Title Page
 Table of Contents
 Information, business, and...
 Discussion on Norton Bedford paper...
 Varieties of accounting theory
 Comments on "varieties of accounting...
 The commercial foundations of accounting...
 Are there commercial foundations...
 The balance sheet -- embodiment...
 Discussion of "the balance sheet...
 What is the message of "A statement...
 A response
 The past's future
 Discussion of "The past's...


Foundations of accounting theory
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Title: Foundations of accounting theory
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Language: English
Creator: Accounting Theory Symposium, (1970)
Stone, Willard E. ( Editor )
Publisher: University of Florida Press
Place of Publication: Gainesville, FL
Publication Date: 1971
Copyright Date: 1971
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General Note: Papers given at the Accounting Theory Symposium, University of Florida, March 1970
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Table of Contents
    Title Page
        Page i
        Page ii
        Page iii
        Page iv
        Page v
        Page vi
    Table of Contents
        Page vii
        Page viii
        Page ix
        Page x
        Page xi
        Page xii
    Information, business, and society
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
        Page 10
        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
        Page 17
        Page 18
        Page 19
        Page 20
        Page 21
        Page 22
        Page 23
        Page 24
        Page 25
    Discussion on Norton Bedford paper "Information, business, and society"
        Page 26
        Page 27
        Page 28
        Page 29
        Page 30
    Varieties of accounting theory
        Page 31
        Page 32
        Page 33
        Page 34
        Page 35
        Page 36
        Page 37
        Page 38
        Page 39
        Page 40
        Page 41
        Page 42
        Page 43
        Page 44
        Page 45
        Page 46
        Page 47
        Page 48
        Page 49
    Comments on "varieties of accounting theory"
        Page 50
        Page 51
        Page 52
        Page 53
        Page 54
        Page 55
        Page 56
        Page 57
        Page 58
    The commercial foundations of accounting theory
        Page 59
        Page 60
        Page 61
        Page 62
        Page 63
        Page 64
        Page 65
        Page 66
        Page 67
        Page 68
        Page 69
        Page 70
        Page 71
        Page 72
        Page 73
        Page 74
        Page 75
        Page 76
        Page 77
    Are there commercial foundations of accounting theory?
        Page 78
        Page 79
        Page 80
        Page 81
        Page 82
        Page 83
        Page 84
        Page 85
        Page 86
        Page 87
        Page 88
        Page 89
    The balance sheet -- embodiment of the most fundamental elements of accounting theory
        Page 90
        Page 91
        Page 92
        Page 93
        Page 94
        Page 95
        Page 96
        Page 97
        Page 98
        Page 99
        Page 100
        Page 101
        Page 102
        Page 103
        Page 104
    Discussion of "the balance sheet -- embodiment of the most fundamental elements of accounting theory"
        Page 105
        Page 106
        Page 107
        Page 108
        Page 109
        Page 110
        Page 111
        Page 112
        Page 113
    What is the message of "A statement of basic accounting theory"?
        Page 114
        Page 115
        Page 116
        Page 117
        Page 118
        Page 119
        Page 120
        Page 121
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        Page 123
        Page 124
        Page 125
        Page 126
        Page 127
        Page 128
        Page 129
        Page 130
        Page 131
    A response
        Page 132
        Page 133
        Page 134
        Page 135
        Page 136
        Page 137
    The past's future
        Page 138
        Page 139
        Page 140
        Page 141
        Page 142
        Page 143
        Page 144
        Page 145
        Page 146
        Page 147
        Page 148
    Discussion of "The past's future"
        Page 149
        Page 150
        Page 151
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Full Text



Papers given at the
Accounting Theory Symposium
University of Florida
March 1970

Edited by


of Florida
sville / 1971

Pr e s s

Univerifty of 7lorida Accounting Seriej no. 7

College of Business Administration
Robert F. Lanzillotti, Dean

Accounting Department
Williard E. Stone, Chairman

or Accounting Series Editorial Board
,i ,bil C. Mobley, Ph.D., Florida A & M University
/.; | F hih Cheng Yu, Ph.D., University of Florida
j "-lilliard E. Stone, Ph.D., University of Florida


All Rights Reserved

CATALOG CARD NO. 75-137855
ISBN 0-8130-0314-8


Bill Paton, Shirt Sleeves Accountant

THE PROCEEDINGS of the accounting theory symposium on
"Foundations of Accounting Theory" held on the University of
Florida campus in March 1970 are dedicated to Dr. William A. Paton.
His influences on accounting theory beginning in 1922 with Ac-
counting Theory have continued undiminished for a generation. It was
William A. Paton who first formulated an integrated, viable theory of
accounting which dared to depart from the pragmatic, work-a-day
approach. So many of his innovations have now been accepted, both in
theory and in practice, that it is difficult to remember the storms of
controversy raised by his ideas in earlier years. The academic phase
of accounting theory, in particular, owes much of its progress of re-
cent years to the firm foundation provided by Dr. Paton's work.
It is a pleasure and an honor to dedicate the proceedings to Dr. Paton
as a very small recognition of the enormous debt which the profession
of accounting owes to him.


Honored Guest
William A. Paton


Albers, Wayne J., Ernst & Ernst
Anderson, Carl A., University of Flor-
Anderson, Wilton T., Oklahoma State
Benninger, Larry J., University of
Bhada, Yezdi K., Ohio University
Brown, James E., Stetson University
Caplan, Edwin H., University of New
Clift, R. C., University of Melbourne
Copeland, Ronald M., Pennsylvania
State University
DaVault, James W., University of
-Demaris, E. Joseph, University of
Devine, Carl T., Florida State Univer-
Ellett, John S., II, University of Flor-
Fertig, Paul E., Ohio State University
Flowers, William B., University of
Frank, Werner, University of Wiscon-
Gorton, Donald E., Wayne State Uni-
Green, David, Jr., University of Chi-
Haas, Robert S., Lybrand, Ross Bros. &
Hartman, Robert F., Jr., Florida Tech-
nological University
Hendricksen, Eldon S., Washington
State University
Horwitz, Bertrand, Syracuse Univer-
Jergensen, Louis C., University of
South Florida

Keller, Thomas F., Duke University
Langendorfer, Harold Q., University
of North Carolina
McCullers, Levis D., University of
Miles, Catherine E., Georgia State Uni-
Miller, Herbert E., Michigan State
Mobley, Sybil C., Florida A & M Uni-
Montgomery, James B., Florida Atlan-
tic University
Mueller, Gerhard G., University of
Patten, Ronald J., Virginia Polytech-
nic Institute
Pattillo, James W., Louisiana State
Pointer, Larry G., Texas A & M Uni-
Price, Harry R., University of Miami
Ray, Delmas D., University of Florida
Schattke, Rudy, American Institute of
Stone, Williard E., University of Flor-
Thorne, Jack F., University of Florida
Voss, William M., University of Ar-
Whitehurst, Frederick D., University
of Florida
Williams, Thomas H., University of
Wixon, Rufus, Wharton School, Uni-
versity of Pennsylvania
--Wyatt, Arthur R., Arthur Andersen &
Yeargen, P. B., University of Georgia
Yu, Shih Cheng, University of Florida



NORTON M. BEDFORD, Ph.D., CPA, holds the Weldon Powell Memo-
rial Professorship in accountancy, and is Professor of Accountancy
and Business Administration, College of Commerce and Business
Administration, University of Illinois (Urbana-Champaign). He
was also President of the American Accounting Association at the
time of this symposium.
R. J. CHAMBERS is Professor of Accounting, University of Sydney,
New South Wales, Australia, and was Visiting Professor of Ac-
counting, University of Florida, in 1970.
C. WEST CHURCHMAN, Ph.D., is Professor of Business Administra-
tion, Schools of Business Administration, University of California
HARVEY T. DEINZER, Ph.D., CPA, is Professor of Accounting, College
of Business Administration, University of Florida.
Louis GOLDBERG, Litt.D., is Head of the Department of Accounting,
University of Melbourne, Melbourne, Australia, and was Visiting
Professor of Accounting, University of Florida, in 1970.
ROBERT E. JENSEN, Ph.D., is the Nicolas M. Salgo Professor of Opera-

tions Research, College of Business Administration, University of
KERMIT D. LARSON, Ph.D., CPA, is Associate Professor of Accounting,
College of Business Administration, University of Texas (Austin).
ALFRED RAPPAPORT, Ph.D., CPA, is Associate Professor of Accounting
and Information Systems, Graduate School of Management, North-
western University.
ROBERT T. SPROUSE, Ph.D., is Professor of Accounting and Director of
the Stanford Executive Program, Graduate School of Business, Stan-
ford University.
ROBERT R. STERLING, Ph.D., is Professor of Business Administration,
School of Business, University of Kansas.
JOHN T. WHEELER, Ph.D., is Professor of Business Administration and
Associate Dean for Academic Affairs, Schools of Business Admin-
istration, University of California (Berkeley).
STEPHEN A. ZEFF, Ph.D., is Professor of Accounting, Graduate School
of Business Administration, Tulane University.


Introduction ix
William A. Paton

Information, Business, and Society 1
Norton M. Bedford

Discussion on Norton Bedford Paper, "Information, Business,
and Society" 26
John T. Wheeler

Varieties of Accounting Theory 31
Louis Goldberg

Comments on "Varieties of Accounting Theory" 50
Stephen A. Zeff

The Commercial Foundations of Accounting Theory 59
R. J. Chambers

Are There Commercial Foundations of Accounting Theory? 78
Kermit D. Larson

The Balance Sheet-Embodiment of the Most Fundamental
Elements of Accounting Theory 90
Robert T. Sprouse

Discussion of "The Balance Sheet-Embodiment of the Most
Fundamental Elements of Accounting Theory" 105
Alfred Rappaport

What is the Measure of "A Statement of Basic Accounting
Theory"? 114
.Harvey T. Deinzer

A Response 132
Robert R. Sterling

The Past's Future 138
C. West Churchman

Discussion of "The Past's Future" 149
Robert E. Jensen




William A. Paton

I'M ESPECIALLY PLEASED to have the opportunity to make these
comments, as in my status of "honored guest" at the meetings where
these papers were presented there seemed to be no appropriate point at
which I could put in my oar.
First, I'd like to remind readers that the rubric for the conference,
according to the printed program, was "Foundations of Accounting
Theory." And on the outside cover appeared the related caption "Ac-
counting Theory Symposium." With such headings one would expect
to hear something about accounting, and I am glad to be able to re-
port that several speakers did actually deal with accounting and its
basic problems. They were perhaps outnumbered-if commentators
are included-by those presenting a somewhat hazy mixture of the
"new" approaches and points of view, embroidered with a dab of sta-
tistics and mathematical allusions and occasional references to the
amazing developments in computers and other devices, but the group
addicted to plain accounting saved the day by keeping the conference
at least within sight of the course laid out for it. Providing major help
in this connection were the outstanding presentations of the professors
from "Down Under," Ray Chambers and Lou Goldberg.
Right here I must confess that I get very tired at times of what


the current crop of revolutionaries in accounting have to say, espe-
cially those who find excuses for abandoning or avoiding the term
"accounting" entirely. I don't object particularly to the content of
their statements, but I don't like the pretension that they have broad-
ened horizons and made discoveries of great importance. Actually they
are ruminating, with little added but some fresh jargon. See, for a
major example of earlier explorations, the extensive writing of Dr.
Leon Carroll Marshall, and especially his proposals at meetings of the
American Association of Collegiate Schools of Business, during his
tenure as dean of the College of Commerce and Administration at the
University of Chicago (1909-1924). Marshall was all for suppressing
accounting altogether through glorification of quantitative measure-
ment, broadly defined, and through statistical approaches and tech-
niques. It should also be noted that the need for servicing management,
of which so much is made nowadays, was stressed by Marshall and
many of his contemporaries. Indeed, the view that a major objective
of accounting is facilitating the administration of business has always
accompanied systematic study of the subject, from the earliest days.
Accounting is a broad and pervasive field, as business transactions of
every kind that are expressed in monetary terms are our meat and
drink. But this doesn't mean that the accountant must be a mathemati-
cian, a statistical wizard, a psychology specialist, a rhapsodic social
participant, or even a computer operator (although here's an area that
he must be keenly aware of). I heartily go along with Ray Chambers
when he suggests that we will do well to confine our attention to
something less than the whole field.
For a long time I've wished that the Paton and Littleton monograph
("An Introduction to Corporate Accounting Standards") had never
been written, or had gone out of print twenty-five years or so ago.
Listening to Bob Sprouse take issue with the "matching" gospel, which
the P & L monograph helped to foster, confirmed my dissatisfaction
with this publication. As I look on this monograph now, I surmise that
the authors must have been unduly influenced by one of FDR'S famous
fireside chats in which he stated: "I am going to put prices back at the
1926-1929 level and then hold them there for a generation" (this is
from memory, unverified). The basic difficulty with the idea that cost
dollars, as incurred, attach like barnacles to the physical flow of mate-
rials and stream of operating activity is that it is at odds with the-actual
process of valuation in a free competitive market. The customer does
not buy a handful of classified and traced cost dollars; he buys a prod-


uct, at prevailing market price. And the market price may be either
above or below any calculated cost figure. Despite any statements in
the monograph that seem to hold otherwise, I have never espoused the
socialistic, cost-plus interpretation of product pricing, and I apologize,
humbly, for any apparent veering in this direction contained in Paton
and Littleton. On the other hand, we have to admit that costs must be
recognized and dealt with. Probably we can agree that orderly and
reasonable procedure in the final absorption of costs incurred is pref-
erable to purely arbitrary, haphazard treatment.
For a long time I've been touting the idea that the central element in
business operation is the resources (in hand or in prospect) and that
the main objective of operation is the efficient utilization of the avail-
able assets. I am further firmly convinced that the most significant
measure of any resource is what it is currently worth (not always
readily determinable, I'll grant). How can we determine where we
stand, what earning rate we are achieving, or where we should go from
here without knowing the value of employed resources? I object, vig-
orously, to certified statements showing land and timber at a fraction
of their demonstrable current market value, with no mention of the
true facts anywhere. Several speakers at the conference, I am happy to
report, took note of the importance of current market values.
With respect to the present-day emphasis on prediction, I was
greatly impressed with Professor Chambers' position, indicated in the
following quotation: "I can readily admit the necessity of future cal-
culations; but I cannot see how these calculations can be made, or if
made, can be worthwhile, without the fullest possible knowledge of
the present financial state of the firm and the fullest possible account
of its past."
In concluding these scattered comments, I can't forego the op-
portunity to pay tribute to my longstanding and esteemed friend
Professor Williard E. Stone. Who but Will Stone would have had the
audacity to conceive of this conference, and who but he would have
displayed the persistence and ingenuity necessary to bring such a proj-
ect to an impressive fruition. Hearty congratulations to you, Williard!


Information, Business, and Society
Norton M. Bedford

IF THERE IS ANYTHING to the total systems approach, it would ap-
pear that some set of relationships ought to exist among information,
business, and society. It would seem that business activities must de-
pend on the information supplied the business entity and that the na-
ture of society must depend significantly upon the actions taken by
business. Contrariwise, it would seem that the nature of society will
condition significantly that which business does and that the activities
business decides to undertake will determine the type of information
which needs to be supplied. Thus it appears that there must exist some-
thing of a network or a system which flows from information to busi-
ness to society and back again. Furthermore, it would appear that
accountants, representing the main business-information system of
American society, ought to be interested in the nature of the set of re-
lationships implied by such a network. The development of such a set
of relationships in detail and the construction of a network display of
their interconnections are, of course, well beyond the capacity of hu-
man accomplishments in the present and foreseeable future. Conse-
quently, one must paint with a broader brush and in subdued, rather
than bold, colors. Nevertheless, there is a great need for such a paint-
ing if the accounting discipline is to adapt to this changing world.

Without such a picture, no matter how indistinct the pattern outline,
there exist no acceptable criteria for expanding the scope of ac-
counting technology and the area to which that technology should be
Let us start the picture of the network with the notion of informa-
tion. While it has many definitions, the rather crude one that "infor-
mation is a bit of news that reduces a decision-maker's uncertainty as
to the decision he ought to make or the action he ought to take" will
suffice for this analysis. Recall that this means that communicating to
a decision-maker something already known would not be information,
nor would disclosing a bit of news not bearing on the decision under
examination qualify. By inference, if information reduces uncertainty,
then misinformation would increase a decision-maker's uncertainty as
to the decision he ought to make or the action to take. Furthermore,
the nature of man's imagination is such that there is ample reason to
think that misinformation, as well as information, is a well-established
institution in most societies of the world. In fact, there seems to be
such a considerable amount of misinformation floating around in so-
ciety that any analysis of information ought to include an examination
of the nature of misinformation and its impact on business and society.
One more notion must be set forth before starting an analysis of the
relationships among information, business, and society. It is the con-
cept of "environmental instability," which is essentially a subjective
concept because environment is merely that view of the outside world
entertained by a decision-maker over which he believes he has no
control. It includes the economic conditions of a society, the political
philosophy prevailing within and among nations, and every other ex-
ogenous constraining factor perceived by the decision-maker. Because
these environmental factors seem to an individual decision-maker to
fluctuate in a rather random manner, they represent nonconstant
factors which the decision-maker views as environmental instability.
In addition, if a decision-maker is confronted with an exogenous fac-
tor of which he had not previously been aware, he thinks of the en-
vironment as unstable, because it does not present itself to him in terms
of specific known factors. In view of these two conditions, it appears
that the environmental instability faced by a decision-maker may be
increased either by making the decision-maker aware of previously un-
considered factors in his environment or by, in fact, increasing the
fluctuations of the factors comprising his known environment. To the
decision-maker, both of these developments would result in an increase


in the complexity of the environment in which he views himself as
acting. To the decision-maker, changes in the instability of his envi-
ronment represent changes in the complexity of the environment in
which he is operating. In this sense, the complexity of an environment
refers to the difficulty of perceiving and being aware of all elements in
the environment and the way these elements interact. Complexity
could be increased or decreased by changing the number of significant
factors in the decision-maker's environment or by changing the extent
of interactions among these factors.
For an individual decision-maker, it is the instability of the environ-
ment that makes decision-making difficult. Because he can never be
completely informed, to the individual decision-maker the environ-
ment is more of an unstable factor than it is a complex factor. But, on
the average, for all decision-makers this instability varies directly and
is highly correlated with the complexity of the environment. This is
significant, for, at the macro level, with which this study is concerned,
it is environmental complexity rather than environmental instability
with which the accountant needs to be concerned.
The advantage of shifting to the macro level is that the study shifts
from the multitude of individual subjective views of environmental in-
stability of each decision-maker to an average condition, which at any
point in time is a single, valued condition. There is no way of knowing,
of course, what this average condition of environmental instability is;
in fact, there is no need to know, for our interest is concerned pri-
marily with changes in the average and only incidentally with what it
is at any one point in time.
Changes in environmental instability, you will recall, were due ei-
ther to the decision-maker becoming more aware of previously uncon-
sidered factors in his environment or to an actual increase in the in-
stability of the perceived environment. The shift to the macro level
excludes the first of these from consideration, because, "on the aver-
age," man's intelligence will not change so rapidly that there will be a
sudden overall increase in man's intuitive perception of the nature of
his environment. Rather, without formal information-development
processes, it appears that man's ability to comprehend his existing en-
vironment occurs slowly. This means that, if a study is seeking to
determine the relationships among information, business, and society
at only a general level, it is appropriate to ignore the gradual intuitive
increase in the intellectual capacity of man to understand his environ-
ment. This does not mean that this factor must be ignored. If one is

more rigorously inclined, there is certainly no reason not to develop a
rate of change in man's ability to understand the environment in which
he operates and then add this to the change in the complexity of the
previously known environment. For the purpose of starting this anal-
ysis, however, it is assumed that at the macro level the bulk of the
changes in the instability of the environment are due to changes in the
actual complexity of that environment. These changes in the com-
plexity of the environment are technological and social value changes
with which accounting information can, without assuming a subjec-
tive point of view, be concerned.
Returning to more familiar ground in order to set up a relationship
between the business decision-making process and information, note
that individual decision-makers face various degrees of uncertainty in
the various decision-making activities. For some decisions, they are al-
most certain as to what they should do. In such a situation, an item of
news confirming a condition about which the decision-maker was al-
most certain would not provide a great deal of help to him. Such a bit
of news would represent a small amount of information because it
would not reduce significantly the decision-maker's condition of un-
certainty. Recall, however, that the amount of information is quite
distinct from the value of information, because the value of informa-
tion typically refers to the income or utility increase resulting from the
use of the information. The distinction between amount and value of
information is best revealed by an example. Thus, if a decision-maker
were fairly certain that he should decide to take action A rather than
action B, a news item confirming that he should decide on A would
represent a small amount of information. But, if the income difference
between action A and action B were $50,000, the small amount of in-
formation could be of considerable value. The point is that the value
of information depends upon the decision-making opportunities avail-
able to the decision-maker and not on his uncertainty about them. On
the average, or over the long run, assuming income opportunities are
random in nature, there would be a high correlation between the
amount and value of information. In the macro sense of this study,
they may, therefore, be considered as similar measures. To avoid any
misunderstanding, however, this study is confined to the relationship
of the amount of information to the business decision-making process.
With this relationship between the amount and value of information
in mind, recall that if a decision-maker were highly uncertain as to
which among possible alternative decisions he should select, a news

item indicating the proper decision to make would be of considerable
help to him and would represent a large amount of information, unless
a certain psychological point, which will be examined in a few mo-
ments, has been reached.
The relationship of business decision-making uncertainty to infor-
mation is best examined with the diagram on the following page.
In order to simplify comprehension of the diagram, the explanation
will start with a discussion of the curves in the first quadrant. Presum-
ably, this is the condition of the business world today, although one
has doubts at times that there really is more information than misin-
formation now provided business decision-makers.
Briefly, the curves in the first quadrant reveal that, as environmental
complexity goes from low to high, the decision-maker's uncertainty
condition, his entropy, increases at a rapid rate. This is reflected in the
"uncertainty-level" curve. The function of information appears on
the chart as one of reducing the amount of uncertainty from the total
area between the uncertainty-level curve and the positive x-axis to
the cross-hatched portion between the uncertainty-level curve and
the "amount of information" curve. The curves indicate that the gap
between the uncertainty level and the amount of information grad-
ually increases as the uncertainty-level curve increases at a rapid rate;
whereas the amount of information curve decreases at a rather rapid
rate until, from point 2 on, increases in data actually decrease the
amount of information provided decision-makers.
The curves in the first quadrant appear intuitively reasonable. The
idea that an increase in the number of variables, conditions, or events
to be considered a part of the environment causes decision-making un-
certainty to rise tends to agree with one's personal experience when
confronted with too many factors to be considered in making a deci-
sion. Also, the idea that information helps reduce uncertainty, until
one gets so much of it that it cannot be comprehended, agrees with
one's personal psychological experience. The curves are based on
more than intuition, however, for they are supported in general by
certain research studies in psychology.1 Limited direct confirmation
of their validity at the micro level has been provided by a nonquanti-
tative empirical research study of the reactions of a purchasing agent
of a university. In this research, the purchasing agent's area of purchas-
ing responsibilities was increased substantially. This resulted in, and
1. See unpublished study by Professor Lawrence S. Revsine, University of
Illinois (Urbana-Champaign, Illinois).


