Fearful asymmetry: The consumption of accounting signs in the Algoma Steel pension bailout

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Accounting, Organizations and Society 33 (2008) 756–782 www.elsevier.com/locate/aos

Fearful asymmetry: The consumption of accounting signs in the Algoma Steel pension bailout Cameron Graham * Schulich School of Business, York University, 4700 Keele Street, Toronto, Ontario, Canada M3J 1P3

Abstract This paper examines the role of accounting in society by looking at the consumption of accounting signs during the financial restructuring of a corporation. The paper builds upon insights from prior research on accounting as simulacrum and hyperreality. It examines how accounting numbers serve as reconfigurable signs that construct appropriate ‘‘crises”, motivate government intervention, and marshal stakeholders towards solutions. The incident at the heart of this study is the 2001 bailout of the Algoma Steel pension plan by the Ontario government. The incident demonstrates how accounting technologies are required both for the production of accounting signs and for their consumption. The paper asks how the production and consumption of accounting signs is different from that of other communication signs, what role consumers of accounting signs play in determining their meaning, and what difference this makes in how corporate pension plans are protected by government. It concludes that the structures and mechanisms surrounding the consumption of accounting signs enable different stakeholders to influence the production of meaning at the moment when accounting signs are consumed, changing the way that risk and wealth are redistributed, and shaping government intervention. Ó 2008 Elsevier Ltd. All rights reserved.

Introduction In this paper, I draw on the work of Baudrillard to examine the consumption of accounting signs by various stakeholders during a corporate financial crisis. Baudrillard (1972, 1973) developed provocative semiological theories about the production and the consumption of signs in society. I ask how the *

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production and consumption of accounting signs is different from the production and consumption of other signs, and what difference this makes in the role of accounting in society. I use a Canadian pension accounting example to explore how accounting signs are used by management, government, creditors, and other corporate stakeholders. In 2001, the severely underfunded pension plan of Algoma Steel was taken over by the Ontario government. The analysis of documents pertaining to this incident demonstrates how accounting

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technologies structure the production and consumption of accounting signs, exacerbating differences in how stakeholders are able to consume these signs, triggering and limiting government intervention, and shifting the boundary between the private and public sectors. My analysis draws upon the work of Macintosh, Shearer, Thornton, and Welker (2000), who discussed financial accounting theory using Baudrillard’s notions about signs (see Baudrillard, 1983; Baudrillard, 1995, 1988). This approach asserts that accounting signs have become divorced from any underlying objective reality. With respect to pension accounting, I argue that Canadian GAAP for defined-benefit pensions has codified a system of arbitrary signs. The study of Algoma Steel demonstrates how these accounting signs can be configured to create representations of pension plans that are useful to corporations in managing government and other stakeholders. I also argue that inequalities amongst stakeholders in their ability to consume accounting signs contribute to differences in the power they are able to exert over the meaning of those signs. The study will be of interest to accounting researchers because it expands, with concrete examples, our understanding of how accounting functions as a language, and in particular how accounting differs from other languages at the point where its signs are consumed. This study contributes to our understanding of the role of accounting information in defining the boundary between the private and public sectors. It provides specific evidence of how the production and consumption of accounting information, as a highly structured form of communication, alters the very institutional setting in which that communication occurs. The transference of pension liabilities from private corporations to government, and the intervention by government in private financial crises, are examples of how the boundary between the private and the public sector can shift. The study is particularly relevant because Algoma Steel was an early adopter of revised Canadian pension disclosure standards in 2000. Similar changes to pension disclosure standards have been implemented by the International Accounting Standards Board under IAS 19 (IASB, 2004) and the Financial Accounting Standards

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Board under FAS 158 (FASB, 2006). These changes have provoked concern (e.g. Brooksbank, 2006; Liddle, 2002; Pension Changes Could Cost $180b, 2006; Squeeze on Pensions Could Tighten, 2006). This study helps shed timely light on the impact of such changes by examining a ‘‘pension crisis” triggered in part by revisions to Canadian pension disclosure standards.

Retracing Baudrillard’s steps The underlying thesis of this paper is that accounting, as a system of signs, can be effectively critiqued by approaching it from the perspective of linguistic theories about the function of signs in today’s society. Prior research has spent surprisingly little time examining accounting from such a perspective, given the prominence of linguistic theory in philosophy in the 20th century. Pioneers in linguistic or literary approaches to accounting research include Belkaoui (1978, 1980), who asserted that accounting is a language and explored the cognitive implications of using that language; Lavoie (1987), who explored the hermeneutics of economic decision making with accounting information; Arrington and Francis (1989), who introduced postmodern linguistic theory to the accounting literature; and Boland (1989), who showed how a hermeneutic approach could break down the dichotomy between subjectivism and objectivism. Although many critical accounting articles are indebted to linguistic theory in a general way, explicitly linguistic approaches to accounting research after 1989 are unfortunately few.1 The one

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I am setting aside the excellent stream of research on accounting and visual images (Daly & Schuler, 1998; Graves, Flesher, & Jordan, 1996; Preston, Wright, & Young, 1996; Preston & Young, 2000), which draws on linguistic theorists. In the pages of AOS, among the few explicitly linguistic papers, as opposed to papers that merely have textual data, are Cooper and Puxty’s (1994) textual analysis of a professional accounting journal article, and Francis’s (1994) exploration of the hermeneutics of auditing. Linguistic treatments of accounting are both more frequent and more recent outside AOS (e.g., Armstrong, 2000; Evans, 2004; Everett, 2004; Macintosh & Baker, 2002; Macintosh & Shearer, 2000; McGoun, 1997; Mouck, 1994; Walters-York, 1996).

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I engage here, by Macintosh et al. (2000), draws on Baudrillard’s notions of simulacrum, implosion, and hyperreality to discuss financial accounting theory. Macintosh et al. (p. 14) argue that Baudrillard’s radical semiological theories are relevant to accounting because they deal with changes in language, information technology, communication and media that fundamentally affect accounting.2 They use Baudrillard’s insights to develop a critique of accounting based on the production and consumption of information. This approach is particularly appropriate for the present study because the resolution of the 2001 Algoma Steel crisis hinged on how the company’s accounting ‘‘signs” were produced and consumed. In semiotic terms (see, for example, Saussure, 1961), signs consist of a word or picture – the signifier – that evokes a concept – the signified. The signifier and signified together act as a sign pointing to some underlying thing – the referent. The word ‘‘corporation”, for instance, evokes the notion of an incorporated company and can be used to refer to a specific organization. In traditional accounting theory, signs have an objective referent: ‘‘net income” measures a real surplus of a company’s economic activity. Macintosh et al. argue, however, that accounting signs have lost their objective referent. They take up Baudrillard’s (1983) provocative suggestion that signs now take their meaning only from their relationship to other signs in the communicative system. As noted by Macintosh et al. (p. 40), Baudrillard argued (1983, pp. 11–12) that signs have passed through four historical phases. In the first phase, signs were a reflection of a profound reality. In the second, signs masked or denatured this profound reality. In the third, signs masked the absence of a profound reality. And, in the fourth, which according 2 Mattessich (2003) has criticized Macintosh et al. and Baudrillard from the perspective of objective realism. Mattessich, who seems to be irritated by Baudrillard’s refusal to play the scientific language game, clings to the notion that science – and hence accounting – can represent objectively the reality of which it is a part. This stance has been discredited by many philosophers, notably Rorty (1991). Mattessich’s philosophy has been critiqued by Archer (1998) and Mouck (2004), but Macintosh et al. have not yet responded to his treatment of Baudrillard.

to Baudrillard is the phase of today, signs precede reality. Macintosh et al. equate the first phase to prehistoric accounting, and trace the accounting notions of capital and income through Baudrillard’s other phases. Accounting, they maintain, is now without objective referent, and they give several supporting examples, including accounting for executive stock options and earnings management. They argue that, just as in Baudrillard’s examples of the hyperreal society, accounting signs now precede the reality they purport to represent, creating that reality through their sign value: accounting signs have gained independence from the real. As Baudrillard put it, ‘‘from now on signs will exchange among themselves exclusively, without interacting with the real . . . [they are] at last free for a structural or combinatory play that succeeds the previous role of determinate equivalence” (Baudrillard & Poster, 1988, p. 125); quoted in (Macintosh et al., 2000, p. 40). Macintosh et al. argue (p. 40) that Baudrillard’s characterization totalizes the present age and ignores the way that accounting signs still maintain a connection to an underlying, albeit social, reality. They ask, ‘‘why is it that accounting information is used extensively in economic and social relations when, according to our Baudrillardian analysis, it does not refer to any real objective realm, and has had changing referents over time?” (p. 40). They point to the clean surplus model (Feltham & Ohlson, 1995) as a partial answer, suggesting that as long as capital and income articulate in a clean surplus relationship, it does not matter how each is defined. The accounting notions of capital and income take their sign values from the system of signs in which they are embedded, rather than from any underlying objective ‘‘thing” represented by capital or income. In this sense, the signs are arbitrary. If accounting is a system of arbitrary signs – that is, a language – then it is amenable to linguistic theoretical analysis. However, caution is required. Accounting differs from English and other vernaculars in several socially important respects. It is formally defined by a professionally dominated process, for instance. Its use is partially professionalized. It has peculiar technical features

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pertaining to its numeric and calculative nature that lend it a false aura of objectivity and precision (cf. Tinker, Merino, & Neimark, 1982; Tinker, 1991) and enforce a certain arithmetic grammar over what can be said. Above all – and this is something Macintosh et al. neglect in their interpretation of Baudrillard for accounting – accounting functions as a system of signs primarily in the financial markets, not the product markets. The financial markets are unlike the mass consumer market featured in Baudrillard’s analysis of signs. In order to explain the implications of this more fully, I want to retrace the development of Baudrillard’s notions of simulacra and hyperreality. Baudrillard’s analysis of signs began with his efforts to update Marxist theory to account for the shift in emphasis in Western society from production to consumption (Baudrillard, 1968, 1970). He formalized his theories in a series of essays published as For a Critique of the Political Economy of the Sign (1972 [trans. 1981]). In these essays, Baudrillard draws a contrast between symbolic exchange and consumption (1981, pp. 63– 65). An example of symbolic exchange is the giving of a gift. A gift is more than an object, it is symbolic of a unique relationship between people. A commodity, on the other hand, is a sign of relations of production. It takes its meaning not from a unique relationship between people but from its ‘‘differential relation to other signs” (p. 66). What Baudrillard means by this is that the basis of consumption is meaningful social exchange, not the brute satisfaction of individual needs. He compares consumption to language. Language, he says, cannot be understood on an utterance-byutterance basis because individual utterances are only intelligible in the context of language. So consumption cannot be understood as the satisfaction of individual needs, but must be understood as a social system for producing meaning through differences in the sign value of commodities (p. 75). Baudrillard’s most formal moments come when he compares the functional logic of use value, the economic logic of exchange value, the differential logic of sign value, and the logic of symbolic exchange (pp. 123–129). In teasing out the connections between these logics, Baudrillard comes to the conclusion that, just as exchange value domi-

