I

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ii.
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. ;:: .']

' lntroducti

Aftet rcadinB this chapteL you shctttld have an appreciation of rhe followitlS:

I what is meant by 'accounting theory' and the purpose it has served over time

[l the structure of this book and how it logically sequences its discussion of
accounting theorY-
 This chapter traces the historical development of accounting theorv and illustrates how
the view of accounting has changed over tine. It linishes by providing an oven'ieu' of
the chapters in this book.

@-. ovERVtEW oF ACCoUNTING THEoRY

Wh_v do rockets need so much power to lift off? Why do humans u,alk on tr,r,o leBs?'l-o
answer these questions, we are liltely to call upon the theories of gravity and evolution.
These theories are generally held in higtr regard for thejr po\,'ers of explanaLion and
prediction, but \'vhat is il that gives them their authority? ln fact, what is a theory?
Fufthermore, rvhat is the relevance of accounting theory to accoultting?
In a perfect financial world there is ro demand for published accounting reports and
hence any accounting theory. \^/€r lvould simpll' look up freely available prices for the
valu€ of assets, revenues, or the costs of all inputs (including managerial costs). In suclt
an furow Debreu econonyL all this infornation is available now and for all futurc timc
periods. But we do not live in such an economic $'orld. lnstead there is a demand for
financial inlormation ro lill gaps in our knorn'ledge and to reduce uncerlainlies about
current and lutr:re values. This demand comes lrom a wide range of stakeholders
-
both internal and external.
ln accounting theory a najor issue is related to questions around n.reasurenent. In
general, hou' should assets and liabilities be measured? By their historic cosl, thejr
selllng price, updated by cLllent costs to buy, or by the present value of future cash
floi,vs? Should we recogDise all inrelnall-v gen€rated intangibles or only recognise them
when they are evidenced by ai.r external transaction, such as in a takeover price? Then
again, \'vhat is tbe impact of implenenting differert measurement systems on the
€conomy or market or on each indiviclual stakeholderl
The tern 'theory' can be used in dilferent ways. As such, it can take on several
meanings. One definition is that a thcory is a dedr.rctive systeDl of staten€-nts of
<lecreasing generality that arise from an agreed or hl,pothesised prenise. Arotber is
thrt a theory is a set of ideas usecl to t-xplain real-u'orld observatiorrs. ln his classic
text on accounting theow, Hendriksen offered definitiorrs of theor-r" and 'accor-LLrting
theory'l'hich are appropriate to this text. These are defined in points 1 and 2 belol,,
resPeclivelY:

1 ... the coherent set olh)?othetical, conceptuaL irnd pragmatic principles lbnnil1g Lhe
general frant-l'orl< ol reference lbr a l'leld of inquiry.
2. . . . logical reasoning in th€ lorm ofa set ofbroatl principles that ( 1) provide a general
framervork of reference b_v u,hich a..oLlnting practice can be evaLual€d and (2) guide
the developurent of nelv practiccs and ptocedutes.l

Theory can be described simplr. as the logical reasoning underlying the staten-ient of
a beliei Whether the theory is accepted dt'pends on:
. horv welL it explains and predicts realitv
. horv rvell it is constructed borh tireoretically and ernpirically'
. hou'acceptableareLheinrplicationsofthetheorytoaboclyofscientists,professionals
and societv as a rthole.
It is il-nportitnt 1(] unclerstand that accountiDg theory is not sirrply an abstract process.
It is not divorce.i from realit1,. ln fact, its main obiectives are to explain u,hv and Lrorv
current accounting practice evoh/€d, to srlg€lest inipror,ernents, and to provicle tlte basis
lor clevelopnenls in suclt practice

PART I A.( o!nting theor\

 Accounting theory is a modern concePt \{hen compared rvith, say, theories
enanating froir nathematics or ph,vsics. AccoLrnting hrst developed as a set of tools
to record activities or lransactions. Even Pacioli's treatise (se€ next page) on double
entry accounting \\'as locused or documerting the Processes invoh'ed and not about
explaining the unde rlying basis fbr this mettiod of recor ding Chambers summarise d
a viev' that accoullting has mainlr, develope'J itl an iniprovisecl fashion rather than
systematically from a structured theory:
Accountinli has liequently been described as a boclv of practices which have been
developed in response to practical needs tath, I th. r br dpliLr.rnt, n l \\'\LrrrJti,
thinhing.:l

That is, nany accounting prescriptions on hor'v to accourlt wer(] cleveloped !o resolve
problens as they arose. I lence, the theory underlying those prescriptiotts also developed
in a largely unstructured rranner. lhis has led to ittconsislencies i|r practice. txarnples of
such inconsistencies include different lll€thods of dePreciation and inrentory expetrsitrg
even rvithin the saJne industry; and ueasuring some assets at lair value i'vhereas othels
are neasuted at cost. In other cases, sone lransactiorls are kept off the financial
statements completeli'. For example, the nove to regulate clisciosures concerned
with rhe capitalisation ofcertain lease commitnleDts was a direct response to practic€s being
adopted rhat failed to recognise the lease liabiliq'in compatry accoLlnts. More recently,
in response to increasing demand, an accounting standard \\'as intloduced reqrtiring
6rns to repon dre cost of providing executive remunelation in the form of shale
oplions. These exanples are consistent with and illttstrate the historical development
of accounting methods (the inconsistenc-v problem). It is r.r'orth Pointing out at this
juncture that sorne theoretical accountanls arsje lhal, because buslttrcs siLurtjons Yaq
across industry (and cor,rntries), u'e need a variety of accounting rnethods that can be
adapted to ht the changing needs of business.
Accountilrg practices also have multiple clemands from insiders, such as managers and
ernplol'ees, ancl outsidcrs such as investors, creditors, taxarion, legislalive anthoritics
and societf in general. This neans that accorinlinB theory is complex aud otle of the
issues under intense debate is r,ho should financial accoulting rePons serve? That
is, udro are the prinlry users of accountitrg infornation? \\te call thjs the 'obiective
probieu' the problem of deterrllning the obiective of firancial infot mation
-
For ruan-v years, itccountiilg stanclard setters have beetl tr-f ing to soh'e the obiectiYe
and inconsistenc-v pLoblcnrs bv dei'cloPing it concePtLLal (theoretical) fianervotk that
r'r,ould lead to nlore consisterlt treatlrcllt (ll lilie itellls. I lowever, conccptLral fian-rervotk
plojects have not resolved tbe irtcotlsistencies itl plactice, and lrave often been rtsed
to justifu or sLlllpon such inconsistencies rather ihan resolve thenl. Because such
franer.rorks seek to provide universal guidance, they have proved too general to plovidtl
a clear set of decision rules ivhich lead to an obvious pl actical anst'er for the full Iange
r, llr\lilrc relurl\
"l , hoi', s r"quircd i 1'replritlg J.

