Accounting accounting care finance handbook health medical practice wiley

This approach does not provide for accounting techniques to be challenged, hence it does not allow for change. For example, we observe practising accountants' methods and techniques and teach those methods and techniques to students.

Those students will become practising accountants whom we will observe in the future to learn what to teach, and so on. The descriptive pragmatic approach focuses attention on accountants' behaviour, not on measuring the attributes of the firm, such as assets, liabilities and profit. In taking a descriptive pragmatic approach, we are not concerning ourselves with the semantics of accounting phenomena.

His conclusion is, of course, in relation to normative theories of how accounting should be conducted rather than pragmatic theories that describe real- world practices.

Psychological pragmatic approach In contrast to descriptive pragmatic approaches where theorists observe accountants' behaviours, psychological pragmatic approaches require theorists to observe users' responses to the accountants' outputs such as financial reports.

A reaction by the user is taken as evidence that the financial statements are useful and contain relevant information. A problem with the psychological pragmatic approach is that some users may react in an illogical manner, some might have a preconditioned response, and others may not react when they should.

This shortcoming is overcome by concentrating on decision theories and testing them on large samples of people, rather than concentrating on the responses of individuals. This interpretation may be described as follows: the semantic inputs of the system are the transactions and exchanges recorded in the vouchers, journals and ledgers - of the business. These are then manipulated partitioned and summed on the basis of the premises and assumptions of historical cost accounting.

For example, we assume that inflation is not to be recorded and market values of assets and liabilities are ignored. We then use double-entry accounting and the principles of historical cost accounting to calculate profit and loss and the financial position.

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 or in terms of what they mean a semantic test. In this way, historical cost theory has been confirmed many times. If we assume a Lakatosian research program, the principles of historical cost accounting form the negative heuristic and, in a Kuhnian viewpoint, the dominant paradigm.

Some accounting theorists are critical of this approach. They argue that 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, 'profit' or 'total assets'. These figures are not observed; they ale simple summations of account balances, and the auditing process is, in essence, simply a recalculation.

The auditing process verifies the inputs by examining underlying documents and checks mathematical calculations. However, it does not verify the final outputs. This means that even if accounting reports are prepared using perfect syntax, they may have little, if any, value in practice. Sterling comments: The inadequacy of this procedure to confirm a theory is immediately apparent. If one were to attempt to confirm a theory of astronomy, as exemplified by a particular planetarium, then one might begin by checking on the accuracy of the observational inputs and one might also check for errors in computation.

One would look at the sky to see if the stars were in fact in the position indicated by the planetarium. In the absence of this last step, several absurdities could result. First, the set of equations could describe any situation whatsoever, e. If one restricted the 'verification' procedure to a check on the accuracy of the inputs and a recalculation, then one would certify that this planetarium presents fairly the position of the stars.

The only way to discover that the orbit ought or ought not to be rectangular is to perform a separate operation and compare the results of that operation with the outputs of the system. If enough of these outputs were subjected to independent verification, the theory of rectangular orbits would be either confirmed or disconfirmed. Second, if there were two planetariums concerned with the same phenomena but with different sets of equations resulting in contradictory outputs, then the auditing procedure would require that both of them be certified as correct when at least one of them is necessarily wrong.

Do share prices rise when profit improves? Metcash increased earnings per share by The article describes a market reaction to accounting news. This description provides an example of which approach to theory? Consider the following syllogism: When a company reports better prospects than previously, investors force that company's share price to increase. Metcash is a company that has reported better earnings per share than previously.

Investors forced Metcash share prices to increase. If so what is the flaw? What, then, about the procedure of adding the amount of cash held by a company today to the amount of cash paid 20 years ago for a piece of freehold land which the company still holds today? The distinctive feature of this philosophy is doublethink.

Doublethink means the power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them. Fixed assets should be carried at cost. In terms of a Popperian approach to science, many of the propositions of conventional accounting are not falsifiable. Take, for example, the following criticism of a definition of depreciation: Definitionsare unacceptablewhich imply that depreciationfor the year is a measurement, expressed in monetaly terms, ofthe physical deterioration within the year, or the decline in monetary value within the year, or, indeed of anything thai actually occurs within the year.

