Immediately after WWII, unlike statisticians' reforms, accountants failed to establish the Cabinet-controlled Accounting Committee and Accounting Law which were originally envisaged as the key to successful "Accountics": the management of the socio-economy through standardized accounting (Part I). Nevertheless, July 1948 is regarded as the beginning of Japan's accounting revolution, as academic accountants accomplished a series of fundamental reforms. Part II examines the process through which micro financial systems were swiftly developed as a microfoundation of the new "democratic" socio-economy. First, academics implemented new accounting for large companies in order to dilute the Zaibatsu- and Imperial-centred regime; followed by censored and standardized accounting education for SMEs and the public in order to change the public perception of the roles of businesses in society. The foci of examination are the political manoeuvres of reformers, the consequences of new accounting, and pragmatic philosophy of the academics in action. Towards the end of the paper, some implications of this history are considered in relation to the impacts of the IAS/IFRS on today's international socio-economy.
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In: Accounting, Organizations and Society, Vol. 32, No. 6, 08.2007, p. 543-575.
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TY - JOUR
T1 - A history of Japanese accounting reforms as a microfoundation of the democratic socio-economy
T2 - Accountics Part II
AU - Suzuki, Tomo
N1 - Funding Information: The US interest in the management of the macroeconomy and dissolution of Zaibatsu first led to the reform of large company accounting. However, SMEs’ accounting practices also had to be taken into account. This was because SMEs inevitably contributed a significant portion of national income, with statistics even scarcer than those of large companies: ‘There is no sector of national income currently more important than the net profits of entrepreneurs (chiefly small unincorporated business men, but including also independent professional men). Yet it is literally true that there are no direct data, complete or partial, past or current, which can be relied on to show the level, composition or trend of entrepreneurial income’ ( Sapir, 1947b, p. 15 ). SMEs were also important in order to incubate new businesses and harness the democratic force after the dissolution of the Zaibatsu -centred economic regime. The Statistical Mission emphasised that family-based secret management was the root, at least in part, of the Imperial and Zaibatsu regime. Accounting education for smaller businesses and the public was therefore considered in the context of the new democratic economy. Sapir’s following observation of accounting in a small business re-confirmed the need for public education, such that the new accounting framework would let them recognise the function and responsibilities of businesses in relation to their socio-economy as a whole (Points A-2 and B-1; Sapir, M. Statistical Mission to Japan, April 1947 ). The rudimentary nature of bookkeeping in Japanese business and the almost whimsical attitude towards it is strikingly illustrated by … Mr. X (owner of a factory where he hired 47 workers), [who] maintains no regular set of books or accounts, and carries all these various transactions largely in his head. When asked if he didn’t feel the need for a bookkeeper, Mr. X – educated in American colleges – agreed he did, and explained he had in fact been constantly on the look-out for some family relative (sic!) with such training and experience (ibid, p. 16; Parentheses in original). In addition to making the new public aware of their role in the management of the economy as a whole, the deficiency of the tax accounting system was another important concern to Sapir. His view was that ‘only when all or the major parts of the corporate business community are compelled to make complete returns of gross income, costs, and net income for tax purposes, on the basis of a well-drawn tax statute can we hope to have complete, reliable, and consistent statistics’ (Point A-2; ibid, p. 14). However, Japanese corporate tax reports were ‘virtually useless because of grave defects and loopholes in the tax laws and laxness in tax collection and administration’. The same was true for individual income taxes, for sales, and excise taxes, etc. ‘Without extensive overhauling and tightening up of the Japanese fiscal system there was little use in trying to utilise the records and reports for analytical purposes’ (ibid, p. 9). The reporting and collection of personal income taxes was ‘so haphazard and inefficient in Japan that the tax records, even if they were systematically tabulated and analyzed, would be practically worthless statistically for estimating wages or anything else. In fact they [were] generally piled up in the Ministry of Finance and never analyzed’ (ibid, p. 12). From such observations, Sapir, ESS officers, and Japanese academic accountants came to plan fundamental reforms of accounting for smaller businesses along with Carl Shoup’s forthcoming Tax reform, whilst vocational education for students and business people became centrally programmed. Back in late 1947, in order to make economic