OLIVE 香川大学学術情報リポジトリ
On Theory Construction and Verif cation
Masayuki Miki
I . lntr oduction
In recent years, there have been many disputes over the methodology of theory
construction among accounting scholars
The last fifteen years of accounting
history seem to be remarkable in particular and seem to be part of a transition
period replacing the inductive or descriptive approach of traditional accounting
with the deductive or normative approach.
It is often said that traditional
accounting theory has been constructed as a distillation of experience and
developed as a tool which assigns current practices to much reliability. Therefore,
traditional accounting theory has been considered to be not a "science", but only
an "art" a s to how we compute enterprise income.
Even if someone said that
traditional accounting the01y is a scientific theor y, another one criticized that
it is no more than an infant of science
Although we don't think simply that traditional accounting theory is only a
tool of current practices or an "art" as opposed to a "science", we must listen
straightforwardly to such criticism and build more desirable basic theory than
before
This basic theory of accounting ought to be built on the basis of scien.
tific methodology
The first step in pursuit of the basic theory is to elucidate
the nature and subject matter of accounting theory as an empirical theory.
On
looking a t the recent literature of accounting from such a point of view, Professor
This paper was written for presentation to the joint seminar of Professor Robert
R . Sterling and Assistant Professor L T. Johnson while I was working a s a
Visiting Research Associate a t Jesse H Jones Graduate School of Administration,
William Marsh Rice University (Houston, Texas), from 1975 to 1977
.
OLIVE 香川大学学術情報リポジトリ
Robert R Ster ling's ax ticle, "On theory constxuction and vex if ication" appears
t o be one of the most ambitious and valuable pieces of literature
The purpose
of this paper is to clarify the nature and subject matter of accounting theory as
an empirical theory through a critical examination of Sterling's article.
I1 The Examination of Sterling's Article
His a1ticle consists of the following four parts:
1) Introduction,
2)
The nature of theories,
3) Some accounting interpretations,
4) A program for constructing a theory of relevant measurements.
In the Introduction, he points out that "although the process of theory const.
ruction is imperfectly understood, it has been noted that the theories of empirical
science have some common properties and that they share a structuue." And, he
starts reviewing "the nature of empirical theories for the purpose of providing
a relief for some current and proposed theories of accounting."
Then, some
alternative interpretations of accounting are examined critically, and finally an
over view for a program for the construction of a theory of relevant measurements
is suggested.
We will examine them in due order
i ) The nature of theories.
His explanation of theories may be summarized as follows:
A "theory" is a set of sentences
Theories are expressed in a language.
Therefore, i t is pertinent to make reference to the study of language for the
study of theories
There are three areas in the study of language. First,
syntactics is the study of logical relations of signs to signs
syntactical propositions-such
positions-are
propositions are often said to be analytical pro-
true, comes into question in syntactics.
have no empirical content
Whether or not
Syntactical propositions
The relation of signs to signs becomes true by virtue
of a set of syntactical rules or definitions
For example, a mathematical pro-
OLIVE 香川大学学術情報リポジトリ
On Theory Construction and Verification
335
position, (a+ b ) 2 = a 2 f2 a b f b2, is analytical
Second, semantics is the study of interrelation of signs t o referents in the
real world.
We need semantical rules to link between a particular sign and a
particular referent.
BY virtue of such semantical rules, semantical propositions
are given empirical meaning to abstract signs.
contents are called empirical propositions
The propositions with empirical
An empirical proposition is referred
to as something in the real world, while an analytical proposition says nothing
about it.
Therefore, the true value [of empirical propositions is verified by
operation of obser vations
.
Third, pragmatics is the study of behavioral relation of signs to the users
of those signs.
Different signs invoke different responses from a particular user
even though those signs are intended to have the same referent.
These three
divisions of the study of language provide the basis for two divisions-empir ical
and nonempir ical-of
sciences.
As the ptopositions of nonempirical sciences are
logically proved by the syntactical rule, they don't depend upon empirical findings
for their truth value.
On the other hand, the empirical sciences have for their
purpose the explanation and prediction of occurrences in the real world.
The
propositions of empirical sciences, therefore, are said to be true only if they
correctly explain or predict some empirical phenomena
The structure of a
theory of such empirical science may be divided into two parts as follows:
(1) A Formal or Axiomatic System which is composed of abstract symbols and
a set of syntactical rules for manipulating those symbols.
(2)
An Interpretation of the formal system which connects certain symbols to
observations via semantical rules
The former is a syntactical or logical part which can be abstracted and studied
in isolation for an empirical part of that theory, but the formal system per se
is not an empirical theory
In order for the formal system to function as a
theory of empirical science, it is indispensable that we add an intetpretated part
of the formal system which gives empirical meanings to certain symbols.
As
the propositions of the inter pr etated part are intended to be empirical, they must
OLIVE 香川大学学術情報リポジトリ
be tested by observations. But this does not entirely imply that all propositions
of an empirical theory must be verified by observations
There are many terms
which operate within the formal system that do not depend on observations.
However , an empirical theory must have some propositions that are verifiable
.
After the empirical Input to a for ma1 system is manipulated by syntactical rules,
the Output from the formal system is connected via semantical rules to observations.
If the observations are a s specified by the formal system, then the
particular proposition is said to be verified
propositions is taken as a test of theory
.
The verification of these individual
If the propositions are found to be
true, then the theory is said to be confirmed.
The part of his ax ticle on "The Nature of Theories" is intended to clarify
the construction process and the structure of empirical theories.
This results in
making clear to a certain extent that an empirical theory is composed of a
Formal System and an Interpretation of the formal system and how each part of
the theory plays an important par t in the empirical theory
This is diagrammed a s follows:
Theory Plane
1
Inputs
/ -'
Syntactical
Manipulation
1 1
Outputs
1
The view that divides an empirical theory into two such parts can be found
in the literature of scientific philosophy.
But such a view could not have been
discovered in the accounting liter ature because accounting theory or "gener ally
accepted accounting principles" have been considered to be inductively formed by
summarizing accounting pr actices in the past and present
Therefore, the
attempt to construct deductively accounting theory by means of the method of
empircal science calls for reflection, all the more, about the research idea of the
current accounting theories and, also, enlightens us on many points.