Fre-theory
Befor:e rhe dor,rble-eltrl' systenl was formalised in lhe 1400s, r'ery iittlc u'as wriltetl
about tlie theoty unclerlf iltg accoLltllirlg practices Duriug the developnental peliocl
of Lhe clouble-ent1y systen, the main emphasis was on pracLice. lt u'as rlot Lrlllil
l.+94 that ir lrrarciscan monk, Irra I'acioli, $'rote tl.re first booh to docLlment the
clouble errtil accountilg systetr as $'c klo,"v iL. fbc t]tle of his u,ork rvas srrttita rlc
Arithnetica Ger)nelid L opt)l tioni al PrcpottilnL iti (Revieu' of Aritltrnetic, Ceouetry
and ProportioDs). lror 300 years loJlor'virg Pacioli's 1494 treatis€, developnents in

Lll\PTtll I rif ,l riurr

 accountirg concentrated on relining practice. This is reletred to as the 'pre-theory
period'.r Coldberg asserts:
No theory of accounting u'as clevised froin the time of I'acioLi dou'tl 1o the opening
ofthc nineteenth centul.,'. Su[igestions oftheory appear here and there, bttt tlot to tlie
e\lc r r.cc\\.rD lr- l, ... c ,r. u-nling on '\rtenlaLi. b,l. '
Llntil the 1930s, developments in accounting theory tvere rather ranCon and
ill defiiied, evolving as the,y \\,ere neeilecl to justi! panicular praclices. Horvever,
developnents in the i 800s led to the formaLisation ofexisling Practices in textbooks and
Leaching nethods. The rapid expansiott in technologl, accompanied b,v the large scale
separatior ofor'r'nership frorl control of the rreans ofprocluction, incieased the dertand
for both lnanagerrent and hnancial accor-tnting infornation. In particular, gror'r'th of
the business sector ar'rd the consttuction of railroad networks in the Llnited States and
the Llnited l{ingdorn increasecl the detnirnd for detajlecl accountinli infornation, for
irrpror,ecl techniques, and fot accoutrting Practiccs suclt as dePreciatiorl rvllich addtessed
the long-rerm nature ofassets. fhe introdurtion oftaxatiolt legislation and the'teething'
problens associated u'ith the binh of the cotpotation led to increasecl gov€rnment
legislation regarding reportirg reqLLirements. Further, sone government and corporate
ecoDol|ric policy decisions were beginnin€l to be based on accountin€j numbers. Also
during this period, economic theoD' rvas progressing rapidly and was beginning to be
linked ro the denands for accoulting inforu.rtion. These developments occurred mainl.v
in the tlnited Kingdon. The-v provided an inpetus for the gtor'vlh oi theories explaining
accountiirg practice to enable accountants to deal with tleu'issues as they arose and to
explaln to students ivhy cerlain procedures rvere adopted. After this, develoPnents in
accoLrnting theory shifted fron the United Kingdom to the Unit€d Stales.

Pragmatic accounting
IJre period 1300 195-5 is olter teferred to as the 'general scientific period'. l'he
emphasis u'as r-rn providing an overall franel'ork to explirin rvhy accountants accouttt
as they do; thaL is, based upon obsen'ation of practice.' Empirical anal-vsis relies on
real u'orLd obsenations rather tlran basing plactice on cleductive logic that is critical
of current practices. The major focus of accounting rras on the use of historlcal cost
transactions arnd the application of the conservatisn prirtciple. 1he scientihc rriethod
rvas interpt eted as being based on empirics
Flor.i'ever, ir4rile it has been l:bellecl an enrpirical peliocl in accountirg development,
there \\'as a degree of logical debate about the nerits of tneasurenlent proceclures.
Ihis r.r'as especiall)'rhe Lase alier the Great wall Street Crash in 1929. Tiris led Lo the
crearion of the Securiries ancl l-xchange Connission (StC) in the llniled States in the
ear ly 1 9-30s. fhe SLC had a brief ald legislative po\'ver to irnprove linancial regrtlation
and reporling, with nan-v seeing the crash being caused by qLrestionable accoutttittg
methods. Stephen Zeff repons rhal I Ieal_i' and l(ripk€, t\.\'o Leading practitioners, were
highl_v critical of the acconnting Nrite rLp plactices in the Llnited States in the 1920s.
Suclr conlnents as '. . u,; ite Llps \{ere rrsed to create incotle ot to relieve the inromc
accounts of irlponalt chatges' and '. . vou can capitalize in solre States praclically
evcrFhing except thc frrrDact'ashes io the bascnent' atrrl'... illustlated whar ttiey sar!
-
irs tltc llilErirrt u'ritc Lrl) of assets in thc 1920s'
The 1910s periocl also gavc rise to several notable accottnting publications and
initiativcs irnd sau, the birLh of profcssiorrally based corceptual theory,. In 1936 the
An.rerican Accourrtiltg Associalion (AAA.) releasecl A l'.nLttLiue Srll{,/,r&ra o1 Accorrl/tin.q
Pt inciplcs ,\flcting (aorpt)ntl( R(pot ts; in t 933 theArnericar Instjtute of(lertilled PrJctisirr€l
Accollttilrls {AICPA) nirde an indeprerclent revierv of accoulting pt irtciples and r eleasecl

P.1RT I A( cor nlif! lh..'!

A Moore) ln the same
Statenrcnt of Accountinl Ptinciples (authored by Sanders, I latlield and
year, the AICPA established the Accounting Procedures Corrrnittee, rvbich published a
series ofaccounting research bLrlletins The nature ofthese brilletins (and othel accounting
theory publications ai the time) was sunnarlsed in the preface of Br lletin No 4f :
r

Irorr)*-tlvo bullerins rvere issued during the perioci 1939 to I953 Eight of these were
reports on termiDology. fhe other 34 \!eie tlle result of research by lhe coinnittee on
accounling procedures directed to those segments olaccounting p|actice whe|e pioblens
\.vere rrost denanding arld n'ith n'hich business and the accouniing prolession u'ere
most concerned at the time.
a result of this sporadic approach to the deveiopment of accoLrnting principles,
-As
the AICPA established the Accounting Principles Board and apPointed a directot of
accounting iesearch in 1959. Overall, this period locused ott the existing Practical
'viervpoint' of accounling and, as research gained nlonentunl over the period, the
theories promulgated to explain Practice became note detailed and conplex.