For example, depreciation depends on allocation, which in turn depends on a future sale disposal value and the expected useful life of the asset. The same is true for profit.

Under this logic, true profit cannot be determined until the firm has been liquidated. Theories based on historical cost conventions lead to cautious hypotheses. The hypotheses therefore are unable to be tested and, as per the falsificationist approach in which a hypothesis is not informative and does not add to scientific progress if it is not worded or proposed so that it is falsifiable , they are not useful for financial decision making except to verify accounting entries.

Hence, they are uninformative and do not add to knowledge or progress in accounting. The above criticisms of historical cost are essentially criticisms about measuring current values and were the forerunner of the current move of International Financial Reporting Standards IFRS towards 'fair value' accounting. In defence of the historical cost system, accountants argue that there is no requirement that accounting outputs should have any semantic content correspondence with current real-world events, transactions, or values or be subject to falsification niles.

They counter by using the argument that the role of accounting is to allocate the historical cost of resource usage against revenue - the matching concept - to determine the surplus secured from economic activity.

If we adopt this allocation approach, the definition of depreciation is then in accordance with the matching concept. Although it may be syntactic, this cost allocation assumption can conflict with normative theories about how we should account to provide information that is useful for decision making. The assumption that accounting should be a measurement system, providing information useful for decision making, is a normative premise assumed by a large group of accounting theorists and regulators.

The criticism that there are many different and acceptable historical cost allocation systems can be explained within a 'positive accounting' framework which makes the assumption that accounting information is an economic good, subject to demand and supply forces. Under positive approaches to accounting theory development, diversity of accounting techniques exists because diversity is required.

This is because different accounting techniques are needed to account for different business situations. For example, where firms are regulated by agencies that allow them to charge prices only on a cost-recovery basis, historical cost could be useful for management accounting price setting and for informing outside users of financial statements about the firm's likely future profits, and also as a means of influencing price-regulation agencies regarding the appropriateness of their price-setting formula.

The allocation of costs used for price setting might involve accelerated cost recognition, such as diminishing-balance depreciation over a short period of time because this gives high costs and leads to high prices being set for the firm's products.

However, a slower cost allocation might better reflect to outside users the likely life and vdlue of the assets. Agency theory suggests that the accounting technique required to minimise the costs of contracting will often differ from situation to situation.

Moreover, different political and regulatory costs affect each firm. Since firms seek to minimise all costs, they will choose different accounting techniques and because historical cost allocation allows a substantial number of allocation techniques, then firms can simply choose the most efficient technique.

During this period, accounting researchers became more concerned with policy recommendations and with what should be done, rather than with analysing and explaining the currently accepted practice.

Normative theories in this period concentrated either on deriving the 'true income' profit for an accounting period or on discussing the type of accounting information which would be useful in making economic decisions. True income: True income theorists concentrated on deriving a single measure for assets and a unique and correct profit figure.

However, there was no agreement on what constituted a correct or true measure of value and profit. Much of the literature during this period consisted of academic debate about the rnerits and demerits of alternative measurement systems. Decision-usefulness:The decision-usefulness approach assumes that the basic objective of accounting is to aid the decision-making process of certain 'users' of accounting reports by providing useful, or relevant, accounting data; for example, to help investors current and potential decide whether to buy, hold or sell shares.

One test of usefulness already discussed is the psychological pragmatic reaction to data. Others do not identify a particular group but argue that all users have the same requirement for accounting data. They usually make adjustments to historical cost measures to account for inflation or the market values of assets. They are, in essence, measurement theories of accounting. 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 or can be fooled by 'creative accountants' conventional accounting is inefficient in an information sense there is one unique profit measure.

These assumptions were rarely subjected to any empirical testing. Their proponents usually described their derived accounting system as the 'ideal'. They recommended it to replace historical cost and prescribed its use by all and sundry. Normative researchers labelled their approach to theory formulation scientific and, in general, based their theory on both analytic syntactic and empirical inductive propositions. Conceptually, the normative theories of the s and s began with a statement of the domain scope and objectives of accounting, the assumptions underlying the system and definitions of all the key concepts.