OLIVE 香川大学学術情報リポジトリ
On Theory Construction and Vex if ication
337
-123-
On examining his article in detail, however, we can discover four problems.
First, the process of empirical theory construction a s a deductive system is not
always explained clearly
Also, there is no explanation about the mechanism of
dynamic development of empirical theories
For example, what is input into a
formal system? What is meant specifically by the suggestion that the output
from the formal system can have empirical meanings by observations? How does
the theory constructed develop through the mechanism of
falsification?
...
confirmation and
and so on.
Second, there is a problem with the lack of verification to the theory's
proposition.
It is said that an empirical theory must have some propositions
which are verifiable.
While this is generally true, it is also the case that some
empirical theories with the lack of vex ification of propositions have their r aison
d'etre as theories explaining the phenomena in the real world. For example, in
the current economic theory of consumer's behavior as i t is often explained in
many textbooks, consumer s optical equilibrium is attained when the consumer's
substitution ration (or slope of relative marginal utilities) i s just equal to the
ratio of the prices of two products. Nevertheless, it is said to be very difficult
f or economists to ver ify this proposition by way of observation or experiments.
But this proposition is considered to be "valid" to explain consumers' behavior.
Why i s i t ? Why is the unverifiable or unverified theory worth existing? In short,
we can say that the second problem is the stability and creditability of theory.
Third, why does an empirical theory have the character of a deductive system?
What Sterling says, after all, implies that an empirical theory must be formed
by a deductive system.
A deductive system forms a 'cdeductive" connection with
-and some prosyntactical rules - they
a small number of basic propositions - they are called "Axioms"
"ositions
which are derivable from Axioms by a set of
are called "Theorems".
In other words, the theory construction by a deductive
system is to describe accounting phenomena by a formal system with formal
logic.
system?
But, why do we have to construct accounting theory as a deductive
OLIVE 香川大学学術情報リポジトリ
Fourth, what determines that one theory is superior to the other, if two
theories exist that explain the same phenomenon?
The purpose of Sterling's article, of course, is not intended to explicate
comprehensively only the nature of theories.'
problems.
Therefore, it is natur a1 to have such
But since the above problems should not be overlooked in the con-
struction of accounting theory as an empirical science, ithese problems will be
clarified in section 111.
(ii)
Some accounting interpretations
Sterling follows the above review of the nature of [empirical theories with a
critical examination of some methods of accounting theory developed in the past.
He prefaces that examination with the point that "different theories are often
theories about different subject matters and the problem is not so much that
there are conflicting theories about the same subject matter a s i t i s that the
various theories are concernerned with different subject matters."
important point
This is a very
But it seeins to have been overlooked by many other theorists.
a ) An Anthropological Interpretation
This method is "to observe accountants' actions and then rationalize those
actions by subsumming them under generalized pr inciples
." Generalized
principles
are formed inductively by observing a lot of individual actions, each of which is
ref ex red to as the "principles of accounting
."
These "principles of accounting"
are usually considered to be "a theor y that says that under such and such conditions
the accountant will act in such and such a way." "The result is not a theory
about accounting or a theory about the things to be accounted for, but a theory
about accountants."
The anthropological interpretation of accounting has been
applied as the explantion of accountants' action for a long time.
We may call
i t , so to speak, one of the most traditional approaches.
But Sterling criticizes that this traditional approach errs in "concluding that
because X is the case, then X ought to be
"
And also, he says "this kind of
theorizing may provide us with an explanation of why accountants act in a certain
way, and it may provide us with the ability to predict their action, but it does
OLIVE 香川大学学術情報リポジトリ
On Theory Construction and Verification
339
-125-
not yield a judgement about the goodness of their action." We can not conclude,
to be sure, that because an accounting man acts in fact in a certain way, then
he ought to act in such manner.
ought to be
What is may be quite different from what
But shouldn't we consider that Sterling attempts to build accounting
theor y on the basis of the common proper ties of empirical sciences? If he tries
to do so, there can be no justification for criticizing another theory on the ground
that an anthropological interpretation doesn't produce any judgement about the
goodness of actions.
Also, Ste~lingsays "that the theory of accounting ought to be concerned with
accounting phenomena, not practicing accountants, in the same way that theories
of physics are concerned with physical phenomena, not practicing physicists."
But accounting phenomena are, in nature, "social" phenomena which are based
on the behavior of human beings, in the same way that economic phenomena
are based on the behavior of human beings who take part in economic activity.
"Social" accounting phenomena are quite different from natur a1 phenomena in
that they are the phenomena of human beings with their "purpose" or with their
"intention "
posive."
'The phenomena we label "social" imply almost invariably "pur-
One of the primary objectives of social sciences is to explain system-
atically the purposive behavior and institutions of human beings.
I t may be taken
into account that social phenomena occur for a certain "purpose."
The natural
phenomena, such as atoms, gravity, friction, rays, don't occur for a certain
purpose.
Thus, the objective of accounting theory is mainly to explain the social
behavior of accountants and economic and legal institutions surrounding what is
called "accounting."
Although accounting phenomena are not rest1 icted to only
the behavior of accountants, it forms one of the most important parts of accounting.
Therefore, the theory of accounting ought to be concerned with accounting
phenomena including practicing accountants.
In short, I can not agree to the
following points of Sterling's view :
1) He asserts that an anthropological interpretation does not yield a judgement
about the goodness of actions, in spite of the fact that he presupposes that
OLIVE 香川大学学術情報リポジトリ
the empirical sciences have for their purpose the explanation and pr ediction
of occurrences in the real world
He asserts that the theory of accounting should not be concerned with
2)
practicing accountants.
But, the actions of accountants are generally con-
sidered to be one of the main factors of accounting phenomena
b)
A Model-of-the-Fir m Interpretation
Under this interpretation, "the accounting system is taken as a model of the
firm in much the same way that a planetarium is a model of the sky
."
Trans-
actions' activity is inputs to the accounting system which is a formal system.
Once the transaction is the input to the formal system, it i s manipulated by
certain syntactical rules.
