Discipline and Punish Exploring The Application of IFRS 10 and

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YCPAC 1933 No. of Pages 17
Critical Perspectives on Accounting xxx (2015) xxxxxx
Contents lists available at ScienceDirect
Critical Perspectives on Accounting

journal homepage: www.elsevier.com/locate/cpa
Discipline and punish: Exploring the application of IFRS 10 and

IFRS 12
Wayne van Zijl, Warren Maroun*
University of the Witwatersrand, School of Accountancy, 1 Jan Smuts Avenue, Braamfontein, Johannesburg, South Africa
A R T I C L E I N F O A B S T R A C T
Article history:
Received 6 October 2014 This paper uses IFRS 10 and IFRS 12 as a case study to demonstrate how a sense of enclosure,
Received in revised form 21 September 2015 partitioning, hierarchical surveillance and normalising sanction is used to encourage
Accepted 24 November 2015 compliance with new accounting prescriptions. Detailed interviews with corporate
Available online xxx governance, nancial reporting and nancial regulatory experts are used to explore the
functioning of Foucauldian power in a practical accounting system. Interviewees also reveal
Keywords: how, even if complete Panoptic control over the consolidation accounting space is not
Consolidation accounting achieved, the disciplinary potential of the new standards is sufcient to support the valid
Financial crisis
expectation of compliance in the eyes of stakeholders and substitute for a loss of trust in the
Financial reporting
aftermath of corporate scandal and nancial crisis.
International Financial Reporting Standards
IFRS 10 and IFRS 12 2016 Published by Elsevier Ltd.
Legitimacy
Panopticism
1. Introduction
Accountings vast calculative infrastructure cannot be attributed only to a neutral means of processing and
communicating nancial information to stakeholders (Hopwood, 1987; Carruthers, 1995). Far from being an inert
mechanism for collecting and processing data, accounting systems play a signicant role in creating new elds of economic
visibility and establishing domains of accountability and responsibility while constituting the dominant discourse for
conceptualising the role and status of organisations (Hopwood, 1987; Roberts, 1991; Mennicken & Miller, 2012). The result
has been the proliferation of technologies of accounting and accountability and the institutionalisation of accounting
practice (Burchell, Clubb, Hopwood, Hughes, & Nahapiet, 1980).
Even in traditional technical renditions of accounting as a rational business instrument (Watts & Zimmerman, 1976),
institutional forces are present (Carruthers, 1995). The proliferation of functional accounting technologies including
bookkeeping systems, budgeting and standard costing is not only the result of economic change (Hopwood, 1987). The
generally accepted role of accounting systems in modern organisations is intertwined with the formalisation and
professionalization of the accounting craft and its establishment as a taken-for-granted mechanism of modernity (Burchell
et al., 1980, p. 7; Chandler, Edwards, & Anderson, 1993; Edwards, 2001). Consequently, the development of specic nancial
reporting standards becomes inseparable from the functioning of political power and trials of strength (Bengtsson, 2011), a
sentiment shared by Ravenscroft and Williams (2009) who argue that neo-liberal economics and political ideology have
played a signicant role in shaping the focus of contemporary accounting standards (cf Zhang and Andrew, 2014). Likewise,
* Corresponding author.
E-mail addresses: [154_TD$IF]Wayne.vanzijl@wits.ac.za (W. van Zijl), Warrem.maroun@wits.ac.za (W. Maroun).
http://dx.doi.org/10.1016/j.cpa.2015.11.001
1045-2354/ 2016 Published by Elsevier Ltd.
Please cite this article in press as: W. van Zijl, W. Maroun, Discipline and punish: Exploring the application of IFRS 10 and IFRS
12, Crit Perspect Account (2016), http://dx.doi.org/10.1016/j.cpa.2015.11.001
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2 W. van Zijl, W. Maroun / Critical Perspectives on Accounting xxx (2015) xxxxxx
Georgiou and Jack (2011) present the evolution of fair value accounting, not only as a rational technical process but also as
one heavily dependent on the perceived legitimacy of existing and emerging accounting practices by constituents.
More needs to be done to understand the conditions which provide the possibility for particular conceptions of the
accounting craft [and] the forces which put accounting into motion (Hopwood, 1987, p. 207). In particular, few studies have
examined the link between accounting systems, technologies of accountability, and modes of shaping social relations
(Mennicken & Miller, 2012, p. 5) making a case for a Foucauldian-inspired analysis of nancial reporting to provide an
alternate perspective on recent technical accounting developments.
Several writers have applied Foucauldian theories of power and control to shed light on the functioning of the
organisation (Knights & Roberts, 1982), management accounting systems (Hopper & Macintosh, 1993) or the behaviour of
individuals in professional settings (Brivot & Gendron, 2011). To date, however, few researchers have considered the
relevance of principles of enclosure, efciency and disciplinary power for explaining changes in nancial reporting
(Mennicken & Miller, 2012). This research addresses this by considering how elements of IFRS 10: Consolidated Financial
Statements (IFRS 10) and IFRS 12: Interests in other Entities (IFRS 12), recently released by the International Accounting
Standards Board (IASB), are reminiscent of Foucauldian principles of enclosure, efciency and normalising examination. At
the same time, we argue that motifs of disciplinary power and control are effectively mobilised as part of a sophisticated
legitimisation process. In particular, the enclosure of the consolidation accounting space, coupled with the possibility of
monitoring by independent regulators, creates a valid expectation of enhanced nancial reporting practices on the part of
users of nancial statements. Even if Panoptic control is not achieved, the appearance of structured and prescriptive
accounting standards allows the IASB to respond to perceived weaknesses in existing accounting practice, securing the
legitimacy of International Financial Reporting Standards (IFRSs) as a global basis for preparing nancial statements.
The study concentrates specically on IFRS 10 and IFRS 12 because they codify an established accounting practice,
providing a detailed case for investigation. In addition, unlike more specialised nancial reporting areas, consolidation
accounting is applied by many organisations, irrespective of industry type, with the results that the principles highlighted by
this paper should be broadly applicable. Finally, the release of IFRS 10 and IFRS 12 are among the most recent developments
in IFRS which were specically introduced in response to a global nancial crisis providing an opportunity to consider how
motifs of disciplinary power interact with changes in corporate reporting and the need to secure stakeholders condence.1
This line of research addresses not only the calls for additional sociology-inspired research in nancial accounting
(Mennicken & Miller, 2012). By relying on detailed interviews with corporate governance experts and institutional investors,
the research explores the functioning of technical accounting requirements, free of the reductionist tendencies of scientic
research methods (Hopwood, 1987; Carruthers, 1995). Finally, the research provides one of the rst critical accounts on the
application of IFRS 10 and IFRS 12 while adding to the critical body of research on the functioning of IFRS in an institutional
setting (see Ravenscroft & Williams, 2009; Georgiou & Jack, 2011; Zhang & Andrew, 2014).
The remainder of this paper is organised as follows: section 2 outlines developments to consolidation accounting over the
last decade and provides a theoretical framework for analysing results, drawing on the principles of Foucauldian power and
control. Section 3 discusses the method. Section 4 presents the ndings and section 5 concludes.
2. Literature review and theoretical framework
2.1. The introduction of IFRS 10 and IFRS 12
IAS 27: Consolidated and Separate Financial Statements (IAS 27)2 used a control-based model to identify subsidiaries to be
included in a parents consolidated nancial statements, with the aim of presenting the activities of the group as a single
economic unit (IASB, 2008).3 To ensure that those investments, which the investor controlled, were consolidated,4 SIC 12:
Special Purpose Entities (SIC 12) was issued during 1998 (IASB, 2010d). It broadened the denition of control to include
special purpose entities (SPEs) or vehicles (SPVs) within the consolidation net (see IASB, 2011b, 2011a). Inadvertently,
however, the standard-setter introduced what would be perceived as an alternate consolidation model, which allowed for
1
Dealing with only two accounting standards can be regarded as an inherent limitation of this research. Nevertheless, restricting the scope of the
research to consolidation accounting ensures focus and offers a detailed case on the relevance of disciplinary power in a nancial reporting context.
2
IAS 27 was issued in 1989 and was amended in 2003. At this time, the IASB did not reconsider the fundamental approach to consolidation of subsidiaries
in IAS 27. In 2011, IAS 27 was superseded by IFRS 10 and IAS 27: Separate Financial Statements.
3
For the purpose of preparing a consolidated set of accounts, IAS 27 required certain consolidation adjustments to be processed, such as the elimination
of intercompany balances and the parents investment in the subsidiary company against that companys equity at acquisition. Further discussion of these
principles is beyond the scope of this paper.
4
For example, an investor holding less than 50% of the voting rights in an investee may still have control over the latter due to contractual arrangements.
These entities were often on auto-pilot in the sense that their nancial and operating policies could not be modied except by their creator or sponsor.
These companies were often formed to carry out specic activities on behalf of their investors and were referred to as special purpose entities (SPEs) or
vehicles (SPVs)
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W. van Zijl, W. Maroun / Critical Perspectives on Accounting xxx (2015) xxxxxx 3
certain entities to remain unconsolidated, contrary to the objective of achieving fair presentation in nancial statements5
(IASB, 2011b).
The 20072009 nancial crisis highlighted the lack of corporate transparency due to the existence of off balance sheet
vehicles (IASB, 2011a, IN 5). As a result, the IASB added a project on consolidation to its agenda to address inconsistent
application of consolidation principles, particularly a perceived conict of emphasis between IAS 27 and SIC 12 (IASB, 2011a,
IN3IN4). In May 2011, the IASB issued IFRS 10 and IFRS 12. The former contains the revised denition of control6 and
consolidation principles (many of which were found in IAS 27 and SIC 12). The latter includes related disclosure provisions
(IASB, 2011a, 2011d). The intention is to ensure greater parity with US GAAP; clarity of the concept of control; and to reduce
varied application of consolidation principles (IASB, 2011a). To achieve these objectives, IFRS 10 is more prescriptive than IAS
27 and SIC 12, adopting a step-by-step approach to determining when a reporting entity has control over its investments.
The accounting principles are supported by lengthy application guidance, many illustrative examples, specic rules
introduced by the IASB to address identied methods of circumventing consolidation accounting and a host of disclosure
requirements in IFRS 12 (PricewaterhouseCoopers, 2012; IASB, 2011a, 2011d; Danjou, 2013).
2.2. Accounting for change in IFRS
The preceding discussion provides a functional account of the development of accounting standards in line with most
positivist perspectives on nancial reporting which interpret the progression of accounting as a rational economic process
(see Watts & Zimmerman, 1976; Barth, 2008; Young, 2009). Two of the seminal works on the archaeology of accounting
systems, however, point to a multitude of interconnected factors implicated in accounting change. These do not ignore the
relevance of varying commercial and economic contexts but also take into consideration the role of accounting as a
mechanism of accountability and control which both reects the needs of the organisation and is inuenced reexively by its
own application (Burchell et al., 1980; Hopwood, 1987). In this context, several academics have provided an alternate
perspective on the evolution of accounting standards and their regulation.
Ravenscroft & Williams (2009) and Whittington (2008), for example, provide a historical account which attributes much
of the development in nancial reporting to a conceptual tension between the need to provide users with information
necessary to make informed investment decisions and the requirement to hold stewards accountable for the resources under
their control. Dealing with fair value accounting, Durocher and Gendron (2014) explore how epistemic commitment to a
particular accounting knowledge-base inuences the perceived appropriateness of fair value measurement and explains
variations in commitment to fair value accounting by professional accountants. More broadly, there is a body of research
which suggests that changes in reporting frameworks and, in particular, the decision to adopt a dominant accounting
discourse, is interconnected with the need to secure legitimacy (Georgiou & Jack, 2011; Maroun, Coldwell, & Segal, 2014).
Although each of these examples draws on different theoretical perspectives, all make the case for the social construction
and development of the accounting craft, a principle apparent in Mennicken and Millers (2012) view of accounting systems
as a means both to describe and to construct particular elds of visibility. Accounting can be used to quantify otherwise
abstract or difcult-to-interpret notions of efciency, protability, solvency and wealth (Hopwood, 1987; Miller & OLeary,
1987; Carruthers, 1995). In this way, technologies such as standard costing, budgeting, and measures of nancial return are
not only part of rational economic function aimed at ensuring optimised production and organisational efciencies; they are
important agents of governmentality which render the performance of organisations and their employees visible and, in
turn, capable of being controlled (Cowton & Dopson, 2002; Mennicken & Miller, 2012).
This social constructivist interpretation of accounting can also be used to shed light on how and why accounting systems,
even when nancial crises highlight inherent limitations, continue to play a central role in capital markets and to command
the condence of stakeholders. For example, the IASBs (2011a,2011b) statements on the release of IFRS 10 and IFRS 12 tell us
nothing about how changes to consolidation accounting requirements are able to address the shortcomings of IAS 27 and SIC
12 and either preserve or regain the condence of stakeholders in the functioning of this part of the corporate reporting
process. The changes have been described only as eliminating inconsistent application of IFRS, promoting comparability and
improving fair presentation (Barth, 2008; IASB, 2011a). Unclear are the exact mechanisms which reassure users, unable to
observe directly how accounting standards are being applied, that condence in this expert system remains justied.
If mainstream views are dispensed with, condence in nancial statements (and the underlying accounting discourse)
becomes the product of powerful institutionalised beliefs and the accumulated experiences of non-expert stakeholders
rather than the exclusive product of economic decision making (Hopwood, 1987; Chandler et al., 1993; Edwards, 2001;
Young, 2009). The functional role of accounting systems, coupled with their use as mechanism of accountability (Hopwood,
1987), accorded signicant pragmatic legitimacy which, complemented with a growing repository of technical expertise,
5
Compounding this problem was the fact that IAS 27 and SIC 12 did not deal with a situation where an agent was used to manage the equity interests of a
company. It was, therefore, possible for an intermediate (agent) to hold the majority of the equity in a company and appear to have control over that
company while, in reality, control vested with the principal (PricewaterhouseCoopers, 2012). Consequently, such companies remained unconsolidated,
despite the release of SIC 12
6
IFRS 10 denes control as: exposure or rights to variable returns from involvement with an investee, where the investor has the ability to affect those
returns by virtue of power over the investee (IASB, 2011a, para 6).
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yielded an important cognitive base (see Suchman, 1995; Edwards, 2001). When it comes to the accounting standards
themselves, cognitive, structural and procedural legitimacy are accorded because accounting prescriptions are the
accumulation of decades of experience which are codied by an independent standard-setter after careful consultation with
stakeholders (consider Suchman, 1995; Rodrigues and Craig, 2007; Maroun et al., 2014). The proliferation of IFRS and its
acceptance as a generally accepted basis for describing the economic position and performance of organisations has simply
reinforced its status as an institutionalised component of the capital market (Rodrigues & Craig, 2007).
In considering how accountings functional properties are intertwined with societal values and beliefs, the relevance of
technologies of accountability (Mennicken & Miller, 2012) and the importance of regulation in periods of late modernity
(Malsch & Gendron, 2009) cannot be overlooked. In particular, a growing body of research supports Foucaults (1977)
assertion that we live in a disciplinary society where social order and what appears to be trust are the product of disciplinary
power and control (Gordon, 1980; Unerman & ODwyer, 2004; Brivot & Gendron, 2011). As an integral part of the expert
capital market system, technologies of surveillance, examination and normalising sanction are also evident in the operation
of accounting systems (Miller & OLeary, 1987; Cowton & Dopson, 2002) to the extent that they are, possibly, a dening
feature of the institutional nature of accounting discourse and practice (Hoskin &Macve, 1986; Hopwood, 1987; Brivot &
Gendron, 2011). In turn, this means that when changes to accounting standards are proposed in response to a crisis of
condence, dependence on the legitimacy reserve of existing accounting discourse is only part of the process of retaining the
condence of nancial markets. Any regulatory response must identify clearly the offending practice; amend the related
accounting prescriptions and create a valid expectation that these changes will impact the object of regulation (Unerman &
ODwyer, 2004; Rodrigues & Craig, 2007; Maroun & Atkins, 2014). In other words, the introduction of new accounting
standards (such as IFRS 10 and IFRS 12) in response to nancial crisis requires effective mobilisation of institutional sites and
disciplinary technologies to, not only stimulate change in accounting practice, but enhance condence in the accounting
function and, by default, the capitalist enterprise (Maroun & Atkins, 2014, p. 839). To explore this line of thought in more
detail section 2.3 outlines briey Foucault's theory of power and control followed by a review of the relevance of enclosure,
sanction and surveillance in a nancial reporting context.
2.3. Financial reporting: disciplinary power and legitimacy
2.3.1. Theoretical framework