The domain of accounting was general. It was in relation to the entire income statement and balance sheet, not just specific accounting items such as accounting for doubtful debts only. Also, it was in relation to all users of financial statements and not confined to a specific user or user group. The normative theorists also made assumptions about the nature of a firm's operations based on their observations.

Detailed and precise accounting principles and rules and a logical explanation of the accounting outputs were outlined. The deductive framework was to be rigorous arid consistent in its analytic concepts. Financial statements should mean what they say; they should have semantic connections with the real world. Although financial statements are abstractions and reductions of firms' economic affairs, since they summarise the stock and the movement of economic resources, they should be pragmatic only to the extent that they were surrogates for direct experience.

An important question in this accounting research concerns the usefulness of accounting data. Are the quantitative data we derive from given sets of operations based on an overall theory of accounting useful to users of financial statements? To find the answer, what was usually done was to take the output data of specific accounting systems and determine whether this data helped decision makers make the right financial decisions.

This is a direct approach to testing accounting theory. Figure 2. The arrows signify the output of each model. Decision makers use accounting data to make predictions about the company. Based on these predictions, they decide what to do, such as sell shares in the company or buy more. The suggestion that alternative accounting systems should be assessed according to their predictive ability is an extension of logical positivism and is termed 'instrumentalism' - that is, a theory has no utility except as an instrument for prediction.

According to Friedman, theories cannot be tested by the realism of their assumptions; they can be judged only by their predictive power. First, if the prediction is verified, it verifies the prediction model of the user, not the accounting system. There are, of course, other variables besides accounting data that affect a financial prediction. We do not know precisely how the accounting data were used.

Second, 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 validity of the accounting model based simply on decision making. On the other hand, realism stresses the explanatory role of science; in essence, prediction in reverse. This methodological point of view stresses the feedback role of accounting.

The 'realism' approach to accounting means that for an accounting theory to be valid it must be more than an instrument for forecasting; it must also hold as a description of the reality that underlies the accounting phenomena.

Accounting, under this approach, gains predictive ability cnly because it gives relevant feedback or descriptive explanation of what has occurred.

We can also question the logical validity of using prediction forecasting as a scientific test for an accounting theory in a dynamic environment where intervening variables cannot be controlled.

Prediction in science is more valid when we can control variables such as air pressure, heat, weight and so on. When we cannot control variables in the economic environment, such as inflation and interest rates or consumer confidence, we have to assess predictions statistically, according to how probable it is that the evidence supporting the prediction is representative. The following article is a comment on the way accounting theory has evolved, become accepted and then implemented.

Now, I'm not usually one of those who goes around suggesting the public sector is wasting money, largely because when all is said and done it seems to me no more prone to the frailty of human fallibility than the private sector, where I have witnessed waste on the most colossal scale.

But on this occasion I'm going to, and I'm going to point a finger at those imposing the waste. IFRS are completely and utterly inappropriate for use by local authorities. I question that, but for logical reason in this case.

The IASB defines decision useful information as that needed by an investor to decide whether to buy or sell shares in an entity. They do not consider there to be any other reason for financial reporting. This is no minor issue: UK GAAP was accruals accounting and sought to match transactions in a period to provide a measure of what had happened in that time scale.

Balance sheets are a residual measure in that process. So this GAAP was about stewardship, financial performance, delivery of value for money, and action over time. The difference is the result for the period. So the balance sheet is predominant and the profit and loss account secondary because it is assumed that the investor in the entity will have a short time scale for involvement usually less than a year - the UK stock exchange changes hands entirely well over once a year now, on average and is therefore wholly uninterested in stewardship, performance over time or even delivery of results.

The IFRS belief is that the only issue of concern to the investors, who they believe to be the sole user of accounts, is in making a quick buck from dealing. Now, let's get down to some basic facts here. No one invests in a local authority. They're not for sale. They do not provide an investment return. With rare exceptions and I regret this they do not even issue bonds to finance their capital projects.

