into account the group’s “discussion” – in particular the agreed items of disclosure (UN, 1984, para. 40, p. 9). The controversy over “true and fair view” versus “honest and accurate” reporting was never resolved. Other unresolved issues included: (1) transfer pricing, royalties, allocation of group overhead to subsidiaries and other forms of intra-group transactions; (2) foreign currency transaction;
  16. 16. AAAJ 11,5 608 (3) contents of general purpose reports versus those of special purpose reports; (4) valuation, classification and disclosure of movements in certain classes of assets and liabilities; (5) equity method of accounting for investments; (6) accounting and reporting for government grants and subsidies; (7) terms to be included in the statement of sources and uses of funds; and (8) non-financial reporting items recommended by the GEISAR (1977). Subsequent developments at the UN resulted in the dissolution of the Ad hoc Group and the creation of another “intergovernmental” group to carry on the job (ECOSOC resolution 1982/67 of 27 October 1982). It was mainly due to pressures exerted from the “Group-77” nations that the ECOSOC agreed to establish another group. The new group also consisted of 34 members elected by the ECOSOC. But, as mentioned earlier, it had significantly diluted terms of reference on international accounting issues. This new group was issuing annual reports containing review of developments. This new intergovernmental group was dissolved in 1993. As a remarkable turnaround the UN has dissolved the UN Commission for Transnational Corporations (in 1994) which was the key organ for the TNC matters. The decision outcomes The political environment and attitudes of the two opposing groups of nations participating in the deliberations at the UN Ad hoc Intergovernmental Group have been presented above. The results of the negotiations can now be summarised on an issue by issue basis in order to identify policy preferences of each group and the decision outcomes. Table I captures the essence of the debate and presents such a summary. Table I is designed to indicate “who prevailed” in the debates. The discussion that follows Table I attempts to analyse “how” the minority view managed to prevail. The following points can be drawn from the information contained in Table I: (1) In most cases the “Group-77” recommended disclosure alternatives were vetoed by the “Group-B” nations. The “no decision” outcome worked well for the defenders of the status quo. (2) A fundamental difference in the philosophy of corporate reporting by TNCs between the “Group-77” and “Group B” delegations is observable. For the first time in any international forum a contesting principle of “accurate and honest” reporting was put forward against the established principle of “true and fair view” for presentation of financial statements. (3) Among the disclosure issues, intra-group transfer items, such as, intra- group leases, sale-and-lease-back, receivables, payables, allocation of group overheads, patent rights, investments, sales and transfers proved to be the most contested issues.
  17. 17. International accounting regulation 609 Accountingandreporting issuesGroup-77positionGroup-BpositionDecisionoutcome 1.QualityofdisclosureIncreasedtransparencyofaccountsCriteriasuchas,materiality,Appropriatedisclosuresbe andincreasednon-financialconfidentiality,feasibilityandmadetomeettheneedsof disclosureisrequiredfromTNCscost-benefitbalancebeapplieduserswhohavea“legitimate” tojustifydisclosure.Non-financialinterestintheaffairsoftheentity reporting(NFR)isnewand controversial.Moresuitablefor SpecialPurposeReports(SPR) 2.ExtentofdisclosureDiscloseallmaterialitemsinSuchadditionaldisclosureshouldDiscloseitemsmaterialenoughto additionto1977minimumlistbelimitedasnecessarytogiveaaffectvaluationsordecisionsby necessarytomakefinancialtrueandfairviewoftheoperationsusers statementscomplete,correctandclearofTNCs 3.TrueandfairviewTNCsshouldprovide“accurateandFinancialstatementsofTNCsNodecision honest”financialstatementsshouldpresenta“trueandfair” viewofaffairs 4.AuditingtheTNCsTNCsbeauditedbyaccountancyCompetence,indpendenceandNodecision firmsofthehostcountryhavingnointegrity,notnationality,were directorindirectlinkswithTNCs.appropriatecriteriaforselectionof Auditfunctioncannotbesubcontractedauditors tootherfirms 5.StructuralchangeinTheexpertgroupshouldconsiderIssuesraisedarecomplexaccountingNodecision disclosuremethodsissuessuchas:problemsandcannotberesolved (1)changestothestructureofinareasonableperiodoftime financialstatements (2)definitionoftechnicalterms (3)valuationofassets (4)classificationofassetsandliabilities (5)creationofcompensationaccounts (6)foreigncurrencytransactions (7)transferpricingpolicies(Continued) Table I. Summary of policy preferences of conflicting groups and decision outcomes at the UN Ad hoc Inter-governmental Working Group of Experts on International Accounting and Reporting (1979-1982)
  18. 18. AAAJ 11,5 610 Accountingandreporting issuesGroup-77positionGroup-BpositionDecisionoutcome 6.RepresentationinDevelopingcountries’participationBroadmembershipisdesirableNodecision,statusquo theIASCshouldbeonequalfootinginallbuttheexpertgroupshouldnot internationalaccountancybodiesindicateanydegreeofrepresentation engagedintheformulationand promotionofinternationalstandards 7.DefactocontrolControloversubsidiariesmighttakeControlshouldbeassumedonlyifControlbeestablishedthough andconsolidationtheformofmanagementandserviceownershipofmorethan50percentownershipofmorethan contractsorlessthan50percentofvotingrightisevident50percentvotingrightsonly shareholdingbutexceedinganyofthe widelydispersedminoritygroups 8.Goodwillpatents,Internallygeneratedpatents,tradeSuchdisclosureisnotusefulOnlypurchasedgoodwillbe trademarksandmarks,goodwilletc.shouldbedisclosed otherintangiblesdisclosed 9.PrepaidexpensesTraditionaltreatmentsofprepaidPresentreportingsystemsshouldPrepaidexpensebedisclosed expensesascurrentassetiserroneous.continueseparatelybutpresentsystem Prepaidexpensesmustbeexcludedshouldcontinue fromcurrentassetandbeshown undertheheadingof“compensation ororderaccount” 10.Intra-groupIntra-groupreceivablesandpayablesUselessinformation.ThesefiguresNodecision receivablesandeliminatedinconsultationbedisclosedcouldbeobtainedfromsubsidiary payableinthenotesbalancesheetorfromspecialpurpose reports.Informationnothepfulforusers 11.DisclosureofInformationonleasingandleasebackInformationnothelpfulforusersLeasesnotreflectedinfixed leasearrangementsarrangementamonggrouporassociatedassetsinbalancesheetand enterprisestobedisclosedotherlong-termcommitment bedescribedandquantified (Continued) Table I.