Possible amount of

Uncertainty level

High i- II1IIII High
Environmental simplicity Environmental complexity

Amount of
misinformation Possible amount of

SThe Origin of
Certainty Information


Relationship of Business Decision-Making Uncertainty to Information

was treated as, an increase in environmental complexity. The addi-
tional responsibilities were assigned as though they were new perma-
nent responsibilities. Under the research project, this condition pre-
vailed for one month. At the same time, using a computer, the amount
of data pertinent to the decisions to be made was increased to the point
that the purchasing agent could not read it all. At the end of the
month, confusion reigned supreme. Although further research on the
validity of the curves is needed for purposes of developing a sensitivity
to the interrelationships among information, business, and society, the
curves have been accepted as valid in this analysis.
The agonizing part about the curves in the first quadrant is that as a
society we do not know where, at the macro level, business decision-
making uncertainty and information now exist on the curve. It is a
question of considerable concern to accountants whether business is
now supplied data at level 1, 2, or 3. The fact that many business exec-
utives have employees digest and brief information reports suggests
that our business-information condition may be beyond point 2. Other
requests for information from business executives suggest that the
present condition may be closer to point 1 than to point 2. On balance,
considering the twentyfold increase in paper work in business in the
last fifteen years, one is inclined to the view that, overall, the present
business information condition may be on the downward slope of the
information curve. Supporting this view is the statement of a scientist
at Arthur D. Little that in the seventies, one of the three major prob-
lems facing business and society will be "a surfeit of information" that
may engulf us all before we can do anything about the other two
problems-pollution and a lack of energy sources. On the other hand,
the rather amazing success of business as reflected in the growth of the
gross national product implies that some very sound business decisions
have been made in recent years. This, in turn, implies that the environ-
mental complexity is not so involved that decision-making must take
place under conditions of high uncertainty. In this context, one is
inclined to the view that the prevailing uncertainty level has not
reached excessive heights and may be somewhere near a point on the
uncertainty-level curve directly vertical from point 2 on the informa-
tion curve.
The determination of the present point on the two curves is a
critical problem for accountants. If, for example, empirical research
supports the belief that too many data are now being provided deci-
sion-makers, it means that accountants will have to redirect research

toward means for compressing information (possibly along the lines
Baruch Lev suggested in his research study on information theory and
accounting) and toward means for improving the accounting percep-
tion process in order to be more selective in recognizing data for proc-
essing. Broadly, the implication is that accounting research ought to
be directed toward compression and selectivity methods.
With the explanation of the first quadrant curves complete, it is rel-
atively easy to grasp the meaning of the curves in the third quadrant.
As "environmental simplicity" increases along the x-axis, the "cer-
tainty level" in which decisions are made increases more than propor-
tionately. Mitigating against the implication that the source of peace
and contentment of man is withdrawal from the hostility of the pres-
ently perceived environment is the emergence of misinformation in
society. From misinformation arises (1) distrust among men due to
lack of communication; (2) myths and false guides for action, due to
lack of knowledge, as studies of certain tribes of Africa reveal; and
(3) general confusion among men regarding proper action. Ultimate-
ly, excessive misinformation will be categorized as irrelevant and ig-
nored for decision-making, and the amount of misinformation curve
will turn up toward the x-axis. While this situation is not relevant to
the topic of this paper, for conceptual completeness one might con-
clude that movement to the left on the environmental simplicity
x-axis, while tending to create a condition of certainty in decision-
making, really represents a return to animallike life, where decisions
are made on the basis of instinct and intuition.
The second quadrant curve indicates that, if information is increased
as the environment becomes more simple, the amount of certainty in
decision-making increases. This is reflected in the area between the
"possible amount of information" curve in the second quadrant and
the certainty-level curve in the third quadrant.
It is in the fourth quadrant that the role of misinformation in mod-
ern society is revealed. Essentially, increases in incorrect data increase,
up to a point, the decision-making uncertainty area lying between the
uncertainty-level curve in the first quadrant and the "possible amount
of misinformation" curve in the fourth quadrant. While empirical evi-
dence on the role of misinformation in modern society is lacking, lim-
ited analyses and intuitive reactions indicate that at least two types of
misinformation prevail in modern society:
(1) purposely released misinformation, in the form of propaganda
intended to widen the decision-making uncertainty area until confu-

sion results and man is no longer able to act in his best interest; and
(2) nonpurposely released information, in the form of inadequate
perception by message receivers and inadequate sensing of the
The implication of the curve in the fourth quarter is that, while mis-
leading advertising pays, if the objective is to confuse the decision-
making of others, it pays only up to a point. One might, in an opti-
mistic mood, suggest that the curve implies that if we get enough
misinformation in society people might ultimately tend to ignore it
and use only reliable information. This possibility has implications for
the auditing function in society, for audited information would be re-
liable information. Of course, to the extent that the auditing function
becomes more fully recognized as one of providing reliable informa-
tion, there will have to occur a significant expansion in both the audit-
ing tools and technology and the scope of applications of the auditing
function in society. There is, in fact, some evidence to indicate that
auditing has taken a few first steps along the long road of developing
reliable information for society.
As to where our society now stands on the possible amount of mis-
information curve in the fourth quadrant, one can only hope that we
are near the nadir and that the depth of the misinformation curve is
not so much greater than the height of the information curve that mis-
information's devisive role is on the wane in modern society. As of
now, man can only make his guesses and call for extensive social psy-
chology research.
Returning to the main topic of this paper, note that there is a subtle
intuitive implication reflected in the first quadrant curves to the effect
that the "environmental complexity" of business is constantly increas-
ing in American society and is creating a more than proportionate in-
crease in the entropy facing business decision-makers. What is the evi-
dence to support such a proposition? Actually, there is precious little,
and the problem becomes one of searching for evidence. Broadly,
there appear to be two reasonable ways to look for this evidence. One
is to examine developments in the business world itself; the other is to
examine the problem of the business environment from the point of
view of society.
As to the developments in the business world itself, it seems most
convincing to note a few specific environmental developments since
World War i which reveal that business decision-makers face a con-
stantly increasing complex business environment. For example:


(1) There has been an increasing specialization of workers, which
has created much greater interdependence among business actions. As
a result of the increasing interdependence, the business decision-maker
has become well aware that the consequences of a decision may be felt
in many other parts of the business world. Reactions to decisions come
from unexpected places.
(2) The size of large business entities has increased significantly,
which creates the possibility that a lower-level decision-maker may be
suboptimizing his own area of responsibility to the detriment of other
areas of the total entity. This would be so because of his inability to
grasp and relate all activities of the total entity.
(3) The population explosion has been widely recognized and, be-
cause it increases more than proportionately the communication chan-
nels which could exist among people, makes decision-makers aware of
the difficulty of their task of discerning changes in the wants and
needs of society which have to be satisfied by business.
(4) The knowledge explosion since World War n has created
multiple ways of doing things. Products can be produced and distrib-
uted in different ways and the correct way at one particular point in
time depends upon the circumstances. Overall, the result is a more
complex environment for decision-making.
(5) Organizations have become more complex in a psychological
sense. That is, involved motivational and inspirational devices are used
to coordinate effective employee relationships. These devices are part
of the business environment as tools which the decision-maker must
consider using in selecting courses of action.
These five situations are illustrative and not conclusive evidence that
the business environment seems to be becoming more and more com-
plex. It is hoped, however, that the illustrations are sufficient to gen-
erate support for the proposition that the business environment is now
most complex and that business itself is a highly interdependent struc-
ture of separate entities. The illustrations do not reveal trends, let alone
a rate of trend change; thus, they afford no basis for predicting the
future, except possibly to imply that things will be different. Yet, if
one aspires to establish a set of relationships among information, busi-
ness, and society, it would be highly desirable to be able to predict
developments in one of these areas and then to use the developed re-
lationships to predict developments in other areas. An examination of
the cause of changes in the business world is therefore appropriate.
It is assumed to be impossible to even recognize, let alone itemize



and categorize, all the forces for change in the business world. But a
study of a number of them suggests that technology underlies them
all. The proposition accepted in this study is that technology is the
most powerful force for change in the business environment and that
its influence seems to be increasing. At the macro level, this suggests
that, if means were available to forecast technological change, that
forecast could be used to predict the future complexity of the business
decision-maker's environment.
Technological forecasting is a relatively new discipline. Its method-
ology is not well developed, but some of its current findings are signif-
icant to anyone interested in the information needs of future society.
Some of these are discussed in the following pages. The first finding of
significance is that applications of technological forecasting proceed
as shown in the accompanying diagram.
The elongated S curve is based on a number of empirical studies
which indicate that business use of technological development pro-
ceeds through a pioneering stage at a slow rate of application then
accelerates until new applications are rapidly introduced. This stage of
rapid applications continues until the possibilities of application tend
toward exhaustion at the upper level of the curve.
The expectation line is the significant line to accountants. This line
reflects the human tendency to extrapolate linearly, and the gap be-
tween the "expectation line" and the "application line" represents an
information gap in society which needs to be corrected and for which
accountants might assume a responsibility. The gap when expectations
lag behind actual applications, area A on the graph, is serious in that it
develops an indifferent attitude on the part of decision-makers that
tends to foster careless decision-making and a disdain for advanced
decision-making technology. It needs to be corrected by an improved
information system if business decision-making is to be performed in
harmony with environmental developments. It is the gap in area B on
the graph that is much more significant, however, for, when expecta-
tions exceed realization, human frustration and conflict result, which,
in turn, tend to result in an undesirable atmosphere that can only do
harm for the institution of business. While the implication of the fol-
lowing graph on the application of one technological development
may be quite significant to decision-makers in an industry devoted to
its development, for all of business, interest attaches to the rate at
which new technological developments are introduced into society.
The limited evidence available suggests that in an overall sense the rate



of technological innovation is still in a period of rapid expansion. As
fast as one technological development is exploited and fully applied,
new developments occur, so that, in the envelope-curve context, the
rate of total technological change in society is rapidly upward and may
even be accelerating.


Expectation line



Application line


Expectation line


tl t2 t3 t4 tn-3 -2 tn-1 tn

Extent of Utilization of Technological Development

The fact is that, up until 1800, technological activity was under
the control of an authoritarian philosophy of life. Authoritative pro-
nouncements were accepted without question and without testing
them against reality. Starting before but emerging as a replacement to
the authoritarian philosophy of life about 1800 came the philosophy
of "experimentally tested thought," widely heralded as the scientific
method. This method of experimentally tested thought generated a
steady acceleration of technological development which carried over



into an expanded role for business in society. But the limitation to the
tested thought philosophy is that different specialized fields of study
were kept quite distinct, and this separateness of fields of study re-
sulted in duplicate and redundant basic work in different fields. Be-
cause the fields were not coordinated, technological advances did not
occur as rapidly as they might have. Moving now in the waning years
of the twentieth century to complement the philosophy of experi-
mentally tested thought is the philosophy of "interfield innovation"
to motivate and control human and technological developments. The
central goal of this new emerging philosophy of life is to "satisfy hu-
man needs"; it is reflected in newspaper jargon as "the cult of the
young," "the student revolt," or "the hippie movement." Actually, the
only reason the new philosophy is mislabeled as a youth movement
is that many post-thirty members of society, having attained some
degree of security in society, have lost the sharpness of their sensi-
tivity to new developments. But whatever its cause and precise nature,
the new philosophy of interfield innovation breaks down the barriers
among different fields of study and provides for the use, under an
overall systems approach, of developments in any field that promises
to further a technological advance. The result of this mingling of vari-
ous fields of study reduces duplicate studies, broadens perspective, and
tends to accelerate even more technological advances in all parts of so-
ciety. Now, as this occurs, the dependence of business decision-makers
on formal information will increase rapidly. This is so, because past ex-
perience is not repeated in a time of such rapid change and the infor-
mation informally obtained by decision-makers by experience over
the years past loses its relevance. The implication is that so rigid is
to be the relationship between business and information in the future
that business decision-making may become an information function,
with the power of business flowing to the centers of information.
The conclusion that technological change is to increase at an increas-
ing rate is supported by a number of technological forecasts in such
diverse areas as (1) the speed of aircraft; (2) human transportation
speeds, in general, which suggest, incidentally, that by the year 2350
we shall be approaching the speed of light; (3) efficiency of fuel-
burning electric power plants; (4) rate of improvement in the grinding
process; (5) efficiency of, illumination sources; (6) lowest tempera-
ture achieved in the laboratory by artificial means; (7) machine tool
tolerances; (8) micro-engineering; and (9) installed technological!
horsepower in the United States. Illustrative of the results of these


9,000 Combat aircraft

8,000 -

7,000 -

, 6,000 -

V 5,000-





250 -

1920 1930 1940 1950 1960 1970
Trend of Aircraft Speed


technological forecasts is the accompanying chart of maximum air-
craft speed for the period 1925 to 2000.2
The implication so far is that information and business are going to
be much more interrelated in the future than in the past. There has also
been an implication, based on the premise that the main force for
change in business is technology, that the business environment of the
future is going to change rapidly and will need a greatly improved
quality of information in the future. This emerging problem of infor-
mation quality, with which accountants are becoming increasingly
concerned, is viewed as the solution to the previously discussed possi-
bility that excessive data, posing as information, are now being pre-
sented to business decision-makers. The conclusion is that accounting
research of the future ought to be directed primarily to the two
problems of:
(1) developing a methodology for compressing information; and
(2) developing perception processes to improve the selectivity of
It would be of interest to make a prediction of the probability that the
information-development process of the future, still known as ac-
counting presumably, will be adequate to supply the information
needs of the future. Unfortunately, this symposium came about six
months too soon to include actual data into the information-prediction
model which I believe appropriate for this question. The model,
adapted from a study by A. L. Floyd of Lockheed Aircraft, is based
on the trend of the "amount of information per bit of data communi-
cated." The forecast is to be based on the calculation of a probability
of improving the information per data bit through applied research
effort. The model appears somewhat as follows.
The probability that a researcher will improve the quality of infor-
mation (quantity of information per data bit) on one research project
from level 1 to level 2 would be:
(1) P(2,1) = -,where:
X is the number of possible research projects that would result in an
advance in the information per data bit from level 1 to level 2; and
M is the total number of research projects that could be undertaken
by the researcher.

2. Adapted from James R. Bright, ed., Technological Forecasting for Industry
and Government (Englewood Cliffs, N.J.: Prentice-Hall, 1968), p. 68.



If this basic formula (1) is expanded to include the average number
of qualified researchers R, each completing N research projects per
period of time, the probability that the accounting profession will
advance the information per data bit to a given level L in a given
time span (At) would be:

(2) P(L,At) = 1 X (t)

This states that the probability of advancing the quality of account-
ing information to level L is merely 1 minus the probability of not ad-
vancing to the new level.
Practically, it is believed that a measure of both M and I (informa-
tion per data bit) can be simulated by a research project on this issue
using accounting reports over the period 1933-1970. These initial
measures of the ratio of successful research projects to projects at-
tempted and of the information per data bit at level 1 can be used as a
starting point. It is assumed that the information per data bit can be
improved-by any one of a number of itemized possible research proj-
ects. The itemization of possible research projects is still an open-
ended project in itself that will be arbitrarily closed on August 31,
1970, after approximately two hours' study per week for one year.
Now, given the objective of improving the quality of information
per data bit and the finite number of possible research projects M of
which X will result in an improvement in the information per data bit,
it is evident that as improvements are made in I (information per data
bit), the number of successful research projects remaining to be com-
pleted will decrease slightly. However, if one posits a limit to the in-
formation per data bit of I = 50 per cent of the uncertainty condition,
it is apparent that as the level of I approaches this limit due to research
results, the number of remaining successful research projects must ap-
proach 0.
For purposes of this model under development, it will be assumed
that the rate of change in the remaining successful research projects is
proportional to the number of research projects used to develop the
quality of information to the prevailing higher level above level 1. This
may be expressed as:

(3) = -k(M X), where:



A2 is the change in the level of I; and
k is a constant.
Integrating equation (3) between the level 2 amount of information
per data bit and the limiting value of I, defined as E, while X ranges
from 0 to X, is found as follows:
0 E
X dx -k
(4) M = M- X k d2,

X 2
which may be expressed as:
= 1 exp [-k(E- 2)].
Note that equation (4) does not recognize that X and M change
with time and that k could be time-dependent.
Now, if we substitute the derived value --into equation (2), we
(5) P(L,At) = 1 exp [-(E 2)kNR(At)].
This means that the probability of moving the quality of informa-
tion per data bit I to level 1 over any period of time is equal to the dif-
ference between 1 P(t) and the result of multiplying the probabil-
ities of not achieving level L as follows:

(6) P(L,t) = 1 exp[-(E- 2) kNR(At)].

Now the trouble with equation (6) is that, although it replaces the
sum of all the kNR(At) elements in equation (5) with the integral,
the integral cannot be evaluated because the number of researchers
R can be varied, which significantly influences the rate of time by
which the quality of information is improved.
But is it possible to assume that, once the accounting profession
shifts its interest to the improvement of the quality of their informa-
tion and away from the quantity of data, researchers will shift from
efforts to develop additional data bits to the new area of research.
While the form of this shift in interest is not known, it is assumed that



the rate of shift is a function of the difference in the amount of infor-
mation provided by improving the quality of information over in-
creasing the quantity of information in the same period of time. Then
the number of researchers available to carry out research projects to
improve the quality of information could be estimated as:

(7) R = R(fge fgn)Ro(t), where:
fge = effectiveness measure of improving accounting information by
improving quality;
fgn = effectiveness measure of improving accounting information
by increasing quantity; and
Ro(t) = the growth rate of total accounting researchers.
Then, the first order approximation (fge fgn) can be used to make
the assumption that:
(8) R = (fge fgn)Ro(t).
Now assuming that k and N in equation (6) are relatively constant,
equation (8) can be placed in equation (6) to yield:

(9) P(L,t) = 1 exp [-(E 2) (fge fgn)T(t)dt], where:

T(t) is a function which varies with time and is equal to
k(t) N(t) Ro(t).
For future projections, the probability P(L,t) may be held at a con-
stant 50 percent value, and then the way the information per data bit
improves with time can be estimated. By setting P(L,t) = .5, the inte-
gral in equation (9) can be evaluated by separation of variables with
the result that:

(10) P(L,t)= .5 = 1- exp [Y] 1 (C- ) where:

1 fgn/E
1 fge/E'
C1, C2 are constants; and
the integral of T(t) = constant times change in time for the finite
ranges of time considered.
Equation (10) is the basis for plotting and projecting the trend of



changes in the quality of information (information per data bit).
Three measurements are necessary to use it:
(1) the limit of the information per data bit to which we aspire;
(2) the extent to which accounting information can be improved
by increasing quantity must be estimated; and
(3) the value of C, must be determined from at least two data
Lacking data to test the formula at this time but putting it through
the computer with arbitrary numbers and comparing it with the trend
of technological changes as exemplified on page 14 as a reflection of
the change in business environment, one develops an apprehension that
accounting information, including that developed by management sci-
ence technology, cannot be developed rapidly enough to be adequate
for the needs of business decision-makers well before the year 2000.
Turning now to an examination of environmental complexity from
the point of view of society as a whole, it seems appropriate to confine
the concept of environment to the set of human activities and those
parts of the physical environment to which there is a human reaction.
This set of human activities is, from a broad structural sociological
point of view, merely the interactions among individuals or groups
in society. These interactions are governed by the socially accepted
modes of thought and action of individuals or groups. In addition to
these social norms, which stimulate specific actions by individuals and
groups, cultural values indicate in general how a group or an individ-
ual in a society will behave. For example, in some societies the majority
of the population may prefer football. In other societies the majority
may prefer opera. The interrelated mass of these norms and values rep-
resents the framework or structure of society in the sense that the mass
is all tied together in a sort of interconnected network of relationships.
The status and functioning of this unified, total human social structure
imposes realistic restraints on the activities or operations of individual
business firms within that society. Illustrative of these restraints are
such business commandments as:
(1) Business action shall not disturb the social norms of private
property and freedom of choice.
(2) Business action shall not disturb suddenly the cultural values
which provide stability to a society.
(3) Business actions shall not disturb those aspects of the physical
environment which influence social norms and cultural values.
Subject to a multitude of manifest and latent social and physical con-



straints such as those listed, business seems to have relatively free
choice in what it chooses to do. There is, however, a growing realiza-
tion in the business world today that the chosen objective of optimiz-
ing the economic operations of the business entity may have so domi-
nated business interests that both the established social norms and
cultural values of American society have been weakened, with the re-
sult that total human society seems, to many members of society, to be
falling apart. As evidence, they point not only to the pollution of our
physical environment but also to the apparent loss of purpose in hu-
man life emerging in our total society. It is this disorganization of
the human environment and its tendency to destroy meaning in life,
they contend, that represents the present-day environment with which
business decision-makers must be concerned in planning (budgeting)
and controlling the operation of a business entity.
In more precise terms, it seems that the impact of the excessive in-
terest in economic objectives, along with a multiple list of other factors
such as the population increase, industrialization, and higher education,
seem to have, according to the economic law of diminishing utility,
dulled human sensitivity to social norms and cultural values to such an
extent that a decrease in the stability of human responses to specific
stimuli is in reality what has occurred. As a result, it becomes more
and more difficult to predict behavior, and, to the casual observer, so-
ciety does indeed seem to be falling apart. This instability of the hu-
man response increases with rapid changes. The overall result is an in-
crease in the uncertainty condition on the part of the people who must
act, which manifests itself in an increased risk to business operations
and even to the business institution itself. These risks, it must be reiter-
ated, are due to the instability of the human response to the traditional
stimuli of values and norms. They are now environmental constraints
of such magnitude that they must be considered in business operations
and budgeting; whereas, they may have been recognized informally in
the past when they were less significant elements.
The point being made is that business must adjust its activities to be
in accord with the prevailing cultural values and norms of the society
in which it operates. This relationship between business and society is
becoming more and more a rigid relationship that cannot be violated.
Furthermore, it is the function of information to enable business to
comply with this relationship. In an effort to restrict the scope of this
paper, the opposite problem of the set of responsibilities of society to
business is not considered.



