The possibility and utility of positive accounting theory

Accounting Organizations and SocieCy,Vol. 13, No. 6, pp. 631---645, 1988. Printed in Great Britain

0361-3682/88 $3.00+.00 Pergamon Press plc

THE POSSIBILITY AND UTILITY OF POSITIVE ACCOUNTING

THEORY

R~ D. WHITLEY

Manchester Business School

Abstract

Watts & Zimmerman'sPositiveAccountingTheory(Englewood Cliffs,NJ: Prentice-Hall, 1986) celebrates the growth of "scientific" accounting research in the U.S.A.and the intellectual progress it has made. The extent to which this sort of research does follow the precepts of empiricist philosophies of science, however, is a matter of some debate. Moreover, the coherence and applicability of the methodological rules Watts & Zimmerman claim to follow is questionable. In particular, the Popperian research programme is of doubtful utility for accounting researchers. Particular characteristics of social phenomena also raise doubts about the feasibilityof engineering models for theory-based social technologies. These doubts about the epistemological and practical value of"positive accounting theory" lead to an alternative, sociological, explanation of its growth and institutionalisation in academic accounting research.

T h e p u b l i c a t i o n of Positive A c c o u n t i n g Theory b y Watts & Z i m m e r m a n ( 1 9 8 6 ) p r o v i d e s an opp o r t u n i t y to reflect o n the c o n s i d e r a b l e g r o w t h in a c a d e m i c r e s e a r c h a b o u t a c c o u n t i n g practices, especially in Anglo-Saxon cultures, a n d its d o m i n a n t style. As m a n y a u t h o r s have observed, a c c o u n t i n g r e s e a r c h has b e c o m e a c e n t r a l activity for m a n y b u s i n e s s s c h o o l a c a d e m i c s a n d has substantially c h a n g e d d i r e c t i o n t o w a r d s a m o r e formal a n d d e d u c t i v e c o n c e r n w i t h hypothesis t e s t i n g a n d q u a n t i t a t i v e m e t h o d s ( D y c k m a n & Zeff, 1984; H o p w o o d & Bromwich, 1984; Kaplan, 1986; Mattessich, 1972). It is the n e w style of r e s e a r c h w h i c h is c e l e b r a t e d b y Watts & Z i m m e r m a n as b e i n g "scientific" a n d w h i c h t h e y see as m e e t i n g an i n c r e a s e d d e m a n d for k n o w l e d g e . In m a n y ways, this b o o k c a n b e s e e n as a manifesto for s u c h "scientific" a c c o u n t ing r e s e a r c h a n d for their leadership p o s i t i o n in its t a k e o v e r of a c a d e m i c a c c o u n t i n g in the U.S.A. Despite C h r i s t e n s o n ' s ( 1 9 8 3 ) d e m o l i t i o n of the scientific p r e t e n s i o n s of the "Rochester" school o f a c c o u n t i n g research, a n d o t h e r s ' attacks o n their a c c o u n t of the g r o w t h of a c a d e m i c research ( L o w e et al., 1983; cf. Peasnell & Williams, 1986), Watts & Z i m m e r m a n c o n t i n u e to

p r e s u m e the scientific status of the n e w style of a c c o u n t i n g r e s e a r c h a n d its practical utility w i t h o u t systematic justification. In c o n s i d e r i n g this e x p a n s i o n of a c a d e m i c research a n d its d o m i n a t i o n b y a p a r t i c u l a r style a n d belief system in this essay, I shall c o n c e n trate o n the a d e q u a c y of the d o m i n a n t m o d e l of "science" a s s u m e d b y m a n y a c c o u n t i n g researchers as a t h e o r y of scientific m e t h o d a n d its a p p r o p r i a t e n e s s for a c c o u n t i n g research. After briefly discussing Watts & Z i m m e r m a n ' s v i e w of positive a c c o u n t i n g t h e o r y a n d the e x t e n t to w h i c h it follows the m e t h o d o l o g i c a l rules w h i c h they claim are c o n s t i t u t i v e of scientific knowledge, I c o n s i d e r s o m e of the difficulties associated w i t h the P o p p e r i a n r e s e a r c h p r o g r a m m e in the p h i l o s o p h y of science. I focus o n P o p p e r ' s t h e o r y of scientific m e t h o d b e c a u s e b o t h Watts & Z i m m e r m a n a n d s o m e of their critics, such as Christenson, claim to follow it. Next I c o n s i d e r w h e t h e r m e t h o d o l o g i c a l rules for evaluating k n o w l e d g e claims in the n a t u r a l s c i e n c e s can b e g e n e r a l i s e d to the social sciences, as Watts & Z i m m e r m a n a n d m a n y o t h e r s assume, a n d the c o n s e q u e n c e s o f c e r t a i n features of social processes and p h e n o m e n a for the p r o d u c t i o n a n d 631

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evaluation of knowledge in the sciences. These features also affect the use of accounting theories for improving accounting practices and conventions. Finally, I shall briefly suggest some of the sociological reasons w h y accounting research has grown so much and b e c o m e dominated by formal quantitative methods and approaches.

THE NATURE AND STATUS OF POSITIVE ACCOUNTING THEORY According to Watts & Zimmerman (1986, p.2), positive accounting theory is concerned with the explanation and prediction of accounting practices. It provides reasons for observed practices and predicts the occurrence of unobserved accounting phenomena. It is "positive" because it deals with "facts" about h o w the world works as opposed to normative statements and theories which are concerned with prescriptions about h o w the world should work. Claiming the authority of Milton Friedman and other economists for this distinction, the authors appear oblivious to the considerable critical literature about "positive" economics (see, for example, Caldwell, 1982, Chapters 8,9; Coddington, 1972; Eichner, 1983; Musgrave, 1981 ) and the limitations of empiricist philosophies of science. They also appear ignorant of recent discussions about the appropriateness of natural scientific methodologies for the human sciences and of engineering models for social intervention technologies (Bhaskar,1979, Chapters 2,3; Fay, 1975, Chapters 2,3; Stockman, 1983, Chapters 6,7; Thomas, 1979, Chapters 3,4; Turner, 1980). The idea that accounting researchers can simply construct general theories of accounting practices which will enable practitioners to predict the outcomes of their decisions in an uncertain world by following methodological rules based on neo-classical equilibrium economics is, to say the least, tendentious and open to considerable scepticism. The ability of Watts & Zimmerman to ignore much of the literature in the philosophy of the natural and social sciences while making

