Economia aziendale and financial valuations in Italy: some contradictions and insights

David Alexander University of Birmingham,

Birmingham Business School Edgbaston

Birmingham B15 2TT

Tel: +44 121 414 8027/6530 Fax: +44 121 414 6678

Email: d.j.a.alexander@bham.ac.uk

Stefania Servalli

Università degli Studi di Bergamo Via dei Caniana, 2

24127 Bergamo (Italy) Tel. +39 035 2052591 Fax +39 035 2052549

Email: servalli@unibg.it

Submitted to Accounting History:

4th December 2008

Resubmitted to Accounting History 19th September 2009

Resubmitted to Accounting History

7th February 2010

Economia aziendale and financial valuations in Italy: some contradictions and insights

Abstract This paper analyses the development of Economia Aziendale as a peculiar

Italian theoretical construct, arguing that the current model - at least since

Zappa’s ideas of 1927 - is not compatible with Italian practice, or with the

largely successful efforts of the legal profession to stifle government attempts

to increase flexibility and relevance.

More precisely our research questions are:

is the strong theoretical tradition of Economia Aziendale consistent with the

strongly prevalent adoption of the historical cost principle in Italian financial

accounting in the twentieth century?

how has the historical cost principle achieved this prevalence?

We show that the theoretical tradition is clearly inconsistent with the

prevalence of the historical cost principle, and provide a coherent rationale

explaining this outcome.

Keywords: Economia aziendale; Zappa; Italian lawyers; flexibility.

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Economia aziendale and financial valuations in Italy:

some contradictions and insights

1. Introduction This paper explores the inter-relationships between several different strands

of accounting development in Italy. In particular, we investigate two research

questions:

- is the strong theoretical tradition of Economia Aziendale consistent with

the strongly prevalent adoption of the historical cost principle in Italian

financial accounting in the twentieth century?

- how has the historical cost principle achieved this prevalence?

We first of all, in section 2, outline the complex and deepseated history and

development of theoretical argument in the Economia Aziendale, whose key

point, despite varied schools of thought, is its focus on the Azienda as an

integrated complex organism. In section 3 we explore the twentieth century

development of Economia Aziendale thinking in more detail, showing in

particular that the theoretical arguments and conclusions about financial

valuation issues are significantly inconsistent both with practice and with the

prevailing legal attitude.

In section 4 we analyse the changes in Italian accounting regulation from the

mid nineteenth century to the introduction of International Accounting

Standards. In Section 5, in the light of the Italian accounting regulation

explored, we explain the prevalence of the historical cost paradigm underlying

i) the interpretation of the regulations (and the influence on them) by Italian

lawyers and legal thinking and ii) the strong importance of taxation and the

related influences of prudence considerations on published financial

statements. We provide evidence that the legislation seems always, though to

varying degrees and in different ways, to have supported a degree of flexibility

and economic relevance in the interpretation of laws and regulations, but that

any such flexibility has been resisted, often successfully, by the legal

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profession, in practice also supported by tax considerations and the strong

prevalence in Italy of private family-controlled companies.

Section 6 discusses, concludes, and suggests implications and messages for

future developments in an IASB world. These considerations are not unique

to Italy, although we do not develop this in detail in this paper.

2. The traditional Italian reality: rooted in the Azienda

The Italian accounting context is characterised by a strong and vibrant

theoretical tradition, known under the name of Economia aziendale, rooted in

the economics of business units, considered as long-term multi-faceted, but

integrated entities (Aziende). An in depth analysis of the Italian accounting

tradition and its main features is given in Zan (1994) and Viganò (1998).

The centrality of the Azienda’s concept has its climax in Zappa (Zappa, 1927),

with the Economia aziendale, as an unitary science that studies the “life’s

condition and existence manifestations of the Azienda”, which is investigated

as an economic coordination of elements implying dynamic processes.

Zappa’s income based accounting system is linked with a systemic and

dynamic concept of the Azienda that is considered as a whole, whose

accounting study is conducted by an approach where coordination prevails

over the individuality of wealth’s elements and where a dynamic perspective

prevails over the static one..

The economic aspect is central in Zappa’s theorisation, as the factor which unifies each kind of manifestation of the Azienda’s life. It is the common denominator of all activities within the Azienda and, as a consequence, of all disciplines that study them: operations (gestione), organisation (organizzazione) and accounting (controllo) (Zappa, 1927).

The above described features of the Azienda, in Zappa’s notion, involve a change in accounting theory that, in the light of the dynamism of the economic

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unit, can’t be centred on net worth, i.e. a static dimension as in previous theorisations (Besta, 1922), but must be focused on a dynamic notion of wealth, as income is. In particular, Zappa elaborates an accounting system, named income based accounting system (sistema contabile del reddito), whose aim is to determine income.

His accounting system, whose values are ordered on the basis of a scheme that defines homogeneous values in relation to their link with income, singles out monetary values, income values (costs and revenues) and capital values. On the basis of this accounting theory, in the light of the aim of income measurement, i.e. of the wealth linked to the dynamism which characterized the Azienda’s activity in a context of monetary exchanges, income determination comes from flows that, by the exchange, lead to the creation of wealth.

The theoretical accounting approach stated by Zappa is the result of a systemic notion of the Azienda. He, being ahead of previous approaches, including the one, formulated on a scientific basis – but only regarding the accounting perspective – by Besta, proposes the wider science of qwaEconomia aziendale, that still represents a peculiarity of Italian internal reality, with some similarities with the German Betriebswirtschaftlehre tradition and its notion of Betrieb.

Zappa’s accounting theory is strongly linked to economic content (Flower, 1996, Biondi, 2002). In particular, the role of Fisher has to be underlined with his work on “The nature of capital and income” (Fisher, 1906) and the influence of Schmalenbach’s thought about a dynamic perspective in the balance sheet (Schmalenbach, 1926) which emerges in the central position ascribed to the income statement. In fact, stating a renewed approach both to the Azienda and the accounting system, Zappa, like Schmalenbach, considered income as the most important aspect in the economy of the Azienda (Canziani, 2007: p.120).

The Azienda is the elementary economic unit of production and consumption (Canziani, 1994; Galassi, 1984). This concept considers both the economic units directly aimed to satisfaction of human needs, including a large range of

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economic units, from family to State, and the ones indirectly devoted to the satisfaction of human needs that involves units characterized by different kinds of production activities, such as industrial, commercial or financial activities, i.e. industrial, commercial and financial firms (imprese industriali, commerciali e finanziarie).

Considering the perspective of the accounting system, while Besta’s

accounting system was applicable to all kinds of Azienda, directly and

indirectly aimed to satisfaction of human needs, Zappa’s income based

accounting system is applicable to the latter only, i.e. to the economic units

which produce wealth: the income that his system measures and represents.

3. Issues of Evaluation in Economia Aziendale

In this section we explore the Economia aziendale thinking with a specific

attention to financial valuation issues, investigating the consistency of the

Economia aziendale with the practical Italian prevalence of the historical cost

principle. Regarding Economia Aziendale we should emphasise that it is a

time and space specific label, spacially considered purely in the Italian

context, and regarding time starting from the mid 1920s. Within this multi-

faceted theoretical framework, with varied detailed approaches to accounting

systems, we will consider a series of authors, i.e. Economisti aziendali,

belonging to different schools of thought, starting from Zappa.

Gino Zappa, in his work “La determinazione del reddito nelle imprese commerciali” (Il Reddito) (1920-29), considering the systematic determination of income, discusses problems about the valuation of inventory. In this part of his book, he underlines that many authors, in particular “the ones that ignore the formation of the variations of a period” are convinced about the logical certainty and the practical opportunity to value inventories at cost, because they imagine that cost valuations exclude or limit flexibility by accountants and managers.

