Accounting Theory Construction1-4

7/27/2019 Accounting Theory Construction1-4

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ACCOUNTING

THEORYCONSTRUCTION

PRAGMATIC THEORIES

SYNTACTIC & SEMANTIC THEORIES

NORMATIC THEORIESPOSITIVE THEORIES


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ACCOUNTINGTHEORIESCLASSIFY ACCORDING TO:

ASSUMPTIONS THEY RELY ON

HOW THEY WERE FORMULATED THEIR APPROACHES IN

EXPLAINING AND PREDICTING

ACTUAL EVENTS


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CLASSIFICATION

SYNTACTIC

SEMANTIC

PRAGMATIC

NORMATIC

NATURALISTIC

POSITIVE


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PRAGMATIC

DESCRIPTIVE

An inductive approach

Based on observationof accountants

behaviour in order tocopy their accountingprocedures andprinciples

Sterling:anthropological

Oldest and mostuniversally used

PSYCHOLOGICAL

Observation on usersresponse to theaccountants outputs

A reaction by the useris taken as evidencethat the financialstatements are usefuland contain relevantinformation


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CRITICISM OF DESCRIPTIVE

PRAGMATIC THEORIES

DOES NOT INCLUDE AN ANALYTICAL JUDGEMENT

OF THE QUALITY OF AN ACCOUNTANTS ACTIONS

NO ASSESSMENT OF WHETHER THE ACCOUNTANTS

REPORTS IN THE WAY HE/ SHE WOULD. DOES NOT PROVIDE FOR ACCOUNTING

TECHNIQUES TO BE CHALLENGED

NOT ALLOW FOR CHANGES.

FOCUSES ATTENTION ON ACCOUNTANTS BEHAVIOUR, NOTON MEASURING THE ATTRIBUTES TO THE FIRM


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CONTINUE

Sterling comments; it is my value judgement that the

theory of accounting ought to be

concerned with accounting phenomena,not practising accountants, in the sameway that theories of physics are concernedwith physical phenomena, not practising

physics. Therefore, inappropriate for

accounting theory construction


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Problem of psychological pragmatic

Users may react in illogical manners

Users might have a preconditionedresponse

Users may not react when they should

This shortcoming is overcome byconcentrating on decision theories and

testing them on large samples ofpeople.


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Syntactic in linguistic syntac is hestudy of the rules @ patterned relation,that govern the way words combine to

form phrases & phrases combine to formsentences.

Semantic referred to as rule ocorrespondence @ operational definition.

Connect symbols, words, term & conceptto real world object, event or function tomake a theory realistic.

SYNTACTIC AND SEMANTIC

THEORIES


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One theoretical interpretation of traditional

historical cost accounting is that it is largelya syntactic theory.

This interpretation of accounting theorymay describe as follows:

- The semantic inputs of the system are thetransaction and exchanges recorded in thevouchers, journals and ledgers of thebusiness.

- Then summarized into financialstatements.

- All these steps were accomplished on

assumptions of historical cost accounting.


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-The individual propositions are verified every

time the statements are audited by checking

the calculations and manipulations.

- However the accounts are rarely auditedspecifically in terms of whether and how

people will use them (a pragmatic test)- In this way, historical cost theory hasbeen confirmed many times.


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Criticism:

1. The theory has semantic content only onthe basis of its inputs.

2. There is no independent empiricaloperation to verify the calculatedoutputs, for example income or totalassets.

3. Traditional historical cost accounting hasalso been criticised on the basis of itssyntactic.

4. There are many imprecision ofdefinitions in accounting. In terms ofPopperian approach to science, many ofthe propositions of conventionalaccounting are not falsifiable.