According to Foucault (1977, p. 109), there must be no more spectacular but useless penalties. Instead, disciplinary power
should operate to clear economic and political ends (Gordon, 1980) such that everyone must be able to read in it his own
advantage (Foucault, 1977, p. 109). In these disciplinary societies, which he describes in Discipline and Punish: The Birth of the
Prison, three agents of disciplinary power are identied (Foucault, 1977; Gordon, 1980). Firstly, enclosure and partitioning
ensure that specic functions are dened, ranked and assessed against established benchmarks in order to achieve control
(Gordon, 1980; Cowton & Dopson, 2002). This goes hand-in-hand with the principle of the efcient body in terms of which
careful scheduling of activities ensures the efciency of processes and efcient use of individuals time. Temporal
elaboration is integral to this, dening precisely how specic acts are executed and sequenced (Foucault, 1977; Gordon,
1980) to ensure that the detailed prescriptions (the knowledge) carried in regulation (the disclosure) and imposed on each
individual (power) [convert] him or her into a manoeuvre . . . (Hopper & Macintosh, 1993, p. 195). Finally, for the principles
of enclosure and the efcient body to be successfully effected, disciplinary power is essential (Foucault, 1977; Gordon, 1980),
with the result that hierarchical surveillance, normalising sanction and examination are critical components of disciplinary
environments (Gordon, 1980; Smart, 2002).
In the rst instance, observation is designed to alter the behaviour of the observed without resorting to physical force
(Foucault, 1977; Gordon, 1980). Hieratical surveillance is subtle: on the one hand, it is accepted readily as a natural part of the
milieu but, on the other, it works insidiously on the individual who is rendered completely visible and manageable (Foucault,
1977). Examination and normalising judgement complement this by employing systems of reward and penalty to ensure
that previously undened domains can be subject to evaluation against pre-determined norms and subject to remedial
action (Foucault, 1977; Gordon, 1980). Added to this is the ability to maintain an archive on past performance to differentiate
between and rank individuals, giving rise to a set of practices which [can] be specied and which positively [produce] ways
of behaving and predispositions in human subjects (Hoskin & Macve, 1986, p. 106).
2.3.2. Foucauldian power and control in a nancial reporting context

