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Unformatted text preview: Ross L. Watts and Jerold L. Zimmerman We expect accounting theorists, who are accustomed to developing rules based on practice, to be perplexed by a demand for accounting principles not based on practice. After the SEC's call (in ASR 4) for accounting principles for which there is substantial authoritative support [1938], the accounting literature begins to discuss the nature of principles [Scott, 1941; Wilcox and Hassler, 1941; and Kester, 1942].63 Further, as theorists come to observe less emphasis being placed on the practicality of their approach, we observe philosophical works becoming far removed from practice such as Chambers [1955a, 1955b, 1966], Mattessich [1957] and Edwards and Bell [1961]. It is instructive to compare the search for accounting principles in the U.S. to that in the U.K. where there has not been a government regulatory body with the statutory power to prescribe accounting procedures [Benston, 1976, pp. 14—30; Zeff, 1972, pp. 1—69]."‘ Until recently there has been considerably less “progress” in the U.K. in the search for accounting principles IZefi’, 1972, p. 310 and Shackleton, 1977, pp. 17—21} and further, "the English began late” [Zefi', 1972, p. 310]. The evidence suggests that the U.K. search for principles is also a response to government pressure which arose out of various financial crises [Zeffi 1972, pp. 39-40; Benston, 1976, pp. 15-17; and Shackleton, 1977, pp. 17-21]. The difference in the timing of the search for principles in the two countries is reminiscent of the 30-year difference in the timing of the general depreciation debates in the UK. and the U.S. That 30-year difference also coincides with a difference in the timing of government regulation (i.e., corporate income tax laws allowing depre- ciation as a deduction). The difference in timing cannot be explained per se by the fact that we are comparing tWO different countries. In the depreciation debates, the UK. led, while the U.S. led in the search for principles. The discussion in this section has suggested that much of accounting theory (e.g., the concepts of depreciation, accrual accounting, the application of the concept of economic income, and the idea that the objective of financial statements is generally to provide information to investors rather than to control agency costs), follows government intervention. Thus, the evidence is consistent with our hypothesis that much of accounting theory is the product of government intervention and that accounting theory satisfies the demand for excuses. The evidence appears to be inconsistent with what we have called the ”public interest” hypothesis. Undoubtedly there are alternative theories which can also explain the timing of the accounting literature. The challenge is to those who would support those alternative theories to specify them and show that they are more consistent with the evidence than ours. V. CONCLUSIONS In our view, accounting theories have had an important role in determining the content of financial statements—although it might not be the role envisioaed by the theorists. Instead of providing “an underlying framework" for the promulgation of “sound" financial reporting practices by standard-setting boards. accounting theory has proven a useful “tactic to buttress one’s preconceived notions" [Zeffi 1974, p. 177]. °3 Storey [1964. p. 3] supports our contention that the Securities Acts were “landmark events" and directly related to the search for accounting principles. °‘ See Sanders [1946] for an overview of the different prevailing attitudes in the U.S. and U.K. in the 19405. 51 52 The Demand for and Supply of Accounting Theories: The Market for Excuses While accounting theories have always served a justification role in addition to information and pedagogic roles, government intervention has expanded the justifi- cation role. The predominant function of accounting theories is now to supply excuses which satisfy the demand created by the political process; consequently accounting theories have become increasingly normative. We are not offering any judgments on the desirability of accounting theories fulfilling an excuse role. What we are arguing, however, is that given the existing economic and political institutions and the incentives of voters, politicians. man- agers, investors, etc. to become involved in the process by which accounting standards are determined, the only accounting theory that will provide a set of predictions that are consistent with observed phenomena is one based on self-interest. No other theory, no normative theory currently in the accounting literature, (e.g., current value theories) can explain or will be used to justify all accounting standards, because: 1. accounting standards are justified using the theory (excuse) of the vested interest group which is benefitted by the standard; 2. vested interest groups use different theories (excuses) for difierent issues; and 3. different vested interest groups prevail on different issues. While a self-interest theory can explain accounting standards, such a theory will not be used to justify accounting standards because self-interest theories are politically unpalatable. As a consequence, not only is there no generally accepted'accounting theory to justify accounting standards. there will never be one. REFERENCES Accounting Principles Board, Opinion 16: Business Combinations, American Institute of Certified Public Accountants, I970). Alchian, Armen and Reuben Kessel, “Competition, Monopoly and the Pursuit of Money," in Aspects of Labor Economics, (Princeton University Press: N .B.E.R., 1962), pp. 157*175. American Accounting Association, “A Tentative Statement of Accounting Principles Affecting Corporate Reports,” THE ACCOUNTING REVIEW, (June 1936), pp. 187 —191. , Committee on Basic Accounting Theory, A Statement of Basic Accounting Theory (American Accounting Association, 1966). . Committee on Concepts and Standards for External Reports, Statement on Accounting Theory and Theory Acceptance (American Accounting Association, 1977). American Institute of Certified Public Accountants. Objectives of Financial State- ments, (Trueblood) Report of the Study Group on the Objectives of Financial Statements (American Institute of Certified Public Accountants, 1973). Beaver, William H., “What Should Be the FASB's Objectives?", Journal of Accoun- tancy, (August, 1973), pp. 49—56. , ”The Implications of Security Price Research for Disclosure Policy and the Analyst Community," in A. R. Abdel-khalik and T. F. Keller (eds), Financial Information Requirements for Security Analysis, Duke Second Accounting Symposium, Duke University (December 1976), pp. 65—81. ...
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