Theory and method

A. Imposing Order
Accountants often need to impose some sort of order on imprecise events
and transactions so taht they can summaries their financial implications. For
examples, when a construction film enters into a multiple-year contract to
build a road systems, the accountant needs to be able to apportion payments
and receipt, billings, labour cost, and so on, in a manner that reflects nnot
only the value of what has been constructed at any point in time but also the
performance of the construction firm under the terms of the contract.
At various times, an accountant will need exercise judgement appropriate to
a range of professional roles. The following is a list of some of the task
accountants undertake and the professional roles accountants need to
resume:
 Analyse the financial implications of transactions, and measure the
value of options that the firm has issued
 Assess the impact of the transactions on society
 Establish the legal entitlement to control particular resources in
order to determine wheteher they are an asset of the entity
 Calculate the current value of of future cash down.

Even numbers that many regards as ‘objective’ and ‘verifiable’ are mere
abstractions of a financial world that is complex, unsystematic and
imprecise. A solution to the proble, is complicated by the numbers of
conflicting theories of accounting that exist. It is difficult to judge between
competing accounting theories when accountants, standard setters and
academics themselves do not seem agree on the valuation of assets and
lianilities or even on the purpose of accounting. In trying to understand the
role of accounting, theorist develop their theories from different
perspectives. It is not surprising, then, that different approaches to theory
have led to many imterpretations of accounting theory and practice. Not all
of these interpretations are mutually exclusive. Students can refer to the
 additional readings at the end of this chapter for further explanations of
some alternative views, including those discussed on the following pages.

B. A range of accounting theories

a. Accounting as an historical records: argues that accounting is concerned
with providing a faithful record of a transactions of an entity.this theory
does not view the role of accounting as being to provide a valuation of
the firm at a particular point in time; it views it as being to provide
simply a faithful record of the transactions involving the firm
b. Accounting as the language: although it is unlikely that accounting will
ever be taught in linguistics classes, theoretically accounting is
sometimes perceived as a language through which management
communicates to other parties such a shareholders
c. Accounting as a intracorporate politics: this theory states that accounting
systems reflect and support the values and needs of specific interest
groups an that accounting information is constructed and used as a
resource in shaping company policies, especially in decision making and
furthering the aim of management.
d. Accounting standard setting as politics: according to this theory,
managers lobby on accounting standards to increase the likelihood that
the reultant accounting requirements will serve their own interest, and
they select accountin techniques to maximise their own utility
e. Accounting as mythology: the theory that accounting is mythology
asserts that accounting system provide a societal resources to be used in
sustaining concepts of rationality and are a means of justifying,
rationalising, and legitimising decisions that ultimately serve other
individual and social ends.
f. Accounting as magic: according to this theory, has a veneer of
rationality and respectability, behind which an accountant can perform
sleight-of-hand accounting tricks which can be compared to a
 magician’s tricks. In this wat the accounting magician is able to make
the financila statement appear to reflect something that is not real.
According to this theory, accounting is a methode of deceiving the users
of reports.
g. Accounting as communication-decision information: this is theory is
action oriented. Accounting reports are prepared in a manner suited to
the needs of users and will have an impact on the decision-making
behaviour of managers and investors
h. Accounting as an economic good: the theory that accounting is an
economic good considers that accounting is one part of a wider
information set, which many include macroeconomics, political,
taxation, and other specific information that affects the performance of
a firm.
i. Accounting as a social commodity: this theory argues that accounting
affects the walfare of different groups in society and can be an agent for
social change.
j. Accounting as an ideology and exploitation: according to this theory,
accounting is part of the ideological apparatus of capitalist society
k. Accounting as a social club: this last theory asserts that accounting
principles, standards and society exist to
 Promote the group interests and aims of accountants
 Generate a professional culture and enchance a monopoly in
professional knowledge
 Enchance accountans public image of professional competence