Foucault (1977) did not deal with accounting as a source of power and control but his model of disciplinary society has
been applied extensively in a management accounting context where motifs of hierarchical surveillance, examination and
normalising sanction have been identied (for example, see Miller and OLeary, 1987; Hopper & Macintosh, 1993; Cowton &
Dopson, 2002). Some have argued that periods of modernity may be more complex than the singular gaze of the Panopticon
described in Discipline and Punish: The Birth of the Prison (Gordon, 1980; Brivot & Gendron, 2011; Haggerty, Wilson, & Smith,
2011). Nevertheless, Foucauldian theories of disciplinary power and control can provide an interesting and alternate
perspective on the functioning of contemporary institutional and organisational practices (Moore, 1991; Hoskin, 1994;
Quattrone, 2004), including technologies of accounting. Consequently, although not dealt with specically by the prior
research (see Miller & OLeary, 1987; Hopper & Macintosh, 1993; Cowton & Dopson, 2002), a Foucauldian-inspired
framework can be applied to the application of nancial reporting standards.
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For example, formal bases for the accumulation of costs, revenues, assets and liabilities intended to provide a detailed
account of the nancial position and performance of an organisation result in a form of economic visibility (cf Hoskin &
Macve, 1986) similar to Hopper and Macintoshs (1993) account of budgeting and costing systems. Reinforcing this view is
the ongoing importance of stewardship and measures of an organisations cash-generating ability for nancial reporting
frameworks (Hopwood, 1987; Ravenscroft & Williams, 2009). Consistent with the idea of discipline by the numbers,
described in a management accounting setting (Hopper & Macintosh, 1993; Cowton & Dopson, 2002), IFRS can be seen as
constructing an economic account of an organisation which can then be acted upon by the users of nancial statements (cf
Mennicken & Miller, 2012). In addition, the professional standards can be seen as the codication of the day-to-day
accounting processes which prior research argues is designed to expose the individual to a disciplinary, punishable web of
discourses and practices which, although appearing natural and inert, drive conformance (see Hopper & Macintosh, 1993,
p. 190). In this way, the technical and procedural properties of IFRS can be interpreted as comparable to the processes of
formalisation, centralisation, and the timing of actions described by the management accounting literature as giving rise to
a type of bureaucratic coercion (Cowton & Dopson, 2002).
In addition, to the extent that a particular nancial reporting discourse is generally accepted as achieving fair
presentation, it provides a broad basis for describing normal performance and then measuring and ranking an
organisations nancial results to drive normalising change (cf Hoskin & Macve, 1986). Complemented by the need to ensure
transparency, nancial reporting standards (even if principles-based) drive consistency and comparability (IASB, 2010b),
facilitating nancial review and analysis akin to notions of examination and hierarchical surveillance.
In turn, each element of disciplinary power and control works subtly to contribute to a manageable economic domain
(Hopwood, 2000, p. 213; Mennicken & Miller, 2012) and the governable reporting entity (cf Miller & OLeary, 1987; Cowton
& Dopson, 2002; Mennicken & Miller, 2012). As explained by Hopwood (1987, pp. 212214), accountancy can be used to
positively enable the governance and control of the organisation along economic lines. Consequently, despite the
limitations of Foucaults theories7 on disciplinary society, these can be meaningfully mobilised in examining surveillance
from a broader angle (Brivot & Gendron, 2011, p. 137). This is especially true if used in conjunction with an institutional
perspective of modern nancial structures which highlights an interconnection between the disciplinary potential of
accounting systems and motifs of power and control as a source of legitimacy and means of preserving the condence of
stakeholders (cf Sikka, 2013; Maroun & Atkins, 2014).
There are several examples of how elements of Foucauldian power and control can be seen a taken-for-granted function
of expert systems. Malsch and Gendron (2011) and Unerman and ODwyer (2004), for instance, explain how nancial crisis
goes hand-in-hand with the proliferation of laws and regulation designed to dene non-compliance, introduce remedial
action and create a sense of additional monitoring and transparency. Similarly, Brivot and Gendron (2011) argue that the
Panoptic metaphor has been superseded by sophisticated surveillance networks which have become a dening feature of
professional life and, as a result, a possible source of cognitive legitimacy (cf Suchman, 1995). This is in line with the
arguments presented by Maroun and Atkins (2014) in an external audit context. Disciplinary power and control is so
engrained in contemporary society (Foucault, 1977; Brivot & Gendron, 2011) that regulations appealing to a sense of
normalising sanction and examination are conferred procedural legitimacy, substitute for lost trust and bolster condence in
the object of regulation (Sikka, 2013; Maroun & Atkins, 2014).
By analogy, in periods of modernity characterised by enclosure, efciency and disciplinary power (Foucault, 1977; Smart,
2002[157_TD$IF]), there is the taken-for-granted assumption that if nancial reporting requirements can be better contained within the
parameters of ever more precise nancial reporting standards, high quality nancial statements result. In other words,
developments in nancial reporting are both a reection of the operation of technologies of Foucauldian power and control
and dependent on these technologies to ensure continued legitimacy. The recent release of IFRS 10 and IFRS 12 can be used as
a case study to highlight this point.
2.3.3. Consolidation accounting, Foucauldian power and legitimacy