Then, it turns into outputs such a s the financial
statements or the balance of any particular account.
The outputs are ver ified
by auditing The a ~ ~ d i t i nofg the outputs means the verification of the individual
proposition and the confirmation of the theory
.
Stel ling criticizes this interpretation from the peculiar nature of the vex ifi- '
cation process in auditing.
That is, the auditing process of the outputs is not
separately verified, but it is only a recalculation of the outputs and an examination of the business document in order to check on the accuracy of the inputs.
For example, neither "net income" nor "total assets" are observable or separately
measur eable
.
There are many diff ex ent accounting procedures for the allocation
of cost a t this time.
But, in the absence of the verification, even if there were
two different accounting procedures concerned with the same phenomena and
with their application resulting in contradictory outputs, the auditor will certify
that both outputs are correct.
In sum, Sterling views the mode!-of-the-firm
interpretation a s inappropr iate because it lacks in the process of the verification.
His criticism for the model-of-the-f ir m interpretation, in judging from the
nature of current auditing, is vex y poignant and scathing.
Of course, what does
it refer to is quite right. At the present time, the auditing gives an opinion as
to whether or not the financial statement actually portrays the financial position
and the results of operations of the firm under examination.
An auditor is not
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341
On Theory Construction and Vex ification
-127-
to "verify" the f inanciai statements and supporting accounting records of a firm ,
but to examine them critically and to give an opinion in the position of a professional accountant
It is certainly only a recalculation of outputs within the
framework of an accounting system
None of the outputs of an accounting system
may be concluded to be separately verified
Apart from the criticism of the
model-of -the-firm interpretation in the light of the nature of auditing, I will
raise a question about the relation of an accounting system to a formal system.
It is understood in the context of the model-of-the-firm that a formal system is
an accounting system and by the verification of the outputs of an accounting
system, accounting theor y can be confirmed.
But a formal system per se is, as has been noted in an earlier paragraph, one
of the main parts of theory
On the other hand, the accounting system is the
mechanism peculiar to accounting,
with respect to classifying,
recording,
calculating and summarizing ail the transactions and reporting the results to the
users.
The accounting system is nothing but an object in the study of accounting
theory. (Even though the accouting system is interpreted a s a "model" of the
firm, a doubt is left whether the accounting system is one component of accounting theory or an object of accounting theory .)
Thus, while the verification of
the outputs of the accounting system does support the justification of the accounting system, it does not imply the confirmation of the accounting theory. In my
view, the accounting system is the phenomenon itself in the real world and the
accounting theory is a model explaining them
while a model i s surrogate
The phenomenon is principal
A clear distinction between an accounting system
and an accounting theory should be naturally drawn in the interpretation.
Also,
the same is true with the verification of the financial statements and the accounting theory.
Each of them is quite different from each other
model-of -the-f ir m interpretation, these seem to be confused
However, in the
Even if a "for ma1
system" were employed in a sense of a logical system peculiar to double-entry
bookkeeping, it should be distinguished from a formal system in empirical
the01y
.
OLIVE 香川大学学術情報リポジトリ
c) A Psychological Interpretation
Under this psychological intepretation, final outputs of the model-of-the
firm interpretation are broadened to include the receivers of the accounting
I epor ts
.
The financial statements are, as indicated in the diagram below, an
input to the receivers
1
I
Transactions
manipulation
(Input)
(Output)
"The interpretation is identical with the above model-of-the-f ir m interpretation
except for the verification of the outpts."
The subject matter of the psycholgical
interpretation i s concerned with how the receivers react to the financial statements
The financial statements are a stimulus and the decision of the re.
ceiver s is a response
"If the receivers react, it is taken a s evidence that the
financial statements are 'useful' or that they contain 'information'."
As the r e -
action of receivers is the final output of the system, the usefulnss of the financial
statements is dete~minedby testing the reaction of people.
Also, the test is
regarded as the vex if ication of theory. The psychological interpretation is equivalent to pragmatics in the study of language.
Sterling's review in regar d to this interpretation can be summarized in the
following four points :
1) The psychological interpretation follows the methodology of the stimulus-
response school of psychology.
This results in a theory which will explain
or predict the reactions of people to stimulus.
But it i s not clear that a
theory of accounting should take on this character.
2)
The response of receivers to the financial statements does not necessarily
provide justification for the usefulness of the financial statements.
influence of a conditioned response must not be overlooked.
The
The receivers
are conditioned by the conventional disclosure of financial reports.
3)
The receivers may react to misinformation because there is vital distinction
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On Theory Construction and Verification
343
-129-
between pragmatic informational content and semantic infor mational content.
The fact that receivers I eact to accounting repor ts does not necessarily mean
that they ought to react.
4)
The reaction of receivers should be taken a s the observable inputs of
accounting theory.
We should not take a stand on describing how the re.
ceiver s react to the stimulus.
The accounting theory construction by the psychological interpretation i s
focused on how people I eact to accounting information.
All accounting inf or ma
tion is represented by signs which affect the behavio~ of people.
Thus, the
psychological theory constr uction amounts to the behavior a1 research of the
relation of signs to the users of the accounting infor mation.
cation function of accounting,
From the communi-
I will consider that the field of the reserch and
the psychological methodology axe also very important for the study of accounting.
But this field of the reseax ch has been long over looked in traditional accounting.
It i s only recently since accounting theorists began to recognize the importance
of the further study.
We will have to expect the prospects of the findings in
the future. Therefor e, we should not r un it down sweepingly. I t seems obviously
to be "scientific" to explain or predict the reaction of receivers to stimulus.
Stering's criticism for the psychological interpretation seems to be appropiate
on the whole.
In particular , the second and the third are quite pertinent. But,
what he says in the fourth criticism is very doubtful to constuct "the theory
of accounting" in a sense of the property of accounting theory.
The matters
on this point will be taken up in the following section.
