Our Colleagues Respond …

As you may recall, on December 3rd, we published Michael Kraten’s opinion piece If Corporations Are People, Why Aren’t They Taxed Like People? And then, on December 20th, we published responses by our colleagues Andrew Felo of Nova Southeastern University and Wm. Dennis Huber of Capella University.

But we still are not yet ready to bring our taxation policy conversation to a close! Lawrence Murphy Smith of Texas A&M in Corpus Christi recently responded:

Corporate earnings are taxed like people, as the people who own the corporation (i.e. stockholders) receive dividends or capital gains from selling stock. For that reason, I’ve always thought the corporate income tax should be zero, thereby avoiding double taxation at the corporate and then the individual level. Further, as you may be aware, the U.S. corporate income tax rate is currently second only to Japan. You might find my paper on taxes and economic activity of interest.

He elaborated:

My point is that corporate income shouldn’t be taxed at all. In other words, if the corporate income tax rate is zero, that would not mean corporate income avoids tax. The people who own the corporation would pay taxes on all the corporate earnings, either when they receive dividends or when they sell the stock. Thus, corporations need have no income tax imposed on the corporation itself, as the owners/people/stockholders ultimately pay taxes on whatever the corporation earns.

As shown in my paper, the US corporate income tax rate is currently second highest in the world, not to mention the most complex, creating high compliance costs. Lowering or eliminating the US corporate income tax would be a boon to the economy.

These are interesting questions, aren’t they? They certainly carry broad public interest ramifications.

We thank Murphy for responding to our recent posts with his astute comments. We continue to welcome, and we shall continue to publish, our colleagues’ perspectives regarding the system of taxation in the United States.

If You Sense That You Need A Different Approach, Why Not Explore Alternative Accounting Practices?

One of the strengths of mainstream accounting research is its standardized regularity. We define our exogenous and endogenous variables based on prior research studies. Then we develop our experimental hypotheses. And after drawing a sizable sample from our clearly defined population of transactions, we use large-scale statistical methods to test those hypotheses.

But what if the variables aren’t easily defined? Or the population, for that matter? Or what if a sizable sample cannot be extracted and quantitatively tested at a meaningful level of significance?

In other words, what if you sense that you need a different approach? How should you proceed? Under such circumstances, you may wish to explore alternative accounting research practices.

For instance, let’s say that you’re evaluating the anti-theft preventive controls at the card, dice, and roulette tables of a casino. How can an auditor test those controls while the games are in progress on a floor that never closes?

The best approach for testing whether controls are in place to prevent dealers from stealing chips may be to employ the auditing method of focused observation. And to make the system more “auditable,” the casino may choose to keep all of the stacks of chips in plain sight.

Indeed, the “plain sight” tactic may convey an additional benefit by deputizing gamblers to serve as auditors. In other words, by enhancing the visibility and thus the “auditability” of the preventive controls regarding chip theft, the casino can enable the players to form a transitory social community to observe and police the dealers.

Likewise, according to Ingrid Jeacle’s 2017 Accounting, Auditing & Accountability article entitled Constructing audit society in the virtual world: the case of the online reviewer, the reviewers of online services like Amazon have formed virtual communities that feature audit logics. Ingrid utilizes a new research methodology entitled “netnography” as a means of “… becoming familiar with the operational features of the site and analyzing its textual discourse.”

It’s not a traditional method of accounting research, is it? But its alternative approach is necessary for studying emerging communities in virtual online spaces.

Caroline Lambert, the Chair of the Conference Organizing Committee of the May 2018 Alternative Accounts Conference at HEC Montreal, also utilizes alternative accounting practices when necessary. According to Caroline:

Alternative Accounting is both an approach and a state of mind. It’s a way to look at events and characteristics with different lenses. It requires us to re-think our assumptions about the influences of accounting in our daily lives, encompassing the largest meaning possible.

