ATPB 313
Accounting Theory & Practice
Sem 2 2013/2014
(updated October 2013)
Topic 2:
OVERVIEW OF ACCOUNTING THEORY
REF: 1 & 2 (Godfrey et al 2010)
1
At the end of this lecture, students
should be able to:
Discuss an
overview of
what
accounting
theory is
Describe how
Describe how
accounting
Describe the
accounting
theories are
development
theories are
constructed
of accounting
formulated
theory
and
and tested
measured
2
Accounting theory - logical reasoning in the form
of a set of broad principles that:
provide a general
framework of reference by
which accounting practice
can be evaluated
guide the development
of new practices and
procedures
3
The
acceptance
of a theory
will depend
on:
How well it
explains and
predicts reality
Main
objectives of
accounting
theory
Explain why &
how current
accounting
practice evolved
How well it is
constructed
Suggest
improvements
How acceptable
are the
implications of
the theory
Provide the
basis for
development of
such practice
4
1800-1955
1400-1800
Pre-theory
period
• No theory of
accounting
was devised
General
Scientific
Period
• Observe
what actually
happened
• Based on
empirical
analysis i.e.
relying on
real-world
observations
not simply on
logic
Pragmatic
accounting
1956-1970
Normative
Period
• Prescribe
what should
happen
• 2 group
dominated
• Limitation of
the theory
• Do not involve
hypothesis
testing
• Based on value
judgment
1970-present
Specific
Scientific
theory
• Describe,
explain and
predict
accounting
practice
• i.e.: bonus
plan
hypothesis
Positive
accounting
5
5. Behavioural Research
Result from the narrow
approach of positive
theorists
Concerned the broader
sociological implications of
accounting numbers and the
associated actions of ‘key
players’
Emerged in 1950s
6. Current development
Corporate collapses e.g. Enron & WorldCom has triggered
question on whether a comprehensive theory of the
impact of accounting on behaviour had been developed
increase in legislative reporting
requirements.
convergence
6
FORMULATING
ACCOUNTING THEORY
Deductive
General to specific
Inductive
Specific to general
7
Deductive
 Drawing specific conclusion from detailed observations and
measurements
 A "top-down" approach.
Deduction
P1 all asset accounts have debit balance.
P2 The plant & machinery account is an asset account.
Conclusion the plant & machinery account has a debit balance
8
Inductive
• From specific observations to a general conclusion
• A "bottom-up" approach
Induction
P1 the plant and machinery account is an asset account and has a debit
balance.
P2 the motor vehicle account is an asset account and has a debit balance.
P3 the land is an asset account and has a debit balance.
Conclusion all asset accounts have debit balance.
9
Theory development eventually must relate to the real world.
Theoretical structure
Syntactic
Pragmatic
Semantic
10
In developing theory using scientific approach, we need to test
a theory using criteria of truth.
Theory testing
self-evidence
Dogmatic
Scientific
Syntactic
Induction
Falsification/Popper
Research program /Lakatos
Kuhnian
Feyeraband
11
Dogmatic
basis
Accept the statements made by people who has the authority
Self-evident
The justification of self-evidence as a way to determine truth is the reasonableness,
sensibility, or obviousness of a statement based on our general knowledge,
experience, or observation
SCIENTIFIC
Syntactic
Statements ascertained as valid or invalid by logic or reasoning alone
Induction
Statements whose truth or falseness can be known only by reference to empirical
evidence or its correspondence with observations of real-world phenomena
Falsification
(Popper)
•
•
the trial and error testing of speculative hypothesis
can never be proven absolutely true, but can be rejected when shown to be false
Research
Programs
(Lakatos)
•
hard core of the research program which stipulate the basic assumptions of
science
forms a protective belt of hypothesis
Kuhnian
paradigms
Revolutionary i.e. involves the abandonment of one theory and replace by another
incompatible theory.
Feyerabend’s
approach
There is no single scientific way of getting ideas.
