The philosophy of accounting is the conceptual framework for the professional preparation and auditing of financial statements and accounts. The issues which arise include the difficulty of establishing a true and fair value of an enterprise and its assets; the moral basis of disclosure and discretion; the standards and laws required to satisfy the political needs of investors, employees and other stakeholders.
Introduction
editThe accounting profession regulates the manner in which enterprises report their financial results through standards issued by national accounting standards bodies. International Accounting Standards Board (IASB) establishes standards which define how transactions should be presented in financial statements. National accounting bodies have, with the exception of the Financial Accounting Standards Board (FASB) in the USA, have substantially harmonised their standards with the international standards.
IAS 1.5 defines the purpose of financial statements as follows:
Financial statements are a structured financial representation of the financial position of and the transactions undertaken by an enterprise. The objective of general purpose financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements also show the results of management's stewardship of the resources entrusted to it.
IAS 1.10 defines how financial statements should be presented
Financial statements should present fairly the financial position, financial performance and cash flows of an enterprise. The appropriate application of International Accounting Standards, with additional disclosure when necessary, results, in virtually all circumstances, in financial statements that achieve a fair presentation.
Ontology, as a branch of philosophy deals with the issue of whether reality or substance exists as an absolute (i.e. independently of our perceptions) or if our perceptions are reality. In financial reporting, substance and economic reality regarded as being of greater importance than legal form (para. 35 of the IASB Framework) and as a result, ontology is an important issue in financial reporting.
In philosophy, it is recognised that there are various perspectives on what reality actually is. The following are examples:
- Objective Reality: Reality exists independently of our perception. No matter how we look at it, it is always the same. It continues to exist, even if we stop believing it exists.
- Subjective Reality: Reality exists in our minds and may appear differently depending upon the circumstances or context from which it is viewed. It exists because we believe it exists.
- Normative Reality: Reality exists as a definition of how things ought to be - in some ways bridging the gap between objectivity and subjectivity.
Substance over Form
editIn financial reporting, the issue of substance over form is evidenced in a number of areas including:
- Finance Leases
- Goodwill and Intangible Assets.
- Revaluation of Investments
- Accounting for Inflation
Baker & Hayes[1] argue that failure to apply the concept of substance over form at Enron caused investors and creditors would have a unrealistic view of the company’s financial position.
The distinction in financial reporting between substance and form raises important concerns in ontology and the philosophy of law[citation needed]. Accounting standards require the reporting of the substance of the matter, rather than merely the legal form of a transaction.[2] For example, finance Leases may be treated as sales rather than as lease expenses, in spite of their legal form.[3]
The real-world consequences of reporting form rather than substance can be severe. Baker and Hayes argue that failure to apply the concept of substance over form at Enron caused investors and creditors to have a unrealistic view of the company’s financial position.[4]
Truth
editConcepts such as faithful representation, neutrality, prudence and completeness all contribute to the qualitative reliability of financial reports[5] This raises epistemological concerns.[citation needed]
The IASB does not present a definition of what it considers to be fair presentation but para, 46 of the Framework states:
Financial statements are frequenty described as showing a true and fair view of, or as presenting fairly, the financial position, performance and cash flows of an enterprise. Although the framework does not deal directly with such concepts, the application of the principal qualitative characteristics and of appropriate accounting standards normally results in financial statements that convey what is generally understood as a true and fair view of, or as presenting fairly such information.
Ethics, as a branch of philosophy deals with the issue of whether truth exists as an absolute (i.e. independently of our perceptions) or if truth is a construct of our minds. In financial reporting, concepts such as faithful representation, neutrality, prudence and completeness all contribute to the qualitative reliability of financial reports (para. 31 to 38 of the IASB Framework). Ethics and [[truth|truthfulness00 in therefore an important issue in financial reporting.
From a philosophical perspective, truth has no single definition; it is expressed in a number different theories:
- Correspondence Theory: Truth corresponds to the actual state of affairs - implies that an objective reality[6].