(iii) The methodology of Sterling's accounting theory construction and some
problems
After Sterling examines some alternative methodologies, he suggests an outline for a program for the construction of his accounting theory,
His view of
accounting is, in essence, that accounting ought to be a measurement-communication process
That is, he suggests that accounting is recognized as a mechanism
OLIVE 香川大学学術情報リポジトリ
which accountants measure something and then communicate that measurement
to the people who make decisions
This suggestion is not novel; it accepts the
most fundamental view of accounting.
But this basic point of view seems to
have influence, more or less, on the characteristics of his accounting theory.
When we suppose accounting is a process of measurement-communication,
what should be measured? Is it the information which is relevant to the needs
of decision makers? Sterling says: "If the1e exists a well-defined decision theor y,
then that theory will specify what observations are to be made or what properties
are to be measured " Apparently, the objects of measurement have various proper ties They have physical proper ties (color, intensity, etc ) as well a s financial
properties (market value, original cost, etc.). Therefore, it may be valuable to
measure all these properties
But not only is it impossible for accountants to
measure all properties, it is also the case that not all proper ties are useful for
decision makers
More importantly , a gr eat deal of various decision-making is
produced by many different decision-making models
Some decision makers don't
know what kind of data they need to make decisions in that problematic situation.
They often make erroneous decisions by a large number of erroneous decision
theories.
Thus, Sterling insists that what accountants ought to measure must be
determined by whether or not it is relevant to that problematic situation
Re-
levance refers not to the needs of decision makers, but to a par ticular situation
The problematic situation itself, however, does not specify the relevant data.
That is why decision theory is required
Also, he emphasizes that accounting
concepts and figures must meet the indispensable requirement of being specified
by some theory; theor y construction and measurement development are inseparable
The important conclusion to be drawn from Sterling's assertion presented
above is that what one ought to measure is the data specified by decision theories
rather than the data desired by decision makers
He attempts to introduce the
findings of decision theory to the construction of accounting theory
A well-de-
fined decision theor y, if any, is considered a postulate or an axiom for the construction of accounting theor y.
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On Theory Construction and Vex ification
345
-131-
In Sterling's view, the objects of accounting measur ement will be restricted
to meeting the
I equir ement
of being specified by confirmed decision theor ies
.
In other words, the connotation of accounting theory is prescribed by the decision
theory.
Therefore, there is no need to verify the theory of accounting which is
being constructed. Instead, "under this view, it is the decision theories that
need confirmation."
If accounting is supposed to be a process of measurement-
communication, the theory which is being constracted should result in only a
part of the more gener a1 decision theories, not "the theory of accounting".
We have described Sterling's methodology of theor y construction so f a r ,
Although his point of view is very tentative and suggestive, there seem to be
some surprisingly important problems.
those problems
Next, this paper will focus on some of
.
One of the most important problems is as follows.
He started to examine
some proper ties of empirical sciences for the pur pose of giving a relief to the
current accounting theory, on the premise that the subject matter of empirical
theories is the explanation and prediction of occurrences in the world.
In other
words, the accounting theory ought to be constructed as the empirical theory
which has for the subject matter the explanation and the prediction of accounting phenomena.
But the accounting theory which ought to be constructed, to
our surprise, abandons the verification of the theory for itself
unjustifiable.
This is obviously
Take an example. Suppose there is a plate on a table.
In this
case, the role of empirical theories is to explain what the plate is made of and
how it i s on the table, or to predict by how much pressure it is destroyed.
The
sentences of the explanation and prediction regarding the plate on the table will
be induced by its observation.
A set of sentences which is formed by this
procedure can be confirmed through the experiment of the same observer or
another whether or not they are justifiable.
If a set of sentences is testified
and verified by a person of reasonable qualifications under a given condition,
then we can say that a set of sentences was confirmed under such condition.
Thus, a set of sentences which we checked up with facts will be a set of des-
OLIVE 香川大学学術情報リポジトリ
cr iptive, explanatory sentences.
If we abandon the confirmation, even though
verified propositions were introduced into a part of sentences, we can not justify
the whole of the explanatory sentences.
Under Sterling's view, any verification
or confirmation is not attempted within the fr amewbrk of accounting theory.
This implies that the theory which he tries to construct i s not accounting theory
but another theory.
Nothing is better evidence of another theory than the fact
that he says "accounting theory is only a part of the more general decision theories."
But this i s contradictory to the starting point where he tries to con.
struct accounting theory a s an empirical theory. Sterling seems to abandon all
possibilities of verification in the context of accounting theory.
But I think it
is a logical leap to abandon all possibilities.
Second, an empirical theory is neither to explain that a plate ought to be
made of something, nor to describe how and what ought to be dished into the
plate on the table
If an empirical theory i s to explain or describe what we
ought to dish into the plate, it will be contradictory to the position that
empirical theories have for their subject matter explanation and prediction in
the real world.
What ought to be dished into the plate i s an issue separated
f I om empirical theories
.
Sterling's view seems to have the methodological
characteristics of asking what ought to be dished into the plate.
This metho.
dology will not be in the form of an explanatory sentence which explains and
describes what is, but in the form of a normative sentence which leads to a
certain direction under a certain value judgement.
For example, the following
quotations may be taken a s good evidence of normative theor y
.
"It appears that
much of the previous accounting literature has not been concerned with that
problem (of the discovery of the relevant properties).
Instead, it has been
concerned with how one measures, and what one measures has been taken a s a
given.
My concern i s with the discovery of what one ought to measure, i. e ,
what properties are relevant.
After that has been established, then the question
of how one goes about the measurement activity should be considered."
As noted in an earlier part, Sterling denies an anthropological interpretation.
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On Theory Construction and Verification
347
-133-
This is mainly because it errs in inducing what ought to be from what is, and
it does not provide any norm about accounting actions. Certainly, what i s i s
not what ought to be. This i s quite true, but only on that point. Why does he
deny the anthropological interpretation on the ground that it does not provide a
normative judgement about accounting actions? Doesn't he attempt to construct
accounting theory as an empirical science which has for its subject matter explanation and prediction?