Normative accounting
The periocl 1956-70 is labelled the'nornative period', because it was a period wher
accounting theorists attempted to establish 'norms'for'trest accounting practice' Dtlrjng
this period researchers, such as Edwards and Bell in 1961 and Chambers in I 966, were less
concerned about what rzcnralll' happened in practice and more concerned about developing
theories that prescribecl u'hat Jhould happen. In the -vears before 1956, several authors
produced preliminary normative lvorks which related urainly to issues sunounding the
appropriate basis for the valuation of assets and owners' claims These theories made
s
atljustments for the inpact ofinflation and specific increases in asset plices
The normirtjve period rvas one of significant debate. tt degenerated into a battle
benveen competing vielvpoints on the ideal approach to neasuring and reponing
accounting information. During rhis period, the debate 1a'as predominantll' about
neasLrremeni rather than the actual Practice of recorclingl and reporting inlolnation
llowever, the end resrilt was no cleaL choice for changing prilctice to one ideal systelr
of (inflation or price adjusted) accouDting, leacling to the contintrecl use of the
historical cost ntethod. The accountillg professiort in Australia has been reluctant to
reignite the debate aboLrt reconmending on a sPecific ar-rd ideal neasuremeDt systerr
and has hiled to issue conptehensite measurenenl guidelilles lnstead, in 2005
the professioll irclopted the measurcnrcnt guiclelines contained in The Lrternational
r\ccountingl Standards Board's (lAStt) corlcePtual lianlewotk. Tire iASB has rather an
runsrmcturerl approach, 1\ith the accounliltg stanLlirrds ailoivirg adoptior of cur|ent
value rneasurenent coltcepts to be nixed rvith historical cost
Norrrarive theories aIe distinSiuished because rhe-v adopt an objective (ideal) srance and
then specifl the means of achieving the stated objective 'Ihe-v provide prescriptions for
ivhat .i/rolld occut to achieve their stated obiective As nentionecl, the najor focus of the
normative accounting theories durirg tlle Period 1956 70 u'as the inPact ofchanging
;rrices on the value of assets and the calcularion ofprolrt (such
theories rvere often seen as a
cor-rsecluence ol-the rt-cord levels of inliation experiell.ed ciuringthis periocl).'
Tr.vo groups dorrinated tlle norlllatiYe preriod the ct itics ofhistorical cost accoulllillS
- \{as sone ovellap betr'veelt these two
and the conceplual franelvorl< propotletlts. There
groups, especially r,vhen histotical cost critics ttied to develop theories of accounling
rvhere asset measurerneltl and profiL deternrinatiott depended on inflation and/or
novenents.
specifi c price
Dr-rring the normative periocl, the iclca of a 'corceptual lranervork' gained increasecl
popularitv. A 'couceptual frameltotk' is a stlalctured theon ef accotlllting. SLlch

, t l'ii li I it'od!.tiarn
 frameu'orks are meant to encompass all components of financial reporting and are
intended to 5pide practice.l0 lior example, ir 1965 Goldberg u,as conmissioned b-v the
AAA to investigate the nature ofaccounting. The resr.rlt was the publication ofAn ln4uii1,
into ths Ntttlue af AcLountlng, which ained at developing a franervork of accounting
theoly by providing a discussion of the nature and meanilg of accounting.r I One year
later, the ,A,{A released A Statemetlt of Basic Account.ing Theor1,, with the stated purpose
of providing 'an integrated statement of basic accounting theory which will serve as a
guide to educators, practitioners and others interested in accounting'. Ibese frameworks
hacl a comnon logical approach. They first stated the objective (prirpose) of accounting
ancl ther rvorked ciorn,nu'ards to derive accounting principles ancl rules that fuifrllec1
that obiective.
'l he nornative period began dran'ing to an end in the early 1970s, and rvas replaced
by the 'specific scientif,c theory' period, or the 'positive era' (1970 ). 'l'lre trvo main
faLtor s thal prronpted the demise of the rornative period rvere:
. the unlikelihood of acceptance of an,v one particular normative theoty
. the application ofiinancial economic principles, increased supply of clata and testing
nethods.
Because normative accounting theolies prescribe how accounting sliould be practised,
they are based on opinions of what the accounts should report, and the best way to do
that. Opinions as to the appropriate goals and methods of accourting vary betu'een
individuals, and most of the dissarisfaction lvith the nornative apptoach was that it
provided no means of lesolving these diflerences of opinion. Henderson, Peirson and
Brownrr outlire the two maior criticisms of nornative theories in the early 1970s:
. Nornative theories do not necessarily involve empirical hlpothcsis tesring.
. Nornative theories are based on value judgenents.
Fllrther, the underlying assumptions of some normative lheories were untested, and
it rvas unclear whether the theories had strorg foundations or assLlmptions about the
purpose of accountin!i. Pragnaticall)., it rvas also difficult to obtain genetal acceptance
of any particular nornative accounting theolr,.

Theory implementation and politics

,A depnession schclar knows what ii takes

by Robert 5rnrue/son
lL \voLrlcl have been insane for US presldent Barack Obanra not to fominate Ben Betnan<e
lo a secon.l ternr as chairnran of thc Feder.rl Reserve. The economics clict.ted it, as clid thc
politics.
Wc u,il ncver knorn, n,hcther the,,rorld rright have sulferccl .r depression il Bernanke's Fecl
lrad nc.rt rcsponded so aggressivelv.
Earlv this r,.ar, the Nobel Prize-\\,lnirinB, ccofonrist ancl NeL| York l//re-t colLrf-rnist P.rLrl
Krugrran issuecl depression rvarnings-
Bcl1l.rrke.dmitted sinrilar lears in lntervie\\'s u'lth D.rvid \ryesse, --(-ononrics editor of Ilre
l\tall Strct:t lr,tunal ancJ author oi /n Fecl l1/e TrLril. I hc t.rcl th.rl the I Lrba econonry 1s no longer
rrrcontro lalrll spiraling clorlnrnard (for 201t1, the lcononrist lntc Igcr'rce Llnit pre.licts grouth
of 2.Tpercentforth--worlcl and LSpe ceflforlhe L-lnite(l St.rLesl was no fo egone conc usion.
Nor \,\.ls iL or(iained that tlrc panic grlpping finani.ial nr.lrkets jLrsl s r nronlhs a,qo rlould subsiclr'.
Fronr rccenI lorvs in N,1arch, tlrc US stocknrar ket is nou' up rou;1h ), 50 per cent.
It is not thnt B--rnanke s Per{orrrance \\,as i a\.vless. Far fronr it. He nraclc tr'r,o b ul']ders. First,
ite .ll.li't sec the crisis conring. Evcn aitcr the collaPse ol lhe in!eslrrellt llan t Bear SteJrrrs r
r\,1arch 2008. hc dlcln'l iorescc a u,icl--sprcad linancia panic or.t s.rvage recesslon.