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nates use value in our economic system, so the signifier dominates the signified in our signification system. The principle of economic circulation is the production of equivalence, exchange value. The principle of circulation in our system of signification is the production of difference, the signifier. Thus, in order to understand the consumption of objects completely, says Baudrillard, one must understand them as signs, not only as commodities. Baudrillard’s critique reaches its zenith in the essay for which the book is named. Here, Baudrillard argues that the problems of Marxist thinking derive from an artificial separation of the economy and culture, paralleled in the artificial separation of the commodity and the sign, requiring ‘‘magical thinking” regarding ideology to reunite them (pp. 142–145). He makes two matching claims: that because the logic of the commodity is at the heart of the sign, signs can function as both exchange value and use value; and that because the structure of the sign is at the heart of the commodity, commodities can function inherently as signs (p. 146). The commodity functions as a system of communication governing social interaction, reducing the symbolic to the form of the sign and rationalizing all exchange (p. 147). The key point in this essay is Baudrillard’s recognition that the moment of interconversion between commodity and sign, when meaning is generated from the commodity and the sign is commodified, is the moment of consumption, not production (p. 147).3 This is what defines today’s society, and what escapes traditional and neo-Marxist analysis with its focus on production and its artificial separation of economy and culture. What Baudrillard is proposing is a more general critique of political economy. Baudrillard makes a subtle point here that will prove important in the discussion of Algoma Steel

3 This may seem fairly straightforward to those familiar with the hermeneutical precepts of Heidegger (1962) and Gadamer (1976), who argued that meaning is created when a text is read, and that the meaning will go beyond the original intentions of the author (cf. Lavoie, 1987; Boland, 1989). Baudrillard’s insight is to link this line of thought to the production and consumption of the commodity, and to recognize the commodity as a sign.

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that follows. He argues that the arbitrariness of the sign does not have to do with the referent alone. It is not the sign that is arbitrarily connected to the referent. It is the signifier that is arbitrarily connected to the signified/referent pair. The signified and referent together form the content of the sign, under the ‘‘aegis” of the signifier (p. 151). The implication of this is that the referent, the ‘‘objective” thing that we often presume to be reflected in the sign, is actually not independent of the sign: ‘‘In a profound sense, the referent is the reflection of the sign . . .” (p. 151). Baudrillard’s later notions of simulacrum, implosion, and hyperreality derive from this insight. This critique of the sign positions Baudrillard to break with Marxism. Baudrillard suggests, for instance, that Marx’s analysis of the commodity was incomplete because he never developed a critique of use value (pp. 128–129). The actual break did not come, however, until Baudrillard’s next book, The Mirror of Production (1973 [trans. 1975]). In this he criticized Marx for reducing people to producers, life to economic production, by accepting the central and unfortunate proposition of political economy: that people are labour power. To Baudrillard, people are no better off being pegged as homo faber than they are as homo economicus (1975, p. 49). He illustrates this by pointing to Marx’s imposition of a ‘‘mode of production” on primitive societies. He argues that Marx has only adopted and reproduced the fundamental concepts of political economy, and that it was necessary to look next at the mode of signification and a critique of the sign (p. 51). He argues that Marx took the economy and production as axiomatic, and is therefore unable to account for how the principle of production is itself produced (p. 66). He goes so far as to say that Marx’s anachronistic analysis of primitive and feudal societies results in a ‘‘theoretical, political and strategic miscomprehension of capitalist formations themselves” (p. 107). Baudrillard (1975, pp. 119–129) addresses these limitations by examining how monopoly capitalism differs from competitive capitalism. Monopoly capitalism, he argues, represents a revolutionary change in capitalism, not merely an extension. Exchange is no longer just abstracted, it is opera-

tionalized, coded, through the production of meaning and difference. What matters is not the control of the means of material production, but control of the code (p. 122). While the consumption of signs produces difference, the process is not that of social differentiation through conscious consumption to consolidate one’s class status. Rather, the process is unconscious (pp. 122–123) because it is programmed. Consumption is no longer contingent, supply and demand are no longer dialectically related; competition, supply and demand remain only as myths to support the system (p. 125). Consumption is now driven by planned socialization, by advertising, for example, which provides not only the answers but also the questions. In this system, signifiers are divorced from their contents, both the signified and the referent, to play freely in self-referential exchange with other signifiers. The system thus neutralizes all contradictions by abolishing referents (p. 129), that is, by collapsing or imploding the difference between the signified and the referent. The radical nature of Baudrillard’s critique comes to life when he shows how his analytic approach explains what Marxist analysis cannot, namely the relegation of entire groups of people – students, races, women – to positions outside the realm of production. These groups cannot be aligned with workers in revolt against those who control the means of production. They must revolt against the code (pp. 131–141). This, then, is the radical and intensely theorized backdrop against which Baudrillard’s (1983) notions of simulacra, implosion, and hyperreality must be viewed. Macintosh et al. (2000, pp. 14– 16) provide a solid summary of these three notions, but they do not connect them to their theoretical derivation. Briefly, the simulacrum is the sign that has been divorced from its referent, and takes its meaning only from its relation to other signs. Implosion is the collapse of the boundary between two concepts or realms, and of the difference between sign and referent. Hyperreality is the state of society in which simulation and simulacra dominate. When Macintosh et al. use these concepts to explore accounting, they achieve little more than a recapitulation of traditional accounting history in trendy terms. By picking up Baudril-

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lard at the point where terms like simulacra and hyperreality emerge, and ignoring the prior development of his thought, they reinvigorate an analytical model of accounting theory but threaten nothing. Baudrillard, they claim (pp. 44–45), is obsessed with the sign world and marginalizes relations of power. Such an accusation is incomprehensible given even the abbreviated chronology of his theoretical development provided above. What then to do about Baudrillard and accounting? I will argue in what follows that Baudrillard must be taken just seriously enough. He is a provocateur, and must not under any circumstances be taken too literally.4 There are glaring weaknesses in what he says, such as a failure to ground his notion of ‘‘symbolic exchange” empirically, which makes it seem somewhat nostalgic; a failure to define more precisely the ‘‘code” or identify who controls it and how; as well as a tendency towards fatalism and nihilism in later works (e.g. Baudrillard, 1993). However, he provokes us to rethink our assumptions, and provides a compelling vocabulary for discussing society that is rooted in his own dissection of Marx. Implications regarding relations of power can quite readily be brought out when using his vocabulary to understand present-day accounting. This is what I will do in the following case study. I will use the incident of the financial collapse of Algoma Steel in 2001 and the subsequent bailout of its pension plan by the Ontario government to show how accounting signs function in Baudrillard’s terms. I will, however, also show how Baudrillard’s analysis is limited for accounting by certain features in the mode of production and the mode of consumption of accounting signs. Before I proceed with my discussion of the Algoma case, I want to clarify what is distinct about the form of accounting signs. Semiotics, as noted above, describes the sign as a signifier/signified pair pointing to a referent. The accounting sign has a peculiar form, in that accounting information consists of a system of equations. The basic 4 The tedious literalism of Schoonmaker’s (1994) critique of Baudrillard is an example of what can happen. The metaphorical qualities of terms like ‘‘code” and ‘‘binary” completely escape her.

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form of the accounting sign is ‘‘Label = Value”, for example ‘‘Accounts Receivable = $100,000”. These signs can be built up into higher level signs, such as ‘‘Current Assets = $1,000,000”, and still higher ones, ‘‘Total Assets = $10,000,000”. In financial accounting, these basic forms are arranged according to the logic of the double entry. Certain events in the course of business are selectively recorded in variations on the form ‘‘Debits = Credits”. This is an equation of equations, each side consisting of one or more basic signs in the form ‘‘Label = Value”. The combination and recombination of the basic form and the transactional form gives rise to other equations at the level of the financial statement proper, such as ‘‘Assets = Liabilities + Owners’ Equity” and ‘‘Revenue – Expenses = Net Income”. It seems clear that the form I have called the basic one is no more basic than the transactional form or the higher level forms of the balance sheet and income statement, but I will call it ‘‘basic” for expository purposes, because it is the form most consistently used throughout the Algoma Steel legal proceedings. One must avoid concluding that the ‘‘Label” in the basic accounting equation is the signifier and the ‘‘Value” is the signified, or worse, the referent. The entire equation ‘‘Label = Value” is a signifier. The form of the accounting sign supports the attempt to impose a single meaning on the sign, to eliminate its symbolic potential and reduce it to the unequivocal (Baudrillard, 1981, p. 149). For the sign-equation suggests finality, as it seems to contain in the monetary amount its own referent. Yet the monetary amount is but a sign of value. It takes its meaning from its relationship to other signs of value, for instance, the values that were assigned to that label in previous financial statements, or the values that are assigned to a similar label in other companies’ financial statements, or the values that were expected by analysts. It also takes its meaning from its relation to other signs of value in the same set of financial statements, such as the meaning of one liability in relation to other liabilities. These meanings, as will be seen, are heavily contested, and are not strictly related to the number assigned by the producer of the accounting sign.

