Carving Nature at Its Joints: The Entity Concept in an Entangled Society

Abstract

ABSTRACTParsing the dividing lines between financial reporting entities and individual elements poses significant professional challenges. In contrast, FASB/IASB exposure drafts on The Reporting Entity describe the boundaries of reporting entities as self-evident and objectively determinable. This paper argues that the entity problem in accounting is much broader than merely a question of determining what activities to include in general purpose financial statements. The history of the accounting entity concept and Scott's (1931) monograph, The Cultural Significance of Accounts, are revisited to explain the weak philosophical basis for modern accounting practice. The paper argues that the FASB/IASB conceptual frameworks exhibit a cultural bias of finite objectivism grounded in philosophical pragmatism and an Aristotelian logic of “natural kinds” sorted into disjoint categories. Alternative conceptualizations from outside the accounting literature depict reality as intertwined, unbounded, and not easily sorted into disjoint categories. The paper concludes that while some disciplines are beginning to view firms as entangled social organisms with problematic boundaries, the accounting profession's ability to adapt may be constrained by a philosophical foundation that treats boundaries of reporting units, accounting practice, and even academic discourse as self-evident.