  19. 19. International accounting regulation 611 Accountingandreporting issuesGroup-77positionGroup-BpositionDecisionoutcome 12.SalesThereshouldbedisclosureofgrossSuchdetailedinformationwasnotSalesshouldbedisclosed.The salesfigureanddeductionsmadeappropriateforinclusioninaamountreportedshouldbeanet therefrom.Also,salestothirdpartyminimumlistfigure,thatis,amountsderived customers(bothdomesticandexports);fromsalesofgoodsandservices intra-groupsalesandsalestowhichfallintothegeneralactivities associatedenterprises(bothdomesticoftheenterprises,lessanysales andexport);revenuefromtechnologyrebates,anyGoodsandServices licensingshouldbedisclosedseparatelyTax(ValueAddedTax)orany othertaxrelateddirectlytoturnover 13.InterestDiscloseinterestexpenseintheincomeDisclosetotalinterestexpensesin expensesstatement.Alsodiscloseseparately:incomestatements (1)otherfinancialchargesItisdifficulttodefineNodecision (2)interestexpensesonshort-termdebtSuchclassificationwouldcauseNodecision andlongtermdebtseriousallocationproblem (3)interestexpensesaccordingtoInordinateamountofdetailNodecision currenciesofborrowings (4)interestexpenserelatedtofinancingNotsuitablefordisclosureinNoagreement.Nodecision investmentprojectsseparatelyfrom interestexpenserelatedtofinancing currentoperations (5)breakdownofinterestexpenseaccordingUnnecessarydetailsNoagreementNodecision tosourcesofcapitalintermsofhome andhostnations 14.GovernmentGovernmentsubsidies,whichcanbequanti-GovernmentsubsidiesaremoreNodecision subsidyfiedbeincludedinto“usualchargesandappropriateforSpecialPurpose credits”.IfcannotbequantifiedandmaybeReports describedastonatureandimportance (Continued) Table I.
  20. 20. AAAJ 11,5 612 Accountingandreporting issuesGroup-77positionGroup-BpositionDecisionoutcome 15.ResearchandDisclosetotalR&DexpenditurefortheSuchdisclosureisappropriateforNodecision developmentperiod.AlsodisclosebasisofSpecialPurposeReports expenditureaallocationofR&Dexpenditure 16.TransactionwithSuchtransactionsbedisclosedforSeparatedisclosureofsomeitems,Nodecision groupenterprisesnoteachrevenueorexpenseitemeithere.g.interestisfeasiblebutgeneral consolidatedandinincomestatementorinnotesdisclosurewasexcessive businesseswith associatedenterprises 17.ForeignexchangeTNCsshouldgiveaclearaccountTheissueiscomplicated.ItisnotNodecision gainsorlossesofforeigncurrencygains/lossespropertodiscloseforeigncurrency gainorlossingeneralpurposereports 18.TransferpricingTNCsshoulddiscloseintra-groupThisinformationissensitive.ItisNodecision policiespricingpoliciessinceitwouldimpracticaltodisclosepricing assistuserstounderstandpricepoliciesingeneralpurposereports. fluctuationsMoresuitableforspecialpurposereports 19.LeasingactivitiesbTNCsshoulddisclosethenatureofLeasingisasubjectofconsiderableNodecision leases,leasingexpensesandincomecontroversy.Leasingexpenditure fromleasesinthegeneralpurposeshouldnotbeanitemofinformation reportsintheannualreport Notes: aTheAdhocIWGEISARrecognizedthatR&Dcostsweresignificantitemsintermsoftheireconomiceffectsandfiscalimplications.Itwasalso observedthatTNCsallocatedtotalR&Dcoststotheirsubsidiariesinavarietyofways bThegroupnotedthatmanyTNCswereengagedinsizeableleasingtransactionsandthattheresultingleasingexpense/incomeisasignificant financialitem Source:CompiledfromUN(1984) Table I.
