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The Methodology of
Positive Accounting
CharlesChristenson
members of the "Rochester School" now propitious for positive research in accounting be-
announced by Jensen. cause accounting researchers are becoming increasingly
well trained in economic theory and research methods.
Each of the two articles coauthored by If Blaug [1980, p. xiii] is to be believed, however, this is
Watts and Zimmerman cited above won no cause for complacency. He says that "the average
the AICPA's award for a Notable Con- modem economist has little use for methodological
inquiries" and that, "to be perfectly frank, economic
tribution to the Accounting Literature in methodology has little place in the training of modern
its year of publication, and an article by economists."
2 It is not surprising that positivists such as Jensen and
Zimmerman [1979] seeking to develop a
Watts hold methodology in low esteem. As Popper [1959,
''positive" explanation of cost allocation p. 51] observes, it is a characteristically positivist dogma
won the Competitive Manuscript Award to deride methodology as "unscientific" and "meaning-
of the AAA. That these articles are con- less": "The positivist dislikes the idea that there should
be meaningful problems outside the field of 'positive'
sidered "top of the heap" is, I shall argue, empirical science.... He dislikes the idea that there
a sad commentary on the standards used should be a genuine theory of knowledge, an epistemol-
in evaluating contemporary accounting ogy or a methodology." This dogma does not enable
positivists to avoid methodological commitments but
research. This is a reflection, I would say, only makes it less likely that they will be self-conscious
of the fact that accounting researchers about the commitments they make.
FIGURE 1
EXAMPLESOF "NORMATIVE"AND "POSITIVE"QUESTIONS
[Jensen,1976,pp. 11-12]
"Normative"Questions "Positive"Questions
FIGURE 2
A TAXONOMY OF ACCOUNTING PROBLEMS
Proposition
Primary
(Accounting Entities) Practicing Some accounting Entity managers
accountants theorists
counting problems falling in that cell. criticized by the Rochester School are
The first row of the table is concerned concerned with how practicing accoun-
with problems at the primary level, tants ought to describe accounting enti-
about the state or behavior of accounting ties. They are metaproblems whose solu-
entities. The financial statements of an tions are proposals, and therefore they
accounting entity have the character of belong in the rightmost cell of the bottom
observational propositions. Therefore, row. I have said above that financial state-
practicing accountants, who are con- ments of an accounting entity have the
cerned with constructing (or "verifying") character of observational hypotheses. I
these statements on the basis of analyses would therefore call those who are con-
of the entity's actual transactions, belong cerned with the rationale for accepting or
in the first cell of this row. rejecting these descriptions "methodolo-
It has been suggested [FASB, 1978] gists" rather than "theorists."
that an objective of financial reporting The program of the Rochester School
for an entity is to enable the prediction of is concerned with describing, predicting,
its future cash flows. In Section III, I will and explaining the behavior of accoun-
show that predictions require not only tants and managers, not that of account-
observational propositions, such as finan- ing entities. Therefore it also belongs on
cial statements, but also primary-level the metalevel, but in the leftmost cell. (I
theories. The second cell of the first row have not shown the division of this cell
would be the concern of those who are into "observational" and "theoretical.")
interested in constructing predictive The discipline of the Rochester School
theories of this kind. might be called "history of accounting"
The managers of an accounting entity or "economics of accounting," since it
are concerned with what the transactions uses concepts and methods from both
of the entity (as distinct from their history and economics. I prefer to call it
accounting representation) ought to be. "sociology of accounting," using "soci-
These problems fall in the rightmost cell ology" in the inclusive sense of Pareto
of the first row. [1935, p. 3]: "Human society is the
The problems considered in the tradi- subject of many researches.... To the
tional "accounting theory" literature synthesis of them all, which aims at
The Universal ConditionalForms of Laws events can be stated in the form of a uni-
Some empirical laws have, besides the versal conditional proposition.'7
negative existential form already dis- By a kind of optical illusion, the uni-
cussed, two logically-equivalent alternate versal conditional form has misled many
forms. Most methodologists have methodologists into thinking that a law
focused their attention on these alternate such as (7) has positive import and is
forms, or even on only one of them. This "confirmed" by an observation of the
has been a source of a considerable event RS. ("The evidence is consistent
amount of confusion about the relation- with the theory," they would say.)
ship of laws to empirical evidence.16 Hempel [1946] has pointed out that this
The laws in question are those that view leads to a paradox.'8 For, it can be
prohibit the joint occurrence of two or seen that (5) is also logically equivalent
more events. An example might be: to:
There is no occurrence of For all x: If x is an occurrence of the
the event RS. event S then x is an occur-
(5)
rence of the event R, (8)
This asserts that the events R and S never
occur in conjunction with each other. The logical form of (8) is called the
From the definition of the comple- contrapositive, but it is obviously just
mentary event, it is obviously equivalent another version of the universal condi-
to assert: tional form.