With this background in mind, it is time to discuss the nature of so-
ciety and the way it is changing toward the objective of determining
more precisely the relationships among information, business, and so-
ciety that will prevail in the future.
As to the nature of the components (the specific elements of the
social environment) which should be considered in providing infor-
mation for business planning and budgeting and to managers for oper-
ating business entities, there seem to be as many views as there are
social scientists. The problem is an ever present consideration, how-
ever, for all societies in human history have had to operate according
to the restrictions of the relationships among the values and norms of
society. But the situation is more acute today, for not only is the world
most complex, but it is also highly interrelated and this interrelated-
ness means that actions in one part of a complex society may have an
unknown impact in another part of society. It is, therefore, particu-
larly important that business firms view and understand the whole sys-
tem of human society before they seek to improve the operations of
their subpart of that whole system. Otherwise, they may do more
harm than good to the total system. It may well be that the cause of
much of the unfavorable view of business today is the tendency of
business entities to suboptimize their own entity operations to the det-
riment of the whole human social system. It may be fair to contend
that the failure of business decision-makers to consider the constraints
imposed by society on business operations and budgeting has caused
business firms to fail to respond to the changed social system arising in
the post-World War ii period. It may be that business has not clearly
perceived its role in society. It may be that business in general has not
recognized that the interests and values of society have to be part of
the interests and values of the business, because business is merely part
of society. It seems reasonable to suggest that businessmen must quit
thinking about their "social responsibilities," because the term implies
that business is separated from society. Rather, business has to start
thinking about the role of business in society and to consider the
proper functions of business in human society. Business must stop
thinking that the subparts of society (and business is merely one of
many subparts) are relatively independent of the whole system. Busi-
nessmen must operate and budget in terms of the whole society system.
It is the overwhelming task of information to see that business is
sufficiently informed to make this adjustment, and accountants must
begin to so think. This requirement-that businessmen must think in



terms of the whole social environment-is a requirement that will be
extremely difficult for accountants to implement. It has been pointed
out previously that technological change alone is going to increase the
complexity of business operations to such an extent that a doubt arose
that information developers could meet that need by the year 2000.
Now, consideration of the social environment and the realization that
business must be more sensitive to and more cooperative with that
social environment places an even greater burden on the information
function in society.
The only reasonable approach to this aspect of the functioning of
accounting information and business appears to be to assume that the
social environment faced by business decision-makers can be under-
stood by studying the manifest and latent communications network
prevailing in total society. The type of communication network re-
ferred to is the flow of all types of messages throughout the environ-
ment, where the term "message" is used in its broad sense as the
transmission of motivational stimuli that cause action. If the business
entity were well wired into this total communication network by an
expanded monitoring information system, it could become aware of
the constraints which the environment is placing on its operations. It
seems reasonable to suggest that it is the responsibility of accounting
information, as one likes to view accounting, to see that business starts
becoming well wired, by an information network, into all activities of
society, in order that society will continue to accept the institution of
business as we know it. Limited historical evidence indicates that so-
ciety measures organizational goals in terms of their perceived con-
tribution to the functioning of the total system of which the single
organization is only a part. Organizational business goals become an
operational subset of the aims of the society and must be devised, in-
terpreted, and implemented within that essential social environmental
constraint. Not to do so ensures the failure not only of the individual
business manager but of the institution of business as well. Thus, the
goal-setting problem of an organization includes the task of deter-
mining a relationship of the organization to the larger society.
The set of relationships between business and society must be such
that it will be apparent that the question of what business organization
goals shall be depends significantly upon what society wants done or
can be persuaded by business to support. Furthermore, since changes
in both business organizations and society are constantly taking place
and will alter organization goals, these goals need to be constantly re-



viewed and altered appropriately. As further explanation of the nature
of the set of relationships between business and society, note that the
goals of a business organization determine the kind of goods and serv-
ices which the organization will produce and offer to society. When
the goals are easily identified, social appraisal and evaluation of goals
may be accomplished by referring to appropriate accounting data.
When goals are intangible and not clearly evident to society, the social
appraisal of the goals and the effectiveness with which they are carried
out is much more difficult; social unrest arises. This means that infor-
mation must facilitate public awareness of the extent to which business
goals are in harmony with the goals of total society. Presumably, this
could be accomplished by an expansion of the auditing concept in
In conclusion, some consideration must be given to the problem of
predicting the future values and norms of society in order to attempt
to arrange a set of relationships among information, business, and so-
ciety that will span time and further the development of civilization.3
Although the notion of a norm or value change is readily understood
at a very general level of consideration, the forecasting of specific
norm or value changes is most involved. There are great complexities
in the way different ones interact with one another.
Note first that a norm-value change is generally not a matter of sub-
scribing to or abandoning a certain norm or value. Rather, it is a matter
of the extent to which the norm-value is believed and the way it is
grouped with others. Also, the norm-values of society tend to conflict
with one another when taken in the aggregate in just the way our life-
needs (for rest, amusement, exercise, and rewarding activity) contra-
dict one another in competing for time, attention, and resources.
The practical importance of the problem of future norm-values is
so great, however, that attempts to deal with it cannot be abandoned
because of its difficulties. With this reservation constantly in mind, the
subsequent considerations of future American norm-values will con-
sider those values itemized by the working party on "values and rights"
of the Commission on the Year 2000 of the American Academy of
Arts and Sciences. In the deliberations of this commission, the follow-
ing norm-values were regarded as particularly affected by or involved
in foreseeable future developments:
(1) Privacy
3. Much of the following material on value change was obtained from a
lecture by Professor Nicholas Rescher at the University of Texas in 1969.



(2) Equality (legal, social, and economic)
(3) Personal integrity (versus depersonalization)
(4) Welfare (personal and social)
(5) Freedom (of choice and action)
(6) Law abidingness and public order
(7) Pleasantness of environment
(8) Social adjustment
(9) Efficiency and effectiveness in organizations
(10) Rationality (organizational and individual)
(11) Education and intelligence
(12) Ability and talent.
Actually, the values in this list can be sorted into three categories as
(1) Individual rights norm-values-privacy, equality, personal in-
tegrity, welfare, freedom
(2) Life-setting norm-values-public order, pleasantness of envi-
(3) Personal characteristic norm-values-efficiency, rationality, so-
cial adjustment, education, intelligence, ability, talent.
Each of the norm-values in the basic list can also be placed into one
of the two categories as (1) threatened in the future, or (2) needed in
the future. Individual rights norm-values and life-setting norm-values
clearly fall into the threatened category in that their realization is apt
to be substantially more difficult in the future society. The condition
of being needed appears to be the lot of the personal characteristic
norm-values in that their espousal, maintenance, and realization will be
especially important in the future society.
In addition to the basic list of social and ability norm-values, there
can be little question that the character norm-values of honesty, loy-
alty, idealism, friendliness, and truthfulness will have a yet greater need
in the crowded, depersonalized, and complex society of the future,
however highly these values may have been prized heretofore. Ameri-
can society has treasured these character values throughout its history,
but in the future they will very likely be markedly upgraded as a social
environment takes shape in which they are increasingly indispensable.
Witness the call of the youth for honesty in government. The plain
fact is that over the past generation there has been a marked tendency
in American norm-values to shift from the notion of "getting ahead
in the world" to the notion of "service to mankind." This is a trend
that will certainly continue and possibly intensify.


Although there is no quantified basis for the projection, the forecast
is that known changes in specific values are underway and that busi-
ness must adjust to them. Accountants should aspire to provide the in-
formation to enable the adjustments to be made.
Overall, the responsibility of the information function in discover-
ing, developing, and maintaining a desirable set of relationships be-
tween business and society is an appalling comprehension. When one
realizes that society is not a static structure and that there is a need for
a constant awareness of the changes taking place in society, it seems
quite clear that American society is going to have to direct a much
greater portion of its resources to the information industry. It seems
that accountants ought now to be doing research on methods for per-
ceiving and monitoring both internal and external activities in and
surrounding business and that they should be attempting to develop
new concepts of significance and of objectivity.

Discussion on Norton Bedford Paper
"Information, Business, and Society"

John T. Wheeler

WHEN I AGREED to be the discussant for the Bedford paper, I
did not realize I would be expected to comment on information, busi-
ness, and society, and all in fifteen minutes. Professor Bedford has
treated us to a tour de force of accounting as the information system
of business in the society of the seventies. I could not possibly com-
ment on all facets of his presentation. Instead, I would like to focus on
three issues raised in the paper which I believe are of utmost impor-
tance to accountants, the future of accounting, and the foundations of
accounting theory.
First, the relationship between information systems and account-
ing needs to be explored. Some people view the two as almost syn-
onymous. Others look at a subsystem of information called the
management-information system and equate it with accounting. This
is the position which Bedford seems to take. For example, he states,
"It seems reasonable to suggest that it is the responsibility of account-
ing information, as one likes to view accounting, to see that business
starts becoming well wired, by an information network, into all activ-
ities of society, in order that society will continue to accept the insti-
tution of business as we know it."
I take a much more limited view of accounting as a special form of


an information system limited to data expressed in monetary terms and
with a generally agreed upon set of rules for the collection, manipula-
tion, and dissemination of data for the use of decision-makers. I have
the old-fashioned notion that the people in market research, produc-
tion control, personnel, public relations, etc., have a role to play in the
total management-information system.
The present trend of accountants is in the direction attributed to
philosophers who learn less and less about more and more until they
know nothing about everything. We know little enough now without
compounding our ignorance by trying to encompass within account-
ing all aspects of information or even of management information.
There is nothing in the training, experience, or personal characteristics
of accountants to indicate a competence for providing information to
business decision-makers concerning changes in legal, social, and po-
litical factors in the environment within which business operates or
concerning changes in human factors within the organization. Ac-
countants need to define clearly the area within which they will oper-
ate and be certain that they possess the competence to perform at a
high level within the scope of their defined activities.
Second, the relationship between accounting and our business sys-
tem needs to be clarified. There is a distinct symbiotic relationship be-
tween accounting and business. Business could not have developed to
its present complexity without the related advancements in account-
ing, and accounting has been forced to grow in stature to retain its
place in business and provide its segment of information to manage-
ment, investors, government, and the general public. Accounting,
however, is not the handmaiden of business, and it is not the role of
accountants to preserve any particular institutions or specific eco-
nomic system. Accounting is a universal type of information system
which is needed in every known form of economic system and by all
resource-using people or organizations within those systems. In our
own society, accounting is as vital to government as to business, to
nonprofit organizations as to business firms. We need to expand our
horizons but not so much in terms of a larger role within the business
firm but rather to a larger role within society by giving more attention
to our possible service to nonbusiness organizations and to society in
This does not mean that the role of accounting in business cannot
grow or should not change. Accounting is an indispensable element in
the operation of business in a free-enterprise economy. If one studies


the more limited role which accounting plays in firms in centrally
planned socialist economies, it becomes evident that, despite the many
limitations in the present state of accounting, the operation of com-
plex industrial organizations in an increasingly complex society has
been made possible by the sophisticated information role of modern
I find myself in rather strong disagreement with Bedford on the role
of individual business firms within our society. He states, "The status
and functioning of this unified, total human social structure imposes
realistic restraints on the activities or operations of individual business
firms within that society. Illustrative of these restraints are such busi-
ness commandments as: (1) Business action shall not disturb the social
norms of private property and freedom of choice. [I believe business
should operate so as to demonstrate that these are viable social norms in
our emerging society.] (2) Business action shall not disturb suddenly
the cultural values which provide stability to a society. [This places
business in a conservative role, but business was once a revolutionary
force in society, and it needs to return to this position if it is to provide
leadership in bringing about a new and better society.] (3) Business
actions shall not disturb those aspects of the physical environment
which influence social norms and cultural values. [Business must dis-
turb the physical environment, but it should do so in a way which will
contribute positively to the determination and attainment of social
norms and cultural values.]"
In short, I would argue, as Bedford does, that business firms are
merely a part of society and they must operate in conformance with
the interests and values of society. This does not mean that business
decision-makers should seek to preserve the status quo. Just as business
has been an aggressive force in bringing about technological change,
it should also operate so as to provide leadership in building a new and
better society. Bedford speaks about interfield innovation with respect
to technological change, but it is even more appropriate to apply this
term to the essential role of business in bringing about change in
Third, the relationship between accounting and society needs to be
developed. Accounting theory has developed with a theoretical foun-
dation in the theory of the firm and the economic concept of business
income. This strong tie to micro-economics has been of fundamental
importance in the structure of accounting theory. We have, however,
failed to develop a comparable foundation in macro-economics. Ac-




counting should serve society, and the foundations of accounting the-
ory should rest on welfare economics rather than on the theory of
the business firm. Bedford has pointed to important forces in society
which must be recognized by accountants, and, by implication at least,
they should be factors in the emergence of new foundations for ac-
counting theory. He states, "The proposition accepted in this study is
that technology is the most powerful force for change in the business
environment and that its influence seems to be increasing." He goes on
to point out the emergence of the "philosophy of interfield innovation
to motivate and control human and technological developments." He
then explains that "the central goal of this new emerging philoso-
phy of life is to 'satisfy human needs'; it is reflected in newspaper
jargon as 'the cult of the young,' 'the student revolt,' or 'the hippie
movement.' "
This view of technology appears to me to be outmoded. One of the
messages of today is that the role of technology is to serve rather than
determine. It is social values rather than technology which is the most
powerful force for change in the business environment. Bedford, in a
later section of his paper, seems to recognize this fact, and he empha-
sizes in particular how the rapidly changing society values increase en-
vironmental complexity and thus the need for information for the
decision-maker. It is becoming increasingly evident that society is
going to require technologists and business firms to turn their atten-
tion to solutions to problems which are of particular concern to so-
ciety. Pollution, urban problems, population growth, and poverty are
examples of issues which society wants to see solved even if this means
diverting resources from other areas where the rate of technological
advance might be more rapid such as space exploration.
Bedford emphasizes the role of business in interfield innovation, the
importance of information to business, and thus the vital role of ac-
counting in providing business with predictions of the "future values
and norms of society in order to attempt to arrange a set of relation-
ships among information, business, and society that will span time and
further the development of civilization."
The implications of all of this for accounting research are pointed
out by Bedford as follows: "The conclusion is that accounting
research of the future ought to be directed primarily to the two prob-
lems of: (1) developing the methodology for compressing informa-
tion; and (2) developing perception processes to improve the selectiv-
ity of information." In the original version of his paper which I


received there was a misprint, so (2) read "Developing perception
processes to improve the seductivity of information." I liked the
original wording better, because there is something about the term
"seductivity of information" which appeals to me. In either case,
Bedford's prescription for future accounting research is good, but I
do not find the needed prescription for the construction of the "foun-
dations of accounting" theory.
I would summarize Bedford's message as encouragement for ac-
counting to expand to provide the information needed by business to
become well wired into all activities of society. That is, the emphasis
is on society as the environment of business, business as a dynamic and
integral force in a changing society, and accounting as a vital function
in providing information for business decision-makers.
I would like to suggest a subtle but fundamental change in this
picture. Accounting needs to expand to provide one vital type of in-
formation for all decision-makers in our changing society in order to
facilitate the operations of all institutions of that society toward the
attainment of the goal of the maximization of human welfare. Here,
the emphasis is on accounting as one type of information system uti-
lized by all segments of society in their quest for the good life for all
mankind. If this approach is accepted, the conclusions follow that the
foundations of accounting theory must rest on concepts of human
welfare and that we should look to philosophy and welfare economics
for useful concepts in its development. This is consistent with Bed-
ford's emphasis on the macro approach, but it is more limited in scope.
He refers at the beginning of his paper to the total systems approach,
and this perspective is important, but it is my considered opinion that
accounting must be viewed as a subsystem. Progress in the develop-
ment of accounting theory will be dependent upon the careful defini-
tion of the scope and purpose of accounting and the total-information
systems approach is antithetical to this objective.



