FRAMEWORK PROJECTS
3. It does not address the problem of estimation, on whid1 past efforts to encourage publication of current costs have foundered. 40
We can make similar criticisms of the IASB Framework. In tbis document, assets and liabilities are defined in very similar terms to those in the United States project. Not only is the definition of assets rather vague, but the recognition criteria are co.uched in terms of probability - a subjective concept. In addition, tbe recognition criterion fails to offer any guidance on the measurement problem, which is fundamental to accounting. Again the definition is open-ended and it appears that any measure would be acceptable as long as the cost or value can be 'reliably' measured. Recent work by the IASB/FASB in the conceptual framework project is addressing these criticisms.
Is it important, as it is in science, that prior agreement is reached on the precise definitions of the elements of accounting? Gerboth contends that real knowledge comes from investigation of the subject matter, not from prior agreement on definitions. He
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claims that to base an accounting framework solely on the limited understanding conveyed by such definitions would be irrational.41
In order to reinforce what Gerboth perceives to be the negligible role that definitions play in both human affairs and science, he quotes from Popper:
In science, we should take care that the statements we make should never depend on the meaning of our terms. Even where the terms are defined, we never try to derive any information from the definition, or to base any argument upon it. That is why our terms make so little trouble. We do not overburden them. We try to attach to them as little weight as possible.42
This is not the approach of the conceptual framework projects. When they attempt to define 'assets', 'liabilities' and other elements, accounting regulators intend that the valuation decisions should depend on the definitions. Contrary to Popper, the FASB sought to make the definition bear as much weight as possible.43
Some argue that the attempt to base accounting practice on preconceived definitions risks a kind of mechanical decision making. Although a conceptual framework may provide a consistency in that it is efficient and orderly, it is a consistency of a trivial sort; consistency with an abstraction, not consistency with real ends. This trivial consistency is a direct consequence of dogmatism whereby pronouncements issued by the FASB, or otl1er autl1oritative bodies, are accepted by the profession. This approach carries the danger that the framework may become an end in itself, consuming time and effort which may be better focused on filling the gaps in accountants' substantive knowledge. Definitions and prior agreement on the meaning of terms are important to the development of a consistent, interrelated and meaningful system. However, it is the over-reliance on definitions that Popper criticises. A contrary argument is that the conceptual framework is necessary and a common understanding of definitions is crucial to consistent preparation and interpretation of financial statements.
Ontological and epistemological assumptions
Throughout the conceptual framework projects, the focus has been to provide information to users of financial reports in an unbiased and objective manner. Freedom from bias, or neutrality, has been defined as 'an information quality that avoids leading users to conclusions that secure the particular needs, desires or preconceptions of the preparers'.44 Solomons explains freedom from bias as 'financial mapmaking'.
Accounting is financial mapmaking: the better the map, the more completely it represents the complex phenomena that are being mapped. We do not judge a map by the behavioural effects it produces. The distribution of natural wealth or rainfall shown on a map may lead to population shifts or changes in industrial location which the government may like or dislike. That should be no concern of the cartographer. We judge their map by how well it represents the facts. People can then react to it as they will.45
This philosophy of realism comes about in accounting from the assumption that we can obsetve, measure and communicate an objective economic reality. Some philosophers of science, for example Feyerabend, argue that scientific truth is not absolute - it refers only to a statement about a constructed reality. A given statement or belief warrants acceptance only after the evidence conforms with prescribed and agreed-upon rules about what is scientific methodology. Hines points out that the problem with the economic realism/measurement approach adopted by the conceptual framework project in the United States (and this applies to the IASB framework as well) is that within many scientific communities, reality is now viewed as being constructed
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and sustained by social practices, thereby polluting accountants' perceptions of economic reality.46 In the social sciences, the undermining of the realism philosophy is even more complele. Within the social sciences, actors act in accordance with prevailing definitions and concepts of reality. By doing this, they maintain and perpetuate that reality .
. . . but we have not so much grasped reality, as created it, by thinking of it in a certain way, and treating it that way ... But when people have a preconceived notion of what reality is, well we can't afford to go against it! Why not?
We are supposed to communicate reality in accounting. If people have a certain conception of reality, then naturally, we must reflect that. Otherwise people will lose faith in us.47
This makes it questionable whether theories forming the basis of a framework can ever be neutral, independent and free from bias. The extension of this argument is that a conceptual framework cannot provide a completely objective means of measuring economic reality since such a reality does not exist independent of accounting practices. Hines considers that it is a two-way interactive relationship in which financial accountants, by the process of measuring and communicating a picture of reality, play a critical role in deciding what is reality. Therefore, they create that reality.
