School of Management Accountability, Representation & Control (MN7262) Discuss whether the concepts of accountability, representation and control can help explain the Euro crisis. Use course materials in your answer. GAO LU Student number 120938023 Date: 13 January 2013 Totur: Paul Brook & Geoff Lightfoot Word account: 2733 1. Introduction ARC (Accountability, representation and control) can be treated as a process of management.
In fact, in order to make sense those three words, it would be best to divide this process into four parts, accounting, accountability, representation and control.
Accounting is a kind of activities which started from ancient times. when people know how to keep information, they began to find ways to keep those information and want to show others, such as the mural which can keep a scene for other people to see what happened in that particular moment and use shell to do account activities.
In other words, accounting is a human activity which uses a “thing” represents another original one, and this practice, which can be called the process of representing (Lightfoot 2012.
P. 3). However, the “thing” we often use is not completely the truth, like Armstrong (2002) mentioned, the accounting activities are not like a printer to copy the reality, it does not just show you the accounting report to give you a statement that maybe the truth, or maybe not.
Armstrong (2002) prefers to treat accounting as a social activity, in his theory, social element such as human understanding, personal interest and social environment can greatly affect accounting activities, because the account report must be read by someone, and the contained information should be used by those specific people in order to know the general situation and then make decisions (Yong, 2006 cited in Paton and Littleton, 1940). Throughout the whole process, it may be a question about whether the information can be trusted or not.
In other words, do the accountants record the “right” thing in the accounting statement? As the article mentioned above, accounting activities need to serves a specific interest and different social understandings. Lightfoot (2013, P. 4) found “representation is rarely neutral, or impartial. The construction of a representation works in the interest of one party”. Which means there is actually no right or wrong accounting activities, if the statement has less usefulness for one group, it does not mean this statement have no value for other specific groups.
For these reasons, all accounting activities must cater to someone’s interest, and this satisfaction is what can be called accountability. What’s more, in order to keeps the process showing the more reliable data, managers always try to monitor it, as Brook (2012) said the concept of control is how the managers follow all the activities during the accounting process and show their power and authority. The recent Euro crisis is absolutely huge disaster for the whole euro zone, and also shows big influence for the world’s economy.
For this reason, people are trying to use their own knowledge to explain it. In ARC way, it is better to analyze it through state governance and euro institution. Just treat the state and the euro zone as a big organization, and find what extend the ARC effect the cause the euro crisis. The first part of this essay will discuss background of the Euro crisis, and the second part will emphasize the Greek government and how the crisis first happened in Greece. In the third part, the essay will use ARC knowledge to show problems in the euro system and analyze the consequence of this problem.
Finally, in conclusion, some advice will be given after a short summary. 2. Background The crisis started from the Greece. When people talked about the euro debt crisis, the first thought that came to mind was blame Greece. Just as the Greek Finance Minister Evangelos Venizelos once complained, “Negative stereotypes about Greece that have been floating around internationally” (Maguire, 2011). Maybe his words are right, but it is also necessary for us study Greece first if we need to know what is really happened for the euro zoon.
As Reuters (22 Dec 2009, P, 1) shows, in early 2009, the new Greece government had exposed that the true budget deficit of Greece would be 12. 7% not as the government had announced before. After the cheating activities coming to light, the three international credit rating agencies, Standard & Poor’s, Moody’s Investors Service, and Fitch, had downgraded the Greece to a low standard one by one for its large sovereign debt. It is because of this event that the whole euro zone came to fell into the crisis, in turn, and the economy of euro zone was hit hard.
It might be an economic problem when we saw it at first sight, the huge sovereign debt which was as high as 12. 7% of its GDP in 2009, and its economy definitely cannot afford the huge debt (Wilkinson 2012). This might be a reason for the market holding a pessimistic altitude of the debt default. 3. Greece There must be something wrong inside Greece. However, it is hard to claim that the Greek government intented to show a misleading report to the EMU (European Monetary Union) or Greek government itself cannot even understand how bad status they were in.
According to the criteria of EMU, Greece must decrease the debt and improve the financial performance, so a new government which was settled in 1993 puts forward a convergence policy in order to restrict the debt. Whereas, Herz & Kotios (2000, P. 171) pointed out that the convergence policy was not worked so well for the lack of implementation. The real expenditures in public sector was still in a high level, as a result, the EMU refused Greece again in 1997. The strike impelled Greece government put forward another policy, another more tightly convergence policy.
Finally, Greece joined the euro zone in 2001. However, according to the efficiency of Greece government before 1997, there was no doubt to suspect the veracity of the true financial condition of Greece in 2001. 4. 1. Control The chaotic of politic system in Greece should be the most important limitation for the country. The power of Greece government was strict by its political institution. “Ministers in their own domains lack de facto executive strength, given the internal problems of the bureaucratic machine” (Featherstone, 2011).