methodological assertions exemplifies the fragmented nature of accounting research as an intellectual field and the lack of strong theoretical norms integrating research results (Whitley, 1984). Watts & Zimmerman consider recent accounting research to be largely constituted by empirical "tests" of economics-based theories about the role of accounting information in market changes. Although they do refer to some other work, the bulk of their discussion of positive accounting theory focuses on the extension of equilibrium theories to capital markets and the disequilibriating effects of new accounting information. Thus there are chapters summarising research on the Efficient Markets Hypothesis and the Capital Asset Pricing Model, the effects of earnings announcements, disclosure regulations and changes in accounting conventions on share price movements, on agency contracting and on the managerial selection of conventions. Practically all this research presumes the adequacy of neo-classical economics models of markets and "tests" hypotheses by statistical analyses of standard data bases derived from annual reports and similar public information. It thus purports to follow the model of scientific work popularised by logical positivist and logical empiricist philosophers of science in which scientists develop theories and general laws which are then tested against observation statements based on experience. According to Watts & Zimmerman, this sort of research has demonstrated progress because theories have been replaced by more refined ones and technical errors have been corrected. Thus they summarise the development of empirical accounting research as a series of theoretical improvements and technical refinements. Leaving aside the question as to whether this selection of research is fully representative of recent accounting research, and whether "positive" research is the only type worth summarising, it seems doubtful whether these studies do indeed follow the methodological rules promulgated by philosophers such as Hempel and Popper. Christenson ( 1 9 8 3 ) has already pointed to the failure of the "Rochester School" to test their

POSITIVEACCOUNTINGTHEORY theories systematicaUy and the a d h o c adjustments made by Watts & Zimmerman w h e n faced with apparent falsifications of their hypotheses. Similarly Lowe et al. ( 1 9 8 3 ) p r o d u c e d empirical evidence which appeared to contradict their account of the development of accounting theories in their 1979 paper, yet the bulk of that paper is reproduced as an explanation of the growth of accounting research in this book. This cavalier approach to empirical tests is echoed by their rather simple account of intellectual change and development which assumes that scientific progress consists of methodological improvements to account for "anomalies". Whereas Popper ( 1968, pp. 8 1 - 1 1 1 ) suggested that scientists should reject theories which were found to be inconsistent with observation statements, and progress consisted of replacing falsifted theories by those with greater empirical content and verisimilitude, Watts & Zimmerman seem to applaud the continued acceptance of the EMH and the CAPM despite their immunity to empirical tests (Findlay & Williams, 1980) and are also unable to demonstrate that the empirical content of accounting theories has increased. Indeed it is not clear h o w any theory which claims to describe equilibrium states of "perfect" markets in which information is costless and true could be considered to have empirical content (cf. Whitley, 1986). Since, however, similar points have been made about economics, this sort of accounting research may be no worse than other pseudo sciences (Blaug, 1980, pp. 253--264; Caldwell, 1982; Deane, 1983; Hutchison, 1976, 1984). If the research summarised by Watts & Zimmerman does not follow the methodological precepts which they claim characterise "science", then the epistemological status of its knowledge claims is clearly in doubt. A further possibility, of course, is that Popper's methodological rules are incoherent and/or inappropriate to knowledge about these sorts of phenomena. In particular, they may not be applicable to research in the human sciences (Findlay & Williams, 1985). This latter possibility is not mentioned by Watts & Zimmerman because they consider the scientific method of

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hypothetico-deductivism to be applicable to all phenomena and to be the only valid way of generating and assessing truth claims in all the sciences. The overall adequacy of Popper's account of scientific progress is likewise not considered by them, they offer no reasons for preferring it to, say, realist accounts (Bhaskar, 1975; Harr6, 1970) or show any indication that they are aware of alternatives. In fact, the only justification for claiming the authority of Popperian epistemology seems to be its use by Blaug ( 1 9 8 0 ) in his analysis of economics. Generally, Watts & Zimmerman appear to rely a great deal on the dominant o r t h o d o x y of neoclassical economics in justifying positive accounting theory and their book could be seen as presenting a methodological case for reducing accounting research to a branch of economics. Depending on one's view about the epistemological status of o r t h o d o x economics and its validity as an intellectual enterprise, this foundation for accounting research may seem less than secure, especially if researchers are concerned to explain w h y social events and phenomena o c c u r and change and help to resolve practical problems. As Findlay & Williams ( 1980, 1985) point out, drawing policy recommendations for financial analysts and managers in an uncertain and internally related world from theories that reduce uncertainty to risk is unlikely to be very effective. Similarly, presumptions of "perfect" competition, h o m o g e n o u s expectations, costless information and negligible transaction costs render much financial economics and positive accounting theory remote from the world of practitioners and incommensurate with their concerns (Whitley, 1986). The dominance of such presumptions in economics does not, p a c e Jensen ( 1 9 7 2 ) and Ross ( 1 9 7 8 ) automatically justify their correctness or demonstrate their relevance for everyday problems in uncertain and interdependent social worlds. The epistemological status of recent accounting research has been discussed by a number of writers in the past 5 or so years, (e.g. Ryan, 1982; Thomas, 1981; Tomkins & Groves, 1983). In many cases, a particular philosophical position

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has been assumed and then used to evaluate a body of research without a great deal of attention being paid to the purpose and adequacy of that position. As we have seen, Watts & Zimmerman claim the authority of Popper for their view of science and its generalisability to accounting research, a commitment that is shared by some of their critics, such as Christenson (1983). In considering h o w appropriate such a commitment is for accounting researchers and those urging particular sets of methodological rules for them, it is clearly important to understand the purpose of such rules and the extent to which they fulfil it as well as its appropriateness for analysing the epistemological status of accounting research. Before, then, discussing the issue of whether theories of natural scientific knowledge are necessarily applicable to the human sciences, I shall briefly raise a number of issues about the nature of the Popperian research programme in the philosophy of science and its success in providing a theory of progress of scientific knowledge. Although I focus on Popper's work, many of the points raised are applicable to other forms of logical empiricism.

