Secrecy can be expensive

A research paper that can keep you awake is ‘ Accounting for Secrets ' by Mark Harrison of University of Warwick ( www.ssrn.com ). “The Soviet state counted people, resources – and secret papers. The need to account for secrets was a transaction cost of autocratic government,” begins the abstract.

An interesting finding in Harrison's paper is the archival evidence of significant costs, multiplied by secrecy's recursive aspect; for, the system of accounting for secrets was also secret and so had to account for itself. The once-classified documents that now fill millions of files in the former Soviet archives had their own lives, the author informs. Each moment in the life of such documents was meant to be recorded from creation through copying, sharing, and transmission to destruction or assignment to the archive, he adds.

Stating that, until it collapsed, the Soviet system of secrecy was the single most important limit on the progress of scholarly research on the Soviet Union itself, the author notes that a defining feature of Soviet single-party government was konspiratsiia (conspirativeness). Citing studies (such as Rosenfeldt, 2009), the author observes that all officials were obliged to conduct the business of government by following norms of conspirativeness that limited the business of leading councils and committees to the narrowest possible set of participants and distributed information about their decisions on the basis of minimal need-to-know. “These norms originated in the pre-revolutionary underground practices of the Bolshevik Party, and had been written down as a formal code of governance by the late 1920s.”

Dangerously, one learns how the role of archives was transformed by conspirative rule, driven by the all-consuming interest of the regime in citizens' past political activities and connections. When a person fell under suspicion, a search of historical records in the archives for “compromising evidence” ( kompromat ) was always among the first steps of the investigation, the paper describes.

Recursive secrecy

Elaborating the recursive property of Soviet secrecy, the author introduces us to Russian words “taina,” the intangible information that is secret, and “grif sekretnosti,” the security classification of the tangible document that expresses it. When “taina” was written down, the result was a secret document; and so, in turn, the existence of the document became a new “taina,” he reasons. “Inevitably, therefore, the paperwork that accounted for secret documentation contained new ‘taina' and was itself secret, and so also had to be accounted for in audits and inspections, the results of which had to be kept secret too, and in turn became new entries in the system of accounting for secret paperwork, and so on and on, potentially ad infinitum.”

To understand the cost involved, you need to face the startling conclusion of the paper – that accounting for secrets made up around one-third of the total documentation now available!

An alarming read that underlines the cost of administrative opacity.

Global standards and their legitimacy

Masatsugu Sanada of Kyoto University presents ‘ A new analytical framework' in ‘Legitimacy of Global Accounting Standards,' a recent paper in www.ssrn.com . The paper begins by explaining ‘legitimacy' (in the words of Suchman, 1995) as a generalised perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially-constructed systems of norms, values, beliefs, and definitions.

In the context of IASB (International Accounting Standards Board) and/or IFRS (International Financial Reporting Standards), the paper redefines legitimacy as ‘motivation for acceptance among multi-stakeholders' and lists the ‘main actors' as regulators, preparers, and users who accept global accounting standards as an institution.

The elements of legitimacy of IFRS, as presented in the paper are justification through benefits brought from application of IFRS; taking advantage of the power of other organisations; providing decision-useful information; theoretical consistency; and consistency among other institutions. As the elements of legitimacy of IASB, the author proposes justification through organisational structure and due process; and superior organisations' delegation and/or acceptance of standards-setting activity.

Also, by introducing the concept of reflexivity, Sanada presents a mechanism in which both legitimacy of accounting standards and standards setters interacted to convey legitimacy of global accounting standards as a system.

Offers a perspective on international standards.

Environmental audit mechanisms

How effective are various enforcement strategies whenever the environment regulator cannot observe the emission level caused by firms directly, and instead relies on self-reported emission levels? This is the focus of ‘ Firms' emissions and self-reporting under competitive audit mechanisms (CAMs) ' by A. Marcel Oestreich of University of Guelph ( www.ssrn.com ). The paper begins by acknowledging that when determining how much costly effort to invest in order to comply with the policy, firms weigh the cost for compliance versus the expected cost for being out of compliance. “The cost for compliance typically comprises the abatement costs and the tax rate for emissions while the expected cost for being out of compliance consists of the penalty for being out of compliance and the audit probability.”

The author notes that CAMs reflect the idea that the regulator is able to make the probability a firm is audited depend to some degree on its compliance effort relative to its peers. “The relative comparisons, based on disclosed information or imperfect signals of compliance effort, generate a compliance competition among regulated firms.”

To evaluate if CAMs can be utilised by underfunded enforcement agencies as a more effective audit strategy in comparison to a random audit mechanism, the study considers how CAMs influence firm's decisions under three audit regimes, that vary in the degree of competitiveness: one, zero competition induced by a random audit mechanism; two, a moderate degree of competition induced by a Tullock lottery audit mechanism; and, three, the highest degree of competition possible induced by an all-pay auction audit mechanism.

The results of Oestreich's study are that CAMs can yield a double dividend, viz. fewer emissions, and more accurate reporting. However, with very high degrees of competition, CAMs can lead to more emissions compared to a random audit mechanism, he cautions.

Recommended study for the environmental accountants.

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