Enron and Wittgenstein

I was browsing the Guardian website the other day and found this article on Wittgenstein and Enron - it's in two parts: part 1 and part 2.

I thought this was superb - at last, a philosophical explanation for why principles-based accounting is superior to rules-based acounting! After a bit of web detective work, I find out that the author, Donald MacKenzie, has invented a new method of studying accountancy, called 'ethnoaccountancy'. Brad Delong has a useful collection of links and comments on some of MacKenzie's other work. Leaderlog also quotes the Enron article. I must take some time to read the two Mackenzie papers - the story of the evolution of the Black-Scholes model is especially interesting given the new IFRS on share option accounting expected next year. This quote by Jonathan King from Brad Delong's site raises some worrying questions about the usefulness of B-S:

4) The discovery of Black-Scholes has led to changes in the world, and especially in our perception of the truth of Black-Scholes. Specifically, people now use Black-Scholes to price options, so to some extent the fact that Black-Scholes describes option prices well is...well, not unexpected.

As an accounting practitioner, I am aware of some of the shortcomings of the B-S model - but mainly its limitations for use in valuing non-transferable share options with peformance conditions attached. It's interesting to see criticism on a more conceptual level. I must read this article - it's stirring thoughts from way back and my degree in history & philospohy of science.

And here's my brother's criique of Mackenzie's Enron article for the LRB - brother is currently writing a PhD on Wittgenstein and Merleau-Ponty so is good at professional philosopher-speak:

Not bad at all - at least he doesn't appear to have made the usual misinterpretations á la Kripke, but then he doesn't describe his position that much. A little wary of the fact that he seems to be attributing rule-scepticism to Wittgenstein (which does sound a little too much like Kripke). The whole point of the discussion of rule-following in PI is not to undercut the idea that rules can and do guide us; it was far more a phenomenological description of what it is in fact like to follow a rule (as opposed to a more traditional philosophical description of how rule-following is supposed to work - which Wittgenstein does think runs into severe regressive problems). Perhaps the point this author was trying to make though is that the rules in accounting have become divorced from any kind of normative practice, so that there is nothing that can be called 'going against' or 'acting in accordance with' these kinds of rules - the interpretative point is correct, on some interpretation a rule can be made to mean anything you like. But for Wittgenstein this doesn't mean that rules themselves are useless or baseless, just that there is something called 'following a rule' that is precisely not the production of an interpretation of a rule, this is the 'according with' and 'going against' that appears to be absent in the case of accounting.

Of course if the 'principle' based UK standards are to be any better then they must avoid this same pitfall - they must not divorce the interpretative from the active aspects of following a rule. Interpretations function as a way of 'showing how' or 'explaining how' to another person who is not already following the rule, this means that interpretations are normally posterior to the rule itself, which is established through normative practices. Presumable these 'principles' are an attempt to establish this link back to some kind of normativity that is not hermetically sealed off from the non-accounting environment.

The last paragraph is crucial, and is addressed by Mackenzie in the second part of his article. What stops principles from just being meta-rules, subject to the same limitations as rules? Something to do with the body of interpretations I think - but I need to consider this some more. And I am too prejudiced to think clearly on this - being firmly committed to principles - based accounting in the UK.