THE PURPOSE AND ADEQUACY OF THE POPPERIAN RESEARCH PROGRAMME One of the most important characteristics of Popper's theory of scientific method is its attempt to formulate a set of methodological rules by which scientific knowledge could be said to progress. Essentially, Popper is concerned to develop a "rational" theory of scientific change which provides the rules of the game of science as a progressive intellectual enterprise (Popper, 1968, pp. 53, 119-126, 276-281; 1963, Chapter 10). This goal is different from the logical positivist attempt to formalise existing scientific knowledge as a true coherent system and thus establish the epistemological criteria for assessing knowledge claims on the basis of currently accepted physics. Popper dismissed such "scientific naturalism" because of the fallibility of scientific knowledge and especially of empirical observations (Popper, 1968, pp. 50-53). By

grounding the validity of empirical knowledge in irrefutable experience of the natural world, the positivists presumed that the current scientific elite had produced true knowledge which could not be revised or radically improved upon. Since Popper thought that the basic task of a theory of science was to account for progress through intellectual change, he rejected this static notion of knowledge based on the fallacious doctrine of induction. In his view, experience is always revisable and contestable and so cannot provide a firm and irrefutable epistemological basis for assessing knowledge claims, rather it is h o w experience is used that separates scientific knowledge from other forms of understanding. As he suggests (1968, p. 108): "the testing of a theory depends upon basic statements whose acceptance or rejection, in its turn, depends on our d e c i s i o n g Thus it is d e c i s i o n s which settle the fate of theories". This methodological conventionalism claims that it is the conventions governing h o w scientific judgments and choices are made that determines their validity and whether they will lead to progress. As a theory of scientific method, then, Popper's approach has to be judged in terms of its coherence in establishing decision rules that account for scientific advance and the likelihood that these rules will be institutionalised in research systems. Because this approach focuses on h o w decisions are made, or should be made if science is to progress, it has to demonstrate that its methodological rules could form the basis of the collective decision-making system we call science. Although, then, the Popperian programme is not invalidated by observations that scientific elites do not follow its rules (see, for example, Collins, 1975, 1981; Farley & Geison, 1980; Knorr et al., 1981; Pinch, 1986; Wynne, 1976) because it does not attempt to describe h o w presently constituted science functions, it has to show that a scientific community could function in the prescribed manner flit is not to be dismissed as vacuous. By locating the source of epistemological validity in the collective conventions of scientific communities, Popper has to develop a sociology of possible scientific communities as a major part of an epis-

POSITIVEACCOUNTINGTHEORY temologically adequate theory of scientific progress. There are at least four major reasons for doubting the success of the Popperian programme in formulating rules which would lead to progress in the sense of improving the truth content of scientific theories. First, it fails to specify in detail h o w scientists are supposed to decide w h e n to accept or reject basic observation statements w h e r e there is some doubt about experimental details, and/or the acceptability of particular observation theories. In such situations scientists could quite "rationally" disagree about the possible falsification of theories. To suggest that a d h o c adjustments be rejected is little assistance here since it is simply unclear which possible modifications increase or decrease empirical content. Thus adherence to falsificationist norms may be indistinguishable from conventionalist stratagems. Similarly, Popper assumes that the empirical content of a theory is, in principle, measurable and comparable across theories yet offers no suggestions as to h o w this is to be achieved and so no guidelines for demonstrating that intellectual progress has, in fact, occurred. Thus, as a theory of h o w science progresses it is incomplete. Secondly, comparing and deciding between two competing theories involves the comparison of their associated observation theories, conditions of application, descriptive vocabulary, etc. (Feyerabend, 1968). There seems little reason to expect all of these to overlap to the extent required for a single crucial experiment to decide unambiguously between them. The more divergent are the terms through which theories are expressed and the domains over which they purport to be true, the less likely is it that they could be directly compared and assessed. Given the necessary connections between observation theories and general theories - - i.e. they must share basic descriptive terms and be mutually consistent - - it could be quite "rational" for the adherents of one theory to reject the evidence p r o d u c e d by those following a competing one. Clearly, theories which conceive phenomena in radically different ways cannot be evaluated in terms of a single set of basic statements (Lakatos,

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1970). Thirdly, it is not at all obvious w h y evolutionary competition should necessarily lead to cognitive progress, except in the trivial sense that survival defines superiority. For trial and error testing to be progressive in a Popperian sense the domains of competing theories would have to be directly comparable and stable over a sequence of tests. Equally, the meaning of each test and its conditions of validity would have to be clear and generally acceptable so that "progressive" conclusions would be drawn. Competition between theories, then, implies a c o m m o n and stable domain of application flit is to be progressive. Otherwise, there is no reason to expect surviving theories to be "better" than other ones. Popper offers no grounds for presuming such commonality between rival theories, other than the view that if science is to progress then it must exist. As Feyerabend points out in a series of papers (1965, 1975, 1981 ), there is considerable historical evidence to suggest that other forms of intellectual progress have occurred when it did not exist. These, and other, difficulties in the Popperian programme led Lakatos to develop his well known methodology of scientific research programmes ( 1 9 7 0 ) which attempted to formulate a "rational" theory of scientific change while allowing for untestable assumptions and the rejection of conflicting evidence. Later ( 1971 ) he extended this approach to incorporate the history of science in an attempt to integrate epistemological theories with historical reconstructions. However, as Feyerabend ( 1 9 7 0 ) pointed out, Lakatos is only able to claim the rationality of scientific progress through competition between research programmes in retrospect, and even then the verdicts of history may be revised through the revitalisation of rejected programmes. Thus rationality becomes contingent and contextual. In addition to these internal problems there is the more sociological issue of whether it is likely, or even conceivable, that scientific communities could be organised around the common goal of the pursuit of corrigible truth through the systematic falsification of members'