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Data sources for a study of accounting signs In basic outline, the Algoma Steel crisis and bailout ran as follows. In 2000 and 2001, the company encountered financial difficulties. It faced severe cash flow problems, and its total liabilities exceeded all its assets, even without including the company’s obligations towards its pension plans and other employee future benefits plans.5 These were non-contributory, defined-benefit plans covering substantially all employees. They were underfunded by almost $800M (Algoma Steel, 2001a). The size of the funding deficit and its swift growth alarmed investors and creditors. The company filed for court protection, prompting the Ontario government to step in. Eventually, an agreement was reached between the province, the company and its various stakeholders, in which the company was restructured and a substantial portion of the pension liability was assumed by the government (Algoma Steel, 2001b). In order to expose the function of accounting signs in this series of events, a variety of related data sets must be examined. The public discourse surrounding the Algoma Steel pension plan incident is one set. It supports an analysis of how accounting numbers were consumed and interpreted in this contentious pension incident. This discourse is represented by articles from Canadian newspapers during 2001, when the crisis made headlines. The Canadian Newsstand database was searched for all references to Algoma Steel during 2001, and the relevant articles6 were read to determine how accounting signs were taken up and represented in the media. This representation includes not only spe-

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Under Canadian regulations, future benefits to employees are divided into two categories for both funding and accounting purposes. Benefits corresponding to the notion of deferred wages are properly called ‘‘pension benefits”, while other benefits pertaining to extended health benefits, dental coverage, and life insurance are given the unwieldy label ‘‘other employee future benefits”. In this study, ‘‘pension plan” is used to refer generally to both kinds of plans. Where necessary, ‘‘pension” and ‘‘non-pension” future benefits are distinguished. 6 There were 416 articles on Algoma Steel in the database from 2001. As many as half of them were duplicates or closely related stories due to the use of wire services by multiple newspapers.

cific citations of individual accounting numbers, but the connection made in the media between Algoma’s accounting numbers and consequent political and financial developments in the case. The history of pension disclosures made by Algoma Steel is a second data set. This information allows us to reconstruct the way the pension fund was presented, such that it was transformed using accounting signs from a politically negligible private fund of wealth into a necessary target of government intervention. Annual reports for Algoma Steel going back to the company’s 1991 restructuring will be included; this cutoff permits comparability by ignoring pre-restructuring signs produced by the company. Court documents from the bankruptcy proceedings form a third data set. From six filing boxes containing all the paper records from the proceedings, 418 pages of information relevant to arrangements with creditors were obtained. These pages were selected by the author and a research assistant by reviewing every document in the filing boxes and pulling out everything substantive related to creditor arrangements. The many routine documents that form the legal paper trail, such as notices of papers being served on witnesses, were ignored. Documents available from other sources, such as drafts of the final agreement, were also ignored. Many documents in the filing boxes were routinely updated before the courts on a monthly basis or better, such as statements from the bankruptcy trustees. Of these, only one or two examples each were retained. Key documents obtained from these boxes included testimony from the Chief Financial Officer of the company, testimony from the courtappointed mediator, and copies of letters sent to key stakeholders towards the end of the settlement negotiations. Supplementing these data sets are the publicly available Ontario government documents pertaining to the bailout of Algoma Steel. These are available from electronic archives on the Ontario government website. The documents include the Pension Benefits Act (1990), related regulations, various government news releases, and successive revisions to the agreements developed between stakeholders under the auspices of the government’s pension intervention facilities.

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All the data are examined in the context of Section 3461 of the CICA Handbook, which governs the disclosure of future benefits for employees. This permits us to understand the syntactic features of the accounting signs, and to see how the pension accounting signs derive their meaning from their linguistic context. While interviews and other local data would enhance the richness of the study, the opportunity to pursue such sources will be left for future research. In order to understand the pension accounting information within its full social context, other data sources are used to establish the specific historical antecedents of the pension incident. McDowall’s (1984) narrative history of Algoma Steel has been consulted to develop a description of the economic history of the company and its importance to Ontario. Two other histories (Beatty & Schachter, 2002; Nishman, 1995) were valuable in describing the 1991 restructuring of the company. This restructuring led to the employee ownership situation that pertained at the time of the ‘‘pension crisis” in 2001. The Algoma Steel bailout has been deliberately selected because of its sheer magnitude and the unprecedented size of the intervention by the provincial government.7 This extraordinary event generated a rich availability of data. Because of this, the case helps reveal social conflicts and accounting problems that may be latent, but are perhaps undetectable, in many other pension funding cases. Certain aspects of the Algoma Steel situation are unusual, however. The steel industry presents specific highly-institutionalized features: the industry is heavily unionized, defined-benefit pension plans are prevalent, and wages are relatively high. While workers surrendered future wages and certain pension benefits during the incidents examined here, the institutional support for these workers nonetheless far exceeds that found in many other areas of the Canadian economy. Because of this, Algoma Steel represents in some ways a ‘‘best case” scenario for Canadian work7

Imperilled corporate pensions have been central features of other major bankruptcy crises in Canada, notably Air Canada in 2003–2004. However, what distinguishes the Algoma Steel case is the Ontario government’s intervention specifically to relieve the company of its pension liability.

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ers. Furthermore, this ‘‘crisis” primarily illustrates the social impact of pension accounting when things go badly. This is important to note because defined-benefit plans in Canada create asymmetries of risk and reward. Funding surpluses typically accrue to workers but employers are responsible for any funding deficits.8 Subsequent events have seen Algoma Steel enjoy a resurgence, exacerbating the asymmetries.

The Algoma Steel pension crisis and bailout Algoma Steel is no stranger to crisis, having gone through a series of collapses, rescues and recoveries since its establishment at the turn of the 20th century (McDowall, 1984, pp. 4–6). Given the railway subsidies, land grants, special contracts, tax breaks, and production bounties Algoma received from the government during its first 50 years (McDowall, pp. 33–38, 162, and 165), it is not farfetched to suggest that Algoma owed its early existence to government support. During the Second World War, government policies encouraging steel production stimulated an expansion at Algoma that continued through to the 1970s (McDowall, pp. 235–257). However, similar government policies in other countries in the 1980s led to global overproduction of steel (Nishman, 1995, pp. 8–9), resulting in substantial losses and a large debt load at Algoma. Eventually, in 1991, Algoma Steel declared insolvency and sought court protection from its creditors. The provincial government of the day was prolabour,9 and was under political pressure to help secure jobs. The federal government refused to step in, leaving the provincial government to co8

Depending on the terms of the plan, funding surpluses may be withdrawn by the company with the consent of workers. This can happen, for example, as a result of labour negotiations if the workers trade part of the surplus for other contractual benefits. 9 The provincial government in Ontario in 1991 was formed by the New Democratic Party, led by Bob Rae. The New Democratic Party in Canadian politics has traditionally advocated social democratic policies and enjoyed labour support.

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ordinate a task force involving major stakeholders (Nishman, 1995, pp. 14–16). A mediated settlement was reached based largely on the workers’ proposal for a form of employee ownership.10 Voting shares amounting to 60% of control of the company were issued to an employee trust, with the remaining shares publicly traded. In exchange, workers agreed to a $200 million wage reduction, benefit reductions, and substantial job cuts (Beatty & Schachter, 2002, pp. 30–31; Nishman, 1995, pp. 19–22). This 1991 restructuring of Algoma Steel accomplished two important things. First, it established the company as an employee-owned enterprise. This development carried significant implications for the governance of the company. Management in the new company was to be ‘‘independent” (Nishman, 1995, p. 25), presumably meaning that it was to operate independently of the majority owners (the employees) in making strategic decisions. Despite acquiring majority ownership and a minority representation on the board, unionized workers regarded the $200 million wage reduction as a contract concession, not as a takeover move (DaPrat, 2005a; Nishman, 1995, p. 25). The second thing the 1991 restructuring accomplished was the entrenchment of the provincial government’s role in ensuring the survival of the company in times of crisis. Direct involvement by both provincial and federal governments in the establishment and growth of Algoma Steel had already provided clear precedent for government intervention in the company. The 1991 provincial government intervention reaffirmed this line of action, and underscored the importance of

10

The settlement converted common shares held by Dofasco and the bonds held by most creditors into preferred shares. (Dofasco, a major competitor in the Ontario steel industry, was at this time majority owner of Algoma.) In the process, Dofasco’s claim on Algoma dropped from $224 million to $69 million. Offsetting this, Dofasco picked up a useful $150 million tax loss and was exempted from pension liabilities. The employees’ shares carried special rights to approve any fundamental changes to the company, and employees could elect a minority (5 of 13) of the company’s directors. The provincial government provided $110 million in loan guarantees, reduced railway freight rates for the company, and waived environmental liability for the creditors and preferred shareholders.

Algoma Steel to the Ontario economy. Hence, by the time the pension crisis of 2001 arose, the company had been firmly established as a site of government action. In the mid-1990s, management embarked on a major capital expansion, the construction of a large new production complex, and initiated a major refinancing of the company. Management’s financial projections for the project effectively circumscribed the choices available to the union. According to the union president, the employees believed they would inevitably lose control of the company if the production facility went ahead (DaPrat, 2005a). The employees therefore entered into new contractual negotiations with the company, and converted most of their 60% interest in the company into improved pensions and other benefits, retaining only 20% ownership (DaPrat, 2005a). Management then issued $500 million of first mortgage notes to acquire funds for the construction project (Algoma Steel, 1996, p. 4; 1997, Note 7; 2000, Note 6). The holders of these notes became one of the influential stakeholder groups in the 2001 bankruptcy negotiations (Keenan, 2001). This new capital structure generated important consequences for the company. For example, while fixed assets rose from $323 million in 1994 to $932 million in 1997, denoting the construction of the new complex (Algoma Steel, 1996, p. 7; 1997, p. 24), the conclusion of construction meant that expenses the company had been capitalizing now hit the income statement. The new fixed assets began to be amortized, including the interest on the first mortgage notes capitalized during construction (Algoma Steel, 2001a, p. 26). In addition, a weakening Canadian dollar created foreign exchange losses for the company, as the first mortgage notes were denominated in US dollars. The company reported large losses beginning in 1998. By 2000, the company had run out of cash and was staying afloat through short-term borrowing. The company blamed its situation on declining sales resulting from oversupply, a reduction in demand, and the dumping of foreign steel onto the Canadian market (Algoma Steel, 2000, p. 2).