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Popperian approach of verifyingtheory:

All hypotheses proposed must becapable or falsification. If a

hypothesis is not proposed or wordedso that it is falsifiable, then it is notin formative and does not add to

scientific progress. Once proposed, ahypothesis needs to be testedrigorously and ruthlessly by bothanalytical and empirical analysis


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Historical cost accountants however,argue that there is no requirementthat accounting outputs should havesemantic content or be subjected tofalsification rules because the

purpose of accounting is to allocatethe historic cost of resource usageagainst revenue, which is the

matching concept. Hence, assets,liabilities and owner's equity areresiduals from this process; they are

not meant to measure or sayan thin about value of the financial


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NORMATIVE

In 1950s and 1960s,the researchers weremore concern with policy recommendation(what should be done).

The theories concentrated either onderiving thetrue income (profit) for anaccounting period or on discussing thetype ofuseful accounting information inmaking economic decision.


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Normative theories

TRUE INCOME

The theorist focused

on a single measure ofassets and correctprofit figure.

However, theres noagreement on whatconstituted a corrector true measure ofvalue and profit.

DECISION USEFULNESS

Assumes that thebasic objective ofaccounting is to helpthe users ofaccounting reports indecision makingprocess by providinguseful and relevantinformation.


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Normative theories

- Decision-usefulness - Based on classical economics concepts (profit &

wealth or rational decision making).

They are normative in nature because they makethe following assumptions:

accounting should be a measurement system. Profit and value can be measured precisely.

Financial accounting is useful for makingeconomic decisions.

Markets are inefficient (can be fooled by creativeaccountant.

* These assumption were rarely subjected to anyempirical testing


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Normative theories

- Decision-usefulness(contd) In science, it is referred to as either

instrumentalism or realism.

Instrumentalism:

Realism: stresses the explanatory role of science.

It means, for an accounting theory to be valid, itmust be more than instrument for forecasting. Itmust also hold a description of the reality thatunderlies the accounting phenomena.

the suggestion that alternativeaccounting systems should be

assessed according to theirpredictive ability (an extensionof logical positivism).


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According to Friedman, theories cannot be testedby the realism of their assumptions (they can bejudged only by their predictive power).

However, some problems involved in applyingthe predictive test.

If the prediction is verified, it verifies theprediction model of the user, not the accountingsystem.

If the decision turns out to be the right one, itverifies the decision model, not the accountingsystem.

* Therefore, it is difficult to interpret the evidenceon decision making.


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The dissatisfaction of normative

accounting theory that have contributed

to the development of positiveaccounting theory

APR03,Q1

NT prescription not based on identified,empirical observation and method .

NT produces irrefutable (invalidate)

prescription even if it is developedlogically.

NT is infected with methodologicalproblem.


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Positive Theories

Positivism or empiricism means testing orrelating accounting hypotheses or theoriesback to the experiences or facts of thereal world.

At first, positive theories focused onempirically testing some of theassumptions made by the normativeaccounting theorists.

For example; using questionnaires andother survey techniques, attitudes to theusefulness of different accounting

techniques were determined.


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Today, positive theory is mainlyconcerned with explaining thereasons for current practice and

predicting the role of accountingand associated information in theeconomic decisions of individuals,

firms and other parties whichcontribute to the operation of themarketplace and the economy.


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The objective of positive

accounting is to explain andpredict accounting practice

-how explanatory and predictivetheories different from one

another in relation to positive

accounting theoryOCT2003,Q1


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Explanatory

-means providing reasons thatexplain observed accountingpractice

Predictive

-theory should be able to predict

unobserved practice.


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The main different between normative andpositive theories are prescriptive

Whereas, positive theories are descriptive, explanatory or predictive.

Positive theories do not prescribe howpeople (accountants) should behave to

achieve an outcome that is judged to begood.

Positive accounting theory can helpprovide an understanding of the role of

accounting which, in turn, can form thebasis for developing normative theories toimprove the practice of accounting.


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CRITICISM

NOV05,Q1

Value laden

A sociology of accounting rather than asemantic or measurement approach.

The logical positive philosophy is outdatedand inappropriate as philosophy ofscience.

Constrained to analyze what is rather

than what could be Assumptions of positive theory should be

more rigorously tested and established.


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THE ENDTHANK YOU

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Accounting Theory Construction1-4