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i n t e l l e c t u a l c r e a t i o n s b y c o m m o n l y a g r e e d testing p r o c e d u r e s a n d c r i t e r i a for assessing t h e validity o f basic s t a t e m e n t s . N o t o n l y d o s u c h social o r g a n i s a t i o n s s e e m e x t r e m e l y r a r e in t h e h i s t o r y o f t h e m o d e r n w e s t e r n s c i e n c e s b u t it is difficult to s e e h o w t h e y c o u l d b e e s t a b l i s h e d a n d r e p r o duced. A social i n s t i t u t i o n w h i c h r e w a r d s t h e p r o d u c tion o f b o l d c o n j e c t u r e s a n d radical theories, a n d t h e i r e l a b o r a t i o n into d e t a i l e d a c c o u n t s o f p h e n o m e n a a n d events, e n c o u r a g e s c o m m i t m e n t to t h o s e t h e o r i e s r a t h e r t h a n to t h e i r falsific a t i o n and r e j e c t i o n . Such c o m m i t m e n t is likely to l e a d to r e j e c t i o n o f c o n t r a d i c t o r y e v i d e n c e a n d t h e s y s t e m o f beliefs that p r o d u c e d it. If, o n t h e o t h e r hand, t h e social i n s t i t u t i o n r e w a r d s c r i t i c i s m and d e m o l i t i o n o f theories, it is difficult to see w h y scientists s h o u l d b o t h e r to d e v e l o p t h e m , let a l o n e m a k e t h e m easy to falsify. R e s e a r c h takes t i m e a n d r e s o u r c e s , so that if it is n o t s u p p o r t e d b y t h e i n s t i t u t i o n s g o v e r n i n g rew a r d a l l o c a t i o n t h e n it is u n l i k e l y to b e e x t e n sively u n d e r t a k e n . Thus, a w h o l l y critical intell e c t u a l s y s t e m is likely to r u n o u t o f c o n j e c t u r e s to c r i t i c i s e and so p r o g r e s s is i m p r o b a b l e . A social i n s t i t u t i o n w h i c h tries to r e w a r d b o t h sets o f activities is likely to b i f u r c a t e into t h e o r y p r o d u c e r s and t h e o r y d e s t r o y e r s w h o share f e w c o m m o n a s s u m p t i o n s a n d interests. Exactly h o w P o p p e r ' s ideal c o m b i n a t i o n o f c o n j e c t u r e s and refutations is to b e a c h i e v e d in a f u n c t i o n i n g social i n s t i t u t i o n remains, then, o b s c u r e . This o b s c u r i t y is n o t greatly r e d u c e d in his p o l i t i c a l a r g u m e n t s in favour o f " o p e n " societies. Since it is t h e c o l l e c t i v e institutionalisation o f his m e t h o d o l o g i c a l rules w h i c h g e n e r a t e p r o g r e s s , this o b s c u r i t y m e a n s that his t h e o r y o f scientific p r o g r e s s is i n c o m p l e t e .

METHODOLOGICAL RULES IN THE HUMAN SCIENCES AND THE ROLE OF A C C O U N T I N G RESEARCH IN C H A N G I N G PRACTICES T h e s e p r o b l e m s and difficulties o f t h e P o p p e rian p r o g r a m m e in t h e p h i l o s o p h y o f s c i e n c e r e n d e r its d i r e c t a p p l i c a t i o n to t h e h u m a n s c i e n c e s in t h e m a n n e r o f W a t t s & Z i m m e r m a n

o f d o u b t f u l value. Even if it w a s m o r e successful in a c c o u n t i n g for p r o g r e s s in t h e n a t u r a l sciences, though, it is n o t o b v i o u s that s u c h m e t h o d o l o g i c a l rules n e c e s s a r i l y a p p l y to t h e h u m a n sciences. T h e r e are t h r e e m a j o r sets o f reasons why the simple extension of m e t h o d o l o g i c a l rules for t h e s t u d y o f natural p h e n o m e n a to t h e h u m a n s c i e n c e s is questionable. First, t h e goals o f t h e h u m a n s c i e n c e s are n o t n e c e s s a r i l y i d e n t i c a l to t h e d o m i n a n t p u r p o s e s o f t h e m o d e r n n a t u r a l sciences, i.e. c o n t r o l o v e r t h e n a t u r a l w o r l d , a n d so m e t h o d o l o g i c a l rules justified in t e r m s o f t h e l a t t e r m a y n o t b e a p p r o p riate. Second, social r e s e a r c h is a v a l u e - l a d e n a n d i n t e r a c t i v e activity in w a y s w h i c h d o n o t a p p l y to t h e natural sciences. Third, social p h e n o m e n a a n d e v e n t s are c o n s t i t u t e d b y m e a n i n g s a n d cultural c o n v e n t i o n s a n d vary a c c o r d i n g l y . In r e s p e c t o f t h e first point, m o s t p h i l o s o p i e s o f t h e natural s c i e n c e s have a s s u m e d that t h e i r u n d e r l y i n g p u r p o s e w a s to i m p r o v e o u r ability to m a n i p u l a t e a n d c o n t r o l t h e n a t u r a l w o r l d , r a t h e r than, for instance, to a d m i r e , a n d b e c o m e i n t e g r a t e d with, c o h e r e n t l y o r d e r e d natural p r o cesses. In this r e s p e c t t h e y f o l l o w t h e d o m i n a n t ideology of modern western science since the l a t t e r p a r t o f t h e 17th c e n t u r y a n d t h e t r i u m p h o f t h e Baconian p r o g r a m m e for t h e d o m i n a t i o n o f n a t u r e (e.g. Daele, 1977; M e r c h a n t , 1980, pp. 1 7 2 - 1 9 0 ) . As a result, m o s t n o r m a t i v e m e t h o d o l o g i e s c o n c e i v e o f e p i s t e m o l o g i c a l validity and p r o g r e s s in t e r m s o f p r e d i c t i o n a n d control. W h i l e s u c h m o t i v a t i o n s are u n d o u b t e d l y pres e n t in t h e h u m a n sciences, i n d e e d t h e y p r o b ably a c c o u n t for t h e b u l k o f t h e f u n d i n g o f social r e s e a r c h , t h e y are n o t t h e o n l y o n e s a n d d o n o t m o n o p o l i s e all r e s e a r c h t r a d i t i o n s a n d assessm e n t standards. In particular, t h e r e are w e l l est a b l i s h e d c o n v e n t i o n s a n d n o r m s g o v e r n i n g hist o r i c a l r e s e a r c h and l i t e r a r y studies w h i c h are n o t justified in t e r m s o f c o n t r o l goals a n d w h i c h have so far successfully r e s i s t e d s u b s e r v i e n c e to logical e m p i r i c i s t d o c t r i n e s ( S t o c k m a n , 1983, pp. 1 2 8 - 1 3 0 ) . Even if t h e d o m i n a n t i n t e r e s t in u n d e r t a k i n g a c c o u n t i n g r e s e a r c h - - a n d mana g e m e n t r e s e a r c h in g e n e r a l - - is to g e n e r a t e k n o w l e d g e w h i c h will h e l p to solve p r a c t i t i o n ers' p r o b l e m s b y e n a b l i n g t h e m to c o n t r o l social