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The 2001 pension crisis at Algoma Steel On April 23, 2001, the company sought court protection. In an affidavit filed by the company on this date (Ontario Superior Court, 2001a), the Chief Financial Officer blamed the company’s predicament on the dumping of foreign steel, as before, but now also blamed Algoma’s financial expenses, and the lengthy implementation of its new production complex (p. 4). The CFO offered many accounting representations as evidence of the company’s plight. He provided as exhibits the unaudited financial statements as at March 31, 2001, as well as a copy of the company’s December 31, 2000 annual report. In the body of his affidavit, he drew attention to the company’s net losses for these two dates, as well as its total assets and principal debts for March 31, 2001. Included in the principal debts were the company’s credit facility, the first mortgage notes, its trade payables, wages and deductions payable, accrued vacation pay, and various pension debts and post-retirement benefits obligations. These debts are shown in Table 1, taken verbatim from the affidavit. What is interesting is that the affidavit lists all the accounting numbers except the pension-related ones as they appear on the financial statements, that is, under a going-concern assumption. The pension liabilities, however, are shown on a wind-up basis. Table 1 From affidavit of Algoma Steel’s Chief Financial Officer (Ontario Superior Court, 2001a, p. 5): Algoma’s principal debts (on an unconsolidated basis) as at March 31, 2001 are as follows Cdn. Millions (a) Credit facility (b) Notes (i) Principal amount (US $349 million) (ii) Accrued interest (c) Trade payables (d) Wages and employee deductions payable (e) Accrued vacation pay (f) Other (i) Accrued pension liability on a wind-up basis (estimated) (ii) Pension plan indexing obligations on a wind-up basis (estimated) (iii) Accrued post-retirement benefit obligations (estimated)

$146 $551 $14 $41 $13 $36 $503 $121 $145

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The impact of this difference in treatment is dramatic. Pension debts total $769 million, instead of the $428.4 million shown in the March 31, 2001 financial statements (Ontario Superior Court, 2001a, Exhibit A). They amount to approximately half the listed ‘‘principal debts”. Although most of these numbers were initially reported in the press (e.g., Van Alphen, 2001a), in later media reports it was the pension shortfall that was highlighted (e.g., Algoma Steel’s $625-M Pension Shortfall, 2001; Daw, 2001; Van Alphen, 2001b). In part, this was due to the immense size of the pension number relative to Algoma’s other accounting numbers, such as equity ($236 million as at the 2000 year end) and even annual revenue ($1106 million). There are several other possible reasons why so much attention was given to the pension aspect of Algoma’s situation. Elderly pensioners and older workers were perceived as vulnerable. Algoma’s average worker was around 50 years of age, with upwards of 25 years of service; approximately 600 of them were due or able to retire in the next 3 years (DaPrat, 2005b). To a certain extent, moves to ‘‘rescue” workers and pensioners would be received positively (Steelworkers Hail Appointment, 2001). In contrast, a direct intervention on behalf of the company as a whole would have been interpreted as taking sides against competitors who were equally important to the Ontario economy. However, this does not fully explain the pension fixation of the media. I would argue that the pension numbers drew attention because they were easily repositioned and reconfigured in ways that allowed them to take on new meanings. That is, even though the pension plans had not changed materially, the pension disclosures could arbitrarily be given new meanings just by rearranging the signifiers. This was not as easily done with the other accounting numbers offered by the CFO in his affidavit.11 11 Pension disclosures are arguably the most easily reconfigured financial accounting signs, but they are not categorically distinct. The increasing emphasis on fair value in accounting standards, particularly for financial instruments, suggests that it will only become easier for managers to rearrange other signifiers at will.

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The specific configurations of pension plan signifiers that were used will be described below when we review Canadian pension accounting disclosure standards. For now, I want to focus on the significance of this facility with pension signifiers. For this is where Baudrillard’s insight about the arbitrariness of signs comes into play. It is not that the sign (e.g., the stated amount of the company’s funded future obligation to employees) is arbitrarily connected to the referent (e.g., the future cash flows when those obligations are paid). Rather, it is that the signifier (e.g., pension liability = $X) is arbitrarily connected to the signified (the notion that the company has a future obligation to its employees). As the signifiers are rearranged, new signifieds emerge from the relationships amongst the signifiers. The notion of the company’s obligation to its employees, how large it is, how well or poorly funded it is – these are all signifieds that change as the signifiers are rearranged.12 Yet because stakeholders react to this notion in complex ways, exercising varying degrees of power at the moment of consuming the sign and thus shaping both the meaning of the sign and the outcome of the restructuring process, the referent is never independent of the signified. The sign precedes the referent, and shapes it. Hence, as the company changes the signifier it uses, the referent is deliberately altered. The company could not completely control the reactions of the stakeholders, but it could and did attempt to impose boundaries on how its obligations could be understood. Anything vague, anything warm and fuzzy about its long-term obligations to its aging workforce, was given precision by the sign that denoted it. As Baudrillard repeatedly argued (e.g., Baudrillard, 1981, p. 149), the sign is not equivocal and ambiguous like a symbol is, it is univocal; the production of the sign is an attempt

12 Note that multiple possible signifiers interact with multiple possible signifieds. There are many ways of signifying the obligation/liability, and each one has multiple connotations. This does not change the logic of the sign form (Baudrillard, 1981, pp. 149–150). The production of signs is about the attempt to impose univocal meanings, not about simplicity.

to exclude unwanted interpretations. The struggle for Algoma Steel’s future hinged on the meaning of these signs, and control of the ability to produce them was a crucial advantage for management, an asymmetry that was institutionalized in the market for financial information despite the partial ownership position of the workers and the huge claims on the company by the notesholders. However, as Baudrillard noted about the commodity, it is not the moment of production that is meaningful but the moment of consumption. So for the accounting sign. Management controlled the production of the signs, but not their consumption. Hence, we must look closely at the mode of consumption of this information: the moment of consumption of accounting information is highly structured, and is simultaneously a moment of reproduction. The consumption of accounting signs in the Algoma Steel ‘‘crisis” involved two important reconfigurations. First, the signs were disconnected from their traditional location in audited financial statements prepared for the financial markets, and re-embedded in legal documents. Although the accounting numbers came from the same accounting systems that produced the audited financial statements, the company dispensed with the imprimatur of its auditors and disclosed unaudited accounting information under the authority of the legal system, that is, by having its CFO state the numbers under oath. Note that this pertains to all the accounting numbers in the affidavit, not just the pension ones. The effectiveness of this redeployment by the company therefore contradicts Macintosh et al. (2000, p. 41), who maintained that the sign value of accounting statements about capital and income derives from their certification by public accounting firms. The Algoma Steel affidavit was not audited. The accounting numbers it contained functioned as signs under two related systems of signification. As accounting signs, they helped present Algoma’s situation dispassionately as a technical, calculative problem amenable to technical, calculative solutions. As signs embedded in the legal sign of ‘‘affidavit”, they took on an urgency that attracted both media and government attention. For instance, they served to reveal to the premier of

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the province both the necessity and the possibility of government intervention (cf. Perkel, 2001).13 The second and simultaneous reconfiguration of Algoma’s accounting signs was particular to the pension numbers. To function so well as an alarm, the pension shortfall had to be both a departure from prior signs produced by the company, and yet consistent with those prior signs. If it was not a departure, if it was not ‘‘new”, it could not have attracted attention. But if it was not somehow consistent, it would not be believable. In other words, the system of signs must permit a new configuration of signifiers that is utterable and understandable, yet previously unspoken. From an accounting perspective, this means that the pension numbers released in the affidavit had to match prior disclosures under Canadian GAAP, yet Canadian GAAP had to have permitted the new message to have remained unspoken until this time. To understand how this could be, it is necessary to review what disclosures Canadian GAAP requires and permits regarding company pension plans. Pension accounting disclosures under Canadian GAAP Accounting for pensions in Canadian GAAP is governed by Section 3461 of the CICA Handbook, which deals with ‘‘Employee Future Benefits”. Subsection 3461.150 states that the objective of the given disclosure requirements is to provide financial statement users with information about the effect of employee future benefits on the financial statements, and about the obligations and assets related to defined-benefit plans such as Algoma Steel’s. The subsection also states that the information is to be useful in understanding the costs, risks and uncertainties related to the company’s pension plan obligations. Users should be able to use the information to make investment (‘‘resource allocation”) decisions and assess management’s stewardship. A distinction is made in 13

Furthermore, news articles from this period reinforced the legitimacy of government intervention by recalling the role of the Ontario government in resolving the company’s previous ‘‘crisis” in 1991 (e.g. Ottawa Provides Loan Guarantee, 2001; Perkel, 2001; Van Alphen, 2001; Watson, 2001).

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the disclosure guidelines between ‘‘pension benefits” and ‘‘other employee future benefits”. Companies in Canada are legally required to manage these two classes of benefits in separate plans, and Section 3461.151 requires that they be disclosed separately.14 The large shortfall in Algoma’s pension and post-retirement benefits plans developed quickly during 2000 and 2001. This had been set up by two decisions by management during the 1990s. The first was the apparent decision to invest the company’s pension fund assets in equity markets, ‘‘apparent” because it is difficult to know from the accounting disclosures how much of the assets were invested in this way, and in which specific stocks. The company’s financial statements indicate that the actual return on plan assets plummeted in fiscal 2001 from a 5-year average of $123 million per annum to a negative return of $18 million.15 These results were typical of many North American companies that had heavily invested their pension assets in equities during the expansive markets of the late 1990s and were exposed when the dot-com bubble burst in 2000 (Fore, 2004; Joss, 2004).16 The relative amount of Algoma’s investment loss was not huge, only 2% of assets, and was offset by continued contributions to the plan. However, the reversal of fortune in the markets was dramatic, and would have had 14

Algoma’s affidavit made a further distinction, listing pension indexing liabilities separately from pension obligations and other future benefits obligations. Indexing provisions of corporate pension plans were not protected by the Ontario government. See the section on the Pension Benefit Guarantee Fund below. 15 While the equity markets plummeted in 2000, a negative ‘‘actual return on plan assets” figure did not appear until Algoma’s 2001 financial statements. The recognition of the negative return may have been delayed due to timing of the asset valuation, although this should not have been the case, since Section 3461 (Exhibit I of Example 1, Situation I) implies that the 2000 calculation should have been based on the fair value of plan assets on Algoma’s year-end date of December 31, 2000. Algoma, unfortunately, did not disclose how it arrived at its figures. 16 Algoma’s key competitors, Stelco and Dofasco, stated similar changes in return on pension assets in the same period. Dofasco’s return dropped from $86.5 million in 2000 to $17.9 million in 2001 (Dofasco, 2001). Stelco’s return dropped from $317 million to $11 million for the same years (Stelco, 2001).