Varieties of Accounting Theory

Louis Goldberg

W ILLIAM JAMES has a sentence which may be pertinent to
these discussions-but I hope it is not. "There is," he says, "a curious
fascination in hearing deep things talked about, even though neither
we nor the disputants understand them."1
The purpose of this paper is to try to distinguish between some of
the senses in which the expression "accounting theory" has been and
is being used, for there can be little doubt, surely, that it is used with
different meanings and, indeed, with different objectives.
At first sight, it may seem that this is a very narrow purpose and
merely an exercise in classification; to some extent it is, but I hope it
will also lead to some clarification of ideas and perhaps some broaden-
ing, rather than narrowing, of our thinking about accounting.
The literature of accounting has not been especially notable for the
precision of its terminology, and, if anybody doubts that there are dis-
crepancies in usage of the expression mentioned, let him ponder just
a few instances:
In the preface to his Accounting Theory, W. A. Paton made it clear
1. William James, Pragmatism (New York: Longmans Green, 1908), p. 5.


that he was expounding an entity theory of the accounting system to
explain the recording and reporting processes of accounting as a coun-
ter to the then prevailing expository textbook presentation of the pro-
prietary theory.2 The premises and postulates explicitly listed in the
final chapter of that classic work are for him assumptions which "ac-
countants are sometimes in danger of forgetting"and which therefore
indicate "limitations of their work."3
For A. C. Littleton, "accounting theory, since it has grown largely
out of accounting practice, may seem to serve principally as a means
of explaining and illuminating what is done in accounting. But theory
has a further ohligatiQn, that of strengthening practice by subjecting
customs to analysis and testing their justification by finding the rela-
tion of customary ideas to basic concepts and purposes."4 Note here,
incidentally, the personification of theory-it has obligations, it is able
to do things, just as a human being. Among the many other observa-
tions of this author on accounting theory was this: "Theory can be
an aid to understanding, and understanding united with practical wis-
dom can carry us a long way toward a good choice. Perhaps it is too
much to expect either theory or practice to be completely satisfactory
alone. I am convinced that theory could not, for theory does not di-
rect; when we use theory we do not seek to prescribe. We are only
trying to analyse, to understand, to persuade. Theory therefore must
consist of explanations, definitions, reasons, justifications, persuasions.
And only sometimes of suppositions and hypotheses."5 He also states,
"If we view the term broadly (that is, not confining it to 'a theory')
theory can be properly called a body of doctrine. It is an area of
beliefs, explanations, justifications, related to an area of practice. Its
elements are descriptions, definitions, arguments, inferences, explana-
tions, reasons-and principles."'
For Eldon S.Hendriksen, accounting theory is "logical reasoning in
the form of a set bo oacprinciples that (1) provide a general frame
of reference by which accounting practice can be evaluated and (2)
guide the development of new practices and procedures."7 He recog-
2. William Andrew Paton, Accounting Theory (New York: Ronald Press,
1922), p. iii.
3. Paton, p. 472.
4. A. C. Littleton, Essays in Accountancy (Urbana-Champaign, Ill.: University
of Illinois Press, 1961), p. 376. This passage was written in 1939.
5. Littleton, 1948 ed., p. 310.
6. Littleton, 1949 ed., p. 387.
7. Eldon S. Hendriksen, Accounting Theory (Homewood, Ill.: Richard D.
Irwin, 1965), p. 1.


nizes that "accounting theory may also be used to explain existing
practices to obtain a better understanding of them"8 but subordinates
this objective to that of providing "the general frame of reference
for the evaluation and development of sound accounting practices."9
Grounds for the choice of the one instead of the other do not seem
to be explicitly given.
For Newman and Melman, "the entire framework of accounting
theory and its concepts and principles can be viewed as constituting, in
effect, the reporting principles and standards designed to achieve fair-
ness in financial reporting."'0 Thus, for them, accounting theory is
something designed and is, further, restricted to certain requirements
,of financial reporting. Since these authors set out to provide assistance
for candidates for the CPA examinations, their attitude is presumably
a reflection or at least a not uncommon interpretation of that of the
professional body which conducts those examinations.
Leonard Spacek draws a distinction between the terms "practical"
and "theoretical," "practical being usable or valuable in practice or ac-
tion; while theory is contemplation or speculation.""x He also averred
that, "when theory and professional requirements to state facts are in
conflict, the theory is wrong."12 Thus, it would seem that theory has
a normative or ethical character, if it can be right or wrong rather than
true or false.
ARS (Accounting Research Study) no. 1, although not
fiing ac .cTinlg t ieory, as ann oWt-trmr a f .it ars ae
o01, mehis6ie ostulates "b e c au., g e _rm..legn
itself readily tQa steartic1ssificatiQn of the.oposiio of. ac.
cqut~~fiQ y and _actce."'i3S And in his comments on this study
SMr. Spacek sates that "the essential prerequisite to the establishment
Sof a-s o framework of accounting theory must be a clear determi-
nation of the purposes and objectives of accounting, which would

8. Hendriksen, p. 1.
9. Hendriksen, p. 1.
10. Benjamin Newman and Martin Melman, Accounting Theory: A CPA Re-
view (New York: John Wiley and Sons, 1967), p. v.
11. Leonard Spacek, A Search for Fairness in Financial Reporting to the Pub-
lic (Chicago: Arthur Andersen & Co., 1969), p. 171. This is strongly reminiscent
of the definition in Samuel Johnson's Dictionary of 1785: Theory. Speculation,
not practice; scheme; plan or system yet subsisting only in the mind.
12. Spacek, p. 182.
13. Maurice Moonitz, The Basic Postulates of Accounting, Accounting Re-
search Study (ARS) 1 (New York: American Institute of CPA'S [AICPA], 1961),
p. 2.




go far beyond the 'definition of accounting' in Chapter 3. .."14
Mr. Spacek's views are further expressed in his comments on that
study: "After the purposes and objectives of accounting are properly
defined [and recognized as prerequisites to theory], the next step is the
establishment of a basic foundation to accomplish these purposes and
objectives.... Then, sound accounting principles consistent with that
foundation should be determined."15 The inference is that accounting
theory is the basic foundation which is established to accomplish the
purposes and objectives of accounting. And, in his comments on ARS 3,
he states again: "The principal purpose of the two research studies...
is to establish a sound foundation for and a general framework of ac-
counting theory so that financial accounting and the resulting financial
reporting will meet the current needs of all segments of our society."1x
Another suggestion was made by Carman G. Blough, who, in com-
menting on ARS 3, stated: "Accounting principles are not theoretical
hypotheses untried in practice or tried and discarded as impractical."17
The AAA Statement of Basic Accounting Theory (ASOBAT) states:
"We define 'theory' as a cohesive set of hypothetical, conceptual and
pragmatic principles forming a general frame of reference for a field
of study,"8s and "the committee has conceived of theory as a coherent
set of concepts explaining and guiding the accountant's action in iden-
tifying, measuring and communicating economic information."'9 R. F.
Salmonson puts these together and gets: "Accounting theory consists
of a cohesive set of conceptual, hypothetical, and pragmatic proposi-
tions 'explaining and guiding the accountant's action in identifying,
measuring, and communicating economic information.' "20
These last definitions suggest a few observations:
1. The whole set of "principles" (AAA), "concepts" (AAA), or "prop-
ositions" (Salmonson) comprises accounting theory. This does not ap-
pear to leave room for a theory of this or that, unless one equates a
theory with a principle or a concept or a proposition. In other words,
"accounting theory" in this use of the term is, of necessity, general.
14. Moonitz, p. 57.
15. Moonitz, p. 57.
16. Robert T. Sprouse and Maurice Moonitz, A Tentative Set of Broad
Accounting Principles for Business Enterprises, ARS 3 (New York: AICPA, 1962),
p. 77.
17. Sprouse and Moonitz, p. 60.
18. ASOBAT (Evanston, Ill.: AAA, 1966), p. 1.
19. ASOBAT, p. 2.
20. R. F. Salmonson, Basic Financial Accounting Theory (Bellmont, Calif.:
Wadsworth Publishing Co., 1969), p. 1.


2. The principles, etc., have to be "cohesive" or "coherent," but it
is not explained what is meant by these terms. Salmonson goes on to
say that "the term 'proposition' is defined as any declarative statement,
true or false. It is used to include in the body of theory ideas not uni-
versally acceptable, but advanced for explanation or for guidance of
practice."21 In the absence of further guidance from Salmonson, this
seems to imply that some false statements and some true statements
may be brought into a relation of cohesiveness with each other to give
us the "body of theory." It is somewhat difficult to see the relevance
of universal acceptability in this connection. What is meant by a de-
clarative statement being either universally acceptable or not univer-
sally acceptable? Human nature being what it is, surely the great
probability is that those who agree with it will accept it, while those
who do not agree with it will not accept it. Where does that get us?
3. The principles, etc., are stated to be "hypothetical, conceptual
and pragmatic." Does this mean that each principle, etc., is hypothet-
ical, conceptual, and pragmatic at the same time? Or is it meant that
some principles are hypothetical, some conceptual, and some prag-
matic? And what meaning is attached to each of these adjectives?
4. The AAA committee, first, has the principles forming a general
frame of reference for a field of study; later it concepts explain and
guide the accountant's action. There seems to be some inconsistency
here. Accountants' actions may be a field for study, and I believe they
are, but the concepts which guide accountants in their actions may not
be the same as the principles which constitute a frame for a field of
study. If the committee had said in the first place that it was looking
at a frame of reference for the actions of accountants, such a statement
would at least have been consistent.
This is by no means an exhaustive listing of expressed views; the
selection has been made simply to draw attention to the fact that there
are conflicting views among writers on accounting as to what account-
ing theory is all about. Of course, each one of us no doubt knows what
he means by accounting theory, but, viewed collectively, we do seem
to have difficulty in making our meaning pellucid.

Because it appeared that some confusion existed even then among
writers on accounting theory, I drew a broad distinction some years
ago between what I called "accounting doctrine" and "accounting
21. Salmonson, p. 1.




theory."22 Briefly, the basis of that distinction was that in accounting
theorywe are concerned with discovering propositions of a general-
izing nature which express facets of truth about the phenomena of
accounting; whereas, in accounting doctrine we are interested in pro-
pounding or laying down standards which are to govern the activities
of accountants in their work. Under this distinction, accounting the-
ory deals with concepts, accounting doctrine with precepts; theory
with examination of what is, doctrine with what should be.
Fam still of the opinion that the'distinction is vallTanifof sufficient
significance to warrant the use of different expressions, but as I do not '
desire to quibble about the use of words, let us for present purposes
call them both theory, but let us distinguish between Theory Sense 1--.
and Theory Sense 2. Theory Sense 1 is the desirable fraie of reference
now so often being referred to as the desideratum for governing the
conduct and performance of accountants, especially in the prepara-
tion of reports of companies and corporations for public consumption.
This is, to a large degree (but not wholly), equivalent to what I pre- ,
viously designated accounting doctrine. Theory Sense 2 carries the
meaning of generalizations derived from observed phenomena of ac-
counting. This is the sense in which accounting theory was used in the
work referred to.
It is clear thatSTheory Sense 1 is the area that practitioners are most
interested in. They are seeking guidance in the performance of their
functions in a complex environment which has changed and is chang-
ing rapidly. The accelerated rate of change in the world in which the
accountant operates has created problems which have arisen virtually
unforeseen but which, nevertheless, often demand urgent solution.
Some of these problems have been relatively short-lived, some have
been solved, but many remain recalcitrant and almost impervious to.
the best endeavors of many accounting thinkers.
Hence, most of the attention of the relevant committees of the pro-
fessional bodies of accountants, of leaders of the profession, and of
many academic writers has been turned in this direction. These people
have been seeking a set of propositions which will serve as a code by
which accountants can fashion their performance and justify their pro-
fessional stance. They have, so to speak, been trying to construct a set
of instructions to accompany a do-it-yourself accounting kit. The
story of this endeavor up to a fairly recent date has been told by
22. L. Goldberg, An Inquiry into the Nature of Accounting (Evanston, Ill.:
AAA, 1965), pp. 34-35 and chaps. 3 and 4.



Reed K. Storey.23 It is desirable, I think, to consider just a few basic
aspects of this development.
It is surely important to be quite clear in our own minds as to what
we are doing or trying to do. If we wish to derive standards of per-
/ formance, we are in a normative field-an area of norms-and the basic
/ question that we are asking is: What is good accounting? Or better,
perhaps, what is the best accounting?
S 7 This is the area of ideals, the area of mores, the area of law-justice,
/ equity, fairness. But it is also the area of personal disagreement, of
preferences and prejudices, of differing interpretations, even of defi-
ance and rebellion. It is the area of balancing the many against the few,
S benefit against detriment, advantage against disadvantage. Here belong
S the discussions of how general and how accepted generally accepted
principles should be, and of what, in some countries of the British
Commonwealth, is meant by "true and fair" in an auditor's opinion.
Limitations of time and space do not permit a full examination of the
Problems arising from these considerations, but there.ire. tw points of
s jgi~ance which should be commented upon.
S.. First' f we wish to set up standards of performance, we must recog-
nize t at we are in a normative field, and considerations of ethics (as a
field of study, not in the sense of professional behavior) are pertinent
and warrant attention. And on this point I cannot express what I think
is the appropriate attitude more aptly than in the words of a writer in
a very different discipline:
there have... been theories which have attempted to base ethics
on natural science, and in particular on biology and psychology.
But such theories appear to have been guilty, on occasions, of il-
logicality in that they appear to have assumed that ethical propo-
sitions can be deduced as a conclusion solely from non-ethical
We cannot infer that we ought to do "x" from, for example,
the statements "most people do x," or "most people desire to do
x," or "most people are commanded to do x"; there must also be
an acceptable ethical premise such as "we ought to do what other
people do" or "... what other people desire to do" or "... what
other people are commanded to do." Furthermore, this argu-
ment that we cannot draw an ethical conclusion from entirely
non-ethical premises applies not only to psychology or biology;
a system of moral precepts can not only have no complete de-
23. Reed K. Storey, The Search for Accounting Principles (New York: AICPA,



pendence on science: it can have no complete dependence, for
instance, on theology or history. Premises arrived at from such
studies may, of course, lead to ethical conclusions, but only if one
premise is itself ethical. Furthermore, such ethical premises must,
of course, command the support of those concerned, and it has
been at this point that many ethical theories have failed to carry
Does this help to explain why there has been such great difficulty in
arriving at the body of principles or postulates or standards-call them
what you will-which should govern the performance of accountants?
Have we led ourselves up a garden path in seeking norms from positive
observations without recognizing the need for an intervening norma-
tive premise which can command support?
It may be that Mr. Spacek is right in saying that there is only one
basic postulate for the guidance of accountants; but, if he is, has he
chosen the right one? Let us consider for a few moments the proposed
postulate of fairness. The implication seems to be that the accountant
(Query: Is this meant to be the CPA only, or does it include others
as well?) is in a position to determine what is fair for all parties con-
cerned. This, in turn, implies that the accountant knows who all the
parties are and what their requirements are in respect to accounting
Information. It should be noted also that this proposition seems to be
Related particularly to published information, although it might be
suggested that internal data are also meant to be covered.
Now, if to be fair means to be impartial, that is, not to favor any
person or group of persons vis-a-vis others, then this presumes that
there is available neutral information uncolored by the influence of the
interests of anybody. It is possible that accounting data of this kind do
exist, especially, perhaps, in relation to events that have taken place in
the past. But there is also, of necessity, a sizable quantum of account-
ing data that is not and cannot be free from the attitudes of particular
people concerned in the quantification of prospective or even of some
past events; this applies in any uncompleted venture at any given point
of time.25 However earnestly the accountant may wish to interpret
these incomplete ventures impartially, or better perhaps, neutrally, he
24. Crawford Knox, The Idiom of Contemporary Thought (New York:
Chapman and Hall, 1956), p. 150.
25. The term "venture" is here used in the same sense as in chap. 8 of my
An Inquiry into the Nature of Accounting, viz., a series of events linked by a
common measure and a social or economic objective into a meaningful relation-



must adopt somebody's point of view about them. And this brings us
straight up against the problems that accountants have been talking
and writing about for years without having arrived at any complete
solution-problems of valuation of assets, going-concern or break-up
bases, depreciation and amortization, conservatism and consistency,
price-level change, etc. It seems difficult to see how a criterion of fair-
ness, in the sense of impartiality, would in fact make any difference to
the tasks which the accountant has to face at present.
However, to be fair might have a somewhat different meaning,
namely, to be equitable. At first sight, this might seem to be the same
as being impartial, but in many cases equity requires some kind of
compensation for a person or group of persons who may be at a dis-
advantage vis-a-vis others. That is to say, some kind of equalizing
process is envisaged. Now, neutral information is not ipso facto of
equal use or benefit to different people. If the accountant is to apply
this notion of fairness as a criterion, his task will be even more onerous
than under the other interpretation. Not only would he need to know
who all the parties are and their requirements, he would also need to
know whether any of them suffers any disabilities relative to others in
interpreting information, what these are, and how to compensate for
them, so that the relative disabilities would disappear. This would in-
volve a knowledge of means of avoiding the perpetuation of the rela-
tion of such disabilities, for it is hard to see how information made
publicly available would not benefit those with present advantages at
least as much as those with present disadvantages, with the result that
the latter would still be under a relative disability. Even if all available
information were made known to all parties, the relative disability of
inadequacy in interpretation would remain. The concept of equitable-
ness imposes a judicial function upon the accountant which he is not
adequately trained to carry out, especially when it comes down to spe-
cific cases, which it must do if it is to be of any practical significance.
So long as social and / or economic and / or political activity is under-
taken in any but the smallest and simplest communities, there must
surely always be some people who know more about the activities of
a particular unit than others, who may be affected by those activities.
Equality of knowledge and even equality of opportunity for knowl-
edge are mythical, even if only because of inevitable time lags between
action and reporting upon action.
Of course, the term "fairness" may mean something different alto-
gether; if it does, I am sure we should all be happy to consider it.



Perhaps the committee of the AICPA was right in stating that postu-
lates were few in number26 (although I find it hard to understand how
they could know this unless they knew what they were); but perhaps,
too, they were wrong in insisting that these postulates lay in the en-
vironment of accounting, for a person's norms of conduct and per-
formance are the result of a self-development. He may develop them
through the experience of his interactions with the circumstances in
which he finds himself from time to time, but the important word here
is "interaction"; that is, his development comes from a process of adap-
tation to his environment, but it is he who adapts. It may sound old-
fashioned to talk about heredity and environment, but we all do still
owe something of what we are to our parents and forebears. And I
suggest that there is a sense in which a profession is in an analogous
position; it has to find its norms within itself, that is, the actions of its
members. The members of a profession should, indeed, study the en-
vironment in which the profession exists and they operate, but their
norms cannot be wholly derived from that environment: the traditions
of the profession should also play a part.
-The second point is this: the standards of performance adopted, if
They are to be effective, must be based upon somebody's authority and
need to be supported by some sort of sanction. The acceptance of a
code involves some sacrifice of freedom of action, and the question
that arises is: are the members of the accountancy profession willing to
yield their freedom of action to some other body, be it even a com-
mittee of their own choosing? Experience with one or two of the
APB'S opinions provides some evidence of doubt about the willingness
to do this to the extent necessary.
Even a statute passed by a constitutionally authorized body will not
be effective if a sufficiently strong body of opposition is marshalled
against its operation. The floor of history is strewn with examples of
authoritative pronouncements of various kinds which, because of suffi-
ciently strong opposition to them, have had to be withdrawn, been al-
lowed to become inoperative, or else have produced conditions of
Numerous references have been made to the urgency for the profes-
sion to formulate its set of generally accepted principles for fear that
some governmental agency would take the task into its own hands and
do the job for the profession. This appears to be regarded with a con-
siderable degree of horror. I wonder whether this fear is completely
26. See Moonitz, p. 1.



justified. Provided that responsible representations of the profession
are seriously considered, I cannot see that the formulation of a code of
performance by a governmental agency would necessarily be a bad
code. It might well have the advantage of having been impartially con-
structed. And, if it were not a bad code, it would at least have the
virtue of force of law and a system of enforceable sanctions to make
it operative. But, of course, whoever formulates the code, the question
is whether we trust our code-makers.

Accounting (and, in earlier texts and articles, bookkeeping) has
often been defined as or asserted to be a science. In most of such state-
ments insufficient attention has been paid to the characteristics of ei-
ther accounting or science to convince that the label fits properly.
More recently, argument has been put forward to justify the view
that accounting makes use of scientific method. At times one gets an
impression that it is not so much those who carry out the accounting
processes who say this, but rather, those writers about accounting
(including myself) who convince themselves of their own scientific
I do not wish to engage in the rather sterile "art or science" debate,
but I think it is worth repeating that, even if accountants are not them-
selves scientific in their work, this does not preclude a scientific study
of what they do. In the same way, the activities of primitive tribesmen
or of subnormal people may not be scientific in the way in which we
normally use that word, but this does not preclude a scientific study of
their activities.
Very little is known-or at least has been recorded for us-about the
way accountants do, in fact, go about their day-to-day work, so that
we cannot judge whether they do attack their problems in a scientific
way. Whatever evidence there is could well be collected and analyzed
from this point of view.
I am aware, of course, that a great deal has been written and lectured
on scientific method, and it is pretty good stuff. Much of it-perhaps
most of it-has been written by philosophers and logicians, and I have
quoted from it on occasions when it suited me. But, on this occasion,
time does not permit a lengthy excursion into it.
However, we should remind ourselves that the essential character-
istic of the practicing scientist (as distinct, perhaps, from the academic
scientific methodist) is surely curiosity as to what is. He wants to find



out something, preferably something which nobody knows yet. How
something works in the way it does, why something exists in the way it
does. The why is not a teleological why but an operational one; it is, in
effect, an extended how. What is termed causal relationship, or neces-
sary and sufficient conditions, and so on, is a statement of how x and y
are related to each other.
/, _-^>The function of a theorist is to formulate statements which will en-
able people, including himself, to understand the relation between dis-
parate phenomena. These phenomena-or facts-can only be perceived
or observed; they have no theory content in themselves. But, when
various facts are related to each other, the element of theory appears.
That is, theory, as distinct from facts, arises when a relationship be-
tween two or more facts or series of facts is perceived or hypothesized.
Such a relationship can be tested for its relative truth; that is, it can be
confirmed or refuted. And we must not forget that this discernment,
perception, or hypothesizing of a relationship is a human activity;
hence, value judgment enters into it, and the influence of one's envi-
ronment and habits of thought come into play. At the same time, we
cannot talk about facts without expressing some relationships; the very
naming of a fact is an expression of a lingual or semantic relationship
between the word and the thing. It follows that value judgments and
relationships and truth are inevitably and inextricably bound up with
the process of communication.
The relevance of this is that it suggests that it is important to dis-
cover some general propositions about accounting as it is practiced,
before finally writing prescriptions about the way it should be prac-
ticed. This is not to say, as some writers seem to argue, that what is
being done now is satisfactory and should not be changed. It is to say
that we should find out what is being done at present and why it is
being done in the way it is. Apart from satisfying our scientific curi-
osity, the resulting understanding may provide a basis for formulating
prescriptive statements as needed.
For example, it is not difficult to argue with a great deal of force,
as many writers have done, that accountants (and businessmen) are
wrong in their treatment-or rather nontreatment-of the problems
arising out of so-called price-level changes. A significant question
that still has not, so far as I am aware, been adequately answered is
why they do what they do. Is it wholly and simply due to wrong-
headedness and perverseness? Are they conscious and deliberate sin-
ners flying in the face of divine authority-the divinity being the


goddess of Reason? Or do they err through ignorance? Or through
apathy? Or could it be that some people in business benefit through
such changes? To get proper answers to these questions, we need em-
pirical investigations into what is in fact happening, so that generali-
zations and diagnoses can be securely and convincingly based on a
wealth rather than on a meager sample of evidence. It would be fruit-
ful, I think, to ask directors and general managers questions such as
these: are you aware of the fact that since the end of World War i the
purchasing power of the dollar has declined steadily and considerably?
If so, have you taken this decline into consideration in formulating
your business policy? If so, what steps have you taken; if not, why
haven't you taken any? Answers to questions like these would tell us
something about what people do or don't do and why.
There are many, many questions that may be formulated that have
not yet been asked as a basis for scientifically derived generalizations
about the accounting process.
In other words, dispassionate fact-finding investigations are re-
quired, and they will be more convincing, in whatever direction they
point, than polemics and assertions, however logically based these
latter may be.
Briefly and in summary, the position I want to take is this: there is
something to be found out about accounting, and it is embodied in
what accountants do. Hence, we must observe what they do, try to
measure it in some way, and try to develop hypotheses (i.e., statements
of relationships) which can be tested by further observation. If, over
a period, some generalizations can be firmly established by reference
to observed and recorded data, we shall be on our way to developing
some Sense 2-A theories.

