Accounting as a discipline has no

theory
Accounting is said to be a form of financial language, which is used to communicate a
message. Accounting can be many things to many different people. Society is made up of
individuals who are interested in accounting they may be shareholders, stakeholders,
employees or the government. Accounting can be produced according to the rules and
regulations but can be manipulated to look favourable to users as in the case of NCB.
Conceptual framework comes from accounting concepts and conventions. It is used as a
knowledge base. Other professions such as medical and teachers had theoretical
knowledge backing them up such as science and technology. Whereas accounting
originally had no knowledge base and has evolved over time.

Accounting theory can be defined as the hypothesis to explain accounting. “theories are
tools which enable us to see particular problems from different perspectives”. (Lecture
notes 1, page 6).

I m going to argue against this statement that `Accounting as a discipline has no theory. In
order to evaluate this statement I am first going to write about the background of
accounting theory, to understand where and why it was introduced. Then I am going to
discuss some of the main theories, which have been introduced to accounting in order to
prove my arguments and to see whether accounting as a discipline has theory or no
theory.

Accounting has been around “at least since C16”. Accounting as a profession has “been
around for over 100 years”. Accounting came around the time of other professions such as
the medical profession and teachers, these professions were backed by “theoretical
knowledge” which was used in decision making and to reduce uncertainty. (Lecture notes
2, page 4). Accountants at the time were just trained to produce accounts and to keep the
general maintenance of books. This was ok for the first 100 years but society has changed
due to the fact that a steep growth in population, business and complex organisations with
complex transactions. Accounting had no theoretical framework during the early years,
which meant there where loopholes and companies could take advantage. David Solomon
page 1 states “accountants are like journalists they should report the news and not make
it”. The accountants had no theoretical backing.

Accounting had evolved over time with few written and was in effect a collection of
traditions, which were not necessarily understood. The development of conceptual
framework was originally rejected by the UK but eventually more and more countries
followed the idea of the USA. The conceptual framework first arose in the mid 1970s in the
USA by the FASB which is the US equivalent of the accounting standards board (ASB,
UK). In 1989 the international accounting standard committee (IASC) published an
abbreviated conceptual framework entitled framework for the preparation and presentation
of financial statements. In 1991 the UK began their own project and eventually a statement
of principle was published and rejected. But then in 1999 a definitive document was
published.

The true and fair view in accounting is produced in all published accounts. The true and
fair view appears to be an opinion in which accountants are supposed to follow the true
and fair view. The true and fair is difficult to define but can be considered as presentation
of accounts which are produced ethically, free from bias and within the accounting
standards. The true and fair view is produced to make information true and fair but has
many problems in interpreting it.

Epistemology regards the theory of knowledge. “Knowledge is used to construct reality” so

it is important to see where knowledge is derived from. (Lecture notes 4, page 2).
“Knowledge is acquired through reason and experience”. (Knowledge, page 50). The
establishment of truth has to be considered in the discussion of knowledge. “Truth is tense
less, truth is independent of our knowledge of it”. (Lecture notes 4, page 4). The different
sources of knowledge are highly problematic. Science can be regarded as providing status
to knowledge. “Science is special because it is based on facts, the facts established in this
way will constitute a secure, objective basis”. “The resulting knowledge can itself be taken
to be securely established and objective”. (Science as knowledge, page 1. Morgan page
307 states that “scientists and social scientists shape knowledge through means of
constructs which help them organize and make sense of the complex and ambiguous
experiences they encounter”.

Knowledge is used in theory, but knowledge is problematic. The factors used to derive
knowledge are not always reliable. Something being right must be “track able to evidence”.
People may believe something is true but it may not be linked to ‘perceptions’. (Lecture
notes 4, page 6). There are many problems with knowledge based on the same lines of
truth but if knowledge is properly derived it is reliable and objective.

The Conceptual Framework can be defined as: “a coherent system of inter-related

objectives and fundamentals that should lead to consistent standards that prescribe the
nature, function and limits of financial accounting and financial statements.”
(www.accaglobal.com page1)

A conceptual framework provides accountants and users of accounting information with a

set of rules, principles and procedures. We can see the overall picture of accounting and
accounting information. Accountants are able to satisfy the needs of all user groups.
Conceptual framework sets out guidelines and procedures, which make processes more
certain. The framework provides standards setters with both a foundation for setting
standards and concepts to use as tools for resolving accounting and reporting questions.
“Horngren (1981) and Dopuch and Sunder (1980)” argue that a conceptual framework
should increase standard setters ability to enact standards they feel are consistent with
accounting theory. (www.pitt.edu/, page 1). It adds to greater efficiency in standard setting
processes by narrowing the range of alternatives. The framework contributes to greater
efficiency in communications. It reduces political pressures in making accounting
judgements. Neutral information enables users of information to make informed investment
and credit decisions. Neutral information serves the public interest by helping to promote
the efficient allocation of scarce resources in the economy and society. The use of an
agreed framework reduces the influence of personal biases. The credibility of financial
reporting is enhanced when objectives and concepts are used to provide direction and
structure to financial accounting and reporting. The framework helps users of financial
reporting information to better understand the information and its limitations. “A conceptual
framework is useful for organising and formulating normative accounting research and for
defining the terms of debate with respect to various standard setting proposals”. (Mozes
1992, pitt.edu/).