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abrupt consequences for pension funding decisions if the company had not filed for court protection (cf. Fore, 2004, p. 7). The tentativeness of the statements in the preceding paragraph is quite deliberate. The impossibility of being more conclusive points to a specific problem in Canadian GAAP. The extent to which plan assets may have been invested in dot-com stocks, for example, remains unknown because Canadian GAAP in 2001 did not require such a disclosure,17 and Algoma’s management chose not to exceed GAAP requirements. This left the accounting signs that were produced bereft of a meaningful context. Like a word uttered in isolation rather than as part of a sentence, these signs wanted the context of other signs—such as asset allocation—that would enrich their meaning. The second management decision leading to Algoma’s sudden pension shortfall was the choice of a high discount rate for future benefits during the 1990s. This policy had to be abandoned when the company adopted Section 3461. These new standards came into effect on January 1, 2000, the beginning of Algoma Steel’s fiscal year, and replaced Section 3460, which had covered pension costs and obligations.18 According to Accounting Standards Board of Canada (2002) and Estey (1999), the purpose of Section 3461 was to rectify a perceived deficiency in pension cost accounting, and to harmonize this section of the handbook with US GAAP. The new section changed the discount rate used to evaluate future cash flows from a pension plan. Previously, reporting entities could 17

Even now, Section 3461.155(b)(ii) requires only that a company disclose its asset mix in the broadest terms, by showing the percentage of assets held in general categories such as equity securities, debt securities and real estate. More detailed information is contained in actuarial valuation reports filed with federal and provincial pension authorities. These are available to plan members upon request, but are not available to the general public. 18 Comments in this paper regarding Section 3461 are not intended to suggest that Section 3461 is either ‘‘better” or ‘‘worse” than Section 3460. By offering specific critiques of Section 3461, I do not mean to suggest that the social impacts of pension accounting in the Algoma Steel case would not have occurred, or would have been more felicitous, under Section 3460. They would simply have been different. As Macintosh et al. (2000, p. 16) note, Baudrillard’s ‘‘orders of simulacra” do not imply sequential improvement.

use a rate determined by management’s best estimate of the long-term rate of return on the pension fund’s assets. The new standard required discounting either at the market interest rates on high quality debt instruments whose cash flows approximated the plan’s cash flow, or at the rate implicit in whatever present amount could be paid to settle the plan’s obligations (Accounting Standards Board of Canada, 2002; Estey, 1999). The new standards also specified that an entity should measure plan assets at fair value; compute the expected return on plan assets using a long-term rate of return on the market value of assets; match the cost of benefits to the periods in which the employee earned them, up to the date at which the employee became entitled to receive them; recognize actuarial gains and losses using the ‘‘corridor” approach (discussed below and in Appendix); and observe new guidance on plan settlements, curtailments, terminations, accrued benefit assets, and multi-employer plans. Significantly, the new standards required all these pension accounting guidelines to be applied to accounting for non-pension future benefits, which had previously been treated on a cash basis (Estey, 1999). As a result of adopting these standards, in 2000 and 2001 the Algoma Steel plan endured dramatic unrecognized actuarial losses, in stark contrast to its prior pattern of unrecognized actuarial gains. The glossary of Section 3461 defines actuarial gains and losses in a defined-benefit plan as changes in the value of the accrued benefit obligation and plan assets resulting either from experience being different than assumed or from changes in actuarial assumptions. In the case of Algoma Steel, the key assumption that changed was the discount rate selected by management to calculate the present value of the company’s future benefit obligations. In adapting to the new GAAP guidelines, management shifted these rates from the steady 8% it had used since the 1991 restructuring, to 7% in 2000 and 6.5% in 2001.19 This was precisely the effect of Section 3461 that had been predicted in the Canadian accounting profession’s 19

These were the rates used for the pension obligation. For the much smaller non-pension future benefits obligation, the rates were 7% for 2000 and 6.75% for 2001.

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leading practitioner magazine (Tishcoff, 1999). These seemingly small adjustments in discount rate caused unrecognized actuarial losses on non-pension future benefits to swell from a 5-year average of $14 million to $75 million in 2001. Even more dramatic was the effect on the pension side, which had enjoyed unrecognized actuarial gains averaging $115 million per year from 1994 to 1999. These gains disappeared in 2000, and became an unrecognized actuarial loss of $267 million in 2001. While random fluctuations in mortality or morbidity experience may have contributed to this negative result, a shift of this magnitude was more likely caused by the change in discount rates; projected benefits calculations have been shown to be highly sensitive to changes in discount rate (Dufresne, 1993).20 Again, it is impossible to be certain here: Algoma did not disclose any details about its actuarial losses, nor did Section 3461 require it to do so.21 Actuarial calculations underlying the pension accounting disclosures informed the funding decisions that produced eventual funding shortfalls. These endogenous effects can be seen in Fig. 1. In this chart, each column indicates the total funding shortfall for pensions and other post-retirement benefits in a given year. This shortfall is called ‘‘Funded status” in the notes to the financial

20 Algoma was not alone in its experience with the new standards. One of Algoma’s key competitors, Stelco, dropped its discount rate from 8% in 1998 and 1999 to 7% in 2000, and to 6.75% in 2001; its actuarial gain of $15 million on all definedbenefit plans in 2000 changed to a loss of $181 million in 2001 (Stelco, 1999, 2001). Algoma’s other key competitor, Dofasco, actually raised its discount rate from 6.75% in 2000 to 7% in 2001; its actuarial losses on all defined-benefit plans dropped from $72.8 million in 2000 to $34.9 million in 2001 (Dofasco, 2001). The widespread uncertainty caused by the changes in discount rate mandated by Section 3461 prompted the AcSB (2002) to issue a statement on ‘‘Measurement Uncertainty and Employee Benefit Plans”. 21 The impact of the adoption of Section 3461 by Algoma was clouded by the simultaneous adoption of other new accounting standards. The effect of Section 3461 on Algoma’s bottom line was a decrease in retained earnings of $40 million. However the concurrent adoption of new income tax accounting standards simultaneously increased retained earnings by $81 million (Algoma Steel, 2000, p. 22).

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statements. However, in Algoma’s notes (following CICA Handbook guidelines) the amount for pensions and the amount for other post-retirement benefits are never added together as they are here. Each column in the chart is composed of several smaller amounts, including the on-balance sheet ‘‘accrued liability” and the off-balance sheet ‘‘unrecognized actuarial gains and losses”. The chart demonstrates that prior to 2000, actuarial gains offset the accrued liability substantially; thereafter actuarial losses exacerbated the liability. During this time period Algoma Steel’s management adopted a curious format for disclosing the pension plan’s funding status. The CICA Handbook’s illustrative examples for such disclosures are fairly straightforward. Nonetheless, Algoma chose a more convoluted presentation. Table 2 shows the funding status disclosures contained in Note 10 to Algoma’s 2001 financial statements. Rather than breaking the plan’s funding status into its components, the Algoma disclosures tell the story of how the accrued liability portion of the pension plan obligation is calculated. They begin with large negative numbers and offset them with a series of mainly positive numbers, to arrive at a smaller negative number. The implication is that the reader should focus on this smaller number. The disclosure is arranged to not to explain the overall obligation, but to explain it away. The reader is guided to pay attention only to the portion of the pension obligation that has been recognized as a liability by the company, the portion that appears on the balance sheet. The overall pension obligation appears less significant—has a diminished sign value—and diminished social consequences. This reinforces the prior effect of relegating the pension obligation disclosure to the notes. In contrast, the examples given in Section 3461 show the funding status as the difference between plan obligations and plan assets. If this format had been followed by Algoma, the notes would have included a table such as Table 3. Note that in Table 3, it is clear that the funding status is the amount being explained. That is, the plan deficit is ‘‘the bottom line”. Yet even in this format recommended by the Handbook, the total obligation for pension and non-pension benefits is never stated.

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$1.000

$800

$600

Total accrued retirement obligation

$400

Contributions and payments after measurement date Unrecognized prior service costs Unrecognized net retirement obligation Unrecognized actuarial losses (gains)

$200

$0

-$200 1997

1998

1999

2000

2001

Fig. 1. Effect of actuarial gains and losses on Algoma Steel pension plan obligation. Source: Algoma Steel Inc. annual reports, 1997– 2001.

Algoma Steel’s disclosure thus appears designed to downplay the company’s obligation for employee future benefits, focussing attention Table 2 Disclosure of funded status Reconciliation of pension funding status

2001

2000

Funded status Unrecognized actuarial losses (gains) Employer contributions after measurement date Unrecognized net pension obligation Unrecognized prior service costs

(552) 267 3

(287) 3 3

(2) 6

(3) 7

Accrued pension liability

(278)

(277)

Reconciliation of post-employment funding status

2001

2000

Funded status Unrecognized prior service costs Unrecognized actuarial losses (gains) Benefits paid after measurement date Unrecognized net benefit obligation

(245) 0 75 1 12

(196) 0 32 1 12

Accrued post-employment benefit obligation [sic]

(157)

(151)

Source: Algoma Steel Inc., 2001 financial statements, Note 10.

instead on the accrued benefit liability. Yet the accrued benefit liability is the most heavily ‘‘constructed” number in Section 3461’s implicit model. It is the one number in the model that is least directly representative of any underlying objective reality that the model might purport to represent. (Readers unfamiliar with Section 3461 are referred to Appendix.) The model stipulates that the accrued benefit liability is the difference between the accrued benefit obligation and the aggregate of the plan assets and any unamortized costs. Thus, any unamortized costs are effectively deducted from the funding status to determine the accrued liability shown on the balance sheet. The implicit model therefore constrains the entity from fully disclosing the funding status of its pension plan in audited statements. Effects of the model in the Algoma Steel pension crisis The express intent of the model in slowly amortizing pension costs is to dampen the random

C. Graham / Accounting, Organizations and Society 33 (2008) 756–782 Table 3 Format for disclosure of funded status suggested by Section 3461 of CICA handbook Pension benefits

Other benefits

2001

2000

2001

2000

Fair value of plan assets Accrued benefit obligation

1018 1570

1101 1388

11 256

10 206

Funded status – plan deficit

(552)

(287)

(245)

(196)

short-term noise that is inherent in the mortality and morbidity experience of the plan, and in the market price of the financial assets of the plan. To this extent, the model is arguably useful. Short-term noise, the argument runs, can have an unwarranted impact on the funding status of the plan, and since the expected value of the noise is zero over time, the model should smooth out these short-term effects. However, the unwarranted impact of certain ‘‘noise-related” parameters arises from the model itself. Market-based parameters like financial securities prices and the discount rates mandated by Section 3461 affect the two main aggregate values in the model, which are the fair value of plan assets and the accrued benefit obligation. Funding status is simply the difference between these two values. If these large values are ‘‘normally” roughly equal, then a relatively small percentage change in one of them can cause the ‘‘normally” small difference to grow by many multiples of itself. Yet changes to these main aggregate values are not always small, being so sensitive to some of the model’s parameters. In a sense, therefore, by implementing extensive smoothing, the model is protecting its users from itself. The argument in favour of smoothing, as frail as it is when parameters take random walks, is particularly flawed when it comes to non-random fluctuations in plan parameters. In the case at hand, the change in discount rates mandated by Section 3461 was singular and non-random. The impact of the adoption of Section 3461 at Algoma Steel, given management’s choice in prior years of high discount rates that were no longer permissible, was to drive up the pension obligation. This happened at the very time plan assets were falling in value. Yet because the net change in these numbers was classified under the model as an actuarial loss, it was metered out to the balance sheet only