C. Theory formulation
a. What is theory
The simplest form of a theory is a statement of a believe expressed in a
language. One definition of a theory is that is a deductive system of
statements of decreasing generality. Braithwaite states:
 A scientific theory is a deductive system in which observable
consequences logically follow from the conjuction of observed facts
with the set of the fundamental hypotheses of the system. A study of
the nature of a scientific theory is thus a study o the nature of the
deductive system used in the theory.
Another definition by Popper, emphasises the emparicel nature of
theories rather than the logical component stressed by Braithwaite:
“Theories are nets cast to carch what we call “the world”, to rationalise,
to explain and to master it. According to these definitions, theories are
logical arguments; their concluding statements of believe(whether they
are explanations, predictions or prespections) are hypotheses. Such
theories comprise a set of premises(statements) that are logically
conected to give rise to one or more hypotheses.
b. How are theories formulated?
Panel A: measuring assets at net realisable value
Deduction
P1 All accountants should prepare their firm financial reports to
satisfy the information requirements of all users of the
reports
P2 All users of financial reports are concerned about the
solvency of reporting firms.
C=P3 All accountants should prepae their firms financial reports to
report the solvency of the firm
P4 The solvency of firm is indicted only by the net realisable
value of their assets.
C All accountants should measure assets at net realisable value
in their firm financial reports

Induction
P1 Norita, Kim, and Dean (who are accountans) measure assets
at net realisable value in their firms financial reports
 P2 Wei, George, and Bhauna( who are accountants) measure
assets at net realisable value in their firms financial reports
C All accountants measure assets at net realisable value in their
firms financial reports

Panel B: The nature of the Land and Buildings account

Deduction
P1 All assest account have debit balances
P2 The Land and Buildings account is an asset account.
C The Land and Buildings account has a debit balance.

Induction
P1 The Land and Buildings account is an asset account and has
a debit balance
P2 The Motor Vehicles account is an asset account and has a
debit balance
P3 The Plant and Machinery account is an asset account and has
a debit balance
C All assets accounts have debit balances

c. Formulating a theory
As an accounting theorist, we must bear in mind that accounting can be
seen as a ‘social science’ as well as a measurement and technical
process. Thus, in a review scientific theories we must also question the
assumptions made by using the ‘scientific methode’ of theory
formulation and present alternative viewpoints. Researches sometimes
disagree about whether the scientific method or the naturalistic method
is more appropriate to accounting theory. As we shall see, the scientific
approach is more structured and controlled in its research design, with
the research problem and hypothesis explicitly stated. Similialy, the
researches techniques are usually structured in an ordered sequences. In
 contrast, the naturalistic approach rejects structured approaches and
holds that a theory is discovered by unobtrusive and passive researches
who have no preconception of the researche problem or the form that
the research will ultimately take. Theory under this approach is thus
discovered, not predetermined.

d. Parts of a theory
There are three types of relationships in the theoretical structure that
should be noted: syntactic, semantic, and pragmatic
 Syntactic relationship
The syntactic, or logical, relationship has to do with with the rules
of the language used. The main used of the syntactic technique in
science owes much to mathematics. An analytic(or syntatic)
methodology relies upon a syllogism. A syllogism consist of a set of
premises and a conclusion.
 Semantic relationship
The semantic relationship links the basic concepts of a theory to a
objects in the real world. Semantic relationships concern the
relationships of a word, sign or symbol to a real world object or event
and it is the semantic relationships that make a theory realistic and
meaningful. The truth value, or semantic accuracy, of a premise is
established by reference to real world descriptive accuracy. It is
established in relation to individual premises and the conclusion, but
not to the line og logic(argument).
 Pragmatic relationship.
Many theories do not have a pragmatic aspect. This relationship
concerns the effect of words or symbol on peole. The nature of
accounting in such that if an overall theory of accounting exists, it
must have a pragmatic orientation. We are interested in how
accounting concepts and their real-world corresponding events or
objects affects people behaviour. This concern is revealed by one
 statement on the objective of accounting- that is should provide
information that is useful in allocating scarce economics resources.
In recognition of the pragmatic nature of much accounting theory, a
popular approach to the theory formulation is the decision model.
The initial premise of the decision model is that accounting
information must satisfy the information needs of users.