These standards are an example of how crisis and proiration of new accounting standards are linked (Shaked & Sutton,
1981; Byington & Sutton, 1991; Carruthers, 1995). The renement of consolidation accounting occurs at the same time as the
IASB accelerates its discussion on the accounting for nancial instruments (Bengtsson, 2011); enhanced disclosure
requirements for nancial assets and liabilities are released (IASB, 2010c, 2010a) and improvements to the accounting for
interests in joint arrangements are tabled (IASB, 2011c).
As explained by institutional theorists, integral to the integrity of nancial reporting is preserving the good faith
assumption that, when weaknesses in nancial reporting standards are identied, these are responded to by the standard-
setter and result in the preparation of nancial statements which achieve fair presentation (cf Giddens, 1990; Suchman,
1995; Rodrigues & Craig, 2007). In this context, motifs of Foucauldian power and control are not limited to preserving the
image of the governable reporting entity (cf Mennicken & Miller, 2012). Principles of enclosure, the efcient body and
7
[15_TD$IF]Neimark (1990) argues that Foucault constitutes an orthodoxy that impairs truly critical analysis. What should be noted is that, while Foucauldian
theories have limitations, they provide an alternate perspective on social phenomena (Hoskin, 1994). This research does not suggest that Foucaults views on
power and control provide a complete account of the RI provisions but that they offer a different perspective. In addition, while Foucauldian theories may
have their critics, the same is true of other conceptions of power advanced by, for example, [156_TD$IF]Lukes (1974) (see Malsch and Gendron, 2011).
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disciplinary power are important for creating a rational expectation on the part of non-expert users that the amendments to
IFRS have resulted in meaningful changes to nancial reporting.
In this context, the aim of IFRS 10 and IFRS 12 is not a radical change in accounting practice (PricewaterhouseCoopers,
2012) but the enclosure of a consolidation discourse designed to reduce divergence in practice and to highlight more clearly
instances of non-compliance. Lengthy application guidance in IFRS 10 and IFRS 12, the inclusion of illustrative examples and
repetition of dened terms complement this (IASB, 2011a, 2011d). Collectively, the new standards seek to improve
comparability; enhance transparency by reducing the prevalence of off balance sheet vehicles; and provide a clear frame of
reference for evaluating managements decision to consolidate or refrain from consolidating an investee (Pricewaterhou-
seCoopers, 2012). Added to this are the adverse implications for the individual who, and reporting entity which, fails to
comply with the requirements of IFRS 10 and IFRS 12. This works hand-in-hand with the functioning of regulatory bodies and
the external audit process which benet from more detailed prescriptions for evaluating compliance with IFRS and,
indirectly, the extent to which nancial statements achieve fair presentation (cf Mennicken & Miller, 2012).
Overall, the result is that technologies of disciplinary power and control are successfully mobilised to drive compliance
with the IFRS and to reassure constituents that trust in the functioning of the expert reporting system remains justied (cf
Hopper & Macintosh, 2002; Mennicken & Miller, 2012; Maroun & Atkins, 2014). Elements of enclosure, efciency and
disciplinary power work hand-in-hand with the good faith assumption that this ensures sound nancial reporting practices,
even if this position cannot be reconciled with the technical aspects of the accounting system (cf Hopwood, 1987; Suchman,
1995). As explained by Suchman (1995, p. 571), in sophisticated institutional environments, complex symbols, beliefs and
rituals work in conjunction with technical properties of expert systems to ensure the continued functioning of capital
markets (Unerman & ODwyer, 2004). When it comes to the operationalization of IFRS 10 and IFRS 12, the application of
complex IFRS by unpredictable human beings, coupled with underlying self-interest (consider Pesqueux, 2005; Tremblay &
Gendron, 2011), allows for considerable variation in the application of consolidation accounting principles. Consequently
complete Panoptic control is seldom achieved (Gordon, 1980; Smart, 2002). This does not, however, detract from the
legitimising potential of the new standards. On the contrary, the mere appearance of disciplinary power and control may be
sufcient to reassure stakeholders that IFRS remains a legitimate basis for the preparation of nancial statements.
It is not necessary for the practical effectiveness of IFRS 10 and IFRS 12 to be perfectly consistent with their symbolic
potential (Meyer & Rowan, 1977; Suchman, 1995). Drawing from the principles outlined by Gunin-Paracini & Gendron
(2010), what is more important is the fact that part of the blame for inadequate corporate transparency can be attributed to
deciencies in IAS 27 and SIC 12. This allows the IASB to appear proactive to powerful stakeholders by introducing a revised
standard in response (see IASB, 2011a). All that is needed are motifs of disciplinary power and control to reassure
stakeholders that the revisions to the relevant accounting standards are theoretically capable of addressing the risk to
transparency posed by off balance sheet vehicles. In this way, elements of Foucauldian power and control, inherent in the
functioning of accounting technologies, work to construct the appearance of governable domains (cf Mennicken & Miller,
2012) and simultaneously reinforce the perceived credibility of the reporting system, even if, paradoxically, complete
Panoptic control is not achieved.
To explore this line of thought further, we use detailed interviews with leading corporate governance, nancial reporting
and auditing experts to examine the functioning of IFRS 10 and IFRS 12. Respondents illustrate how elements of the new
accounting standards are reminiscent of Foucauldian constructs of enclosure and disciplinary power. This is followed by a
discussion on how the appearance of disciplinary power is successful in adding to the legitimacy of the IFRS highlighting a
mutually reinforcing relationship between technologies of enclosure and surveillance and the taken-for-granted faith in the
appearance of disciplinary power and control.
3. Method
Detailed interviews are used to explore the thoughts of a sample of experts on the recent release of IFRS 10 and IFRS 12. In
particular, due to the lack of direct prior research employing a critical theoretical frame of reference for analysing IFRS, a
qualitative approach was most suitable (see Brennan & Solomon, 2008; ODwyer, Owen, & Unerman, 2011). The research
concentrates on the views of those directly involved with the preparation, audit or analysis of nancial statements, including
commentary from auditing, nancial reporting, nancial analysis and corporate governance experts. Respondents include
preparers, nancial analysts, standard setters, audit partners and nancial accounting academics with at least fteen years'
experience in their respective elds, their expertise adding to the quality of the ndings (Appendix 2). This is to ensure a
range of opinions.8
Potential interviewees were contacted either by telephone or e-mail and invited to participate in the research. They were
8
The fact that several respondents provided critical perspectives that challenged the status quo suggested that the interviews were not dominated by a
single perspective.
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informed of the nature and purpose of the research and guaranteed complete anonymity. A time was scheduled to meet with
each interviewee and an outline of the research project, including a list of open-ended questions, was made available at least
three working days before each interview. These questions addressed the possible operational effects of IFRS 10 and IFRS 12,
including the rationale for introducing the new standards.9 The questions centred around three main themes: (1) whether or
not the new standards achieved an added sense of corporate transparency and accountability; (2) the extent to which the
IFRS denes and codies consolidation principles; and (3) the possibility of the prescriptions of IFRS 10 and IFRS 12 being
circumvented, as was the case with SIC 12. As recommended by Creswell (2009), the questions were piloted during July
2012 with two academics at the authors' university and two audit partners from one of the Big 4 audit rms in the authors'
country.
Time was spent establishing rapport with the respondents who were encouraged to speak with complete candour; were
reminded of their right to withdraw from the study at any stage; and were asked to agree to the recording of their interviews.
Twenty-four interviews, each lasting between 45 min and 3 h were conducted in the authors country from October 2013 to
May 2015. Restricting the research to a single jurisdiction was necessary due to time and cost constraints. This poses an
inherent limitation to the study. Nevertheless, it should be noted that all respondents had several years of experience which
included either working in multiple jurisdictions or signicant interaction with other accountants, auditors and regulators in
different regions. Consequently, a sufciently broad group of interviewees, with a diverse range of views, was included in the
study to ensure that the ndings are relevant for an international audience, rather than only to practitioners and academics
in the location where the study was physically conducted.10
All interviews were semi-structured. On occasion, respondents were asked to explain a particular concept or statement in
different words or from different perspectives, to address script coherent expressions or to resolve any ambiguities
(Alvesson, 2003). Although the sequence in which the issues were addressedas well as the detail provided by each
respondentvaried, the same themes were covered during each interview and the same point was used to commence each
interview, namely: the requirement of IFRS 10 to prepare consolidated nancial statements (adapted from Holland & Stoner,
1996; Holland & Doran, 1998; ODwyer et al., 2011).
Recordings were transcribed upon completion of the interviews. Initial notes were contrasted and general themes,
categories and interconnections were identied, using a type of data mind map (adapted from: Holland, 1998a; Holland,
1998b; Oakes et al., 1998; Leedy & Ormrod, 2001). Content was organised initially under headings and sub-headings (codes)
consistent with interview questions (Appendix 1), including, inter alia: the technical aspects of IFRS 10 and IFRS 12, the
relevance of accountability and the importance of transparency. Closer review of eld notes and the prior literature led to
reclassication of interview content as necessary and to the renement or use of additional codes, with the result that the
data analysis process was iterative. All notes were numbered and cross referenced to a code register or legend to allow for
easy data analysis. Codes with few or no allocations were aggregated. The product was a summary table for each transcript
which effectively assigned the transcript content to different content pools, each of which is aggregated under a nal set of
axial codes (adapted from: Parker & Roffey, 1997; Leedy & Ormrod, 2001; Creswell, 2009; ODwyer et al., 2011; Rowley, 2012).
The axial codes were derived from the prior accounting research employing a Foucauldian framework (cf Hopper &
Macintosh, 1993; Cowton & Dopson, 2002; Maroun & Atkins, 2014). Examples included: the development of an enclosed
space; the sequencing and disaggregation of consolidation processes; and hierarchical examination. While the use of axial
codes can limit the exploratory potential of the study, it provided a basis for structuring the nal results and ensured focus on
the research question: exploring how elements of IFRS 10 and IFRS 12 are reminiscent of Foucauldian principles of enclosure,
efciency and normalising examination and contribute to the legitimisation of IFRS (cf, Leedy & Omrod, 2001; Creswell,
2009).
4. Results
4.1. Enclosure and the efcient body
According to Foucault (1977, p.149) enclosure and the efciency of the body is a question of distributing individuals to
isolate, map and observe them. When it comes to IFRS 10, this is not achieved in the same physical sense but rather in terms
of separating an otherwise complex and subjective accounting system into clearly dened processes and procedures which
are capable of being easily described and subjected to review.
Several practitioners, for example, explained how IFRS 10 is clearly partitioned (R9) and follows a procedural approach
(R3) for concluding on whether or not a reporting entity has control over one or more investees. This is seen in the structure
9
IFRS 10 and IFRS 12 are only effective for annual periods commencing on or after 1 January 2013. While some respondents had encountered or dealt with
the application of the new standards, others had not. In these instances, interviewees discussed the expected impact on the new standards. While this may
be regarded as a threat to validity and reliability in a positivist sense, hypothetical reasoning is an accepted characteristic of interpretive studies ([158_TD$IF]Llewelyn,
2003). In addition, due to the fact that interviewees have considerable experience with the IFRS, they were able to provide valid opinions.
10
During the course of the interviews, nothing came to the researchers attention to suggest that responses varied according to the regional or cultural
differences of the respondents. This conrmed that a sufciently diverse group of interviewees had been engaged for the purpose of this study. It should,
however, be reiterated that the relevance of culture, multinational work environments and jurisdiction-specic idiosyncrasies is deferred for future
research.
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of IFRS 10. Firstly, the purpose and design of the investee is considered, followed by an assessment of whether or not the
investor has the power to direct the relevant activities of the investee (IASB, 2011b). This follows a hierarchical decision-
making process in which the investor carries out a preliminary assessment of the voting rights which could provide it with
the ability to direct the investee's relevant activities (IASB, 2011b, B9B16). If these rights alone do not confer power over the
investee, additional facts and circumstances must be considered, with IFRS 10 providing a list of additional (and ranked)
control-indicators (IASB, 2011b, B18B20). One respondent explained the implications of this approach as follows:
Instead of a complicated collective assessment of whether or not you ought to consolidate, you have a step-by-step
process and a list of control indicators. It becomes much easier for the board, the audit committee or the external auditor
to focus on a particular part of the decision to consolidate or not to consolidate and to ask you to justify your conclusion
(R23).
As a result, several preparers explained how the different components of the consolidation process would have to be
dealt with individually with the more subjective elements the subject of additional internal review. This was especially
evident when processing the actual adjustments required when consolidating an investee with each activity required by IFRS
10 ranked according to perceived importance and complexity and the focus of additional monitoring and cross-checking by
senior members of management.
In addition to affecting the scheduling of work, several respondents suggested that the procedural (R2) or mechanised
(R3) approach to IFRS 10 operated subtly to ensure compliance with the prescriptions of the new accounting standards:
The requirements of IFRS 10 are very clear. The standard tells you exactly what you need to do. I mean, some of it is even
sequenced. It literally reads like a step 1, step 2, step 3 approach. And when you get something which is so very clear, it is
very difcult to ignore (R21).
As explained by Foucault (1977), the purpose of enclosure and partitioning is to organise the otherwise heterogeneous
activities of labour to maximise advantages and neutralise the inconveniences (p. 149). In a nancial accounting context,
this is metaphoric but the relevance of enclosure and partitioning for governmentality is still clear (Mennicken and Miller,
2012). Consistent with the ndings of Hopper and Macintosh (2002) and Cowton and Dopson (2002), the intention is to
disaggregate the decision to consolidate a subsidiary into its component parts, making it easier to assess how management
concluded whether or not one entity is under the control of another and to hold the relevant individual accountable for that
decision:
Researcher: Does the step-by-step approach to consolidation which you have described make you feel more
accountable?
Respondent: Obviously! You cant rely on the fact that your conclusion was based on a holistic review of the facts and
your own gut feel. The standard has broken that up into different parts and people can then ask you what you concluded
for each control indicator and which indicators you placed more emphasis on. That denitely makes you more aware of
how important it is to be able to justify what you did (R3)
Detailed application guidance, complemented by numerous examples and the repetition of the main principles, is
designed to reduce divergence in accounting practice, ensure compliance with IFRS 10 and further enclose the consolidation
process:
The standard setters provide more application guidance to try and create compliance . . . The guidance is there to make it
very clear how the principles in IFRS 10 must be applied (R7).
Yes, [IFRS 10 is] too long, and it's so detailed and it is repetitive . . . [Its] trying to really put parameters around exactly
what all the rules are to try and close all the loopholes so that they make sure if something has to be consolidated, it gets
in (R9).
As explained by Hopper and Macintosh (1993), enclosure and the principles of the efcient body are designed to ensure
that prescriptions (the knowledge) carried in regulation (the discourse) and imposed on each individual (power) converted
him or her into a manoeuvre (p. 195). In a management accounting context, this amounts to budgets, prot centres and
internal nancial controls forming the basis for dressage-like training to encourage a predetermined approach to business
management (Hopper &Macintosh, 1993, p. 197; Cowton & Dopson, 2002). From a regulatory perspective, principles of
enclosure and the efcient body take the form of automatic adherence to the processes and prescriptions of the relevant laws
(Maroun & Atkins, 2014). When it comes to IFRS 10, elements of disciplinary power are seen in the way in which illustrative
examples, application guidance and repetition of terms and principles are designed to constrain the interpretation of
consolidation principles in order to promote the consolidation of structured vehicles.
Most interviewees felt that the 20072009 nancial crisis highlighted the possibility of inadequate nancial reporting,