Here is the paradox: If observation of
All occurrences of the event R are an instance of RS "confirms" (7), then
occurrences of the event S. (6) observation of an instance of RS "con-
To use a familiar example, "All men are firms" (8) and therefore, by virtue of the
mortal" is logically equivalent to "There logical equivalence, it also "confirms"
is no immortal man." (7). To be concrete, the law "All crows
In modern mathematical logic, (6) is are black" is equally confirmed by ob-
further analyzed into: serving a black crow and a nonblack
16 For example, Nagel [1963, p. 215] has suggested
For all x: If x is an occurrence of that Friedman's [1953, p. 14] argument that the "as-
the event R then x is an sumptions" of a theory need not be "realistic" is based
occurrence of the event on the erroneous notion that the antecedent of a universal
conditional proposition is an assumption of a theory.
S. (7) Another example of a confusion, to be discussed
The logical form of (7) is that of a uni- shortly, is Hempel's paradox of confirmation.
17 Zimmerman [1980, p. 108] says, "A positive theory
versal conditional proposition: universal is of the form, 'If A then B', that is capable of being
because of the prefixed phrase "For all refuted." This represents some progress over the state-
x'' (called the "universal quantifier" in ment by Watts and Zimmerman [1979, p. 273]: "We
would prefer to reserve the term 'theory' . . . for sets of
logic), and conditional because of the hypotheses which have been confirmed [sic]." Yet
"if ... then. . . " clause. The sentence Zimmerman commits three technical errors in his short
following the "if," "x is an occurrence of sentence: (1) he omits reference to universal quantifica-
the event R," is called the antecedent of tion over a free variable, (2) he omits the restriction of
the conditional form to those laws which prohibit a
the conditional; and the sentence follow- joint event, and (3) he calls the conditional "positive"
ing the "then," "x is an occurrence of the when in fact it has only negative import.
18 Hempel's "paradox of confirmation" is discussed
event S," is called its consequent.
by Ijiri [1975, pp. 165-167]. Since I consider Hempel's
Thus, every empirical law that pro- paradox to be a reductio ad absurdumof the concept of
hibits the joint occurrence of two or more confirmation, I do not agree with Ijiri's analysis.
FIGURE4
ARECOMBINEDIN PREDICTION
How SEVERALKINDS OF INFORMATION
(Shaded areas represent events excluded in region K)
R R R A R
S S S
tional proposition, "The event R is ing the behavior of the entity (a primary-
occurring in the spacetime region K." As level theory, in terms of Section I).
shown in Figure 4(b), this sentence rules
Explanatory Reasoning
out the occurrence in that region of the
event R. Combining this information From a purely logical perspective, the
with that contained in the law, we can explanation of a singular occurrence is
conclude (see Figure 4(c)) that all possi- the mirror image of prediction. In the
bilities are excluded except RS, the joint case of prediction, we are given an em-
occurrence of R and S. Thus, we can pirical theory and some inputs (state-
derive the prediction, "The event S is ments of initial conditions); we seek to
occurring in the spacetime region K." derive a proposition describing an as-yet-
An observational proposition used in unobserved occurrence. In the case of
deriving a prediction is called a statement explanation, we are given an observed
of initial conditions [Popper, 1959, p. 59]. occurrence; we seek both an explanatory
Thus, in order to deduce a positive theory and some statements of initial
prediction, one needs in general both an conditions (the explicans) from which we
empirical theory (one or more laws) and can derive a sentence (the explicandum)
one or more statements of initial condi- describing the observed occurrence. This
tions. In terms of Caws's characterization process may be represented by the follow-
of a theory (quoted at the beginning of ing schema:
from which it can be deduced. In other of this state of affairs, and they lead to
words, we reason in the reverse of the different conclusions regarding the ap-
deductive direction. There is this differ- praisal of theories.
ence: In explanatory reasoning, we ac- According to one methodological view,
cept the explicandum as true on the basis called instrumentalist, explanation is
of observation; we terminate reverse nothing but prediction in reverse, or, to
reasoning when we have found laws and put it a little differently, a theory is
initial conditions that we likewise accept nothing but an instrument for prediction.
as true on the basis of observation. In The credo of instrumentalism has been
normative reasoning, we desire that the characterized as follows: In explanatory
description of a certain final state be reasoning, both the statements of initial
true; we terminate reverse reasoning conditions and the explicandum describe
when we have found laws that we accept aspects of reality, to-wit, occurrences in
as true and controllable initial conditions the phenomenal domain. In contrast, the
that we can make true by our actions.20 theory itself does not describe any aspect
In ancient Greek geometry, forward or of reality. Reality, according to the
deductive reasoning, which was used in instrumentalist, consists of nothing but
''proofs," was known as the "method of occurrences of events [Popper, 1965, p.
synthesis," since in it a number of condi- 108].
tions are combined or synthesized to Instrumentalist, it may be noted, is a
produce a single result. Reverse reason- slightly liberalized version of positivism.
