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GODFREY HODGSON HOLMES TARCA

CHAPTER2 ACCOUNTINGTHEORY CONSTRUCTION

Pragmatictheories
Descriptivepragmaticapproach:
basedonobservedbehaviourofaccountants theorydevelopedfromhowaccountantsactin certainsituations testedbyobservingwhetheraccountantsdo actinthewaythetheorysuggests isaninductiveapproach

Pragmatictheories
Criticismsofdescriptivepragmaticapproach:
doesnotconsiderthequalityofanaccountants action doesnotprovideforaccountingpracticestobe challenged focusesonaccountantsbehaviournoton measuringtheattributesofthefirm

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Pragmatictheories
Psychologicalpragmaticapproach:
theorydependsonobservationsofthe reactionsofuserstotheaccountantsoutputs areactionistakenasevidencethattheoutputs areusefulandcontainrelevantinformation

Pragmatictheories
Criticismsofthepsychologicalpragmatic approach:
someusersmayreactinanillogicalmanner someusersmighthaveapreconditionedresponse someusersmaynotreactwhentheyshould

Theoriesarethereforetestedusinglarge samplesofpeople
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Syntacticandsemantictheories
Semanticinputsarethetransactionsand exchangesrecordedinvouchers,journalsand ledgers Theinputsarethenmanipulatedonthebasis ofthepremisesandassumptionsofhistorical costaccounting

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Syntacticandsemantictheories
Criticisedbecausethereisnoindependent empiricalverificationofthecalculatedoutputs The h outputsmaybe b criticised i i i dfor f poorsyntax inaccuratee.g.differenttypesofmonetary measuresareaddedtogether

Syntacticandsemantictheories
Theoutputsmaybesyntacticallyaccuratebut neverthelessbevaluelessduetoalackof semanticaccuracy(alackofcorrespondence withrealworldevents, events transactionsor values)

Syntacticandsemantictheories
Historiccostaccountingmayproduce accurateoutputsbutwhichnevertheless havelittleornoutility Thatis, is theyarenotusefulforeconomic decisionmakingexcepttoverifyaccounting entries

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Normativetheories
1950sand1960sgoldenage
policyrecommendations whatshould be concentratedonderiving:
trueincome i (profit) ( fi ) practicesthatenhancedecisionusefulness

basedonanalyticandempiricalpropositions Financial statements should mean what they say

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Normativetheories
Trueincome:
asinglemeasureforassets auniqueandcorrectprofitfigure

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Normativetheories
Decisionusefulness:
thebasicobjectiveofaccountingistoaidthe decisionmakingprocessofcertainusersof accounting greports p by yproviding p gusefulaccounting g data

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Normativetheories
Thedecisionprocess

Accounting system of company X

Prediction model of user

Decision model of user

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Positivetheories
Expandedduringthe1970s Basedonexperiencesorfactsofthereal world Explain l i the h reasonsf forcurrentpractice i Predicttheroleofaccountinginformationin decisionmaking

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Positivetheories
Themaindifferencebetweennormativeand positivetheoriesisthat
normativetheoriesareprescriptive positivetheoriesaredescriptive descriptive,explanatoryor predictive

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Differentperspectives
Scientificapproach:
hasaninherentassumptionthattheworldtobe researchedisanobjectivereality iscarriedoutbyincrementalhypotheses hasanimpliedassumptionthatagoodtheory holdsundercircumstancesthatareconstant acrossfirms,industriesandtime

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Differentperspectives
Criticismofthescientificmethod:
largescalestatisticalresearchtendstolump everythingtogether itisconductedinenvironmentsthatareoften remotefromtheworldofortheconcernsof accountants

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Differentperspectives
Naturalisticapproach:
impliesthattherearenopreconceived assumptionsortheories focusesonfirmspecificrealworldproblems

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Differentperspectives
Alternativewaysoflookingattheworld:
CATEGORY ASSUMPTION 1. 1 2. 3. 4. 5. 6. Reality as a concrete structure Reality as a concrete process Reality as a contextual field of information Reality as a symbolic discourse Reality as a social construction Reality as projection of human imagination

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Differentperspectives
Forcategories1 3itismoreappropriateto usethescientificapproach Forcategories i 46the h naturalistic li i approach his i moreappropriate

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Differentperspectives

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Scientificapproachapplied toaccounting
Misconceptionsofpurpose Makescientistsoutofaccountingpractitioners Researchers=practitioners Thedesireforabsolute absolutetruth truth

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Scientificapproachapplied toaccounting
Thescientificmethoddoesnotclaimto providetruth Itattemptstoprovidepersuasiveevidence whichmaydescribe, describe explainorpredict

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Issuesforauditingtheory construction
Auditingisaverificationprocessthatis appliedtotheaccountinginputsand processes

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Issuesforauditingtheory construction
Auditorsprovideanopinionon
whetherthefinancialstatementsaccordwiththe applicablereportingframework whetherthestatementsgiveatrueandfairview

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Issuesforauditingtheory construction
Thenormativeeraofaccountingcoincided withanormativeapproachtoauditingtheory Thepositiveereofaccountinghasledtoa positiveapproachtoauditingtheory

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Summary
Manydifferentapproachestotheory formulationinaccounting Evolutionofaccountingtheory
positive iti v.normative ti scientificv.naturalistic

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Keytermsandconcepts
Descriptivepragmaticapproach Psychologicalpragmaticapproach Syntacticandsemantictheories Historicalcostaccounting Normativetheories Positivetheories Scientificapproachtotheory Naturalisticapproachtotheory Auditingtheory

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