1. BAO5535 Issues in
contemporary Accounting
Week 1
Introduction

2. Welcome to BAO5535 Issues in
contemporary accounting
Subject coordinators and lecturers:
Ms Helen Yang
Contact: helen.yang@vu.edu.au (preferred)
Phone: 03-9919 5265
Office: G3.36 Footscray Park Campus
Professor Colin Clark
Phone 03-9919 1565
Office: C10.16 City Flinders Campus
BAO5535 Issues in Contemporary 2
Accounting

3. What we are going to learn?
• Refer to your Unit of Study Guide for
further details
BAO5535 Issues in Contemporary 3
Accounting

4. What Assessment is there?
• Refer to Unit Guide
BAO5535 Issues in Contemporary 4
Accounting

5. How to start with this subject?
• Prescribed textbooks
Deegan, C, 2009, Financial Accounting
Theory, 3rd edition
Deegan, C, 2010, Australian Financial
Accounting, 6th edition
Accounting Handbook 2011 available
online at www.aasb.com.au
• Subject website at Blackboard (Webct)
• Seminars
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Accounting

6. How to successfully complete
the course?
• Do your homework
– Attempt weekly activities before each class
• Attend seminars
• Be an Active learner, i.e. participating in class
discussions and online discussions
• Don’t forget to ask for help
– Student learning service
– Your lecturers
– Librarians
– Student administrators
– Your peers
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Accounting

7. Any questions so far?
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Accounting

8. “A long journey starts from the
very first step”, I wish you a
challenging but a rewarding
semester
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Accounting

9. Topic 1 Professional ethics and theories in
accounting – Learning outcomes
– Be able to explain the difference between deductive and
inductive approaches to theory development
– Be able to explain ethical theories and their implication to
accounting practice
– Be able to apply APES 110 Code of ethics for
professional accountants to decision-making process
– Be aware of development of accounting theories
– Appreciate that there is no single unified theory of
accounting
– Be able to critically evaluate difference theories in
accounting
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10. The role of professional judgement in
financial reporting
• While the accounting treatment of many
transactions and events is regulated, many others
are unregulated
• Accountants expected to be objective and free
from bias (although, as we will see, various
theories of accounting question whether
accountants will allow objectivity to determine the
selection of accounting methods)
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11. The role of professional judgement in
financial reporting (cont.)
• Information generated should faithfully represent
underlying transactions and be neutral and
verifiable
• The consideration of economic and social
implications of possible accounting standards
implies bias in their development and
implementation
– standard setters face a ‘dilemma which requires a
delicate balancing of accounting and non-accounting
variables’ (Zeff 1978, p. 62)
1-11

12. The power of accountants
• Output of the accounting process impacts many
decisions about wealth transfers so the judgement
of accountants affect various parties’ wealth
• The provision of accounting information leads to
power of knowledge for others
• Accountants can give legitimacy to organisations
which may not otherwise be deemed legitimate
(e.g. emphasising profits)
– e.g. profits legitimise Commonwealth Bank (see
Accounting Headline 2.1, p. 45)
1-12

13. The power of accountants (cont.)
• Profit measures ignore many social and
environmental externalities caused by the
reporting entity
– e.g. major adverse social consequences of a cigarette
manufacturer
• Accounting does not objectively reflect a particular
entity—it creates it
1-13

14. Ethical theories and Ethical decision making
principles
• Consequence-based (teleological)
– Utilitarianism
– Egoism
• Duty-based (deontological)
– Fairness
– Justice
• Virtue-based (ontological)
– Aristotle virtue ethics
– Confucius virtue ethics
Please refer to: An introduction to Business Ethics, 2nd Edition, Des
Jardins, 2006, McGrall Hill, Chapter 2: Ethical Theory and
Business for further details
1-14

15. Code of ethics for Professional accountants
(Cont)
Refer to APES 110 Code of Ethics for Professional
Accountants
Threats and Safeguards
Para 100.10 of circumstances. Many threats fall into the
following categories:
(d) Self-interest threats
(e) Self-review threats
(f) Advocacy threats
(g) Familiarity threats
(h) Intimidation threats,
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16. Code of ethics for Professional accountants –
Fundamental principles
Refer to APES 110 Code of Ethics for Professional Accountants
Para.100.4 A Member is required to comply with the following
fundamental principles:
(a) Integrity
(b) Objectivity
(c) Professional competence and due care
(d) Confidentiality
(e) Professional behaviour
Note: Please refer to Section 110 –150 of APES 110 for further details
Also refer to APES 205 Conformity with accounting standards (effective
on 1 July 2008), available at
http://www.apesb.org.au/Document/Issued_Standards/APES%20205%20Conformity%20with%20Accounting%20
1-16