- Coherence Theory: Truth has coherence with some specified set of propositions or beliefs.
- Constructivist Theory: Truth, reality and knowledge are "constructed" in our minds, there is no absolute.
- Consensus Theory: Truth is borne from consensus between parties.
- Pragmatic Theory: Truth is that quality which has the most value when applied in actual practice.
- Pluralist Theory: There may be more than one property that makes something true - and therefore more than one version of the truth.
The IASB does not present a definition of what it considers to be fair presentation but para, 46 of the Framework states:
Financial statements are frequenty described as showing a true and fair view of, or as presenting fairly, the financial position, performance and cash flows of an enterprise. Although the framework does not deal directly with such concepts, the application of the principal qualitative characteristics and of appropriate accounting standards normally results in financial statements that convey what is generally understood as a true and fair view of, or as presenting fairly such information.
Paragraph 24 of the Framework states that:
Qualitative characteristics are attributes that make the information provided in the financial statements useful to its users...."
The following qualitative characteristics are defined in the Framework:
- Understandability: The information should by users, however, the framework (para 25) acknowledges that some users may not be able to understand the information.
- Relevance: The information should be relevant to the decision making needs of its users - in terms of "evaluating past, present and future events"
- Reliability: The information should be free of any material error or bias: it should present the substance of transactions with neurality, prudence and completeness.
- Comparability: Users should be able to compare results over time or compare the results of different enterprises and evaluate their relative positions with confidence.
In the absence of accounting standards that specify how these characteristics should be applied, these concepts have wise scope for interpretation. It may be argued that the concept of truth as reflected in the IASB framework is a coherence theory of truth in that it defines truth in terms of a set of guiding principles.
Knowledge may be defined as a belief that is true and justified.
Harmonisation and Context
editThe International Accounting Standards Board was established in 2001 with the responsibility of for promulgating international accounting standards. The establishment of a single standard setting body was the result of each country defining its own set of accounting standards - effectively presenting financial truth a different way.
The following factors have been identified as the major causes for the diversity of accounting policies adopted by each country:
- Level of Inflation
- Stage of Economic Development
- Political Stability
- Legal System
- Language and Culture
Accounting Research
editA significant aspect of research in the field of accounting is concerned with whether or not users of financial information are adequately informed of the financial affairs of an enterprise by its financial reports. One approach to assessing whether this is so is to compare the results of corporate performance with stock prices and evaluate whether
Gaffikin (2007)[7] describes the history of research in this context as having evolved through two phases
- Normative Phase: Up until about 1970, research tended to view stock prices as a reflection of a partially informed market and benchmarked stock values against fundamental valuations.
- Positive Phase: Since about 1970, research have been influenced by new philosophies - especially the Efficient Markets Hypothesis of Fama (1965)[8] and the Capital Asset Pricing Model of Sharpe (1964)[9] and Lintner (1965)[10] which regard market valuations as a reflection of all available information.
In effect, this reflects a shift in thinking from:
- Trying to understand how best to present financial reports in order to inform the market better, to
- Trying to understand whether the market knows something that ought to be reflected in published financial reports.
IASB and FASB Statements
editIASB statements[11] are identified as IAS x.y or IFRS x.y, where x is the statement number and y is the paragraph number. IAS statements are those formulated before the International Accounting Standards Committee was reformed to become the IASB.
The IASB has also publishes a "Framework" which explains the foundational concepts upon which accounting standards are based.
Paragraph 24 of the Framework states that:
Qualitative characteristics are attributes that make the information provided in the financial statements useful to its users...."
The following qualitative characteristics are defined in the Framework:
- Understandability: The information should by users, however, the framework (para 25) acknowledges that some users may not be able to understand the information.
- Relevance: The information should be relevant to the decision making needs of its users - in terms of "evaluating past, present and future events"
- Reliability: The information should be free of any material error or bias: it should present the substance of transactions with neurality, prudence and completeness.