POSITIVEACCOUNTINGTHEORY processes better, the existence of alternative goals and methodological norms means that the presumption of the unity of methodological rules across all Sciences is not warranted. In any case, the idea that social scientific knowledge can improve managers' ability to control the social world as if it were a closed social system, whose outputs can be systematically varied by altering inputs, is dubious as we shall see. The issue of the value laden nature of social research has been the subject of extensive discussions, at least since Weber's essays about sociology (1949), and Schreuder has recently provided a useful summary of some of the main points involved with particular reference to theories of accounting (1984). As he suggests, both the natural and the social sciences, and methodological schools c o n c e r n e d with them, involve value judgements in the design of research projects, in the practical application of results and in the general c o m m i t m e n t to research as an activity leading to knowledge. They differ, however, in the degree to which: (a) evaluative judgements are part of adequate descriptions of phenomena, and ( b ) scientific accounts necessarily involve critical assessments of the p h e n o m e n a being studied. Descriptions of social events and phenomena often require the use of terms which have positive or negative connotations, both in the scientists' o w n culture and in the one being analysed. Democracy, extermination camps and efficiency are all terms which may be used to provide accurate descriptions of states of affairs and which have evaluative meanings. Their correct use thus necessarily implies value judgments about the state of affairs being described in a way that does not o c c u r in many natural sciences - - although it may in the biological sciences. In and of itself, this need not imply that the social sciences are fundamentally different from physics and chemistry since rules for evaluating descriptive terms and sentences can be developed in a similar manner to those in the latter fields without necessarily adhering to the value judgments implicit in them. Thus, there are conventions governing the correct description of a political system as a democracy and of a prison camp as an

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extermination camp (Bhaskar, 1979, pp. 7 4 77), which are distinguishable from the value commitments implied by those terms. However, this evaluative c o m p o n e n t of descriptive terms does restrict their domain of appropriate application and thus the generality of law-like statements including them. To apply terms such as democracy, justice and freedom to the analysis of societies which have no conception of what they mean or h o w they could be valued, is clearly to p r o d u c e inadequate descriptions. Methodological rules which insist on the formulation of universal statements, then, are inapplicable to the human sciences. The construction of social scientific explanations of events and phenomena implies that everyday explanations and descriptions are, in some way, flawed and inadequate. Thus, to seek to explain w h y certain firms use particular accounting conventions in presenting their financial results by the self-interest of their top managers, as do many researchers discussed by Watts & Zimmerman, is to criticise those managers' own accounts of their choices, i.e. as being in need of further explanation. Such explanations, which necessarily involve redescriptions of participants' accounts, also suggest w h y managers held the incorrect beliefs they claim to have. Since these beliefs and accounts constitute the social reality being explained then social scientists are inevitably criticising what exists, simply by taking them as problematic. Thus, the assertion of epistemological superiority by researchers implies a negative evaluation of everyday meanings. Except perhaps in the use of certain metaphors, this sort of evaluation of the phenomena being studied does not o c c u r in the natural sciences, at least not to the same extent (Merchant, 1980, pp. 192-252), and so theories of scientific method which prohibit it are not applicable to the human sciences. These differences between the human and the natural sciences are connected to the third set of reasons for questioning the direct applicability of methodological rules for the study of the natural world to the social world: the meaningful nature of social phenomena. The objects being explained in the social sciences are partly consti-

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tuted by the meanings used to characterise them by people, and by the norms governing correct usages in particular cultures. Thus the same physiological movement, e.g. shaking hands, can have quite different meanings in different cultures and so constitute different social phenomena. Financial accounts may consist of black marks upon paper but their meanings vary according to the conventions governing their use and so the nature of a financial statement depends on the system of meanings of which it is a part. Thus, any description of a social "fact" involves an interpretation of cultural symbols and the meanings used in everyday life. This interpretation of others' descriptions involves an interaction between the social scientists and the phenomena being studied in a way that does not o c c u r in the natural sciences. In the latter case, scientists can create their o w n observation language for theoretical purposes without having to consider whether their descriptions are connected to those of participants'. Social scientists, on the other hand, have to understand the everyday meanings of symbols and actions in particular cultural contexts if they are to use them to constitute the objects of investigation. Adequate descriptions of social phenomena thus require some understanding of participants' conceptions since these form the "empirical base". For example, any comparative study of the accounting profession in Europe would have to appreciate that the English idea of "profession" is different from that held by many continental cultures and so the meaning of the term "professional accountant" varies between national cultures (Friedson, 1986, pp. 30-37; Macdonald, 1985). Methodological norms for the human sciences, then, have to include criteria for evaluating the adequacy of descriptions which incorporate the "correct" interpretation of events in terms of dominant cultural conventions. The meaningful nature of social phenomena has a further three major consequences for methodological theories, and also implications for the possibility of developing theories of social processes which would enable accountants and managers to control outcomes more effec-

