Faithful representation as an ‘objective mirage’: A Saussurean analysis of accounting and its participation in the financial crisis

Abstract

Abstract This paper takes as its starting point the claims of critics that fair value was an active participant in the dynamics of the financial crisis, and then sets out to explore this participation through drawing on the works of Saussure and Derrida. For Saussure, the relation between sign and referent is always ‘arbitrary’ and, as applied to accounting signification, suggests the impossibility of the seemingly realist ambition of standard setters for accounting to simply ‘faithfully represent’ independently existing ‘economic phenomena’. Instead, for Saussure and Derrida, meaning is purely differential and relational and arises only in the play of difference between signs over time. Following their views on the nature of signification, our account begins with a description of the complex credit derivatives whose rapid shift from profit to loss under fair value triggered the financial crisis. We then explore accounting’s participation in the crisis along three dimensions: the collapse of difference between accounting signs that characterised derivatives’ initial construction as profitable, and their later valuation using the ABX.HE index; the self-interested neglect of how fair value accounting signs would interact over time with accounting dependent remuneration practices, credit ratings, and capital adequacy rules; and the introduction of new sources of heterogeneity to accounting in the application of the fair value measurement hierarchy. The paper concludes by suggesting that, in allowing the recognition in the present of values derived from inherently uncertain forward estimates, fair value accounting made possible not the management of risk, but its exploitation.