For instance, together with Claire Dambrin, in an article entitled Beauty or not beauty: Making up the producer of popular culture that was published in Management Accounting Research in 2017, we analyzed the control mechanisms — mostly cultural controls — through which brand managers embody their product. The managers must continuously brand themselves within their own organizations to be considered “performing individuals.”

Alternative accounting is an interesting approach, isn’t it? Clearly, it is needed to study cultural, sociological, and other topics when traditional approaches fail to offer practical research methods. And given the prevalence of such topics in the Public Interest field, it’s the type of research approach that is sure to attract our colleagues.

Our Colleagues Respond …

On December 3rd, we published Michael Kraten’s opinion piece If Corporations Are People, Why Aren’t They Taxed Like People? You can find that piece, and all of our other blog posts, on our blog page at AAAPublicInterest.org.

But Michael’s post did not bring an end to our taxation policy conversation! Two of our colleagues then responded with follow-up comments.

First Andrew Felo of Nova Southeastern University noted that “individual owners of the corporation also pay income tax on the corporation’s earnings. That means the income is taxed at a much higher rate than 20%.”

Why is that important? Because it addresses the concern that the corporate tax rate is about to be reduced to a level that is far less than the individual tax rate. Nevertheless, the two-tiered nature of our system of corporate taxation does illustrate Michael’s original observation that “corporations aren’t taxed like people.”

And then Wm. Dennis Huber of Capella University suggested that: “To see how the Supreme Court has created corporations as persons, see Law, Language, and Corporatehood: Corporations and the U.S. Constitution, and The Supreme Court’s Subversion of the Constitutional Process and the Creation of Persons ex nihilo.” Both are available at Dennis’ SSRN page.

We thank Andrew and Dennis for responding to our recent post with these insightful comments. And we shall continue to publish our colleagues’ perspectives regarding the American system of taxation.

If Corporations Are People, Why Aren’t They Taxed Like People?

Editorial Note

We are delighted to publish this “opinion piece” by Dr. Michael Kraten, a member of the AAA Public Interest Section and a frequent contributor to our social media blog. As always, when you read this contribution, we ask that you keep in mind that the opinions expressed therein are those of the author. They do not represent the position of the AAA or of any other party.

Author Biography

Michael Kraten, PhD, CPA (Mike) is an Associate Professor of Accounting at Providence College, where he teaches the graduate accounting capstone course and an interdisciplinary undergraduate course in sustainability. He serves as the publisher and editor of the AAA Public Interest Section’s social media blog.

Mike specializes in valuation, risk management, and management accounting issues, with functional interests in sustainability and corporate social responsibility. He has written papers for Accounting and the Public Interest, the Journal of Banking and Finance, the International Journal of Accounting, the CPA Journal, and other publications.


Have you been keeping track of the U.S. Republican Party’s proposal to transform the American system of income taxation as it wends its way through the legislative process? If you’re doing so, you may be wondering about the answer to a very simple question:

If the Republican Party truly believes that “corporations are people,” why is it willing to tax corporations at rates that fall so far below comparable personal (or individual) rates?

After all, if corporations are people, one may conclude that they should be taxed like people. Conversely, if they are not, then one may conclude that several recent Republican legislative positions are dissonant in nature.

To elaborate on this question, it may be helpful to review some historical background. And to do so, we may wish to begin with the birth of the American nation in 1776.

In June 1776, for instance, Virginia ratified its Declaration of Rights, a document that later evolved into its State Constitution. The declaration included an assertion that “… all men … have certain inherent rights … namely, the enjoyment of life and liberty, with the means of acquiring and possessing property, and pursuing and obtaining happiness and safety.

The Declaration clearly drew upon John Locke’s earlier assertion, in his Two Treatises of Government, of an individual’s natural rights to life, liberty, and estate (or property). And at roughly the same time that the colony of Virginia was ratifying its Declaration of Rights, Virginian Thomas Jefferson was defining life, liberty, and the pursuit of happiness as unalienable rights in the American Declaration of Independence.