tively in the way advocated by Watts & Zimmerman. First, universal laws are improbable, if not impossible, since languages, meanings and hence phenomena vary greatly and are subject to change. Thus comparing theories in terms of their generality may not be a useful way of assessing their merits. Highly general theories such as neo-classical economics may be inferior to more specific ones simply because there are few, if any, phenomena to which they refer. Second, basic statements are not simply constructed by researchers but, as we have just seen, involve everyday descriptions and theories. If these latter change then so too do the criteria for assessing the adequacy of scientific descriptions and so the generality of these. What might, then, have been an acceptable description for "testing" a theory in certain conditions becomes unacceptable w h e n those conditions alter. Furthermore, everyday descriptions may be contested by conflicting groups within cultures and language communities so that standards for evaluating evidence which presume a consensus of social actors may be inapplicable. Theories of scientific method which require scientific agreement on what counts as a basic statement, such as Popper's, either have to extend that requirement to participants' accounts - - in which case they may not be relevant to m u c h social research - - or to develop rules for dealing with conflicting descriptions about what happened. Such rules have, of course, been developed by historians and other "interpretative" human scientists but these typically do not fit into the sort of methodological norms preferred by adherents to the doctrine of the unity of the sciences and a single "scientific method". Again, this double contestability and revisability of empirical evidence implies the limited nature of general statements in the human sciences and the limited domain over which theories can be valid. Third, the meaningful nature of social phenomena implies that they are conceptually interrelated and so alter when their relations to other phenomena change. This implies that relations between social entities are internal. Two Or more objects are internally related w h e n their being a particular type of social object depends

POSITIVEACCOUNTINGTHEORY on their connections to each other (HarrY, 1979, pp. 88-89). To be a husband, parent or employee, for instance, a person has to be married, have children or be paid for w o r k by an e m p l o y e r w h o has certain p r o p e r t y rights over the use of one's capacities. If these latter relations do not hold then the previous descriptions of social roles are false. Thus the nature of particular social p h e n o m e n a depends on h o w they are related to other phenomena. This means that causal explanations which require the cause and the effect to be ontologically separate are not applicable to social processes. Thus theories which are modelled on Newtonian mechanics and p r e s u m e that changing relationships between p h e n o m e n a do not change their nature are inappropriate for the explanation of social processes, nor of course are they appropriate for significant areas of the natural sciences (Prigogine & Stengers, 1984). For example, the growth of large managerial hierarchies in the U.S.A. has b e e n explained in terms of their relative efficiency in integrating mass production with mass marketing practices in particularly favourable circumstances (Chandler, 1977, 1981) and/or in reducing transaction costs in situations of high uncertainty (Williamson, 1975; Kay, 1984, pp. 7 9 100; Daems, 1983). The underlying productive mechanism in these accounts is imperfect competition realised and mediated by particular institutional arrangements. By generating such hierarchies, though, these arrangements and the operation of competitive markets themselves change, as is evidenced by the ability of large firms to diversify and change market boundaries (Karpik, 1978). Thus causal mechanisms may p r o d u c e particular p h e n o m e n a in particular situations but in doing so they are themselves altered because of the internal relations b e t w e e n social entities. Methodologies requiring universal causal laws expressing strictly deterministic, external relations b e t w e e n invariant structures and effects are, then, not appropriate to the social sciences. These differences b e t w e e n the natural and the social sciences m e a n that methodological norms for evaluating knowledge claims in the former

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are by no means appropriate for the latter. They are also c o n n e c t e d to a further differentiating characteristic: social p h e n o m e n a only o c c u r in "open" systems whereas natural p h e n o m e n a can be generated in closed systems by laboratory experiments (Bhaskar, 1979, pp. 57-62). O p e n systems are those in which invariant empirical regularities do not obtain and so cannot provide tests of theories in the way advocated by m a n y methodologies of the natural sciences. Since it is only in closed systems that constant conjunctions b e t w e e n events can be p r o d u c e d predictions of social events are always tendential and not deterministic. Together with the internal relatedness of social phenomena, this point implies severe restrictions on the d e v e l o p m e n t of formal theories of social processes which could enable managers, investors or anyone else to achieve specific o u t c o m e s by systematically varying particular inputs. The idea that scientific research will lead to the construction of precise and complete quantitative theories of social p h e n o m e n a which could be incorporated into managerial and accounting techniques, in a similar way to theories of ideal machines and electron discharges in light bulbs being incorporated into engineering design methods (Channell, 1982; Reich, 1985, pp. 1 2 1 - 1 2 6 ) seems unrealisable. Watts & Z i m m e r m a n ' s claim (1986, p.14) that accounting research will enable practitioners to make better decisions, because it will tell them what the consequences of different choices will be, implies that the system being manipulated is closed, well understood and independent of practitioners' beliefs and actions. Once it is agreed that these conditions do not hold then accounting research has to be justified in terms of other goals and criteria. Instead of searching for some idealised theory of closed social systems in the style of neo-classical economics, as Watts & Z i m m e r m a n and other disciples of Chicago s e e m to wish, these points suggest that accounting researchers concerned to understand accounting practices with a view to "improving" t h e m in some way should b e c o m e m o r e modest in their aims and focus on h o w particular social processes helped to pro-

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duce particular sets of practices in certain circumstances. The constitution and change of accounting practices as ways of generating various sorts of information for different groups then b e c o m e objects requiring explanation rather than taken-for-granted "realities". Such explanations necessarily involve epistemological issues since accounting information purports to describe particular social realities for recipients w h o may act on it (Mattessich, 1972). Any theory of accounting practices which takes them to be problematic questions their adequacy as knowledge producing conventions and claims superior epistemological status. In so doing it implies alternative accounting practices which would be better because they are based upon methodological rules which claim to generate superior knowledge to everyday accounts. Since accounting practices generate information and knowledge, then a social theory of h o w and w h y those practices developed and operate as they do presupposes the superiority of its framework for producing knowledge in explaining them, and presumably this framework can be extended to improve their validity. For example, if it is claimed that a particular change in accounting conventions was "really" due to powerful business elites bringing pressure to bear upon accountants rather than because of technical improvements based on normative accounting theory, this implies that the social scientist or accounting researcher has a set of methodological rules which enable her or him to produce more valid knowledge than that relied upon by the FASB or similar bodies. This "better" knowledge reconstructs the change and the rationalisations adduced in its favour as phenomena to be explained by a broader and more complete social theory of accounting practices. As such, this theory could, in principle, be used by accounting standards bodies to formulate better conventions, relative to particular purposes, than before because it increases their knowledge about their own practises and the validity of their justifications, as well as providing some guidelines about the generation of more valid information about social practices.