  21. 21. International accounting regulation 613 (4) The whole debate indicates that the developing countries have a clear idea about the crucial areas of TNC accounting and reporting which are important for controlling and monitoring TNCs’ operations. For example, the “Group-77” emphasised, among others, the following points: • the transparency of published statements, rather than their comparability and harmonisation; • accurate and honest financial statements as opposed to “true and fair view” as the reporting philosophy; • need for structural change in financial reporting; • the concept of de facto control for consolidation; • classified disclosure of interest expense according to: – currency of borrowing; – sources of borrowing – home or host country; – interest for financing investment or for financing current operations; – classification of sales revenue into revenue from natural resources and revenue from technology licensing; – separate disclosure of intra-group leasing, loans, sales and transfers etc. (5) In almost all these cases the views of the “Group-B” nations prevailed. They were able to discard many disclosure issues simply by arguing that such classification would cause serious allocation problems. Discussion and analysis Given the democratic decision-making rule and relative strengths of the conflicting parties, the outcomes of the negotiation summarised in Table I would seem unexpected. Each UN member nation has equal voting rights and the UN Charter provides for decision making by majority vote. According to this rule the “Group-77” (developing nations), by virtue of their numbers (21 out of 32) should have been able to carry their proposals through. Moreover, the Ad hoc Intergovernmental Group was already dealing with a previously endorsed disclosure package (by the GEISAR, 1977) and most of the issues and alternatives raised and proposed by the “Group-77” were either already adopted in practice or were under review by other accounting bodies. However, in a political bargaining situation, reasons and rationales can often be accepted or rejected depending on the possession or non-possession and deployment of some social, economic, and political resources by the respective groups involved in the negotiation (Lasswell and Kaplan, 1950). Prevailing in a decision-making process is, therefore, a phenomenon that identifies the powerful. More importantly, that phenomenon or outcome reveals the
  22. 22. AAAJ 11,5 614 possession and use of some economic and political resources by the “winner”. These are likely to be the resources which are in short supply to the group defeated. Every actor in a society (national or international) may be thought of as controlling, by his/her actions and decisions, some amounts of values (or resources) in relation to others, so that the controlling actor can increase or decrease the resource position (both pecuniary and/or non-pecuniary) of those others by his/her own actions or decisions. The values, resources or interests that are desired by other people, but controlled by the actor, may be called his/her power base or “base values” (Lasswell and Kaplan, 1950). Similarly, some of his/her desired values, resources and interests (called “scope values”) may be controlled by one (or more) other actors. In a bargaining situation, other actors can be induced to give up control over some of those resources in consideration of, or exchange for, any units of base values over which the first actor has political influence owing to his/her base value position. According to this theory, the power base for actor A (where A could be a person, a country or group of either) is an amount of value or resource under, A’s control which is needed by B. Theoretically, then, A is in a position to increase or decrease B’s wealth, well- being, or enjoyment of respect (i.e. prestige) by his/her action. If B values that which A controls, B must try to convince A to let B have more of these values. The actual method used in such a convincing process may range from simple negotiation involving requests and offers to give up some scope values controlled by B in A’s favour to the use of military power in extreme cases. For example, “Group-B” nations possess surplus food and superior technology, superior military and above all political control over multinational corporations (base value of the developed nations) which the developing nations often desperately need to resolve their domestic problems. On the other hand “Group-77” developing nations possess the opportunities of cheap labour, huge consumer market, low taxes, and above all, the voting rights at the UN (Base values to “Group-77” and scope values to “Group-B” nations). The “Group-B” nations want “Group-77” votes at the UN in order to pass resolutions favourable to “Group-B”, simply because UN resolutions are important in shaping world opinion. UN agenda items and resolutions are used to form opinions on what is good and what is evil; what is legal and what is illegal. They can enhance or damage international image about a nation or a group of nations. Thus, if the “Group-77” developing nations need and want economic aid to improve their technology and industrial base, or if a hungry nation needs food in order to drive off famine, and one or more of the “Group-B” nations (e.g. USA, UK, Japan) control the supply of these resources, then the country(ies) possessing the resources will have a “power base” (i.e. potential power) for exercising influence over these more needy countries (Deutsch, 1966). “Group-B” nations may use (exercise) these “base values” (power base) to acquire influence and power over the behaviour of some or all of the “Group-77” nations in order to gain control over some “scope values”– such as a favourable vote, an abstention, a non-opposition, acceptance of some proposals, approval of
