Chapter 2: Accounting Theory and Accounting Research Instructor’s Manual
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CHAPTER HIGHLIGHTS
The chapter provides the student an appreciation for the contribution of research to the general
growth of our knowledge about accounting. It shows how accounting research affects the
standard-setting process in financial accounting.
Given the rise of formal approaches to theory and a concern for the process of measurement
discussed in Chapter 1, the question arises as to whether accounting is an art or a science. A
science might be defined as a discipline or area where considerable measurement problems exist.
In the physical and natural sciences, there should be a high degree of consensus among
measurers. This will be less the case in the social sciences simply because of the variability of
human behavior. Nevertheless, they should come under the domain of science. Accounting
could certainly move closer to the science realm as a result of the rise of scientific method and
the concern for measurement.
QUESTIONS
Q-1 Do you think that the work of a policy-making organization such as the FASB or the
SEC is normative (value-judgment oriented) or positive (oriented toward value-free
rules)? Discuss.
It is unquestionably normative because judgments must be made in accordance with objectives
or other criteria. While a standard-setting group may attempt to be neutral, it usually must
decide among different positions, each of which will have its adherents. A standard-setting
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Q-2 An individual who was appraising accounting education had the following premises
(assumptions):
• Accounting professors used to do more consulting with accounting
practitioners than they do today.
• Accounting professors have become more interested in research that is abstract
and not necessarily practical.
He, therefore, concluded that accounting students are not as well prepared to enter the
accounting profession as they used to be. Which type of reasoning was the individual
using? What is your assessment of his conclusion?
Q-3 In 1936 the United States was still suffering from the Great Depression. During the
presidential election campaign, an extensive survey of voter attitudes was undertaken
to find out whether the public preferred the incumbent, Franklin Delano Roosevelt, or
the challenger, Alf Landon. The sample was gathered randomly from telephone book
listings throughout the country. A preference was found for Alf Landon; however,
Roosevelt won re-election by a huge landslide. What type of research was being
conducted? Why do you think it failed to make an accurate prediction?
The method employed is inductive (empirical). The research failed because in 1936 a
representative sample could not be gathered solely from people who had telephones because
large segments of the population did not have telephones. The magazine (The Literary Digest) in
Q-4 In accounting, deductive approaches are generally normative. Why do you think this is
the case?
As long as there is a value judgment or normative type of premise in the system, the results must
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Q-5 A frequent argument is that inductive reasoning is value-free because it simply
investigates empirical evidence. Yet some charge that it is not value-free. What do you
think is the basis for this charge?
As long as there are choices to be made, then research cannot be value-free. The choice of what
one examines (question A versus question B) entails a value judgment. Parameters used in the
Q-6 Several years ago an author stated that corporate income could be scientifically
ascertained, but any type of adjustment for inflation would be pure folly because
measurements would tend to become very subjective. Do you agree with the author’s
appraisal? Comment in detail.
The question pertains to an actual article that appeared in the early 1950s. The word
“scientifically” was not defined in the article, so it is difficult to know what the author meant.
Q-7 Of the four disciplines in the following list, which do you think qualify as sciences and
which do not? State your reasons very carefully.
Law
Medicine
Cosmetology
Accountancy
Cosmetology (barbers and beauticians) is concerned with a relatively frivolous subject matter;
hence, it should not qualify. While law uses a system of precedence and deductive reasoning,
the judge (not to mention the jury) ultimately employs judgments in making decisions. The
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Q-8 Several occupations within two of the aforementioned disciplines are listed here.
Which do you think come closest to being scientific?
Accounting researcher
Chief accountant for an industrial firm
Medical researcher
Doctor (general practitioner)
The accounting researcher and the medical researcher obviously come closest to being scientists,
insofar as their work should be value-free (though this is not totally possible). They should be
using formal research techniques to attempt to shed light on unanswered questions. Significant
measurement problems are also present in work of this sort. Other researchers should arrive with
Q-9 What are some of the pitfalls of empirical research?
There are many pitfalls. Sample size relative to the universe being examined should be large
enough to draw an inference with minimal chance of an incorrect conclusion. The parameters
selected should be reasonable: for example what do we mean by “large firms” and “small firms.”
Q-10 If Watts and Zimmerman are correct that managers of very large firms oppose
accounting standards that would raise their income and favor those that would lower it,
what policy implications would this have for a standard-setting organization such as
the FASB?
Managers of very large firms might fear possibilities such as antitrust action, excess-profits
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Q-11 What is the major difference in orientation between positive accounting theory and
more overtly normative theories, such as the valuation approaches discussed in Chapter
1?