statistics more reliable, Takahasi recommended that the Instructions for the Preparation of Industrial Financial Statements should apply not only to “Restricted Companies” (i.e., large Zaibatsu -related companies), but also to other ordinary firms. However, this aim was not realized at the time, because Hessler and Murase thought of the Instructions as tentative and only applicable to large Zaibatsu companies. The quality of the Instructions was ‘not sophisticated enough to form the basis for all companies’ accounting’ ( Murase, 1958 ). M. Hashimoto, a colleague of Takahashi and an advisor for the ESS, requested the Association of Industrial Accounting to revise the Instructions ( Kurosawa, 1979j, No. 10, p. 99 ). This task was eventually taken over by the Investigation Committee. Out of gratitude to L.Q. Moss, Chief of the Professional Education Section, for his help in organizing the Conference on Accounting Standards and Education which led to the establishment of the Investigation Committee (see Section, Corporate accounting for macroeconomic management in Part I), Ueno himself took responsibility for the education division ( Kurosawa, 1979j, No. 10, p. 99 ). Under the leadership of Ueno, the Second Division of the Investigation Committee was placed in charge of accounting education, particularly devoted to SMEs and public education. In March 1949, the Second Division summarised the economic condition of SMEs in the draft of Essentials of Simplified Retail Store Bookkeeping . The following paragraph points out that accounting was not practised to the degree necessary to establish an “autonomous” financial system. The autonomous financial system here meant the mechanism by which financers help each other according to their own will, and the government and tax payers agree on an appropriate level of taxation, both based on regulated accounting practices: Despite the fact that the small and medium-sized enterprisers in our country are playing a very important part in our economic recovery, they are now facing very serious financial difficulties. … which chiefly originate from the following causes:- (a) Our bankers are reluctant to finance the small and medium-sized enterprisers mainly because of the fact that their financial conditions are unascertainable for lack of any reliable financial statements . (b) The extremely heavy tax levied on their incomes is fixed by haggling between tax-payers and revenue officers as the majority of tax-payers do not keep their books of account at all and no reliable figures are available to ascertain the exact amounts of taxable income. ( anon. (probably Nakanishi, Nabejima, and Kurosawa), March 1949 , Suzuki’s translation; Emphasis added). In this way, leading accountants of that time clarified that the lack of tradition in representing themselves through accounting prevented the Japanese from forming effective banking and fair taxation. Note here, as often pointed out by both economic historians and institutional economists, that both the banking system and public financing became the most important pillars of Japan’s high economic growth after the War, which would not have been possible without accounting education (e.g., Aoki, 1990 ). 9 Although the relationship between the development of standardized accounting and its economic consequences is a minor topic in economics, this particular point seems to be highly relevant to the studies of developing and transitional economies. For instance, unreasonably high tax levying, due partly to the untrustworthiness of accounting records, is a common problem that some developing and transitional economies, such as the Russian economy, currently face. In China, unreliable financial statements and lending based on them caused a massive non-performing loans problem in the 1990s. Although these points go beyond the scope of this paper, for those who are interested in the developing and transitional economies, there is much to be learnt from the history of Japanese accounting and economic growth. 9 Despite the urgent need for reform, however, Ueno once again faced interference from the Ministry of Finance which insisted upon its exclusive control over financial matters. Yet, this time, Ueno turned to the Shoup Tax Mission as a source of political backing. Following recommendations made by Gilbert, Rice and Sapir, the US Government sent Carl Shoup as Chief of the Tax Mission in 1949. In September 1949, Shoup published the Report on Japanese Taxation , in which he supported the role of the Investigation Committee as a standard setter. “[a]n organized effort must be made to improve Japanese accounting practices. A start in this direction has been made by the formation of the Committee for the Improvement of Accounting Standards (i.e., Investigation Committee). This Committee should continue to function as an independent advisory group, upon which would be represented those interests, Government and private, that are concerned with the subject of accounting standards. In particular, the Tax Administration Agency should be represented on that Committee. ( Shoup Mission, 20 Sept., 1949, sec. Improvement of Accounting Standards and Practices ). According to Kurosawa, this reaffirmed that the Investigation Committee had legitimate control over other institutions such as the Ministry of Finance in preparing accounting standards. 