In this view then, accounting research should provide not only explanations of w h y particular practices o c c u r and change, but also why practitioners c o m e to have incomplete or false beliefs about them. Social scientific explanations, that is, are superior to everyday accounts of events insofar as they provide reasons for mistaken beliefs about events and phenomena as well as better accounts of them. Such explanations could improve accounting practices if practitioners modified their beliefs and actions accordingly and so the "application" of social theories resembles a process of"enlightenment" rather than modifying inputs to a relatively closed system. By providing better understandings of w h y particular conventions arise and h o w they function, accounting researchers should enable practitioners to improve their practices and procedures that produce accounting information for particular purposes in particular situations. This process would, of course, change social realities in such a way as to render the original social scientific explanation inapplicable. THE RISE OF MODERN ACCOUNTING RESEARCH If the sort of research summarised and advocated by Watts & Zimmerman does not follow the methodological rules they claim to adhere to, and in many cases these are neither characteristic of the natural sciences, nor free from internal incoherence nor directly applicable to the social sciences, then it may be w o n d e r e d why so much of it has been done in the past two decades in the U.S.A. and elsewhere. Although an important part of the answer to this question is the prevailing academic prestige hierarchy and the relative ease of carrying out and publishing quantitative research using publicly available and machine readable data compared to field studies (Hopwood, 1983; Kaplan, 1986), this does not explain w h y such a strong prestige hierarchy became institutionalised in the U.S.A. in the 1960s nor w h y practitioner elites apparently acquiesced in its domination of college training programmes.

POSITIVE ACCOUNTING THEORY

A full discussion of these questions cannot be given here but some of the major influences and factors can be indicated. Essentially, the dev e l o p m e n t of m o d e r n accounting research can best be understood as part of the general expansion of higher education in many industrialised countries in the 1960s and 1970s c o m b i n e d with the widespread belief that scientific research could not only increase o u r mastery over the natural world but could also resolve social problems and help to manage social change. This belief in scientific knowledge as a crucial resource in maintaining and improving the social order has b e e n particularly strong in the U.S.A. since the Progressive era (Bledstein, 1976, pp. 123--127, 324--331; Wiebe, 1967, Chapter 6 ) and received a considerable reinforcement from its evident military utility in World War II (Kevles, 1977, pp. 3 6 7 - 3 9 2 ) . As is well known, the success of operations research in that war encouraged m a n y to believe that similar techniques and approaches could p r o d u c e useful knowledge for managing social organisations and dealing with social problems (Hall, 1983). Additionally, the long period of e c o n o m i c growth in m a n y societies in the 1950s and 1960s enabled some economists to proclaim successfully the validity and utility of their knowledge to the extent that large numbers of economists w e r e recruited by many national bureaucracies (Coats, 1981 ). The prestige and perceived utility of the natural sciences, mathematics and economics encouraged leading business schools in the U.S.A. seeking to improve their general prestige to invest in "scientific" research. This tendency was directly supported by the Carnegie and Ford foundations w h o published major reports on business education in 1959 by Gordon & Howell and Pierson et al., which called for an expansion of "scientific" research in U.S. business schools. This sort of research emphasised hypothesis testing, quantitative methods and the developm e n t of formal models which promised to provide techniques for solving managerial p r o b l e m s and controlling social processes (e.g. Pierson et al., 1959, pp. 3 1 3 - 3 1 4 ) . These foundations also gave m o r e material support for this kind of w o r k -

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in the form of substantial grants and publishing opportunities which considerably assisted the d e v e l o p m e n t of m o r e "rigorous" research in Finance and Accounting (Dyckman & Zeff, 1984). The popularity of this type of research, and its rapid diffusion to most of the embryonic fields of management research, can then be partly explained by its c o n t e m p o r a r y social prestige and the recruitment of applied mathematicians, "behavioural scientists" and economists. It also, however, provided a n u m b e r of benefits to those seeking academic respectability and a u t o n o m y at the same time as claiming to improve managerial techniques. First, by insisting on the importance of mathematical m o d e s of reasoning and expression business school academics could exclude practitioners from the assessment of their research c o m p e t e n c e and techniques. Together with c o m m i t m e n t to highly formalised and abstract e c o n o m i c theories, this increased barriers to entry and provided the basis for a relatively standardised training system and means of certifying academic c o m p e t e n c e in a similar manner to the mathematisation of college engineering courses in the 1880s and 1890s in the U.S.A. (Calvert, 1967, pp. 60--80; Levy, 1980, p. 201 ). The expanding labour market for research skills in business and management was thus organised and controlled by easily recognised and tested c o m p e t e n c e s which could be inculcated through formal training programmes. Second, it facilitated the production of large numbers of highly restricted and specific research results on a wide range of topics. The basic techniques of mathematical modelling and statistical analysis can be applied to all sorts of problems and issues without having to learn large amounts of descriptive details. In a competitive system w h e r e researchers have to publish quickly and frequently to gain attention, tenure ~and promotion, this style of research is preferable to one which insists on detailed and lengthy observations of accounting practices in organisations, such as that espoused by Kaplan (1986). It also reduces uncertainty about the validity of research o u t c o m e s because this bec o m e s a technical matter rather than a concep-