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through the corridor rule, in tiny increments and a year delayed. Thus, a mechanism designed to smooth random fluctuations was being used to cope simultaneously with a permanent restatement of plan assets and the structural adjustment of the market to plummeting dot-com valuations. Subsequent random fluctuations in experience and the market cannot be counted upon to undo this. The significant changes in Algoma’s pension obligation that arose in 2001 resulted in two different sets of accounting signs being produced. When the company filed for bankruptcy, one set of signs was produced that highlighted the pension funding shortfall. At the year end, after the ‘‘crisis” had been resolved, a second set of signs was produced that covered the same period of time but presented a much different picture. In the second set of signs, contained in the company’s annual report, the overall pension plan obligation was relegated to the notes of the financial statements, as mandated by the CICA guidelines. Thus, Algoma’s management disregarded the demand for accounting information that was evident in the way the media took up the pension obligation figure when the crisis first broke.22 This illustrates how the production of accounting signs is dependent on the conditions of their consumption. At the fiscal year end, Algoma management no longer addressed the court, from whom it had sought protection, but the shareholder, from whom it sought confidence. The Management Discussion and Analysis in the annual report was thus well within the requirements of Canadian GAAP, but entirely unresponsive to other stakeholder needs, when it failed to mention the enormous actuarial losses. In fact, the MD&A stated only that during the year the accrued pension liability had risen from $277 million to $278 million. The implicit model of Section 3461 accomplished two contradictory things for Algoma Steel. First, it constrained evidence of volatility for years, only to release it in a torrent when discount rate regulations changed. Second, it was delivered into the hands of management two ready sets of figures, one for minimal recognized portions of future lia22

Congruence between media attention and the interests of other stakeholders, such as investors, should not be taken for granted.

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bilities and another for their greater unrecognized whole. All the accounting signs in the affidavit were taken straight from Algoma’s accounting system, but assets and non-pension liabilities had only going-concern estimates associated with them. The pension numbers, in contrast, were easily turned on their heads to show the (un)funded status of the plans. These numbers could be said to represent the wind-up value of the pension plans without further work being necessary.

Structured consumption of signs and the resolution of the crisis Algoma Steel’s disclosure decisions and the underlying calculative techniques of Section 3461 must be evaluated in terms of the network of social relations in which Algoma Steel was embedded. Certainly, the market for Algoma Steel’s securities was impacted by the calculations, at least to the extent that the calculations were inseparable from the 2001 restructuring process. According to Toronto Stock Exchange archival records (available on MSN.com), the price of Algoma shares fell from $0.40 to as low as $0.22 on April 23, 2001, when the company filed for court protection. After a brief rebound, prices declined from $0.35 in late April to $0.25 in mid-October, and plummeted to the $0.10 range after the restructuring plan was announced on October 24, 2001. However, the market was but one of the social relations pertaining to Algoma Steel. Algoma’s pension accounting also affected relations between Algoma and its workers, and between both these parties and the government. With the workers, Algoma was engaged in a rather circular exercise involving capital formation. As discussed above, when the 1991 restructuring took place, the workers gained control of 60% of the company. While this stake was reduced to 20% in 1994–1995, the relevant governance structures remained unchanged. Management was considered independent, and the workers were both owners and employees. The relationship between management and workers-as-owners was mediated by the board of directors and the trust that held the employee shares. The relationship between management and workers-as-employees

was mediated by the union, but only partially, because not all employees were union members. Because of the circularity of the company– worker relationship, it is inappropriate to draw on facile explanations of the disclosure choices made by management regarding the pension plan. Since workers had representatives on the board, one would have expected them to have full access to information. However, management did not disclose all that it could, nor indeed all that it was required to under the company’s articles of incorporation. Under cross-examination during the court proceedings, the company’s ‘‘Chief Restructuring Officer” said that despite the articles specifying that the union’s representative was to receive all Board material, the company had not divulged any ‘‘confidential” information to the union regarding the restructuring. The workers were not given any information about the restructuring that was not shared equally with other stakeholders (Ontario Superior Court, 2001b, pp. 6–8). In understanding the situation they were in, the workers were dependent on management and upon the expertise of the accountants hired by management. The result was a passive acceptance of the company’s representations: when asked why the union was not more vocal during the events of 2001, a present union leader said, ‘‘Well, management told us the company was going bankrupt” (DaPrat, 2005a). Algoma’s adoption of the new pension accounting guidelines in 2000 triggered a change in its relationship with the provincial government. With the removal of the latitude to nominate a discount rate, management was unable to continue constructing its preferred picture of a healthy pension plan. When plan assets failed to deliver the large returns of the 1990s, and the pension obligation ballooned due to the lower discount rate, the pension accounting model effectively constructed a new reality for the company. Algoma was now a company with a severely underfunded pension plan. This was the handhold the provincial government needed in order to intervene in the company once more. The pension benefits guarantee fund What made it feasible for the government of Ontario to intervene was its possession of the

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requisite technologies for intervention. In 1990, the provincial Pension Benefits Act had established in Ontario the Pension Benefits Guarantee Fund (PBGF) to protect workers from the risks of private company pension plans. This fund covered pension benefits, including worker pensions, spousal pensions, and plant-closure benefits, but did not cover non-pension post-retirement benefits such as health care. The fund was financed by annual contributions from employers with pension plans. By 2001, however, the fund had accumulated only $200–240 million in assets, less than half the amount of Algoma Steel’s pension deficit (Daw, 2001; Keenan, 2001; Province of Ontario, 2001). The fact that the PBGF was nevertheless used in the Algoma Steel bailout suggests that when it comes to effecting the goals of government, it is not necessarily the amount of funding that matters, but the existence and availability of appropriate technologies. Embedded in the PBGF were a set of accounting technologies that enabled the government to act. Using these technologies, the Financial Services Commission of Ontario, which administers the fund, was able to collect, track, and enforce contributions from employers. The funds collected were aggregated and invested. PBGF assets were invested in cash equivalents and bonds (Province of Ontario, 2001), not in stocks and other riskier securities. The fund was designed to be supplemented by loans from the provincial government when necessary. The PBGF received pension plan assets in exchange for absolving companies of a limited portion of their pension obligations. The liability assumed by the PBGF was for the amount of pensions earned by Ontario-based employees, excluding most escalating or indexing provisions.23 Under the terms of the Pension Benefits Act, plans with over $500 million in assets were able to file for exemption from certain funding solvency 23 The PBGF liabilities excluded the following: ‘‘(a) any escalated adjustment, (b) excluded plant-closure benefits, (c) excluded permanent layoff benefits, (d) special allowances other than funded special allowances, (e) consent benefits other than funded consent benefits, (f) prospective benefit increases, (g) potential early retirement window benefit values, and (h) pension benefits and ancillary benefits payable under a qualifying annuity contract” (Pension Benefits Act, 1990, s. 2).

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regulations (Pension Benefits Act, 1990, s. 5 & s. 37). This privilege was withdrawn (cf. Reg. 203/ 02, 2002, s. 1) shortly after the Algoma plan bailout, but Algoma had qualified for this exemption and hence had not been observing the funding solvency regulations. Nonetheless, the Algoma pension plan was covered by the PBGF. The existence of the PBGF was crucial to the government’s ability to consume the accounting signs that had raised the alarm about the Algoma Steel pension plan. While the meaning of any sign depends on the conditions of its consumption, for accounting signs those conditions are highly technical. This distinguishes accounting from other languages. The PBGF, as noted, was not in a position to accept the entire pension obligation of Algoma. However, under the Pension Benefits Act and the terms negotiated in the 2001 settlement, the PBGF assumed not only most of the obligation, but most of the plan assets. Hence, the net new liability taken on by province of Ontario, backed by the assets of the PBGF and any loans to the PBGF that would be necessary, was limited to the funding deficit, and was further reduced by the deletion of indexing and other benefits under the negotiated settlement. Given that the existing plan assets would, in the event of Algoma Steel’s complete failure, have gone to settle at least a portion of the pension obligation, the intervention of the government through the PBGF must be evaluated on the basis of the incremental benefit provided to the pensioners, plus the benefits realized by other stakeholders. Terms of the 2001 plan of arrangement The incremental benefit provided to workers and pensioners was mixed. While the pension plan was saved from default, the plan assets would, without government intervention, have provided 65% of the accrued pension obligation at the end of 2001 (56% of the total future benefits obligation).24 Under the terms of the bailout, the existing pensions of retirees were protected, but as noted 24 At the beginning of 2001, plan assets would have provided even more: 79% of the accrued pension obligation (70% of the total future benefits obligation). These calculations are derived from Algoma’s 2001 annual report.

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Table 4 Final terms of arrangement Terms of the plan of arrangement    

All existing voting shares were deleted, including the employees’ 20% ownership stake Employees received 20% of the new common shares, which were no longer held in trust and had no special rights Interim financing provided by banks during Algoma’s court protection was entirely secured Notes holders received, pro rata, new notes totalling US$187.5 million, plus 75% of new common shares. (Existing notes had amounted to US$349 million, plus US$47 million in accrued interest)  Pension claimants received a replacement pension plan  Unsecured claimants received, pro rata, 5% of the new common shares, or could elect to receive up to $2,500 to settle their claim  The City of Sault Ste. Marie received $5 million in future payments, secured by Algoma’s real property  The federal and provincial governments received all income taxes owing  A new collective bargaining agreement was enforced, featuring $153 million wage and benefit reductions, reduced vacations, reduced pension benefits, and job cuts  Pension payments to existing Ontario pensioners were taken over by the PBGF, along with related plan assets. Pension payments to non-Ontario pensioners remained the obligation of Algoma Steel, to be paid from general revenues or a new pension plan  Pensions of current workers were secured by a claim on the remaining plan assets, and also by a $100 million claim on the fixed assets of the company, subordinate to the claims of the banks and notes holders Source: (Algoma Steel, 2001b, p. 13; 2002, p. 30).

the Pension Benefits Act did not protect any indexing of these pensions. Benefits not guaranteed by the PBGF were moved over to a new supplementary plan to be funded by Algoma Steel, with whatever risks that entailed. The technical capacities of the PBGF affected the provincial government’s ability to respond to the Algoma Steel crisis, and were an important factor in how Algoma’s accounting signs played out in court. However, the consumption of accounting signs in the legal proceedings was not shaped merely by technical matters. The terms of the Plan of Arrangement were negotiated by the company and its stakeholders through a long and arduous process. The court documents reveal that the settlement was affected strongly by the relative power that the stakeholders were able to exert on the negotiations. While the provincial government had the technical capacity to consume certain accounting signs, other stakeholders lacking such elaborate technical capacities also influenced the negotiations. Each stakeholder was framed and denominated by its accounting status as a creditor.25 Creditors were grouped into classes, such as unsecured creditors who had the 25