Why is he not satisfied with only the explantion and
prediction? The clue to the answers of those questions will be given by consider ing that he assumes implicitly as follows:
Accounting theory ought to provide
a certain norm about the actions of accountants as well a s explanation and pre.
diction
Unless it is understood that he seeks to construct the accounting theory
which gives us a certain norm, his criticism against the anthropological interpretation will be full of contradictions (The theory which guides our actions t o
a certain desirable direction will be called "normative theory ")
It must be concIuded that Sterling's methodology takes on the character of
normative theory
Normative theory is quite different from descriptive theory
in the point of subject matters and the methodology of theorizing.
Descriptive
theory is to explain facts as they are and to predict how they will be
There-
fore, we cannot expect descriptive theory to guide accounting practices. (These
points will be discussed in section IV)
.
If Sterling's theory is no~mativetheory-
one side of theorizing - he will be able to criticize descriptive theory - another
side of theorizing.
In fact, his criticism against an anthropological interpretation
was, a s far as his theory is understood as normative theory, very poignant and
scathing.
111.
The Structure of Empirical Theories and the Process for Their Development
Generally speaking, a body of systematic knowledge is required to explain
and predict phenomena in the real world. I t i s certain and lawlike knowledge a s
opposed to the vagueness of fragmentary knowledge. But for cet tain knowledge,
,
OLIVE 香川大学学術情報リポジトリ
it would be impossible to acceptably explain and predict phenomena in the real
world.
This certain knowledge is generally said to be a "theory
."
The theory
consists of a set of the written statements and parts of statements, which may
be referred to conveniently as "formations."
But this for mation of theory as
described here does not imply for mation like typologies, definitional or classificational schemata.
Perhaps a better definition would be that a theory is a
systematically related set of statements, including some lawlike generalizations,
that i s empirically testable.
To constuct a theory in this sense, we will need
knowledge in the sense of a hypothesis.
Knowledge as a hypothesis is r epresented
by a statement or a set of statements.
Therefore, a scientific "hypothesis" and
a "theory" are often employed a s synonyms. How a hypothesis i s acquired
depends upon the various situations of scientific inquiries.
But a hypothesis is
generally invented by the following inferences :
1)
Inductive inf ex ence ,
2)
Deductive inference,
3)
Intuition,
4)
Analogical inference,
5) Multi-dimensional inference, i , e . , the combination of those inferences.
Here, the word "hypothesis" will be used to refer to whatever statement is under
examination no matter whether it purports to describe some particular fact or
event or to express a general law or some other, more complex, proposition.
A hypothesis is required to give direction to a scientific investigation. Without
such hypotheses,
any scientific inquiry is blind.
Scientific knowledge i s
arrived a t by appiying what is often called "the method of hypothesis", i . e . , by
inventing hypotheses as tentative answers to a problem under study, and then
subjecting these to empirical test.
But a s a hypothesis itself is not a specific
proposition, we are not able to vex ify directly the hypothesis itself.
So, virtually
testable knowledge is inferred logically and deduced from the abstract hypothesis.
To get this kind of knowledge, we have only to infer logically.
The propositions
which are deduced by logical inference are called "testable pr opositions" or
OLIVE 香川大学学術情報リポジトリ
On Theory Construction and Verification
349
"observable propositions." (Car 1 G
. Hempel
-135-
uses the word "test implications",
but I think the terms "testable propositions" or "observable pr opositions" are
Testable propositions are normally of a conditional
easier to under stand. )
character : they tell us that under specified conditions an outcome of a certain
kind will occur
In other words, testable propositions can put into the explicitly
conditional form that if conditions of kind '"2' are realized, then an event of
kind "E" will occur.
Testable propositions of this kind provide a basis for an
experimental test, which amounts to bringing about the conditions "C" and checking whether " E occurs as implied by the hypothesis.
A statement or set of
statements is not testable a t least in principle, or if it has no testable propositions, then it cannot be significantly proposed or entertained a s a scientific
hypothesis or theory, for no conceivable empirical findings can then accord or
conflict with it
In accordance with the direction of this testable proposition, we observe the
object under study and perf or m experiments
The propositions which I epr esent
the results of observations and experiments are called
"I
epor ted propositions"
.
If a reported proposition "R," coincides with a testable proposition "TI", (that
is, if conditions of kind "C" are given, then an event " E always occurs), we
can say that the reported proposition "R," verified the testable proposition "TI".
In the same way, we can infer or deduce from the hypothesis "HI" the testable
..., and we can
observe and experiment in accordance
with the di~ectionsof these propositions.
The reported propositions R2, R3, R4,
propositions T2, Tar T4.
.. .., which
are acquired by the observation and experiment, are checked up
with the testable propositions Tz, Ts, T1"
. . If
each reported proposition can be
taken a s good evidence oi each testable proposition, as far a s these particular
propositions are concerned, we can say that the hypothesis "HI" was confirmed.
A f avor able outcome of even a very extensive and exasting test can provide
more or less strong evidential support or confirmation, although'it cannot provide
conclusive proof for a hypothesis.
The confirmation of a hypothesis will depend
upon the quality and quantity oi evidence.
That is, the confirmation of a
OLIVE 香川大学学術情報リポジトリ
hypothesis depends upon the variety of evidence, as well as the quantity of the
favor able evidence available.
the resulting support.
In gener al, the greater the variety , the stronger
Thus, the creditability and stability of a hypothesis can
be enhanced by the support of a great deal of various evidence.
On the other hand, if the results of observations or of experiments (i. e.,
the reported proposition "R,")
did not coincide with the requirement of the
testable proposition "TI", the fact implies that the hypothesis "HI" was refuted
by the reported proposition "R,".
The refutation of a hypothesis implies the
incompleteness of a hypothesis itself.
hypothesis ''H?
Then, we will have to form a new
by giving up or modifying the old hypothesis "HI".
pothesis "Hz" produces the testable propositions TI', T2/, T3/.
way a s the above "TI".
. . . via the same
As a result of observations or of experiments, if the
reported propositions R,', Rzf, R3/.
Tzl, Tat..
The hy-
. , we can say that
.. can
support the testable propositions TI1,
the hypothesis "Hz" was conf irmed. If the reverse
i s the case, the hypothesis is refuted.
Needless to say, findings that are to
dislodge a well-established theory have to be weig hty; and advelse experimental
results, in par ticular , have to be repeatable.