So the user of the financial statements that IFRS assume to exist are not present in the case of local authorities. There are no investors. And the use for which the financial statements that IFRS assumes to exist, being the decision to buy and sell shares, does not exist in the case of local authorities. There is nothing to buy and sell.

This alone, at this most obvious and basic level, makes it abundantly obvious that IFRS is the wrong accounting system for local authorities as it is for any unquoted company, incidentally, for much the same reason - an absence of any marketable security.

It's worse than that though: IFRS will not require accounting for stewardship of public funds entrusted, or for the supply of services, both of which are core to the management of local authorities. And we know that a failure to measure almost always means a failure to deliver in management terms.

This means we have a potential disaster on our hands. And whose fault is this? Well firstly, the IASB's. They do not act in the public interest, after all. They are a private cartel designed by and promoted for, in no small part, the benefit of their biggest sponsors - who are the Big 4 firms of accountants.

Second, those firms have much to answer for. They have just made a fortune from the IFRS transition for first tier listed companies, now they're selling similar services to the secondary markets and after that there was a void.

So they've persuaded the professional bodies which they dominate to move IASB into local authorities which will give their teams work for several more years. You can call that cynical if you like - but actually, it's just a statement of fact.

What I really hate i s when people say the public sector i s inefficient when the entire reason is that the public sector was sold a completely dud product by the private sector. That's true of most of the IT debacles, for example. It will be true here.

Someone needs to wake up, smell the coffee and realise that UK local authorities are being sold a dud reporting system designed from the outset to be unfit for their needs. This project must be cancelled now before it i s too late! This is not just a waste of money.

This i s a straightforward con. I am angry. And so should all local authority tax payers in the UK. We're going to be taken for a ride unless we protest now. What are the differences and why is IFRS deemed inappropriate for local authorities?

Based upon the arguments by Murphy should we have different accounting svstems? For local authorities? For different countries? What approach is Murphy using when he addresses the question of accounting for local authorities? Why do you think IFRS has been adopted for local authorities? Is it scientific or unscientific? Australian equities are now about 40 per cent off bear-market lows. Ditto the Australian dollar. Commodity indices are at nine-month highs, while domestic interest rates are at year lows.

I remain a bull - a true believer. I'm still a supporter of the commodity supefr-cycle. So why in the world am I worried? I get the feeling we may be trading at interim highs on equities, the Australian dollar and commodities.. I can't shake the feeling that investors have already factored in most of the market's medium-term positives. This inevitably leaves them prone to short-term negative surprises. Commodities are a particular concern. I think Xstrata's Mick Davis caught the mood on Tuesday when he pointed to the "froth" that had accompanied the run-up in metal prices.

I'm also expecting a more pragmatic reading of the domestic interest rate outlook to soften the local currency. Equity investors appear to be searching for an excuse to take some profits. Many are still pinching themselves, as they come to terms with their recent good fortune.

So how should investors play this? As volatility returns, the market will inevitably wrong- foot many as it moves to find a new floor. Do you look to take advantage of gains that have accrued since the March lows and lock a little away? Or do you grit your teeth and ride out any short-term volatility, before the expected fourth-quarter resumption of the dominant market trend? Whatever path you take, view any correction as an added opportunity.

Forget selling rallies - it's time to buy dips. What is a bull market? What is a bear market? Why would high commodity prices and low interest rates help to maintain share prices? What is the theory underlying the advice to buy the 'dips'? Is this a normative theory? Positivism or empiricism means testing or relating accounting hypotheses or theories back to experiences or facts of the real world.

Positive accounting research first focused on empirically testing some of the assumptions mzde by the normative accounting theorists. For example, by using questionnaires and other survey techniques, attitudes to the usefulness of different accounting techniques were determined.

A typical approach was to survey the opinions of financial analysts, bank officers and accountants on the usefulness of different inflation accounting methods in their decision-making tasks such as predicting bankruptcy or deciding whether to buy or sell shares.

Tests attempted to deternine whether inflation accounting increased the information efficiency of share markets; whether profit is an important determinant in share valuation; whether the cost of gathering 'finer' accounting data outweighed the benefits; or whether the use of different accounting techniques affected value. Today, the greater bulk of positive theory is concerned mainly 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 that contribute to the operation of the marketplace and the economy.