PART 1 .A..oLrnl nc lh.o \

 ln the sumnrer of 2008, the economy u,a: u'eakerring but seemed
econom ists
- to Bernanke and most
to be sr,riler ing irorl inilaticlnan' overheating. Consunrcr pric es \vere r rsing at a
-
5 per cent annual rate, oi was peakinB at $147 a barrel.
Second, along with tl'le then-lreasury secretary Henry Paulson, Bernanke allowed Lehman
Brothers to 80 bankrupt in September. Both have said the,v lacked the legal power to rescue
Lehnran and tl'rat no one $,antecl to buy it.
lf Bernanke and Paulson hrcl fully anlic:iltatec1 the consequences of Lehnran's l.tilLrc, thev
almost cerlainlv rvould have found a nav to save it. Once Lehnran collapsed, the crisis got
nrLrch worse. Banks retreated irom lending to each other, investors woLrlcln't buy nerv boncls,
banks, consumers and busincsses hoardecl cash. The economy contracted at .tn annual rate
of 5 per cent to 6 per cent.
Here is rvhere Bernanke distinguishecl himseli. A student of the Creat Depression, and
especiall,vof the disastrous efiects of bank failures, he went wcll beyond the stanclarcl
response of lowering interest rntes (the ovemight Fed funds rate droltpecl effectively to zero
bv Decenrber). Thc Fcd creatccl a clizzyirrg arra,v of liquiclity facilities to substitLrte morc tlrarl
$US1 trillion of Fed credit ior retreating privatc credit. lt supported markets for nrol1gages,
mone)/ market funds, comnrercial paller, arto loans ancl student oar'rs. The strateBy was, its
Wessel says, to do \n,hatever it took to avoid a conrplete loss of credit and confidence .r loss
causing continuous drops in spencling ancl assct prices {for stocks, borrds, homes) and ending
1n depression.
Although there rverc other.rctors, the Fed's interveDtions were clecisive in halting thc 1t.rnic.
It is an open question whether any other Fed clrairman someone withcut Bern.tnke's
detailed knorvledge of the Depression - so bolcl ln sLlpllo(ing creclit
r,vould have been
-
nrarkets. Moreover., Bernanke's approach inspired sinrilar moves abroad. But this is also
Bernanke's burden. If the Fecl doesn't rvithdrar,r, all that extra credit cluickl), enough, it nrav
spawn inflation. lf it $,ithdraws it too qLrickly, it may subvert recovery.
5/)u/(.,r E\{ (' l)Li irrrfr Ih,' lUslr,:ii, i frl)rncr,r/ l, r.f ll i\r gr !l 100(r tr. i l

Quesdons
1. The article clescribcs horv .r l)articul.rr tl'reoretical appro.rch has bcen replaccd by anothcr.
Explain rthv one theor| rePlaces another, ar'rcl !vho, or u,hat, determines rvhether an
existing theory sLrrvives.
2. Does the relntroduction oi a theory nrean that it shoLrlcl not have been replaced in the first
place?
3. Shou ld a theorr'be cliscardccl if it does not sllecifv the nre.rns ofachieving a stated objective?
Explain vour ansrvcr.

Positive accounting
The dissatisfaction $'ith normative theories, combined n,i(h incrersed access io elrpirical
data sets ancl an increasing rccognitio|r of economic argumerts lvithin the accoullting
literature, led to the shift to a 'llew' forrl of em;:ilicisn \{'hich op€rates under the broad
lalrel of 'pcrsitive theory".r] lrr effect, positive theory rvas hardlv 'nerr/, as it rvas based
on the elnpirical approach, rvhich formed the basis of rhe gen€ral scienriFc peliod.
Positivc tlrcor-\'sought 10 provide a framcrvoLk for explaining the practices rvhich were
being observetl; that is, r,rhether what pra(tising accoulrtants produced hatl a decision
Lrsefulness objective, whethcr it hlled other roles, and rvhcther it rv.rs inferior or superior
to proposed alternatives.
'l1.re objective of positive itccoLurtiug tireory is to explain .rnd predict .rccoLll)ting
practice. An example of a positive accorlnting theory is the theory that lc.lds to \tltat
is l<nown ils the'bonus phn hypothcsis'. This theory relies on manager-s beinlj \\'ealth
lrnxirrisers u.ho u'oulcl rathcr have rrrore u'ealth than less. even at the t'xpensc of

( tl\i'l I lt 1 flnrrl].lior'1
 shareholders. lf managers are remunerated paftly with bonuses based on reponed
accounting profits, the managers have incentives to use accounting policies that
maximise reponed profits in periods when they are likely to leceive bonuses. Thls
theory leads to the predictiotl (hypothesis) dlat managers who are remunerated via
bonus plans use profit-increasing accounting methods more than managers who are
not remunerat€d via bonus plans. Such ttreories are impotlallt since they explain the
economic, or lvealth, effects of accounting and why accounting is imporln rrt to v-uious
pafties such as shaleholders, lenders and nanagers all of whose personal wealth
is affected b1' accounring decisions.r! It is also important in assisting in the design of
contracts based on accounting numbers that control such behaviour'
By explaining and predicting accounting practice, Watts and Zimmern.ran consider
that positiv€ theory has given order to the apParent confusion associated with the
choice of accounting lechniques. They argue that positive accounting theory helps
predict the reactions of investors in the market (such as current shareholdels) to the
actions of managenent aDd to rePofted accounting inlbrmatiou.r5 One benefit of suctt
research is that it enables regulatoIs to assess the economic consequences ofthe various
accounting practices they consider. the problem with this approach is that wealtlr
naximisation became the ans\4ler to ev€ry question. I3asically, whatever lhe observed
practice, it could be construed as a means of maximising wealth (normally for the firn.r,
but sometimes for nlanagement). To Sive the argunent symmetry, the reverse argument
could also be applied that the observecl Practice was to miniDise the inPact
- namely,
of costs or some e{ternal event on the value of the iirm. The positive literature ilvolves
developing hypotheses about realiqv which are subsequentl)' tested by observation of
impact, usuall-v based upon the assumption of wealth naximisation fhe approach
has att.acted criticisms rvhichr are largeiy based on the seemingly narror'r' approach that
concentrated on agency theory and assunPtioirs about the efficienry of markets
'l'he potential role of positive accounting theories in explaining and predictiltg
behaviour is illustrated in theory in action 1.2.