The author underlines that the determination of cost is not an easy problem to solve, in particular, because of the impossibility to find a simplified solution for

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a problem that cannot be separated out from the complex and complementary ongoing of the Azienda’s operations. He doesn’t agree with people who reduce cost valuation to a simple incontrovertible “factual” attestation, that you can easily check.

As emphasised in the previous section, Zappa’s accounting approach is linked with the idea of the Azienda as a dynamic system, which is considered as a whole, where coordination prevails over the individuality of wealth’s elements and where a dynamic perspective prevails over the static one. Consistent with this approach, the rule - which Zappa defines as “too much ingenuous” (Zappa, 1946: 502) - to evaluate at the lower of historical cost and current value doesn’t solve the problem of dividing the results of operations in order to attribute them to the periods they relate to, especially when these operations are inflexible and develop over long periods.

In particular, the author underlines (Zappa, 1946: 503) that the historical cost valuation of inventory is not necessarily the only rational valuation to quantify elements of the income referred to operations still in progress, because of the frequent uncertainty of the same costs, even when they are identifiable with a certain autonomy, but because of the variety of business situations and of the market trends too. Zappa - abhorring the idea of giving a rigid rule for valuations of inventory valid for each situation and each Azienda - considers a range of values that has its extreme limits in historical cost and estimated revenue values, within which one can identify values to attribute, case by case, taking into account the different and changeable circumstances of the specific Azienda and of the market (Zappa, 1946: 506).

The inside knowledge of the specific situation of the Azienda permits the possibility to determine costs with a certain autonomy, but also the amount (superior or inferior) of revenues, and the degree of coordination. In Zappa the focus is on reliability of values, without an imposed restriction to a historical cost valuation, but considering the different internal and external circumstances involving the Azienda. We have considered the position of Zappa about valuations of inventory in order to start showing that in the Italian context, the academy had not

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necessarily excluded the possibility of considering a range of values. Indeed the arguments can be broadened to a general theoretical proposition.

Considering the Italian context concerning the theoretical aspects and the peculiarity of the Economia aziendale that expresses itself in the unity of its object (Azienda) it’s possible to underline that the focus within the valuations involved in the accounting systems, whose aim is to measure income, is on the maintenance of income generation capability.

In an attempt to extract the rather elusive essence of Zappa’s concept of

income, we give two quotations. The first is a rough translation (deliberately

literal and close to the original, rather than free and into vernacular English)

from Zappa (1946: 266)1:

If we believe that the destination of income is a characteristic element of it, we would rather say by definition that it is additional value above the initial capital, that you can remove, or leave as an increase in capital. And if, in defining income, we would enunciate a rule for wise operations, instead of asserting that it is the excess of capital that remains free for consumption, we would prefer to say that it cannot be consumed except within reasonable limits.

Secondly from Zappa (1946: 267)2.

Income available for consumption, or which is available for levy or distribution, must not only not reduce the initial capital, but it shouldn’t even damage the capacity of capital to provide an income: income is essentially a surplus value, whose making leaves unimpaired the value which is the mechanism for its creation.

It is instructive to compare these quotations with a classic Anglo-Saxon analysis of income, i.e. the work of Hicks (1946). The essence of his argument is as follows.

The purpose of income calculations in practical affairs is to give people an indication of the amount which they can consume without impoverishing themselves. Following out this idea, it would seem that we ought to define a man’s income as the maximum value which he can

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consume during a week, and still expect to be as well off at the end of the week as he was at the beginning.

He discusses various practical implications of this thinking, leading to his final definition (which he labels his “Income number 3”). This is

the maximum amount of money which the individual can spend this week, and still expect to be able to spend the same amount in real terms in each ensuing week.

This is of course an entirely future-oriented concept and, transferred to the context of a business rather than an individual, is incompatible with the accountant’s traditional usage of historical costs in the profit measurement process. Profit becomes the excess after having charged against revenues the full costs which will be necessary to replace the resources consumed in earning such revenue. The question is, is Zappa, in essence, saying the same thing as Hicks?

Whilst a close connection is not explicit, the phrase in the second quotation: “it

shouldn’t even damage the capacity of capital to provide [i.e. in the future] an

income” is at minimum very strongly suggestive of such a relationship. It is

surely difficult to argue that the Zapparian analysis is supportive of the

historical cost emphasis in recent Italian accounting practice.

We suggested previously that there seem to be strong similarities between

the earlier Betriebswirtschaftlehre (BWL) tradition, as developed in particular

by Schmidt and Schmalenbach, and Zappa’s ideas. Zan (1994: 288) directly

supports two of these key factors. One of them is the “radical holistic

approach which shapes [Zappa’s] thought in an internally coherent way

relative to the unitary view of the “azienda”” and an attitude fundamental to

Schmalenbach’s approach to the business entity. The second factor is Zan’s

explicit confirmation that Zappa “argues that elementary accounts should

state the true and the real value of individual assets, representing their

replacement costs ...”. This last comment gives direct support to our linking of

Zappa with Hicks in valuation terms.

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To attempt a summary, we can suggest that Zappa’s point of view is linked with subjectivity and uncertainty involved in the income quantification and the need to protect the firm’s capability to produce it. The income concept as a combination of cost measured by negative numeral values and revenues measured by positive numeral values, in its implications about capital maintenance, seems to suggest, besides this combination of cost and revenues for concluded processes, a valuation of inventories, i.e. still existing processes, that, if included within a range of values, needs to be considered in a prudent sense. Incidentally, we believe that the contrast between income-centred and asset-

centred accounting systems can be over-played. The logic of double-entry,

the articulation of income statement and balance sheet, and the rationale of

economic theory, all point towards this danger. Income is simply the surplus

generated after maintaining capital, so the issue of income determination boils

down to choosing a definition of “capital” to be maintained – or, of course, vice

versa. The key difference between the “income” approach of Zappa and the

“patrimonialist” approach of Besta, for example, is in their chosen concepts of

capital maintenance, Zappa being more forward-looking than Besta in his

suggested evaluations.

Even if Economia aziendale, from its origins on, developed a series of schools of thought (Giannessi, 1954) there is a commonality in the position of the different authors about the valuation issues, coming from the need to always consider the coordination, the unity and the dynamism which characterise the firm.

While not for one moment claiming a comprehensive coverage, we briefly

mention representatives, i.e. Economisti aziendali, of three such schools, the

Tuscan, the Systemic and the Neapolitan, in addition to the Venetian-

Milanese, represented by Zappa himself and some of his disciples.

Onida, one of Zappa’s disciples associated with the Milanese school, asserts (Onida, 1974: 56) :

In financial statements in-progress operations’ values cannot be

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determined without considering the results of these operations in future periods (at least as much as possible). 3

In particular, considering asset and liability values, Onida asserts (Onida, 1974: 59):

Asset values should be adapted to direct or indirect future realized values, which you could estimate; liabilities values should be adapted to estimated costs – and about debts, in particular, to extinction values – at which they should be settled in the future. 4

Direct or indirect realisation values (for assets) and extinction values (for liabilities) are considered as limits, i.e. respectively as the upper value you can give to an asset and the lower value to attribute to a liability. These values allow assets to be renewed from future revenues, while considering liabilities, they correspond to what you suffer to extinguish them. The principle of prudence is respected because income, coming from this range of valuations, doesn’t impair the capital, i.e. it has the feature to be distributable (reddito distribuibile).

