Accounting Theory

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ACC 3135

Exploring the Development of Accounting Theory

Unit 2

ACC3135:
Accounting Theory

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ACC 3135

Lecture outcomes:

• Evaluate various accounting theories and debates

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What have we learnt from Week 1?

• Accounting is not so concrete and objective as we thought it to be, but can be shaped by various views and interests in society, and therefore can be considered to be socially constructed. (See Week 1 Reading List)
• Also form Unit 1, the importance of theories in ‘viewing’ and ‘interpreting’ accounting & its function in society.

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• Today’s lecture will continue with the idea that accounting is socially constructed by exploring notions of ‘reality’ and how various groups in society have a say in shaping and determining the function of accounting. In particular the notion of reality construction which has its roots in philosophy and philosophical debates.

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• We have also mentioned the importance of the ‘True and Fair’ in accounting and despite its prominence in accounting people including accountants have difficulty in interpreting its meaning.
• Thus should accounting be bought under public scrutiny? (from Unit 1)

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• Different people and indeed different groups of people will have particular views and interests to protect and as such their reality can differ considerably.
• (i.e. accountants, users of accounting information and what does the public expect of accountants?)
  

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• Thus reality depends on people and struggle and whose reality can be considered legitimate? And how is this achieved?
• Groups with power can legitimate their reality.
• This can be achieved through ‘words’ and ‘language’. Words have different meanings according to (historical) context and situations.
• Meanings can not be fixed, they are constantly undergoing transformation and are being shaped by various groups such as accountants and pressure groups that want to priorities their reality.

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• The media also have a part to play in the shaping of meanings through images and language.
• Modern society is made up of ‘different’ individuals who live and work in it.
• They are connected to each other through complex relationships each prioritizing their own reality. Due to this, social inequalities and antagonisms exist. (capitalist/worker relationship).
  
  
  
  

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• Once certain issues have been resolved in society other issues are waiting to be resolved.

• Accounting practice has to exist within a particular social structure such as capitalist society. The incidence of bankruptcy and liquidation means that capital (finance) is given a chance to move on. It does not remain static.

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• Thus in our society, happiness is measured by material objects and as such fraud can happen.
• The work of accountants occupies a central place in society, as they are responsible for monitoring the economic health of companies.
• Where does the State come into all of this?
• The State gives the accountancy profession their status and privileges.

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• Why is the State interested in all of this?

• The State does not own companies and businesses in society, it needs revenues through tax. The State has a vested interest in Capitalism. If Capitalism does not work then how will it get its revenue?
• So what is the relationship between accountancy and the State?
  

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Historically the accountancy profession was established as a creation of the State. If the State got mixed up in accountancy scandals this meant disaster. Therefore the State was not legitimate.

In cases of fraud and scandals it’s the Jury which in the end tell accountants what is wrong with their practices, then why are lay people involved if accountants are the experts?

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• Historically, accountants have had this notion that they are professional.
• Professional and ethical?
• Suggestions that accountants have a ‘coherent body of knowledge’ follow standards and follow their ‘True and Fair View’.
• Is all this really enough?
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Does accounting have a coherent body of knowledge? i.e. What is an asset?

Disagreement exists as to the meaning of fundamental concepts.

Accounting can not be said to be a science –it’s a craft. The user tells the accountant what they want. The accountant is able to manipulate and construct economic reality, according to the reality that is prioritised.

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Accountants even believe in predictions. Consider ratio analysis. Looking at the past in order to make predictions about the future?

If accounting is a science then maybe using ratio analysis for prediction has some justification.

The function of accountants and accounting can not be underestimated in society. They look after the global functions of a business.

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They are able to analyse the various components of a business.

What could be salvaged if the worst happened?

i.e. look at the current situation with regards to the banking industry.

Thus, there could be antagonism between production and finance.

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Accountants construct economic reality. They can be considered to be communicators of reality (economic), but in communicating reality, accountants construct reality (see Hines article week 2’s reading)

In addition, this reality can also be limited and one-sided. Morgan’s article suggests the notion of accounting being objective is largely a myth as accountants and accounting assist in its construction.

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Whose reality are we reporting on and prioritising?

Can reality be challenged and what could happen if it is challenged?

Perhaps the destruction of the myth that accounting is concerned with the construction of objective reality.

The reality that accounting reports on is economic reality.

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So can theories help us to come up with some answers to what accounting is all about?

By using theories we can throw some light on accounting and try to make sense of it.

Are more theories better than one?

With many theories we will have access to different theoretical perspectives. These will give us different and multi ways of seeing.

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We will never be able to find evidence without theory , by using different /multi ways of seeing we can turn commonsense theories upside down.

Commonsense theories?

Some authors have suggested that theories which have been used to explore and make sense of accounting have been shaped by (different) imagery or images over time.

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Solomons suggests that the task of accountants is to provide information which is free from bias. He gives reference to the notion of ‘Neutrality’. Neutrality should be sought, without it, the accountancy profession is under threat.

Solomons puts forward various metaphors in order to illustrate how accounting can seek to promote neutrality (free from bias) ‘Representation Faithfulness’.

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See the metaphor/analogies of Journalism, Cartography, Telephony and Speedometer.

Tinker in his paper takes these points up and suggests that Solomons analogies are problematic on various levels, both on epistemological (ideas and generation of knowledge, issues relating to philosophy) and practical grounds.

Can reality be captured in an unambiguous way?

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Are we not a part of the reality that we are trying to capture?

(see the article of Morgan,1988)

What about the notion that people are different and indeed different groups of people will have particular views and interests to protect and as such their reality can differ considerably.

Thus reality depends on people and struggle,

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Whose reality can be considered legitimate? And how is this achieved?

Groups with power can legitimate their reality.

Can accountants ever be neutral?

Accountants are products of our society, can we and indeed accountants have an empty head?

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How do you make others accept your way of seeing?

Through the way that you act, through morals, ethics and guidelines and adherence to mythical concepts such as ‘True and Fair’.

Also again through words and language.

Accounting information can PERSUADE people to accept particular realities.

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Accountants are powerful, they construct economic reality through their craft.