  23. 23. International accounting regulation 615 access into the countries’ market, allowance of major concessions to the TNCs operating in those countries and so on. The “Group-77” nations, on the other hand, may decide to use (or exercise) whatever potential power they have (e.g. voting power) to win over a crucial decision. Dahl’s pluralist methodology, however, would decline to recognise a party as “powerful” if one of the parties fail to exercise such potential power to prevail at the time of actual decision making. Construction of a “right” of veto by the “Group-B” nations Signs of visible conflict started to emerge at the fourth session of the Commission on TNCs (May 1978) where the GEISAR report was explicitly considered. The Commission on TNCs was supposed to follow the rule of one- nation one-vote and decision making by simple majority vote as provided by the UN charter. But in this case the “Group-B” nations declined to support the implementation of any UN disclosure recommendations unless they were passed with absolute unanimity. They had also threatened to withdraw from all negotiations concerning TNCs if the rule of majority vote was adopted in the decision making (US Department of State, 1982). This construction, and use, of a right of “veto” by the “Group-B” nations had a dramatic impact on the outcomes of the negotiation. The “Group-77” nations had the voting majority; but they obviously did not have much authority over the TNCs. They realised that resolutions passed in the UN without the explicit endorsement of a TNC’s countries of origin would have little effect in practice. Moreover, the threatened cuts in financial support to the UN by the “Group-B” would endanger the existence of the Commission itself. Eventually the so called consensus formula of decision making was adopted at the Commission’s 4th session. The GEISAR report failed to gain a consensus support, and naturally no measures were recommended for its implementation. However, as a compromise solution the Commission agreed to set up an Ad hoc Intergovernmental Group of Experts on Accounting Standards. The “consensus” rule of decision making was passed on to the Ad hoc Group as well. The acceptance of the consensus formula for decision making essentially stripped the developing nations of their only source of power. On the surface, the consensus formula presented a unifying and compromising image. However, in a decision-making process, a consensus formula tends to suffocate all democratic values and offers each and every party a de-facto power to veto over any decision. With such a power each and every party can destroy a consensus of the rest through unilateral disapproval of a decision. Such a veto power is instrumental in blocking resolutions from being passed. The “Group-B” nations thus successfully eliminated the possibility of any resolution being passed by majority vote. The “Group-B” nations, in this case, successfully used their base values (economic influence and control over TNCs) to compel the “Group-77” nations to abstain from exercising their base values (voting power).
  24. 24. AAAJ 11,5 616 The “Group-77” nations were the change-seekers and the “Group-B” nations were the defenders of status quo. If any decision was taken, the change seekers would have been victorious. On the other hand, if no decision is made due to a lack of consensus, the status quo was effectively preserved. Under the unanimity rule, the job of the minority “Group-B” nations thus became easier. They simply had to disagree with any disclosure proposal placed by the “Group-77”, put a counter proposal and communicate their reservations about the issue. There has been numerous occasions (as shown in Table I) when “Group-B” nations have rejected disclosure proposals presented by the “Group- 77” (and indeed recommended by the GEISAR) simply by arguing that they were of “unnecessary detail”; “were not suitable for general purpose reports”; “would violate business confidentiality”; “would not accrue enough benefits to match costs”; “need further investigations”; and so on. It was also observed that in extreme cases, the USA and Japan alone have exercised such de-facto veto in order to block many decisions otherwise agreed upon by all other nations (US Department of State, 1982). It may be recalled here that a similar exercise of pressure and threat of abandoning all negotiations in international trade by the developed market economy nations in 1964 resulted in the acceptance of the so called “consensus formula” at the Geneva Conference of UNCTAD-1 (Cordovez, 1967). The net result was a total stalemate in the negotiations – a nil output despite heated debate and frequent meetings. The negotiations at the UN Commissions on TNCs, and in the various sessions of the Ad hoc Intergovernmental Group, evidenced meaningful employment of a similar strategy from the “Group-B” nations. Under such a decision-making rule, the question of what is or what is not on the agenda becomes less relevant. No matter how serious the issues are, the final outcome is certain – the preservation of the status quo. Conclusions The commercial activities of transnational corporations are critical because they cut across national boundaries and are responsible for the distribution and re-distribution of a significant volume of wealth and jobs across the globe. Furthermore, this paper supports the view that international regulation of corporate accounting is a significant variable in shaping and re-shaping the economic and political relationship among nations, and can potentially contribute in easing international tensions and fostering economic and social harmony among nations. A proper accountability of this phenomenon is arguably an essential element in modern day international relations. However, it has been shown that the needs and aspirations of the developing nations and the developed nations are quite different on the TNC issue. The developing nations have little voice in the accounting standard setting process of other international bodies, such as the IASC, or the OECD (Stamp, 1978; UN, 1984). There is no other international forum except the UN where these nations are meaningfully represented on an equal footing. It is, therefore, not surprising