Out of control

i'r'esh l-rlcvr to banlring as rogue trader costs

Societe Ceirerale US$7.1 biilicn
bl Sudip L:at-(.upta

A "masslve iraud" bv a junior rogLrc tr.'rLIer ha5 punched a US$7 billion hole in the fin.inces oi
French barrk Sociele Cenerale, leaving its credibll]t-v ln tiltters and forcing it to gct cmcrgenc)'

France's central bank ancl Sovernment scrambleci to shore uP confidel-lce in the banking
s),stem alier Societe Cenerale, France's second-biggest bank, sajd it had been the victinl oi
massive ancl "exceptiona " iraucl resulling in losses oi'1.9 billion euros
SocCcn, one of France s oldest banks and a u'orld leader in free-rvhceling nodern financial
cJcriVatjvcs, banrecl a yo!ng backroont tradcr wholl it salcl had tried to corer up bacl llcts
on the stolk nrarket. "lt was an extrenrcll'sophistic.rtecl fraucl ln thc u'.1)' it was concealecl",
saicl socicte cenerale chalrman DarieL Boutof, rvho oilerecl t0 rcslSn bLrt has been askcd to
stdy orr.
Shares ilr tlrc banl< fel nrore thatr 6'li to 7'1 eulos
The Ban k of France a n nou ncecl an enqtrirl' b1' the Ban l<ing Comnt ission. Covcrnor Christian
No,ver sald SocCen had been altle to overconlc thc crisis because it rvas "verv sol d"

10 PART I A( ( oL nlrrir lheor!

 ii iraud is proved, lhe loss r,vill be the blgEest caused by a single trader, dlvarfing the
U5$1..1 billion loss by trader Nlck Leeson that brought down British bank Barings in tl.re
1990s.
SocCen cleclined to r-rame thc trader, but said he had been suspended pending clismissal
aiter confessing to his actiofs. lt described hlrn as a nan in his thirtics who hacl worl<ed for
SocCen since ZOOZ and earnecl Less than 1 00 000 (US$146 5OO) euros a year. He nor'v faces
legal action from Societe Cenerale, rvhlch is in turn already being sued by a groull of l Ot)
angrv shareholdcts.
The bank accusecl the tracler ol tal(ing "nrassive fraudulent" Posltlons in 2007 and 2008 on
European equity market indexes, meaning he rvas gambling on broacl nrovements in share
prices. When the banl< discoverecl the concealed trades, it decided to close the poslti.rns in
the marl(et as quickly as possible, but this coincidecl r'vith a sharp nrarket selltff, and the
bank's losses on the deals spiraled to,1.9 bjllion euros.
Like Leeson before hirn, the trader apparently benefited fronr knou'ledge oi the bank's
control systems after worl(ing in the bacl< o{iice of its trading rooms, accordlnS to
SocCen.
It saicl he hacl used a "scheme of elaltQrate fictitlous transactiorrs" to try to cover up his
mistal<es, but did r.rot.iccuse hinr of profiting personally from his actiorrs.
The announcement sent it sl'liver throrrgh the world banking industrv, which is sLrffering a
creclit crunch as high-risk u.s. nrortgage borrorvers de{ault on their loans. Lehman B[others
chief executive and chairman Richard Fulcl called it "everyone's $'orst niShtnrate" in a
comnrent fron-r tl-re World Fconomic Forrim in Davos, Slvitzerland
"we Bet the feeling that the financial markets have become a big casino which has lost
control. lt seerrs lncredible that the Societe Cenerale can lose 5 billiorr through one operator",
said Alaln Crouzat, :t portfolio manager at Nlontsegur Finance
Other said the crlsis at SocCen, one of the top l0 banl<s in the eurozone by marl<et value,
could spell trouble elservhere. "The most serious thing is that this pLrts into doubt the risk-
management systems at somc ltanks," said Fortis anal,vst Carlos Carcia. "You can't suddenll'
this from one day to the next a hit o{ $7 billion. ln the light of this, rvhat r've've
"nnounc"
clone is to clorn,n8rade banks that are very linkecl to tradinB income or I'vhose capitai base is
wea k. "
Analysts sald the episode rvould have a rr.rajor lnPact on tlre repLrtat;on of SocCen. whlch
was founded in 186,+ and is one of France's riost prestlgious blue chiP cornpanies Several
sajd thc ttank, n,hich lras for vears been coveted by larger French rival BNP Parillas, could
face a battle to renrain indepenclent. Shares ln BNP rose 7o,i.
SorCen said it expected a 2007 net Profit oi beh{een 600 and 800 million euros, t^;ell
belo\\,its 2006 prolit iiBU re.
\r)rr/t t\rer|l'iorrji.ililtrii l , rtrr lil(lli rri'l irr'.' lr'rrrr(r'rl )i' i
"

Qu est io ns
1.'Rogue'is clefinecl in thc Oxford dictlonatl'as'that $'hich L,rcks appropriate control;
something r,vhich is irresponsible or Lrndisciltlinecl'. civen this deflnition, rvho is Lt tinrately
responsible for the rogue tracling outlined jr the Socicte Cenerale scandal the tradcr
directly invo vecl; marurgenrent, who are responsible ior th-'hiEh risk frameu'orl< in rvhich
the trader operiitcd; ol a t-oilbinatiott of lloth?
2. Discuss tlre rolc played ln the Socccn c.rse b,v cach of the iollor'ving tlrree eler.lents:
personalitv, in-,:titLrtional itanrc\vork, ancl ollPortuni\'.
3. Hor.v collrl S()(:iete ccnet.lle lr.rve bee| unarnrare of thc .rclivil) oi ils traclcr afcl oi thc
eirVironnrent th.rl l1 had crtaleil for the tl-a[ler to ol]erate \\'ithinl
,rogric' traders arc
4. Do ,vou thlnk that the actions of Prerlictable !ncler ;tartic!lar theorie-s
(s!ch as a5lcfct,theorvll Exlt ain 1'og1''t.t'
"'-.