If the hypothesis was refuted in
this way, then it will be abandoned or modified and will be converted into a
newer hypothesis "H$'.
Thus, an empirical theory keeps on developing, in a
spir a1 process, toward a more universal and complete theory
.
Will the confirmation of a hypothesis imply that it i s true?
no.
The answer is
That many testable propositions were vex if ied by many reported propositions
does not imply that a hypothesis is true, but that i t was confirmed by some
particular reported propositions.
The creditability or the acceptabiIity of a hypo-
thesis or a theory, strictly speaking, depends upon the relevant parts of a total
scientific knowledge, including all the evidence relevant to the hypothesis and all
the hypothesis and theories then accepted that have any bearing upon i t ,
That
is, the creditability or acceptability is determined by the probability of the theory's acceptance within the level of a body of scientific knowiedge at a particular
time
In this sense, empirical science as a positivistic science may be ultimately
OLIVE 香川大学学術情報リポジトリ
On Theory Construclion and Verification
said to be a system of tentative hypotheses which are subjected to the restrictions
of science a t a particular point in time
As has been explained so f a r , the construction of a theory and i t s process of
dynamic development mean that an empirical theory must be for med a s a deductive
system.
In order to form a theory a s a seductive system, first of all, we must
prescribe a process of theory construction and vex ification
deduction of testable propositions,
reported propositions,
i. e , an hypothesis,
criterion of logical
judgement on verification; all of which must be manipulated in a system of
strictly defined signs.
In other words, we can proceed by listing a set of pri-
mitive elements (i. e , all terms that have no synonym in a language system), a
set of axioms, a set of for mation rules (i. e , grammar which determines the
permissible expressions of a language).
an axiomatic system.
"calculus".
All of which, taken together
By the application of these procedures, we can form a
However , a calculus has no empirical meanings.
for ma1 system.
, deter mine
It is a purely
Ther efoxe, by adding semantical interpretation to an axiomatic
system, it will be a deductive system.
If so, why does an empirical theory take
on the structure of a deductive system? The answer would be found in an accounting of scientific descriptions of phenomena in the real wor Id.
The reason
is that strict explanation is ensured by the theory developed as a deductive system.
But I have no intention of concluding from this that all empirical theories
now existing in our society are formed a s a deductive system, or that all accounting theories must be constructed as a deductive system.
Because even if all
of the axioms and theor ems were strictly prescribed and logical truth consequently
ensured, it would be extremely difficult to give an axiomatic system some
empir ical meaning and to verify it by observed facts.
In particular
,
accounting
handles many normative statements (for example, accounting ought to be fair )
or many imperative statements (for example, value a t market price under a
particular condition) because accounting practices reflect, more or less, the needs
of the society a t a particular time.
This is why i t is difficult to accept all sorts
of assertions into a deductive system.
As already noted above, an hypothesis ,is
OLIVE 香川大学学術情報リポジトリ
a statement or set of statements that are empir ically testable a t least in principle.
It should be noted that we can not make any judgement a s to whether many
normative or imperative statements regar ding the f airhess and ethics of accounting are true or false.
It is not a matter of truth-value, but of consensus and
selection. Therefore, it is impossible, rather than difficult, to accept asser tion
into a strictly or purely deductive system and to construct accounting theory a s
a deductive system.
In considering the theory construction of accounting, the normative or imperative fields or phases of accounting should be distinguished clearly from the
accounting fields which are describable as a deductive system. (This is the very
important point, which will be explained further in the next section.)
This paper will now focus on what determines the superiority or inferiority
of theox ies.
Suppose there are two theories to explain the same phenomena.
Of
course, these theories are assumed to be in search of the same subject matter
for the reason that different subject matters yield different theories.
In this
case, what deter mines the superiority of one theory over another ? Does it depend
upon only the degree of formalization? Of course it does not A theory is clearly
required to be complete in the degree of formalization.
The I elationship between
an axiom and a theorem or testable proposition must be true in a formally logical sense.
But, if the formalizations of the two theories are complete a s formal
systems, it can be said that the superiority of theory depends upon how the
theory can universally explain the wider range of universe of discourse with a
fewer axilliar y hypotheses.
On explaining a certain phenomenon, we usually
use many axilliar y hypotheses or axilliar y assumptions.
As described earlier ,
testable propositions are derived or inferred from the hypothesis that is to be
tested.
This statement, however, gives only a rough indication of the relation-
ship between a hypothesis and the sentences that serve a s its testable propositions.
In most cases, we use premises which axe tacitly taken for granted
in the context of argument.
By means of these premises, one can derive or
infer testable propositions from a hypothesis.
These premises are called axilliar y
OLIVE 香川大学学術情報リポジトリ
On Theory Construction and Verification
353
-139-
assumptions, which play the role of mediating between a hypothesis and a
testable proposition.
It should be noted that the more axilliary assumption an
hypothesis has, the wider the universe of discourse is and the more complicated
the axiomatic system.
If we go far enough, a phenomenon (even if it i s ex-
tremely complicated) will be explainable by means of the innumerable axilliar y
assumptions.
But such an explanation naturally lacks in the persuasive power
.
We cannot say such an "explanation" is not an explanation, however formally
systematic it may be
Therefore, I am of the opinion that fewer axilliary
assumptions and a universal r ange of explanations deter mine the super ior ity of
theory provided that the degree of formalization is the same level between two
theories
.
The theory a s a deductive system describes the phenomenon in the real world
by means of a few basic propositions (called axioms) and some testable propositions which are reduced by the application of inference rules, and then
confirms the description by facts.
univer se of discourse.
The truth-value of theory is confirmed in a
Although the confirmation of theory is desirable, it is
difficult for us to confirm in the social context.
This does not necessarily deny
the r aison d'etre of the theory which has not been confirmed yet.
In the case
that there is no alternative theory which is more desirable (e.g, universal) than
the present theory, the present theory, even if it has not been confirmed, has
some functional value.
IV.
Descriptive Theory vs.
Normative Theory
In scientifically constructing the theory of accounting, one of the most
important things i s to know "what is the subject matter of accounting theory
being constructed".