Hines further claims that mainstream accounting research is based on 'taken-for- granted' commonsense conceptions and assumptions, which run counter to questions on how social reality arises and is maintained and legitimised. For example, conceptual frameworks avoid relying on deductive and empirical evidence for asserting their correctness. If they did take such an approach, generally accepted accounting principles would be deduced from the higher level beliefs, objectives and assumptions of the framework. Instead, the reverse seems to occur. These elements are held to be truths through an inductive process of deriving accounting principles which have never been formally tested against logic and empirical evidence. The 'authority' equivalent of science for the conceptual framework is traceable to the opinions of authoritative bodies and individuals. This is where science and accounting, as manifested in the conceptual framework, seem to diverge.
Further, the structure of conceptual framework projects bears some resemblance to a hypothetico-deductive approach. The hypothetico-deductive approach to scientific explanation has two main consequences. The first leads to universal laws or principles from which lower level hypotheses may be deduced. Secondly, there is a tight connection between explanation, prediction and the techniques applied. For example, the JASE and PASE conceptual frameworks have generalised assumptions and objectives from which principles (standards) and procedures (methods and rules) should be able to be deduced. The essential purpose of this approach to science is to arrive at an understanding of our environment in order to be able to operate more effectively in that environment. However, some authors disagree with this approach to science:
... accounting researchers believe in a ( confused) notion of empirical testability. Despite this lack of clarity as to whether theories are 'verified' or 'falsified', there is widespread acceptance of J-Jempel's [1965] hypothetico-deductive account of what constitutes a 'scientific explanation'.48
This hypothetico-deductive approach influences the epistemological and methodological assumptions about 'tests of truth' and the manner in which most accounting research is undertaken. For example, emphasis is placed on large-scale sample surveys and empirical analyses using 'statistically sound techniques' and on
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deriving general theories. Assumptions are also made about behavioural characteristics ( e.g. rational wealth maximisation and information needs of users, relating to future cash flows and current values) and about the way people relate to one another and to society. These approaches preclude, to some extent, research techniques which are individualistic and/ or focus on case studies. As Homgren comments:
Each person has characteristics that limit the usefulness of a conceptual framework ...
Almost everyone says he or she wants a conceptual framework, but his or her conceptual framework may not be yours.49
Circularity of reasoning
As we have seen, one of the stated objectives of a conceptual framework is to guide the everyday practice of accountants. A superficial view of the conceptual frameworks indicates that accountants at least follow one scientific path - that of deducing principles and practice from generalised theory. However, various countries' existing conceptual frameworks are typified by an internal circularity. For example, within FASB Statement No. 2, information qualities such as reliability are stated to depend on the achievement of other qualities, such as representational faithfulness, neutrality and verifiability. However, these qualities, in turn, depend on other non-operationalised information qualities. For example, the discussion of neutrality relies on relevance, reliability and representational faithfulness, but the necessary and sufficient conditions for obtaining any of these qualities are not stated. The FASB framework attempts to break out of, or justify, this circularity of reasoning by referring to the notion of an informed accounting person who will have sufficient and appropriate knowledge to determine and interpret financial reports. However, it provides no specific guidance as to how this should be achieved.
An unscientific discipline
Is accounting a science? Conceptual frameworks may have attempted to adopt the deductive (scientific) approach, but this approach is questionable if accounting does not qualify as a science to begin with. Accounting has been variously described as an art or a craft in addition to its scientific description. In 1981, Stamp said:
Until we are sure in our minds about the nature of accounting, it is fruitless for the profession to invest large resources in developing a conceptual framework to support accounting standards. so
Indeed, Stamp considers that accounting is more closely aligned to law than to the physical sciences, since both the accounting and legal professions deal with conflicts between different user groups with varying interests and objectives. I-le describes law as a normative discipline which is prescriptive in nature and full of value-laden concepts.
Accounting faces imperfect markets and involves subjectively based, human decision- making processes. In contrast, the physical sciences are considered to be positive disciplines, descriptive in nature and characterised by value-free concepts.
