INTERPRETING FINANCIAL STATEMENTS 97
and customers, but for political power and institutional legitimacy, for social as
well as economic fitness’ (DiMaggio and Powell, 1983, p. 150).
These legitimating and isomorphic processes become taken for granted by
organizations as they strive to satisfy the demands of external regulators, resource
suppliers and professional groups. These taken-for-granted processes themselves
become institutionalized in the systems and processes – including accounting and
reporting – adopted by organizations. Meyer (1994) argued that accounting arises
‘in response to the demands made by powerful elements in the environment on
which organizations are dependent’ (p. 122).
Each of these theoretical perspectives provides a different view of the role of
preparers and the needs of users of financial statements. This perspective also
follows through to the users of management accounting information.
However, as we have suggested earlier in this book, accounting is not without
its limitations. A case study serves to highlight these limitations.
Case study: Carrington Printers – an accounting critique...........
Carrington Printers was a privately owned, 100-year-old printing company
employing about 100 people and operating out of its own premises in a medium-
sized town. Although the company was heavily indebted and had been operating
with a small loss for the past three years, it had a fairly strong Balance Sheet and a
good customer base spread over a wide geographic area. Carrington’s simplified
Balance Sheet is shown in Table 7.11.
The nature of the printing industry at the time the accounts were prepared
was that there was excess production capacity and over the previous year a price
war had been fought between competitors in order to retain existing customers
and win new customers. The effect of this had been that selling prices (and
consequently profit margins) had fallen throughout the industry. Carrington’s
plant and equipment were, in the main, quite old and not suited to some of
the work that it was winning. Consequently, some work was being produced
inefficiently, with a detrimental impact on profit margins. Before the end of
the year the sales director had left the company and had influenced many of
Carrington’s customers, with whom he had established a good relationship, to
move to his new employer. Over several months, Carrington’s sales began to drop
significantly.
Lost sales and deteriorating margins on some of the business affected cash flow.
Printing companies typically carry a large stock of paper in a range of weights,
sizes and colours, while customers often take up to 60 days to pay their accounts.
Because payment of taxes and employees takes priority, suppliers are often the
last group to be paid. The major suppliers are paper merchants, who stop supplies
when their customers do not pay on time. The consequence of Carrington’s cash
flow difficulties was that suppliers limited the supply of paper that Carrington
needed to satisfy customer orders.
None of these events was reflected in the financial statements and the auditors,
largely unaware of changing market conditions, had little understanding of the