Administration
Study materials
Readings are required (especially for topics 1-4)
and are available on interact
Study guide also available on Interact.
Assessment
2 X 20% assignments.
1 X 60% exam (2 hours)
Learning style
concerned chiefly with “why” – not “how”
need to master ‘discuss’, ‘contrast’, ‘explain’,
‘debate’
use dictionary regularly – and a good glossary
(there is one in interact wiki)
Dangers of plagiarism – always cite sources &
follow good referencing style.
Nick Davis 28/04/20
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Objectives
• appreciate the importance of studying theory;
• define what philosophy of science is from its
various perspectives and how it applies to
accounting;
• appreciate that there are many theories in
accounting performing different functions;
• realise that theories are tied to value
judgements; and
• accept that theories should be critically evaluated
against the criteria of advancing knowledge
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What is a theory?
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Accounting theories:
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Why study accounting theory?
• Accounting is a very powerful discipline
Profit/size of net assets seems to be the major
criteria for many decisions These numbers are arrived at using accounting
techniques which aren’t necessarily full proof.
• Accounting theory is being developed to
answer such questions as Is this the correct profit? Should profit be the measure of business success?
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Philosophical approaches to science
(theory building)
• Induction
• Falsification
• Deduction
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Naïve Induction
“If a large number of A’s have been observed
under a wide variety of conditions, and if all those
observed A’s without exception possessed the
property B, then all A’s have the property B.”
(Chalmers, 1982, p.5)
From this a theory can be developed which can
then be used to predict or explain real world
activities
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Problems of induction
• Number of observations required
• Circumstances in which observations take place
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How to answer the problems
• Use of probability
• Falsificationism
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Falsificationism
• Start with a problem
• Develop a falsifiable hypothesis
• Test the hypothesis and attempt to eliminate it
by falsification
• If hypothesis resists falsification it may be more
highly regarded and incorporated into theories
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Problems of falsificationism
• Dependent on observation statements
• Complexity of realistic test situations
• Possible premature rejection of hypotheses
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Deduction
• Validity of conclusion depends upon the
premises. P1 All asset accounts have debit balances P2 Plant and Machinery is an asset account C Plant and Machinery has a debit balance
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Kuhnian paradigmatic shift
• Paradigm 1 Pre-normal science Normal science Crisis and instability Revolution
• Paradigm 2 New normal science Crisis and instability etc
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Philosophy of science and accounting
• Does the Kuhnian view apply to accounting? AAA (1977) and Wells (1976) say YES Peasnell (1978) and Laughlin (1981) say NO
This may be easier to answer after a few weeks of
study…..
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Empirical research in accounting
• Usually performed on share price reactions to accounting
issues. Eg, share price movements & new standards.
• Theory formulation
• Identification of research problem based on theory
• Problem resolved into hypotheses and dependent and
independent variables identified Dependent variable is the share price.
• Data collected – usually quantitative
• Data subjected to statistical analysis leading to
evaluation of hypothesis
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Naturalistic methods
• Focus on firm specific problems Use individual case studies and detailed fieldwork Answers the question ‘what is going on here?’
• Research as naturally as possible Talking to people who are affected by accounting
issues, like budget constraints etc.
• Have no preconceived assumptions or theories
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History of accounting theory
development
• 1800-1955 – general scientific period – theory
provided explanations of what occurred in
practice
• 1956-1970 – normative period – accounting
theorist attempted to develop norms for best
accounting practice
• 1970 – specific scientific theory – positive
accounting theory – these theories attempt to
explain and predict accounting practice.
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Normative Theories
• Based upon the stated objective of the theory
• Constructed on the basis of deductive reasoning
• Some of the assumptions of some normative
theories include –profit maximisation, decisionuseful,
develop own concepts of income and
financial position.
• Problems Not value free No predictive power Theories not adopted
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Positive Theories
• Explain why something happens and predict
why something happens
• Based on personal utility maximisation
• Argued as being value free
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Criteria for acceptance of theories
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Objectives – recap
• Define what philosophy of science is from its various
perspectives and how it applies to accounting
• Appreciate that there are many theories in
accounting
• Understand that theories often perform different
functions
• Realize that theories are tied to value judgments,
and
• Accept that theories should be critically evaluated
against the criteria of advancing knowledge
Nick Davis 28/04/20
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