D. Testing a theory
a. Criteria of truth
People have confidence in different criteria of truth. Three different
kinds of criteria or authoritative bases that people use are:
 Dogmatic basis
In accounting, dogmatism is the basis by which accountants come to
accept teh validity of rules and procedures. An authoritative body
approves pronouncements or accounting standards that are accepted
by those in the profession. This mode of operation is believed to be
desirable because a certain uniformity of practice is deemed
necessary. The issue is whether confodence in the authoritative body
is well placed. The weakness of the dogmatic basis is that
introsprective evidence, including personal bias, is acceptable in
determining whether a statement is true. Yhe crucial factor is rhe
indovidual personal opinion about the person or group making the
statement. The objective evidence in support evidence in support of
the statement is secondary.
 Scientific basis
This section provides an overview of than debate. We emphasise the
scientific basis for theory testing because it has been the most
common approach to accounting research since the 1980s. Readers
should be aware, though. That other approaches are also used.
 Syntatics rules
 In the first categoryare those statement that can be ascertained as
valid or invalid by logic or reasoning alone. Examination ofthe
logic of the argument making up the theory is the basis of the
test. The validity of an argument and the truth of any resultant
statement can be established without refrence to sensory
experience
 Induction
In the second category are those statements whose truth or
falseness can be known only by refrence to empirical evidence.
That is the truth of statements is assessed according to its
correspondence with observations of real-world phenomena.
Thus, the statements are said tobe knowable a posteriori( from
something subsequent) and to be ‘contingent’. The empirical
evidence must be objective- taht is, it must be ubiased, external
and public so that it can be verified by another investigator.
 Popper and falsification:
Scientific endeavour is the trial an error testing of speculative
hypotheses which can never be proven absolutely true, but can be
rejected when shown to be false. Under the falsification view, all
hypotheses proposed ,ust be capable of falsification. If a hypothesis
is not proposed or worded so that it is falsifiable, the it is not
informative and does not add to scientific progress.
 Research programs
A progressive research program has a group of scientists actively
working on research in the positive heuristic, whereas a
degenerating program has no active research. Lakatos, however,
finds it difficult to say that any one program is superior to another.
The problem is that progress can be very slow, and what appears to
be a degenerating program now may well lead to progress many
years later.
 Kuhnian paradigms, or disciplinary matrices
 According to kuhn, scientific theories and progress have a
revolutionary character, and the characteristics of the scientific
community play an important role. A revolution involves the
abandonment of one theory and its replacement with another,
incompatible, theory. Kuhn’s description of the waay science
progresses can be summarised as falling into five different stages:
pre science,normal science, crisis revolution, new normal science,
and new crisis.
 Feterabend’s approach
The core of Feyerabend’s thesis is that reality and society are far
too complex and dynamic for any one method or paradigm to
dominatescience. He argues that the only good scientist is one who
prepared to develop and accept inconsistence ideas and theories
and their methods of developmenrt, and that a pluralistic or multi
paradigm development, where there is only one predominant
paradigm at a time. His approach is basically that there is no single
scientific way of getting ideas; they can arise from many
intellectual pursuits which, in the extreme, could even include
witchcraft and magic.
Accounting Theory Construction

A. Pragmatic theories
a. Descriptive pragmatic approach
The descriptive pragmatic approach to accounting theory construction is an
inductive approach-it is based on continual observation of the behaviour of
accountants in order to copy their accounting procedures and principles. A
theory can be developedfrom observations of how accountants act in certain
situation. The theory can be tested by observing whether accountants do, in
fact, act in the way the theory suggests.
The descriptive pragmatic approach is probably the oldest and most
universally used method of accounting theory construction. Until
quiterecently, it was popular way of learning accountinh skills- future
accountants were trained by being apprenticed or articled to practising
accountant. However, there have been several criticsms of this approach to
accounting theory construction:
 The descriptive pragmatic approach does not include an
analytical judgement of the quality of an accountant’saction
 This approach does not provide for accounting techniques to be
challenged, hence itu does not allow for change
 The descriptive pragmatic approach focuses attention on
accountants behaviour not on measuring the attributes of the
firm.
b. Psychological pragmatic approach
Psychological pragmatic approach require theorists to observes user
response to the accountants output(such as financila reports). A reaction
by the user is taken as evidence that the financial statement are useful
and contain relevant information. A problem with the psychological
pragmatic approach is that some users may react in an illogical maner,
some might have a preconditioned response, and others may not react
 when they should. This shortcoming is overcome by concentrating on
decision
Theories and testing them on large samples of people.