Theoretical and empirical elements are somewhat loosely defined and applied in accounting, and it lacks a definitive scientific paradigm. Early (normative) accounting theory had many weaknesses. Positive accounting theory is still in its embryonic, possibly pre-scientific, stage. This does not necessarily indicate the lack of a scientific approach, however. Provided the theoretician is rigorous in applying the ontological, epistemological and methodological rules relating to the field of study, the scientific methodology may be said to be applied.
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Positive research
It has been argued that the basic focus of the conceptual framework projects providing financial information to help users make economic decisions - ignores the empirical findings of positive accounting research. Early market research has cast doubt on the ability of published accounting data to influence share prices and on the importance of accounting data for making economic decisions relating to the share market. Some argue that the share market does not appear to be fooled by creative accounting techniques, the valuation of assets and liabilities is not a real issue and that the market is relatively efficient in the semi-strong form. Furthermore, agency theory offers an explanation for the observation of many different accounting techniques. These accounting techniques are demanded by agents who seek to minimise monitoring costs in the most cost-efficient manner. The accounting technique of least cost will naturally vary between firms and industries and variation in accounting practice is therefore desirable. Nonetheless, for decisions with multiple choices, accounting information may be useful. This is an area that behavioural research has not yet fully considered.
Furthermore, those who argue that positive accounting research and a conceptual framework are in conflict sometimes ignore the mounting evidence that capital markets are not completely efficient. Even if they are efficient, the fact that the market responds immediately to information in financial reports does not mean that individuals process the information efficiently or that individuals or groups cannot make incorrect investment, lending, supply, or purdrnse decisions. If a conceptual framework could ensure that these people received useful information, it would serve a useful purpose.
The conceptual framework as a policy document
As a generalised body of knowledge, the conceptual frameworks fail a number of 'scientific' tests. Even if we argue that reality is merely a social construct anyway, there is no deductive process inherent in the frameworks to apply them to empirical phenomena in order to change the reality to a more preferred state in terms of assumed goals. Whether the frameworks can be considered completely normative models for accounting practice is also a problem, because accepted practice has been determined largely by adopting existing procedures which the frameworks attempt to legitimise.
An alternative to viewing the conceptual frameworks as either scientific or deductively derived normative models is to consider them as policy models. Ijiri differentiates between normative and policy models.51 I-le says that a normative model is based on certain assumptions concerning the goals to be served; the researcher does not necessarily subscribe to the assumed goals. Thus, although a normative model has policy implications, it is different from a policy judgement, which involves a commitment to goals. Whether descriptive or normative, a model is a theory which can be scientifically verified. This is different from policy statements based on value judgements and opinions. Ijiri points out that theories and policies are intermingled in accounting, whereas in other empirical sciences the distinction is well established.
For example, economic policies are treated quite differently from economic theories. In contrast, accounting theories always seem to be tied to policies.
Controversies among accounting theorists centre mainly on how accounting practices should be carried out - an issue that dearly belongs to accounting policy according to Ijiri.52 Further, if one accepts Tinker's view, then even the positivist, descriptive approach of researchers is simply an attempt to legitimise an ideological position at the theoretical level.53 Perhaps a more realistic approach is to reject the conceptual frameworks as bodies of 'scientifically' derived theory and accept them as policy statements based on value
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judgements and opinions. This approach also has implications in relation to the qucslion of whether conceptual frameworks are largely a reflection of professional values.
The distinction between theories and policies is important. Policy issues are generally resolved by political means. This can be crucial when looking at conceptual frameworks in terms of their interpretation of reality and political processes. Political power can be defined 'as the ability of an individual or group to impose their definition of reality on another individual or group'.54 Since accounting does not operate in a social, economic or political vacuum, it may be that the resulting conceptual frameworks are to some extent a reflection of either the will of the dominant group or, alternatively, a consensus between competing and conflicting political influences. This view tends to conform with Buckley's 'constitutional' approach to policy models, whereby principles are derived from axioms.55 Such truths as continuity, objectivity, consistency, materiality and conservatism are considered self-evident. The conceptual frameworks appear to reinforce this constitutional approach, largely re-endorsing pre-existing principles. The FASB, in fact, defines a conceptual framework as a 'constitution', as well as a 'coherent system of interrelated objectives and fundamentals'.56
The constitutional approach conforms with Bunge's assertion that people claim they can have instinctive knowledge independent of controlled experience:
They left science the boring task of finding the details of this knowledge but its essence they held, without proof, to be attainable either by special intuition or by reason alone (rationalism), in any case without extrospection and experiment. 57
The constitutional approach also conforms with the assertion that accounting largely relies on self-evident or dogmatic bases for establishing criteria for truth. Extending this to the conceptual framework, truth may simply be the ideas embodied in the conventions and doctrines of accounting. That is, in line with the historical-constitutional approach, the conceptual framework is little more than the perpetuation of unquestioned accounting conventions. This approach is expressed in Chambers' claim:
... all we have as fundamental or basic is a set of propositions that are more or less arbitrarily established, or which are plain dogmas. There is no body of ideas or knowledge by reference to which we can judge whether or not these propositions are preferable to others, we must simply accept them.58
In defending tl1e FASB approach to building a conceptual framework, its chairman at the time, Kirk, claimed that the view that standards can be set by consensus is part of a belief that standards are conventions and conventions are formed by agreement.