Because the proceedings took place under Ontario’s Companies’ Creditors Arrangement Act, stakeholders lacking the status of creditor were excluded from the negotiations. It is interesting to see legislation formulated specifically around accounting constructs.

option of taking either a $2500 flat settlement or a prorated share of a fixed amount of money set aside for this class. The power of stakeholders was not a function of the class’s total claim or the individual stakeholder’s claim, but of the distribution of the claims within the class. The City of Sault Ste. Marie was in a class on its own. Pensioners were divided into two classes, according to their indexed and non-indexed benefits claims; the large total benefits claim being well distributed amongst many pensioners, these people exercised very little individual power. The notesholders were different from the pensioners in that the distribution of notes was uneven, a minority of notesholders holding a majority of the dollar amount of the notes. In the final terms of arrangement, listed in Table 4, the notesholders did well. They came away with 75% ownership of the company plus a considerable fraction of the original debt still being owed to them in new notes. The notesholders were able to gain this result because they were able to defeat earlier drafts of the plan. The plan had to be approved by a double majority of each class of creditor (i.e., by a majority of the creditors representing a majority of the dollar value). The first draft of the plan of arrangement called for a 9% interest rate on the bulk of the new notes. This was raised to 9.5% in the second draft of the agreement, which was approved by everyone except

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24% of the notesholders. Because they held 84% of the dollar value of the notes, they were able, at the last minute, to prevent the second draft from being approved. This triggered emergency meetings between management and the stakeholders to rescue the plan (Ontario Superior Court, 2001d, p. 5). The final version of the plan of arrangement shows an 11% interest rate on the new notes. This is another indication of how the consumption of accounting signs is structured: because the pension obligation was widely dispersed amongst the pensioners, the larger notesholders were more easily able to affect how the accounting information would be interpreted and translated into stakes in the restructured company. The accounting signs that denominated the creditors’ claims on the company presumed to impose a specific valuation on each claim. Yet the meaning of these signs is determined at the time of their consumption during the legal procedures and negotiations. The meaning is shaped by legal features such as the definitions and procedures of the Companies’ Creditors Arrangement Act, by technical features such as the PBGF and Section 3461 of the CICA Handbook, by the distribution of power amongst the creditors and by their exercise of power. Denouement Following the 2001 Plan of Arrangement, the company enjoyed a resurgence in both sales and stock price. Investors received a good return, employees continued to work, and retirees continued to receive their pensions. But the complexities of the resolution prevent an unequivocal judgement of its success, even with the benefit of hindsight. Employee wages were lower than before, and retirees’ pensions were no longer indexed. In addition, the resolution to Algoma’s 2001 pension crisis may well have damaged the relationship between employees and retirees. According to the present union leader (DaPrat, 2005a), in 2001 the retirees felt they had no choice but to go along with the agreement being negotiated amongst the stakeholders. They felt they would gain no advantage by speaking out against the company’s position. According to the union leader, while the union’s primary goal during the 2001 negotiations

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was to protect retirees’ existing pension benefits, the retirees ended up angry about the settlement because they lost indexing. Their anger was exacerbated in 2004 when Algoma returned to prosperity and the current workers received a $10,000 advance on profit sharing as part of a new contract.26 The retirees received no such bonus, yet they felt they had sacrificed in 2001 in order to help turn the company around (DaPrat, 2005a).

Fearful asymmetry The transplantation of accounting signs from Algoma Steel’s financial statements to the legal context of the affidavit demonstrates how the meaning of accounting signs is affected by their mode of reproduction. The subsequent struggle between the stakeholders demonstrates how the meaning of accounting signs is affected by their mode of consumption. Reproduced in their new legal setting, all the accounting signs took on an urgency that transcended audited statements. These signs were an attempt by management to assert both the need for court protection and the distribution of liability. The disclosures made by Algoma Steel in the affidavit were simply insufficient for anyone to see how some crucial numbers were derived, a situation engendered by information asymmetries, the opacity of Section 3461, and the arrayed expertise of Algoma’s actuaries and accountants. Yet despite these advantages, management was unable to impose an undisputed meaning on their accounting signs. The most important accounting signs in the legal process were those that denominated the creditors. The legal status of participants was not independent of these signs. Each claim on Algoma Steel was initially predicated on Algoma Steel’s accounting calculation of the amount owing. To dispute this would entail producing an invoice or other accounting records that could signify a greater claim. For tradespeople, this might be relatively simple, supposing for instance that Algoma 26

The union leader who provided the information did not state whether this was an average amount or a flat amount per worker.

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had failed to process an invoice correctly. For pensioners, however, disputing the stated pension liability would be extremely difficult. It would involve a calculation so complex as to be beyond the average individual’s capability to perform, and even beyond the pensioners’ collective ability. They were, for all practical purposes, completely at the mercy of the company’s calculations. However, there is no indication in the court documents or the media coverage that Algoma’s accounting calculations were themselves contentious. The contest came after the accounting signs were accepted under oath, and reproduced into the court proceedings. The lengthy negotiations from April until December of 2001 between management and the creditors, which also involved the union making wage concessions, was a process of giving the accounting signs a precise legal meaning, of translating them into new legal and financial arrangements. In this direct sense, the accounting signs preceded the reality they seemed to describe. The signs described a set of claims, yet the claims had no effect until the signs were consumed and rendered meaningful. The signs suggested an equivalence – that the pensioners’ claim on the company, for instance, was roughly equivalent to the notesholders’ claim on the company ($503 million compared to $551 million) – yet each class of creditors required the accounting signs to translate into a unique new set of financial relationships. For example, in due course the sign ‘‘Notes payable = $551 million” came to mean 75% of the new shares and an entire new set of notes payable. This is not obvious or inherent in the sign at the moment of reproduction. It is the result of contestation during an extended process of consumption. The legal status of the creditors, established through accounting records, gave each class of participants the same opportunity to influence the outcome. However, the ability to operate the system of calculations and the system of legal procedures was not evenly distributed amongst these participants. The pensioners had no collective voice; a common legal advisor had to be provided by the courts (Ontario Superior Court, 2001c, p. 151). As noted, because the pensions were fairly evenly distributed amongst the pensioners, there was no small group of them that could hold up

the restructuring proceedings. Unlike the notesholders, the pensioners were passive consumers of Algoma Steel’s accounting signs, and hence suffered more severely the consequences of the asymmetries of the mode of reproduction. These information asymmetries would have been worse had they not been partially addressed27 by the new discount rates mandated in Section 3461. The guidelines for discount rates in Section 3461 take some of the previous latitude out of the hands of management, making the accounting somewhat more transparent. However, there is a cost to this. The new guidelines stipulate that the discount rates should now follow the market. Thus, an opaque but relatively stable discount rate is replaced by a rate that is arguably more transparent, but also more volatile. The risks of the market replace moral hazard. The opacity of Section 3461 might suggest that the accounting profession plays a hegemonic role in pension accounting in Canada, that somehow they control ‘‘the code” that for Baudrillard symbolized the programmatic way that signs take on meaning in our society. However, other features of the Algoma Steel narrative contradict this. Algoma management was able to hire accounting expertise to exploit its information asymmetries, putting the accounting profession in a subservient role. Also, the accounting signs in the company’s 2001 affidavit that triggered governmental actions lacked the accounting profession’s imprimatur. 27

Asymmetries are still evident in the impossibility of reconstructing certain intermediate results in the present study. For example, the discount rates disclosed in the 2001 Algoma statements seem wrong. If the disclosed rate of 6.5% is used, the pension-related portion of unamortized net actuarial loss at year end works out to $250 million. Since the funding deficit of the pension plan was $552 million, a difference of $296 million would be computed for the accrued pension liability. However, the accrued pension liability was only $278 million. This is the amount that would be computed with an 8.1% rate. While the working papers for the disclosure would likely be more complex than the general model based on Section 3461 that is described here, the discrepancy is nonetheless irresolvable given Algoma’s existing disclosures. Thus the complexity of Section 3461 turns disclosures of pension liabilities into ‘‘black boxes” impenetrable to financial statement users, and renders the expertise of professional accountants indispensable to managers of companies that must submit to the requirements of the CICA Handbook.

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The Algoma Steel events, therefore, would call into question the way that Macintosh et al. (2000) privilege the accounting profession in their discussion of accounting as simulacrum and hyperreality. They argue that the sign value of an accounting sign derives from its authentication by an accountant: certified signs impart ‘‘a sense of exogeneity and reliability to society at large” (Macintosh et al., 2000, p. 41). It is unclear, however, what system boundaries Macintosh et al. are assuming when they refer to exogeneity. The accounting profession is no more exogenous to the social systems that produce accounting signs than booksellers or newspaper editors are to the social systems that produce vernacular language signs. The insistence on the exogeneity of professional certification unnecessarily undermines the Baudrillardian perspective Macintosh et al. provide on accounting. For consistency with Baudrillard, I would argue that an accounting sign takes its sign value from its position within the system of signs in which it appears, not from pseudo-exogeneity. This system of signs, however, must be understood more comprehensively than Macintosh et al. suggested. The system context of accounting signs is not limited to clean surplus models or pension accounting models. The pension numbers in the affidavit, for example, took their sign value not only from their relation to other accounting signs, but also from the legal signs in which they were embedded and indeed from the credibility of Algoma Steel management itself. This sign value was amplified when the media picked up the numbers and repeated them widely. If certified accounting signs provide anything to social and commercial discourse, it is not exogeneity but relative stability. This is because certified accounting signs are produced, at least nominally, according to standards that take considerable time and effort to change. While the standards setting process can be influenced by those with the power to do so, the process is institutionalized to the degree that it is largely conservative and resistant to change. This results in accounting standards that change much less quickly than accounting signs can be changed, making certified signs relatively stable against