associated with the accounting for and disclosure of interests in subsidiary companies (section 2.1). In this context, repeating
the denition of control (R10); expanding on the application guidance to ensure the correct interpretation of
consolidation principles by preparers (R3) and the use of extensive examples (R9) are equivalent to the dressage described
by Hopper and Macintosh (1993). The aim is not to create an alternative to consolidation but, as indicated by the examples
below, to condition the minds of those preparing consolidated nancial statements to ensure consistent application of the
IFRS as intended by the IASB (Danjou, 2013):
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[Ultimately], the IASB was wanting more consolidations than IAS 27 seemed to provide. IAS 27 was being read by most
people as a rule, as opposed to an indication that was not necessarily a complete list of all circumstances (R1).
Because you need to be compliant with the standard. So if you dont think that way, unfortunately youre not going to get
the correct answer and youll fail your audit. [What is the correct answer?] What IFRS wants (R4)
Because they want a specic rule . . . they dont want you to have the ability to have your decision. They are trying to
create a constrained way of thinking. It must be clear-cut. What is the nal message? When in doubt, rather consolidate
(R2).
That the standards are described by most respondents as the collection of sophisticated rules and procedures adds to the
disciplinary potential of IFRS 10 and IFRS 12. On one level, a technical and complex discourse for describing the consolidation
decision-making and accounting process is, in itself, probably able to accord legitimacy (cf Burchell et al., 1980; Suchman,
1995) and promote compliance with the new standards. The comments of several interviewees, however, gave the
impression that diction (working with the technical provisions of IFRS 10) contributes to an accounting discourse which
completely describes an accounting function and codies the generally-accepted position that, when one entity has control
over another, this is communicated to the users of nancial statements by consolidation accounting. Reinforcing this are the
IASBs claims to achieving fair presentation (R1; R10; R9) and the assumption that IFRS 10 communicates a unique and
appropriate economic reality to the users of nancial statements (R4; R9; R23). The formal structure of the standard, coupled
with a technical, logical approach to determining when an entity ought to be consolidated by another, has an enclosing effect,
giving rise to the unchallenged assumption that compliance with IFRS 10 is the only means of communicating the true
economics of the relationship between a parent and its subsidiary (R4; R8; R10). Consider, for example, the following
comment:
IFRS 10 denitely achieves fair presentation. There are no other IFRSs which deal with consolidation. The idea is virtually
the same as US GAAP. We consolidated because this is the universal view provided by the accounting [159_TD$IF]experts . . . Its
just like that and thats the way its always been (R10, emphasis added).
In other words, IFRS 10 constitutes the very discourse associated with the accounting function. It formalises taken-for-
granted assumptions that useful nancial statements are those in which subsidiary companies are consolidated (R1; R2).
Although it is conceivable that alternatives to consolidation are possible, the principle of control and consolidation has,
become entrenched in day-to-day accounting practice to the extent that an alternative to the consolidation principles coded
in IFRS 10 (and its predecessors) has become almost unimaginable for some preparers and users (R1; R2; R10):
Its very simple. If you have a subsidiary company you have to consolidate it. There is just no other way to communicate
the economics of the relationship between a parent and subsidiary to the users of the nancial statements. Anything else
is just no good. (R10)
As explained by Mennicken and Miller (2012, p. 7), accounting technologies have a capacity for acting on the actions of
others, allowing accounting protocols to both create and constrain subjectivity. Similarly, Cowton and Dopson (2002) and
Hopper and Macintosh (1993) describe how a technical rational costing and budgeting system is able to dene the nature
and purpose of the organisation and its members and encourage conformance with predetermined managerial ideals. In the
context of IFRS 10, the enclosure of the consolidation space has allowed the technical standard to constitute the very basis for
what it means to prepare useful nancial statements promoting compliance by preparers.
4.2. Surveillance, examination and normalizing sanction
For several interviewees, a primary concern with IAS 27 and SIC 12 was that ambiguity created an opportunity to avoid
consolidation when in the interests of the parent to do so. This resulted in less economic visibility (R3)11 (IASB, 2011a):
Are [preparers] actually going to identify all of those entities that they control and consolidate them properly? Or are they
going to hide some, using SIC 12 and all of its exceptions? . . . The biggest problem, before they brought in IFRS 10, was
that people perceived a mismatch between IAS 27 and SIC 1212 and if you are trying to keep things off your balance-
sheet, you could try and almost create arbitrage between the two . . . [Introducing IFRS 10] makes it very clear that there
is a single set of criteria that you use to evaluate your relationships with your subsidiary companies and that makes the
nancials much more transparent (R7).
As explained in section 2.1, IFRS 10 was introduced to reduce divergence in accounting for subsidiaries and mitigate the
risk of unconsolidated vehicles distorting the nancial position and performance of a reporting entity. Complementing this
are the disclosure requirements of IFRS 12:
11
Debt could be pushed into SPVs that were not consolidated, thereby hiding vital nancial information regarding decisions to invest or not in that
particular entity (R3).
12
As discussed in section 2.2, this was due to IAS 27 referring to control, while SIC 12 referred to risks and rewards associated with the interests in the
investee.
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If you really dont think that you meet the consolidation requirements, then its good to give the disclosure [required by
IFRS 12] because then, at least, you are agging to the user that there is possibly some or other entity that might, in a
different scenario. This ensures that they are aware of the relevant facts and circumstances and can make the right
decisions (R9).
In a management accounting context, reporting centres with clear lines of communication become a means for senior
management to identify non-compliance or under-performance and take remedial action. In this way, the accounting system
offers the potential for additional monitoring or review which has a disciplinary effect on the subjects of the reporting
system (Hopper & Macintosh, 1993; Cowton & Dopson, 2002). IFRS 10 and IFRS 12 are, for at least some respondents, working
in a similar way. In particular, the requirement to disclose why a company has not consolidated a reporting entity was
interpreted as improving corporate transparency and the ability of investors to hold managers accountable. This was
described by one expert as follows:
I think what theyve done in IFRS 12 is almost creating a spotlight on those entities [that are not consolidated]' (R7).
Although the context is not precisely the same as that described by the management accounting literature (see Miller &
OLeary, 1987; Hopper & Macintosh, 1993) the operation of IFRS 10 and IFRS 12 were seen by several experts as focusing
attention on management's consolidation practices (R7; R9; R11; R18). This is consistent with the idea of a disciplinary gaze
referred to by Foucault (1977), especially when considering how additional reporting works hand-in-hand with a complex
system of nancial examination and review. Respondents described the functioning of four integrated systems of
surveillance and examination interconnected with the additional transparency afforded by IFRS 10 and IFRS 12 and a sense of
normalising sanction: (1) external audit, (2) systems of corporate governance, (3) review by institutional investors and (4)
the operation of a nancial reporting review board.
In the rst instance, external audit is able to rely on the prescriptions of consolidation accounting practice to interrogate
management's decision either to consolidate an investee or not:
I think IFRS 10 gives a lot more ammunition to the auditing rms to stop people arguing against control. So auditors have
a lot more ammunition in IFRS 10 to say to the client, No, this entity should be consolidated (R6).
Interviewees explained how external audit is similar to an examination process in that it includes test procedures
designed to evaluate the subject matter (the nancial statements) against a suitable framework (IFRS) (see Hoskin & Macve,
1986; Maroun & Atkins, 2014). The renement of the consolidation accounting standards adds to this:
The additional guidance in IFRS 10 helps the preparers and, more particularly, the auditors to justify a decision [to
consolidate or refrain from doing so] because the reality is that the auditor wants a stick. If the auditor hasnt got a
particular set of principles and guidelines, [he nds himself] in a very difcult position . . . What IFRS 10 does is give the
auditor a set of very clear principles (maybe even rules) which he can use to test management's decision about not
consolidating a SPV (R2).
As discussed in section 4.1, IFRS 10 aims to enclose the consolidation space by providing clearly dened principles for
concluding whether or not an investor is required to consolidate its investee. In doing so, it provides a detailed frame of
reference for evaluating management's decision to consolidate an entity or refrain from doing so. In other words, a
comprehensive discourse for conceptualising and disaggregating the consolidation accounting space (section 4.1) can be
successfully mobilised to achieve transparency and used as a form of normalising examination (cf Mennicken & Miller, 2012).
For several prepares, auditors and users, IFRS 12 forms part of this process:
Lets assume that the auditors want to consolidate and that management dont. The rst thing IFRS 12 does is force you to
disclose the unconsolidated structured vehicles. So we might disagree on something but the fact that we agged it
probably means that you have to disclose it . . . At least you have to alert the market to the fact that you have considered
something but you havent consolidated. And I think that this requirement in IFRS 12 is a great help because now, all of a
sudden, if you are confronted with a client that doesn't want to consolidate (and an audit rm does) . . . you are forced to
disclose (R6).
That IFRS 10 and IFRS 12 can lead to additional information being reported to the market adds to the sense of hierarchical
surveillance achieved by the external audit function. Application of the accounting standards is no longer an internal process
relying on the professional judgement of one or two preparers of the nancial statements. Several respondents explained
that the possibility of IFRS 12 and IFRS 10 leading to queries from key investors is always at the back of your mind (R23) and
makes you double check that you really dont meet all of the requirements [in IFRS 10] before you decide not to consolidate'
(R1). In this way, additional disclosure working with the partitioning of the decision-making process followed to justify
that a structured vehicle need not be consolidated (section 4.1) has a disciplinary effect:
Remember that IFRS 12 puts more information in the public domain. Its not impossible for that to result in some difcult
questions from your big investment houses. If they see something that doesnt make sense, they can ask far more
questions using IFRS 10 and IFRS 12. This is something that they couldnt do before . . . and because of this, I think that we
are denitely more on our toes when it comes to dening who is included in our group of companies (R22).
The monitoring function offered by systems of corporate governance is an additional consideration. Miller and OLeary
(1987) and Hopper and Macintosh (1993) explain how the calculative potential of accounting systems has, historically, been
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employed within an organisation to construct new elds of visibility and, in turn, congure persons, domains, and actions as
objective and comparable (Mennicken & Miller, 2012, p. 7). This logic applies equally to the introduction of IFRS 10 and IFRS
12. The standards give you the recipe for deciding when you have control (R3) and provides the audit committee, working
with internal and external auditors, with a road map to ask questions and interrogate the decision not to consolidate an
investment (R24). Consequently, although the new accounting standards may not t perfectly with Foucault's model of
disciplinary power and control, the possibility of additional monitoring and review has a similar normalising effect to
hieratical surveillance and processes of examination associated with the Panopticon:
Because IFRS 10 breaks down the decision-making process and because IFRS 12 gives so much additional disclosure about
how you concluded if you do or dont have to consolidate, I have found that the non-executives [on the board of directors]
and the audit committee are asking more detailed questions I suppose that makes sense. IFRS 10 and IFRS 12 break down a
complicated process into parts and require you to disclose where and how you used your judgement. Its really about
hanging out your washing for these people to see . . . I mean, you stand in front of these people [members of the audit
committee and the external auditor] and its like having an oral exam where they ask you questions and measure you up
against what IFRS 10 says you ought to do (R3).
Does this feel like an interrogation? (Researcher)
Yes and no. Its obviously very formal and very polite and no-one has a spot light on you like you see in the movies but you
still do quite a bit of sweating. You make damn sure that youve worked properly through IFRS 10 and IFRS 12 in advance
(R3).
Even in instances where preparers had not been questioned on their application of IFRS 10 and IFRS 12, added
transparency coupled with the ability of auditors, governance committees and institutional investors, to challenge how the
standards are being applied worked to ensure a prudent application of consolidation accounting requirements by most
preparers. As explained by Roberts (1991), an important feature of systems of accountability and disciplinary power is the
potential for surveillance, in addition to actual observation, to regulate the behaviour of the individual (Foucault, 1977). This
was clearly apparent when interviewees discussed the functioning of an independent review board established by a local
stock exchange13 .
This body was formed to assist with cases of alleged non-compliance with IFRS and, according to all respondents, is well
placed to make use of additional information being reported in terms of IFRS 10 and IFRS 12 to challenge the decision to
refrain from consolidating structured vehicles. This is especially true given that the regulatory body is able to rely on a review
of nancial statements, complaints about poor nancial reporting practice, and additional information requested directly
from the reporting entity to assess the appropriateness of the application of consolidation accounting requirements. In this
way, the review board operates as an important technology of surveillance, examination and normalising sanction. Consider
the following statement:
IFRS 10 gives preparers a step-by-step approach for deciding whether or not to consolidate but it also gives an outsider a
map for asking questions about why you did or did not include a subsidiary in your nancials. Added to that is IFRS
12 which requires disclosure on the judgements made in the process. Thats all in the public domain and the [regulatory
body] can (and has) made use of that information to ask some companies very difcult questions (R23).
As is the case with external audit and independent committees of the board, IFRS 10 and IFRS 12 offer a means for
regulators and those charged with governance to gain insights into the consolidation process at almost no cost. These bodies
may not enjoy a complete Panoptic view of the respective organisation but they are, nevertheless, offered a means of
analysing management's decision to refrain from consolidating a structured vehicle and to request additional information to
continue with the process of normalising assessment. What was, however, especially relevant for preparers is the fact that
the regulator makes use of a random selection process and complaints of poor reporting practice submitted directly to the
stock exchange. Consequently, although the reporting entity may suspect that enquiries from the stock exchanges review
board may be likely, most respondents agreed that the company (and its preparers) would be unware of whether or not the
consolidation accounting is being interrogated by this body or the outcome of the regulator's analysis until a request for
additional information is received. One respondent explained the effect of this as follows:
Whether you like it or not, IFRS 10 and IFRS 12 are written in such a way that they force companies to be more
transparent. Add to that the fact that your nancials could be reviewed or that someone can now read about your SPV's
and complain to the [stock exchange] and you dont know if that has happened or when it's going to. That makes you
nervous (R24).
Do you know how scared people are of [the review body]? . . . They are scared of [it]terried. You go and tell them [the
review body] is coming to look at their nancials and youll see them quiver' (R3).
13
This board is an advisory panel made up of accounting experts as a joint initiative been the local stock exchange and accounting body. Its role is to
investigate investigate and to advise the stock exchange on alleged cases of non-compliance with nancial reporting standards in, inter alia, annual reports.
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As predicted by Foucault (1977), the effect of the concurrent functioning of actual or perceived surveillance is a discipline
of the self which, in a nancial reporting context, encourages compliance with IFRS 10 and IFRS 12 and a reduction in the
propensity to leave structured vehicles unconsolidated (see section 2.1):
Because the environment is so regulated and because [of] oversight and the FRIP, and functions like that, companies in
general would rather be conservative [and consolidate] and rather do what they think is [in line with IFRS] . . . because
you are never going to get into trouble if you have consolidated but you will get into trouble if you shouldve
consolidated and you haven t (R9, emphasis added).
When asked to elaborate how you get into trouble (R9) respondents did not refer to physical repercussions, the risk of