As different subject matters obviously are considered to
yield different theories, to begin with, we must know under what subject matter
theory construction i s attempted.
Also, it is very important to know the pur-
pose or function and limitation of the theory being constructed under a certain
subject matter, especially, in criticizing another person's theory.
OLIVE 香川大学学術情報リポジトリ
Now, according to the dif frence of subject matters, we will classify current
accounting theories as two different categories.
That is:
1) Descriptive theor y-Basic theory,
2 ) Normative theor y-Applied theory.
These are quite heterogeneous theories in the sense that they have different
subject matters.
Heterogeneous theories should be distinguished clearly f rom
each other.
i)
Descriptive theory
The subject matter of this theory i s to analyze what is, to explain i t
systematically, and to predict how it will change under a certain condition.
That is, descriptive theor y i s to analyze genr ally accepted accounting principles,
various kinds of accounting regulations,
accountants'
actions and accounting
p~actices,etc. and then to explain by consistent methods; why they existed in
the past and why they exist a t the present.
I t is possible to consider that the
empirical phenomena in the real world occur under certain covering pr inciples
or laws.
Descriptive theory attempts to explain without any contradictions a s
a whole what is and what was.
In other words, descriptive theory i s the inquiry
of a certain principle or law covering the empirical phenomena.
Of course,
the success of consistent explanation will be helpful to the unknown state in the
future, a s well a s in the past and a t the present.
I t should be noted that descriptive theory has its essential feature in the
explanation and prediction of its purpose, and it says nothing of what ought to
be.
Descriptive theory does not offer any 'judgement of goodness of what is,
and the theory does not guide any desirable actions under a certain value judgement.
Any judgement about goodness of actions cannot be expected in the
descriptive theory
what ought to be.
.
Essentially, descriptive theor y has no function of producing
Some people might contend that descriptive theory has no
usefulness because it does not yield any judgement about the goodness of actions,
but I will say that this view i s wrong.
Descriptive theory does not yield any
norm of actions, but this doesn't mean that descriptive theory i s not useful in
OLIVE 香川大学学術情報リポジトリ
On Theory Construction and Verification
355
clarifying unsolved problems and unknown states.
-141-
To systematically explain
complicated phenomena under certain principles will be useful in the recognition
and prediction of present unsolved problems and unknown states.
portantly, to know what ought to be, we must recognize what i s
More imSuch recog-
nition i s the first step to be taken in constructing the theory of accounting.
What is not what ought to be.
But if we know the nature of what is, i. e.
how i t is, we will be able to obtain the knowledge of how we ought to act.
This is not the essential purpose of descriptive theory, but the utility of the
theory
.
We will emphasize repeatedly that descriptive theory itself does not
yield directly any judgement of what action ought to be taken.
In this sense,
descriptive theory is basic theory in the study of accounting.
Now, attention will focus on the meaning of consistent or systematic explanation of an empirical phenomena.
It implies that a theorist must recognize
fully the structure of empirical theory and its process of development, a s described in an earlier section, and the construction of accounting theory in accordance with that principle.
system.
In a word, it i s to construct a theory as a deductive
Theory constructed as a deductive system assures the creditability and
acceptability of explanation.
In this case, what is laid as axioms will depend
upon how a specific theorist grasps the nature of accounting
That is, what i s
set a s axioms depends upon the selection of the specific theorist.
ample, suppose the axiom of Mr.
dete~minethe income of enterprises.
For ex-
A i s that the nature of accounting i s to
Also, the axiom of M r . B is that the
nature of accounting is the measurement and communication of information
useful for decision-maker s .
The different axioms result from the diff ex ence of
recognition of what each person thinks of the nature of accounting.
So the
difference of axioms results from the difference of each subjective judgement.
It i s very doubtful whether subjective judgements can be avoided in an ultimate
sense of the words.
But this subjectivity should be understood in the sense that
subjectivity of human beings in fact-recognition is necessarily unavoidable.
This
subjectivity does not mean value-jndgement or ought-to-be judgement as will be
OLIVE 香川大学学術情報リポジトリ
explained in the following section on normative theory.
In short, we cannot
evaluate the relative subjectivity of different axioms until we test the validity
of testable propositions.
The question i s whether the explanation system under the axiom is consistent
as an axiomatic system and, also, whether the interpretation of the system
corresponds to the facts observed by qualified observers. This process of theory
construction and verification is regarded as the r equirement for acceptability of
axioms.
The existence of God can be developed by an axiomatic system.
But
however systematic it may be, unless the propositions of an axiomatic system
are confirmed by empirical facts, we cannot say that the system i s a scientific
explanation.
Science is the domain of being able to bear repetitious testing.
Descriptive theory is developed in the form of a deductive system to efficiently accomplish the subject matter, the explanations satisfy the requirement
of explanatory relevance in the strongest sense; the explanatory infor mation
they provide implies the explanandum sentence (the sentence describing the
phenomena to be accounted for by an explanation) deductively, and thus offers
logically conclusive grounds why the explanandum phenomena is to be expected.
That is, scientific explanation i s attained with the help of a deductive system.
Scientific explanation will broaden our knowledge and under standing by predicting and explaining phenomena that were not known when the theory was formulated
ii)
Normative theory
Normative theory is the formulation of a series of statements developed on
the premises of a specific value judgement or ought-to-be judgement.
Norma-
tive theory is not to explain what is and to predict what may happen in the
future, but to reform or improve what is. As what is, without doubt, is not
what ought to be, this t h e o ~ yaims a t a "more desirable" direction.
desirable depnds upon a value judgement of a specific theorist
.
What is
Conceptually,
a value judgement is to say the goodness of objects and an ought-to-be judgement is to say what ought to be
For example, if a person says "this picure
OLIVE 香川大学学術情報リポジトリ
On Theor y Construction and Verification
is beautiful," the observer makes a value judgement.
Also, if a person says
"the color of this picture ought to be painted with more blue," that is an oughtto-be judgement 'of the observer.
A value judgement i s to assess objects and
an ought-to-be judgement i s to require someone to ta!ce a certain action.