  25. 25. International accounting regulation 617 that the UN, as the only international co-ordinating body with universal membership, became involved in the process. The present study attempted to analyse regulatory developments over TNCs at the UN, to identify the groups and parties involved at various levels of the negotiation process, and to capture the underlying tensions, conflicts and compromises among nations. Empirical evidence suggests that, despite the UN’s outward image of a democratically constituted organization, the UN decision on (at least) the TNC issue cannot be explained in terms of democratic rules and values. The normal democratic rules (as provided by the UN Charter) are frequently overridden by domination (Clegg, 1979, 1989) of one kind or another. The present study describes the process as a political one, and power is the central element in such political analysis. The pluralist decision-oriented framework of power based on the works of Dahl (1957, 1961, 1966, 1968) and Polsby (1960, 1963) was utilised because Dahl’s methodology proved to be more consistent and amenable to the objectives and empirical data presented. As suggested by Dahl, the outcome of a negotiation process was shaped not by the possession of resources relative to other parties but by the actual exercise of these resources in the decision- making arena. Thus, a group which ostensibly lacked power in terms of voting rights came out as “winner” owing to the skilful and timely exercise of the strategic resources they possessed. The results reinforce the view that all member nations at the UN may well have voting rights, but whether these rights are exercised or not depends on their socio-economic and political position at that time. In the negotiations over accounting standard setting within the various UN bodies, it was found that the group holding majority votes was neutralised from exercising these rights by intimidation and threat of withdrawal from all negotiations by the minority group. Such political manoeuvring by the minority was successful because of the prevailing hegemonic domination (Clegg, 1979) and control over the international economic institutions by the minority (Gilpin, 1979). A rule of consensus was constructed and applied in the decision-making processes, which provided the opportunity to the minority to block all decisions. Dahl’s pluralist methodology focuses on the actions, or lack of actions, by each individual or group in the formal decision-making process. The framework successfully identifies power wielders and can explain how power was successfully exercised over others. It attempts to explain power in a “combat” situation, and offers a clear focus on outcomes. However, the methodology fails to present a complete picture of the underlying process responsible for such action (or inaction). A more appropriate methodology might be required to study a further aspect of power as articulated by Bachrach and Baratz (1962, 1963), which goes on to examine various forms of “agenda controlling”; i.e. those actions of political participants which prevent contentious issues being surfaced in the first instance. It is also possible to take the investigation one level further by examining the process by which the social or economic variables are politically “managed” and manoeuvred in such a
  26. 26. AAAJ 11,5 618 manner that many participants become confused or lose sight of their real interests, or fail to realise that they are being subjected to manipulation. Finally, the ex post facto nature of the study and resultant gaps which might have been introduced while reconstructing behaviour of participants from documents and records rather than from first hand personal observation is recognised. Such first hand observation for an archival study was not feasible for understandable reasons. Notes 1. The pluralist model of power suggests that in a decision-making situation every participant in the process has almost an equal chance to influence the decision. That is, no single person or group holds absolute power. 2. The drive for accounting regulation of TNCs has been precipitated by a number of factors. They have been known to fiddle their accounts; avoid or evade taxes (Bhagwati, 1967); Capithorne, 1971; Winston, 1970): rig their intra-company transfer prices (Lall, 1973; Vaitsos, 1970, 1974); import foreign labour practices (Morawetz, 1974); compete unfairly with local firms (Barnett and Mueller, 1974); export jobs from home countries to host countries (Rubin, 1971); bring obsolete technologies to the developing world (Barnett and Mueller, 1974; Robinson, 1979); meddle, bribe and wreck balance of payments (Muller and Morgenstern, 1974; Nayaar, 1978); overturn local economic policies (Litvac and Maule, 1969); and play off government against government (UN, 1974; Kussi, 1979). 3. The Senate subcommittee report revealed the attempt made by the ITT (of USA) to overthrow the Chilean Government through a military coup. See, The Economist (1976, p. 69. 4. Under the UN structure, the ECOSOC is the principal organ which is responsible for handling issues of economic and social matters. It is composed of the government nominees of 54 member nations elected by the General Assembly on the basis of predetermined regional and political groups to represent: Africa, 13; Asia, 12; Latin America, 12; Developed Market Economy Countries of Western Europe, North America and Oceania, 12; and Socialist Nations of Eastern Europe, five. The ECOSOC exercises its power under the authority from the General Assembly. It operates on the basis of one- nation, one-vote and decision making by majority vote. See Article 61 of the “UN Charter”. reprinted in, among other places, Kaufmann (1980, Appendix 1). 5. Key decisions are decisions on key issues. Key issues are issues over which a conflict of interest is visible. 6. The UN had attempted to set disclosure standards only. It made little or no attempt to set measurement standards. 7. That is, they were not government nominees of the countries they belonged to. They acted, deliberated and voted as independent individuals as opposed to government delegates. 8. For the names and other details of the members, see the report of the GEPs (UN, 1974). 9. For a complete list of personalities testified before the GEPs and summary of the hearings, see, UN (1974). 10. Even if some information was available the data did not adequately measure the phenomenon of the TNCs. Neither the sales and earnings figures, nor capital flows and investment stock could fully measure the impacts of the operations of the TNCs. The large incidence of inter-affiliate transactions with attendant transfer-pricing effects and practices involving capitalisation and de-facto control over local entities and resources could distort the real picture (UN, 1974). 11. ECOSOC decision 114 (LIX) 29 July 1975. See UN Doc. E/5655, May 1975.