Similar positions are expressed by Cassandro (1910 - 2004), an author scientifically linked to Amaduzzi, who the systemic school refers to. Di Canio summarises the view of Cassandro as follows (Di Canio, 2008):

P.E. Cassandro in dealing with the issue of valuations in financial statements identifies and defines the concept of rational income. It must express - he asserts – the real and genuine increasing of initial capital due to the carrying out of production activity. Its measurement, therefore, must not damage the future carrying out of business actions and it must imply a fair remuneration of all the other factors of production that have concurred to create the conditions in order that this wealth was generated.5

Rossi, another of Zappa’s Milanese disciples, concludes (1966, p.162):

We think it’s no longer possible to assert that capital valuation, when you are preparing a set of annual financial statements, has to be done considering the past – as with the so called cost valuation postulates – but, on the contrary, carefully examining facts related to future operations.6

An attention to future orientation is also in De Minico, referred to by the

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Neapolitan school, who, even if he was far from Zappa’s criterion of imputation of costs and revenues, considered that

[...] the maximum value to give to capital used in a business is a function of variables whose roots are all in future elements to evaluate (future revenue, future costs, normal future income) [...]. (De Minico, 1946: 69).7

Similarly, critical positions about the use of historical costs as an incontrovertible approach were expressed by Amodeo, another influential author of the Neapolitan school.

Amodeo, talking about the valuation of inventory asserts that neither the cost nor the current value can always be considered suitable for a financial report that aims to measure and represent the income of a period, pointing out the possibility to consider the value of future realisation, as a value that avoids the limits of a backward looking valuation (historical cost) or contemporary values (current value at the end of the period). All this is asserted always underlining the need to consider, inside the unity of the entity, the future perspective of the entity itself (Amodeo, 1967: 350).

A valuation approach named the functional approach is due to Giannessi (1979: 343-346), an influential exponent of the Tuscan school, who pointed out the need to consider any particular element to be part of the entity in relation to its environment. In particular, the valuation process is seen as the result of a series of assessments which considers the nature of the elements involved, the equilibrium of the entity and its future perspectives. Considering Italian Academic theorisation, attempting a brief summary of the detailed comments and quotations presented here, a flexible approach to valuation issues is clear. In particular, it is linked with the features of Aziende within the Economia Aziendale approach and their space and time relations considering the income measurement aims, which are of logical necessity future-oriented. The point about flexibility should be emphasised. It is certainly not suggested

that either Zappa or other Economisti Aziendali reject historical cost.

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Equally, however, it is being suggested that the strong practical presence of

historical cost in the last few decades would be so rejected. Further, the

strong prevalence of historical cost as a maximum value for recorded assets

would be rejected too. Flexibility of valuation upwards as well as downwards

is explicitly supported.

A more recent Italian authority, writing in English (here quoted verbatim) puts

it as follows (Galassi, 1980: 34).

Zappa’s definition of a general income concept allows wide flexibility according to needs, by shifting also the boundaries of the entity towards sub-entities or super-entities (e.g. national economic system) for which income must be defined. This general formulation consents the construction of different income concepts, each suitable to a well defined purpose.

He concludes his whole paper (p.46):

In Zappa’s opinion the cost basis is acceptable, provided we make aperiodic comprehensive revaluations, even every two years, in the form of a general revision of “values system”, which takes into consideration realistic depreciation, price-level adjustments, market value, replacement value, appraisal value and so on, in other words, the new conditions and economic prospects laid down by environment dynamics and consequently the business dynamics (emphases original).

We therefore arrive at a clear answer to our first research question. Twentieth century Italian Economia Aziendale theory is not consistent with the practical Italian prevalence of the historical cost principle. Given this clear inconsistency, we now turn to our second research question: how has historical cost achieved its practical supremacy, against prevailing theoretical considerations? We hypothesise that the role of the lawyer, achieving preference and supremacy over the role of the economist and the accountant, is fundamental. Section 4 below outlines a historical regulation context. Section 5 addresses the question itself. 4. The role of law and regulation8 Ever since the thirteenth century the evolution of accounting in Italy has been

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characterised by a close linkage with written law. After the fall of the Roman empire and the ‘dark ages’ of the low Medieval Age, the Age of Italian city states developed the origins of the legal influence on accounting. In 1865 the first Italian Commercial Code, heavily influenced by the Napoleonic Code, included the mandatory drawing up and filing of financial statements for public limited companies (società anonima). The 1882 Commercial Code adopted a liberal approach, basically merely stating in one article the general principle that the accounts should show with “straight-forwardness and truth” (evidenza e verità) the economic results of a company.

It was generally accepted that the accounts could not be criticized “for underestimating or overvaluing” (Vivante, 1923) provided that they had been approved by the ‘sovereignty’ of the shareholders in general meeting. So for a considerable period there was commonality between accounting thought and accounting practice as regulated by the law. But things started to change in the 1930s and 1940s when jurisprudence recognised that the approval of the shareholders in general meeting could be overturned in the event of fraud or restriction of a shareholder’s property rights and the interests of third parties.

There was thus a general movement during the 1930s towards further

restriction of accounting, and in that climate the new 1942 Civil Code was

created. The promulgation of this Code (CC) was a clear step towards

increased legal regulation. A proliferation of accounting provisions took place,

another general principle joined that of “straight-forwardness and truth”

(evidenza e verità) and, for the first time, presentation and valuation

requirements were defined.

The new general principle, expressed in Article 2423 CC, required the balance sheet and profit and loss account to show with “clearness and precision” (chiarezza e precisione), a company’s financial position and economic results. This formula was intended as a guideline in relation to which specific rules had to be interpreted. It was generally accepted that “clearness” and “straightforwardness” (“chiarezza e evidenza”) referred to form and content, while “precision” and “truth” (“precisione e verità”) referred to valuations. The next article (2424 CC) related to “clearness”, since it dealt

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with the balance sheet minimum content, indicating the assets and liabilities required to be included therein. The 1942 Civil Code did not mention any compulsory contents of the income statement, so that companies were allowed to present very condensed and unsatisfactory information regarding their economic results.

Valuation rules were given in art. 2425: the historical cost principle was the fundamental one and marked the maximum amount at which fixed assets, both tangible and intangible, were to be stated; inventory was to be valued at the lower of cost and net realizable value. The historical cost basis was usually required also in accounting for associates, even when the investor had a substantial interest. No rules were set for liability valuation.

However, Article 2425 (1942) contained a potentially very significant statement. It began with an apparently specific requirement.

Methods for the valuation – In the valuation of the items among the assets the following methods must be complied with: 9

At the end of the detailed list, however, we find the following:

If special reasons require a derogation from the rules of this article, the directors and the board of statutory auditors must indicate and justify each derogation in their reports to the shareholders’ meeting.10

Since derogations have to be indicated and justified, it follows of course that derogations are explicitly allowed. Within its area of scope, this is a legally-sanctioned over-ride. It should be noted however that whilst the special reasons clause is expressed in a very open and general way, it explicitly only relates to this particular article. The following article (2425 bis) entitled “Contents of the profit and loss account” (“Contenuto del Conto dei Profitti e delle Perdite”) contains no such provision. However 2425 is about the valuation of balance sheet items, not the contents of balance sheets.

To explore the origins of this provision relating to valuation rules we have to

go back to the 19th century. Prior to the 1882 Commercial Code there was a

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lively debate on the desirability or otherwise of establishing valuation criteria.