In Greece, the over powerful constitutional strength and cabinet structure help Greek own a democratic system, this system may give the public more right and benefit, however it also means that the weak governance will influence Greece in the same way. Featherstone (2011, P. 195) claimed that the political system in Greece has no efficiency, too limitation by the cabinet, even the minsters are in charge in their own area, and they have no real authority in the system. Apparently under this kind of political institution, the decentralization of power cause the government without efficiency and authority.
Lost authority means lose control for a state government. It may present in two ways, the first one is the lost control for the local government, and the financial policy which is put forward by the central government cannot be fully executed by the local government. The second one is the lost monitoring of local finance. The central accounting agency cannot follow the local deficit effectively. Without powerful centralization, the whole government departments will lose the right to punish those who did not respond to their activities. 4. 2. Accountability
Once the government cannot guarantee its power, as we talked above, the whole country may lose efficiency. Its’ direct consequence is the unclear accountability, which can be seen from the relationship between central and local government. It is the dereliction of duty from local accounting department that collects the local financial data accurately, but the statistics agency in Greece cannot even record the currency financial situation. Under normal circumstance, the financial data which are used by the state accounting department are collected from the local government.
According to Kaplanoglou & Rapanos (2011, p. 27), the local accounting activity includes 4 elements; they are the spending, the tax, financing and local debt. These four indexes represent the local condition objectively which require the accounting department collecting data honesty, responsibility. These accounting activities are usually in charged in local accounting agency. Featherstone (2011, p. 195) pointed out that before the Greece enter the Euro zone, the government has no idea how many employees they have in the public sector.
This accounting problem represents how inefficiency the Greece accounting departments are. What is more, in Kaplanoglou & Rapanos (2011)’s article, the annual information from local government which is used for the parliament to make budget plan has great deviation. This kind of unreal in basic financial data may misrepresent the reality of the economic condition in general. 4. 3. Representation The chaos of politics and the untrustworthy accounting economy data both contribute the crisis in Greece. First of all, in Greece, the budgeting control lacks a framework.
In order to get a good economic performance, the government of a country usually needs to adjust the macro-economy; and the financial budget is a useful way to balance the interest between different sectors. It is not enough to only keep the accurate of the financial data, but attention must be paid to the medium-term developing overview. Kaplanoglou & Rapanos (2011, p. 22) claim that the Greek government has no full set of budget framework; the annual fiscal report may mislead the government to make the wrong decision.
And because of dereliction of accounting agency, the parliament cannot hold the accurate information of the country, so they cannot submit the valuable budget for Greece. Secondly, the Greek government cannot control the spending of the budget. The parliament needs to calculate the whole budget into several parts in order to balance different area of Greek economy. However the competent accounting agency caused problems for the government, resulting in the government not knowing in which area they should spend more money and which part they should reduce.
This is one reason why even Greece was in a great crisis which has a large debt but most of its money is still spent in the public authority sector. Kaplanoglou & Rapanos (2011, p. 30) show that the fiscal governance should benefit for evaluating government financial policy, but in Greece the information distortion brings the Greek the huge debt and infinite loops of borrowing. 4. Euro zone 5. 4. Representation After talking about Greece, it is necessary for us to change our view to the whole euro zone.
Because of Greece, a question may be asked, how can a country with so much debt like Greece join the EMU and the managers of EMU not realize the problem before the crisis. Indeed, most of the research on the Euro crisis established on the financial area, which want to use financial or economic knowledge to explain the huge Greece debt and just blame the responsibility on the speculators (Wihlborg, 2010, p. 2). But the reality is the Euro authorities ignored the diversity between euro member countries. Wihlborg (2010, p. 4) pointed out that, at the beginning of the formation, the Euro was already criticized by its idealism.