  27. 27. International accounting regulation 619 12. The group included, among others, Mr Joseph Cummings (the then Chairman of the IASC and Deputy Senior Partner in charge of international relations of Peat, Marwick and Mitchell and Co.), the late Pieter Louwers (Chief Auditor of Philips Group of The Netherlands), Mr Hans Havermann (a leading German accountant), Mr Petra Gyllenhammer (President, Volvo group of Sweden), Mr Washington SyCip (distinguished Philippino accountant), and Mr Lakshmi K. Jha (Governor of Jammu and Kashmir, India). 13. The terms of reference of the expert group was limited to reviewing reporting requirements in different countries and existing reporting practices of the TNCs: identifying information gaps in existing corporate reports; and recommending a list of minimum items that should be disclosed in the general purpose reports of TNCs and their affiliates (UN, 1977, p. 17). 14. Note that the UK was not included in the group. However, Mr Joseph Cummings, Chairman of the London-based IASC, was a member of the group. 15. As far as the financial items are concerned, the group of experts’ recommended list of minimum disclosures represented a synthesis of the FASB Standards of the USA, the disclosure rules contained in the OECD guidelines (OECD, 1976), and the IASC pronouncements – all tailored to the needs of host nations. But on non-financial reporting it had broken new grounds. The group suggested that non-financial information was no less important than financial information in apprising the social and economic impact of the operations of TNCs on the countries and communities in which they operated. The GEISAR report may be called radical to the extent that no other national or international body had then considered non-financial disclosure per se as a candidate for accounting standard setting. In terms of conception and content, the UN disclosure list was more comprehensive than any which existed in practice or had been proposed by other bodies. 16. See, Official Records of the ECOSOC, 64th Session Supplement No. 12 (1978), UN Doc. No. (E/1978/52, E/C 10/43). 17. ECOSOC Resolution 1979/44. For a text of the resolution see CTC Reporter (1979). 18. Two seats remained vacant from the Socialist bloc nations which deliberately abstained from these negotiations. For a complete list of personalities involved, see UN Doc. E/c. 10/1982/8/Nov. 1 (UN, 1984). 19. Key decisions are decisions on key issues. Key issues are issues over which a conflict of interest is visible. 20. The origin of the title of this group dates back to the UNCTAD-I negotiations in 1964. A total of 77 developing nations formed this group to present a unified position on global trade issues. This group had more than 120 members. But the original title is still maintained by the group as a symbol of unity. See, Cordovez (1967). 21. Mr L.K. Jha from India. 22. The report of the GEISAR was going to be considered and supposedly be accepted at this session of the Commission. The ICC/IOE argued that the UN disclosure proposals encroached upon business confidentiality; they would put TNCs at a competitive disadvantage to local enterprises; the cost of improved reporting would exceed perceived benefits; and that proposals relating to segmental reporting and non-financial disclosure, in particular, were “ambitious” and “impracticable” (ICC, 1978, para. II (4.2), p. 7). The ICC/IOE maintained that harmonisation of accounting standards across national boundaries was the fundamental problem and expressed that they were “surprised and concerned” at the UN Secretary General’s optimism about the implementation of the GEISAR recommendations before tackling the harmonisation issue. (ICC, 1978, para. 1(1),. p. 3). 23. See Official Records of the ECOSOC, 64th session, No. 12 (1978), UN Doc. (E 1978/52, E/C, 10/43), para. 108.
  28. 28. AAAJ 11,5 620 24. The group also could not resolve the controversy as to whether TNCs should provide “accurate and honest” financial statements (demanded by the “Group-77”), or they should present a “true and fair view” (favoured by the “Group-B”). There were also conflicting opinions on the type of information to be disclosed by the TNCs at each subsidiary level (UN, 1981). References Abell, P. (1975), Organizations as Bargaining and Influence Systems, Heinemann, London. Bachrach, P. and Baratz, M.S. (1962), “Two faces of power”, American Political Science Review, Vol. 57, pp. 641-51. Bachrach, P. and Baratz, M.S. (1963), “Decisions and non-decisions: an analytical framework”, American Political Science Review, Vol. 57, pp. 641-51. Bachrach, P. and Baratz, M.S. (1970), Power and Poverty: Theory and Practices, Oxford University Press, New York, NY. Barnett, R.J. and Mueller, R.E. (1974), Global Reach: The Power of the Multinational Corporations, Simon and Schuster, New York, NY. Benson, H.L. (1978), “Danger! a ‘corporate report’ from the UN”, Accountancy, May, pp. 130-1. Bhagwati, J. (1967, 1969), “On the under-invoicing of imports”, Bulletin of Oxford University International Economic Studies (Bovies), March, 1974. Booth, P. and Cocks, N. (1990), “Power and the study of the accounting profession”, in Cooper, D. and Hooper, T. (Eds), Critical Accounts, Macmillan, Basingstoke. Booth, P. and Cocks, N. (1991), “Critical research issues in accounting standard setting”, Journal of Business Finance and Accounting, Vol. 17 No. 4, pp. 511-28. Capithorne, L.W. (1971), “International corporate transfer prices and government policy”, Canadian Journal of Economics, Vol. 4, pp. 324-41. Carty, J. (1982), “Accounting standards and United Nations”, World Accounting Report, pp. 9-13. Choi, F.D.S. and Bavishi, V.B. (1982), “Financial accounting standards: a multinational synthesis and policy framework”, International Journal of Accounting Education and Research, pp. 159- 83. Choi, F.D.S. and Mueller, G.G. (1978), An Introduction to Multinational Accounting, Prentice-Hall, Englewood Cliffs, NJ. Choi, F.D.S. and Mueller, G.G. (1984), International Accounting, Prentice-Hall, Englewood Cliffs, NJ. Clegg, S. (1979), The Theory of Power and Organization, Routledge and Kegan Paul, London. Clegg, S. (1989), Frameworks of Power, Sage Publications, London. Cordovez, D. (1967), “The making of UNCTAD: institutional background and legislative history”, Journal of World Trade Law, May, pp. 243-328. CTC Reporter (1979), Vol. 1 No. 5, p. 21. Dahl, R.A. (1957) “The concept of power”, Behavioural Sciences, Vol. 2, July, pp. 201-15. Dahl, R.A. (1958) “A critique of the ruling élite model”, American Political Science Review, Vol. 53, June, pp. 463-9. Dahl, R.A. (1961), Who Governs? Democracy and Power in an American City, Yale University Press, New Haven, CT and London. Dahl, R.A. (1966), “Further reflections on ‘the elitist theory of democracy’”, American Political Science Review, Vol. 60 No. 2, pp. 296-303. Dahl, R.A. (1968), “Power”, in Sills, D.A. (Ed.), International Encyclopedia of Social Sciences, Vol. 12, Macmillan and Free Press, New York, NY, pp. 405-15. Deutsch, K.W. (1966), “Some quantitative constraints on value allocation in society and politics”, Behavioural Sciences, Vol. 11 No. 4, pp. 245-52.