But did Locke, Jefferson, and their peers intend to imply that business organizations also possess these unalienable rights? Or were they strictly referring to rights that are held by individuals?

Their writings appear to be focused on individual rights. Nevertheless, the U.S. Republican Party now supports the libertarian position that corporations are associations of individuals. Thus, consistent with recent U.S. Supreme Court decisions, certain human rights that are held by individuals can be aggregated into rights that are held by associations of individuals, and thus by corporations.

That’s why, during the 2012 Presidential campaign, candidate Mitt Romney declared that “corporations are people” in regards to the legal rights of corporations. Despite subsequent public criticism of Romney’s declaration, he was accurately describing the Supreme Court’s position in various decisions (such as the Citizens United and Hobby Lobby cases) that confirmed the existence of corporate rights.

In a fiscal sense, President Ronald Reagan’s earlier Tax Reform Act of 1986 also established a rough equivalence between corporations and individuals by bringing the maximum corporate tax rate and the maximum personal rate into rough equality. Specifically, it reduced the nominal corporate rate to 34% and the nominal personal rate to 28%. However, due to the phase-out of personal exemptions, it “topped out” the effective personal rate at 33%.

So how can we summarize these established (or “establishment”) Republican positions? Although the Founding Fathers and their predecessors defined individual rights without explicit reference to corporate rights, U.S. Republican Party leaders from Ronald Reagan to Mitt Romney implicitly or explicitly declared that “corporations are people,” and concluded that business entities should enjoy many of these same rights.

But then what are we to make of the fact that President Donald Trump favors a reduction in the top corporate tax rate to 15.0%? While only supporting a slight reduction in the top individual rate to 35.0% from 39.6%?

That’s a bit inconsistent with the established Republican position, isn’t it? After all, if business corporations possess many of the natural rights of individuals, it is reasonable to believe that they should be taxed as individuals. Instead, the President favors an ostensibly dissonant policy of treating corporations like people on legal matters when it favors business entities to do so, while treating them differently than people on tax matters when it likewise favors the entities to do so.

On the one hand, there may be nothing illegal about such a position. But on the other hand, its natural dissonance may breed a sense of cynicism about a lack of equity in our system of government.

Ethical Claims of Large Accountancy Firms Smack of Hypocrisy

Editorial Note: We are delighted to publish this “opinion piece” by Dr. Prem Sikka, a frequent contributor to our social media blog. As always, when you read his contribution, we ask that you keep in mind that the opinions expressed therein are those of the author. They do not represent the position of the AAA or of any other party.

Prem Sikka is Professor of Accounting and Finance at the University of Sheffield and Emeritus Professor of Accounting at the University of Essex in UK. His research on accountancy, auditing, tax avoidance, tax havens, corruption, corporate governance, money laundering, insolvency and business affairs has been published in international scholarly journals, books, newspapers and magazines. He has appeared on domestic and international radio and television programs to comment on business matters. He has advised and given evidence to a number of UK and EU parliamentary committees. Most recently (2016-2017), he advised the UK House of Commons Work and Pensions Committee for its investigation into the collapse of BHS, one of the largest retailers, and related pension matters.
Prem holds the Working for Justice Award from Tax Justice Network, Accounting Exemplar Award from the American Accounting Association (AAA), Lifetime Achievement Awards from the British Accounting and Finance Association (BAFA) and PQ Magazine, Personality of the Year Award from Accountancy Age and the inaugural Abraham Briloff Award from The Accountant and International Accounting Bulletin for promoting transparency and public accountability of businesses.

All over the world there is concern about tax avoidance by large corporations and wealthy elites. The latest revelations known as the Paradise Papers add further fuel to the debate. The Paradise Papers consist of some 13.5 million pages of internal information leaked from Appleby, a law firm specializing in international tax planning. The documents are publicly available on the website of the International Consortium of Journalists.

