If it is imaginable to develop an accounting theory
(Hendriksen and McDonald) then how do we approach its development? Research in
this area has centered on traditional approaches, regulatory approaches and
what has come to be observed as new approaches. Following are the approaches
Traditional approaches cover:
Non-theoretical approaches to accounting theory are concerned with developing a theory or accounting methods and principles that will be beneficial to manipulators, mainly decision makers. This approach can be established in a practical or authoritarian way. In essence this is the approach the accounting occupation has used in the past to develop an accounting theory and it is honestly apparent it has not been able to resolve conï¬‚ict in accounting practices or philosophies.
Theoretical approaches to the development of an accounting theory are many such as:
- Deductive approach
- Inductive approach
- Ethical approach
- Sociological approach
- Economic approach
- Eclectic approach
This approach involves developing a theory from elementary proposals, premises and assumptions which results in accounting principles that are reasonable conclusions about the subject. The theory is verified by determining whether its results are acceptable in practice. Edwards and Bell (1961) are deductive theorists and historical cost accounting was also derived from a deductive approach.
For this approach we start with observed phenomena and move towards generalized conclusions. The approach requires experimental testing, i.e. the theory must be supported by sufï¬cient illustrations/observations that support the derived conclusions. Fairly often the logical and inductive approaches are mixed as researchers use their knowledge of accounting practices. As Riahi-Belkaoui states: General propositions are formulated through an inductive process, but the principles and techniques are derived by a deductive approach. He also observes that when an inductive theorist, Littleton (1935), collaborates with a deductive theorist, Paton (1922), a hybrid results showing compromise between the two approaches.
This is truly an ethical approach that centers on social welfare. In other words, accounting principles and methods are assessed for acceptance after considering all effects on all groups in society. Thus within this approach we would need to be able to account for a business entityâ€™s effect on its social environment.
This approach attention on general economic welfare. Thus accounting principles and methods are assessed for acceptance dependent on their impact on the national economy. Sweden, in its national GAAP, uses an economic approach to its development. The IASB in developing its standards does tend to take an economic approach into account. For instance, the current conversation on accounting for leases focuses on the result that a standard requiring the capitalization of all leases, whether ï¬nance or operating, might have on the economy or business in general. Traditionally, accounting standards have been set without considering economic consequences but lobby pressures from clusters who observe themselves as being affected can be solid.
This is maybe our current approach where we have a mixture of all the approaches already identiï¬ed appearing in our accounting theory. This approach has come about more by accident than as a deliberate attempt, due to the interfering in the development of accounting theory by specialists, governmental bodies and individuals. This eclectic approach has also run to the development of new approaches to accounting theory.
Numerous would regard this as the approach we presently have to accounting theory. They grip this view because to them it does not look that standards, even those of the IASB, are based on broad, related theories but are developed as solutions to current conï¬‚icts that arise in our attempts to provide beneficial information to manipulators. Certainly, they might argue that new standards are only developed when a specific manipulator complains about misrepresentation or non-information. But there are questions to consider if we do adopt this approach to the development of accounting theory. In the main these queries center on whether we should accept a free market approach to the regulation, a private sector regulatory approach or public sector regulatory approach. This regulatory approach is also one that tends to recognize solutions to difï¬culties that have occurred in our reporting rather than providing us with a theory that anticipates the issues.
These efforts to use both conceptual and empirical reasoning to formulate and verify an accounting framework. The approaches are:
- Events approach
- Behavioral approach
- Human Information Processing approach
- Predictive approach
- Positive approach
The events approach was developed in 1969 by George Sorter and was deï¬ned as â€˜providing information about relevant economic events that might be useful in a variety of decision modelsâ€™. The events approach leaves the manipulator to aggregate and allocate weights and values to the event. The accountant would only provide information on the economic event to the user, he would not undertake a decision model. Thus, for example, the event approach income statement would not specify ï¬nancial performance in a period but would transfer events that occurred during the period without any attempt to determine a bottom line.
The behavioral approach attempts to take into account human behavior as it narrates to decision making in accounting. Devine (1960) stated the following:
On balance it seems fair to conclude that accountants seem to have waded through their relationships to the intricate psychological network of human activity with a heavy handed crudity that is beyond belief. Some degree of crudity may be excused in a new discipline, but failure to recognize that much of what passes as accounting theory is hopelessly entwined with unsupported behavior assumptions is unforgivable.
This to us seems fair remark. Given that ï¬nancial reporting is about communicating information to users to permit them to make decisions, a lack of attention of how that information inï¬‚uences their behavior is certainly unforgivable. Studies in this area have tended to concentrate on:
- The adequacy of disclosure
- Usefulness of ï¬nancial statement data
- Attitudes about corporate reporting practices
- Materiality judgements
- Decision effects of alternative accounting practices
In one of these areas, materiality, it was discovered that manipulatorsâ€™ assessment of materiality was individualistic and that the provider of the information was not in the finest position to determine materiality for a manipulator. There is much work still to do within the behavioral approach.
Human information processing approach
This is comparable to a behavioral approach in that it focuses on how manipulators interpret and use the information provided.
This approach attempts to formulate an accounting theory by focusing on the analytical nature/ability of a particular method of reporting an event that would be of use to the manipulator. Such approaches are most predominant in what could be regarded as management accounting. Efficient market hypothesis, Beta models, chaos theory are all examples of this approach.
This can be best clarified by quoting Jensen (1976), who called for the:
development of a positive theory of accounting which will explain why accounting is what it is, why accountants do what they do, and what effects these phenomena have on people and resource utilization.
The approach is based on the proposition that managers, shareholders and regulators are rational and that they effort to exploit their utility. The theory became known as â€˜the Rochester school of accountingâ€™. The positive approach is totally reverse to the normative approach and efforts to explain why accounting procedures and policies are as they are, whereas the normative approach attempts to suggest the accounting procedures and policies to be implemented.
May 29, 2017