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An Introduction to Accounting Theory An Introduction to Accounting Theory Gabriel Donleavy Download free books at GABRIEL DONLEAVY AN INTRODUCTION TO ACCOUNTING THEORY Download free eBooks at bookboon.com 2 An Introduction to Accounting Theory 1st edition © 2016 Gabriel Donleavy & bookboon.com ISBN 978-87-403-1391-8 Peer review by Dr. Nicole Ibbett, University of Western Sydney, Australia Download free eBooks at bookboon.com 3 AN INTRODUCTION TO ACCOUNTING THEORY CONTENTS CONTENTS Learning Outcomes 7 About the author 8 Preface 10 1 Accounting and Agency Theory 12 1.1 What theory is 13 1.2 Hypotheses 13 1.3 Theories, laws and theorems 14 1.4 Positive facts and normative opinions 15 1.5 Accounting theory, economics and law 18 1.6 Agency theory 20 2 The Conceptual Framework 23 2.1 Introduction 23 2.2 Key elements of the framework 26 2.3 The purpose of accounts 28 www.sylvania.com We do not reinvent the wheel we reinvent light. Fascinating lighting offers an infinite spectrum of possibilities: Innovative technologies and new markets provide both opportunities and challenges. An environment in which your expertise is in high demand. Enjoy the supportive working atmosphere within our global group and benefit from international career paths. Implement sustainable ideas in close cooperation with other specialists and contribute to influencing our future. Come and join us in reinventing light every day. Light is OSRAM Download free eBooks at bookboon.com Click on the ad to read more 4 AN INTRODUCTION TO ACCOUNTING THEORY CONTENTS 2.4 Characteristics of accounting that conform to the framework 31 2.5 Accounting elements 35 2.6 Frameworks and legitimacy 38 3 Accounting Standards 39 3.1 Introduction to regulation 40 3.2 Introduction to constructionism 41 3.3 Standards based on rules or on principles 41 3.4 Intangibles and goodwill 43 3.5 The reporting entity 45 3.6 Liabilities 46 3.7 Whose fair value? 47 3.8 Table of International Accounting Standards current at the start of 2016 49 4 Measurement and Valuation 53 4.1 Introduction 53 4.2 Measurement scales 54 4.3 Valuation 61 4.4 Valuation under inflation 65 4.5 Two approaches and clean surplus theory 68 4.6 Fair value and faithful representation 70 5 Accountng and Capital Markets 72 5.1 Does accounting affect stock market prices? 73 5.2 Earnings management 83 5.3 HEURISTICS 86 6 Accountability 90 6.1 Introduction 90 6.2 Auditing’s market role 92 6.3 Theories of Accountability 92 6.4 Critical Perspectives in Accounting 98 6.5 Ethical Paradigms of Accountability 103 6.6 Ethics, Ethical Development and Professional Accountants 115 7 Accounting Pathologies – Fraud, Failure and Evasion 124 7.1 Audit expectation gap 124 7.2 Fraud 126 7.3 Manipulation and Positive Accounting Theory 129 7.4 Accounting and Business Failure 133 7.5 Theory and Accounting Pathologies 137 Download free eBooks at bookboon.com 5 AN INTRODUCTION TO ACCOUNTING THEORY CONTENTS 8 The New Accounting Reports: Sustainability and Integration 141 8.1 Introduction – CSR 142 8.2 The Global Reporting Initiative (GRI) 145 8.3 The International Integrated Reporting Council (IIRC) 148 8.4 Conclusion 151 9 The Unfinished Work of Accounting Theory 155 9.1 Space Age Accounting 155 9.2 The Next Hundred Years 157 9.3 The Next Hundred Light Years 157 9.4 Public accounting for the actual public 159 9.5 Deep equity accounting 161 9.6 A Critical conclusion 161 References 189 Download free eBooks at bookboon.com 6 AN INTRODUCTION TO ACCOUNTING THEORY LEARNING OUTCOMES LEARNING OUTCOMES After completing this book, the reader will be able • to explain why accounts are the way they are, • to evaluate the competing theories of why accounting is the way it is, • to understand the main alternative accounting treatments of items whose valuation is controversial, • to appreciate the different developments taking place now and formulate a view about them • And to think critically about any claim wherever it may be or wherever it may have come from Download free eBooks at bookboon.com 7 AN INTRODUCTION TO ACCOUNTING THEORY ABOUT THE auTHOR ABOUT THE AUTHOR Gabriel Donleavy is the Professor of Accounting at Australia’s University of New England and the Deputy Head of its Business School. He read Economics at Cambridge, Law at London and obtained his PhD from Glasgow on the uses and abuses of cash flow statements. He has published in the Journal of Business Ethics, the British Accounting Review, the International Journal of Accounting and Economics, Long Range Planning and has addressed three of the quinquennial meetings of the International Association for Accounting Education and Research. He has worked in universities in England, Singapore, Hong Kong, Macau and Australia. He has held the posts of: - Academic Director of the Hong Kong University Business School - Head of the School of Commerce and Law at