He promotes tl1e idea that a conceptual framework best serves the public interest, because it is a conceptual approach. Standard setting by consensus, compromise or consequences does not serve the public interest, because it is a political approach.59 However, this is problematic since the public interest is represented by users who have conflicting needs. Kirk's remarks are compromised by a research survey which he quotes.
The survey showed that a majority of respondents from universities, government, the financial media and the large accounting firms wanted a framework that would result in significant changes in financial reporting. In contrast, a majority of company managers and security industry officials favoured a framework that affirmed the status quo.
The fact that the FASB conceptual framework in many instances describes existing practice tends to indicate that the political process prevailed in the development of the framework. Miller has claimed that the FASB and its conceptual framework will survive only by maintaining a position that reflects the interests of the beneficiaries of the capital market. He rejects Kirk's claim that the FASB managed to avoid having to develop a conceptual framework based on consensus, claiming that standards emerge
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from 'a vested sel of political processes that create inconsistencies as the search for a consensus continues'. 60
The political nature of accounting and its reflection in conceptual framework projects has been stressed in the accounting literature. For example, Burchell and his colleagues state:
... the roles which ( financial accounting] serves are starting to be recognised as being shaped by the pressures which give rise to accounting innovation and change rather than any essence of the accounting mission. 61
If we accept that the conceptual framework will develop to be a description of present accounting practice, then it will also be merely an outgrowth of institutional and social processes. This is the very reason Hines believes that the FASB's conceptual framework and, by implication, the IASB/FASB's current joint project, will fail. Its stated objective embraces truthfulness and realism. The success of the accounting profession is judged against this objective. Solutions to accounting controversies will always be determined by social interaction and will be situation-specific. 62
Professional values and self-preservation
An explanation of conceptual frameworks in terms of self-preservation and professional values may at first appear to be a contradiction in terms. 'Self-preservation' implies the pursuit of self-interest, whereas 'professional values' suggests idealism and altruism.
However, 'professional values' can mean several things. Greenwood points out that professional organisations emerge as an expression of the growing consciousness-of- kind on the part of the profession's numbers. They promote group interests and aims.63 The outcome of this social interaction is a professional culture with social values. The social values of a professional group form the basic fundamentals: the unquestioned premises on which its veiy existence rests. Foremost among these values is the perceived worth of the service which the professional group provides to the community, together with a strong sense of responsibility to the community.
Gerboth considers that this sense of personal responsibility - the essence of professionalism - is what makes accountants' decisions objective. The key to objectivity lies in the values of those who practise accounting. Accounting must take its direction not from its concepts or from its intellectual structure, but from its professional conduct. Gerboth argues:
Of necessity, accountants make many judgements. And when they do, their decisions may differ from those that other accountants would make. But that does not make the decisions arbitrary. Accountants' freedom to decide is not freedom to decide as they please. Their personal responsibility for the decisions forces a diligent search for the best obtainable approximation of accounting truth, and that responsibility leaves no room for arbitrariness. 64
It was stated earlier in this chapter that conceptual frameworks do not operate in a social vacuum. Where complex human affairs are involved, it is probably impossible to develop a comprehensive, prescriptive framework and decision model. For example, Agrawal, in reference to the United States' framework, cites a series of issues ranging from comparability to cost-effectiveness which cannot be resolved by recourse to the framework.65 These can only be decided by judgements which will inevitably be subjective. Judgement is also largely based on professional values. Greenwood refers to this as the value of rationality where there is a commitment to objectivity in the realm of theory and technique. 66 More controversially, he claims that, because of this orientation, nothing of a theoretical or technical nature is regarded as sacred and unchallengeable simply because it has a history of acceptance and use.
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