The 1882 legislators were in the end reluctant to do so. The 1882 Code stated

the required general principle of “straight-forwardness and truth” for annual

accounts (art.176), but left the prescription of rules as a matter for the internal

regulations of enterprise (art. 89). In other words, the 1882 Code made a very

deliberate decision not to adopt a legalistic or prescriptive approach. But the

debate continued. Two extreme positions can be detected (Portale, 1983 p.86

ss.):

a) the ‘liberal’ position arguing that a set of fixed valuation rules would be

unable to fit the needs of diverse companies;

b) the ‘interventionist’ position arguing that a set of fixed valuation rules was

necessary to prevent companies all doing different things, and

furthermore, to bring Italy into line with the legal situation in other countries

such as Germany, Austria, Hungary and Switzerland11.

Following much discussion, the 1942 wording was adopted as a compromise. The overriding principle allowing departures from civil rules has always represented a controversial matter, not least because it introduced a deviance within a legal system which is otherwise strictly “civil-law” based. Several contrasting opinions about the correct interpretation of “speciali ragioni” (special reasons) were proposed. These may be summarized under two main theoretical headings. One approach interpreted “special reasons” as specific circumstances regarding the company as a whole, so that for example a particular situation of the company could justify exceeding the maximum value prescribed by law. Avoiding a loss bringing disrepute to the firm, or implying a substantial capital reduction, when it is possible to cover it by revaluing an asset, was suggested as an acceptable example of “speciali ragioni” (Levi, 1981, Colombo, 1987).

A second more prevalent approach in the literature deemed that “special reasons” were to be related to a firm’s individual assets. Events changing an asset’s economic nature could permit the abandonment of its historical cost and the adoption of a higher and more appropriate value. This would be the case for an agricultural site turned into a building one, or grazing land transformed into a camping site or land converted into an oilfield.

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It is worth noting that, whichever of these two approaches is taken in interpreting this clause, the clause itself is completely consistent with the ethos of the Economisti aziendali. This is not to suggest however that the Code as a whole closely reflects the logic of their analysis, even before the later restricting influences and interpretations which we discuss below. Considering Zappa himself, it would not be valid to see the 1942 Code as a simple affirmation of his arguments.

The next major significant event was the publication of the EU Fourth Directive in 1978. Article 2, with the explicit true and fair view override, is well-known, and not reproduced here. The official Italian text translated “a true and fair view” as “un quadro fedele”, linguistically similar to, for example, the French and the Dutch versions.

It is necessary at this point to consider some conceptual issues in relation to text translation. Evans (2008: 4/5) summarises the position as follows:

Thus for the special register of accounting, we use specialised terminology, but we also share “everyday” words with non-accountants. We do however need to be aware that (a) terminology may have different definitions in everyday usage as opposed to our special register, and (b) even where we agree on a definition, terminology may still be interpreted differently by different groups of persons (lay persons, practising accountants, regulators and legislators, and academics).

She could, and perhaps should, have added that different interpretations may be caused not only by different groups of persons, but simply by different nationalities and cultures within the same functional group.

These distinctions are underpinned by the two disciplines of linguistics and semiotics, together with philosophical foundations of socially constructed internal reality, which together support the proposition that language usage is arbitrary in word selection, and community specific in meaning and interpretation. A detailed exposition is beyond our space limitation here, see e.g. Alexander and Ionascu (2008), and references therein. We will analyse the implications of these issues in considering the process of adoption of EU

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concepts into Italian law below.

In 1983, after a forty-year debate on the role and significance of the ‘special reasons’ formula, time was ripe for legal clarification. Art.9 of the revaluation law called “Visentini-bis” (n.72/1983) stated that ‘special reasons’ were intended as those requiring departure from legal rules in order to give a “faithful picture” (“quadro fedele”) of the company’s economic and financial situation. The primary intention of the Italian government was probably to state an ‘authoritative’ interpretation – legally sanctioned – of the ‘special reasons’ formula so as to clarify its correct application. In this respect, it was probably decided to anticipate in part the Fourth Directive implementation, which at that time was believed to be imminent (Minervini, 1983).

Thus, during the 1980s the dispute on the overriding principle was revived because of the different legal scholarly reactions to the “quadro fedele” formula. Furthermore, it seemed that this concept was inserted within the excessively narrow sphere of the valuation rules, whereas the original general principle in the Directive (“quadro fedele” – “true and fair view”) did and does refer to the whole accounts. According to one opinion, the “quadro fedele” formula did not differ essentially from the fundamental principle of ‘clearness and precision’ (art. 2423 of 1942 CC). It would be achieved, in fact, when legal rules were respected. In other words, departures had to be enacted – in order to be permissible – within the extant legal framework and the general criteria that could be derived from it (Colombo, 1987). Other academics saw instead, in the new legal provision, permission for overcoming the legislative restrictions on valuation each time gains on assets occurred (Ferri, 1983). In addition, it appeared to some that accounting standards could prevail over law principles.

In this respect, the risk perceived by some legal scholars was that practitioners could be granted too great a flexibility in deciding departures from stated rules, if an interpretation of the “quadro fedele” expression in terms of complete freedom in overcoming valuation limits was to prevail.

Having established the starting position from the Italian perspective, we can now move on to the actual enactment of Article 2 of the 4th Directive into

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Italian law. This appears in the new Article 2423. Table 4.1 gives this complete in Italian, and in the translation by Frignani & Elia (1992). Three points are particularly worthy of consideration.

[Table 4.1 about here]

Firstly, no attempt has been made to preserve all the original words (and therefore perhaps concepts?) from the 1942 version. The new “rappresentazione veritiera e corretta” principle replaces the previous ones. Its superiority over specific provisions is explicitly stated.

Secondly, the last sentence is completely new. This seems to say that any profits regarded as realised for accounting purposes as a result of derogation from a specific provision of the Code must be transferred to a non-distributable reserve until amounts representing those profits have actually been recovered. The Fourth Directive requirement has in a sense been “captured” by the Italian internal reality of conservatism. The general concepts of economic reality and substance over form have not been rejected, but they have, arguably, been subverted by a combination of conservatism and legalism, leading to the conclusion that downwards revaluations must be recognised, but upward revaluations should be ignored if possible, and their significance at any rate minimised.

The third point, of course, is that the “quadro fedele” phrase has disappeared. Instead of the 4th Directive phrase of “dare un quadro fedele” we have “rappresentare in modo veritiero e corretto”. The obvious direct translation of this would be: to represent in a truthful and correct manner. In brief; to give a true and correct view. This is the wording of the pre-1947 UK Companies Act. True and correct sounds more precise, more legalistic, less subjective, less economic, then true and fair. What are the implications of this change in wording? One possible answer is that there are no implications. There are a number of factors, consistent with our comments about the subjectivity, flexibility and indeterminacy of the meaning of words, which might suggest that the change in wording has no fundamental significance.

Firstly, there is the importance of distinguishing the words used in any

19

situation from the concept which the words are seeking to represent, applying the principles of linguistics briefly mentioned above. Applying this idea to the true and fair view concept gives an interesting ‘double-approximation’ effect. The words used are at best an approximation (an image?) of the concept, and the concept recognises that we can only at best present, through our accounting statements, an approximation (an image) of the economic and physical reality which is the business enterprise. This argument suggests that any idea of ‘correctness’ in accounting statements, at least if the word is taken in a strict scientific or logical sense, is quite absurd.

The second factor arises from the Ministerial Commentary on the 1991 amendments. This was issued by the “Commissione per lo studio e l’attuazione delle direttive CEE in materia societaria” that drew up the legislative measure. This Commission was established under the “Ministero di Grazia e Giustizia” (Ministry of Justice). The commentary on the enactment of Article 2 of the Directive states quite explicitly that the words “rappresentare in modo veritiero e corretto” were used in preference to “dare un quadro fedele” because the new version is better. It “seems to represent the best translation of the expression ‘true and fair view’ which was the original for the requirement in the Directive” (“Che sembra constituire la più esatta traduzione dell’espressione true and fair view dalla quale trae origine la norma della Direttiva”). In a relevant opinion by a leading legal scholar (Jaeger, 1984), the change in wording from “quadro fedele” to “rappresentare in modo veritiero e corretto” was only in order to give a proper translation of the Fourth Directive general clause.