criminal sanctions or the cost of nes and penalties. Instead, disciplinary power works subtly by threatening the image of
both the reporting entity and individual responsible for the preparation of the nancial statements (see Miller & OLeary,
1987; Hopper & Macintosh, 1993; Cowton & Dopson, 2002). With adherence to IFRS 10 and IFRS 12 generally accepted as
resulting in nancial statements which achieve fair presentation (R1; R6; R7; R10), a departure from consolidation principles
has severe implications for the legitimacy of the reporting entity. Non-compliance also stigmatises the individuals
responsible for the preparation of the nancial statements ensuring correct application of IFRS (see Miller & OLeary, 1987;
Sauder & Wendy Nelson, 2009).
The funny thing is it follows management. . . . management teams are heavily judged and scrutinised . . . and youll
nd that pressure [from investors and the market] will make them [comply with IFRS 10 and IFRS 12]' (R8, emphasis
added).
Nobody wants to get into an argument with the stock exchange, the audit committee or an investor at an AGM. You may
lose and, after that, you are in the very embarrassing situation where your company has not complied with IFRS and you
are the one responsible for that . . . What makes it worse is that IFRS 10 and IFRS 12 are much clearer than SIC 12 and IAS
27. I can tell you that no nancial manager or group accountant wants to be in a situation where you get it
wrong . . . especially with all of the new information that IFRS 12 requires to be disclosed . . . Your mistake is public and
everyone can see it . . . the reputational consequences are most severe.
What these comments highlight is the close association between hierarchical surveillance and normalisation of
behaviour. Similar to the ndings of Maroun and Atkins (2014, p. 846) in an external audit setting the effect of
surveillance is reinforced by formal and informal examination carried out by an independent regulator, auditor or user of
nancial statements. The end result is that disciplinary power works subtly to promote compliance with IFRS 10 and IFRS 12.
4.3. On the relevance of disciplinary power for legitimacy
The Panoptic metaphor does not, however, provide a complete account of individual behaviour in the presence of
disciplinary power (Hopper & Macintosh, 1993; Cowton & Dopson, 2002; Maroun & Atkins, 2014). Respondents unanimously
agreed that there were no guarantees that IFRS 10 and IFRS 12 would be applied, in every instance, as intended by the IASB. In
particular, the application of the accounting standards in unforeseen contexts introduces the possibility for considerable
variation in the interpretation and extent of and adherence to the prescriptions of IFRS 10 and IFRS 12 (cf Sauder & Wendy
Nelson, 2009; Tremblay & Gendron, 2011; Maroun & van Zijl, 2015). Nevertheless, all of the interviewees agreed that the
release of these standards represents an important development in nancial reporting practice.
Despite the fact that complete enclosure of the consolidation accounting space is not achieved, respondents agreed that
the new standards play an important role in reassuring stakeholders that IFRS continue to provide a sound basis for the
preparation of nancial statements. This was especially relevant in the context of the global nancial crisis where
rationalised technologies of discipline and power are mobilised to garner support and to substitute for a loss of trust in the
capital market system (cf Gunin-Paracini & Gendron, 2010).
Its no surprise that IFRS 10 [and IFRS 12] are debated by the IASB at the same time as the economic crisis in the U.S.A and
Europe. Yes, these standards were part of a convergence project with the [Financial Accounting Standards Board]. But you
can put money on the fact that the IASB was also responding to the nancial crisis. The banks were under the spotlight and
people were asking questions about how appropriate the IFRS's actually are. So, what does the IASB do? They scrap IAS
27 and SIC 12 apparently because of various aws and then revise the [consolidation standards]. Practically, they dont
actually change very much. But they get a lot of support by looking like they are being proactive and revising the standards
in response to the crisis in America [and Europe] (R18).
Social crisis gives rise to a loss of condence in economic institutions; a desire to allocate blame to those perceived as
responsible; and awkward questions about why the regulatory bodies failed to prevent the respective scandals (Gunin-
Paracini & Gendron, 2010). From a nancial reporting perspective, the shortcomings in IAS 27 and SIC 12 are identied and
become a focal point for the IASBs stated purpose of improving nancial reporting. Whether or not there were signicant
weaknesses in the accounting standards, or merely inadequate application by a limited number of preparers, is not relevant
(R4; R9; R18). What matters is that IAS 27 and SIC 12 are labelled as decient (section 2.1). A perceived dual consolidation
model is offered as a plausible reason for off balance sheet vehicles undermining corporate transparency in the aftermath of
the 20072009 nancial crisis (cf IASB, 2011a). The IASB then introduces IFRS 10 and IFRS 12 to clarify consolidation
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principles (R5); eliminate any inconsistencies regarding when a reporting entity ought to consolidate its investees (R9); and
to lay down specic rules to cover known misapplications of IAS 27 and SIC 12 (R1). In this way, the development of the
accounting standards is not only in response to changing economic circumstances but is also part of the process of securing
the legitimacy of IFRS as an appropriate basis of accounting.
The accounting standards change because there are new developments in business . . . But what is equally relevant is the
fact that IFRS 10 and IFRS 12 were specically brought out because of the risk of off balance sheet vehicles contributing to
the nancial crisis [in 2007/2008]. The IASB had to show that it was on the ball and so it brought out a whole new set of
consolidation standards in quite a short period of time (R7).
The structure of the revised standards plays a key part in securing the continued credibility of the IFRS. To be accepted as a
rational and feasible means of addressing inappropriate consolidation accounting, achieving a sense of enclosure, as
discussed in section 4.1, is important:
Look, the structure of IFRS 10 is so that it will be taken seriously [sic]. There were problems with IAS 27 and SIC 12. We
knew that and that is what the IASB was telling us. People were looking for clear guidance on when to consolidate so that
is why IFRS 10 follows a step-by-step approach for deciding if you have control and have to consolidate another
entity . . . Anything other than the detailed prescripts which we now have wouldnt have been taken seriously . . .
because what people wanted to know was that there was a means to break down the facts to conclude if you have control
and then to hold people accountable for how they applied those principles (R7).
Institutions secure legitimacy by demonstrating consequential relevance (R3). In the context of nancial crisis and
concerns about misuse of SPVs (IASB, 2011a), the detailed application guidance, numerous examples, repetition of key terms
and anti-avoidance rules create the valid expectation that divergent application of consolidation accounting principles is
reduced. That IFRS 10 and IFRS 12 do not completely enclose the professional space is not critical. What is more relevant is
the appearance of a formal rational structure which responds to the interests of the current and future providers of capital.
For most of our interviewees, this formal structure is sufcient to reassure them that IFRS 10 and IFRS 12 have improved the
nancial reporting landscape:
Overall, I think that IFRS 10 makes it more difcult to justify the conclusion that you dont need to consolidate. There are
probably still some people who will nd ways to get around the new standards. But, overall, I think that we can place a lot
more condence in the fact that people are correctly consolidating, especially when it comes to the [structured entities]
(R4)
The possibility of additional review or scrutiny by auditors, regulators or other stakeholders because of the added sense of
transparency in the revised standards (section 4.2) provides further reassurance:
Because IFRS 12 requires so much disclosure and because IFRS 10 is so very clear, I think that what you get is more
transparency. And that makes sense. When things are more transparent, you can feel comfortable that preparers are
doing what they should be (R11)
As explained by Suchman (1995), legitimacy is accorded by integrating with the dominant belief-sets of constituents.
With disciplinary power and control an essential feature of contemporary society (Foucault, 1977; Gordon, 1980) motifs of
enclosure, partitioning, hierarchical surveillance and examination become an important source of cognitive legitimacy
(Sauder & Wendy Nelson, 2009; Brivot & Gendron, 2011; Maroun & Atkins, 2014). Each of these elements appeals to the
generally-accepted expectation that new laws and regulations rely on at least some form of disciplinary power to address
undesirable corporate conduct (see Rodrigues & Craig, 2007; Maroun & Atkins, 2014). For example, an added sense of
monitoring and review of the consolidation process (section 4.2) resonates with societal expectations for high quality,
transparent corporate reporting as is evidenced by the proliferation of codes of governance and best reporting practice
([160_TD$IF]Institute of Directors in Southern Africa, 2009; [16_TD$IF]Solomon, 2010; International Integrated Reporting Council, 2013[162_TD$IF]).
Concurrently, the technical rational discourse of the new standards (section 4.1) does more than just enclose and partition
the consolidation accounting space to facilitate examination and normalising sanction (section 4.2). Discourse, structure and
the appearance of technical rigour formalise the knowledge base, secure a sense of procedural and structural legitimacy and
encourage compliance (see Rodrigues & Craig, 2007; Mennicken & Miller, 2012). Consequently, even if IFRS 10 and IFRS 12 do
not result in complete Panoptic control, they are grounded in the power-knowledge discourse where governmentaility is
more about disposition than overt imposition of prescriptions (Cowton & Dopson, 2002; Rodrigues and Craig, 2007) To
paraphrase Leon (2001, p. 34, cited in Brivot & Gendron, 2011): surveillance always carries with it plausible justication
that makes most of us content to comply.
Some respondents were more critical. They argued that IFRS 10 and IFRS 12 were applied legalistically and that some
organisations were relying on complex schemes to circumvent the new accounting prescriptions. Nevertheless, the general
consensus was that release of IFRS 10 and IFRS 12 represents an important nancial reporting development which is in the
best interest of general users of nancial statements. Technical limitations of the revised standard were mentioned by some,
but not all, of our respondents. More signicant than isolated departures (R4) are the sound prescriptions (R3) of IFRS 10
and IFRS 12 which, to paraphrase Suchman (1995, p. 580), demonstrate that the [IASB] is making a good-faith effort to
achieve valued, albeit invisible ends even if the new standards cannot address completely the risk of off balance sheet
vehicles.
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When pressed, our expert users could not provide detailed examples of exactly how auditors, governance committees or
regulators had applied (or could apply) the guidance in IFRS 10 and IFRS 12 to hold reporting entities accountable. Similarly,
specic cases where IFRS 10 and IFRS 12 would improve corporate transparency by either resulting in the consolidation of
off balance sheet vehicles or additional disclosure in connection with structured entities were not discussed. The opacity of
the audit process (Power, 2003); inherent limitations of regulatory bodies (Vakkur, McAfee, & Kipperman, 2010); and the
possibility of resistance to the prescriptions of IFRS 10 and IFRS 12 (R1; R3; R9) were either overlooked or minimised. Instead,
there was the assumption that because IFRS 10 and IFRS 12 are more rigid (R1), repetitive (R7), and prescriptive (R8), they
facilitate additional monitoring and review. In other words, even if processes of examination and normalising sanction are
more symbolic than pragmatic, the motif of disciplinary power and control is more than adequate to reassure users of
nancial statements that IFRS 10 and IFRS 12 make a legitimate contribution to nancial reporting.
5. Conclusion
This paper highlights the functioning of IFRS 10 and IFRS 12 in a single capital market. It argues that the wording and
structure of those two publications enclose and partition the consolidation accounting space, effectively deconstructing a
complex and subjective assessment of whether or not an investor has control over an investee into a series of more distinct
parts. The rational technical structure of IFRS 10 and IFRS 12 mean that the standards constitute the only acceptable
discourse for describing a particular economic reality resulting in compliance with the underlying accounting prescriptions.
At the same time, illustrative examples, application guidance and repetition of terms constrain the interpretation of
consolidation principles to promote the inclusion of structured vehicles in group nancial statements. Hierarchical
surveillance, examination and normalising sanction are an inextricable part of this knowledge-power discourse. The
deconstruction of the concept of control allows each part of the decision-making process to be ranked, analysed and
subject to review against the norms prescribed by the IASB. The checks and balances forming part of modern corporate
governance paradigms reinforce this. Enclosure and partitioning of the consolidation process, complemented by additional
reporting, offer those charged with governance, investors, external auditors and regulators an opportunity to challenge
preparers application of the standards. This form of enquiry, coupled with the reputational risk for the reporting entity and
individual accountant identied as non-compliant, has a signicant disciplinary effect which encourages conformance with
IFRS 10 and IFRS 12.
We say encourage rather than ensure because complete Panoptic control is not achieved. Interviewees reported that,
although isolated, there could be some instances where IFRS 10 and IFRS 12 were not applied as intended by the IASB. This
does not, however, detract from the generally accepted view that the new standards represent an important corporate
reporting development. The reason is that motifs of enclosure, examination and sanction are cleverly employed as part of a
complex process of legitimisation, similar to that described by Suchman (1995) and Gunin-Paracini and Gendron (2010).
The 20072009 nancial crisis precipitates a loss of condence in capital markets and raises questions about the
adequacy of existing IFRS. The IASB offers aws in connection with IAS 27 and SIC 12 as part of the reason for a lack of
corporate transparency. IFRS 10 and IFRS 12 are then introduced to ensure that nancial statements service the information
needs of users. Elements of disciplinary power and control, whether actual or perceived, are effectively mobilised to ensure
the continued condence of stakeholders in the integrity of IFRS. The rational technical structure of the standards; an added
sense of corporate transparency; and their ability to facilitate additional monitoring and review of preparers integrates
naturally with the growing societal expectation for more transparent corporate reporting practices (Solomon, 2010) and a
capital market system which readily accepts the role of disciplinary power for creating a valid expectation that reforms are
followed (Gunin-Paracini & Gendron, 2010; Maroun & Atkins, 2014).
In this way, IFRS 10 and IFRS 12 are an example of how, despite the continuous ow of corporate failures (Gunin-
Paracini & Gendron, 2010, p. 134), IFRS retains its position as a generally accepted basis for preparing nancial statements.
Elements of enclosure, partitioning, surveillance and examination even if incomplete can appeal to the belief-sets of
constituents who readily accept the plausibility of disciplinary power and control to contribute to meaningful reform.
Paradoxically, rather than result in the development of alternate bases of accounting, nancial crises appears to result in the
proliferation of ever more complex standards being issued by the IASB.
Additional research is, however, required to understand the development of the professional accounting space. This
research only deals with the interconnection between Foucauldian power and control and consolidation accounting
provisions in IFRS 10 and IFRS 12. It does not provide a complete account of disciplinary power in a nancial reporting
context. For example, we do not deal with socialisation of individuals in accounting rms; the relationship between
standard-setters and states; or the political construction of the accounting standards (for details in this regard, see Fogarty,
1992; Cooper & Robson, 2006; Bengtsson, 2011). At the same time, rather than concentrate on the specic sites of regulation
and control, the research explores the perceptions of stakeholders, highlighting motifs of disciplinary power in the provision
of IFRS 10-and IFRS 12 and the connection between Foucauldian power and control and the perceived legitimacy of nancial
reporting standards. In this context, future research can concentrate on developing Foucauldian theory as a framework for
explaining changes in corporate reporting practices. For example, exploring whether or not other material accounting
developments exhibit elements of enclosure, examination and normalising sanction can offer an interesting line of inquiry.
This should be complemented by additional research on the relevance of cultural and governance characteristics in different
jurisdictions and how these interacts with the effects of disciplinary power and control.
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[163_TD$IF]Acknowledgements
Thanks go to Professor Jill Solomon and Professor Robert Garnett for their comments on the dissertation and earlier
versions of this paper. The authors would also like to acknowledge the participants of the Meditari Accountancy Research
Conference, South African (2014), the Henley Business Schools GARI Conference (Henley on Thames), the British Accounting
and Finance Association, Brighton (2012), the International Corporate Governance Conference, Johannesburg (2012) and the
Africa Leads Conference, Stellenbosch (2012) for their comments and recommendations. Finally, the authors are grateful to
Mrs Lelys Maddock for editing the this paper. Special thanks also go to the Sellschop Foundation for partial support of this
project.
Appendix 1. Interview questions
1. What is the rationale behind consolidation? Do we need to consolidate and why?