{ ij.,,i,ltii I lfl'o(luLton 11
 'l'his seemingl,v narrow approach of the positive theorists resulted in a resurgence,
especially in the 1980s, in behavioural research. Behavioural research is concerned u'ith
the broader sociological irnplicatiors of ar:counting numbers and the associated actiotts
of key participants such as nanagers, shareholders, creditors and the govelnment as
they react to accounting inlormation. An exanple is a theo4' Lhat predicts that loan
managers carlnot process all the llnancial inlormatiolr the,v receive, so the-v assess films'
credlt risk Lrsirg the information that is n.tost relevant to the background of the loan
nanager. If the loan manager had been involved v'ith loans to 6rns that defaulted
on their debt agreements because of poor cash florvs, despite profitablc activiries, it
is predicted ihat the manager will place more reliance on cash flow infornalion tharr
other infornatiorr. On th€ other hand, if the loan n-ranager had been involved lvitll
loans to firnls that defaulted because of unprofitable op€rations, ii is predicted that
the manager rvill place more reliance on the reported prof,L or loss and earnings
prospects of prospective borrou'ets. llehavioural accounLillg theory tends to locus or
psychological and sociological influences on individuals in their use and/or Pr eparation
of accounting. Note that, although it had a resutgence in the 1980s and colltinues ta)
be important, behavioural reseaich in accounting eurerged in th€ early 1950s and llrsl
appeared in the accounting literature in 1967.r'
More receltll', there has been a spate of very significalt arrd dramatic corPorate
collapses or confessions of corporate rvrongdoing. 1\1an), stakeholders (slrareholders,
governrrrent, and creditors) are concerired aboul the failure of trccounting inlbrn-iatiorl
to signal such financial catastrophes and the apparent maniPulation of accottntingi
information and of those meant to independently rePon on financial inlornation
(auditors). In fact, in sone of these cases (such as Enron in 2001 and the collapses in
the financial sector in 200.3) it appears that the auditors colluded rvith ]nanaflenent to
niisiead the external stakeholciers. ln one sense, this suppofts the Positive vielv that at
least one pailv was acting to ma-xinise its u'ealth to the obvious detritnent of othcrs.
lhis leads ro an altemativc vieu, theoq, focused on the impacl of accounting on
- il afier the everil of obseir,ed behaviour, the <.urlent
behaviour rather than on explanations
corporate and reporting failures coulcl l'ell have been predicted. Illstead, as occurred in
the afternath ol the 1 930s follorvirg tlre 'Greal Crash' of the Wall Street exchange, thc
legislative reponing realuirerrents have been increased significanLll'(e.g. the Sarbanes-
Oxlq-Act (20t12) iD the tlnitec1 States), follou'ing the collapse ofWorldConr and Enron.
C)ne yie\\' is that it is impossible to clevelop a single theory of accountingi, as hutnan
greecl, opportuiristn, lutrLre unccrtainl-v, trntl a degree of tlirivety on tire part of some
stal<eho lder s can never be ca;rtut ed in a th eo ry of accounting pel .\s Accounling slandards
and leg,islated reporting measures are the outcone of conpeting sets of irrt€rests and
this ural. r'r,'ell be the place to begin developing a ne\^'/ theoD' of accoutltitlg behaviour'
Either rval', the currellt ervitonmenl is one of increased clisclosures and leponing
requirenents \\'ith legislated sanctions. But the ke)' question is I'iil this advance the
cievelopnent of theories relating to ac{-our'\ting Ineasuretrterts and disclosuresi

Recent developments
Both acadenic and professional interesls in thcory ,-levelopmellt have tellded to be
alignecl in the past. In recent tirres, horr'evct, rcacletric and prolessional develoPnerlts

12 I {liT I rccDr nl I tlr. ,

 in accounting theory have taken somewhat different approaches. Whereas the academic
research emphasis remains in the area of capital market, agency rheory, and behaviotLral
inrpacts, the profession has pursued a nore normative approach. in particular, rhe
prolession has sought normative theories ro uniil accounting practice and make it more
homogeneous, u.hereas academic researchers have sought to better understand the role
and inpact ol diflerent forms of accounting inlormation. l'l.rese positive and norrnative
approaches are not incompatible, since au understanding of the intpact of accounting
is.r factor that accounting standard setters consider in developing prescriprions tbr
Practice.
In the nid to late 19BOs, (he Australian accounting profession was heavily invoh,.^d
in t)re conceptual framework ciebate in an atten)pr ro provide a definitive statement of
tlle nature and purpose of financial reporting zrnd to provide appropriate criteria lor
deciding between alternative accounting practices. ln December I9g7, the Australiau
AccountiDg Research Foundation (AARIr) rc-leased ED 42A D 'proposed Sraremellts
of Accounti.rg CoDceprs', u,hich outlined rhe objective, qr-ralitati'e characterisrics ancl
rules for the definitiort and ileasurement of assers and liabilities. It also included a
detailed outline of the 'rentarive building blocks of a conceptual framervork for
regulation of financjal reporting'. 'Ihis rvas closely followed by ED a6A-B in March
1988, $'hich outlined the concept of a repofiing entity and providcd definitions of thc
rneasurerrent and recognition of expenses. ln 1990, tlie AARI] formallv applied tlre
basis of the conceptual franework in Stirtemenr of Accounring Conc€pts (SAC) 1, 2 and
3, follou'ed in 1992 by SAC 4. Sl\C 5, tlte controversial measurenrent statenr€nt, had
not been released prior to the adoption of international financial reporting standards
(l|RS) in 200s.
'fhe transition to II]RS saw Lhe replacenent of SAC 3 and SAC 4 with the lAsii's
conceptual frame$'ork, which to5iether rvith SAC I and SAC 2 make, up the conceptual
lralnervork in Australia. The IASB franework also forms the basis for the fi'antelvorks of
other standard-settiltg narions such as rltc tlnited Kingdom, Canada and Nerv Zealand.
The conceptual framervorks of the variorrs countries are used in developing accountitlg
standards and in arlenrpling to reduce the inconsistencies arising fron earlier fiagmentcd
theorv and practice developll.tcnts. Ihe need foL a single, consistent framervork has
gained rvidespread acceptance in recenr years. Ihe IASB, in a ioint proiect \.vith the
IIS Financial i\ccounting Standards Board, embarl<ed on a new conceptual fra'tcrvorl<
proiect in 2005 to update antl improve the conceptual frirntel,ork fbr standatd serters
ancl prepalels ofhnarrcial statelltcnts to Llse.
The need for a singlt' set of international accout.rting standards r.vas acknorvledged bl thc
accou nringi profession in Australia $'idr the adoption ofllRS ilt lalluary 2005. International
standards seek to hanronise practices llcross intcrnational reponillg boundilries and to
reduce the differences in reponecl inforntation \vhich aie a direct consequence ofdifferent
accounting choices. l his approach aims to eliIniDatc accountine disclosures and techniqucs
specific to orre or a sntall group ofcountries uticlt subsequt'ntly affects the cotrrparability
or integration of infor mation, particuiarlv for nrrrltinational and listcd corporatioDs. 'l'hc
assunption is that the same theoretical isstres apply rvhether the stiurdards arc specilic to
one counln'or de$igncci lor glL-rLral irpplicittion.
|igure 1.1, overlc.rf, sumtrr.trises thc nrain yrer.iods ol- theory rlevelopnte,llt to tl.tc
Pr('sent.

