CH 02

GODFREY
HODGSON
HOLMES
TARCA
CHAPTER 2
ACCOUNTING THEORY
CONSTRUCTION
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
2
Pragmatic theories
Criticisms of descriptive pragmatic
approach:
does not consider the quality of an
accountants action
does not provide for accounting
practices to be challenged
focuses on accountants behaviour not
on measuring the attributes of the firm
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
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
5
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
6

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
7

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)

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
Normative theories
1950s and 1960s golden age
policy recommendations
what should be
concentrated on deriving:
true income (profit)
practices that enhance decisionusefulness
based on analytic and empirical propositions
Financial
Financial statements
statements should
should mean
mean what
what
they
they say
say
10
Normative theories
True income:
a single measure for assets
a unique and correct profit figure
11
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
12
Normative theories
The decision process
Accounting
Accounting
system
systemof
of
company
companyXX
Prediction
Prediction
model
model of
of
user
user
Decision
Decision
model
modelof
of
user
user
13
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
14
Positive theories
The main difference between
normative and positive theories is
that
normative theories are prescriptive
positive theories are descriptive,
explanatory or predictive
15
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
16
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
17
Naturalistic approach:
implies that there are no preconceived
assumptions or theories
focuses on firm-specific real-world
problems
18
Alternative ways of looking at the
world:
CATEGORY
CATEGORY ASSUMPTION
ASSUMPTION
1.
1. Reality
Realityas
asaaconcrete
concretestructure
structure
2.
2. Reality
Realityas
asaaconcrete
concreteprocess
process
3.
3. Reality
Realityas
asaacontextual
contextualfield
field of
ofinformation
information
4.
4. Reality
Realityas
asaasymbolic
symbolicdiscourse
discourse
5.
5. Reality
Realityas
asaasocial
socialconstruction
construction
6.
6. Reality
Realityas
asprojection
projectionof
ofhuman
humanimagination
imagination
19
For categories 1 3 it is more
appropriate to use the scientific
approach
For categories 4-6 the naturalistic
approach is more appropriate
20
21
Scientific approach
applied
Misconceptions
of purpose
to accounting
Make scientists out of accounting

practitioners
Researchers = practitioners
The desire for absolute truth
22
Scientific approach
applied
The
scientific method does not claim
to accounting
to provide truth
It attempts to provide persuasive
evidence which may describe,
explain or predict
23
Issues for auditing

theory
construction
Auditing is a verification process that
is applied to the accounting inputs
and processes
24
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
25
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
26
Summary
Many different approaches to theory
formulation in accounting
Evolution of accounting theory
positive v. normative
scientific v. naturalistic
27
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
28
29

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GODFREY

Theories are therefore tested using

Syntactic and semantic

Syntactic and semantic

Syntactic and semantic

Syntactic and semantic

based on analytic and empirical propositions

Make scientists out of accounting

Issues for auditing

Issues for auditing theory

Issues for auditing

Key terms and concepts

Descriptive pragmatic approach

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