B. Syntactic and semantic theories

One theoretical interpretation of traditional historical cost accounting is that
ut is largely a syntatic theory. This interpretation may be described as
follows: the semantic inputs of the system are the transactions and
exchanges recorded in the vourchers, journals and ledgers of the business.
These are then manipulated on the basis of the premises and assumtions of
historical cost accounting.
Some accounting theorists are critical of this approach.they argue that the
theory has semantic content only on the basisi of its inputs. There is no
independent empirical operation to verify the calculated outputs, e.g.
‘profit’ or ‘total assets’. These figures are not observed.

C. Normative theories
The 1950s and 1960s saw what has been described as the ‘golden age’ of
normative accounting research. During this period, accounting researchers
become more concerned with policy recomendations and with what should
be done, rather than with analysing and explaining what was currently
accepted practice. Normative theories in this period concentrated either on
deriving the ‘true income’ for an accounting period or on discussing the type
of accounting information which would be useful in making economics
decisions.
True income: True income theorists concentrated on deriving a single
measure for assets and a unique profit figure. However there was no
agreement on what constituted a correct or true meassure of value and profit.
Decision-usefulness: The decision-usefulness approach assumes that the
basic objective of accounting is to aid the decision making process of certain
 users of accounting reports by providing useful, or relevant, accounting
data.
In most casses decision usefulnesss theories of accounting are based on
classical economics concepts of profit and wealth or economic concepts of
rational decision making. They usually make adjustments to historical cost
measures to account for inflation or the market values of aasets. They are,
in esssence measurement theories of accounting. They are normative in
nature because they make the following assumptions:
 Accounting should be a measurement system
 Profit and value can be meaasured precisely
 Financial accounting is useful for making decisions
 Market are inefficients or can be fooled by ‘creative accountans’
 Conventional accounting is inefficient (in an information sense)
 There is one unique profit measure
D. Positive theories
During the 1970s, accounting theory saw a move back to empirical
methodology, which is often referred to as positive methodology.
Positivism or empiricism means testing or relating accounting hypotheses
or theories back to experiences or facts of the real world. Positive
accounting research first focused on empirically testing some of the
assumptions made by normative accounting theorist. The main difference
between normative and positive theories is that normative theories are
prescriptive, whereas positive theories are descriptive, explanatory or
predictive. Normative theories prescribe how people such an accountants
should behave to achieve an outcome that is judge to be right, moral, just,
or otherwise a good outcome. Positive theories do not prescribe how people
(accountants) should behave to achieve an outcome that is judged to be
good. Rather, they avoid making value-laden prescriptions. Instead, they
describe how people do behave; they explain why people behave in a certain
manner. Many positive theories researches are largely dismissive of
 normative viewpoints. Similiarly, many normative theorist do not accept the
value of positive accounting research.

E. Different perspectives
This approach to research s generally described as the ‘scientific’ approach
and is the approach currently used by most researches in accounting, and
the approach that is published in most major academic accounting journals.
This, in turn influences the types of research problems posed and the
hpotheses that are tested. It is important for accounting researchers to clearly
recognise the assumptions underlying their research and to consider whether
alternative research approaches are more appropriate.
the naturalistic approach can be compared with ‘scientific’ accounting
research which is more prone to aggregating the results from testing number
of hypothesis in order to form general theories of accounting. Naturalistic
research starts from specific real-world situations; the main intention is to
answer the question ‘What is going on here’, not to provide generalisable
conditions for wide segments of society.
The case-study approach is seen by some researchers as best fulfilling the
role of or crystallising the research problem for naaturalistic research. For
example:
... where is not feasible to develop theoretical model prior to
empirical observation, the next best alternative(an exploratory
approach) may be followed