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the backdrop of economic commotion and babble. This does not mean that accounting signs are not arbitrary. But it is important to clarify the notion of arbitrariness used by Baudrillard. Examples provided by Macintosh et al. (2000, pp. 41– 42), such as the use of ‘‘red” on a traffic light to mean stop and ‘‘green” to mean go, illustrate not arbitrariness but conventionality. The original choice of red instead of, say, purple, was possibly quite arbitrary, but this does not exhaust Baudrillard’s notion of arbitrariness in language. The traffic-light example only evokes the image of someone following the convention of stopping at a red light. However, consider for a moment a world in which drivers of large, powerful trucks are armed with devices that can control traffic lights for their own benefit, switching them to green as they approach intersections. In such a world, these truck drivers would be producers of traffic signals, and the masses of other drivers and pedestrians would be mere consumers. This is the world of accounting today. The Algoma Steel crisis illustrates the considerable latitude that corporations have in controlling the production of accounting signs. This latitude is built into the models of Section 3461 of the CICA Handbook, and it is available to corporations because they dominate the resource of accounting expertise. Bringing this matter of power into the equation is necessary in order to comprehend what Baudrillard was getting at. At another point in their article Macintosh et al. provide a wonderful illustration of the differential effects of power, General Electric’s use of earnings models to make strategic decisions (pp. 32–33). Their example shows how the production of accounting signs creates the reality that accounting then pretends to reflect. Not everyone has the power to produce such signs. This is clear in the case of Algoma Steel. Management was able to produce accounting signs that mattered, that made a difference in the social world. However, this social difference was not produced until the moment when these accounting signs were consumed. Consumption, as we saw in our re-examination of Baudrillard’s earlier writings, is a social system for producing meaning. Yet workers and pensioners were largely passive

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consumers of these signs, while other creditors and government bureaucrats had greater capacity to shape how the accounting signs would be interpreted. The function of accounting signs in Algoma Steel’s social relations thus went beyond the benign agreements on meaning that Macintosh et al. discussed, when they said that institutionally produced accounting information is: . . .an arbitrary but essential feature of a hyperreal world. Without it, everything would seem to depend on everything else and interaction would be problematic if not impossible. (pp. 32–33) What Macintosh et al. miss, however, is that social interactions are problematic. This is true for government, for investors, for banks, and, no doubt, even for management. But it is especially true for the relatively powerless, such as elderly pensioners. The relations of power in society become institutionalized in things like Section 3461, and render difficult, for the average citizen, the operation of the system of signs by which society is governed. This helps explain what Macintosh et al. (p. 44) noticed about accounting information, that it does not fully behave as Baudrillard predicted signs should in a hyperreal society, and become absorbed, de-politicized and neutralized by the masses. The Algoma Steel incidents suggest that the reason it does not behave in this way is that the consumers of accounting information are not ‘‘masses”. The consumption of accounting information is structured and institutionalized, just as its production is. There are no undifferentiated, passive masses absorbing accounting signs. Rather, there are relatively institutionalized and programmatic interfaces waiting to receive the correct combination of accounting signs in order that the technologies of governance and wealth distribution be triggered into action. This overstates the mechanistic aspects of accounting communication, of course. Nonetheless, the point remains that accounting signs are consumed primarily by technically structured corporate and bureaucratic agents, rather than by masses of consumers. Hence, when the underfunding of Algoma Steel’s pension plan was revealed, the tools of pen-

sion accounting permitted Algoma’s management to construct a new picture of its pension plans, and to marshal creditors and institutionalized resources towards a negotiated solution. The Algoma Steel events illustrate that at least in Canadian society, with its relatively decentralized form of government, accounting signs serve to define and to shift the boundary between government and the private sector. The intervention of government whereby pension assets and liabilities were taken over into the PBGF was a temporary collapse, or in Baudrillard’s terms, an implosion, of the boundary between government and private sector. The reproduction and reconfiguration of accounting signs in this cases was structured by institutional mechanisms, regulations, and the role of expertise. These structures are at the root of the uneven distribution in Canadian society of the ability to operate the system of accounting signs.

Conclusion As Macintosh et al. (2000, p. 45) state, ‘‘We are concerned with describing the nature of accounting signs, with unearthing how they came to be produced and with why they subsequently come to be taken for granted as a reality of their own”. The present study has provided specific evidence of how accounting, as a system of signs, structures and enables the public protection of private pensions. We have seen how the institutions and techniques of pension accounting create a system of wealth distribution and risk distribution amongst investors, creditors, management, employees, the government, and other stakeholders. We have seen, in particular, how pension accounting under Canadian GAAP has served to mobilize these institutions in times when the system is represented as ‘‘failing”. The system of accruals built into Section 3461 permitted the company’s pension funding problem to remain unspoken, isolated as a pension deficit note rather than being aggregated with the company’s overall performance numbers. This permitted the company’s immediate stakeholders, including investors and creditors, to avoid the brunt of the new reality induced by

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Section 3461. By applying the corridor rule and confining the ‘‘damage” to the company’s pension fund, the situation was successfully problematized as a pension crisis, amenable to government intervention through accounting technologies embodied in the Pension Benefit Guarantee Fund. The ‘‘failure” of the system is thus seen to be the very point at which all its flexibility and strength was brought into play. The crisis point—constructed, packaged and presented by accounting—served as the pivot point where risks and wealth allocations were successfully renegotiated. The possibilities provided by Section 3461 for this pivoting and reconfiguration were created not by direct legislation and state control, but by an institutionalized diffusion of social governance. The role of accounting signs in this pervasive form of governance is contingent on the particular regimes of power and knowledge in which the signs are situated. I have argued that these signs should be viewed as simulacra, arbitrary signs that take their sign value from the system of signs in which they circulate, and that these arbitrary signs serve to shift the boundary between government and the private sector. By focussing on the accounting sign, the present study highlights how governmental programs like the PBGF function as institutionalized consumers of accounting signs. When, as in the Algoma Steel situation, these accounting signs are produced by corporations and others outside of government, and are taken up discursively to trigger programmatic government interventions, the power to govern is effectively dispersed. This suggests that the power to govern in today’s democratic society is, at least in part, negotiated through and mediated by accounting signs. The Algoma Steel pension bailout shows how unevenly the capacity to influence this negotiation is distributed in Canadian society, because of information asymmetries, the role of accounting expertise, and the arbitrariness of accounting signs.

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Welker, Dan Thornton, Steve Salterio, and Elizabeth Farrell are gratefully acknowledged, as are the suggestions of two anonymous reviewers. This paper benefited from the insights of Yves Gendron and participants at the Alternative Perspectives on Accounting Conference, held at Laval University in March 2007. Funding was provided by SSHRC through a Doctoral Fellowship, and by the Schulich School of Business. The able research assistance of Mona Mann is gratefully acknowledged.

Appendix. The implicit model of Section 3461 Section 3461 of the CICA Handbook uses an accounting model that brings together actuarial calculations of future benefit payments with financial valuations of assets set aside to fund those payments. The crucial accounting question being answered by the model (cf. 3461.001) is this: given the actuarial and financial calculations, what is the proper way to recognize, measure and disclose the costs of employee future benefits? The principle applied in the guidelines is that the cost of future employee benefits should be recognized in the period in which the employee provided the service that earned her the benefits.28 The explicit basis for this principle is that ‘‘Benefit plans are considered part of an employee’s compensation arrangement” (3461.002). Just as wages are considered an expense to be matched to the period in which corresponding revenues were earned, so future benefits should be matched to the same period. This can occur through the recognition of the liability to pay those benefits, or the recognition of the cost itself, either as an expense or capitalized in an asset such as inventory (3461.002, Footnote 1). The attribution mechanisms at the heart of this model involve matching distinct units of the future benefits to specific periods of service by employees, and calculating by actuarial methods the present value of each unit for the period in which it accrued. The actuarial methods are black-boxed by the Handbook. That is, they are treated as an

Acknowledgements 28

The comments of Dean Neu, Jeff Everett, Teri Shearer, Hussein Warsame, Daphne Taras, Mike

The guidelines point out that some future benefits are recognized when an event occurs, such as the application of the employee for disability benefits (3461.003).

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independent and unquestionable given. Two separate accrual attributions are involved. In the first, the units of future benefit are calculated as earned on a period by period basis. By this process, the accrued benefit obligation of the company is calculated. This obligation is recalculated each year, based on updated actuarial assumptions, employee data, and other input parameters.29 During the course of a year, the obligation for future benefits increases by the cost of benefits earned by employees during the year (the current service cost), and decreases by the amount of any benefit payments actually made. In addition, interest accrues to the employees on the outstanding portion of the obligation, the portion that had been earned before the period began and which has not yet been paid to the employees. When the experience of all these increases and decreases does not match the actuarial projections, the difference is calculated as an actuarial gain or loss on the accrued benefit obligation. An additional actuarial gain or loss is calculated on the plan assets, being the difference between expected and actual return on assets. The total of these two actuarial gains or losses is not recognized immediately in the entity’s financial statements. Rather, the model assumes that these actuarial gains and losses are random, and will offset themselves over time. In order to give the entity time for these fluctuations to net out, and so avoid short-term shocks to its financial statements, a second accrual attribution is used. In the second accrual attribution of the model, a portion of the costs of the benefit obligation is allocated back to the current period. By this process, the accrued benefit liability of the company is calculated. The so-called ‘‘corridor” rule is the primary method for making this attribution. Under the corridor rule, the net actuarial gain or loss, which may fluctuate widely from year to year due to changes in mortality experience, market values for assets, and so on, is dampened by accumulating it from year to year off the balance sheet, 29 Pension plans are governed by federal legislation for entities registered nationally, and by provincial legislation for entities registered provincially. This pension legislation typically requires a complete actuarial recalculation only every few years. Extrapolations from the prior recalculation are permitted in intervening years.

and amortizing a portion of this accumulation to the financial statements each year. The calculation of the amortization amount is convoluted. First, only part of the net actuarial gain or loss is subject to amortization. If the net actuarial gain or loss does not exceed 10% of the greater of the accrued benefit obligation and the fair value of plan assets, no amortization is necessary. If it does exceed this 10% figure, then only the amount by which it exceeds the 10% figure is subject to amortization. This excess amount is to be spread out over the remaining service life of the average employee. That is, if most employees have 8 years to go before collecting their benefits, then only 1/8th of the excess amount is recognized on the entity’s financial statements this year. Furthermore, since the calculation is performed using the net actuarial gain or loss as at the beginning of the year, the impact of a fluctuation on the financial statements is not only dampened but delayed. Besides the corridor rule for actuarial gains and losses, several other calculations are used to attribute the benefit obligation back to the current period as a pension cost. The current service cost, the interest cost on the obligation, and the simple amortization of any changes to the plan—i.e., changes to accounting policies (transitional obligations) or retroactive changes to promised benefits (past service costs)—are all components of the pension cost. The pension cost recognized every year is accumulated. The contributions the entity makes to the pension plan are deducted from this accumulation. The result is the accrued benefit liability that appears on the entity’s balance sheet.

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