A third factor to consider is the full implication, in the Italian context, of the word “corretto”12. Nobes (1993) suggests that: “the word ‘corretto’, in a law in a Roman law country, appears to mean ‘in accordance with legal rules’. This can be supported e.g. by Colombo (1987), as already referenced. Colombo further states that the “veritiero e corretto” formula was considered “più idonea ad escludere il pericolo che la clausola generale si inserisse nel sistema come strumento di ‘ammorbidimento’ della disciplina (better for excluding the dangerous insertion into the legal system of a general clause as a tool allowing ‘softening’ of provisions)” (Colombo, 1991, p.14). It seems that conflicting motivations are at work here. The legal motivation is to restrict

20

flexibility. The Government (Ministerial) motivation is to accept the implications of the ‘original true and fair view expression’ i.e. not to restrict it.

In summary here, the overall picture in this section is of statutory attempts at

flexibility, decreasing but demonstrable, up to the 1942 Code. Between 1942

and 1991, however, these attempts seem to have been finally stifled, the E.U.

directives being enacted as prudently, and as pro historic cost, as possible,

and interpreted in the same direction.

5. The triumph of the historical cost paradigm 5.1 Historical, legal and fiscal aspects We now discuss a number of factors which we believe have contributed to

greater or lesser extent to this increasing prevalence, and eventual

dominance, of historical costs as a maximum evaluation in Italian twentieth

century financial reporting. There is of course no one single cause, but a

multi-facet situation where elements, not singly determinant in other contexts,

worked systemically in the direction of the prevalence of the historical cost

paradigm. For these reasons, our analysis of the triumph of this paradigm

needs to be embedded in a preliminary examination that involves historical,

political and cultural aspects of the context where the internal socio-economic

dynamics involved manifested themselves.

In the accounting regulation field, the Italian context has been historically

characterised by a strong role of rules and their interpretation. In this situation

lawyers have always taken the lion’s share of influence, because of their

deep involvement in the interpretational and judicial part of the regulation

process. The position of professional legitimacy to interpret and judge that

they assumed in this process made their influence concerning valuations in

financial reports stronger compared with other groups involved, such as

accountants or academics.

At the beginning, the 1882 Code, in the name of its liberal spirit, requiring the

general principle of “evidenza e verità” for annual accounts (art.176), defined

21

a kind of blank proxy regarding accounting techniques, which however at that

time found in Italy a lack of general accepted accounting principles (Bocchini,

1977). The liberal approach expressed by the Code made any kind of more

specific intervention about valuation impossible, opening with its agnosticism

the way to very flexible choices by firms.

In the twentieth century, the socio-economic reality the legislator and the

interpreters had to deal with was much more complex than the one

characterizing the previous codification. The socio-economic reality was

complex because of the technological and economic evolution that

characterised that period. The phenomena of production became technically

and economically more complex, evolving beyond the limits of the previous

juridical discipline13.

This socio-economic complexity began to emerge in the juridical regulation,

by second thoughts on the liberal model of the mid nineteenth century, which

by this time had lost its capability of controlling events. The evolution of the

legal culture has been synthesized as the “emergence of the collective

dimension”, expressed, in particular, by the need to consider a collective

perspective coming from a fragmentation of the reality and the dynamics of

the economy due to the passage from an old economic model founded on

property to the new one based on entrepreneurship (Marchisio, 2007: 25).

In this context, the emerging of this perspective projected the focus of the

lawyers from the internal side to a “collective dimension”, involving a variety of

exchanges and a complexity of subjects, inducing them to adopt a prudent

approach, even where the legislator allowed forms of flexibility such as the

ones in the 1942 Civil Code, as described in section 4.

In fact, if during the period of the Commercial Code, in a context without

positive rules about valuations, jurisprudence asserted the

unquestionableness of the valuations made by the general meeting, with the

adoption of the 1942 Civil Code it focused the attention on the interpretation of

the valuation rules in the perspective to safeguard the interest of third parties

22

(Camodeca, 2001: 206).

Considering the political context, it is important to note that Italy had a Fascist

government continuously from 1922 until after the passing of the new Civil

Code in 1942, i.e. throughout its gestation and creation. As regards the

implications for business organisations, this period was characterised by what

was known as corporatism. The basis behind this was the supremacy of the

State. Cinquini quotes a Mussolini speech (Cinquini 2007: 213) (described as

“Mussolini, 1925”, but he fails to give the reference):

This is our formula: everything inside the State, nothing out or in opposition to the State.

Cassese (1986: 123) gives the same quotation (without attribution), noting

however that the attitude is identifying state with society, a tie denied by the

founders of the theory of the state.

However, corporatism was not particularly totalitarian. Private property and

individual economic freedom, for example, remained. But the firms

(corporazioni) were run as organs of the government, in the sense that

individual factors of production – in effect a variety of stakeholders, in modern

terms, were subjugated (in theory) to the needs of the State. Labour, capital

and so on were expected to maximise State benefits, not their own return.

Spirito (1932: 243), quoted in Cinquini (2007: 213) summed this up.

This is the core of corporatism: the transformation of property and private initiative in a direction inspired by public goals.

Such a desire for greater State control and coordination was consistent with,

and probably an active encouragement of, the developing desire to define and

restrict disclosure and valuation practices in financial reporting which we

discussed in some detail in section 4. Obviously the philosophy and detail of

the 1942 Code was a product of its environment, and fascism was very much

part of that environment. Nevertheless, it is instructive to note that this Code,

when fascism disappeared, survived for nearly five decades, until the

23

novelties introduced in the Code in 1991, “substantially unchanged” (Cinquini,

2007: 216). Clearly, it was reasonably consistent with the general Italian

context, and not merely with the needs of a dictatorship.

Considering the topics of this paper, it is interesting to underline that Fascism

in the economic field always rejected approaches inspired by the need to let

markets operate in order to reach an endogenous equilibrium (Marchisio,

2007: 74), but on the contrary supporting and regulating a private economic

action that was realised within the corporative solidarity, i.e. within the social

aims attributed to private business by the State.

In this sense, the Civil Code represents an example of regulation that

expresses recognition and protection of a subjective right which transcends

subjective interest and is identified with the State interest. Even when private

autonomy prevails - as in the case of the contractual area, of which company

regulation is part - the recognised and protected interest is the collective one

(F.S. Azzariti et al., 1943: 5)

This social aim underpinning the Civil Code regulation, consistent with the

hypothesis of this paper, can be considered as an element supporting the

prevalence of a legal, prudent and conservative approach over academic

flexibility principles.

In analysing the context of the valuation issues involved here, it is worth

noting that two different conceptions about financial statements were

emerging in Italy, during the first decades of the XXth century, i.e. the juridical

and the economic.

The juridical approach is linked to De Gregorio (1908), a well known lawyer,

whose thinking is founded on the need to define rules about a minimum

content of financial statements and analytical valuation criteria in order to

define a set of rules applicable to all entities. This approach was the

theoretical answer of lawyers, easily adoptable in practice, to the absence of a

legal regulation.

24

On a completely opposite side there was the economic conception of the

financial statements, which had the important economist Maffeo Pantaleoni as

its champion (Pantaleoni, 1909). These words of the author are important

also for the influence they will have on the Economia aziendale paradigm

about valuations (Pantaleoni, 1909: 199)14:

a) a collection of assets must have different valuations in relation to

different aims; b) values must be consistent with expected future realised values.