( HlPlFR I Jntro(lr.lior 13
 Practice development

/1q0b 175A he theory perrcd

continued development of practice)

1 754 b 1920s:
Formalisation ol practice
1800 IB00s to 195 5: Ceneral scientific period
(explanations of practice and developmerlt of explanatory framervorl<)
l95b lo le 0': Natm,rtt,p pptiad 1o A b -AA|J: Po i i\' . ' ountin?
1900
staternrrf of ideai nrJ.li'e)d-rrl /r'or) -,r',rne\^or len'pl 'in
L,a'is io ,-,, ^iP\ing.u' r prac ., o. "ndpred'rb' Irario--
2000 2000 ta present: Mixed developnent
positive and normative regulatory theories

FIGURt 1.1 Accounting theory tirielint'

@-. cONTENT ourLtNE

This book provides a link between issues in accounting theory, research and practice.
To reflect this, the book is divided into three pans:
Part 1: Accounting theory (chapters 1-3)
Part 2: Theory contributing to practice through accountiDg standards (chapters 4 10)
Part 3: Accounting and reseatch (chaPters 11-14)
Chapters 2 and 3 detail man-v differe[t theory construction franer'r'orks and then
apply then to analyse examples fron the accounting literature. 'l he 'Pafis' of a theory
are detailed, the neans of testing theories are considered and the chronological
developnent of accounting theory is traced. LlDdersta[ding the collrPonents of rheory
developilent is important for accourtarts, not just those r'vho will become academics,
but also those who need to understand the choice of alternative accounting methods
and explairi this ro clients and stakehoiders. lt is aiso important to distinguish betrveen
theory development as it relates to the natural versus humaD sciences. Accounting
processes and information are the result of a complex set of human intetactions and
decisions rvhich may nor fir the Lraditional empirical (or scienrific) process. When it
cones to interpreting human behaviour, conpletely rational and systematic approaches
uray nor apply. To be a complete professional accountant one leeds to understand
the nainstream approaches to tlreory development, in order to specilically consider
rheories of accounting, the behaviours accouiltillg information demands, and the
advice needed b_v clients. 'I-hus, these chapters set dorvn the fundanrerltals of taking a
:, icrr ti6, PvrsPe, tir.
Cltaprer describes how, over time, the different perspectives of the different usels
,tr
of financial slatements have influenced the locus of accounting. ll covers issues such
as whether the focus of accounting is on reporting the ownership interest in the firn
or rhe fjrancial aflairs of the hrm as a separate operating entity. In addition, this i
i
j
j
14 PAR I I Acco!ntinil theory ;d
chapter highlights a common view that accountants actually create their orvn 'reality';
that is, accounting measures and reports are an outcome of the boundaries drarvr by
accountants to construct the reponing entity. Basically, a signilicant number of choices
and decisions are made to ensure the accountinS methods fit the reporting entit)'. lt is
important to appreciate thal human decisions, preferences and objectives will alfect
the accountilr8 viewpoint adopted,'"vhich in turn drives the accounLing choices rrade
in recordingi, measuring and reponirg accountiltg information. I his is an import.rnt
chapter in the context that the llRS has adopted a shareholder perspecti\:e rather than
an entity perspective when deterlnining the focus of accounting.
Since measurenent is fundamental to accountiltg, chapter 5 provides ar.r introductiot.r
to some imponant technical issues in relation to tneasurement and to how it applies to
accounting theory and practice. lve learn that in fundamental measurement nunbers
can be assigned b_v reference to natural larvs, but in accounting lhere is ccnsiderable
debate over the nature of fur'rdamental value. We also learn that accounting is derive cl
measurement that clepends on tlle previous measurelnent of two or more otlter
quantities. for example, $'e calculate income and expenses before profit is determined.
Fiat measurements are those that relate numbers to properties of objects or eyents on
tlre basis of arbitrary definitions.
Chapter 6 provides an overview of the accounting measur€rnent systems from rvhiclt
the principles of fair value accounting can be said to be derived. The first section
describes conventional historical cost accounting and the theoretical bases, criticisllts
and defence of the system. During the normative period, the historical cost systern cante
under attack, and theories were developed lcl deal with the effects of changing prices
on asset valuation and profit determination. These theories focused on either bu_ving
prices (curren( costs) or selling prices (exit prices). This part ofthe chapter outlines thir
development ofcurrent cost and exit price accounting theories and techniques, revie\\,s
the application of such techniques, and analyses the perceived inpact of reporting
current cost and arit price information. Thus, this chapter enables the studeDt to place
in(o perspective arguments about accounting neasure[lent and the current debates
ilbolrt neasurenent in IFRS.
'lhe definition and measurenent of assets and liabilities ale flndamental in
dctermining the net value of the lirm and, in nranl' cases, the incoure and ecluitl'.
Chapter 7 provides the definition of an asset and ircldresses neasurernent issues reLate.cl
to tangible, intangiblc and flnancial assets. 'l-hc ruixed nreasurt-urent attribute mo(lcl
applied bv IFRS is outliDed as l'ell as the concepts and nethods behind diflercnt
nlcAsurenent nethods. Chapter 8 is concernecl u'ith the credit side of the balirnce
sheE't
- liabilities ard equity. Liabilities are first deIln,.'d and applications associated
rvith applying the recognitiorr and nixed measurement criteria to emplovee benefits,
pension liabililies, provisions and contingencies are discussed. Issues are currentlv
under intense debatc as the IASB and |ASB attempt to improve ilccounting standalds
irt these areas. The chapter finishes rvith the definition of equitv as the residual intercst
in assets, discusses the concept ofcapital, and outlines the differerce between debt ancl
eclu it_v.
'lhe calculation ol profit has been a kcl' conrponent in irccountitrg rreirsrtrcnent over
many _years and forms a firndirmental compoDcllt in rraD1. valu;rtion nodels, capital
market research, aBCn(!- contrarts, tnxation issues, social issues and the behaviour
of indivicluals. Chapters 9 and 10 provide overviews of the issues faced in the lu'o
uain components used to derir.e income - revenue and erpcnses. Discussion is
provided about recognition critcrion from cash trarsactions through to more recenL
-
concepts sucl't as the actluisitior.r of a custonrer vrrlued at exit price. We show that thelc is