2. Why do you think the IASB introduced IFRS 10 and IFRS 12? What was the rationale behind introducing them?
3. Do you see any differences or discrepancies between IAS 27 and SIC 12?
4. Does IFRS 10 increase the scope of consolidation?
5. Do you think it is a coincidence that IFRS 10 and IFRS 12 were released so soon after 2007/8?
6. What do you think about the language used in IFRS 10? Could all businessmen/businesswomen understand it? If not:
[164_TD$IF]7. Does IFRS 10 impact on the way in which you understand control and consolidation?
8. Why do you think the IASB structured IFRS 10 and IFRS 12 in the way they did?
9. Do you nd IFRS 10 repetitive?
10. What are the principles contained in IFRS 10?
[165_TD$IF]11. Do IFRS 10 and IFRS 12 increase the visibility and transparency of an entity?
12. Is it possible for a user to evaluate an entity's decision not to consolidate, through the IFRS 12 disclosure?
13. Does IFRS 12 create a heightened sense of judgement, knowing that if they do not consolidate and do comply with IFRS
12, their decision not to consolidate is open to judgement by all?
Appendix 2. Table of interviewees
Respondent Background Approximate length of Cumulative years of experience International experience in

Number interview (approximate) respective eld
Respondent 1 Preparer (multinational) 45 min 17 Yes
Respondent 3 Preparer & academic 60 min 18 No
Respondent 4 Audit partner (assurance) 60 min 15 Yes
Respondent 5 Audit partner (technical) 45 min 16 Yes
Respondent 6 Audit partner (technical) 45 min 16 Yes
Respondent 9 Academic (nancial 60 min 12 Yes
accounting)
Respondent 10 Preparer (local company) 60 min 13 No
Respondent 11 Preparer (former audit 45 min 10 Yes
manager)
Respondent 12 Analyst (nancial) 30 min 11 Yes
Respondent 13 Academic (corporate 120 min 15 Yes
governance)
Respondent 14 Regulator 45 min 18 Yes
Respondent 16 Retired investment banker 120 min 46 Yes
Respondent 17 Standard-setter 60 min 15 Yes
Respondent 18 Standard-setter 90 min 19 No
Respondent 19 Analyst & investor 120 min 22 Yes
relations
Respondent 20 Analyst & investor 180 min 20 Yes
relations
Respondent 23 Board member (former 60 min 20 Yes
preparer)
Respondent 24 Board member (former 40 min 20 Yes
preparer)
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The authors would like to note that it is not the intention of this research to explore differences in the opinions of different
classes of interviewees. The study examines whether or not respondents felt that the provisions of IFRS 10 and IFRS
12 achieve a sense of enclosure, efciency, and disciplinary power. How these views vary depending on cultural,
organisational or institutional context is beyond the scope of this research.
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Contents lists available at ScienceDirect