17. Application of ethical principles to ethical
issues in business – common avoidance
of professional responsibility
• Listen to your heart or to your head?
• It is not my problem!
• Everybody else does it!
• It is not ‘cooking the book’ , it is creative accounting method!
• It does not breach the law when people are sacked!
• I am just doing what I have been told!
• Greed is good!??
1-17

18. Class activity
Application of ethical principles to ethical issues in
business
• Ethical dilemma decision making tree.doc
• Harris accountant jailed for $36 m fraud” Courier-
mail 27 June 2002, cited in Deegan (2009, p.276)
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19. What is a theory?
• ‘A coherent set of hypothetical, conceptual and
pragmatic principles forming the general
framework of reference for a field of inquiry’
(Hendriksen 1970, p. 1)
• Based on logical (coherent) reasoning, and not ad
hoc in nature
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20. How theories are developed
Inductive method (Bottom up)
– Conducts empirical studies and form theory
Deductive method (Top down)
- Develop hypothesis and test them
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21. Accounting theories
• Accounting is a human activity
• It would seem illogical to study financial accounting
(for example, the accounting standards) without
also studying accounting theory
• Theories of accounting consider
– people’s behaviour with respect to accounting information
– people’s needs for accounting information
– why people within organisations elect to supply particular
information
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22. Why study accounting theories
• Learning the rules of financial accounting without
considering the implications of accounting
information is not recommended
• Studying theories of accounting exposes students
to various issues, including
– how elements of accounting should be measured
– motivation for organisations to provide certain types of
accounting information
1-22

23. Why study accounting theories (cont.)
– motivation for individuals to support or lobby regulators
for some accounting methods in preference to others
– the implications for organisations and their stakeholders if
one accounting method is chosen or mandated in
preference to others
– how and why the capital markets react to particular
information
– whether there is a ‘true measure’ of income
1-23

24. Examples of uses of accounting theories
• Theories might
– prescribe how assets should be valued
– predict why managers will choose particular accounting
methods
– explain how an individual’s cultural background affects
accounting information provided
– prescribe what accounting information should be
provided to particular classes of stakeholders
– predict that the relative power of a stakeholder group will
affect the accounting information it receives
1-24

25. Overview of theories of accounting
• Many theories of financial accounting exist
• No universally accepted theory of accounting
– different perspectives about the central objective, role
and scope of financial accounting
• No universally accepted perspective about the role
of accounting theory
– different researchers have different perspectives of the
role of accounting theory
– a researcher’s own values will influence which theory he
or she elects to embrace
1-25

26. Overview of accounting theories development
• General scientific period (1920s-60s)
– Inductive method, explanation of practice and development of
explanatory framework
• Normative period (1960s-70s)
– Prescriptive approach
• Empirical period (mid to late 1970s – 2000)
– Rational economic persons assumption, a framework to explain
and predict behaviour
• Mixed development (2000 – present)
– Positive and behavioural theories
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27. General scientific period
• Relied upon the process of induction
– development of ideas or theories through observation
• 1920s to 1960s theories developed from observing
what accountants did in practice
– codified as doctrines or conventions of accounting
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28. Criticisms of inductive method
• ‘… concentrates on the status quo, is reactionary
in attitude and cannot provide a basis upon which
current practice may be evaluated or from which
future improvements may be deduced’ (Gray,
Owen & Maunders 1987, p. 66)
• Assumes what is done by the majority is the most
appropriate practice
• Perspective of accounting Darwinism
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29. Example of inductive approach to theory
development
• Grady (1965) undertook research commissioned
by the American Institute of Certified Public
Accountants (AICPA)
• Formed the basis of APB Statement No. 4 ‘Basic
Concepts and Accounting Principles Underlying
the Financial Statements of Business Enterprises’
– reflected generally accepted accounting principles at the
time
1-29

30. Normative Period —1960s and 1970s
• Sought to prescribe particular accounting practices
– known as normative theories
• Not driven by existing practices, and hence not
typically inductive in nature (that is, not based on
observation)
• Rather, were deductive in nature and, based on
logical argument, sought to develop new methods
of accounting
• Theories critical of historical cost accounting
• Sought to provide improved approaches to asset
valuation in a time of widespread inflation
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31. Normative theories
• Based on what the researcher believes should
occur in particular circumstances
– not based on observation
• Example of normative theory
– Continuously Contemporary Accounting (CoCoA) by
Raymond Chambers
• Should not be evaluated on whether they reflect
actual accounting practice
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32. Classifications of normative theories
• True income theories
– make assumptions about the role of accounting then
seek to provide a single ‘best measure’ of profits
• Decision usefulness theories
– ascribe a particular type of information for particular
classes of users on the basis of assumed decision-
making needs
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33. Decision usefulness theories
• Decision-makers emphasis
– undertaking research that seeks to ask decision makers
what information they want
– knowledge then used to make prescriptions about what
information should be supplied
• Decision-models emphasis
– develops models based on the researchers’ perceptions
about what is necessary for efficient decision making
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34. Criticism of normative theories—an
example
• Normative theories have been criticised for lack of
empirical observation
– based on personal opinion about what should happen
– positive theorists argue that they would prefer to provide
information about expected implications of actions and let
others decide themselves what they should do
– positive theorists also make value judgements
1-34