ing, which seeks to discover the necessary Positivism awards scientific status only
conditions, was known as the "method to statements of "what is." Instrumental-
of analysis." The two methods are dis- ism differs from strict positivism in ad-
cussed by Polya [1945, pp. 141-154]. See mitting that theories, although they can-
also Hintikka and Remes [1974, Chapter not be reduced to statements of "what is,"
IX]. are nevertheless needed in science. It
claims, however, that their utility is only
IV. THE APPRAISAL OF THEORIES as instruments for prediction, and not as
My purpose in this section is not to descriptions of reality. Positivism and
appraise the theories of the Rochester instrumentalism both agree that only
School but rather to criticize the stan- observational propositions describe
dards by which they think a theory ought reality.
to be appraised, that is to say, their An alternative methodological view,
methodology. It is not possible, of course, called realism, agrees that explanation is
to draw a clean line between these two (logically speaking) prediction in reverse
purposes. The essence of my criticism of and that, therefore, a theory that explains
the Rochester School's methodology is can also be used as an instrument for
that they use it to defend their theories prediction. Realism also admits that
against what would be appropriate criti- some theories may be nothing but instru-
cism. ments for prediction. Realism holds,
however, that for a theory to be consid-
Instrumentalismvs. Realism ered explanatory, it must be more than
In Section III it was noted that, from a an instrument for prediction. It must also
purely logical point of view, explanation 20
Reverse reasoning is, of course, the method used in
is prediction in reverse. There are two reasoning from a product to the process that produces
divergent methodological interpretations it, as discussed in Section III of this article.
III; only theories that are at least a good Popper [1972, p. 353], however, calls
approximation to the truth are acceptable the notion that an explicans is corrobo-
for this purpose. rated23 by drawing correct predictions
The Rochester School, however, is from it "incorrect and grossly mislead-
immune to any criticism of instrumental- ing." He points out that "A true predic-
ism, since it abandons (perhaps unself- tion may easily have been validly deduced
consciously) that part of Friedman's from an explicans that is false." As we
methodology. It places the greater stress have seen in Section II, a theory as a col-
on theories that describe and explain, lection of laws has no positive import,
and it mentions prediction relatively in- and almost all observations will be
frequently, usually in a context where the consistent with (i.e., will not contradict)
testing of a theory through its predictions even a false theory. Therefore, we cannot
rather than its instrumental use is the infer the truth of a theory from the truth
issue. Jensen's list of "positive" questions of predictions drawn from it. In short,
(Figure 1) illustrates this emphasis on the Rochester School's notion that an
explanation rather than prediction. And explanatory theory is made acceptable
Watts and Zimmerman [1979, p. 274] merely by successful prediction is logi-
proudly claim that their theory not only cally fallacious.
''predicts that accounting theory will be On the other hand, a false conclusion
used to 'buttress preconceived notions"' to an argument does entail the falsity of
but also that "it explains why." its premises. If, therefore, a prediction
If someone questions the realism of derived from an explanatory argument
part of Friedman's theories, he can fall turns out to be false, we can be sure that
back behind his instrumentalist ramparts the explicans is also false. "This means,"
and argue that the criticism is irrelevant; as Popper [1972, p. 353] says, "that a
the theories with which he is concerned prediction can be used to corroborate a
do not purport to explain but only to theory only if its comparison with obser-
predict, and so long as they predict vations might be regarded as a serious
correctly they are adequate. The same attempt at testing the explicans-a
defense is not available to the Rochester serious attempt at refuting it. A 'risky'
School. The Rochester School's theories prediction of this kind may be called
must either be realistic or they must be 'relevant to a test of the theory."'
rejected as explanations. Since an explicans consists of at least
two premises-a law and a statement of
Appraisal of an Explanatory Theory initial conditions-the fact that the
The Rochester School appears to falsity of the conclusion implies the
believe that the only way one can test the falsity of the explicans does not determine
truth of a theory is to derive predictions how this falsity is to be distributed over
from it. They also appear to believe that the terms of the explicans. That is, the
correct predictions make a theory more falsity of the explicans may mean that the
acceptable. [Watts and Zimmerman, law(s) are true and the initial conditions
1978, p. 125; 1979, p. 283; Zimmerman, false; that the law(s) are false and the
1980, p. 122]. (As a matter of fact, as I will
show later, Watts and Zimmerman claim 23 As indicated in Section II above, Popper considers
that their theories should be accepted a theory to be corroborated only if it has survived serious
attempts to refute it. His reasons for preferring the term
even though predictions derived from "corroboration" to the term "confirmation" are given
them are false.) in [1959, pp. 251-252, n. *1].
search for correct predictions engaged in U. S. Steel, and Chrysler; later in the same paragraph
two of the three are identified as IBM and General Tele-
by the Rochester School is simply not phone. No explanation is given of this obvious incon-
''relevant." sistency [Watts and Zimmerman, 1978, p. 127].
[p. 286, n. 46]. with the behavior of practicing financial accountants and
managers; Watts and Zimmerman [1979], with that of
In other words, the Rochester School academic accountants; and Zimmerman [1979], with
is inviting other researchers to repair the that of cost accountants.
no time to read their manuscripts, and the The old ways still have much to recom-
function of wastepaper-baskets has now been mend them.
taken over by scientificjournals.
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