The valuation approaches in Chapter 1 can each be viewed as a system. The choice of a
valuation system (replacement cost over exit values, for example) is based on the value
Q-12 For a discipline to become a science, the results of experiments and research must be
exact. Do you agree with this statement? Discuss.
Not necessarily. Science involves complicated questions of measurement. At other times, there
may be disagreement relative to hypotheses. Nevertheless, science is an open process that uses
Q-13 Why, in practical terms, is it impossible to separate deductive and inductive
approaches to theoretical reasoning?
Inductive work usually contains basic assumptions that are accepted without any further
Q-14 What is the relationship among scientific method, accounting research, and accounting
policy making?
Accounting research is an important input to the accounting policy-making process. Most
Q-15 What are the two principal underlying assumptions of agency theory (positive
accounting research)? Critique their role in constructing a theory of accounting.
The two principal assumptions are that individuals act in their own best interest and that the firm
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Q-16 The “uncertainty principle” of the famous physicist, Werner Heisenberg, states that
physical phenomena cannot be precisely measured because the very act of measuring
affects the phenomenon being measured. Which of the directions of accounting
research discussed in the chapter does Heisenberg’s uncertainty principle relate to most
closely?
The “uncertainty principle” clearly relates most closely to critical accounting. Critical
accounting believes that by investigating a topic we literally help to shape the reality that we are
Q-17 Why do you think the term “deprival value” was used to name a specific type of
replacement cost?
Deprival value tries literally to measure the cost to the firm of not having (being deprived of) the
particular asset.
Q-18 Of the following decision-model advocates discussed in the chapter (Chambers,
Sterling, Solomons, Bell, and Ijiri), which one stands out as most unlike the others?
Ijiri stands out because he is an advocate of historical cost adjusted for the change in the general
Q-19 What is the difference between “accounting theory” and “accounting research?
Accounting research is an active process, the results of which can add to the “store” of
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Q-20 Why does the decision-model orientation to research accord more closely with the
standard-setting function than any of the other research directions?
The decision-model orientation attempts to prescribe valuation approaches on a “global” basis:
exit value or entry value for example. If either of these approaches were instituted, the FASB
Q-21 If there has been a paradigm shift (scientific revolution) in accounting research, but not
in accounting practice, what may this signifiy?
It may indicate that accounting research and accounting practice are not in synchronization with
each other. In the move toward empirical research in accounting (a paradigm shift in accounting
Q-22 In accounting behavioral research, student subjects have been frequently used as
proxies for real-world decision makers. Does this lead to any potential problems?
Using student subjects as proxies for real-world decision makers may lead to findings that may
not generalize to the population. The students may have different values, analytical abilities,
Q-23 Why do you think that ethnographic research (footnote 65) would be difficult to apply
to organizations such as the SEC and FASB?
Ethnography is a social science research method. Data collection consists of interviews,
observations, and document reviews over an extended period of time, usually years or perhaps
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Accounting Theory (9
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CASES, PROBLEMS, AND WRITING ASSIGNMENTS
1. Agency theory takes the view that the corporation is the locus or nexus of many
competing and conflicting interests. List as many of these conflicting groups as you
can and discuss in detail the nature of their conflicts with other groups.
Among the conflicting groups would be management, auditors, shareholders, creditors, labor,
and government.
Management desires to maximize its own income through bonus arrangements (which may mean
that cash flows are diverted from shareholders) and will probably desire lower reported income if
it fears government antitrust action, excess-profits taxes, or simply adverse public opinion.
Shareholders generally want high cash dividends and price appreciation on their shares (the latter
2. Using the article by Colin Lyas (“Philosophers and Accountants”) in Philosophy
(January 1984, pp. 99–110), discuss and compare Sterling’s scientific approach to
standard setting with the judicial or jurisprudential approach of Stamp.
Lyas’s article is not particularly difficult to understand and dovetails neatly with the discussion
in the chapter of the various directions in accounting research. Notice also that Lyas
immediately refers to the public misperception of accounting as unambiguously objective and
clear-cut in a similar fashion to the opening paragraph of Chapter 1 of this text.
Chapter 2: Accounting Theory and Accounting Research Instructor’s Manual
Accounting Theory (9
th
edition) Page 9 of 9
CRITICAL THINKING AND ANALYSIS
1. How can accounting move more toward becoming a science rather than an art?
Discuss.
One method would be to eliminate arbitrary choices among accounting methods in generally
similar event situations (LIFO versus FIFO although income taxes are a problem here, different
depreciation methods, and moving towards principles based accounting standards such as
requiring all long-term leases to be capitalized).