This research tests theories that assume that accounting information is an economic and political commodity, and that people act in their own self-interest.

Positive accounting theory in particular covers questions such as: Do firms substitute alternative ways of financing assets when the rules governing the accounting for leases change? Which firms are more likely to use straight-line depreciation rather than diminishing-balance depreciation, and why? The theory used to answer these questions generally revolves around managers' incentives to maximise bonuses based on their companies' profits, their incentives to avoid breaching accounting-based debt covenants and thereby reducing the cost of debt, or their incentives to use accounting techniques to divert attention from their high profits if those profits would attract public or government scrutiny, and perhaps lead to higher taxes.

In this book, chapters 11, 12 and 13 focus on different types of positive accounting theories. The main difference between normative and positive theories is that normative theories are prescriptive, whereas positive theories are descriptive, explanatory or predictive.

Normative theories prescribe how people such as accountants should behave to achieve an outcome that is judged to be right, moral, just, or otherwise a 'good' outcome. Positive theories do not prescribe how people e. Rather, they avoid making value-laden prescriptions. Instead, they describe how people do behave regardless of whether it is 'right' ; they explain why people behave in a certain manner, for example to achieve some objective such as maximising share values or their personal wealth regardless of whether that is 'right' ; or they predict what people have done or will do again, regardless of whether that is 'right' or 'best behaviour'.

Many positive theory researchers are largely dismissive of normative viewpoints. Similarly, many normative theorists do not accept the value of positive accounting research. In fact, the theories can coexist, and can complement each other.

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. We start with a theory based on prior knowledge or accepted 'scientific' theory constructions. When we observe real-world behaviour that does not concur with the theory, we treat that anomaly as a research issue and express it as a research problem to be explained. We develop a theory to explain the observed behaviour and use that theory to generate testable hypotheses that will be corroborated only if the theory holds.

This approach has an inheren, assumption that the world to be researched is an objective reality capable of examination in terms of large-scale or average statistics. This type of research is carried out by incremental hypotheses which are then combined to provide greater understanding, or better predictions, of accounting. The implied assumption is that a good theory holds under circumstances that are constant across firms, industries and time.

This approach to research is generally described as the 'scientific' approach and is the approach currently used by most researchers in accounting, and the approach that is published in most major academic accounting journals. This, in turn, influences the types of research problems posed and the hypotheses that are tested. It is important for accounting researchers to clearly recognise the assumptions underlying their research and to consider whether alternative research approaches are more appropriate.

There is a body of literature, loosely labelled naturalistic research, which is critical of the highly structured approach adopted by 'scientific' researchers.

We briefly review some of their criticisms in this section. Most researchers now accept that the most appropriate approach depends on the nature of the research question being considered. The first criticism of the scientific method is that large-scale statistical research tends to lump everything together. Hypotheses based on the use of stock market prices or surveys render much of accounting research remote from the wcrld of practitioners.

Also, they are not commensurate with the concerns of many individual accountants in their roles as accountants. Some researchers advocate the naturalist research focus as being more appropriate for gaining a knowledge of accounting behaviour in its natural setting. The idea is that we undertake research as naturally as possible. This approach has two implications.

First, we d o not have any preconceived assumptions or theories. Second, we focus on firm-specific problems. This is done by taking a flexible research approach using close observations and placing less emphasis on mathematical analysis, modelling, statistical tests, surveys and laboratory tests.

The usual way to undertake naturalistic research is to use individual case studies and more detailed fieldwork. This type of research is much more micro in its perspective because it is aimed at solving individual problems which may be firm-specific. Therefore, results may be more difficult to generalise. The naturalistic approach can be compared with 'scientific' accounting research, which is more prone to aggregating the results from testing a number of hypotheses in order to form 'general theories of accounting'.

Naturalistic research starts from specific real-world situations; the main intention is to answer the question 'What is going on here? The case-study approach is seen by some researchers as best fulfilling the role of exploring or crystallising the research problem for naturalistic research.