- Comparability: Users should be able to compare results over time or compare the results of different enterprises and evaluate their relative positions with confidence.
In the absence of accounting standards that specify how these characteristics should be applied, these concepts have wise scope for interpretation.
Further Reading
edit- "International Financial Reporting Standards (2009) " London, International Accounting Standards Committee Foundation.
- Belkaoui, A. Stewart, J. (2002) "Accounting Theory", 2nd Edition, South Melbourne : Nelson Thomson Learning.
- Schroeder, R. G., Cathey, J.H., & Clark, M. (2005) "Accounting Theory: Text and Readings", 7th Edition. John Wiley and Sons.
See also
editThe study of accounting in a philosophical context may be defined as the study of financial reporting in the context of Ontological Issues(Existence, Reality, Being and Purpose), Ethical Issues (Truth and Morality and Epistemological Issues (Knowledge, Belief, Reason, Justification, Cognition, Comprehension, Inference, Decision-Making and Learning).
Philosophy in Related Professions
editAccounting Standards Topics
editReferences
edit- ^ Baker,C.R & Hayes, R, (2004) "Reflecting Form Over Substance: The Case of Enron Corp.", Critical Perspectives on Accounting, Volume 15, Issues 6-7, August-October 2004, Pages 767-785
- ^ IASB Framework, para. 35
- ^ Basic Leasing Terminology, Business Owner's Toolkit
- ^ Baker,C.R & Hayes, R, "Reflecting Form Over Substance: The Case of Enron Corp.", Critical Perspectives on Accounting, Volume 15, Issues 6-7, August-October 2004, Pages 767-785
- ^ IASB Framework, para 31--38
- ^ Bradley, F.H., "On Truth and Copying", Mind 16 (62):165-180.
- ^ Gaffikin, M. "Accounting Research and Theory: The age of Neo-Empiricism (2007) Australasian Accounting Business and Finance Journal Vol. 1, No.1.pp. 1-19.
- ^ Fama, Eugene (1965). "The Behavior of Stock Market Prices". Journal of Business 38: 34–105
- ^ Sharpe, W.F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk, Journal of Finance, 19 (3), 425-442
- ^ Lintner, John (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets, Review of Economics and Statistics, 47 (1), 13-37
- ^ International Financial Reporting Standards (2009) London, International Accounting Standards Committee Foundation.
External links
edit- Edward Stamp, Michael J. Mumford, K. V. Peasnell (1993). Philosophical perspectives on accounting. Taylor & Francis. ISBN 9780415080934.
{{cite book}}: CS1 maint: multiple names: authors list (link) - Ahmed Riahi-Belkaoui (2004). Accounting theory. Cengage Learning EMEA. ISBN 9781844800292.
- Isaac Cheifetz (July 18, 2005). ""The Philosophy of Accounting"". Minneapolis Star Tribune.
- "What is conservative accounting philosophy?". Wikianswers. Retrieved 4/4/2009.
{{cite news}}: Check date values in:|accessdate=(help) - Robert K. Mautz (June 1964). Philosophy of Auditing. American Accounting Association. ISBN 9780865390027.
- "HISTORY AND PHILOSOPHY OF ACCOUNTING THEORY" (PDF). Universiti Kebangsaan Malaysia. Retrieved 4/4/2009.
{{cite web}}: Check date values in:|accessdate=(help) - John William Cook, Gary M. Winkle (February 1980). Auditing: Philosophy and Technique. Houghton Mifflin. ISBN 9780395286609.
- Thomas Donaldson, Patricia H. Werhane, Margaret Cording (17 May 2002). Ethical Issues in Business: A Philosophical Approach. Prentice Hall. ISBN 9780130923875.
{{cite book}}: CS1 maint: multiple names: authors list (link) - Bill N. Schwartz (20 Dec 2000). Research on Accounting Ethics: 7 (Research on Accounting Ethics. JAI Press. ISBN 9780762307432.
- Glenn Cheney (February 7, 2005). "FASB returns again to the philosophy of accounting". WebCPA.