The structure of the conceptual frameworks produced to date comprise of the following:
The objective of financial reporting, including the users of financial statements and their
information needs.

Qualitative characteristics of accounting information that enable financial statements to

fulfil their objective, determine what is useful information, and provide criteria for choosing
among alternative accounting methods.

Definitions of the elements of financial statements such as nature of gains, losses, assets,
liabilities and ownership interest.

A set of criteria for deciding when the elements are to be recognized in financial
statements.

A set of measurement rules for determining the monetary amounts at which the elements
of financial statements are to be recognized and carried in the accounts.

Guidelines for the presentation and disclosure of the elements in financial statements.
Conceptual framework may have its advantages, but it also
has disadvantages. One of the main issues is “whether the
cost of preparing a conceptual framework is justified in
terms of it s benefits, including whether it is possible to
develop a set of consistent fundamentals and whether these
will lead to improvements in accounting standard setting”.
(Thomas, page 496). Another issue is that whether
accounting standards just make published accounts more
consistent rather than comparable. More meaningful
comparisons would result from allowing companies to
choose those accounting policies which are appropriate to
their individual circumstances. Standardization forces
companies to use the same accounting policies, but it does
not necessarily mean that they are the most appropriate
accounting policies for each company and thus comparisons
may be misleading. In some occasions conflict will arise on
the qualitative characteristics for e.g. sometimes the
information that is the most relevant is not the most
reliable. However, the main draw-back of a conceptual
framework is that it can be too general in nature and the
principles may not help when actually producing the
financial statements. Also there may be further
disagreement as to the content of the framework and the
contents of standards.
The Statement of Principles defines the objective of financial statements as:

“to provide information about the reporting entity’s financial performance and financial
position that is useful to a wide range of users for assessing the stewardship of
management and for making economic decisions.”

(www.accaglobal.com)

The Statement comprises the following eight chapters:

1 The Objective of Financial Statements.

2 The Reporting Entity.

3 The Qualitative Characteristics of Financial Information.

4 The Elements of Financial Statements.

5 Recognition in Financial Statements.

6 Measurement in Financial Statements.

7 Presentation of Financial Information.

8 Accounting for Interests in Other Entities.

Ssap2 (statement of standard accounting principles) was drawn up in 1971 which was
before the conceptual framework and it was designed to provide “guidance on the
disclosure of accounting principles”. Ssap2 saw 4 main traditional conventions as
‘underpinning’ accounting, these were going concern, accruals, prudence and consistency.
The going concern convention is defined as the accounting convention that holds that the
business will continue operations for the foreseeable future. The accruals concept is
defined as expenses that are outstanding at the end of the accounting period. The
prudence convention is defined as a cautious view taken for future problems. The
consistency convention is defined as the accounting convention that holds that when a
particular method of accounting is selected to deal with a transaction, this method should
be applied consistently over time. Fred21 came out just before FRS18 as an update for
ssap2. Fred21 stated that going concern and accruals were still important and that
consistency and prudence should be considered as qualities. Ssap2 was superseded in
1999 by the statement of principles. Ssap2 was then replaced by the ASB financial
reporting standard 18 (FRS18) in 2000. FRS18 identifies two accounting concepts that it
describes as being part of the bedrock of accounting and playing a pervasive role in
financial statements. These comprise of the going concern assumption and the accruals
concept.

SSAP2 was valuable because it was the first real “step forward to providing a knowledge
base for accounting”. (Lecture notes 2, page 5). It was the first “opportunity to try and give
meaning to practices which had evolved”. (Lecture notes 2, page 5). After ssap2 there
other SSAP’s and FRS’s introduced in order to provide more judgement in accounting.
Some of the standards introduced are SSAP9 which outlines stock and long term
contracts, SSAP13 accounting for research and development, and FRS15 defines tangible
fixed assets. These SSAP’s and FRS’s as well as all the others introduced provide
accounting with set rules and regulations, which in turn made it more consistent and
reliable.

Solomon argues that “accounting is held to be akin to journalism in that we are presumed
able to find and extract pure, uncorrupted, neutral facts”. (Tinker, page 298). But tinker
argues that Solomon’s theories are problematic. The true and fair view is very hard to
understand and interpret and therefore can be very problematic. Morgan states that
accountants are subjective constructors of reality presenting and representing the
situations in limited and one sided ways.

Accounting theory is not concrete in any sense but you can see that it does make
accounting more consistent, reliable and makes more sense of it. I have concluded that
accounting as a discipline has theory. In my opinion the benefits of accounting theory
outweigh the drawbacks. The development of conceptual framework is helpful in some
ways but unhelpful in other ways. It is helpful in reducing scandals and protecting the
users of accounts. It is probably unhelpful to managers who have to follow the strict
guidelines i.e some managers may be unhappy with the disclosure of inefficient areas.
Professor Mcvae says “ that it was impossible to obtain a conceptual framework but that
attempt to do so would help us to organise and understand what we do”. Accounting has
accomplished its purpose, which was to deal with the change in society and to undertake
the loopholes and scandals that were taking place in accounting.