:y/ f
Theory Sense 2 thus means explanation of relationships between
facts. But the ultimate success of a theory in this sense depends on its
capacity tapredict as well as toexplain.
This aspect has not gone completely unnoticed in accounting litera-
ture. For instance, D. C. Phillips wrote recently: "Perhaps the most
important feature aa. scientific theory is its predictive vale. With he
aid of a theory it should be possible to make a prediction about some
future observable event. Sir Karl Popper has explicated this predictive
function of science in detail an' hREs" Fg;ued that non-scientific the-




ories (or pseudo-scientific theories) do not havepredictive value."27
It must be remembered, however, that even what appear to be
the most firmly based scientific theories are still tentative: they are
founded on environmental assumptions which further investigation
may show to have limitations in the scope of their application.
Nevertheless, the aim in any discipline which may be claimed to be
scientific is to attain to propositions which are generalizations derived
from the observation of phenomena and which can be used to predict
Phenomena. If the predicted occurrences take place in accordans.e
with the inferences drawn from the propositions, this tends to confirm
the generalization; if they do not, a re-examination of the generaliza-
tion is clearly called for. For we must also recognize and remember
that the facts of life are obstinate. They cannot be ignored indefinitely,
nor can they be distorted to suit our convenience. But they can be
explored. And I suggest that the facts of life with which the account-
ing observer is concerned are aspects of human behavior. A balance
sheet, a funds statement, a statement of variances are expressions of the
results of human activity. Certainly they are expressed in words and
figures, but these are garments, so to speak, which clothe the activities
of people and which, one might observe in passing, can be and often
are styled and cut to make specific impressions.
If we wish to explore the possibilities of predictive theory in ac-
counting, we shall have to be immodest enough to penetrate beneath
the outer garment of reports and statements to the human behavior
beneath them. I do not think this is impossible, although we have
scarcely begun to do so as yet. When we do, who knows what won-
ders we may uncover.
At the same time, we must remember that many of the most fruitful
discoveries in modern science have come from investigation into the
nonconformity of observed phenomena to the predictions of their
This leads to the consideration of two further points. The first is
that in the literature of accounting-and of some other disciplines-
much seems to have been made of rational behavior. Some expression
about rationality almost always appears among our postulates. The
meaning of this seems to have been largely taken for granted, and so
27. D. C. Phillips, "Systems Theory-A Discredited Philosophy," Abacus 5,
no. 1 (Sept. 1969): 14.


also has the self-evidence of its existence and, indeed, of its universality.
On the first aspect-its meaning-I suggest that anybody who postu-
lates rationality should make it clear in what sense he makes use of it,
for it may mean different things to different people. For example, is a
rational action one for which results conform to expectations held
when the action was taken; or one that has been reasoned out; or one
that has had a successful or pleasing outcome, whether expected or
not; or one that is what a normal person would do in accordance with
the mores of his society; or one that we think we ourselves would
have taken in the same circumstances; or, simply, one that can be ex-
plained (whatever that may mean) to somebody's (perhaps our own)
The philosophy underlying rationality seems to be that a rational
person is someone like you and me, and, while there may conceivably
be some doubt about you, there surely cannot be about me. But a great
deal of human behavior, including economic behavior, is not based on
what I would call a rational attitude. Consider some of the priorities of
our social life. By what standard of rationality does a football coach
earn much more than a university professor? Or a movie star than the
secretary of the United Nations? Or a pop group more than the group
of astronauts who reached the moon? And how much of our national
advertising and marketing bill is directed towards promoting impul-
sive, rather than reasoned, buying? If you wish to accept these condi-
tions of society as being based on rationality, you are welcome to do
so, but please do not ask me to accept them without making it clear
what kind of rationality embraces them.
On the second aspect-that of its universality-I cannot do better
than quote a passage from R. G. Collingwood: "the idea that every
agent is wholly and directly responsible for everything that he does is
a naive idea which takes no account of certain important regions in
moral experience. On the one hand, there is no getting away from the
fact that men's characters are formed by their actions and experiences:
the man himself undergoes change as his activities develop. On the
other hand, there is the fact that to a very great extent people do not
know what they are doing until they have done it, if then. The extent
to which people act with a clear idea of their ends, knowing what ef-
fects they are aiming at, is easily exaggerated. Most human action is
28. For some questions that arise under each of these interpretations, see Louis
Goldberg, "How Rational is Rational?" New York Certified Public Accountant
(July 1964), p. 514.




tentative, experimental, directed not by a knowledge of what it will
lead to but rather by a desire to know what will come of it."29
It might be observed that, based on this criterion, much of scientific
development has not been rational, in that so many scientific discov-
eries have been accidental, by-products of activities directed to some
end other than that resulting. Further, in the application of scientific
method, the end envisaged as a result of deductive reasoning has to be
tested by experiments or observations-often many of them-in which
a process of trial and error, which is not very rational, is necessary.
The second point concerns the place of a priori reasoning. We all
use a priori reasoning at times, that is, we deduce from the general to
particulars, but if we are wise, we do not act on the conclusions so
reached without checking them against the actual world. Hence, while
the purely deductive reasoning process has a place in accounting the-
ory, its limitations should be clearly recognized.
Now it seems to me that this sort of reasoning has had a very good
run in the accounting literature in recent years. It is, of course, the
basis of model building, and there can be nothing against this-we all
do it at some time or other. Models are often such beautiful entities.
But when it comes to formulating a set of axioms or postulates from
which we deduce particular propositions which are intended to govern
the actions of people, we must, I suggest, be very careful indeed about
them. A few questions suggest themselves in relation to any basic pos-
tulate, axiom, or whatever other name it may go under.
1. Is it self-evident? If so, it amounts simply to an "I believe" asser-
tion-a subjective evaluation supported by the background and experi-
ence of the person making the assertion and really acceptable only
either to the credulous or to those with a similar background and ex-
perience; in other words, to those who are willing to accept it. We
must be aware that what is self-evident to me may not be self-evident
to somebody else now, or to me in a year's time. If we are to be scien-
tific in our approach, we must remember that in the search for
Truth there is no self-evident truth. The history of human thought is
full of overthrown self-evident truths.
2. Is it something which is proved by practice? If so, then the evi-
dence for it must be presented, complete and convincing, before ac-
ceptance should be expected.
3. Is it a conclusion arrived at in another area of study? If so, the
29. R. G. Collingwood, The Idea of History (Oxford: Clarendon Press, 1946),
pp. 41-42.



basis for it in that other area needs to be examined rigorously and the
previous questions asked in the context of that other area. If it is a
conclusion arrived at in a science, we must bear in mind that scientists
are very much aware that all their laws and theories are tentative.
4. Is it a definition? If so, it cannot produce more than it contains
within itself by implication. A definition is usually a description rather
than a premise.
If we seek to apply the rules of logic to a series of postulates, we
must also bear in mind that a logical system is, of necessity, a closed
system. As already argued, ought propositions cannot be derived
logically from is propositions without the interposition of some other
ought proposition. One of the virtues of using mathematics or sym-
bolic logic is to discover the limitations of our postulates and our logic
as well as their potentialities. As D. C. Phillips cogently put it: "the
conclusion of a valid deduction cannot contain an expression that does
not appear in the premises; this indeed is the core of the issue, because
scientific explanations can be put in the form of deductions. It follows
from this logical point that the possession of an emergent property
cannot be deduced from premises that do not contain reference to this
property; it is logically impossible, for example, to deduce the produc-
tion of a colourless, odourless and tasteless liquid (i.e., water) from
premises that refer only to the properties of the gaseous substances
hydrogen and oxygen."30
Many writers, at least since Francis Bacon, have warned against
the dangers of over-reliance on a priori reasoning. One of the most
graphic commentaries was made by John Tyndall in 1874, and, al-
though it is of ancient vintage and refers to an even more ancient
scientist-philosopher, it seems worth citing in part, if only for the
felicity of its language:
"As a physicist, Aristotle displayed what we should consider some
of the worst attributes of a modern physical investigator-indistinct-
ness of ideas, confusion of mind, and a confident use of language,
which led to the delusive notion that he had really mastered his sub-
ject, while he had as yet failed to grasp even the elements of it. He
put words in the place of things, subject in the place of object. He
preached Induction without practising it, inverting the true order of
inquiry by passing from the general to the particular, instead of from
the particular to the general. He made of the universe a closed sphere,
in the centre of which he fixed the earth, proving from general prin-
30. Phillips, p. 14.



ciples, to his own satisfaction and to that of the world for near 2,000
years, that no other universe was possible. .. He affirmed that a
vacuum could not exist, and proved that if it did exist motion in it
would be impossible. He determined a priori how many species of ani-
mals must exist, and showed on general principles why animals must
have such and such parts.... Aristotle's errors of detail... were grave
and numerous. He affirmed that only in man we had the beating of the
heart, that the left side of the body was colder than the right, that men
have more teeth than women, and that there is an empty space at the
base of every man's head."31

Accounting, in the sense of the sort of work accountants do, may,
if you wish, be regarded as an art. If it is so regarded, it is an art of
selection, analysis, interpretation, design, and presentation. In this re-
spect, it is proper to formulate standards of performance.
At the same time, the processes involved in this so-called art can
be examined dispassionately and scientifically, and, it is to be hoped,
some valid generalizations, that is, statements of tendency, may be
Perhaps the confusion (as I see it) arises from the fact that the sub-
ject matter in both cases is the same, namely, human behavior. But in
the one case-the search for standards of performance-the search is for
an ethic. In the other-the quest for relationships between phenom-
ena-the search is for (tentative) truth. Both are needed, but they are
different things and should not be mixed up in our minds.
I am very conscious of many limitations in this paper. In particular,
it oversimplifies the position and deals very broadly with problems
which need to be examined in much greater detail than has been pos-
sible in the present context. This is a need whose complete satisfaction
will require the efforts of many people for a considerable period.
Nevertheless, I have tried to state the essence of the problem of ac-
counting theory as I see it and to disentangle some of the knots in
thinking that we seem to have made for ourselves.
At the same time, I recognize that some valuable and exciting empir-
ical research work has recently been carried out and is currently being
carried out, particularly by some of the younger people in our ranks.
This is an encouraging development, and we should try to foster the
31. John Tyndall, Address Delivered Before the British Association Assembled
at Belfast, 1874 (London: Longmans Green & Co.), p. 14.


work of such investigators, for, in my view, it is on them that the hope
for the future of our profession rests.
One point I should like to emphasize, in conclusion, is that, so far as
I am concerned, the examination of what is does not imply that what
is, is right. It simply means that what is, is there-to be examined and
explored and explained and understood. And all this by whatever
means of enquiry are appropriate and productive.
Finally, I end as I began, with a short sentence from William James:
"Theories thus become instruments, not answers to enigmas, in which
we can rest."32
32. James, p. 53.

Comments on
"Varieties of Accounting Theory"

Stephen A. Zeff

SAMUELSON WRITES, "Methodological discussion, like calisthen-
ics and spinach, is good for us."
It was not until the 1950s (with a few earlier exceptions) that ac-
counting writers evinced an interest in the content and structure of
theory. Shortly after the transoceanic exchange of pointed criticisms
between Chambers and Littleton, a special committee of the AICPA
thrust the word "postulates" into the center of accounting contro-
versy. The emphasis of the institute's new research program on deduc-
tive reasoning1 seemed to be precipitated by mounting frustration
with the "pragmatic-prescriptive" approach of the Committee on Ac-
counting Procedure. Under the new plan, postulates were the lock
and research was the key that would open the way toward resolving
the alleged internal inconsistencies and blurred focus of accounting
With few exceptions, accounting researchers in the 1960s placed the
1. I accept Moonitz' statement that both deductive and inductive processes will
be found "in any inquiry other than the most abstruse speculations of meta-
physics." Maurice Moonitz, "Why Do We Need 'Postulates' and 'Principles'?"
The Journal of Accountancy (Dec. 1963), p. 45. When the terms "deductive" and
"inductive" are used in this paper, it should be understood that the word "pre-
dominantly" stands in a shadow as a modifier.


deductive approach in a normative frame. Storey probably spoke for
many of his brethren when he wrote: "A ... proposition that should
be laid to rest is that the purpose of accounting principles is to justify
accounting practice.... A rationalizing effort is not properly termed
'research' for its intent is to defend existing conditions, whether good
or bad, and is the antithesis of a search for the truth."2
Yet the new research movement brought its own brand of frustra-
tion. A number of deductive studies have appeared in the last ten years.
They describe themselves as problem-oriented, postulational, axio-
matic, or conceptual. Differences in terminology (which has never
been a strong point in accounting practice or research), methodology,
and rigor have made comparison and evaluation difficult. After assess-
ing a recent deductive study, Caplan was moved to remark: "Recent
experience... suggests that global theoretical formulations which are
broad enough to receive widespread support are too broad to serve as
workable guides to action. On the other hand, by the time that these
formulations have been narrowed to the point where they might pro-
vide such guides, so many value judgments and unsupported assertions
have been introduced that it is no longer possible to obtain agreement
on the validity of the theory. Thus, in our opinion, if research in basic
accounting theory is to be truly productive, it is necessary to concen-
trate efforts elsewhere."3
As we emerge from our first cycle of attempts at normative-
deductive research, the voice of Louis Goldberg, a persistent spokes-
man for the apparently small school of empiricists among us, is begin-
ning to attract attention.
I have traced Goldberg's Baconian leanings to his 1939 book A Phi-
losophy of Accounting (which was revised in 1957 under the title An

2. Reed K. Storey, The Search for Accounting Principles (New York: AICPA,
1963), pp. 64-65. If Storey purports to imply that research may not play the role
4f;ibserving the behavior of accountants and the behavior of those whose actions
are reflected in accounting measurements, all with a view toward producing gen-
eralizations about the present state of the accounting function, I would charge
that he defines research much too narrowly. It would appear, however, that
Storey is complaining about the addition of value judgments to such generaliza-
tions in order to rationalize the perpetuation of observed accounting practices.
Naturally, these value judgments are the product of an implicit normative-
deductive analysis.
3. Edwin H. Caplan, "Relevance-A 'Will-o'-the-Wisp,'" Abacus (Sept. 1969),
p. 53. Sterling, however, after reviewing the same study, concluded, "I agree with
the new methodology and world-view." Robert R. Sterling, "A Statement of
Basic Accounting Theory: A Review Article," Journal of Accounting Research
(Spring 1967), p. 111.


Outline of Accounting). In a 1963 article Goldberg the skeptic is not
impressed with the work being done in accounting theory.4 In 1965
the AAA published his monograph An Inquiry into the Nature of Ac-
counting, the first part of which is a statement of his methodological
posture. It is there that he distinguishes between theory and doctrine,
the latter being prescription by an authority "whose pronouncements
are either respected or feared."5 "Some writers," Goldberg writes, a
bit pointedly, "think that deduction alone is the most powerful in-
strument in the advancement of knowledge."6 Goldberg accepts de-
ductively derived propositions that find referents in the world of
experience, or fact. Failing such a test, a deductive proposition "must,
for all purposes of practical and practicable application, remain barren,
no matter how convincing the process of logical expression may be."7
S In his paper presented at this conference Goldberg begins by dem-
onstrating that the term "theory" means different things to different
researchers. Even Hatfield, an eclectic who excelled at detecting i1-
"logic and incongruity in the accounting literature, would have liked
Goldberg's low-profile conclusion: "viewed collectively, we do seem
to have a little difficulty in making our meaning [of theory] pellu-
cid." Goldberg's survey deftly reveals the conscious and unconscious
methodological division among accounting researchers. Few writers
other than Chambers, Deinzer, Devine, Littleton,8 and Goldberg have
probed the apparently bottomless depths of methodology as applied to
accounting-if, indeed, accounting differs in this respect from other
fields of study.
In the central part of his paper Goldberg classifies so-called theory
into two senses. Theory Sense 1, which he still prefers to call doctrine,
embraces the normative-deductive approach, including the ethical ap-
proach, which is separately classified by Moonitz, Hendriksen, and
4. Louis Goldberg, "The Present State of Accounting Theory," The Account-
ing Review (July 1963), pp. 457-69.
5. Louis Goldberg, An Inquiry into the Nature of Accounting (Iowa City:
AAA, 1965), p. 35.
6. An Inquiry into the Nature of Accounting, p. 74.
7. An Inquiry into the Nature of Accounting, p. 76.
8. See the recent collection of Chambers' papers: R. J. Chambers, Accounting,
Finance and Management (Chicago: Arthur Andersen & Co., 1969), esp. pp. 347-
471; Harvey T. Deinzer, Development of Accounting Thought (New York:
Holt, Rinehart and Winston, 1965); Carl Thomas Devine, "Research Method-
ology and Accounting Theory Formation," The Accounting Review (July 1960),
pp. 387-99; and A. C. Littleton, Structure of Accounting Theory (Urbana, Ill.:
AAA, 1953). See also the syntheses by Hendriksen and Salmonson, cited in foot-
note 9, infra.



SalmonsonY. Theory Sense 2 refers to inductive or generalizing the-
ory, and, if I may interpolate from his Nature of Accounting Theory,
it would seem to admit deductive reasoning, in the positivist rather
than normativist sense, the conclusion of which could be verified by
empirical test. The A and B subdivisions of Theory Sense 2 distinguish
between the explanative and predictive capacities of positive theory.
The latter is an innovation in Goldberg's writing.
The issue is whether new knowledge in accounting should be sup-
plied by normative or positive investigation: "what ought to be" ver-
sus "what is." This does not parallel the centuries-old debate among
philosophers of science on rationalism versus empiricism. Nor will one
find a direct parallel with the methodological dispute in economics, in-
volving, among others, Friedman, Machlup, and Samuelson.x1 Their
differences lie entirely within positivist theory, though some benefit
can be derived from their discussions on whether the adequacy of
(positivist) theory may be judged by the realism of its assumptions or
by the predictive quality of the derived propositions or hypotheses.
Goldberg's empiricism is not identical to Littleton's special interpre-
tation of inductivism. To his observations of experience, Littleton adds
value judgments about the content of good and bad practice.1"
Nor can Goldberg's empiricism be seen in Grady's Inventory.12
Grady found real-world support for his basic concepts, objectives, and
principles by drawing on sEc Accounting Series Releases, official pro-
nouncements of policy-making committees of the AICPA, and the
eighth edition of a widely known auditing book. As far as I can dis-
cern, Grady did not observe what accountants actually do. His sources
of information are the quintessence of Goldberg's authority figure for
propagating doctrine. Grady's inductive-like synthesis consists of a
9. Maurice Moonitz, The Basic Postulates of Accounting (New York: AICPA,
1961), pp. 3-4; Eldon S. Hendriksen, Accounting Theory (Homewood, Ill.:
Richard D. Irwin, 1965), pp. 8-10; and R. F. Salmonson, Basic Financial Account-
ing Theory (Belmont, Calif.: Wadsworth Publishing Co., 1969), pp. 10-12.
10. See Milton Friedman, Essays in Positive Economics (Chicago: University
of Chicago Press, 1953), pp. 3-34; and the several papers found in Papers and
Proceedings of the Seventy-fifth Annual Meeting of the American Economic
Association (Dec. 27-29, 1962); American Economic Review (May 1963), pp.
204-36; and the comments in The American Economic Review (Dec. 1965), pp.
11. For corroborating assessments, see Deinzer, pp. 56-57 and 145-46; and
Chambers, esp. p. 366; and R. J. Chambers, "Some Observations on 'Structure of
Accounting Theory,' The Accounting Review (Oct. 1956), pp. 584-92.
12. Paul Grady, Inventory of Generally Accepted Principles for Business En-
terprises (New York: AICPA, 1965).



number of generalizations derived from various levels of doctrine.
That the recommendations of his authoritative sources are generally
followed in accounting practice is a hypothesis that may be put to em-
pirical test. But it is not empiricism to look only at the dictates of
Nor is the Goldberg brand of empiricism to be found in Sterling's
recent analytical survey of the nature and meaning of the term "going
concern."13 His field work is confined to the nonempirical accounting
literature. The study does not observe what accountants actually do.
On the surface it would seem that the 1938 monograph A Statement
of Accounting Principles, by Sanders, Hatfield, and Moore, approxi-
mates the Goldberg vision of empiricism. The authors report that
inquiries were made of competent persons by means of "personal in-
terviews, supplemented by correspondence."14 Yet they also looked
at the literature and were strongly influenced, in some sections, by
evolving corporate law. Moreover, the accounting principles were ex-
pressed as imperatives, suggesting the intervention of value judgments.
Gilman's Accounting Concepts of Profit cannot qualify as empiri-
cism, for it also draws on a largely nonempirical literature.
\ This brief review does not denigrate the usefulness of any of the
research studies mentioned. It serves only to point out that much of
oiir inductive research has not involved the observation of the account-
Sant at work. There are instances, especially in doctoral research, of
questionnaire surveys made of practicing accountants.l" Though ob-
servation need not be personal observation, the probitive potential of
studies limited to questionnaire surveys is often severely limited.
With Devine, I readily admit that research of the empirical mold is
difficult to carry out and necessarily entails a great deal of subjectivity
in design and execution.16
In discussing Goldberg's Theory Sense 1, I think we must distin-
guish, at least at the level of conception, between two types of
normative-deductive research found in the accounting literature. On
the one hand, we have suffered argument by authority, argument by