The economic approach, linking the valuations to the aim of the financial

statements, denies the possibility to define compulsory rules, asserting the

idea that we can have different criteria, as a function of the aim of the

statement itself. This was an important aspect successively used by

Economia aziendale theory about valuation issues. Actually, from its origin

(1926), in affording these topics, Economia aziendale has always stressed the

economic meaning of the financial statements as a system of values aiming to

measure the income available for consumption in a perspective of

maintenance of the entity, considered as an ongoing system.

The 1942 Civil Code, on one hand represented the acceptance of some

proposals made by Zappa during his belonging to the Besta patrimonialistic

school (Zappa, 1910) – i.e. before the foundation of the Economia aziendale

and his income approach – when he defined a set of “clear and precise” rules

that could help in representing a real result of the period (p. 223), an approach

that he later rejected in the name of the principle of the new science, as

mentioned above, that didn’t permit any rigid valuation rule.15 On the other

hand the Code included forms of flexibility, such as “special reasons”.

At the same time, the focus of the 1942 Code kept on being on the capital and

on the balance sheet, consistently with the most influential juridical school of

thought (De Gregorio, 1908, 1938). In fact, the Code defined the content of

the balance sheet aiming to expose the capital, in order to protect third

parties, ignoring the definition of a minimum content of the income statement,

25

which was defined by the law only in 1974.

The result, as analysed in some detail in section 4, was a mix of principles

where the request of “clearness and precision” was combined with forms of

flexibilities, all in a general background of prudence which characterised the

juridical approach adopted.

In this situation where the law expressed a combination of juxtaposed

positions, lawyers and their perspective emerged with great importance, in

particular considering their role in the judgment system. It is important to

underline that in that period the position of the accounting profession was

disadvantaged because of the absence of generally accepted accounting

principles, not yet existing, which could have been a link with the academy

positions and helping in pushing towards flexibility, in an Economia aziendale

sense.

At the same time the accounting profession faced an economic system,

represented by small-medium sized firms, family owned, that seemed to

completely ignore the wide debate inside the accounting thought about the

financial statements and their role, just wanting to defend their secrecy and

the entrepreneur interests (Melis, 2005), also in the light of tax authority

pressures, with the consequence of a use of the financial statements

consistent with these aims.

In section 4 we have discussed some legal developments in Italy during the

20th century in some detail. They seem to us to demonstrate considerable

commonalities, in two particular respects. The first is that they all include, in

different ways, a deliberate attempt to allow a material element of flexibility,

local relevance, and subjectivity in the application and interpretation of

specific requirement and regulation. The 1942 Article 2425 sub-clause, for

example, in the (restricted) areas where it is applicable, is definitely an

override of specific statutory requirement, designed to facilitate relevance to

an individual particular scenario, not merely an extension thereof. The second

commonality, however, is that these various attempts have been largely

26

unsuccessful. One element in this failure is undoubtedly the successful

opposition of much of the legal profession, whose interpretation of valuation

criteria was rigid, as already shown.

In addition, we can consider that jurists’ emphasis on considering capital as a guarantee for creditors induces them to prudent interpretations, which they also assert inside technical Commissions where their presence is relevant, as we can see considering the Italian legislative structure. Indeed, further evidence of rigidity is provided by a consideration of Italian legislative procedures. In Italy accounting regulation is the result of a process controlled by the Lawmaker through a complex and multipart legislative system, composed of numerous bodies, with different natures, involving Public Bodies, Stock Exchange Authority, Accounting Profession and Stock Companies and their Associations, implicated at different levels.

Another aspect that can be underlined in the Italian accounting regulation process is about the background of people involved inside the legislative process that leads to an accounting law. Before its discussion in Parliament, any parliamentary bill is assigned to a political Commission, which however, when there are laws regarding specific and technical aspects, delegates a technical Commission, composed of specialists, to produce a draft of the law. Considering accounting laws, these Commissions are often characterised by a prevalence of jurists. An example is represented by the D’Alessandro Commission charged to review the Civil Code to introduce the IVth and the VIIth Directives. It was initially composed of 20 members, 17 of whom were lawyers.

The lawyers’ approach in considering capital as a guarantee for creditors combined with their prevailing presence inside technical Commissions can suggest a juridical path dependency within the accounting regulation process that leads to an interpretation of external inputs of change influenced by the internal inter-subjective principle of prudence. The Italian accounting regulation system has experienced and is experiencing some significant changes coming from outside the country (EU Directives, IAS/IFRS

27

introduction) that enter the Italian business and anthropological reality by a complex and articulated accounting regulation model, where the internal community, with all its theoretical and practical traditions, decodes and recomposes (within the limits of linguistic equivalences), according to internal regulation instruments, with the consequence that, at the moment, the external forces are still contrasted by conservatism.

As already implied in the paragraphs immediately above, another factor in all

this is the relatively close nature of the typical financing structure of Italian

enterprises. Differently from the Anglo-Saxon scenario, the Italian one is

characterized by family owned, small-medium sized firms, where the bank

system has a central role in their finance. In this situation, where equity has a

low incidence if compared with debts, relations between companies and

banks are fundamental for the development of enterprises. At the same time

in small-medium firms the entrepreneur, in his core position inside the firm,

often adopts a culture of secrecy and a conservative approach, supported by

the tax driven paradigm typical of fiscal law influence in Italy. Recent findings

show that few small entrepreneurs want to move from a tax driven paradigm

to a “fair” one (Demartini et al (2005)).

The features of the Italian accounting regulation above described allows us to make some comments regarding, in particular, the role of tax aspects and the bias towards conservatism, as elements that limit the change coming from outside, especially in a context, like the Italian one.

After the legislative decree 127/91, which asserted that in preparing the income statement the valuation criteria to apply have to be the ones stated in the Civil Code, there was an internal conflict of laws, in particular between the civil and fiscal laws. Fiscal rules indeed stated in art. 75 of the Testo Unico delle Imposte sui Redditi (TUIR) (Consolidated Laws on Income Taxes) that allowable costs must be charged to the income statement. As a consequence, the legislative decree 127 required a reconciliation inside the income statement, including items n. 24 and n. 25, respectively regarding “Value adjustment made exclusively as a consequence of tax policies” and “Provision

28

relating to tax benefits”. Using this fiscal appendix it was possible to determine the “Result for the year” (item n. 23), considering only Civil Code valuation criteria, while the “Net profit and loss” (item n. 26) was in accordance with fiscal criteria.

After a major debate about this fiscal appendix - regarding, for example, connected issues such as depreciation and deferred taxation (see Ruggeri, 1983) - the requirement of the fiscal appendix was abolished. At the present time depreciation and provision costs, recognised only in order to reduce income tax, are included in a different report, prepared just for the Tax Authority.

This is just one example of the strong role of tax aspects in Italy. Further, considering in particular non-listed companies, - which in Italy are represented by small and medium-sized family-dominated businesses, which are a great part of the whole economic scenario - the influence of tax law is particularly strong, because of their owners’ aims wanting to minimize their taxation.

5.2 Professional juxtapositions Like much of Europe (and consistent with a tradition of legalism), the

introduction of accounting standards emanating from the private sector,

notably International Accounting Standards, has proved problematic for the

Italian regulatory system. The accounting standard setting process is an area

where many quarrels between accountants and lawyers have been observed

(Pong, 1999: 9).