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tual or theoretical one. Competition between researchers can readily be mitigated in this situation by specialisation on different topics because there is no need to demonstrate the theoretical relevance of one's results. Third, by basing their research style on the mechanistic model of social systems and claiming the ability to offer complete understanding of such "machines" putative accounting researchers were able to combine entry barriers with the promise of better techniques for control. The search for general statements about invariant relationships, which could be translated into managerial procedures for manipulating social processes to achieve determinate results, justified abstract and mathematical formulations. Measurement and closure were encouraged because they seemed to be "scientific" and to provide firm predictions about the results of resource allocation decisions. This search for quantitative precision and simplicity is reminiscent of the U.S. Bureau of Public Road's attempts to turn road design into a "scientific" activity by extensive laboratory testing of relationships between two and three variables under highly restricted and artificial conditions. As Seely ( 1 9 8 4 ) makes clear, not only did these take much more time and effort than was originally thought but they did not derive from any fundamental theoretical model and were useless to practising engineers. The field trims conducted by state engineers which attempted to mimic critical features of environmental conditions and use patterns proved much more applicable and significantly improved road design. These advantages of quantitative methods and mechanistic models help to explain their rapid adoption by academic researchers of business and management eager to demonstrate their scientific powers. They do not, though, explain why practitioners, especially those w h o skills might be thought to be threatened by the new "scientific" basis of practical techniques, apparently acquiesced in their exclusion from knowledge production and assessment. Accountants in particular might be considered likely to oppose such a "scientification" of skills and practices, especially in the U.S.A. and the U.K. where they

are organised as a self-policing and legitimating profession. In the case of the U.S.A. this acceptance of the new style of research in accounting can be partly explained by the long standing domination of vocational training by the colleges and universities, especially since the elite private colleges established professional schools at the end of the 19th century. Similarly, since the 1920s "science" has tended to be used as a means of legitimating expert authority and excluding outsiders, such as immigrants, from access to elite occupations (Auerbach, 1971; Freidson, 1970; Larson, 1977). Thus basing professional skills upon academic knowledge is a relatively established practice in the U.S.A. However, such knowledge need not be nomological and deductive to fulfill these functions, as is shown by the development of legal "science". This consisted of analytical induction from cases, according to Auerbach ( 1971, p. 552), and formed the basis of a distinct occupation of law teachers and reformers. The acceptance of more formal, quantitative and deductive forms of research and knowledge in accounting in the U.S.A. can, I suggest, be seen as the result of three major factors. First, insofar as accounting practices and conventions have traditionally been legitimated by any theoretical position, they have depended upon marginalist economics (Tinker, 1985, pp. 107-113). Consequently, the integration of accounting research with economic theory and adoption of economic reasoning in formulating research problems are difficult to oppose without appearing to deny the existence of any coherent theoretical foundation for such research. Second, although Watts & Zimmerman and their colleagues claim the utility of their research for accounting practitioners, their "laws" and hypotheses have little or no implications for accounting practices because they are not about them in any meaningful sense. Rather, the bulk of these studies deal with imaginary worlds of economic equilibria where information is true and costless and everyone acts "rationally" and so cannot form the basis for reorganising and rationalising accounting practices and skills in

POSITIVEACCOUNTINGTHEORY u n c e r t a i n social w o r l d s w h e r e p e o p l e have h e t e r o g e n o u s e x p e c t a t i o n s , goals a n d beliefs. C u r r e n t practices a n d c o n v e n t i o n s are not, then, t h r e a t e n e d b y this sort of r e s e a r c h b e c a u s e it does n o t deal w i t h them. Finally, the inflation of the 1970s a n d g r o w t h of legal i n t e r v e n t i o n s i n t h e financial system rend e r e d traditional a c c o u n t i n g practices s u s p e c t a n d in n e e d of s o m e r e v i s i o n a n d additional legitimation. Just as o n e result of the inflation o f the W e i m a r R e p u b l i c was to i n c r e a s e the attent i o n paid to a c a d e m i c theories of a c c o u n t i n g entities (Locke, 1984, pp. 1 6 3 - 1 6 5 , 2 7 2 - 2 7 3 ) , so too t h e s e e x i g e n c i e s i n the 1970s e n c o u r a g e d the professional elite to enlist a c a d e m i c s a n d implicitly claim t h e a u t h o r i t y of "science" for proposed revisions. It s e e m s p r o b a b l e that the g r o w t h of litigation in a c c o u n t i n g m a t t e r s will f u r t h e r stimulate this search for "scientific" justification o f c o n v e n t i o n s a n d practices.

CONCLUSIONS The expansion and redirection of accounting

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r e s e a r c h i n the 1960s a n d 1970s f o r m e d part of a general growth in academic research about b u s i n e s s a n d m a n a g e m e n t in the U.S.A. a n d its o r i e n t a t i o n to "scientific" n o r m s a n d procedures. As such, it reflected w i d e s p r e a d beliefs a b o u t the usefulness o f scientific k n o w l e d g e for managing problems and processes and the need to r e o r g a n i s e t r a i n i n g p r o g r a m m e s a r o u n d s u c h k n o w l e d g e . T h e o u t c o m e has b e e n the instit u t i o n a l i z a t i o n o f a distinct k n o w l e d g e p r o d u c tion system i n the U.S.A. a n d e l s e w h e r e w h i c h is separate from p r a c t i t i o n e r s a n d closely l i n k e d to r e s e a r c h in finance. This field is d o m i n a t e d b y intellectual values a n d c o n v e n t i o n s d e r i v e d from o r t h o d o x e c o n o m i c s and, programmatically, at least, from p o p u l a r i s e d logical e m p i r i c i s t philo s o p h y of the n a t u r a l sciences. Watts & Z i m m e r m a n ' s P o s i t i v e A c c o u n t i n g T h e o r y is an a t t e m p t to c o n f i r m this d o m i n a t i o n a n d to c o l o n i s e doctoral p r o g r a m m e s in a c c o u n t i n g w i t h these values. G i v e n the w a y the a c a d e m i c c a r e e r system o p e r a t e s in the U.S.A., it s e e m s p r o b a b l e that they will b e successful e v e n t h o u g h their analysis is seriously flawed a n d relies o n theories o f scientific m e t h o d that are i n c o h e r e n t a n d inapplicable to a c c o u n t i n g research.

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