In common with previous leaks known as the Panama Papers, Luxembourg Leaks and HSBC Leaks (see References, below), once again attention is focused on the role of the Big Four accounting firms in crafting schemes that enable wealthy elites and large corporations to avoid taxes. All too often the firms sell tax avoidance schemes to their audit clients and then report on the resulting transactions. Audited Company accounts rarely provide information about corporate tax avoidance strategies. Whether the tax avoidance schemes are legal or otherwise can only be established by test cases, and these are comparatively scarce as tax authorities frequently lack the resources to investigate and challenge the schemes.

In any case, the revelations raise questions about ethics and morality of practices that deprive elected governments of resources for alleviation of poverty and investment in social infrastructure. Faced with the ability of capital and wealthy elites and corporations to avoid taxes, citizens are left with stark choices: either pay more for a crumbling infrastructure or forego hard-won social rights. Neither is palatable or conducive to social stability.

The Big Four accounting firms routinely seek to distinguish themselves from others by appealing to ethics and social responsibility. Their websites boast of ethics. The website of PricewaterhouseCoopers (PwC) claims that the firm’s “high standards of ethical behavior, are fundamental to everything we do … We are willing to walk away from engagements and clients if our independence, integrity, objectivity, or professionalism could be called into question if we continued”. Deloitte claims that “Integrity and ethical behavior are central to maintaining our reputation”. Ernst & Young boldly states that “We reject unethical or illegal business practices in all circumstances … We are alert for personal and professional conflicts of interest”. KPMG boasts “high ethical principles”. In the light of a steady stream of revelations, the above seem to be just cynical PR statements designed to disarm critics and it is unlikely that journalists and general public attaches too much credibility to the claims.

Big accounting firms have a long history of profiting from tax avoidance. In 2003, a report by the US Senate Permanent Subcommittee on Investigations concluded that

“respected professional firms are spending substantial resources, forming alliances, and developing the internal and external infrastructure necessary to design, market, and implement hundreds of complex tax shelters, some of which are illegal … They are now big business, assigned to talented professionals at the top of their fields and able to draw upon the vast resources and reputations of the country’s largest accounting firms …”.

Here is an interesting extract from a 2013 UK House of Commons inquiry into the role of the Big four firms in tax avoidance. Just before the hearing, the chairperson of the Committee met a senior person connected with PwC and then said

“I have talked to somebody who works in PwC, and what they say is that you will approve a tax product if there is a 25% chance—a one-in-four chance—of it being upheld. That means that you are offering schemes to your clients—knowingly marketing these schemes—where you have judged there is a 75% risk of it then being deemed unlawful”.

Partners of other firms admitted to having a threshold of 50%.

The Paradise Papers once again show a huge gap between the public claims and actual practices of accounting firms. How can this be explained?

The gap persists because the internal dynamics of the firms are decoupled from external responses. Firms manage external pressures and public skepticism with claims of ethical behavior and social responsibility. Well, they can hardly do anything else. At the same time, internal processes cannot easily be aligned with such claims. Internally, staff are trained to design and sell tax avoidance schemes. Tax departments and staff are assigned revenues and profit generating targets. Those failing to meet the targets are disciplined whilst those meeting the targets are rewarded with promotions and salary increments. Over a period of time, certain habits and practices become normalized and tax avoidance becomes just another part of daily organizational life. As the internal and external dynamics remain decoupled, any claims of ethical conduct come across as hypocritical. The hypocrisy is not an accidental or unintentional outcome, but rather it is the intentional outcome of policies deliberately chosen and implemented by senior executives of the firms.

The tensions between internal and external responses are exposed by whistle blowers, court cases, media investigations and leaks such as the Paradise Papers. The negative publicity and public anger should encourage firm to align organizational culture, goals, practices and mindsets of staff with social expectations but they have shown little inclination to do so, especially as large amounts of profits are at stake. So the prospect is of further loss of legitimacy, public anger and possibilities of tougher regulatory responses.