Considering that accountants and lawyers are each one part of what Abbott

defines in his work as “the system of professions” (Abbott, 1988), where each

professional group tries to defend and enlarge its jurisdictional area, some

remarks can be made about jurisdictional boundaries between these

professions in the Italian context, bearing in mind the position of the Italian

academy too.

29

It has been suggested that in the United Kingdom the accounting academic

tradition and the accounting profession have almost no connection, and they

are both stronger because of this (Annisette and Kirkham, 2007). In Italy too,

the two are not always closely connected, but different implications can be

suggested, considering the Italian context’s peculiarities illustrated above.

In Italy it can surely be argued that Economia Aziendale, allowed to develop

its own internal logical coherence, is stronger because of this autonomy, but

the same cannot be argued for the Italian accounting profession. In fact, as

already mentioned the Italian accounting regulation system is embedded in a

Civil Law context, involving different players. These players are implicated at

different levels, with a central role of the Lawmaker and numerous public

bodies, characterised by a strong prevalence of lawyers, such as for example

inside Commissions delegated to prepare the draft of accounting laws, as

discussed above.

In addition, the strong fiscal influence on the valuation process forces the

accounting profession towards positions expressed by the legal profession

and fiscal Courts, which are conditioned by a prudent approach, aimed to

protect creditors and guarantee the tax yield due to the State.

Abbott’s analysis is developed and presented in an essentially national, rather

than international, framework. In a world of multinational influences, much

stronger generally today, and perhaps particularly in the European Union,

such a focus is an artificial limitation on the analysis (Sikka and Willmott,

1995). In this context outside influences from a supranational standard-setter

(the IASB) and regulator (the European Union) become significant. The

legalistic philosophies of these two influences are significantly different, and

that of the IASB, unlike that of the EU, is significantly different from the Italian

tradition. International Standards, with a specific investor focus and a common

law background, are designed to be interpreted and applied by accountants

rather than by lawyers.

30

As Pong (1999, p.25) asserts “codification of generally accepted principles

presents risks for the accounting profession”. In fact, in this situation, the

accounting process becomes more widely focused on interpreting and

applying rules in specific situations. This interpretation process in the

accounting context requires accounting expertise. As Pong suggests (p.26),

“the accounting profession may seek to develop standards that only

accountants can interpret”. But of course an exactly comparable point can be

made about the legal profession also looking after itself. In the case of Italy,

for example, formally stated and precise rules have allowed accountants to be

overtaken by lawyers, given the lawyers’ claims to professional expertise in

the interpretation of rules as rules, independently of the context involved.

In addition, a narrowly legalistic interpretation of precise rules is incompatible

with the whole approach of Economia Aziendale, as described above, which

places great emphasis on an integrated consideration of the business

organization as a multi-faceted entity operating in a complex environment,

and allows “flexibility according to needs” (Galassi, as already quoted).

All of the above-mentioned factors, the strong legal position both theoretically

through the civil law tradition and practically through control of the regulatory

creation process, the fiscal influence and the creditor/conservatism paradigm,

represent strong pressures reducing the likely influence of the accounting

profession considered in its own right. The profession was not in a strong

position to fight back. It was not until 1975, when the national accounting

body created an Accounting Principles Commission, that there was any hope

of even trying to “seek to develop standards that only accountants can

interpret” (Pong, as already quoted). By then it was much too late.

The lack of professional accounting principles, and the pressures coming

from a tax driven context, were elements making accountants weaker if

compared with lawyers, whose legal approach to interpretation of accounting

law, and power inside the accounting regulation system, allowed

conservatism to prevail.

31

It is interesting to briefly contrast the Italian scenario with that of the UK. To

highlight the question: why has a strong prevalence of historical cost not

developed in the UK? In outline terms the answer is very simple: there was

no reason why it should; there were no major forces pushing practice in that

direction. The focus on the needs of equity investors at the micro level rather

than on debt financing, and on state management at the macro level, implied

local flexibility rather than national uniformity. It was generally recognised

that, whilst excessive optimism was obviously unacceptable, excessive

conservatism was equally obviously misleading. Accounting was, and is,

regarded as an economic-based discipline and not a law-based discipline,

with regulations traditionally minimised. Neither “Recommendations” which

appeared from the Institute of Chartered Accountants from 1942; nor

“Standards”, “intended to be mandatory”, which appeared from 1970, had the

force of law, emanating from, and being enforced if at all by, Professional

accounting bodies on their members by reason of such membership. By the

time that EU influences, through the Fourth and Seventh Directives, began to

attack this mechanism, IASC/B influences appeared to help defend and

preserve it (as the UK had surely intended when it was instrumental in

creating the IASC, always based in London, in 1973 – the same year the UK

joined the EU!).

So, in summary on the UK contrast, a different environment: financial, legal,

cultural and Professional, created a different valuation approach. The

economic logic, similar, as we have shown, to that of Economia Aziendale,

was not sabotaged to anything like the extent of the Italian situation.

It should also be pointed out that the preponderance of legal authority in Italy,

whilst fundamentally different from the UK, is by no means unique in Europe.

A French publication (Garnier, 1947) described accounting as the algèbra du

droit, the algebra of law, a phrase picked up in political debate by Baert and

Yanno (2009). Germany has traditionally adopted a similar tradition – see for

example Wüstemann and Kierzek (2005) and the resulting (critical)

discussion: Alexander (2006), Nobes (2006), Wüstemann and Kierzek (2006).

In both these countries also, historical cost became totally dominant (as a

32

maximum) through the second half of the 20th Century, the logic of

Schmalenbach suffering the same fate as that of Zappa, and in both these

countries the tax/financial reporting link became very strong, and ingrained in

the local psyche. Further the link was in both cases explicitly enforced by

fiscal law.

6. Summary and Conclusion

This paper has provided, within the limits imposed by length considerations, a

thorough exposition of the theoretical construct of Economia Aziendale,and of

the implications of the construct in general, with a specific attention to Zappa

and other influential authors within the multi-faceted scenario of the

Economisti Aziendali, for valuation and measurement. The wide-ranging

(synthetic) notion of the Azienda (entity) leads to a clear realisation that

income measurement requires significant future orientation, not merely a

historical cost orientation.

Secondly, we have provided evidence that the Italian legislation has been

sympathetic to the flexibility which is needed in measurement approaches if

performance measurement at the entity (Azienda) level is going to provide the

relevance which theory and logic require. However such efforts have been

significantly denigrated and thwarted by the Italian legal profession.

Contradiction in thought and motivation between Economisti Aziendali and

Italian juridical philosophy has been clearly illustrated.

For reasons of both general familiarity and shortage of space, we have

devoted less attention to details of Italian accounting practice over the last

half-century. The strong influences of tax considerations, bank and family

finance as opposed to outside equity finance, a preponderance of small and

medium enterprises (SMEs), and a general wide-spread culture of secrecy, as

outlined above, are well-known (e.g. Nobes 1983, Zambon 2003).

The historical heritage of a Civil Code regulation, underpinned by social aims,

33

according with the hypothesis of this paper, can be considered as a further

element supporting the prevalence of a legal, prudent and conservative

approach despite the need of flexibility embodied within academic principles.

Legalism can seem to act in sympathy with such attitudes, as for example

with the following of legal form rather than economic substance in relation to

long-term leases, leading to a failure to record a long term lease in the

balance sheet of the lessee. But in fact, as Nobes (2005) and others have

pointed out, this (legal) conclusion is actually wrong in law. There is a legal

right, owned by the lessee, to the use of the asset for a limited period. This

legal right to the use of the (tangible) asset is itself an (intangible) asset under

both legal and economic/accounting definitions. But the legal position on

leases has been to ignore this, and focus only on the physical (tangible)

asset. This is exactly what preparers would want to hear, as it allows

preparers to keep resources and obligations off balance sheet; the former

omission being justified by conservatism and the latter position being justified

by pragmatic convenience, i.e. the desire to hide the existence of unavoidable

debt repayments, leading (paradoxically) to an imprudent (anti-conservative)

statement of resources (patrimonio).

