godfrey hodgson holmes tarca chapter 2 accounting theory construction
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GODFREYHODGSON
HOLMESTARCA
CHAPTER 2 ACCOUNTING THEORY
CONSTRUCTION
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Pragmatic theories
Descriptive pragmatic approach:• based on observed behaviour of accountants• theory developed from how accountants act in
certain situations• tested by observing whether accountants do
act in the way the theory suggests• is an inductive approach
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Pragmatic theories
• Criticisms of descriptive pragmatic approach:– does not consider the quality of an accountant’s
action– does not provide for accounting practices to be
challenged– focuses on accountants’ behaviour not on
measuring the attributes of the firm
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Pragmatic theories
Psychological pragmatic approach:• theory depends on observations of the
reactions of users to the accountants’ outputs• a reaction is taken as evidence that the outputs
are useful and contain relevant information
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Pragmatic theories
• Criticisms of the psychological pragmatic approach:– some users may react in an illogical manner– some users might have a preconditioned response– some users may not react when they should
• Theories are therefore tested using large samples of people
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Syntactic and semantic theories
• Semantic inputs are the transactions and exchanges recorded in vouchers, journals and ledgers
• The inputs are then manipulated on the basis of the premises and assumptions of historical cost accounting
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Syntactic and semantic theories
• Criticised because there is no independent empirical verification of the calculated outputs
• The outputs may be criticised for poor syntax inaccurate e.g. different types of monetary measures are added together
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Syntactic and semantic theories
• The outputs may be syntactically accurate but nevertheless be valueless due to a lack of semantic accuracy (a lack of correspondence with real-world events, transactions or values)
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Syntactic and semantic theories
• Historic cost accounting may produce ‘accurate’ outputs but which nevertheless have little or no utility
• That is, they are not useful for economic decision making except to verify accounting entries
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Normative theories
• 1950s and 1960s ‘golden age’– policy recommendations – what should be– concentrated on deriving:
• true income (profit)• practices that enhance decision-usefulness
– based on analytic and empirical propositions
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Financial statements should mean what they say
Financial statements should mean what they say
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Normative theories
• True income:– a single measure for assets– a unique and correct profit figure
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Normative theories
• Decision usefulness:– the basic objective of accounting is to aid the
decision-making process of certain ‘users’ of accounting reports by providing useful accounting data
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Normative theories
The decision process
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Accounting system of
company X
Accounting system of
company X
Prediction model of
user
Prediction model of
user
Decision model of
user
Decision model of
user
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Positive theories
• Expanded during the 1970s• Based on ‘experiences’ or ‘facts’ of the real
world• Explain the reasons for current practice• Predict the role of accounting information in
decision-making
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Positive theories
• The main difference between normative and positive theories is that– normative theories are prescriptive– positive theories are descriptive, explanatory or
predictive
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Different perspectives
• Scientific approach:– has an inherent assumption that the world to be
researched is an objective reality– is carried out by incremental hypotheses – has an implied assumption that a good theory
holds under circumstances that are constant across firms, industries and time
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Different perspectives
• Criticism of the scientific method:– large-scale statistical research tends to lump
everything together– it is conducted in environments that are often
remote from the world of or the concerns of accountants
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Different perspectives
• Naturalistic approach:– implies that there are no preconceived
assumptions or theories– focuses on firm-specific real-world problems
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Different perspectives
• Alternative ways of looking at the world:
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CATEGORY ASSUMPTION
1. Reality as a concrete structure2. Reality as a concrete process3. Reality as a contextual field of information4. Reality as a symbolic discourse5. Reality as a social construction6. Reality as projection of human
imagination
CATEGORY ASSUMPTION
1. Reality as a concrete structure2. Reality as a concrete process3. Reality as a contextual field of information4. Reality as a symbolic discourse5. Reality as a social construction6. Reality as projection of human
imagination
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Different perspectives
• For categories 1 – 3 it is more appropriate to use the scientific approach
• For categories 4-6 the naturalistic approach is more appropriate
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Different perspectives
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Scientific approach applied to accounting
Misconceptions of purpose• Make scientists out of accounting practitioners• Researchers = practitioners• The desire for ‘absolute truth’
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Scientific approach applied to accounting
• The scientific method does not claim to provide ‘truth’
• It attempts to provide persuasive evidence which may describe, explain or predict
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Issues for auditing theory construction
• Auditing is a verification process that is applied to the accounting inputs and processes
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Issues for auditing theory construction
• Auditors provide an opinion on– whether the financial statements accord with the
applicable reporting framework– whether the statements give a true and fair view
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Issues for auditing theory construction
• The normative era of accounting coincided with a normative approach to auditing theory
• The positive ere of accounting has led to a positive approach to auditing theory
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Summary
• Many different approaches to theory formulation in accounting
• Evolution of accounting theory– positive v. normative– scientific v. naturalistic
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Key terms and concepts
• Descriptive pragmatic approach• Psychological pragmatic approach• Syntactic and semantic theories• Historical cost accounting• Normative theories• Positive theories • Scientific approach to theory• Naturalistic approach to theory• Auditing theory
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