ACCOUNTING THEORY CONSTRUCTION

PRAGMATIC THEORIES SYNTACTIC & SEMANTIC THEORIES NORMATIC THEORIES POSITIVE THEORIES

ACCOUNTING THEORIES
CLASSIFY ACCORDING TO: ASSUMPTIONS THEY RELY ON HOW THEY WERE FORMULATED THEIR APPROACHES IN EXPLAINING AND PREDICTING ACTUAL EVENTS

PRAGMATIC SYNTACTIC

NATURALISTIC

CLASSIFICATION

SEMANTIC
POSITIVE

NORMATIC

PRAGMATIC

DESCRIPTIVE An inductive approach Based on observation of accountants behaviour in order to copy their accounting procedures and principles Sterling: anthropological Oldest and most universally used

PSYCHOLOGICAL Observation on users response to the accountants outputs A reaction by the user is taken as evidence that the financial statements are useful and contain relevant information

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, NOT ON MEASURING THE ATTRIBUTES TO THE FIRM

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 same way that theories of physics are concerned with physical phenomena, not practising physics.

Therefore, inappropriate for accounting theory construction

Problem of psychological pragmatic

Users may react in illogical manners Users might have a preconditioned response Users may not react when they should

This shortcoming is overcome by concentrating on decision theories and testing them on large samples of people.

SYNTACTIC AND SEMANTIC THEORIES

Syntactic in linguistic syntac is he study of the rules @ patterned relation, that govern the way words combine to form phrases & phrases combine to form sentences. Semantic referred to as rule o correspondence @ operational definition. Connect symbols, words, term & concept to real world object, event or function to make a theory realistic.

One theoretical interpretation of traditional historical cost accounting is that it is largely a syntactic theory. This interpretation of accounting theory may describe as follows: - The semantic inputs of the system are the transaction and exchanges recorded in the vouchers, journals and ledgers of the business. - Then summarized into financial statements. - All these steps were accomplished on assumptions of historical cost accounting.

-The individual propositions are verified every time the statements are audited by checking the calculations and manipulations.

- However the accounts are rarely audited

specifically in terms of whether and how people will use them (a pragmatic test) - In this way, historical cost theory has been confirmed many times.

 Criticism:
1.

2.

3.

4.

The theory has semantic content only on the basis of its inputs. There is no independent empirical operation to verify the calculated outputs, for example income or total assets. Traditional historical cost accounting has also been criticised on the basis of its syntactic. There are many imprecision of definitions in accounting. In terms of Popperian approach to science, many of the propositions of conventional accounting are not falsifiable.

Popperian approach of verifying theory: All hypotheses proposed must be capable or falsification. If a hypothesis is not proposed or worded so that it is falsifiable, then it is not in formative and does not add to scientific progress. Once proposed, a hypothesis needs to be tested rigorously and ruthlessly by both analytical and empirical analysis

Historical cost accountants however, argue that there is no requirement that accounting outputs should have semantic content or be subjected to falsification rules because the purpose of accounting is to allocate the historic cost of resource usage against revenue, which is the matching concept. Hence, assets, liabilities and owner's equity are residuals from this process; they are not meant to measure or say anything about value of the financial

NORMATIVE

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

The theories concentrated either on deriving the true income (profit) for an accounting period or on discussing the type of useful accounting information in making economic decision.

Normative theories
TRUE INCOME

The theorist focused on a single measure of assets and correct profit figure. However, theres no agreement on what constituted a correct or true measure of value and profit.

DECISION USEFULNESS

Assumes that the basic objective of accounting is to help the users of accounting reports in decision making process by providing useful and relevant information.

Normative theories - Decision-usefulness Based on classical economics concepts (profit & wealth or rational decision making). They are normative in nature because they make the following assumptions: accounting should be a measurement system. Profit and value can be measured precisely. Financial accounting is useful for making economic decisions. Markets are inefficient (can be fooled by creative accountant. * These assumption were rarely subjected to any empirical testing

Normative theories - Decision-usefulness (contd)

In science, it is referred to as either instrumentalism or realism. Instrumentalism: the suggestion that alternative accounting systems should be assessed according to their predictive ability (an extension of logical positivism). Realism: stresses the explanatory role of science. It means, for an accounting theory to be valid, it must be more than instrument for forecasting. It must also hold a description of the reality that underlies the accounting phenomena.

According to Friedman, theories cannot be tested by the realism of their assumptions (they can be judged only by their predictive power). However, some problems involved in applying the predictive test. If the prediction is verified, it verifies the prediction model of the user, not the accounting system. If the decision turns out to be the right one, it verifies the decision model, not the accounting system. * Therefore, it is difficult to interpret the evidence on decision making.

The dissatisfaction of normative accounting theory that have contributed to the development of positive accounting theory
APR03,Q1

NT prescription not based on identified, empirical observation and method . NT produces irrefutable (invalidate) prescription even if it is developed logically. NT is infected with methodological problem.

Positive Theories

Positivism or empiricism means testing or relating accounting hypotheses or theories back to the experiences or facts of the real world. At first, positive theories focused on empirically testing some of the assumptions made by the normative accounting theorists. For example; using questionnaires and other survey techniques, attitudes to the usefulness of different accounting techniques were determined.

Today, positive theory is mainly concerned with explaining the reasons for current practice and predicting the role of accounting and associated information in the economic decisions of individuals, firms and other parties which contribute to the operation of the marketplace and the economy.

The objective of positive accounting is to explain and predict accounting practice -how explanatory and predictive theories different from one another in relation to positive accounting theory
OCT2003,Q1

Explanatory -means providing reasons that explain observed accounting practice

Predictive -theory should be able to predict unobserved practice.

The main different between normative and positive theories are prescriptive Whereas, positive theories are descriptive , explanatory or predictive. Positive theories do not prescribe how people (accountants) should behave to achieve an outcome that is judged to be good. Positive accounting theory can help provide an understanding of the role of accounting which, in turn, can form the basis for developing normative theories to improve the practice of accounting.

CRITICISM
NOV05,Q1

Value laden A sociology of accounting rather than a semantic or measurement approach. The logical positive philosophy is outdated and inappropriate as philosophy of science. Constrained to analyze what is rather than what could be Assumptions of positive theory should be more rigorously tested and established.

THE END
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