TAK: Accounting Theory Construction

The role of accounting

 * Bookkeeping = recordkeeping ==> tujuan akuntansi adalah pencatatan (recording) transaksi
 * Accounting = accountability ==> tujuan akuntansi adalah sebagai bentuk pertanggungjawaban manajemen seberapa banyak revenue, cost yang terjadi selama periode tertentu dan asset yang dimiliki
 * Accounting = information for decision making ==>

if the objective is accountability, we should use historical value not the fair value because. while the role of accounting is to decision making, we should use the fair value.

Objective of financial reports

 * Poor performers
 * Good performers
 * Investors

Pragmatic approach
observing the practices and techniques of working accountants and then teaching those practices and techniques to successive accountants.

Descriptive pragmatic approach
Descriptive pragmatic approach:
 * based on observed behaviour of accountants
 * theory developed from how accountants act in certain situations
 * tested by observing whether accountants do act in the way the theory suggests
 * is an inductive approach

Criticisms of descriptive pragmatic approach:
 * does not consider the quality of an accountant’s action
 * does not provide for accounting practices to be challenged
 * focuses on accountants’ behaviour not on measuring the attributes of the firm

Psychological pragmatic approach
Psychological pragmatic approach:
 * theory depends on observations of the reactions of users to the accountants’ outputs
 * a reaction is taken as evidence that the outputs are useful and contain relevant information

Criticisms of the psychological pragmatic approach:
 * some users may react in an illogical manner
 * some users might have a preconditioned response
 * some users may not react when they should

Theories are therefore tested using large samples of people

Semantic Theory
Semantic approach: semantics is sometimes referred to as rules of correspondence or operational definitions. it connects symbols, words, terms, or concepts with real-world objects, events or functions and is seen to make a theory realistic. In accounting semantic theory concern it self with the correlation of propositions to objects or events and manifests itself in terms of measurement theories: for example measuring the effects of inflation on assets and liabilities and adjusting the accounts to reflect these adjustments. Theorists in this area argue that by applying these adjustments, the accounts then have semantic content an can be related to the real world (which they see as being market prices)


 * 1) Input semantics -- assigning numbers to the transaction inputs of accounting, e.g. assets, liabilities, revenue, expenses.


 * 1) Output semantics -- testing the outputs of the accounting system against some external reference, e.g increases in profits against share price changes.

Syntatic Theory
Syntactic approach: represents the logical relation in the theory. This concerns the rules of the language employed, e.g, the rules of grammar for English or the rules of mathematics for mathematically expressed theory. Syntactical relation are logical connections that cement together and explain the important concepts of the theory.


 * 1) Syntactic theory is one that is capable of testing on the basis that it is valid in terms of its logical consistency.


 * 1) Thus the calculation of accounting profit and determination of asset valuation can be valid in relation to their conformity with rules prescribing the measurement of accounting profit and asset valuations.
 * 2) One example is the operation of summation in the balance sheet. It is a logical rule that, if objects or properties are to be added, they must be alike. However, existing accounting balance sheets aggregate purchase prices which are not alike under the current conditions of changing prices.
 * 3) Many accounting methods are based on certain principles, assumptions, constraints which are formulated as a result of certain agreements between the representatives of the professional accounting community, hich not necessary

Positive Theory
Positive theory deals with explaining or predicting what actually happens in the real worlds. They would probaly collect data concerning earnings announcements and analysts' forecasts, and statistically compare the returns for different circumstances: when analysts' forecasts are above, below, or at the amount of profit reported.

Normative Theory
Normative theory is concerned with prescribing what should be done. One of the issues hich becomes the focus of some normative theorits is how to derive the 'true income' (profit)

Different perspectives
Scientific approach:
 * has an inherent assumption that the world to be researched is an objective reality
 * is carried out by incremental hypotheses
 * has an implied assumption that a good theory holds under circumstances that are constant across firms, industries and time

Criticism of the scientific method:
 * large-scale statistical research tends to lump everything together
 * it is conducted in environments that are often remote from the world of or the concerns of accountants

Naturalistic approach:
 * implies that there are no preconceived assumptions or theories
 * focuses on firm-specific real-world problems

Alternative ways of looking at the world:
 * 1) Reality as a concrete structure
 * 2) Reality as a concrete process
 * 3) Reality as a contextual field of information
 * 4) Reality as a symbolic discourse
 * 5) Reality as a social construction
 * 6) Reality as projection of human imagination


 * For categories 1 – 3 it is more appropriate to use the scientific approach
 * For categories 4-6 the naturalistic approach is more appropriate

Scientific approach applied to accounting
Misconceptions of purpose: • It attempts to provide persuasive evidence which may describe, explain or predict
 * Make scientists out of accounting practitioners
 * Researchers = practitioners
 * The desire for ‘absolute truth’
 * The scientific method does not claim to provide ‘truth’

Issues for auditing theory construction

 * Auditing is a verification process that is applied to the accounting inputs and processes
 * Auditors provide an opinion on
 * whether the financial statements accord with the applicable reporting framework
 * whether the statements give a true and fair view
 * The normative era of accounting coincided with a normative approach to auditing theory
 * The positive ere of accounting has led to a positive approach to auditing theory

Summary

 * Many different approaches to theory formulation in accounting
 * Evolution of accounting theory
 * positive v. normative
 * scientific v. naturalistic

Keyterms

 * Descriptive pragmatic approach
 * Psychological pragmatic approach
 * Syntactic and semantic theories
 * Historical cost accounting
 * Normative theories
 * Positive theories
 * Scientific approach to theory
 * Naturalistic approach to theory
 * Auditing theory

Ref

 * https://sirius.is3.cloudhost.id/docs/ppt-godfrey/Slide-AKT-405-Teori-Akuntansi-2-Godfrey.ppt.pdf