10 Kurosawa acknowledged that ‘the original idea of an Accounting Committee as a standard setting body had been almost turned down but was saved by L.Q. Moss to survive as an educational institution (1947; see Section, Corporate accounting for macroeconomic management in Part I). This time, thanks to the Shoup Plan (1949), we recovered our status as a committee for accounting standards’ ( Kurosawa, 1979l, No. 12, p. 99 , Suzuki’s translation.). With Shoup’s help, Ueno sought further help from the ESS: ‘…[the] Research Committee (i.e., Investigation Committee, Suzuki) was established in the Economic Stabilization Board in June last year in compliance with the suggestion of the interested offices of [the] ESS as an organ preparatory to the establishment of a permanent organization on improvement of business accounting system. But no actions have been taken so far for the establishment of a permanent organization mainly on account of administrative retrenchment and reduction of public expenditures. … In view, however, of the recommendations of the Shoup Tax Mission on the improvement of accounting system, and with a view to expediting the establishment and maintenance of business accounting standards, it is considered appropriate to reorganize and strengthen the Research Committee along the following lines and your kind consideration in this respect is cordially requested’ ( Ueno, 5 November, 1949, pp. 1–2 ). 10 Tsuru and the members of the Investigation Committee collaborated with the Shoup Mission, and they eventually came up with what is now known as the Blue Income Return system in December 1949. 11 The name of Blue Income Return came from the colour of the return form, which remains the same until today. 11 There are two points to be noted with regard to this new system. Firstly, as the Preface to the Shoup Report stated, the aim of the Blue Income Return was ‘to recommend a modern system, which depends upon the willingness of business men [sic] and all taxpayers of substantial means to keep books and to reason carefully about some fairly complicated issues of equity (i.e., the measurement of business performance)’ ( Shoup Mission, 20 Sept., 1949 . Emphasis and parenthesis added). Following the Allied Powers’ occupation policy to cultivate a “democratic economic force” in Japan, the tax system was revamped on the basis of business people’s willingness to calculate their own income and tax based on accounting. It was revolutionary for the Japanese in the sense that the new tax was based on a “self-assessment” principle under which taxpayers managed their own books. Kurosawa noted, ‘nowadays, everyone takes the self-assessment system for granted, but it was absolutely unfamiliar for both the tax authorities and tax payers’ ( Kurosawa, 1979k, No. 11, p. 98 ). Secondly, as we see in his Principles of National Income Analysis ( Shoup, 1947 ) and “Development and Use of National Income Data” ( Shoup, 1948 ), Shoup was another expert of national accounting in the US at that time. The Japanese tax system was designed in such a way that tax return data served national accounting, taxation and public finance. Taken together, these two points illustrate the manner in which tax data started being collected automatically based on the willingness of the business community, thus contributing towards the establishment of the microfoundation of macroeconomic data (Point B-1). The reformers’ efforts did not stop at setting the standards on paper. In order to ensure completion of the Blue Income Return by smaller businesses, the Second Division arranged special education programmes for smaller businesses and the public. Its major tasks were the publication of a standard textbook and follow-up on-the-job-training (known in Japan as “OJT”). As a subject still taught in Japanese high schools today, bookkeeping has proven much more popular than economics, as the former is perceived to equip graduates with more practical skills upon leaving school. Unlike in many other developed countries, economics courses are rarely taught in Japanese high schools. Therefore, it is through accounting courses to large extent that students learn the functioning and workings of companies, both as a self-contained entity, and as a participant in the national economy. The process of developing the standard textbook and courses was closely monitored by ESS officials. For instance, the contents of the textbook’s three volumes were translated into English, approved in advance, then reviewed according to the directions given by March ( Murase, n.d., (c. 1948–1949) ): ‘I have run through the textbooks, … A strong objection may be raised by some teachers that it is too early in this stage to teach the students to classify the assets into current assets and fixed assets. However, I am of the opinion that the students of Accounting should be taught from the beginning to make the classification of the assets when they are going to prepare any balance sheet. …’ ( Murase, November 16, 1948 ). As exemplified in the above and following stenographic records, when the Division worked on the contents of the standard accounting textbook, it clearly kept in mind both the students’ cognitive processes and the way in