As
both jugements are considered to be a value judgement in a broad sense, we
will have almost no significance of the clear distinction between the two. But,
both judgements should be strictly distinguished from the fact recognition saying about the nature of what is.
Normative theory starts from setting up the axioms which are based upon
value judgements of observers.
proposition is untestable.
Therefore, i t should be noted that this kind of
This point will be explained further.
Suppose, a
person advocates that accountants ought to use replacement cost rather than
historical cost because replacement cost is very useful for the decision making of
users.
Also, another person contends that accountants ought to use exit value
in place of historical cost.
No one can
Now, who can decide which contention i s right?
Whether a person suppor t s replacement cost or not depends upon
whether he thinks it i s "better" or "more desirable" than historical cost.
same i s true for another person abvocating exit value
obviously based upon different value judgements.
Both contentions are
Ther efor e, both contentions
are a matter, not of which contention i s right, but of agreement.
they are not testable propositions by observations.
The
Essentially,
It might be better to say
that there i s no need to verify all of the propositions in normative t h e o ~ y .
Although there are not a few normative, ethical, imperative concepts-vex ity,
fairness, conser vatism-in
accounting theor y, these concepts are not consistent
with descriptive theory.
The statements including these concepts are not
testable.
Only if these concepts are applied to normative theory, will they func-
tion effectively.
While descriptive theory presupposes testability, normative
theory does not
This i s the essential difference between the two theories.
Therefore, normative theory has no structure or process of devloprnent a s an
empirical theory, a s descr ibed in the ear lier section
Never theless, this point
OLIVE 香川大学学術情報リポジトリ
does not deny the r aison d'etr e of normative theory
.
The function of normative
theory exists in assessing the goodness of what is and in giving normative pressure for the pur pose of the improvement of the real world.
The explanation of ncrmative theory, like descriptive theory, i s :done in the
form of an axiomatic system to avoid logical contradictions and to sufficiently
acquire the explanatory poweI
.
Normative theory always attempts to assimilate
the findings of interdisciplinar y disciplines and for ms a desirable judgement,
And on the basis of the value judgement, the logical development of explanation
is per formed in an axiomatic system.
Well-established
normative theory will
cause the ref or mation of the existing practices and convention in a broad sense,
of social phenomena.
This function of normative theory, without doubt, will
be very useful for the solution of unsolved problems.
V.
Summary
Through the examination of Professor Robert R.
Sterling's article, I at-
tempted to clarify the nature and subject matter of accounting theory a s an
empirical theory
.
Although his "theory construction and verification" has some
problems to be solved, he suggests many penetrating views for relief of the
current confusion in accounting theories.
Sterling applies the method of empir i-
cal theory to the study of accounting and intends to systematize accounting
theory by a scientific approach.
That intention and the suggestions developed
here should be highly valued.
The theory of empirical science consists of a Formal system or Axiomatic
system and an Interpretation of the system.
A formal systemn i s a logical plane
of the theory. On the other hand, an interpretation is an empirical plane following observations.
Empir ical theory i s a systematically related set of statements,
including some lawlilre gener alizations that are empirically testable.
Empirical
theory is constructed a s a deductive system to offer logically conclusive grounds
why the phenomena axe to be expected.
Through the procedure of confirmation,
empirical theory is always modified and keeps on developing dynamically in a
OLIVE 香川大学学術情報リポジトリ
On Theory Construction and Vex if ication
359
spir a1 process toward a more universal theor y.
-145-
The superiority or inferiority
among some theories should note the logical systematization and empirical confirmation
In this case, the super iority of theor y is determined by whether a
specific theory has relatively mor e universal explanatory power by a few axilliar y
assumptions than another theory.
Mention of the term "accounting theory" should not be overlooked that there
are two sorts of heterogeneous accounting theories which have different subject
matters.
Descriptive theory has for its subject matter the explanation and pre-
diction of empirical phenomenon in the real world.
nature of reality and precisely predicts i t s change.
This theory describes the
Descriptive theory says
nothing of what ought to be, but it gives basic data in order to form a value
judgement about what ought to be, by elucidating the nature of reality.
The
initial objective of accounting theories should be the study of this basic theor y
.
On the other hand, normative theory has for i t s subject matter the reformation of what i s empirically.
This theory aims a t leading u s to more
desirable directions under a certain value judgement.
Like descr iptive theory,
normative theory i s developed a s an axiomatic system.
positions under normative theory are untestable.
But all of the pro-
Therefore, i t i s difficult to
say that normative theory i s empirical theory.
Nevertheless, the raison d'etre of normative theory should not be denied
readily.
Normative theory attempts to assimilate the findings of inter disci-
plinar y disciplines and for m a desirable judgement.
And on the basis of the
value judgement, the logical development of explanation is performed in an
axiomatic system.
Even though normative theory must, a t the outset, rely on
the findings of descriptive theory which elucidate existing conditions, the
guideline of what ought to be will be enhanced by the aid of normative theory.
This function of normative theory, also, will be useful for the solution of unsolved problems.
In the study of accounting, we should clarify the subject matter of a constructed theory and set to work according to a scientifically appropriate meth-
OLIVE 香川大学学術情報リポジトリ
-146'-
odology.
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American Accounting Assocition, "Report of the Committee on Accounting
Theory Construction and Verification," Supplement to The Accounting
.
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Bedford, Norton M. Future of Accounting in a Changing Society. (Stipes Pub-
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Chisholm, Roderick M. Theory of Knowledge. (Prentice-Hall, Inc , 1966). pp.
56-69.
Hempel, Carl G. Aspects of Scientific Explanation.. (The Free Press, 1965).
pp. 173-187.
. Philosophy of
Natural Science. (The Free Press, 1966). pp.
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Rudner , Richard S. Philosophy of Social Science. (The Free PI ess, 1966). pp.
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Sterling, Robert R. Theory of the Measurement of Enterprise Income. (The
University Press of Kansas, 1970). PP. 351-361.
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Review (July 1970). pp. 444-45-7.
--
"Toward a Science of Accounting, " Financial Analyst Journal,
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Von Wright, George H. Explanation and Under standing
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(Cox nell University