13. Robert R. Sterling, "The Going Concern: An Examination," The Account-
ing Review (July 1968), pp. 481-502.
14. Thomas Henry Sanders, Henry Rand Hatfield, and Underhill Moore, A
Statement of Accounting Principles (New York: American Institute of Account-
ants, 1938), p. xv.
15. A recent and noteworthy example is Abraham J. Briloff, The Effectiveness
of Accounting Communication (New York: Frederick A. Praeger, 1967).
16. Devine, pp. 393-94.




tradition and usage ("it is good because it is done"), and, most impor-
tant, argument by deduction with unstated assumptions. "The actual
state of accounting," writes Chambers, "is not that it has no theories,
but that it has an almost inexhaustible quantity of implicit, partial, and
contradictory theories."17 This implicitness makes it impossible to
monitor the validity of argument. It is more religion than theology.
The second type of normative-deductive research is that which
makes explicit the antecedent propositions, attempts to demonstrate
their concordance with environmental reality, and adheres to accept-
able rules of logical inference.s8 The logical outcome of this normative
deduction would not necessarily correspond with the reality of extant
accounting practice, yet the proposed accounting practices might be
demonstrated to achieve the objectives implicit in the assumptions of
the model.19
Here we encounter a fundamental difference between Goldberg and
many normative deductivists. Goldberg's search for the truth in ac-
counting would not be confined to what accountants do and what they
say about what they do. Both Goldberg and the deductivists place em-
phasis on the impact of accounting on the behavior of persons who are
not accountants. They may be investors, managers, creditors, or gov-
ernment officials, among others. While Goldberg's principal concern
with the impact of accounting on the behavior of nonaccountants is in
the predictive sphere-an important and worthy concern in itself-the
normative deductivists are more directly concerned with the shape of
accounting in the light of the needs it should satisfy. Accounting,
being a service activity, must endeavor to discover and serve the needs
of the community. In mediating the competing claims of different
groups for his services, the accountant cannot escape making ethical
judgments. Yet Goldberg believes that accountants are not able to
make such decisions and, further, that ethical judgments are beyond
the domain of science. Churchman, on the other hand, gives hope that
science may yet cope with the ethical oughts. He writes:
17. Raymond J. Chambers, Accounting, Evaluation, and Economic Behavior
(Englewood Cliffs, N.J.: Prentice-Hall, 1966), p. 371.
18. The most complete example of this type of study is the aforementioned
Accounting, Evaluation, and Economic Behavior.
19. This type of proof is very difficult to attain in accounting. Writes Cham-
bers: "since accounting is practised in a social matrix, the elements of which
(habits, laws, regulations) cannot either be altered or held constant for the pur-
pose of testing a new idea, the conclusions from any attempt to experiment with
accounting ideas are likely to be vitiated by the numerous concurrent extraneous
influences." Chambers, Accounting, Finance and Management, p. 381.


ethical judgments are really judgments made for the sake of fu-
ture generations .. The vague scientific interpretation of "X
ought to do A on ethical grounds" is "A is what future man will
want X to have done." Some of the vagueness of this translation
has been removed by giving a tentative interpretation of "Y
wants X to do A," where Y is a social group. If Y is the social
group which includes future man, as the argument seems to de-
mand, then the difficulties of explaining the idea of social ap-
proval become very great....
In a sense, the attempt to view morality through the eyes of
science is more fantastic than factual, more visionary than pre-
cise. Science still knows so little about what present-day man
wants that it is fantastic to talk about what future man will want,
and to suggest the possibility of forecasting such wants by scien-
tific method. Nevertheless, it is hard not to talk in this vein even
though in so doing one drastically violates the ideals of rigor and
clarity. It is difficult not to because science has a stake in moral-
ity, that is, in the future wants of humanity. Philosophers of sci-
ence must ask themselves whether the problems of future men-
admittedly relevant to current science-are forever beyond the
understanding of current science.
It therefore seems clear that we must consider the feasibility of
a scientific discipline which predicts the future interests of men
by means of a theory of the development of interests. Such a the-
ory is much like discussions of the origin and ultimate fate of our
universe-terribly important but not rigorously defensible at the
present time.20
I believe that accountants must be interested in discovering the soci-
etal needs for their services. Present accounting practice, being no less
need-oriented than some prospective and untried accounting prac-
tices, has supposedly evolved in response to demands and counterde-
mands, some expressed through formal law and its application, some
communicated through less formal media. Through the prism of
Goldberg's empiricism, and perhaps with the aid of a historical tracing
of the point and counterpoint between accounting and its environ-
ment, we might discover the needs which present accounting practice
strives to satisfy. Today, because of the dearth of historical and
Goldberg-type empirical research in accounting, we can only specu-
late on the present condition.

20. C. West Churchman, Prediction and Optimal Decision (Englewood Cliffs,
N.J.: Prentice-Hall, 1961), pp. 22 and 23-24.




Whatever the mix of societal needs that present-day accounting
practice purports to satisfy, it should not be concluded without fur-
ther study, first, that this group of needs is the best selection from the
set of all possible needs and, second, that present accounting practice
is adequate to satisfy the needs thus selected.
Though I have attempted to argue that normative deductivism de-
serves an important place in accounting research, I hasten to Gold-
berg's side as a fellow positivist. I fear that the pressures upon ac-
counting researchers to invent better information systems to feed
the insatiable appetite of sophisticated decision models have almost
eclipsed the concern for accumulating knowledge, qua knowledge,
about our field of study.
In our rush to convert accounting into an omnipotent information
system to serve mankind's decision models, we should not ignore
man's experience with accounting and the lessons that may be learned
from such experience. The practice of accounting has a history and a
present, and we as scholars know precious little about each. Historical
investigations have been sparse, and some of these have been used as
foils to prove the authors' preconceived notions. For accountants, we
keep poor records; the records we have are seldom studied.
I therefore join Goldberg in the quest for what is, and I add for
what has been.
But I cannot desist without submitting to a Machiavellian urge:
Goldberg's empirical approach can conceivably play a strategic role
in conditioning the practicing profession to the rigor of accounting
Goldberg says that 'Theory Sense 1' is the area that practitioners
are most interested in." Contrariwise, I would argue that the practi-
tioners' growing frustration with the prescriptive literature, both au-
thoritative and nonauthoritative, was what prompted the leaders of the
profession to propose the AICPA's new research program twelve years
Notwithstanding the use of the term "postulate" and the clear pref-
erence for the normative-deductive approach in the report of the in-
stitute's Special Committee on Research Program, I seriously doubt
that the practicing profession at this time is intellectually or emotion-
ally prepared to endeavor to understand and appreciate rigorously de-
ductive studies of the normative type. At the present time there is a
craving, I think, for general statements (they might be called princi-
ples by some) of what is. I would offer as evidence the popularity of


the Grady Inventory in comparison with the reception accorded the
normative Moonitz and Sprouse/Moonitz studies.21
A profession that has lived by authoritative prescription and reli-
gious dogmatism for many years cannot suddenly adapt to the enlight-
enment of normative scholarship-especially at a time when auditors'
liability is one of the most unsettled areas in the law. In some circles,
the word "theoretical" is the death blow to attempts to reform ac-
counting. Theory is seen as a threat, and I suspect that the empiricism
espoused by Goldberg, in addition to the obvious benefits its applica-
tion would bring to the body of accounting knowledge, would at the
present time command the greatest respect from practitioners. At the
same time as it escapes the charges of promoting impractical and un-
tried practices, it will, it is to be hoped, foster confidence among prac-
titioners in the methodology of scientific investigation. Whether this
degree of confidence will ever rise to the point where the profession
would openly and dispassionately evaluate normative models is not
presently known.
21. See the "Statement of the Accounting Principles Board (APB)," dated
April 13, 1962, plus the comments of Barr, Blough, Grady, and Werntz in the
Sprouse / Moonitz study. For the Grady study, see Anthony's book review, The
Accounting Review (Jan. 1966), pp. 194-96; and Weldon Powell (who was the
first chairman of the APB), "Inventory of Generally Accepted Accounting Prin-
ciples," The Journal of Accountancy (Mar. 1965), pp. 29-35. See also Weldon
Powell, "The Development of Accounting Principles," The Journal of Account-
ancy (Sept. 1964), pp. 37-43.



The Commercial Foundations of
Accounting Theory

R. J. Chambers

THE LAST DECADE has seen the adequacy of existing methods of
accounting, and their products, brought sharply into question. Around
the world, commercial events, business failures, and the merger move-
ment have obliged regulatory bodies to give more attention to the
financial publicity provisions of the company codes than in any other
decade. In the same decade there have been many symposia on ac-
counting theory. Ten years ago we might have hoped that there would
have emerged by now some clear and positive line of thought, some
conclusions which would warrant the advancement with confidence
of improvements in technique. There has been no such result.
Had it been a matter of only ten years, we could perhaps excuse
ourselves. But the criticisms of Canning, Sweeney, and Macneal of
some thirty to forty years ago have not been met, either in the general
body of theory or in practice. I believe this failure to be explicable in
terms of the modes of inquiry and exposition which have prevailed and
seem to still prevail in accounting. For, first, there is a noticeable reluc-
tance to assign quite definite and limited functions to accounting. At-
tempts to limit the field of discourse and the function of accounting
proper are treated almost with scorn by teachers as well as practi-
tioners. Yet, it was only when naturalists gave up mixing metaphysics

with physics, and concentrated on a limited range of phenomena and
ideas, that they laid the foundation of modern scientific knowledge.
When one has mastered one's own speciality, it is profitable to con-
sider what greater power, knowledge, or service it may in future put
within one's grasp. But it is futile to adopt the role of visionary unless
one knows how first to get rid of the follies of present doctrine and
Second, almost everyone seems to think he is entitled to an opinion
on the subject matter and the nature of accounting theory-an opinion,
what is more, which others will respect. This belief may have been
fostered by the prominence given to opinion and judgment in state-
ments on practices. However, there can be no more mischievous idea
than that the choice of the magnitudes recorded and reported and the
choice of rules of processing are matters of opinion. There can be no
greater source of disruption and confusion. For if these things are mat-
ters of opinion, there can be no solid core of principles, no ascertain-
able function, no systematic knowledge. It should be well known that
it is profitless to debate matters of opinion. But to a considerable ex-
tent the literature consists of free-wheeling debate rather than the sys-
tematic, intensive, and consciously controlled analysis of present and
proposed schemes of accounting.
Reluctance to assign precise and limited functions to accounting and
an easy attitude toward the merit of mere opinion have doubtless con-
tributed to the present methodological chaos. There has been rela-
tively little accumulation of factual evidence, or recourse to available
factual evidence, in the derivation of basic ideas. There has been much
talk of the use of deduction,1 but there is little evidence of its use.
Some have attempted to align thinking about accounting with think-
ing about "economic matters" in the wider sense of the term. The phe-
nomena under consideration have been described in such general terms
that no clear accounting rules can be deduced.2 Some have felt it im-
possible to proceed to clear conclusions, protesting ignorance of how
people behave in commercial situations.3 Some, while restricting at-
1. E.g., Carl Thomas Devine, "Research Methodology and Accounting The-
ory Formation," The Accounting Review (July 1960); Maurice Moonitz, The
Basic Postulates of Accounting (New York, 1961), p. 6; Eldon S. Hendriksen,
Accounting Theory (Homewood, Ill., 1965), chap. 1.
2. The use of such portmanteau terms as communication, measurement, re-
source, entity, information, environment, without any description or analysis of
what is meant, is so common that it needs no documentation.
3. E.g., AAA, A Statement of Basic Accounting Theory (Evanston, Ill., 1966),
p. 69. Perhaps the statement reflects the views of only some of its authors; see


tention to the actions of individuals and firms, have found it impossible
to avoid mixing commercial, political, and psychic elements of choice
and behavior.4 And hardly anywhere is there presented evidence, from
commercial and financial affairs, of the necessity of the information
it is proposed that accounting should produce. In all, the linkage of
theory with practical affairs, both at the initial postulational stage
and at the final testing stage, is at best tenuous, and at worst missing
I have chosen to use the words "commercial foundations" in the
title of this paper, first, because in my view accounting is concerned
strictly with commercial experiences, events, and considerations; sec-
ond, because to concentrate on specific particulars enables us to follow
exactly the same course as others have followed in the pursuit of cer-
tain, or highly probable, generalized knowledge. I could as well have
used the words "economic foundations" or "empirical foundations."
I rejected them, because I wished to leave in no doubt my concern
with specific particulars, the consideration of which, alone, can yield
grounds for belief and tests of belief in one kind of accounting or

Much of the discussion of accounting deals in a general way with
commercial affairs, buying, selling, borrowing, lending, and so on. But
by far the greater part of it deals with the records of commercial af-
fairs. Commercial affairs and the records of commercial affairs are not
the same thing. A record is a construction, an artefact. The way it is
constructed depends on how we see or understand the matters re-
corded and on how the matters recorded are subsequently to be seen
or understood. A purchase, a sale, simply occurs. It can be recorded in
many ways, from the long descriptive paragraphs of the early book-
keepers to the abbreviated symbols of mechanical devices. If it is an
isolated event, it is sufficient to describe it as it occurred. But if it is
part of an on-going mixed sequence of events, the consequences of
which affect later choices and commercial dealing, it must be so em-

Norton M. Bedford, "The Nature of Future Accounting Theory," The Account-
ing Review (Jan. 1967); and George H. Sorter, "An 'Events' Approach to Basic
Accounting Theory," The Accounting Review (Jan. 1969).
4. As witness, the rising occurrence in the literature of references to organiza-
tional and individual goals and social ends and values, in wider senses than the
commercial or financial sense.


bedded in the record of those events that subsequently the effects of
the mixture and the sequence can be seen and understood.
That a record is a construction is emphasized. If I keep a cash book,
the balance it shows of cash on hand at any time is not necessarily the
amount of cash I have. I and everyone else can make errors and lose
money accidentally. The amount of money I have, not the amount in
the cash book (unless the amounts are the same), determines what I
can buy, and the usefulness to me of any reckoning I make before buy-
ing. If I keep a more complex record of cash movements and other
movements in the things I buy, use, and sell for my own purposes, I am
at liberty to do as I please-on the record. But, as in the case of the
cash book, that record will only be indicative of what has happened
and what I can now do if it is constructed with that object, and if in
fact I have taken care to see that it records all the events which have
affected my present capacity, and knowledge of which may affect my
present judgment in respect of my commercial affairs.
I hope everyone would assent to the propriety of the two condi-
tions mentioned. Whatever my likes and dislikes may be about the
manner of keeping records, they cannot be allowed to affect the sub-
stance of the record if the product of the record is to help me in the
two ways specified. If I choose to disregard any event or class of
events which has had a bearing on my present capacity for buying,
selling, borrowing, lending, paying debts, and so on, the statement of
capacity which I deduce from the record will be inconsistent with my
actual capacity. Similarly, if I choose to incorporate in the record any
expected event or class of events which may in the future affect my ca-
pacity for commercial action, the deduced statement of capacity at
any time will not be consistent with my actual capacity at that time.
In both cases, my present judgments about the past and the possibili-
ties of the present and the future will be mistaken if I base them on the
statement deduced from the record.
I hope everyone would assent to these two propositions. I mention
them because both the exclusion of things that have happened and the
inclusion of things that are expected to happen seem to be counte-
nanced by many extant and proposed practices. It is not denied that
men may wish to classify past events the better to make judgments
about the future. But classifying past events does not mean disregard-
ing the effects of some of them. Nor is it denied that men may wish to
speculate about future events, the better to choose which will serve
them best. But speculation about the future does not warrant the in-


production, into any statement of present capacity, of the substance of
those speculations or of any one of them.
It seems highly probable that the confusion of past, present, and
future in present and proposed practices has arisen because, in per-
sonal affairs, we very seldom have to think very closely about the dis-
tinction. We are familiar with our past experiences-at least we think
we are. We are familiar with our present state; as individuals we have
a rough idea at any time of the commercial worth of what we own.
The thing that looms largest in our minds is thinking about what we
might do next; how much will it cost us to have that vacation, furnish
that room, run that additional car, and so on.
In business affairs, however, the things done are so numerous that
only a small proportion of them comes under the notice of managers,
and the experience of only that proportion is known to them. And
none of them is known to investors and other outsiders. The effects of
those and all other things must be brought together in some way which
represents the whole experience of the firm. Similarly, the assets and
obligations are generally so numerous that an account of them all must
be prepared deliberately, if managers and investors are to be familiar
with the present state of the firm. Certainly what the firm might do in
the future is of consequence, as in the case of individuals thinking of
their own affairs. But the discovery of what has occurred and of the
resulting present position provides the major factual premises, of a fi-
nancial kind, for speculation about the future. It cannot be brushed
aside as readily as we might brush it aside in our personal affairs be-
cause of our own familiarity with those personal affairs. We hold this
process of discovery to be the prime function of accounting. If it is
not done as well as is possible, judgments about past and future lack
that contact with the factual present which alone provides a trust-
worthy foundation for choice and action.

There can be little doubt that the present states of business firms
from time to time are of immediate concern to managers, at least
in some obvious respects. Knowledge of cash flows, for example, is
widely said to be of consequence. Anyone familiar with the care and
attention given to cash positions, arrangements with bankers, short-
term borrowing and lending, and such matters, by company treas-
urers and boards of directors, will know that in this respect what the
literature says is matched by what is done in commercial practice.


Balances of receivables and payables are closely linked to cash bal-
ances. It would be futile to attempt to project cash movements from
any point of time without firm knowledge of the cash balances and
receivables and payables balances at that point of time. It would be
equally futile to attempt to explain the past drift in net monetary bal-
ances without firm knowledge of those balances at the moment of the
For cash resources, firms are not limited to the amounts they can
generate by way of revenues. They may pledge assets, singly or in
total, as security for cash advances. The immediate security for lenders
is the market selling price of the assets pledged. It is often said that the
significant value of an asset to a firm is its calculated net present value
in its present use. But no lender on the security of the firm's assets is
concerned with the value of those assets to the firm in this sense. He is
concerned with the value of those assets as generators of cash for him-
self in the event that he must enforce his claim against the borrower by
sale of the charged asset. Furthermore, a borrower in this position will
want to know the market prices of his assets in order to be free to make
his own choice of arrangements to meet his creditors, so that he is not
entirely at their mercy if he is unable to meet his obligations from
ready cash.
For confirmation of this view, one may have recourse to bond in-
dentures and similar instruments. Wherever a charge over particular
assets or groups of assets is given as security for borrowings, there will
be found some provision restricting other borrowing by reference to
the amount of the assets of the borrower. Now the term "the amount
of the assets" in such an indenture can have only one kind of meaning.
The object of the provision is to cover the amount borrowed. This
cover is given, not by the book values of assets, however determined,
but by the market values of assets. It would be unwarranted to regard
"the amount of the assets" as a term of art, having a meaning derived
solely from accounting rules, whatever they might be. As we have
said, a record is a construction. Unless what it yields is consistent with
the real state of affairs, creditors' interests, in financial information for
their protection, cannot be served. Nor indeed can the interests of
borrowers be served.
There is ample evidence in the history of commerce of the correct-
ness of the point we are making. A very simple and almost everyday
instance is the buying of stock on margin. It must be widely known
that if the market price of a stock bought on margin falls, the buyer


must pay up, put up further security, or be sold out. On a more exten-
sive level, there are many cases in which book values, which seemed to
provide adequate cover for secured loans, have been found to be en-
tirely misleading, to the very great cost of creditors.
It may be contended that lenders are accustomed to lend only a cer-
tain proportion of the amount of any pledged assets. But the safety
margin can only be known to be safe if at any time the market value
of pledged assets is known. Further, few firms have only one creditor.
If a firm has only one creditor, and that creditor is sufficiently impor-
tant to the firm to oblige it to disclose the market value of its assets,
perhaps it would not matter (at least for the creditor's protection)
that its balance sheet did not disclose the market values of its assets.
But the typical situation is that a firm has many creditors, some se-
cured, some unsecured. And all are entitled to know whether they may
reasonably expect their claims to be met. Private disclosure of market
values of assets to a few privileged creditors would not cover this case.
Nor would it be possible for stockholders to judge whether or not a
firm is approaching the limits of its borrowing power if they are in
ignorance of the market prices of assets; yet, for any informed opinion
on the prospects of changes in leverage and asset backing, this infor-
mation is necessary.
Consider now the stockholders of a company. It would be generally
agreed that the relative worths of two ventures determine which is to
be preferred. Every classroom exercise and every real-life exercise in
choosing between alternative investments has somewhere in it a pres-
ent amount of cash or cash substitutes or cash equivalents. In addition,
every such exercise contains particulars of two or more alternative
courses of action and their expected financial outcomes. Whatever
method of appraisal is used, it is expected that a conclusion will be
reached of the kind "Course X is preferable (or preferred) to Course
Y" or, in other words, "Course X is worth more than Course Y."
Now suppose that a firm has $10,000 in cash and has two courses of
action open to it, X of which the net present value is $12,000, and Y of
which the net present value is $11,000. We would not, at the date in
question, say that the firm had a greater cash balance than $10,000.
Suppose next that the firm has not $10,000 in cash but an asset A which
has a resale price of $10,000. And suppose that course X is to sell the
asset A and use the proceeds otherwise, and course Y is to continue to
use the asset. And suppose the net present values of X and Y are as be-
fore. As in the previous case, course X is worth more than course Y.