CFl,\PTIR 1 llltr)d!ctron 15
 norv less emphasis on the traditional notiolts of realisation and earned. We also discuss
the concept of the comprehelsive income. Expenses are defined ancl concepts such as
economic benefits, expirecl costs and matching expenses and revenue are discussed in
chapter 10. Onc outcome ofthese two chapters is the Lrltirl']ate consideration ofthe
nature ofprofit and the altcr native measure lnent rules that can give rise to quite different
levels of reported profit.
Positive empilical accorlnting tl.reory lras been at the folefiont of the academic
accour'rting research agerrda fbr several clccades. Chapters l1 ind l2 locus on the
philosophy, scope and inrpact of positive theory on accounting theory development.
Chapter i 1 details the development oftheorics ofaccounting poliry choice and ieyenue
managelnent. it focuses or.r coDtracting, a5lencv and signalling theories, as a result ofthe
divergence between managers and shareholclers (and debtors), that previde ntanagers
rvith incentives to trranage ilccounting nunbers to maxirnise (he nealth of thenrselves or
the frrnr. Chaptel 12 describes and explains the development oftheories abotLt the r ole of
accountin€i infolmation iD the share mrr ket. lt focuses or eYidence of ho!r' sh.rre prices
respond to accounting infornation, irnd u,hv the infornirtion shoulcl ilfltLencc either
the price or anollnt of shares that are lraded. The role and devclopment of behavioural
accounting theory are described in chapter 13. 'lhis chapter explains how relaxing some
of the assumptions undellying positive accounting theory and focusing on individual
behaviour rather than on aggregate narket behaviour influences an understanding of
the role of accounling repons and their significance, in variorrs contexts, to various
paflies. The final chapter, chapter I4, discusses son.re recent controversial issues in
accounting theoq/ and reSiulatior.t. Issues covered ale the use of XBItl,
- a system that
enables users to extract accour.rting data at a micro (less aggregated) level, the irrpact of
Sarbanes-Oxle,r' on the accountirrpi and aucliting professions, ttre role of fair values in
the global financial crisis of 2008-2009, the IASB and FASB convergence program, and
the impact of IFRS on ar.rditors. l-'inall-v, the chapter ends b1'summarising a nunber
of issues in sustainabili ' iccour'rtir1g. This research area is a gro\\'ing eritcrrsion to
the rraditional focus of accountinS theory on flnancial issues. It exallljnes social and
environmental issues in il1r accolrntii.rg context. lbpi(s covcred irrclude thc Clobal
Reporting lniti.rtives, clirlatc charrge issues irud accour'rtin8 for carborr emissions rights,
.,i\lrr'AllCr I'ohlirll. ,irlJ \..t1. - lC(Ollltti rt
Overall, this book ains to assist studclls to devclop the necessitrJ' skills to interpret,
discuss, er.aluate and criticisc conpcting theorit's ancl cenccpls, .rncl to .rppl1 Lhe clenents
of thcsr' theoric's lnd colrccpts to clrncnt itccountillll issues. Nlole spccificalh', it ilims to
help stttclents cr,.tluatc llrc current issurs surrounclirrg thc introcllrcliorr of l|RS on a
scienti6c basis, Lrsing logic.rncl enpilical pcrspectiles.

Add itionaE rea(,: ; t-rgs

Anthony, R, I Iarvkins, D, t\ lrterchant, K 1999, A.corrltiil.q: trr.rl rlrrl a,l.srr-s, 1Otlr ecln, New
Yorl{: NlcGra\v-l lill.
13arry, I) 2002, Rir1r lriri.s: lrorl t/rr,I lrrlltrtJi-i ,lr{1 l.ic/icr:r 1()-rl $9-5() riiilirrli i/r ()nr,.lit, Syclnr:y:
Randon Hotrsr.
rrlarshall, D, Nlc\lanus, \\', <\ \'ielt', L) 2LlOf,..\.Lorlrlii,.,j: r/r,tt tln rririrrbcrs riic,rr, 5(h edn,
New York: \lc(lraw I lill.
Sco1t, W 2006, I:itlLtnciil tkountin.,l lhcol)', lolonto: l)earson.
Zefl S,\ 2007, l/rc SEC- r'rr/t,-i lri.\l.)ritrrl.()-\l ,r.(1){rntilr{j 1934 to Ih( i 97(}.\, \'Vorkir)g papel,
l
Januirry, Rice LlniVersitr,.

16 ,;\RT 1 Ar !,)unL fs theIri

J
Endnotes
1. An Arrow- Debreu economv is when ? . SA. Zeff, The SEC tLies histarical cost Llniversiq' of Queensland Press,
there are complete and perfect dccauntin1: 1934 to tlie 1970i, \vorking I 9 75; S Cilman, A.counting concepts

narkets with all possible information paper, Ric€ University, lanuary, 2007. ol prott, Nerv York: Ronald Press,
available about current and future See also David Al€xander and Eva 1939
events. Jermakowicz, Abd.us, vol.42, no.2, 10. A detailed analysis ofthe conceptual
2. E Hendriksen, A..auntint theo\,, p. l, 2006, p- 143, $'here they conment on framework literature is provided io
lilinoisi Richard D ln\,in, 1970. conceptual fran€works that reinforced chapter 2 ofrhis book.
3. Rj Chambers, 'Why bother with historic cost and consenatisn This 1 . l- Coldberg, An inquitf inlo tlrc nature
1

postulates?', /ou?n/rl o/ A..orlntiig \\'as a reaction (against deviations of accounting, owa Citt : AAA, 19 6 5.
I

Research, vol.1, no. 1, Spring, p. 3, from transaction accounting) to the 12. Henderson, Ireirson and llrown
1963. widespread practices ofthe 1920s to op cit, p 39.
4. S Henderson, G Peirson and R overstate assets ancl net income'. 13. Chapters 11 and 12 pro\'ide a
Brown, Financial accountin| tlva\' 8. Tlvo examples olsuch books are: derailed analysis ofthe positive
is ndture a d tlet'elopinefl, Znd K 1'11 lh it accountiig, accounting literatLrre.
edn, Melbourne: Longman Cheshire, ^,1acNeal, University of
Philadelphia: 14. I'or further detajl, see chapter 11.
1992. Pennsylvania, l9i9; and H S\\'eeney, 15. R Watts aDd J ZimnernaD, Po-silire
5. lor a detailed discussion of rhe Sidlrifi.zed d.:i:0urrtirs, Ne\\' York: ttccounling theotT, Lngleh'ood Clitfs,
historical development of the Harper, 1936. NJ: Prentice Hall, 1986.
double,entry system, see l- Coldberg, 9. See, for example, O Edwards and 16. J Birnberg and I Shields, 'Three
The development of accountjng', P BelI, The thetnl' anrl neasurentent af decades of behavioral accounting
Australian Accountdncf Sard?nf, N.1arch, brLsiness incofie, Berkeley: tlniversity reseatch: A search for older',
pp. 3-8; May, pp. 51 9; lul,v, ofCalifornia, 1961; R Chambers, Behatiorli Resedrch in Accountitl|,
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cHAPTER I lnll orlLr.lion 17