Central Queensland University - Dean of Quality at Central Queensland University - Dean of the Faculty of Business Administration at the University of Macau - Dean of the Faculty of Business and Law at Victoria University (Melbourne) - Acting Deputy Vice Chancellor at Victoria University (Melbourne) - Principal and CEO of the Anglo European Chiropractic College. He has designed, reviewed, had validated and accredited business and accounting courses with the national accounting bodies in England and Hong Kong, with England’s Quality Assurance Agency, England’s Higher Education Funding Council, with Hong Kong’s Council for Academic and Vocational Quality, national and international chiropractic bodies, and the Association for the Advancement of Collegiate Schools of Business. He is a registered expert with the Hong Kong Council for Academic and Vocational Quality and been a member of several of its program validation panels in recent years. He has published six books, 40 refereed scholastic articles and 90 papers and monographs in the fields of business education, accounting and business ethics. He has been a consultant to Hong Kong’s Independent Commission Against Corruption, to the accounting division of the late Arthur Andersen, and been on the consulting register of the Asian Development Bank. Download free eBooks at bookboon.com 8 AN INTRODUCTION TO ACCOUNTING THEORY ABOUT THE auTHOR He was a co-founder of the UK’s anti-cult Family Advice Information and Rescue group in the late seventies, an organizer of Hong Kong Amnesty International before and after Tian An Men in the late eighties, a National Trustee of England’s Citizens’ Advice Bureaux at the turn of the century and is now a member of the New South Wales advisory board of the National Seniors’ Association. He has dual Anglo Australian citizenship, speaks good French and is a published poet. Gabriel D. Donleavy MA (Cantab), LLB (Lond), PhD (Glasg), CA, FCPA, FIMgt, FRSA, JP(Q) E-mail: [email protected] Nicole Ibbett is a lecturer in accounting at Western Sydney University. She holds a doctorate in business administration from the University of Newcastle and has degrees in both accounting and finance and has been teaching in both areas for over 20 years. Before turning her focus to teaching, Nicole worked in a variety of finance and commercial accounting fields. Nicole is the author of a financial mathematics textbook, Financial Mathematics for Decision Making, which is designed to assist non-specialists with applying interest rates to making financial decisions. Her current interests are in the area of analysis and interpretation of financial reports. Download free eBooks at bookboon.com 9 AN INTRODUCTION TO ACCOUNTING THEORY PREFACE PREFACE This introduction to accounting theory book is different from other accounting theory books. It is only some 150 pages long instead of over 500. It is written by one person, not by a whole committee or consortium. It includes every major development on accounting up to the year of the book’s publication 2016. That means, unlike other texts on accounting theory, it addresses the 2015 revision of the conceptual framework by the International Accounting Standards Board, the 4th version of the Global Reporting Initiative, and the postulates of the new Integrated Reporting with its new definitions of capital. Another way in which this book differs from other accounting theory textbooks is that it meant for an international audience, not one circumscribed by the borders of the US, UK or Australia. It concerns global accounting issues, not national ones, but it is not a book on international accounting. It is an introduction to accounting theory. The book is meant to be easy to read so I apologise for including references and citations. If I left them all out, you would not know whether what I was saying was my personal opinion or had some authoritative evidence to back it up. I have tried to minimize the references though, consistent with the requirements of the need to evidence statements and give credit to theory inventors and innovative thinkers. I hope I have made it very obvious when anything is just my personal opinion. The final way in which this book differs from other accounting theory books is that it is deliberatively aimed at enhancing your critical thinking ability. Provocative statements are made to get you thinking. Some widely held theories are reviewed skeptically to get you in the habit of casting a critical eye on sacred cows like the EMH that are delivering neither milk nor miracles. The social and economic context of accounting is regularly brought into discussion to stop you swallowing whole the idea that any aspect of social studies can be wholly neutral; and accounting, like all of business studies is a social study. It is done by people about people to people.
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