which accounting impacted upon the epistemology of economic reality ( Kigyo Kaikei Seido Taisaku Chosa-kai, 17/02/1949 ). Shinobu Imai initiated the drafting of the standard high school textbook and curriculum. He planned to start with a petty cash book and household account book; however, Kurosawa and Ueno opposed this strategy. Imai: I started from a petty cash book – the most familiar form of money management. I wanted students to think of management in a simpler way, to work things out for themselves and progress from there through trial and error. I have also included the use of the household account book to guide them from the familiar to the new… Kurosawa: I think, the petty cash and the household account books are essentially different from enterprise accounting in nature. While bookkeeping education aims to teach enterprise accounting, the petty cash and household account books do not and therefore, it would be inappropriate to use the two to fulfil the same objective. Ueno: Since double-entry bookkeeping has been a globally shared system or institutional mechanism that has been used to describe the workings of enterprises, it is better to “imprint” students with this idea of double-entry bookkeeping as a given method from the very beginning (Kigyo Kaikei Seido Taisaku Chosa-kai, 17/02/1949, Suzuki’s translation; emphasis added). Later, Ueno and Kurosawa were appointed members of the Committee for Approved Textbooks in the Ministry of Education, and Kurosawa drafted the first official guideline for the teaching of bookkeeping at school ( Kurosawa, 1979j, No. 10, p. 101 ). Accordingly, no alternatives, other than standardized double-entry bookkeeping and accounting, were provided to students. Priority was given to the unified and internationally shared method of modern accounting. Analogous to one’s mother tongue, accounting had become a given means of communication that implicitly directs the public to see economic issues as a balanced financial matter. Thereafter, other matters such as family relationship and values (in a modern term, Keiretsu -based trust), altogether came to be treated as “external” to the companies’ financial and economic profiles (Point B-1; anon. (Nakanishi, Nabejima, Kurosawa), March, 1949 ). 12 While standardized accounting started generating formal and official profiles of corporations and the economy, it also started creating the “externalities” which can be technically defined as factors that are not included in accounts. Such factors as ‘ keiei kazoku shugi ’ (i.e., a famous Japanese management philosophy, “management familism” or the “Principle of Company as Family”), for example, may originally be central to the performance and measurement of businesses, but they came to be less important, at least in accounting terms. The creation of the externalities seems to have significant implications for some contemporary concerns, such as the relationship between accounting, environmental problems, and corporate social responsibilities. 12 Having handed over such textbook issues to the Ministry of Education, the Second Division then concentrated on professional education, adult education and OJT ( Kurosawa, 1979j, Vol. 31, No. 10, p. 101 ). Two academic accountants, T. Nakanishi and T. Nabejima, were appointed to the committee of standard accounting for SMEs. Under the supervisory leadership of Ueno and Kurosawa, they started drafting standard accounting methods and procedures from April 1949. Within half a year, the Essentials of Bookkeeping for Small and Medium-sized Companies 13 ‘… it is absolutely necessary for them [i.e., SMEs] to have their books of accounts kept somehow or other as accurately as possible in case they are unable to afford the costs of employing bookkeepers, well versed in the theory of double entry bookkeeping; alternatively, they can keep their own books of account under the double-entry system in order to tide over the financial difficulties they currently face’ ( anon. (probably Nakanishi, Nabejima, Kurosawa), March, 1949, p. 2 ). 13 was published as a basis for the Blue Income Return, which was enforced in December 1949. ‘This booklet became the best seller of the time’, since every enterprise came to have a duty to calculate tax according to the proper bookkeeping guidelines ( Kurosawa, 1980b, No. 2, p. 81 ). Similarly, even for those who were not ‘well versed in the theory of double-entry bookkeeping’, it was soon adopted as a matter of routine practice ( anon. (probably Nakanishi, Nabejima, Kurosawa), March, 1949, p. 2 ). In this way, double-entry bookkeeping became diffused as a principal method of business description even within smaller businesses. In order to achieve standardized accounting practices as well as an applied understanding of them in practice, Kurosawa even provided lectures to students, business people, and professionals, for little and often no financial reward. For example, the ‘Report on Lectures of Business Accounting Principle ’ shows that at least 32 lectures were organized for business people in July and August 1949, not only in large cities but also smaller, local cities, such as Takamatsu, Nagasaki and Muroran. The lecturers were Ueno, Kurosawa, Iwata, and a few other academic accountants. They drew more than 10,000 audience members from all over the country. The lectures were on the significance of the new regulations and concrete procedures to be disseminated through Japan on a public level (anon., 10/01/1949, Lecture of the Business Accounting Principles ). 