•
12
 A useful way to study & assess accounting theories is to classify
them according to the assumptions they rely on, how they are
formulated and their approach to explaining & predicting actual
events.
 Accounting theory classification:
Pragmatic
Syntactic
Semantic
Normative
Positive
Naturalistic
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THEORIES
EXPLANATION
Pragmatic Theories
Descriptive pragmatic Observe behavior of accountants
approach
Psychological
pragmatic approach
Observe users’ responses to the accountants outputs i.e.
financial reports
THEORIES
EXPLANATION
Normative Theories • How to derive the ‘true income’ for an accounting period
(1950s and 1960s)
• Type of information useful for economic decisions.
Positive Theories
(1970s)
• Testing theories back to the experiences or facts of the real
world (to find the reasons)
• i.e. questionnaires/survey
Alternative
Naturalistic
approaches
• Tries to explain complex & unique situations using an
unstructured approach.
• Use case studies & individual experiences
• Try not to generalize.
Syntactic
•
rely on logical argument based on a set of premise.
Semantic
•
how theories correspond to real-world events.
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Syntactic and Semantic Theories
 A theory that has both syntactic and semantic element
 E.g. historical cost:
 Proponents:
 Syntactic: Logic in the sense it is the value recorded on the day
transaction is made
 Semantic: The cost recorded based on real vouchers
 Opponents:


Syntactic: Poor as different monetary measures are added
Semantic: Do not consider inflation and no independent
empirically observable correspondent to concepts such as profit
or assets.
15
Issues for auditing theory construction
Development of a
theory of auditing
(lag in 1960s)
Development of a theory
of accounting
Early writers attempted
to document the process
of auditing and the
duties of expected of
auditors.
16
Accounting theory
Definition:
Logical reasoning in the form of a set of
broad principles to provide a general
framework of reference by which
accounting practice can be evaluated &
guide the development of new practices
and procedures.
Objective:
Explain current accounting practice
evolved, suggest improvements &
provide the basis for development of
such practice.
Development of Accounting
Theory
1.Pre-theory period (1400-1800)
2.General Scientific Period (1800 – 1955)
3.Normative Period (1956 – 1970)
4.Specific scientific theory/Positive Era
(1970 –present)
Formulate:
• Deductive:
Parts of
Theory:
general to specific
• Inductive: specific
to general
1.Syntactic .
2.Semantic
3.Pragmatic
Theory Construction:
1.Pragmatic – behavior of accountants &
users of accounting information
2.Syntactic – rely on logical argument
based on a set of premise.
3.Semantic – how theories correspond to
real-world events.
4.Normative – rely both on semantic &
syntactic approach.
5.Positive – test hypothesis against actual
events.
6.Naturalistic – consider individual cases &
try not to generalize.
Testing:
1.Dogmatic .
2.Self-evident
3.Scientific:
• Syntactic
• Induction
• Falsification/Popper
• Research program
/Lakatos
• Kuhnian
•Feyeraband
17
Q1 Useful theories must eventually relate to the real world.
Using examples, please discuss THREE distinct
relationships of theories which are: syntactic, semantic and
pragmatic.
[6 marks]
Q2. Accounting theorist attempted to established norms for best
practice during the normative period. While, specific scientific
theory is to explain and predict accounting practice.
i. Explain two groups dominated during the normative period.
[4 marks]
ii. Explain the reasons why the specific scientific theory
arises.
[6 marks]
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Q3 Explain TWO (2) limitations of self evidence. Discuss with example.
[4 marks]
Q4 In your opinion, can accounting theory be constructed as a purely
syntactical exercise without involvement by other approaches?
Provide your reasoning.
[4 marks]
Q5 Is it important to account for the effects of inflation on deriving the
‘true income’ in normative theory? Provide your reasoning.
[4 marks]
Q6 What role(s) can theory play in relation to accounting? Give an
example.
[4 marks]
Q7 Explain FOUR (4) main differences between normative and positive
theories.
[8 marks]
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