HSBC Leaks

Luxembourg Leaks

Panama Papers

Speculations about the implications of the Pathways Vision for how we understand accounting

Eileen Z. Taylor, PhD, CPA, CFE, is an Associate Professor of Accounting at North Carolina State University’s Poole College of Management, researching whistleblowing, ethics, and accounting information systems. She has published in a wide range of journals, including Journal of Information Systems, Journal of Business Ethics, Behavioral Research in Accounting, Accounting Horizons, Accounting and Public Interest, and Journal of Accountancy. She serves on several editorial boards. She holds a BS, MAcc, and PhD from University of South Florida.

Paul F. Williams is a Professor of Accounting at the Poole College of Management at North Carolina State University. Paul earned a BSF from West Virginia University, and MBA and Ph.D. degrees from the University of North Carolina at Chapel Hill. He joined the N.C. State faculty in 1985 after spending 1977 to 1985 at Florida State University. His research interests include accounting ethics, theory, and critical perspectives in accounting. His publications have appeared in Critical Perspectives on Accounting, Accounting, Organizations and Society, The Accounting Review, Contemporary Accounting Research, Journal of Business Ethics, Accounting and the Public Interest, Accounting Horizons (for which he won the best paper award for 2014), among many other journals. He has served as chairperson of the Public Interest Section of the American Accounting Association and as editor of Accounting and the Public Interest. He received the Public Interest Section’s Accounting Exemplar Award in 2013.


The draft manuscript is available online at:



In the spirit that a picture is worth a thousand words, the Pathways Commission Vision’s “perception” of accounting is a simplistic caricature of a practice epitomized by bookkeeping and governed by a “black letter” tradition whereby hard-and-fast rules exist for distilling the vast number of data business generates into a meaningful narrative about the financial state and performance of a firm. The “Reality” Vision is a rather heroic self-perception the profession has for the role it will play in producing a prosperous society. The problematic ambiguity with the “Reality” obviously revolves around the concept of “prosperous society” and what implications different notions of “prosperous” have for accounting’s role in society, given accounting’s (and accountants’) limitations. We propose a vision for a prosperous society based on the 17 UN goals, specifically focusing on the two which relate to income distribution and sustainability. We consider how accounting can play a role in helping achieve this view of a prosperous society.

<1> For the benefit of our readers who didn’t attend our Symposium, how would you describe your interest in the topic?

We have long thought about how accounting could be used to better serve the public interest; by which we mean using accounting and its tools and concepts to promote (to the extent possible) the well being of a large and diverse set of individuals. We have unfortunately witnessed accounting practice become a profession, more aptly, an industry, that serves a narrow swath of stakeholders rather than a wide public interest.

At the same time, we have observed social changes wrought by questionable policies, unchecked private interests, and technological advances. While some individuals and organizations are better off, others have been disproportionately and negatively affected. Issues such as income inequality, declining natural resources, hunger, declining upward mobility, and access to education are challenges to our success and sustainability as a human race. The United Nations has identified 17 goals which address many of these global challenges, and in our paper we focus on income distribution as the one most closely tied to accounting, and to our role in society as experts in accountability, measurement, and safeguarding of resources.

<2> Do you think the Pathways Vision Model accurately represents accounting as it is; as it should be?

While we applaud the AAA and AICPA for considering a better way to represent accounting to the public, we do not believe that the Pathways Vision Model accurately represents accounting. While this vision may represent what the industry (and by this we mean corporate clients and audit firms) would like the public to believe, we believe it is lacking. And that concerns us as academics and as educators.

If accounting is to hold true to its origins as a function that helps maintain justice and accountability in our society, then this vision needs revision. The first part of our paper is a critical analysis of the model, while the second part of the paper proposes a new model and equation for accounting that works toward fulfilling our obligation to the public interest.

<3> What is your vision?