But it would be just as useless in this case to show the asset A in an
amount different from $10,000 as it would be to show the cash in the
previous case in an amount different from $10,000.
But suppose the book value of the present asset A is $8000 and that
that is the only information known. If this were taken to be the limit
of the financial capacity of the venture, course X could not even be
considered. But if it were possible to borrow another $2000 and the
borrowing of this was taken into account in assessing course X, the net
present value of course X would be loaded with an additional $2000
initial outlay plus the interest charges-all quite improperly, since the
(undisclosed) resale price is sufficient to make course X possible.
The example shows several things. First, we need to know the cash
we have, or the cash equivalent of the cash and other things we have,
if we are to do any calculating in respect of future alternatives. If we
do not know this, our choices between alternatives will be mistaken;
indeed, some feasible alternatives we may not even consider. And, as
every judgment of relative worth is based on present facts and ex-
pected financial outcomes given the present facts, the only presently
verifiable element in the calculations and the only uniformly used
component of the calculations is the cash equivalent (or sum of the
resale prices) of the assets.
The stockholders and the managers of companies are both faced
with problems of the above kind: managers with choices between
projects, stockholders with choices between companies (or, more gen-
erally still, between companies and other forms of investment). Now
stockholders can discover day by day the cash equivalents of their
present holdings and alternative stocks. What they need is something
to inform their expectations of the financial outcomes of alternative in-
vestments on their part. As in the earlier example, it is impossible to
form expectations of the performance of companies unless one knows
how they are presently placed financially, that is to say, what they
own and in what proportions the equities in those assets run to differ-
ent classes of equity holder. But stockholders cannot be expected to
form any idea of the inflows and outflows from the specific operations
of the many firms in which they may invest. They can, however, be
informed of the effectiveness of the whole of the past operations of
companies and their managements; they are so informed by the rates
at which the equities of residual equity holders have been increased.
These, the achieved rates of return of companies, may be modified by
actual or prospective investors when forming their expectations, in the

light of their views on the expected impact of general or specific trade
conditions. The process is exactly analogous to the formation of man-
agerial expectations, even though the calculations are of a less specific
kind. But none of these calculations or expectations can be serviceable
unless it is based on financial statements expressing positions and re-
sults in contemporary, and therefore comparable, terms.5
There are, of course, some who hold that, when a set of assets and
equities is put together, we have something greater than the sum of the
parts. It is implied that the aggregation of the cash equivalents of assets
represents, if anything, less than the whole firm. Of course this is true.
The whole firm in its concrete manifestation, however, is not what
balance sheets represent. They represent in some sense the amount of
the investment in assets and the apportionment of that amount among
the classes of equity holders. It is true that any given collection of assets
may be put together in different ways by different managers of them.
But the effect of putting them together and to work in a given way is
the net income yielded, year by year. When we know the amounts
and composition of the assets and equities of any firm and what it pro-
duces (in financial terms) from time to time, we have all that is neces-
sary to describe it and with what effect it has been managed. We can
compare these characteristics with like characteristics of any other
company, and with any more general form of investment; on the basis
of knowledge of the past and present and of general expectations of
the future, we may formulate specific expectations in respect of future
possibilities for as many alternatives as we choose to consider.
In much of the literature the kinds of comparison we have been
mentioning seem to be regarded as occasional or unusual. For exam-
ple, the arguments against uniformity in accounting and the arguments
for diversity with specification of the methods used give scant regard
to the conditions under which comparison is possible. They are, in this
respect, quite at odds with the reflective exercises which are part of
judging and choosing. We cannot judge anything without some other
past or present thing in mind. We do not choose unless we have at least
two possible things in mind. Far from being unusual, comparison is of
the essence in judging and choosing. And judging and choosing are
potentially everyday exercises. But we cannot judge, choose, or com-
pare commercial propositions in terms of all their specific differences
by reference only to financial statements. We use financial statements
5. The argument is presented in more elaborate form in "Measures and
Values," The Accounting Review (Apr. 1968).



to inform us only of financial elements of judgments and choices.
However, in respect to theircommercial outcomes, whatever specific
nonfinancial elements we may want to consider, we cannot judge or
choose unless we can reduce all the financial facts to common order-
equally up-to-date and equally inclusive of the effects of past decisions
and of the impact of past events of the nondecided kind.
It is vain to pretend that the prices of things have not risen when in
fact they have. It is vain to contend that these changes are immaterial
and that their consequences should be omitted from accounts. It is
vain to pretend that the purchasing power of money has not risen or
fallen when in fact it has. It is vain to expect managers or outsiders to
be able to take cognizance, in their reflections, of the specific effects of
these changes on particular firms and their results. For it is quite pos-
sible that, for any common class of assets, the prices of the holdings of
one company may move at a different rate from, and even in opposite
direction to, the prices of the holdings of another company. And it is
quite possible that the different asset compositions of two companies
will expose them quite differently to the effects of changes in the pur-
chasing power of money.
It is also vain to attempt to exclude or separately to identify the ef-
fects of these different kinds of change. It is widely said that some of
these effects are controllable, or at least are subject to managerial
choice, while others are not. In simple thought experiments it is pos-
sible to isolate all kinds of possible variation. But in the complex of
commercial operations of any firm, any kind of variation is intimately
associated with other kinds. And few are strictly controllable. If the
C company sold $1 million worth of goods in one year and planned to
sell the same in the next year, and yet only half of its customers placed
orders in the next year, it cannot be said that sales were, in any worth-
while sense, controllable by its managers. The risks of business are that
fashions will change, wants will change, techniques will change, per-
sonnel will change, prices will change, the purchasing power of money
will change. It is unrealistic to suppose that managers can cope with,
make provision against, or respond to some of these changes and not
others. And there are so many ways in which they can respond that
the only safe way to treat the effects of these changes is to capture
them all as well as is possible.6

6. Arguments against the separate identification of elements of the increment
in residual equity are given at several points in Accounting, Evaluation, and Eco-
nomic Behavior, pp. 118-19, 226-27, 236-37.

It seems unnecessary to illustrate further the particular ways in
which present knowledge bears on judgments of the past and expecta-
tions of the future. The present is the link between past and future.
Present financial position is the link between past events and future
events. If it is not known, we cannot knowledgeably review the past
or plan for the future. The past and present are in principle knowable
and unalterable; the future is not knowable, but we can guess, calcu-
late, and plan its shape if we know what the past has yielded and how
we stand presently. These distinctions between past, present, and fu-
ture have been the basis of much of my own work. I can readily admit
the necessity of future calculations; but I cannot see how those calcu-
lations can be made or, if made, can be worthwhile without the fullest
possible knowledge of the present financial state of a firm and the
fullest possible account of its past.

The method of analysis we have illustrated proceeds from particular
kinds of problem situations to which any person or firm may be ex-
posed. It may well be asked in what way this method differs from the
methods of others who have advanced proposals different from our
own. The difference lies in the particularity with which we examined
the situations we described and with which we could have examined
other such problem situations. Lest it be supposed that this is not a
material difference in method, it will be instructive to look at the meth-
ods used in developing some other proposed bodies of principles. It
will be found that, in general, the authors of these proposals do not go
back to the specific commercial settings in which financial information
is used; their method is to expound or to reformulate ideas which are
held or debated among accountants. It is as if the proof of the pudding
were in the mixing, not in the eating.
Moonitz' study The Basic Postulates of Accounting, as indeed
other studies to be mentioned, has a specific professional and temporal
setting. It will be recalled that the work of the reconstituted Research
Division of the AICPA was viewed as a potential corrective of the piece-
meal examination of professional problems over the previous two dec-
ades. The antecedent research bulletins addressed themselves to ac-
counting technicalities, however, not to the utility of the resulting
information. The connections between information and its use were
never established. Had they been established, it would perhaps have
been sufficient, in the postulates study, to deal with the users and uses



of accounting information in summary fashion and to pass on to the
terms of art, which are at least one stage removed from commercial
calculation and dealing. The Moonitz study concerns itself principally
with these terms of art-the particular constructs and language forms
common in debates among accountants. There will not be found in
the study any illustration of the precise way in which accounting in-
formation enters into the processes of choice or judgment, although
examples of certain kinds of decision are named (e.g., pp. 28-29) and
decision-making is elsewhere referred to in less specific terms (e.g.,
p. 27).
We are not here concerned with the merits of the discussion in the
study of such terms of art as "assets," "entities," "accounting periods,"
"going concerns," and so on. We are simply pointing out that, in the
absence of proven connections between choices and certain anteced-
ent financial information, the discussion of higher-level abstractions is
premature. We choose only one example of the effect of the absence of
explicit and admitted connection. We are told that, "without state-
ments of position we have no starting point, no end, no check points
to verify our measures of change" (p. 16). Then later: "For the most
part, accounting data rely on past prices, but not entirely. Pressures
have been building up in recent years for more use of future, and
hence estimated, events and prices in order to make accounting re-
ports 'more useful' "; it is suggested that nothing "stands in the way
of such a development" (p. 29). The two stated views are, of course,
inconsistent. Analysis of the particular elements of any financial or
quasi-financial problem would have suggested that complete informa-
tion on past events and present position and future estimates based on
present position are both essential in choosing and that the mixing of
past and future, of events and expectations, in reports of one kind (as
the second quoted passage suggests), cannot serve to inform choices.
The Illinois study, A Statement of Basic Accounting Postulates and
Principles, makes no direct reference to specific uses or users of ac-
counting information. There are, of course, references to stewardship
(pp. 2, 3), to "maximization of the benefits of resource utilization"
(pp. 2, 3), to "decisions to be made by the various interests in an enter-
prise" (p. 3), and to serving "the needs of a variety of interests ..
whose needs vary" (p. 15). Notice that the components of all these
phrases are abstractions, or constructs. None refers to such specific
details as concern any person or persons engaged in trade or persons
having to consider the merits of alternative courses of action. The


whole discourse is lifted away from the context of the marketplace.
We do not claim that discourse in general terms or by recourse to con-
structs is improper. We do claim, however, that in the absence of
examples of the particular uses of the information generated by any
process we are given no ground for supposing that one kind of ac-
counting is any better than any other; what is more to the point, we
have no ground for supposing that any particular kind of accounting
is of any use at all.
True, the statement has a section on transactions. But nowhere are
we given the anatomy or mechanics of the reflective process which
precedes transactions, nor of the parts played by various kinds of fi-
nancial magnitude and calculation in that process. True, we are told
that "accounting fulfils a social need by reporting data which provide
a basis for evaluating the success with which enterprise management
has utilized the scarce resources entrusted to it" (p. 32). But nowhere
are we given a single illustration of an evaluative device used by so-
ciety or by individuals.
The AAA statement, ASOBAT, is much more specific in dealing with
the actual or potential users of accounting information than the Moon-
itz study and the Illinois statement. There are statements of the kinds
of decision which are made by named classes of parties-investors, sup-
pliers, creditors, employees, and others (p. 21). But nowhere is there
a suggestion of the ways in which particular pieces of financial infor-
mation enter into those decisions and choices. We are told specifically
that information on earnings, financial position, and liquidity is neces-
sary (pp. 23-25). But we are treated to no discussion of the variant
meanings of these terms and no particular definition or analysis of
any one of them. Indeed, most of the discussion is devoted to the pre-
diction of future earnings, positions, and cash-flows without any os-
tensible connection between specific present knowledge and specific
estimations or predictions.
There are occasional pieces of evidence or occasional dicta which
may be taken as indicating the futility of some kinds of accounting.
Thus historical cost accounting is said to lead to undervaluation of
assets and overstatement of earnings following inflation (p. 28). It
is alleged that accounting on the basis of "current values (however
defined) fails to satisfy a number of [unspecified] uses" (p. 30).
But there is no illustration of the ways in which the alleged defects
would distort judgments or estimates in any specified commercial


Perhaps our request for definition and specific illustration will be
considered pedantic. But we may very well believe that to define and
illustrate would be much too uncomfortable a task when the authors
were committed to the parallel reporting of positions and results on
two bases. Their conclusion inevitably means that earnings, working
capital, net assets, owners' equity, rate of return, leverage ratio, and
other such aggregates and relations can have two different magnitudes
at the same time. But analysis of the particular uses which can be made
of these magnitudes in commercial reckoning would show that their
components could ideally be of one kind only.
As in other cases, the discussion is removed entirely from contact
with the commercial choices which, because there is no other source
of information of the same kind, accounting might be expected to in-
form. The greater part of the statement employs terms and phrases
which relate to debates among accountants and notions peculiar to ac-
countants. It does not come down to the level of the city's haggling,
choosing, and economizing. Its propositions are not, therefore, based
on explicit inferences from observables, and its conclusions are not
submitted to the test of usefulness in identified problem-contexts.
Time and space prevent us from dealing here with other recent the-
oretical works and the textbooks which purport to deal with account-
ing as an aid to decision-making. Generally, their style is the same as
the examples noticed above. Allusions to particular situations in which
factual and hypothetical financial magnitudes and relationships are
used are missing. There is no discussion of the commercial significance
of asset-backing, achieved ratio of return, debt to equity ratios, indi-
cators of liquidity-which among them embrace all the figures which
appear in periodical financial statements. The reader is left to suppose
that these things are of no account (a conclusion flatly contradicted
by the literature and practice of security analysis); that, if they are of
importance, the necessary figures must be obtained otherwise than
from accounting statements (yet no indication is given in the litera-
ture of any systematic alternative source); or that the specific magni-
tudes of these indicators may be used without regard for the effects of
the different accounting rules used by any firm, or as between firms,
on the component elements of the indicators (which is patently false).
In the absence of this analysis, there is no foundation for conclusions
by way of deductive inference. The occasional allusions to deduction,
as a method of reaching conclusions, are generally pointless, for sel-
dom are they followed by explicit application of the deductive process


to any set of premises for the reaching of any stated conclusion; where
a line of deductive argument is begun, it is dropped in mid-course, and
attention is switched to more palatable assertions.7
Finally, there is no attempt to indicate how the magnitudes derivable
by any proposed accounting process would eliminate specified defects
of alternative processes or would positively advance the capacity for
informed judgment of users of accounting statements. Seldom are
there references to reported failures, misdemeanors, or disputes as evi-
dence of the propriety or impropriety of any process or conception.
The world of commerce is just disregarded, instead of being regarded
as the laboratory in which proposals and theories are refined and put
under test. It seems unlikely that progress will be made as long as ac-
countants are content to find shelter under the idea that magnitudes
and methods are matters of opinion and are content to disregard the
confusion which stems from the coexistence of materially different
conceptions of what matters in daily commercial experience.

The kinds of exercise we have described in the previous section
arise from the belief that what accountants do provides the empirical
foundation of principles and theories.8 Given this belief, it is easy to
understand the consequential belief that to proceed from observable
practices to principles is to follow the same steps as other sciences fol-
low. We hold that this is a mistaken view.
We may use an analogy from, say, chemistry. If we watch closely
the things which a chemist does in a laboratory, we can report every
step he takes. We can collect descriptions of what many chemists do-
put measured quantities of solids and fluids of certain kinds into test
tubes and retorts; observe their interaction in atmospheric air or under
exposure to heat, and so on; and weigh or otherwise measure the prod-
ucts. None of these observations, however, would provide any knowl-
edge at all of the laws, principles, or theories of chemistry. We could
say it is generally accepted practice among chemists always to use
clean instruments or containers, always to weigh or measure inputs

7. Examples are the switch in treatment between the first half and the second
half of Canning's The Economics of Accountancy; the switch from exit prices,
after making a strong case for their use, by Edwards and Bell (The Theory and
Measurement of Business Income); and the switch from dual values to a single
value in Ijiri's The Foundations of Accounting Measurement.
8. This belief is at least implicit in all attempts to provide a rationalization for
existing practices.


and outputs in particular ways, and always to write down or other-
wise record what they have done. But all this describes only the overt
and superficial elements of what chemists do. Chemical knowledge
subsists in statements of the ways in which chemical substances can be
related to one another or mixed with one another, and with what ef-
fects. The routines of chemists are intended to insure that they do not
draw false inferences from the reactions and other events they bring
about and observe. But they are not the empirical foundations of
chemical knowledge.
It is exactly the same in accounting. Knowledge of financial calcu-
lation subsists in statements of the ways in which specific kinds of fi-
nancial magnitudes can be related to one another or mixed with one
another, and with what effects. If we know the effects we wish to
bring about-magnitudes which will inform others of what has hap-
pened, of how firms stand in financial relation to the rest of the com-
munity, of the present capacity for varied but unspecified actions at
any time-we can devise routines which will bring about just those
effects. The empirical foundations of accounting knowledge lie in the
kinds of financial magnitudes which men find it necessary and reason-
able to relate, add, subtract, and compare if certain kinds of judgments
are to be made or certain kinds of conclusions are to be drawn in re-
spect of commercial or financial matters. They do not lie in the kinds
of practices accountants have become accustomed to following.
There seem to be grounds for supposing that the widely held dic-
tum, that different kinds of information are necessary for different
kinds of decision, also has its roots in the variant practices of account-
ants rather than in close examination of reflective processes. We may
use another analogy. The properties of common salt are numerous. Its
components are sodium and chlorine in a fixed proportion; its specific
gravity is given by a fixed number; its molecular weight is a fixed num-
ber; its solubility is known; and the ways in which it combines with
other chemicals are known. Any given user of sodium chloride in a
chemical process may make use of knowledge of these properties in
any combination, depending on what process he is concerned with and
what he intends to produce. But it would be futile to expect to pro-
duce what he intends if specific gravity, molecular weight, solubility,
and so on did not have unequivocal values.
It is exactly the same in the case of the financial properties of firms.
If we know (1) the financial position of a firm at a given time, (2) the
composition of its assets and equities, (3) the net income it has recently


earned, we can put these pieces of information together in any way
which is relevant to the kind of choice or judgment we may wish to
make. If we happen to be investors, we can relate these magnitudes or
any pertinent combination of them to their counterparts for other
firms and other forms of investment and to the prices of other secu-
rities and investments, which we can discover independently of finan-
cial statements. But only if they are unequivocal magnitudes. If we
happen to be managers, we can relate these magnitudes or any perti-
nent combination of them to the counterparts mentioned and to the
prices of any other potential assets which we can discover, at any time,
independently of the accounting process.
What is necessary for different kinds of decision is not, therefore,
different kinds of information, but different combinations of the com-
ponents of a body of information of the same kind. Investors as a class
are not solely concerned with the magnitude of a year's income; some
are concerned with the magnitude of net assets, some with the rela-
tionship between assets and equities. As the composition of some will
change in the light of the firm's performance and external commercial
events, it is necessary to provide the kind of information which is us-
able by all. Similarly creditors and financiers as a class are not con-
cerned solely with asset coverage; some, at times, are concerned with
net income and its components-but not a different net income or one
calculated on different principles from the net income which is of in-
terest to stockholders. Managers as a class are not solely concerned
with any particular financial property of a firm, but with them all-
and with such quantified expressions of those properties as will serve
them in as many possible problem contexts as possible.
As we have said, we will not find the empirical foundations of
accounting in the variant practices and conceptions of accountants.
They will be found only from the widest survey of the potential uses
of financial information in commercial reckoning and from the at-
tempt to find just that kind of information which is commonly usable
by all parties to commercial and financial dealings.


To devise and subsequently to test theories by reference to the phe-
nomena they deal with is the normal and accepted course of all empir-
ical science. We have aimed to illustrate the same processes in this
paper. The phenomena in question are statements about the effects of


particular transactions and other events which bear on the financial
positions and results of firms. The questions at issue are: "What kinds
of particular and aggregate statements are usable and necessary in the
specific contexts of specific problem situations?" and "Of those kinds,
which are worthwhile continuously recording and periodically re-
porting because they are parts of the ongoing history of the financial
affairs of firms?"
We considered a number of typical problem situations which indi-
cate that contemporary resale prices are pertinent to judgments of past
results and choices based on present potentials at any time. We found
no use or need for book-values which are inconsistent with market
prices. We concluded that representations of the effects on a given
firm of all its transactions, and of all changes in the prices of its assets,
and of changes in the purchasing power of money, are necessary if
those without immediate knowledge of acquaintance are not to be
The types of transaction and event we discussed are factual in char-
acter, and the modes of reckoning and dealing considered we hold to
be typical and verifiable. These constitute the core of factual premises
for our conclusions. They are the real stuff of commerce. They must
somehow be embraced by any theory of the generation of pertinent
financial information.
Every theory makes use of some generalized terms, idealizations, or
constructs. These are inventions. But if they are to be serviceable they
must have demonstrable empirical correlates. It may be said that any
theorist is entitled, is free, to choose his own constructs. But with that
freedom runs the obligation to show how the constructs are related to
observed and experienced events and to show how the products his
theory entails engage with the reflections and actions of men in active
commerce. There can be no useful construct in a theory of accounting
which is not firmly tied, directly or indirectly, to some choice or ac-
tion of a commercial kind. We noticed however that the literature
generally fails to deal with observable events in their temporal and cir-
cumstantial settings and fails to consider the specific connections of the
products of the theories propounded with the known criteria of choice
in commercial matters.
I have not in this paper attempted to illustrate all the commercial sit-
uations in which statements of financial position based on resale prices,
and statements of results embracing the effects of changes in prices and
the purchasing power of money, are relevant. The general ideas of

continuously contemporary accounting,9 as I have expounded them
elsewhere, have arisen from consideration of such situations. They
have been supported by observation of commercial events, disputes,
frauds, and failures, as well as by analysis of the notorious conflicts in
the present body of doctrine.
The theory of continuously contemporary accounting takes cogni-
zance of all the factors which have given rise to suggestions for dif-
ferent forms of accounting. It is more fully historical than historical
cost accounting. It embraces the effects which price-level-adjusted
accounting attempts to cope with. It embraces the effects which re-
placement-price accounting attempts to cope with. It is geared to the
calculation of expected outcomes of future possibilities. Its products
are capable of being related to any other financial magnitudes at a
given time. Each of the types of accounting just mentioned has the
recognition of some element of commercial reality as its justification.
But each ignores some other aspects of that reality, and in that sense
each falls short of the ideal system which would cope with all of the
elements of commercial experience.
My object has been to suggest that the methods of empirical science
have scarcely been tried in accounting. The common observables and
experiences of commercial reckoning and dealing are generally disre-
garded; yet they are the only legitimate foundation for a viable theory
and serviceable practices. In place of their analysis, we have discus-
sions of higher-level abstractions, discussions which drift away from
or point only vaguely in the direction of the very points of choice and
judgment at which accounting information is used.
Whatever confidence I have in my own inference from these ex-
periences and observables may be shaken by demonstration of their
falsity. But I do not believe that any worthwhile theory of accounting
or any worthwhile practice can emerge otherwise than from examina-
tion of the exigencies of men engaged in the calculating, choosing, and
dealing characteristic of the marketplace.
9. I allude here to the main ideas mentioned in the previous sentence. Some of
the suggestions made in Accounting, Evaluation, and Economic Behavior I would
now modify, but only through stronger belief in the propriety of the main ideas.
A paper on these modifications is forthcoming.



