ADVANCED FINANCIAL ACCOUNTING

Advanced Financial Accounting

Advanced Financial Accounting

1.

Watts and Zimmerman (1979, pp.273-305) challenge the proposition that accounting theory is used to determine accounting practice and standards and that the supply of such theories improves accounting practice. A supply and demand condition exists. If there are a large number of individuals able to supply a wide diversity of theories at relatively low cost, then supply will be responsive to demand. Consumers will determine the production of accounting research through incentives to accounting researchers. The more prestigious the academic researcher, the greater will be the resources granted to them. The tendency for some academic researchers to write papers on current controversies derives from such self-interested motivation.

An output of academic research is policy recommendation. Whether intentional or not by the researcher, Watts and Zimmerman (1979, pp.273-288) argue these recommendations will be favourably quoted by those with vested interests. Those advocating a particular view will seek out compatible accounting researchers. Through commissioning further research, they may seek further justification. The end product is to produce a survival bias for theory based upon the vested interests.

Rationales differ (and are inconsistent) across accounting standards because a standard is the result of political action. The outcome depends on the relative costs which the various involved parties are willing to incur to achieve their goals. And these costs will vary with the expected benefits (Watts and Zimmerman, 1979, p. 287)

From empirical examination of legislation and industries as diverse as railways to capital markets, Watts and Zimmerman (1979, p. 289) claim support for “the hypothesis that accounting theory has changed after the introduction of government regulation”. Political action generates accounting theory, not vice versa. They concluded they are not offering any judgement on the desirability of accounting theories fulfilling an excuse role. What we are arguing, however, is that given the existing economic and political institutions and the incentives of voters, politicians, managers, investors,etc. to become involved in the process by which accounting standards are determined, the only accounting theory that will provide a set of predictions that are consistent with observed phenomena is one based on self interest. No other theory, no normative theory currently in the accounting literature, (e.g. current value theories) can explain or will be used to justify all accounting standards, because:

accounting standards are justified using the theory (excuse) of the vested interest group which is benefited by the standard;

vested interest groups use different theories (excuses) for different issues; and

different vested interest groups prevail on different issues.

While a self-interest theory can explain accounting standards, such a theory will not be used to justify accounting standards because self-interest theories are politically unpalatable. As a consequence, not only is there no generally accepted theory to justify accounting standards, there will never be one (Watts and Zimmerman, 1979, pp. 300-301).

Critical theory offers an alternative view of society and the acceptance of the established world order. Critical theorists (Lehman 1992, 4) view accounting information as social control measures (Chua 1986, 625) based upon the unequal distribution of power in ...