Critical Perspectives on Accounting

Discipline and punish: Exploring the application of IFRS 10 and

2 W. van Zijl, W. Maroun / Critical Perspectives on Accounting xxx (2015) xxxxxx

2. Literature review and theoretical framework

2.1. The introduction of IFRS 10 and IFRS 12

W. van Zijl, W. Maroun / Critical Perspectives on Accounting xxx (2015) xxxxxx 3

2.2. Accounting for change in IFRS

4 W. van Zijl, W. Maroun / Critical Perspectives on Accounting xxx (2015) xxxxxx

2.3. Financial reporting: disciplinary power and legitimacy

2.3.1. Theoretical framework

2.3.2. Foucauldian power and control in a nancial reporting context

W. van Zijl, W. Maroun / Critical Perspectives on Accounting xxx (2015) xxxxxx 5

2.3.3. Consolidation accounting, Foucauldian power and legitimacy

6 W. van Zijl, W. Maroun / Critical Perspectives on Accounting xxx (2015) xxxxxx

W. van Zijl, W. Maroun / Critical Perspectives on Accounting xxx (2015) xxxxxx 7

4.1. Enclosure and the efcient body

8 W. van Zijl, W. Maroun / Critical Perspectives on Accounting xxx (2015) xxxxxx

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4.2. Surveillance, examination and normalizing sanction

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4.3. On the relevance of disciplinary power for legitimacy

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Appendix 1. Interview questions

1. What is the rationale behind consolidation? Do we need to consolidate and why?

Appendix 2. Table of interviewees

Respondent Background Approximate length of Cumulative years of experience International experience in

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