Opponents said that in one currency area, the member countries require some abilities to adjust the inherent imbalance for they cannot use currency tools like national exchange rate to do the same thing. This is a basic criterion for a consummate currency union, however the fact is, some member countries of euro zone cannot met the criteria very well, the best example is Greece. As previously mentioned, the bad accounting department and government inefficiency let the country have limited ability to keep high flexibility to balance the domestic economy. Wihlborg (2010, p. ) told us an idea which is talking about the importance of early warming. In his article, the crisis existed from the beginning of the euro zone, which shows that most people in the Euro zone were over optimistic about the currency union, they thought the union itself can be the best solution for most dilemmas union member countries Wihlborg (2010, p. 4). Those two factors reflected that, the over-expectation of the euro union and the limitation of background data research preparation together contribute the overly expansion in early times, which gives the possible for the subsequent crisis. . 2 Control Precisely because of the optimism we talked above, the importance of institution improvement were ignored by the EU government. The most important problem is the Euro without an access accounting and framework. Obviously, the Euro authorities choose to believe that the union of Euro can use natural flexibility advantage to overtake the flexibility problems among member countries, in other words, they prefer the financial way to show a lueprint to the world the union is benefit, however, Wihlborg (2010) also claimed that, the blueprint can be treated as a plan which was built be divorced from reality, because as he said the political element can block the adjustment. It is easy to come to a conclusion that before the Greece crisis. On one hand, the governments of deficit countries lack the power to adjust the domestic economy and cannot offer the accurate financial report to the Euro authority; on the other hand, the Euro authorities use the wrong data and overoptimistic view to build the Euro zone.
Objectively, the expectation let the euro zone did not realize how important a monitor agency is. The desire of expending the euro and monetary integration let European lower their guard. 4. 3 Accountability After the crisis happened, it was too easy for the Euro authorities to show kindness to Greece, “In May 2010, the European Union and IMF provided 110bn euros ($140bn: ? 88bn) of bailout loans to Greece to help the government pay its creditors” (BBC, 2012). It is confusing that the first aid comes so quickly but the second one comes so late.
According to the BBC (2012), the next aid cannot put forward so immediately for the Greek government cannot show out the fiscal tightening policy. The euro authorities either just gave money to the debt countries, or just let the debt countries to deal with the crisis by themselves. However, the result was depressed, as Sandbrook (2011, p. 2) described that, after the Greek Prime Minister, George Papandreou, set the financial tightening policy, an old teacher suicide himself. The issue caused thousands of ordinary people on the street protest the policy and this protesting finally turned into violence action.
The urgent affair which is facing the EMU, was shown a general guideline for all the member countries. And this guideline mush has punishment action as its backup. On one hand, as the most powerful economies in the Euro, German, UK, should take more responsibility to help balance the uncertain element in Euro area, more important target is to keep the union more stable; on the other hand, the debt countries such as Greece and Italy need to do more effectively to control their domestic debt.
With this kind of rule, the union members can show more accountability for their whole interest. 4 Conclusion Generally, ARC is a process that a manager uses to manage an organization effectively. It concludes the information collecting, summarizing, and delivering while the authority must watch the whole process and make sure they are making the right decision for the right status. According to the process, the weak state governance and unreal local financial data together show the unreal status to the Greek governance, which causes the misunderstanding of the reality.
The monitory and governance control system in a country should watch all activities that the government did, however they did not do their work very well in Greece. This problem not only exists in Greece, but can also be found in other euro member countries as well. The Euro union itself without good preparation of defeating the crisis at first, no research, no collecting data, and even no financial monitory system to control all member countries. The misrepresentation of euro expectation cannot allocate responsibility perfectly and when the crisis happened, there was no framework to guide the rescue program.
After all, in an organization, like the euro zone, all the memberships should at least try to serve the union itself, should take their own accountability to help the union for a better future. As a suggestion, what the euro member country should do next is to take more responsibility in escaping the debt problem, such as the tightening monitory policy. The euro zone authority, should build financial institutions and monitory the frameworks, which can put forward a valid guideline to restrict financial activities among member countries. References
Armstrong, P 2002, ‘Management, Image and Management Accounting. ’ Critical on Accounting 13, pp. 281–295 Brook. P 2012, MN7262, Accountability, Representation and Control. Lecture 4, Week 4: Accounting and management concrol. Lecture PowerPoint slides. University of Leicester. Viewed 29 October 2012. BBC 2012, ‘Eurozone crisis explained’, BBC, 27 Nov 2012, p. 1, viewed 4, Jan 2013, http://www. bbc. co. uk/news/business-13798000 Featherstone, K 2011, ‘The Greek Sovereign Debt crisis and EMU: A Failing State in a Skewed Regime’, Journal of Common Market Studies, vol. 49, no. , pp. 193-217 Kaplanoglou, G & Rapanos, V 2011, The Greek Fiscal Crisis and the Role of Fiscal Governance, LSE Research Online viewed 3 Jan 2013, http://eprints. lse. ac. uk/36432/ Herz, B & Kotios, A 2000, ‘Coming home to Europe: Greece and the Euro’, Journal of Intereconomics, Vol. 35, no. 4, PP. 170-176. Lightfoot, G 2012, MN7262 Accountability, Representation and Control. Lecture 2, Week 2: Representation (1): Representation of accounts and representation of theories of accounting. Lecture PowerPoint slides, University of Leicester. Viewed 16 October 2012.
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