Are There Commercial Foundations of
Accounting Theory?

Kermit D. Larson

THE TITLE of Professor Chambers' paper "The Commercial
Foundations of Accounting Theory" suggests an attempt to explicate
those commercial events, things, or characteristics which are believed
to provide important premises in the development of accounting the-
ory. Given Professor Chambers' stated opinion that "accounting is
concerned strictly with commercial experiences, events, and consid-
erations," the commercial foundations of accounting theory are seen
to provide the empirical events which, if examined, dictate the com-
mercially necessary information that should be generated by account-
ing. More particularly, the commercial foundations of accounting
theory are "the common observables and experiences of commercial
reckoning and dealing . ."-"the exigencies of men engaged in the
calculating, choosing, and dealing characteristic of the marketplace."
The main thrust of Chambers' paper involves a two-sided argument.
On the one side, he argues that the general modes of inquiry and expo-
sition in accounting fail to adequately comprehend the empirical foun-
dations of accounting, which are the common observables and experi-
ences of commercial reckoning and dealing. He states, "the literature
generally fails to deal with observable events in their temporal and
circumstantial settings and fails to consider the specific connections of


the products of the theories propounded with the known criteria of
choice in commercial matters." On the other side of the argument, it
is asserted that the "current cash equivalent" theory of accounting is
firmly grounded in these commercial foundations; the products of cur-
rent cash equivalent accounting are deduced from the specific com-
mercial settings in which financial information is used.

Perhaps the most critical issue raised in Chambers' paper is the gen-
eral inability of accountants to clearly justify the data outputs of
accounting by showing the significance of the data to specific decision-
making processes. In my opinion, this problem is likely the most criti-
cal impediment to the improvement of accounting theory and prac-
tices. I generally agree with Professor Chambers that the recognition
of this problem implies a criticism of the typical modes of inquiry
found in accounting literature. All too often the analyses of alternative
accounting procedures have included little or no consideration of the
specific ways in which the resulting information might bear upon de-
cision processes. Contrary to Chambers, however, I reject the argu-
ment that this deficiency is essentially a consequence of inadequate
modes of inquiry and exposition. The whole process of assessing the
relevance relationship between data and decision is a highly complex
and problematical affair. To deny our general state of "ignorance of
how people behave in commercial situations" and to assert that there
are known criteria of choice in commercial matters constitutes, in my
view, a simplistic perception of human decision. Indeed, the recent
surge of interest in behavioral accounting research might be explained,
in large part, as a direct response to the problem that the criteria of
choice in commercial matters are not known.
Several problems in the analysis of human decision may impinge
upon the process of determining what information is or is not relevant
to a decision. Suppose, for example, a decision-maker develops an
idealistic decision model, that is, a model which correctly incorporates
all of the important factors such that employment of the model will
maximize his objectives. Further, suppose that some of the important
variables in the decision-maker's model are unknowable (perhaps be-
cause they will be determinant only in the future). A possible course
of action is for the decision-maker to seek information regarding those
variables which are knowable, make subjective estimations of those
which are not, and continue to use the basic (idealized) model that is


consistent with his overall objectives. A second course of action is
equally possible, however. The entire model may be cast aside (due
perhaps to the frustration which results from repeated answering of
questions to which there are no answers). In its place there may be
substituted a surrogate model, all or most of the variables of which are
knowable. The analytical processes of the surrogate model may not
even resemble those that were characteristic of the more idealistic
model. This surrogate decision model is utilized because it is easy to
employ, and the decision-maker reasonably presumes that the results
of the model more or less crudely conform to those that would have
been obtained using the idealistic model under idealistic conditions.
If the process of decision-making proceeds along the lines that I
have outlined-and Chambers' analysis provides no evidence to con-
tradict the employment of surrogate decision models-the accounting
theorist is faced with special difficulties in establishing the relevance of
accounting data to the decision. There is no clear understanding on
the part of the decision-maker, or on the part of anyone else, as to the
closeness of fit between the idealistic decision model and the surrogate
decision model that the decision-maker actually uses. Further, the sur-
rogate model, like any surrogate, is not deductible from the decision-
maker's general objectives or from the form of the idealized model,
even if these were knowable. Accountants may and should engage in
expansive research regarding the decision-making function, one result
of which might be to discover the extent to which surrogate decision
models are actually used by decision-makers. Perhaps then accountants
can determine the form of those models and can provide the necessary
informational inputs. However, even this is not entirely satisfactory,
for we must rest completely upon the decision-maker's ability to pick
good surrogate models.
It is not the purpose of this discussion to provide an exhaustive list
of the deficiencies in our knowledge of human decision-making. One
further example may, however, enforce the argument that the criteria
of choice in commercial matters are not in the least established by one
man's opinions as to the ways in which decisions are actually made.
Some choice situations are such that all of the important criteria
can be determined with reasonable accuracy. In such cases, the act of
choice is not so much a matter of decision as it is mechanical calcula-
tion. In many other choice situations, some of the critical criteria are
not capable of verifiable measurement. In the latter event, the decision-
maker may not even be able to perceive an idealized model-a model




that would be applicable if the important criteria were susceptible to
verifiable measurement. This state might result from a highly ambigu-
ous set of fact conditions in which the parameters of each alternative
are poorly structured and subject to great uncertainty. In simpler
terms, the decision-maker recognizes that a choice must be made and
knows little more than that he is faced with a very vague and poorly
structured problem. Under these conditions, even the isolation of a
surrogate decision model may be of questionable validity. Ex ante, the
decision-maker simply decides to "sleep on it" and then chooses. Ex
post, the decision model uncovered by a researcher or the decision-
maker is likely to reflect much more a rationalization of the actual
choice than it is to reflect the criteria that played a significant role in
the decision.
To whatever extent accounting assists in reaching decisions of this
sort, the relevance of accounting data can only be presumed. I do not
argue that these limitations of accounting represent insurmountable
barriers to the future development of accounting. I do argue, how-
ever, that, given our present state of ignorance regarding the criteria
of choice in commercial situations, the present relevance of account-
ing data under current cash equivalent accounting, or any other form,
must ultimately be presumed.


The previous comments and what will follow consist in large part
of my personal opinions on the subject matter and nature of account-
ing theory. Correspondingly, it is appropriate that we consider Pro-
fessor Chambers' beliefs regarding the role of opinion. In proposing to
explicate the failure to develop any clear lines of thought on account-
ing theory during the last decade, Chambers argues that two particu-
lar aspects of the modes of inquiry and exposition in accounting have
been causal. First is the noticeable reluctance to assign definite and
limited functions to accounting. Second, "Almost everyone seems to
think that he is entitled to an opinion on the subject matter and the
nature of accounting theory-an opinion, what is more, which others
will respect . However, there can be no more mischievous idea
than that the choice of the magnitudes recorded and reported and the
choice of rules of processing are matters of opinion. There can be no
greater source of disruption and confusion. For if these things are mat-
ters of opinion, there can be no solid core of principles, no ascertain-


able function, no systematic knowledge. It should be well known that
it is profitless to debate matters of opinion."
Perhaps the entire argument against opinion is an attempt to refute
the long-established method of, what I would call, reasoning by au-
thority. This procedure is clearly evident in some of the widely read
classics of accounting, in which the conclusions are supported not so
much by an appeal to logic as by the authoritative style of presenting
the author's opinions. Nevertheless, the pitfalls of this tradition can
certainly be renounced without adopting the naive approach of purg-
ing opinion from the process of determining accounting procedures.
It is not profitless to debate matters of opinion; to argue otherwise is
to refute the possibility that opinions take cognizance of experience or
facts. It is to deny that opinions may provide partial strains of reason-
ing where no complete logical patterns exist. Finally, it fails to accept
the existing state of affairs in accounting, wherein decisions as to the
magnitudes recorded and reported and the choice of rules of process-
ing must be made today and wherein countless alternatives exist be-
tween which choice is necessarily a matter of opinion.
I have previously noted Chambers' criticism of the "noticeable re-
luctance to assign definite and limited functions to accounting." Obvi-
ously, the assigned functions of accounting have a direct impact on the
choice of the magnitudes to be recorded and the rules of processing. I
might point out that the functions which Chambers assigns to account-
ing are supported by nothing more than his opinion. And this is as it
should be, for the normative theorist's assignment of functions is nec-
essarily a matter of opinion.

The argument of Chambers' paper, consistent with his previous
work, makes a sharp distinction between past, present, and future and
places a special importance upon the definition and measurement of
present position. It is in large part this special emphasis on the present
vis-a-vis the future that distinguishes Chambers' work from that of
many other contemporary writers. He states: "Present financial posi-
tion is the link between past events and future events. If it is not
known, we cannot knowledgeably review the past or plan for the
future. The past and present are in principle knowable and unalter-
able; the future is not knowable.... We hold this process of discovery
[of what has occurred and of the resulting present position] to be the
prime function of accounting. If it is not done as well as is possible,




judgments about past and future lack that contact with the factual
present which alone provides a trustworthy foundation for choice and
There are at least three reasons cited in support of the relative em-
phasis placed upon calculations which relate to the present. Each of
these three arguments which underlie the attributed significance of
present position in accounting is worthy of further consideration.
The first reason for the relative significance of the present is that the
process of choosing between alternative courses of action necessarily
depends upon the capacity to engage in future action. If the decision is
to be made in the present or the near future, the capacity of impor-
tance is present capacity. Thus, the attribute of the present which is of
special importance to choice in commercial affairs, and therefore of
importance to accounting, is the capacity to engage in commercial
Clearly, the capacity to act is an important factor in the selection
and evaluation of alternative courses of action. Unless one considers
and evaluates alternatives in light of his capacity to act, feasible al-
ternatives may be inappropriately excluded from consideration, and
nonfeasible alternatives may be inappropriately included in the eval-
Narrowing the analysis to accounting statements of financial posi-
tion, Chambers points out that the present capacity of stockholders is,
of course, discoverable by reference to the marketplace rather than to
the firm's statement of financial position. We may note that this point
should be generalized to include the capacities of all external parties.
The present capacities of external parties to take market action obvi-
ously are not portrayed by a firm's statement of financial position.
This is true regardless of the class of external party one may wish to
consider, e.g., investors, suppliers, customers. Thus, to the extent that
information regarding the present is used to determine present capac-
ity of the actor, which usage is distinguished from the possible signifi-
cance of present information as a basis for predicting the future, the
statement of financial position must be relevant only to decisions made
on behalf of the entity.
Other critics have addressed themselves to the problem of determin-
1. It must be emphasized that the analysis of this section is not concerned with
the possible significance of present capacity as a basis for estimating future re-
sults of a course of action. That point will be covered subsequently.


ing the particular managerial decision situations in which a statement
of financial position, prepared to reflect exit prices, would be relevant
and those situations in which it may not be relevant. I wish to raise
the far more general problem of the great presumptive gap that exists
between a statement of financial position-that is, a report which is de-
fined in terms of the accounting procedures that are employed in the
statement's construction-and a concept of financial position-which
purports to specify the informational significance of the concept. In
other words, it is one thing to define the term "financial position"
as the present capacity of a firm to engage in future market action. It
is quite a different thing to define financial position as a classified array
of a firm's assets and equities, measured in terms of their current cash
equivalents (or any other type of measurement for that matter). These
two approaches to the definition of financial position result in a match-
ing pair of concepts, the correspondence of which can only be pre-
sumed, given our present state of analytical refinement.
Does Chambers' statement of financial position adequately portray
the capacity of a firm to engage in future market actions? However
this question is answered, the answer will incorporate to a significant
extent the personal opinions of the respondent. An affirmative answer
will be less discomforting if one is willing to exclude from considera-
tion the elements of present financial capacity which are executory,
such as the capacity to issue additional stock. Similarly, one's confi-
dence in the descriptive validity of this statement of financial position
will be buoyed if the present capacity to engage in future market ac-
tions is somehow perceived as being separate and distinct from the
current cash equivalents associated with packaging the firm's assets in
various alternative combinations. At the least, these factors would
seem to cast serious doubt on the informational significance of Cham-
bers' statement of financial position.
There is another general problem that creates great uneasiness in my
mind regarding the informational significance of the statement of fi-
nancial position. We all recognize that the present state of a firm is
multidimensional in character. If I abstract from the present state of
the firm those characteristics which pertain to its capacity to engage in
future financial activities, I am still left with a large multidimensional
set of characteristics. Such factors as the existing state of managerial
talent and the degree of flexibility and skill evidenced by the firm's
labor force would seem to be important elements of consideration in
assessing the firm's present capacity to engage in future financial activ-




cities. But these characteristics are not described in the statement of
financial position. Giving adequate recognition to the awesome com-
plexity of a large corporation's present position, the representation of
present capacity is, perhaps, entirely too lofty an objective to hold for
the balance sheet.
A second reason for the special significance attributed to the present
is that knowledge of the present position, and of the past, is viewed
as providing the major factual premises for speculation about the fu-
ture. Chambers states: "it is impossible to form expectations of the
performance of the companies unless one knows how they are pres-
ently placed, financially.... I can readily admit the necessity of future
calculations; but I cannot see how those calculations can be made, or
if made can be worthwhile, without the fullest possible knowledge of
the present financial state of a firm and the fullest possible account of
its past."
In the previous section the statement of financial position was dis-
cussed in terms of its purported representation of the capacity to act.
Financial position in that sense was noted to be of significance only to
parties acting on behalf of the firm. To the contrary, when financial
position is analyzed as the factual basis which underlies estimations of
the future, the statement of financial position is seen to have potential
informational significance to all parties (internal and external). All
parties considering future actions related to a firm will be interested
in information that is serviceable in predicting or estimating what the
future holds for the firm. It should be re-emphasized that retrospective
and contemporary calculations in accounting are of no significance to
external parties unless they aid in the process of making predictions.
Unfortunately, except for a few rather strongly worded statements
to the effect that future expectations must be based upon present and
past financial information, scant attention is given to the specific ways
in which contemporary and historical financial information is serv-
iceable in predicting the future. This would seem to be a natural result
of the view that the future is in principle unknowable, and that "all
the results and inferences from [future calculations] are individual and
The problems of future estimation that are faced by stockholders

2. Raymond J. Chambers, Accounting, Evaluation, and Economic Behavior
(Englewood Cliffs, N.J.: Prentice-Hall, 1966), p. 84.


were treated only by an analogy. The supposedly analogous example
was of a firm which owned one asset and had two investment alterna-
tives. However, in that example the net present value of each alter-
native was given as part of the facts of the example. Thus, the example
had nothing to do with the problems of estimating the future with
regard to each alternative. Correspondingly, it is essentially irrelevant
to the stockholder's problem. It certainly does not show the specific
ways in which financial statement information should be used to pre-
dict the future consequences that will result from an investment in
It is indisputable that predictions of the future are dependent upon
our knowledge of past events and present conditions. But the events
and characteristics of the past and the present are generally complex,
frequently multidimensional, and always unbounded in number. Some
process of selecting certain events and characteristics for analysis, and
omitting others, is obviously necessary. Chambers' belief that future
calculations cannot be made in a worthwhile manner "without the
fullest possible knowledge of the present financial state of a firm and
the fullest possible account of its past" begs the question and obscures
the basic problems of deciding which events and characteristics should
be included in the descriptive scheme of accounting and which should
be excluded. There are many approaches to estimating what the fu-
ture holds for a firm, and I would venture that a significant proportion
of them involve minimal consideration of balance-sheet information,
whether or not exit prices are used as the basis of preparation. I know
of no way to specify the relevance of retrospective and contemporary
calculations to prediction other than to carefully examine the predic-
tive process and to show precisely how and under what caveats certain
kinds of historical data can be incorporated into a specified predictive

A third reason supporting the pre-eminent position of the present in
accounting is that, contrary to anticipatory calculations of the future,
the present (and the past) is, in principle, knowable. Thus, if account-
ing is constrained by the objective of providing information which is
factual-which is susceptible to present verification-it must be con-
strained to exclude anticipatory calculations.
In appreciation of the inherent risk associated with making predic-
tions, many accountants may accept, on practical grounds, the exclu-




sion of anticipatory calculations from the domain of accounting. As a
theoretical matter, however, the relative emphasis on the present and
the past and the corresponding exclusion of anticipatory calculations
from the domain of accounting are suspect. The descriptive or explan-
atory objectives of accounting are, in my view, wholly analogous to
the objectives of other empirical sciences in which predictive capac-
ity is a widely recognized objective. The inability to presently verify
predictions of the future need not be considered an insurmountable
hurdle. The theoretical utility of independent corroboration relates to
the verification of the predictive process, not to the specific instance
of prediction.
These arguments are supported by the interface between the pre-
dictive models of operations research and accounting. A more compre-
hensive view of the information-generating process in business firms
-which would encompass both of these areas-would recognize an-
ticipatory calculations as an integral part of that process.

Professor Chambers argues that a viable theory of accounting for
business firms must be grounded in the realities of commercial experi-
ence. More particularly, this involves explicating the specific ways in
which the products of a theory are important elements in the evalua-
tive and calculative processes underlying commercial decisions.
In support of his theory, Chambers provides illustrations which pur-
port to state the important elements of consideration in certain com-
mercial situations. I previously criticized one of those illustrations. It
will be beneficial to consider the other illustration, for the purpose of
supporting my argument that hypothetical examples are not evidence.
Examples may provide a convenient mode of expressing one's opinion,
but they do not provide evidence to substantiate the claim that the
current cash equivalent theory of accounting is well grounded in the
specific commercial settings in which financial information is used.
Chambers states: "[Firms] may pledge assets, singly or in total, as
security for cash advances. The immediate security for lenders is the
market selling price of the assets pledged. It is often said that the sig-
nificant value of an asset to a firm is its calculated net present value in
its present use. But no lender on the security of the firm's assets is con-
cerned with the value of those assets to the firm in this sense. He is
concerned with the value of those assets as generators of cash for him-
self in the event that he must enforce his claim against the borrower by


sale of the charged asset." Consider an alternative view. Regarding the
preponderance of debt financing in a highly industrialized economy,
the market selling price of the assets pledged is, at best, of secondary
significance to the lender. To the contrary, the primary element of
significance is the firm's expected ability to service the debt, which is
a function of the expected cash flows from the firm's operations and
the degree of risk that corresponds to these expectations. Regarding
those large firms which provide the vast majority of economic pro-
duction in the United States and which engage in the vast majority of
debt financing, liquidation is an extremely rare occurrence even in the
case in which the firm is in financial distress. Further, few loan officers
would grant credit if default were deemed a significant possibility.
Chambers continues the illustration: "Wherever a charge over par-
ticular assets or groups of assets is given as security for borrowings,
there will be found some provision restricting other borrowing by ref-
erence to the amount of the assets of the borrower. Now the term 'the
amount of the assets' in such an indenture can have only one kind of
meaning. The object of the provision is to cover the amount bor-
rowed. This cover is given, not by the book values of assets, however
determined, but by the market values of assets." Consider an alterna-
tive view. When a lender requires that restrictions be placed upon
other borrowing, the primary intent is to protect the ability of the
firm to service the debt. If the restriction is stated by reference to an
"amount of assets," that term is essentially a convenient and conven-
tional surrogate for debt service capacity. Thus, the market values of
the assets are generally of nominal significance in the sense of serving
as a basis for predicting the results of liquidation.
I do not offer these alternative views as evidence of identified cri-
teria of choice in commercial situations, albeit I submit they comprise
a reasonable interpretation. I offer them only as an arguable point of
view, for the purpose of rejecting such illustrations as adequate evi-
dence to substantiate the commercial foundations of any accounting
theory. Whatever lack of confidence I have in Chambers' inferences
from his experiences and observations may be shaken by a demonstra-
tion of their empirical validity.
Are there commercial foundations of accounting theory? An af-
firmative answer follows directly from the perception that a primary
function of accounting is to provide relevant information to persons