  29. 29. International accounting regulation 621 (The) Economist (1976), “Controlling multinationals”, January, p. 69. Frey, F.W. (1971), “Comment on issues and non-issues in the study of power”, American Political Science Review, Vol. 65, June, pp. 1,081-101. Gerboth, D.L. (1973), “Research, institution and politics in accounting enquiry”, Accounting Review, July, pp. 475-82. Gerboth, D.L. (1982), “Muddling through with the APB”, Journal of Accountancy, May, pp. 42-9. Giddens, A. (1968), “Power in the recent writings of Talcott Parsons”, Sociology, Vol. 2, pp. 256-72. Giddens, A. (1979), Central Problems in Social Theory, Macmillan, London, University of California Press, Berkeley, CA. Giddens, A. (1981), A Contemporary Critique of Historical Materialism, Macmillan, London. Giddens, A. (1984), Constitution of Society, Polity Press, London. Gilpin, R. (1979), “The politics of transnational economic relations”, in Modelski, G. (Ed.), Transnational Corporation and World Order: Readings in International Political Economy, W.H. Freeman, San Francisco, CA. Gray, S.J., Shaw, J.D. and McSweeney, L.B. (1981), “Accounting standards and multinational corporations”, Journal of International Business Studies, Spring/Summer, pp. 121-35. Hope, T. and Briggs, J. (1982), “Accounting policy making – some lessons from the deferred taxation debate”, Accounting and Business Research, Spring, pp. 83-94. Hope, T. and Gray, R. (1982), “Power and policy making: the development of an R & D standard”, Journal of Business Finance and Accounting, Vol. 9 No. 4, pp. 531-58. Horngren, C.T. (1972), “Accounting principles: private or public sector”, Journal of Accountancy, May, pp. 37-41. Horngren, C.T. (1973), “The marketing of accounting standards”, Journal of Accountancy, October, pp. 61-6. Horngren, C.T. (1976), “Will the FASB be here in the 1980s?”, Journal of Accountancy, November, pp. 90-6. Hunter, F. (1953), Community Power Structure: A Study of Decision Makers, University of North Carolina Press, Chappel Hill, NC. Hussein, M.E. and Ketz, J.E. (1980), “Ruling élites of the FASB: a study of the big eight”, Journal of Accounting, Auditing and Finance, Vol. 3 No. 4, pp. 354-67. ICC (1978), International Standards of Accounting and Reporting: Joint ICC/IOE Report Submitted to the UN Commission on Transnational Corporations, 4th Session (1978), Official Document, 191/111. Rev., International Chamber of Commerce, Paris. Kaufmann, J. (1980), United Nations Decision Making, Sijthoff and Noordhoff, The Netherlands. Kelly-Newton, L. (1980) Accounting Policy Formulation: The Role of Corporate Management, Addison-Wesley, Reading, MA. Kussi, J. (1979), The Host State and Transnational Corporations – An Analysis of Legal Relationships, Saxon House, London. Lall, S. (1973), “Transfer pricing by multinalnational manufacturing firms”, Oxford Bulletin of Economics and Statistics, August, pp. 173-95. Lasswell, H.D. and Kaplan, A. (1950), “Power and society: a framework for political inquiry”, Yale Law School Studies, Vol. 2, Yale University Press, New Haven, CT. Levy, P. (1984), “The OECD Declaration on international investment and multinational enterprises”, in Rubin, S.J. and Hufbauer, G.C. (Eds), Emerging Standards of International Trade and Investment, Rowman and Allanheld, Totowa, NJ, pp. 48-62. Litvac, S. and Maule, T. (1969), “The multinational firm and conflicting national interests”, Journal of World Trade Law, Vol. 3, March-April, pp. 309-16. Lukes, S. (1974), Power: A Radical View, Macmillan, London.