Tomkins and Groves disagree with this viewpoint. They see the naturalistic
research approach as being more appropriate to different ontological
assumptions. Differences in ontological assumptions imply different
research styles and influence the research question asked and investigated.
To the further explain ontology and the different research style which may
be used, we consider the article by Tomkins and Groves and the Morgam
and Smircich classification they used

Category Assumption
1 Reality as a concrete structure
2 Reality as a concrete process
3 Reality as a contextual field of information

4 Reality as symbolic discourse

5 Reality as social contruction
6 Reality as projection of human imagination

Six basic ontological assumption sets

Categories1-6 are alternative ways of looking at the world. Category 1 is a

strict objectivist viewpoint of the world, where behaviour will always
conform to a set of behavioural rules, and outcomes of decisions and actions
are highly predictable. In relation to category 1, for example, researchers
assume that all managers aim to maximize their personal wealthand that
they aware of how they can use accounting techniques to do so. This enables
researchers to predict what accounting methods managers will use if
accounting choice is unregulated. Researchers will predict that all managers
behave in the same manner because they have a shared view of the world
and of the outcomes of their actions, and because they sharepreferences for
particular outcomes. When researchers view the world as a concrete
structure(category 1), this enables them to use the scientific approach and
statistical method to test their predictions. The scientific approach is
 appropriate where the behaviour investigated is predicted to occur
systematically, according to a model of behaviour and events.

For category 1-3, it is more appropriate to use scientific approach. By

appropriate observation and measurement, it is assumed that one has readily
avaible, stable, and usually very simple functions relating to isolated and
small subsets of the social world that can be used for accurate predictions.

For categories 4-6 Tomkins and Groves suggest that naturalistic or

exploratory research is more appropriate. These three categories are
generally labelled as ‘symbolic interactionist’ symbolic interactionists see
their world as one in which people from their own separete impressions
through a process of human interaction and negotiation.

As we have previously noted, the ontological assumption we make implies

different epistemological approaches and certain research methods. This is
turn influences the type of research problem asked and the hypotheses that
are tested.

Scientific research Naturalistic research

Ontological assumptions  Reality is objective  Reality is socially

and concrete constructed and a
 Accounting is product of human
objective reality imagination
 Accounting is
constructed reality
Epistemological approaches  Piecemeal  Holistic
advancement of  Complexity of the
knowledge world cannot be
 Reductionosm solved by
 Testing of individual reductionism
hypotheses  Irreducible laws
 Law capable of
generalisation

Methodology  Structured  Unstructured

 Prior theoretical base  No prior theory
 Empirical validation
or extension

Methodes  Syntatic model  Case studies

formulation  Exploration by
 Empirical induction to flexibility
form hypotheses  Experience of events
 Appropriate statistical
methods

A comparison of scientific and naturalistic research

F. Scientific approach applied to accounting

Accountants who believe in a scientific appoach want empirical evidence
and logical explanation to support accounting practices so that practtitioners
can recommend the most appropriate methodes for given situations based
on this evidence. People find statements more convincing when
substantiated by objective, empirical evidence than statements based only
on debatable rationalisations.
Anothe common misunderstanding about the application of the scientific
view in accounting is that ‘absolute truth’ is desired, which of course is not
possible. Therefore, those who argue against the scientific aaproach to
theory formulation contend that is fruitless to seek that which is impossible.
Such an arguement is based on the misconception that science discovers
absolute truth. The scientific method is not perfect. It is a human invention
to help us ascertain wheter a statement should be considered true or not. The
structure of the process in which this determination is made is such that no
one claim absolute truth in science. Thus, scientific truth is provisional. A
statement of theory gains the status of ‘truth’ only after scientist in the area
from which the theory evolves decide that the evidence is sufficiently
persuasive, e.g. when statistical tests shows that the results obtain have less
than a 5% probability of occuring by chance. The history of science disclose
that substitutions, adjustments and modifications of theories are made in the
light of new evidence.