We start by considering the goal at the top of the model. If accounting, as a social function, is to lead us to a prosperous society (note, this is not a society with some prosperous individuals in it), we must first consider what contributes to (or detracts from) society’s prosperity. In our paper, we focus on reducing income (and wealth) inequality, noted by Stiglitz as a critical aspect of well being, and identified by the United Nations as one of the top 17 global challenges facing us today. We then consider how accounting, in particular accounting concepts, tools, and expertise, can help us achieve that goal.

The Pathways Vision Model would have us measure only economic activity narrowly understood, make critically important judgments with our existing accounting expertise, which by our own definition of our expertise would result in useful information, leading only to good economic decisions, and thus a prosperous society.

While we may want this model to be accurate, we don’t think the world works that way. So, we have thought about how we might change our accounting perspective to achieve the prosperous society goal, at least as it pertains to income inequality reduction.

In the second part of our paper, we examine the individualistic (corporate) centered equation, and consider how it might be rearranged to serve society.

The current accounting equation is: 
Assets = Liabilities + Net Assets (aka equity), and 
Net Income = Revenues – Expenses

However, if we look closer at the income equation (below), we begin to see the value laden nature of accounting, which prioritizes and denotes as good, gross income of owners, and denotes everything that reduces that shareholder income as bad. This very equation leads us to focus on creating a society with a few prosperous individuals, since the goal of an owner in this equation is to increase his own income, and minimize all others’ incomes.

Gross income of owners = Revenues – gross income of labor – gross income of suppliers – gross income of creditors – gross income of government – capital allowances – net externalities.

However, we could rearrange the equation to put any one of the arguments on the right as the focal argument because a corporation is a legal being whose purpose may be specified by the society that permits corporations to exist. Viewed in this way, the management of a corporation is not focused solely on shareholder income, but on what distribution of revenues is appropriate considering that all of the parties have status that deserves respect in the management process. In the sustainability literature, this notion is referred to as “integrated thinking.” Thus, rather than generate net negative externalities to maximize shareholder income, efforts to internalize such costs is a corporate end-in-itself and an object of managerial decision making.

<4> Is the Pathways vision just one in long line of initiatives and fads that have come and gone with little to no lasting effect?

With all due respect to the well intentioned individuals who worked on the committee and on the model, we are concerned about the narrow focus on economic measures and decisions. We have learned enough at this point to recognize that human behavior is much more complex than can be explained by the rational man and principal/agent theories so often put forth as legitimate reasons for our behavior.

In addition, we see an explicit bias toward financial accounting in this model, and find it difficult to apply the model to the many other areas of accounting (e.g., tax, systems, governmental, etc.) that all share an accounting mindset.

According to its creators, the model is a starting point. We can only hope that academics, educators, and students will question this vision as we have, and work towards creating a more accurate model, one that serves the public interest.


Important Clarification

Hello, AAA Public Interest Section Blog subscribers! Here is an important clarification message for you.

If you visit our blog’s home page at AAAPublicInterest.org and read the essay that was posted yesterday, you’ll notice author and contributor Steve Mintz’s photo, professional title, and contact information at the bottom of the page. My name, Michael Kraten, does not appear on the essay at all.

Is that a problem? Well, no … it isn’t. It’s perfectly correct.

So why is that noteworthy? Well, if you look closely at the corresponding email message that WordPress sent to your inbox yesterday, there’s a line near the top of the message that simply states “By Michael Kraten” instead of “Posted By Michael Kraten.” Steve’s authorship is correctly noted at the bottom of the email message, but for some reason, WordPress only includes the name of the Publisher at the top of such messages.

So, for the sake of transparency, let’s clarify the authorship of the essay. Steve is the author who wrote the piece, and I am the blog publisher who posted (i.e. uploaded) the piece. Although my name doesn’t appear anywhere on the blog’s home page, I’ll add a post-hoc clarification statement to Steve’s essay on that page as well.

My apologies for the need to send you this follow-up message. Having budgeted a grand total of $35.88 annually on blog expenditures, I regret that we need to live with WordPress’ limited default options. Nevertheless, we’ll continue to transmit clarifications whenever appropriate.

Mike Kraten