  30. 30. AAAJ 11,5 622 Merelman, R.M. (1968), “On the neo-elitist critique of community power”, American Political Science Review, Vol. 62, June, pp. 451-60. Mills. C.W. (1956), The Power Elite, Oxford University Press, New York, NY. Morawetz, D. (1974), “Employment implications of industrialization in developing countries”, Economic Journal, Vol. 84, September. Muller, R.D. and Morgenstern, R.D. (1974), “Multinational companies and balance of payment in LDCs: an econometric analysis of export pricing behaviour”, KYKLOS, Vol. 27, pp. 304-21. Nayaar, D. (1978), “Transnational corporations and manufactured exports from poor countries”, Economic Journal, Vol. 88, March. OECD (1976), International Investment and Multinational Enterprises: Guidelines for Multinational Enterprises, OECD, Paris. Parsons, T. (1957), “The distribution of power in American society”, World Politics, Vol. 10, October, pp. 123-43. Parsons, T. (1963), “On the concept of political power”, Proceedings of the American Philosophical Society, Vol. 107 No. 3, pp. 232-62. Polsby, N. (1960), “How to study community power: the pluralist alternative”, Journal of Politics, August, pp. 474-84. Polsby, N. (1963), Community Power and Political Theory, Yale University Press, New Haven, CT. Polsby, N. (1968), “Community: the study of community power”, International Encyclopedia of Social Sciences, Vol. 3, Macmillan, New York, NY and Free Press, Glencoe, IL. Rahman, S.F. (1991), “Accounting and reporting by transnational corporations: a global view of the regulatory regime”, School of Accounting Working Paper Series, No. 81, University of New South Wales. Robinson, A. (1979), Appropriate Technologies for Third World Development, St Martin’s Press, New York, NY. Rubin, S.J. (1971), “Multinational enterprises and national sovereignty: a skeptic’s analysis”, Law and Policy in International Business, Vol. 3 No. 1, pp. 1-41. Selto, F.H. and Grove, H.D. (1983), “The predictive power of voting power indicies: FASB voting on statement of accounting standards Nos 45-69”, Journal of Accounting Research, Vol. 21 No. 2, pp. 619-22. Stamp, E. (1978), “Multinational companies are misguided in opposing UN disclosure rules”, Financial Times, London, 10 May, p. 8. Stamp, E. (1979), “International standards to serve public interest”, in Brennan, W.J. (Ed.), Internationalization of Accountacy Profession, CICA, Toronto, pp. 117-26. UN (1974), The Impact of Multinational Corporations on Development and on International Relations, Doc. E/5500/Rev. 1 (ST/ESA/6), UN Department of Economic and Social Affairs, New York, NY. UN (1977), International Standards of Accounting and Reporting for Transnational Corporations: Report of the Secretary-General and Report of the Group of Experts on International Standards of Accounting and Reporting, Doc E/C. 10/33, UN Commission on Transnational Corporations, New York, NY. UN (1981), International Standards of Accounting and Reporting: Report of the Ad hoc Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting on its 1st, 2nd, 3rd and 4th sessions, Doc E/C. 10/81, UN Commission on Transnational Corporations, New York, NY. UN (1984), International Standards of Accounting and Reporting: Report of the Ad hoc Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting, Doc E/C. 10/1982/8. Rev. 1, UN Commission on Transnational Corporations, New York, NY.
  31. 31. International accounting regulation 623 US Department of State (1982), Current Status Report: Selected International Organization Activities Relating to Transnational Enterprises, Office of Investment Affairs, Washington, DC, July 1981. Vaitsos, C.V. (1970), “Transfer of resources and preservation of monopoly rents”, mimeo, Harvard Development Advisory Services. Vaitsos, C.V. (1974), Intercountry Income Distribution and Transnational Enterprises, Clarendon Press, Oxford. Wang, N.T. (1978), “The UN may ‘audit’ business”, Business Week, 26 June, pp. 98-100. Watkins, M.H. (1968), Foreign Ownership and the Structure of Canadian Industry: Report of the Task Force on the Structure of Canadian Industry, Canadian Government Publication, Ottowa. Whitt, J.A. (1979), “Towards a class-dialectic model of power: an empirical assessment of three competing models of political power”, American Sociological Review, February, pp. 81-100. Winston, G.C. (1970), “Over-invoicing, underutilization and distorted industrial growth”, Pakistan Development Review. Wolfinger, R.E. (1971), “Non-decisions in the study of local politics”, American Political Science Review, Vol. 65, pp. 1,063-80. Further reading Laughlin, R. and Puxty, A. (1983), “Accounting regulation: an alternative perspective”, Journal of Business Finance and Accounting, Vol. 10 No. 3, pp. 451-79. Laughlin, R. and Puxty, A. (1984), “Accounting regulation: an alternative perspective”, Journal of Business Finance and Accounting, Vol. 11 No. 4, pp. 593-6. Newman, D.P. (1981), “An investigation of the distribution of power in the APB and FASB”, Journal of Accounting Research, Vol. 19 No. 1, pp. 247-62. Newman, D.P., Ronen, J. and Sprouse, R.T. (1981), “The SEC’s influence on accounting standards: the power of the veto” (plus discussion on the above and reply), supplement to the Journal of Accounting Research, Vol. 19, pp. 134-73. Putxy, A. (1985), “Locating the accountancy profession in the class structure: evidence from the growth of the user criterion for financial statements”, paper presented at the Interdisciplinary Perspectives on Accounting Conference, University of Manchester, July. Wilmott, H. (1984), “Accounting regulation: an alternative perspective: a comment”, Journal of Business Finance and Accounting, Vol. 11 No. 4, pp. 585-91.