CHAPTER 3- Accounting Theory Construction

Question 1
What do accountants who wish to apply the scientific approach to accounting hope to accomplish?

Accountants who believe in the scientific approach want empirical evidence to support accounting practices so that practitioners can recommend the most appropriate methods to use which is based upon that evidence. A semantic approach to accounting theory would be to confirm by empirical evidence the accounting numbers by reference (probably) to market prices (i.e. a measurement approach).
Another approach, would be to examine the use of accounting practices and numbers in light of political, social or behavioural theories (pragmatics). The researcher would then attempt to "scientifically" explain the use of accounting numbers in terms of these theories.
The scientific approach in accounting is not an attempt to make scientists of practitioners nor is it an attempt to discover "absolute truths."

Question 2
We shouldn’t bother with accounting theory. We should be pragmatic and look at the facts of the real world. Discuss.

Tutors should be aware that this question is a common one thrown up by practicing accountants and will invoke a number of responses from students. A number will argue that an approach which lacks a theoretical component (syntactic) will have the danger of becoming dogmatic or self fulfilling. A pragmatic approach may mean that emphasis is placed upon the behaviour of accountants and little emphasises is placed upon the meaning of the actual 'financial statements." Accounting then may revert to a procedural art.
On the other hand, others may rightly argue that accounting theory may become too obtuse if a completely theoretical approach is taken, without regard to the facts of the real world. Theoretical argument without pragmatic application is likely to be of little benefit to business and society.
Another point worth noting in this question is the meaning of "the facts of the real world” Our analysis of testing a theory suggests that the above statement should be subjected to a number of tests.
Tutors should use this question to point out the problems of taking extreme positions. To ignore any theoretical framework or to ignore pragmatic implications may be equally dangerous. Students should be encouraged to combine analytics with pragmatics.

Question 3
Accounting is a branch of mathematics. Its purely analytical and as such, the only unblemished science. Discuss.

In a strict sense this statement is correct. The balance sheet equation whereby debits equal credits, and the mathematical connection between the income statement and the balance sheet is purely analytical. However, we may choose to extend accounting beyond the boundaries of being a mathematical science and consider aspects such as: accounting as a measurement science, a political science, an economic science, a managerial science etc.

Question 4
Outline the underlying framework of normative accounting research. Should accounting be a semantic science? Does inflation matter to accountants?

Normative accounting research is more concerned with policy recommendations and is concerned with what should be done in contrast with explaining why current practice is carried out in the manner that it is.

Normative theorists usually attempt to derive either the "true income" or adopt the "decision - usefulness" approach whereby accounting reports are an input into users decisions (e.g. to buy or sell shares, management decisions on the financial wealth of firms etc).

As a consequence many normative theorists are measurement theorists who attempt to incorporate the effects of inflation into accounting reports. In this sense they take a semantic viewpoint - relating the figures in the accounting reports to actual objects (assets, liabilities) or events (changes in inflation).

Whether accounting should be purely a semantic science (or a syntactic or pragmatic science) is in itself a normative statement and which ever way students answer this point should be brought to their attention.

Inflation may matter to some accountants but not to others. For example a management accountant who is trying to control costs or projects may have to pay a great deal of attention to the inflation rates in various sectors, an accountant who is responsible for hedging money market funds will be interested in the real rate of return on funds or look to inflation induced hedges (e.g. in real assets). On the other hand taxation accountants, auditors or record keepers may have very little interest in the effects of inflation.

Question 5
Outline the underlying framework of positive accounting research. What role has this research played in theory development?

Positive accounting theory was a reversion to testing or relating accounting theories back to the "facts" or "experiences" of the real world. Examples of such research was questionnaires and surveys of bank officers or investors regarding their use of financial reports for decision making; or whether inflation adjusted accounting reports actually aided decision making. Current positive accounting research is aimed at explaining the reasons for actual accounting practices and in predicting the role of accounting data in economic, political and social decision making. Positive theory has expanded accounting theory from the purely decision making focus of normative theorists into analysis of political and economic factors.

Question 6
What is the obstacle to testing an overall theory of accounting?

One obstacle is that there is presently no one agreed theory of accounting. Researchers in accounting appear to be segregated along the lines of different schools of thought who adhere to their own perceptions or "views of the world." Therefore, there is no agreement on the methods of testing an overall theory of accounting.

In a narrower sense, one direct test of an overall theory of accounting would be to determine whether the output data of the accounting systems, which are constructed on the basis of the overall theory, are useful to users. The data of the accounting systems are utilised by users in their prediction models, and the conclusions (predictions) are then used in their decision models. The problem is that if the prediction is verified, it verifies the prediction model, not the accounting system and its output. There are other variables besides accounting data that affect the prediction. We do not know how the accounting data were utilised. Also, if the decision turns out to be right, it verifies the decision model, not the accounting system.

Interpreting the evidence on decision-making is extremely difficult. We do not know how to interpret the evidence to determine that accounting information is useful. Thus, a direct test is virtually impossible. We must be satisfied with the weaker, more direct tests which are usually advanced by accounting setting bodies and include: relevance, verifiability, freedom from bias, timeliness, comparability, reliability and understandability.

Question 7
How does an ontological assumption affect accounting research? What is the difference between scientific and naturalistic research.

An ontological assumption is the way we see the world. Using the Morgan and Smircich six-way classification than we may assume reality as being anything from a concrete structure (realist - objectivist viewpoint) down to reality as a projection of human imagination (unstable - human specific).

If we have an ontological viewpoint that the accounting world is relatively concrete and stable then it is more appropriate to choose a scientific approach to accounting theory. That means that we are more likely to have a structured, prior theoretical base and use empirical validation. On the other hand if we view the world of accounting as being a product of human imagination we are more likely to have an unstructured research methodology with no prior theory.

The difference between scientific and naturalistic research is set out in the table 11.2 on page p253. The tutor should aid students understanding by briefly categorising accounting research into scientific and naturalistic.