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  • Deegan (2014) - Chapter 1

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    Accounting Theory and Practice

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    Deegan (2014)_Chapter 1

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    Accounting Theory and Practice

    Droits d'auteur :

    © All Rights Reserved
    Téléchargez comme PDF ou lisez en ligne sur Scribd
    Signaler comme contenu inapproprié
    46 vues23 pages

    Deegan (2014) - Chapter 1

    Transféré par

    Owl
    Accounting Theory and Practice

    Droits d'auteur :

    © All Rights Reserved
    Téléchargez comme PDF ou lisez en ligne sur Scribd
    Signaler comme contenu inapproprié
    sur 23
    OPENING ISSUES At the beginning of « eer ye Osun Cereals) Bees ee ce Ra eee eae ee Caer Mee eet ele ee adking the res s eee pe et ea a ee ees Cee ee Pea WHAT IS A THEORY? 2 REE ET I TS ee In this book we consider various theories of financial accounting, Perhaps, therefore, we shovld stat by considering what we mean by a theory. There are various perspectives of what constitites a theory. The Orford English Dictionary provides various definitions, including a stem of dees or statements held as en explanation or acount ota group offacts | actanear | oF phenomena on, System oF eas or | ‘The Macquarie Dictionary provides the following definition of a theory: temapieaten | @ coherent goup of general propesitions used as principles of expleraton for a class of | oraccamtola | | phenomena | Retns a The a Pee 5 coherent set of outing researcher Hendriksen (1970, p. 1) defines a theory as retical, conceptual and preematic principles form of inguir CIAL ACCOUNTING THEORY The definition. provided by Fi. nrikoen Is very similar to the US Financial Accounting Standards Boards definition of its original Conceptual Framework Project (which in itself is deemed to be a normative theory of accounting}, which is defined as a 2 coherent system of intemlatad objectives and fundamentals that can lead to consistent standards = (FASB, 1976) a The use of the word ‘coherent’ in three of the above fonr definitions of theory is interesting and reflects « view that the cousponents of a theory (perhaps inchnding assuanptions about man behaviour) should logically combine together to provide an explanation or guidance in respect of certain phenomena The definitions are consistent with a perspective that theorles are not ad hoe in nature and should | he based on logical (systematic and coherent) casoning. Therefore, when we talk about a ‘theory’ we a are talking about much more than simply an idea or a ‘hunch, which we acknowledge is different from ‘ how the tenn ‘theory’ ts used im some contexts (for instance, we often hear people say they have a ‘theory’ about why sornething might have occurred when they really meun they have a hunch’) will be seen in this book, some accounting theories are developed on the basis of past j observations (omplrically based) soane of which are further developed to make predictions ' about likely occurrences (and sometimes also to provide explanations of why the events i | occur), ‘That Js, particular theories may be generated and subsequently supported by i developed on | Undertaking numerons observations of the actual phenomena in question. Such empirically ; the besis of past | based theories are said to be based on inductive reasoning and are often labelled ‘scientific’, iE observations, and | as, fi any theories in the ‘sciences’, they are based on observation, However, empirical research is restricted by the data that is currently available, which in tun means that studies *eelyoccurences, | cannot be undertaken of phenomena that cannot be obscrved by the researcherand this | tndvotve easing | has broader philosaphical implications. Alternatively, other accounting theories that we also | ASPRg28" | consider do not seek to provide explanations or predictions of particular phenomena but | ts weighing | Tather, prescribe what should be done (as opposed to describing or predicting what is done) | spobsenetionai | in particular circumstances. ( Te | ___ Llewelyn (2003) points out that the term ‘theory’ in accounting: not onky applies to ‘grand || ARRTASES | theories tht ecko tell ue about bod gonoalealle nena tee ay ae vat in i | _,Enaleatreeaen | physics) but also applies to any framework that helps us make sense of aspects of the (soclal) Researen that relies | world in which we live, and that helps provide structure to understand our (social) experiences, We stress that different theories of accounting often have different objectives. Llewelyn (23, P. 665) provides some interesting views about what constitutes theory, She sta 2s that Theories impose cohesion and stability (Czarniawska, 1997, p. 71) 0 that wie iguty thoy ings and give rise to different as igificance, everyone has a naed for ‘theary' to go about their everyday affairs. ‘Theories’ do not just fide in libraries, waiting for academics to ‘dust t ambiguous (which is most of the time!) peop work at confronting this Also, because "ife’ and situations commonly heve ™ down's they are used ws people addres ambiguity, contradiction or paradox so that they can dacide what to do (and think) net. Theories erate expectations about the wat Because accounting is a human activity (you cannot have ‘sccounting’ without accountants), theories of financial accounting (and ther thany) will consider such things as people's behaviour andlor people's needs as regards financial accounting i formation, oF the reasons why people within crganisations might eleet to supply particular information to particular stakeholder groups. For exaimple, this book considers, among others, theories that: * explain why particular aecounting rules are mandated by rogulators in preference to others (theories of regulation are considered in Chapters 2 and 3) PTER } INTRODUCTION TO FINANCIAL ACCOUNTING THEORY sed on a particular perspective of the role of accounting. assets should be valued for external reporting purposes (such prescriptive or normative theo! im Chapters 