For example:. They see the naturalistic research approach as being more appropriate to different ontological assumptions. For example, we may view accounting as a social construction. We may wish to understand what self-images people hold, what underlying assumptions sustain that view, or what part this perception plays in controlling the way they perform their everyday role. These are the types of questions that might be researched using a subjective ontology.

First, they list a six-way classification of the nature of the social world see table 2. Categories are alternative ways of looking at the world. Category 1 is a strict objectivist viewpoint of the world, where behaviour will always conform to a set of behavioural rules, and outcomes of decisions and actions are highly predictable.

In relation to category 1, for example, researchers assume that all managers aim to maximise their personal wealth and that they are aware of how they can use accounting techniques to do so e. This enables researchers to predict what accounting methods managers will use if accounting choice is unregulated. Researchers will predict that all managers behave in the same manner because they have a shared view of the world and of the outcomes of their actions, and because they share preferences for particular outcomes.

When researchers view the world as a concrete structure category I , this enables them to use the scientific approach and statistical methods to test their predictions. Category Assumption 1. Reality as a concrete structure 2. Reality as a concrete process 3. Reality as a contextual field of information 4. Reality as symbolic discourse 5. Reality as social construction 6. Reality as projection of human imagination Source: C. Tomkins and R. Groves, 'The everyday accountant and researching his reality', Accounting, Organizations and Society, vol.

As we move down through the categories we are gradually relaxing our assumptions about the 'concreteness' of the world: category 1 assumes that the world is concrete and stable, category 6 views the world as unstable and human-specific. In category 6, humans are not expected to behave according to a set of behavioural rules that apply to everyone equally. Complex interrelationships and individualistic decision models are assumed.

Individuals are not expected to think alike. Because individualism is expected in category 6, the scientific method and statistical tests are inappropriate because their assumptions are violated.

Although individuals may behave rationally according to their personal understanding of the world and of the outcomes of particular actions, they do not share a common understanding of how the world works, and they have different preferred outcomes from their decisions.

For example, some managers might prefer to maximise their personal wealth; others might prefer to maximise their subordinates' job satisfaction; and others might prefer to minimise their personal work effort. Understanding decision making involves understanding individuals' perceptions and preferences. For categories , it is more appropriate to use the scientific approach.

By appropriate observation and measurement, it is assumed that one has readily available, stable and usually very simple functions relating to isolated and small subsets of the social world that can be used for accurate predictions. Symbolic interactionists see their world as one in which people form their own separate impressions through a process of human interaction and negc-tiation.

They believe that social action and interaction is possible only through exchange of shared interpretations of 'labels' attached to people, things and situations. Reality is not embodied in the rules of interpretation themselves, but only in the meanings that result from people's interpretation of the situations and events they experience.

A 'scientific' approach to researching the interpretations people make might elucidate such rules through large-scale, statistical research in those areas where meanings held by individuals might be assumed to be stable. In contrast, the 'naturalist' would research the problem by placing emphasis on 'feeling one's way inside the experience of the actor' in order to gain an understanding of the problem.

This process might identify many significant forms of social behaviour which cannot be related to a few well-specified variables with stable meanings, but which result from the nature of the interactions among a group of people. Her forensic accounting experience includes engagements for purposes of alleged embezzlement, misappropriation of assets, financial feasibility, divorce and shareholder dissolution matters, and bankruptcy.

Forensic engagement customers are in the banking, manufacturing, laboratory, real estate, healthcare, professional service and private equity business sectors. A certified Public Accountant, licensed in Georgia and Tennessee, Rhonda is a member of the Georgia and Tennessee Societies of Certified Public Accountants, the American Institute of Certified Public Accountants, and the Financial Consulting Group,LC, and association of valuation and accounting firms across the country that specialize in business valuation and litigation support services.

Rhonda lectures nationally for various healthcare and financial organizations regarding the issues of combining the practicality of accounting with the needs of business management. Office: Fax: Areas of Expertise. Post a Comment. Labels: Business and Economics. No comments:. Newer Post Older Post Home. Subscribe to: Post Comments Atom.