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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