5 and 6) predict that managers paid bonuses on the basis of measures Such as profits will seek to adopt those aecounting methods that lead to an increase in reported profits (such descriptive or positive theortes are considered in Chapter 7 ‘© seek to explain how an individual's cultural background will impact on the types of accounting {information that the individual seeks to provide to peuple outside the organisation (such a theory is considered in Chapter 4) ‘© prescribe the accounting information that should be provided to particular classes of stakeholders ‘on the basis of their perceived information needs (such thebries are often referred to as decision usefulness theories, and are disenssed in Chapter 5 «predict that the relative power ofa particular stakeholder group (with ‘power’ often being defined {in terms of the group’ control over searce resources) will determine whether that group receives, the accounting information it desires (which derives from a branch of Stakeholder Theory, which is discussed in Chapter 8) ‘+ predict that organisations seek to be perceived by the community as legitimate and that ecounting information can be used by the organisation as regain ean of gaining, maintaining or wg legitimacy (which derives from Legitimacy Theory, c asidered in Chapter 3) WHY IT IS IMPORTANT FOR ACCOUNTING STUDENTS TO STUDY ACCOUNTING THEORY © Asa student of financial accounting you will be required to learn how to construct hd edna accounting standards and other professional and statutory requirements, In your working life (whether or not you choose to specialise in accounting) you could be involved in such activities as analysing financial statements for the purposes of making particular ling accounting guidance accounting practices underlying these various yo be in performing these actvities—and therefore the better equipped you are likely to be to sucteed in your chosen career decisions, compiling financial statements for others to i, oF ge niles for others to follow. The better you understand the activities, the more ive you are Hi) Given that accounting theories aim to provide a coherent and systemati framework for investigating, anderstanding and/or developing various accounting practices, the evaluation of altemative accounting practices is likely to be much more effective if the person evaluating these practicos has a thorough rasp of accounting theory. Although all students of accounting (like students in any subject) should be inter juaing th students have been content w sted in critically ev Ihenomena they are studying, we recognise that, in the past, many h simply leaming how to apply various accounting practices without questioning the basis of these practices, However, in the wake of a growing number of high-profile accoanting failures (such as Lehman Brothers, Enron and WorldCom in the United States, HMV Group in tho Uni dom, Parmalat, Lernout and Hauspie Speech in Europe, and HIH Insurance, One.Tel, Haris Scarf and Ailans Musie ‘within Anstralia). it has arguably never been more important for accountants to understand thoroughly and be able to eritique te accounting practices that they use, Withont such a theoretically informed understanding, it js difficult to evaluate the suitability of current accounting practices, to develop improved accounting practices where current practices arc unsuitable for changed business situations, and to dh 1d the reputation of accounting wh accounting practicos are wrongly blamed for causing, INANCIAL ACCOUNTING TH ‘companies te fail. This is « key reason why itis important for you to study and understand accounting theories Asa result of studying the theories of financial accomnting in this book, yon will be exposed to various issues, inchuding: ‘+ how the various elements of accounting should be measured what motivates managers to provide certain types of accounting information ‘what motivates managers € select particular accounting methods in preference to others ‘whal motivates individuals tb support and perhaps lobby regulators for some accomnting methods in preference to others what the implications for particular types of onganisations and their stakeholders are if one ‘method of accounting is chasen or mandated in preference to other methods how and why the capital markets react to particular accounting information + whether there is a ‘true measure’ of income Accounting plays a very important and pervasive role within soc rules of Gnancial accounting (as embodies Simply to within accounting standards, conceptual frameworks and the like) without considering the implications that aecounting formation can have would seem illogical and, following the high-profile accounting failures at Enron and other organisations potentially dangerous Many significant decisions are made on the basis of infor jon that accountants provide {or in some circumstances, elect not to provide), so accountants are often regarded as being very powerful and influential pe The information generated by accountants enables others to make important decisions. For example: Should they support the organisation? Is the organisation earning sufficient profits’? Is it ear soessive ‘profits’? Is the organisation fulfilling its social responsibilities by ly support programs and environmentally responsible production technologies and, if so, how much? In considering profits, is profitability a valid measure of organisational success? Further, if the accountanVaccounting profession emphasises particular attributes of organisational performance (for example, profitability) does this in turn impact on what society perceives as being the legitimate goals of business?” As a result of considering various theories of financial accounting, this book provides soune answers to these important issues. Ata broader level, an understanding of accounting theories ean be crucial to the roputation and future of the accounting profession, Unerman and O"Duyer (2004) have argued that the rise in high-profile accounting failures has raised the level of awareness among not

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