14 In order to disseminate information on accounting and promote the status of accountants, lectures were also given by the US officials. One of the lecture titles was ‘Opportunities of Accountants’, in which students and business people were encouraged to become professional accountants ( anon., n.d., c. 1948–1949 ). 14 This short description of the origin of modern accounting education cannot represent the entire process through which double-entry bookkeeping and standardized accounting came to dominate the mode of economic description among the Japanese public. The scope of this paper is limited to showing how the foundation of standardized accounting was established. Empirical tracing of how this foundation actually contributed to the subsequent growth of the Japanese economy requires further research. Yet, the above analysis together with figuration of large corporations and industries section, in which aggregate pictures of firms came to be graphically represented, is at least illustrative of how the public has come to be aware of the workings of enterprises through modern accounting which was considered as a ‘globally shared’ mode of democratic economics (Kigyo Kaikei Seido Taisaku Chosa-kai, 17/02/1949). 15 Similarly, an ESS memorandum that records the discussions among the Investigation Committee states that ‘[b]ookkeeping techniques [should be] taught before advanced theory’ to get students used to the ‘world standard’ ( Swanson, 11 February, 1949 ). 15 Suzuki (2003a) investigated theoretically how standardized financial accounting has come to be the common mode of economic epistemology, in which factors such as “econocrats”, “numerical notations”, “form of accounts”, “aggregation”, “codification and regulation”, “textbooks”, and “education, publication and indoctrination” are considered to constitute a self-perpetuating apparatus that facilitates the prevalence and even incorrigibility of accounting. The above history hopefully provided some evidence for such understanding. More importantly, the relationship between accounting education and macroeconomic governance illustrated in this history is useful for future research on the impact of today’s dissemination of international accounting on developing and transitional economies.
PY - 2007/8
Y1 - 2007/8
N2 - Immediately after WWII, unlike statisticians' reforms, accountants failed to establish the Cabinet-controlled Accounting Committee and Accounting Law which were originally envisaged as the key to successful "Accountics": the management of the socio-economy through standardized accounting (Part I). Nevertheless, July 1948 is regarded as the beginning of Japan's accounting revolution, as academic accountants accomplished a series of fundamental reforms. Part II examines the process through which micro financial systems were swiftly developed as a microfoundation of the new "democratic" socio-economy. First, academics implemented new accounting for large companies in order to dilute the Zaibatsu- and Imperial-centred regime; followed by censored and standardized accounting education for SMEs and the public in order to change the public perception of the roles of businesses in society. The foci of examination are the political manoeuvres of reformers, the consequences of new accounting, and pragmatic philosophy of the academics in action. Towards the end of the paper, some implications of this history are considered in relation to the impacts of the IAS/IFRS on today's international socio-economy.
AB - Immediately after WWII, unlike statisticians' reforms, accountants failed to establish the Cabinet-controlled Accounting Committee and Accounting Law which were originally envisaged as the key to successful "Accountics": the management of the socio-economy through standardized accounting (Part I). Nevertheless, July 1948 is regarded as the beginning of Japan's accounting revolution, as academic accountants accomplished a series of fundamental reforms. Part II examines the process through which micro financial systems were swiftly developed as a microfoundation of the new "democratic" socio-economy. First, academics implemented new accounting for large companies in order to dilute the Zaibatsu- and Imperial-centred regime; followed by censored and standardized accounting education for SMEs and the public in order to change the public perception of the roles of businesses in society. The foci of examination are the political manoeuvres of reformers, the consequences of new accounting, and pragmatic philosophy of the academics in action. Towards the end of the paper, some implications of this history are considered in relation to the impacts of the IAS/IFRS on today's international socio-economy.
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U2 - 10.1016/j.aos.2006.10.003
DO - 10.1016/j.aos.2006.10.003
M3 - Article
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SN - 0361-3682
VL - 32
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EP - 575
JO - Accounting, Organizations and Society
JF - Accounting, Organizations and Society
IS - 6