- Robert Bloom (1994). The Schism in accounting. Greenwood Publishing Group. ISBN 9780899306995.
- The new spirit of capitalism. Verso. 2005. ISBN 9781859845547.
{{cite book}}: Unknown parameter|authors=ignored (help) - J. Edward Ketz (2006). Accounting Ethics. Taylor & Francis US. ISBN 9780415350808.
- Blount, Edmon W. (July 1995.). "The philosophers of Norwalk ask: "What's an asset?"". ABA Banking Journal. 87 (7). New York: American Bankers Association.: 80. ProQuest 218480597.
{{cite journal}}: Check date values in:|date=(help) - "Accounting Philosophy Principles". directorym. Retrieved 4/4/2009.
{{cite web}}: Check date values in:|accessdate=(help) - Jagdish S. Gangollya, Mohamed E. A. Hussein (August 1996). "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: PERSPECTIVES FROM PHILOSOPHY OF LAW". Critical Perspectives on Accounting. 7 (4): 383–407. doi:10.1006/cpac.1996.0042.
- Norio Sawabe (February 2008). "STUDYING THE DIALECTICS BETWEEN AND WITHIN MANAGEMENT PHILOSOPHY AND MANAGEMENT ACCOUNTING" (PDF). Sumitaka Ushio Graduate School of Economics, Kyoto University.
- Nihel Chabrak (September 13, 2002). "The Politics of Transcendence:Hermeneutic phenomenology and Accounting Policy" (PDF). Université Paris IX DAUPHINE.
{{cite journal}}: Cite journal requires|journal=(help)
- "AC952-7-SP: PHILOSOPHY OF MANAGEMENT AND ACCOUNTING". Retrieved 4/4/2009.
{{cite web}}: Check date values in:|accessdate=(help); Text "University of Essex" ignored (help) - "Truth and fairness in accounting, auditing and finance:what do we learn from political philosophers?" (PDF). Retrieved 4/4/2009.
{{cite web}}: Check date values in:|accessdate=(help); Text "University of Alberta, School of Business" ignored (help) - R. Bernardi (Fall 2005). "Ethics research in accounting". Accounting Educators Journal.
- C.R. Baker (1996). "Accounting Ethics: a search for truth in an age of moral relativism". Research on Accounting Ethics.
- Baker, C. R. (October 1976.). "An investigation of differences in values: Accounting majors vs. nonaccounting majors". The Accounting Review: 886–893.
{{cite journal}}: Check date values in:|date=(help) - Baker, C. R. (July 1974.). "Some observations on student values and their implications for accounting education: A comment". The Accounting Review: 576–577.
{{cite journal}}: Check date values in:|date=(help) - C. Richard Baker (2006). "Towards a genealogy of wealth through an analysis of biblical discourses". Accounting History. 11 (2): 151–171. doi:10.1177/1032373206063112. S2CID 143857598.
- Allyn, R. G. (October 1951.). "The study of philosophy as part of the accounting students' training". The Accounting Review: 576–579.
{{cite journal}}: Check date values in:|date=(help) - Arnett, H. E. (April, 1967.). "The concept of fairness". The Accounting Review: 291–297.
{{cite journal}}: Check date values in:|date=(help) - Bedingfield, J. P., S. E. Loeb. (July, 1973.). "Attitudes of professors toward accounting ethics". The Accounting Review: 603–605.
{{cite journal}}: Check date values in:|date=(help)CS1 maint: multiple names: authors list (link) - Brenner, V. C. (July, 1973.). "Some observations on student values and their implications for accounting education". The Accounting Review: 605–608.
{{cite journal}}: Check date values in:|date=(help) - Brenner, V. C. (July 1974.). "Additional comments on student values and their implication for accounting education". The Accounting Review: 578.
{{cite journal}}: Check date values in:|date=(help) - Marc Abrahams (2 May 2006). "Foucault, footy and philosophy". The Guardian.