Prudence and secrecy, leading to a significant lack of transparency, have

tended to triumph over economic logic, using juridical support when this

pointed in the desired direction. In summary, therefore, the contradictions

between Economia Aziendale, the lawyer and accounting practice together

with the strength of fiscal influence and the weakness of the accounting

profession and its absence of regulatory influence, have generally allowed

practice to follow the path chosen and preferred by preparers, which explains

the triumph of historical cost, and answers our second research question.

The implications of IFRS introduction will provide, indeed are already

providing, a new and significant fourth contradiction, again pushing against

the strong acceptance of historical cost. This paper provides a platform for

analysis of such developments, already being considered by the authors

elsewhere (reference suppressed), and doubtless by others. Such analysis

34

can develop into a considerable research agenda, both broadening to other

countries, and deepening the various social and sociological aspects which

we briefly discuss. To the extent that purposes and context of Italian entities

(Aziende) change, accounting practice is also likely to change, with the

economic thinking behind much IASB regulation being significantly in

contradiction with Italian legalism and traditional practice. But the extent to

which the context, financial and cultural, of the typical Italian Azienda

changes, and the implications for current and future contradictions, are an

empirical matter for future histories.

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2423. Redazione del bilancio – Gli amministratori devono redigere il bilancio di esercizio, costituito dallo stato patrimoniale, dal conto economico e dalla nota integrativa.

Il bilancio deve essere redatto con chiarezza e deve rappresentare in modo veritiero e corretto la situazione patrimoniale e finanziaria della società e il risultato economico dell’esercizio.

Se le informazioni richieste da specifiche disposizioni di legge non sono sufficienti a dare una rappresentazione veritiera e corretta, si devono fornire le informazioni complementari necessarie allo scopo.

Se, in casi eccezionali, l’applicazione di una disposizione degli articoli seguenti e incompatibile con la rappresentazione veritiera e corretta, la disposizione non deve essere applicata. La nota integrativa deve motivare la deroga e deve indicarne l’influenza sulla rappresentazione della situazione patrimoniale, finanziaria e del risultato economico. Gli eventuali utili derivanti dalla deroga devono essere iscritti in una riserva non distribuibile se non in misura corrispondente at valore recuperato.

2423. Drafting preparation of the balance sheet – The directors must draw the balance sheet16 of the financial year, comprising the assets and liabilities account, the profit and loss account and the explanatory note.

The balance sheet must be drawn clearly and it must represent truthfully and correctly the patrimony and financial situation of the company and the economic result of the financial year.

If the information required by specific statutory provisions are not sufficient to give a truthful and correct representation, the additional information necessary to this purpose must be given.

If, in exceptional cases, the application of a provision of the following articles is incompatible with the truthful and correct representation, the provision must not be applied. The explanatory note must give the motives for the deviation and must indicate its effects on the representation of the assets, financial and economic result position. Possible profits deriving from the deviation must be recorded in a non distributable reserve if they are not of an amount corresponding to the recovered value. Table 4.1 Article 2423; 1991. Source: Frignani and Elia (1992).

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Endnotes

1 Noi, se credessimo la destinazione elemento caratteristico del reddito, vorremmo piuttosto, tra l’altro, dire per definizione che esso è un valore addizionale al capitale iniziale, che può prelevarsi o lasciarsi in aumento del capitale stresso. E se, nel definire il reddito, volessimo enunciare anche una norma di saggia gestione, invece di asserire che esso è un’eccedenza di capitale che rimane libera per il consumo, preferiremmo dichiarare che esso non può consumarsi che entro limiti ragionevoli. 2 Il reddito devoluto al consumo, o che si può prelevare o distribuire, non solo dunque deve essere tale da non diminuire il capitale iniziale, ma nemmeno dovrebbe intaccare l’attitudine del capitale a fornire un reddito: il reddito è essenzialmente un valore eccedente, che nel determinarsi lascia integro il valore che è mezzo di sua rilevazione. 3 I valori di bilancio relativi ad operazioni in corso, non si possono determinare prescindendo dalla ponderazione (almeno finché questa riesca possibile) dell’esito che le operazioni in corso avranno negli esercizi venturi. 4 I valori attivi dovrebbero essere adeguati ai valori di effettivo futuro realizzo, diretto o indiretto, che in relazione ad essi si potessero presumere; i valori passivi dovrebbero essere adeguati ai presumibili costi - e per quanto riguarda i debiti, ai valori di estinzione - che ad essi dovranno in futuro contrapporsi. 5 P.E. Cassandro nell’affrontare il problema delle valutazioni di bilancio individua e definisce il concetto di reddito razionale. Esso deve esprimere, afferma, il reale e genuino accrescimento del capitale iniziale per effetto dello svolgimento dell’attività di produzione. La sua misurazione, quindi, non deve danneggiare il futuro svolgimento degli accadimenti aziendali e deve comportare un’equa remunerazione di tutti gli altri fattori della produzione che hanno concorso a creare le condizioni affinché tale ricchezza si generasse. 6 A noi pare non possa più sostenersi che la valutazione del capitale investito, quando si forma il bilancio d’esercizio, debba farsi guardando al passato – come postula la cosiddetta valutazione a costo – e non invece prendendo in attento esame fatti ascrivibili alla gestione futura. 7 [...] valore massimo da assegnare al capitale impegnato in un affare è funzione di variabili le radici delle quali si rinvengono tutte in elementi futuri da prevedere (ricavi futuri, costi futuri, futuro reddito normale) [...]. 8 Parts of this section are based on an unpublished paper by the first author and Chiara Saccon, University of Venezia, written in the 1990s. 9 Criteri di valutazione – Nella valutazione degli elementi dell’attivo devono essere osservati i seguenti criteri: 10 Se speciali ragioni richiedono una deroga alle norme di questo articolo gli amministratori e il collegio sindacale devono indicare e giustificare le singole deroghe nelle loro relazioni all’assemblea. 11 But not the U.K.!

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12 An interesting angle on the implications of ‘corretto’, is revealed by consideration of the concept, well known in several strata of Italian society (including the academic), of a “caffè corretto”. A caffè corretto is a coffee which has the grappa (Italian liqueur) mixed in with it, as opposed to served separately. So, how could “caffè corretto” be translated into English? One thing which is surely clear is that “correct coffee” is not a remotely adequate translation. Perhaps “improved coffee”, “the best coffee”, would give a better characterisation. This of course suggests the idea that “veritiero et corretto” should not be translated as “true and correct” but perhaps more loosely but more honestly, as “the best possible”, “the finest”, “the most faithful”. Such a suggested meaning is actively supported by the Ministerial Commentary already referred to. 13 In this new economic dimension forms of aggregations of different kinds, such as groups or consortia (consorzi), started to interest law scholars of that period. Some examples of this interest are the works of the thirties by Ascarelli (1933), Salandra (1934) and Vivante (1935). 14 a) un dato complesso di attività deve ricevere valutazioni diverse in relazione a finalità diverse; b) le attribuzioni di valore devono essere conformi ai prezzi previsti di effettivo realizzo. 15 For more insights about valuations in this “early” Zappa and his relations with the ideas of earlier accounting scholars, see Gonnella, 2010. 16 This is of course a simplistic mis-translation: “bilancio” here means “financial statements”, not balance sheet.

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