35. Example of prescriptive theory
• 1961 and 1962 studies by Moonitz, and Sprouse
and Moonitz commissioned by the Accounting
Research Division of the AICPA
• Authors proposed that accounting measurement
systems be changed from historical cost to a
system based on current values
• Such research should not be evaluated by
reviewing current practice
• Not supported by AICPA as too radically different
from current practice
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36. Positivistic Period — mid to late 1970s - 2000
• Research aimed at explaining and predicting
accounting practice rather than prescribing
particular practices
• Known as positive theories
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37. Positive theories
• Seek to predict and explain particular phenomena
• Begins with assumption(s), and through logical
deduction enables prediction(s) to be made
• If predictions are sufficiently accurate when tested
against observations of reality, they are regarded
as having provided explanation of why things are
as they are
1-37

38. Positive theories (cont.)
• Positive Accounting Theory
– developed by Watts and Zimmerman
– seeks to predict and explain why accountants elect to
adopt particular accounting methods in preference to
others
– based on ‘rational economic person’ assumption
 individuals motivated by self-interest tied to wealth
maximisation
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39. Criticism of positive theories—an example
• Positive theories of accounting have been
criticised for not providing prescription
• The decision not to provide prescription could
alienate academic accountants from their
counterparts within the profession
1-39

40. Evaluating theories of accounting
• Students should consider the merit of the
argument and the research methods employed
• Some researchers may adopt strategies (such as
overt condemnation of alternative theories) to
support their own research and theoretical
perspective
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41. Evaluation of theories—the position taken
in this book
• Theories of accounting are only abstractions of
reality
• The choice of one theory in preference to another
is based on value judgements
• Cannot expect to provide perfect explanations or
predictions of human behaviour or assess what
types on information users actually need
1-41

42. Evaluating theories—logic and evidence
• When evaluating theories, need to consider
– whether the argument supporting the theory is logical
– whether you agree with the central assumptions of the
theory
– whether you accept any supporting evidence provided
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43. Logical deduction
• Acceptance of an argument must be based on the
accuracy of the premises
– an argument is logical to the extent that if the premises
on which it is based are true, then the conclusion will be
true
– Compare the following statements
 All cats have fur and four legs
 Tom has fur and four legs
 Therefore Tom is a cat
And All cats have fur and four legs, Tom is a cat, therefore
Tom has fur and four legs
• We do not need to refer to ‘real world’ observations
to determine the logic of an argument
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44. The role of assumptions
• Even though an argument is logical we might only
accept the argument if we accept any critical
assumptions being made
– if we reject any central assumptions we may reject the
prediction
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45. Can we prove a theory?
• Can we expect that a theory of financial
accounting (and hence, about people) can provide
perfect predictions in all cases?
• A theory might not have perfect predictive
capabilities, but still be useful
• Saying that we have proved a theory on the basis
of observations ignores the fact that subsequent
observations might not be in accordance with the
theory
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46. Can we prove a theory? (cont.)
• Falsificationists would argue that a theory can
never be proved, though it might be the ‘best’ at a
particular point in time
• Safer to say that our evidence supports a
particular theory
1-46

47. Dishonest tricks in argument
• Thouless (1974) identifies 38 dishonest tricks
some writers use to support their argument
including
– emotionally toned words
– statements where ‘all’ is implied but ‘some’ is true
– diversion to another question or to a side issue
– use of speculative argument
– prestige by false credentials
– appeal to mere authority
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48. Summary
• Methods to develop a theory
• Ethics theory and application in accounting
practice
• Accounting theories and development
• Evaluation of theories
Topic references:
FAT Ch1
APES 110 Code of Ethics for Accounting Professionals
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49. Class activities
• Case study “Harris Accountant ”
• Discussion Questions
– Ch 1 FAT: 1.1-3, 1.5, 1.8, 1.16, 1.20, 1.25, 1.27
• Additional Activities
– Online discussion forum
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50. Relax, we are finished
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