conditional normative accounting methodology incorporating value judgments and means end relations...

8/12/2019 Conditional Normative Accounting Methodology Incorporating Value Judgments and Means End Relations of an Applied Science 1995 Accounting, Organizati

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This attitude is aggravated by the positivetrend in accounting. The scientific and phlloso-phic meaning of positive implies a theory freeof value judgments (except for pre-scientificones, necessary for scientific research in gen-eral). In other words, a pure science cannotaccept value judgments as premises but canencapsulate them only in observed facts.Means-end relations are thus automaticallyexcluded from the theory itself, since the goalor end is a value-laden premise for determin-ing the means. Attention to value judgmentsgives way to a concern with presumed caus-alities based on statistical association. This pre-disposes academic accountants to think interms of cause and effect relations, often with-out awareness of the logical gap between thelatter and means-end relations or, at best, blur-ring the difference between them. Such a trendexplains why so many academics try to turn abasically applied discipline into a pure science.

As a consequence, many accountants seemto be bewildered when confronted with a para-digm that focuses on the relations betweenmeans and ends ln accounting. Indeed, noth-ing appears to be more difficult to changethan a preconception established by training,professional habits or a life-long way of think-ing. And yet anyone l o o k f n g at the practice ofaccounting must admit that its objective is notto represent economic reality in a purely scien-tific way, but to approximate it p r a gma t i c a l l yon the basis of particular norms. But just as theopponents of Galileo refused to look throughhis telescope to see the evidence in favour ofthe heliocentric theory, so some academicsseem to be unwilling to see the evidence supporting the view that academic accounting isan applied discipline.The situation is different in other appliedsciences. Physicians, for example, have empha-sized means-end relations from the very inception of their discipline. Even today, medicineofficially recognizes innumerabie effectivetreatments or remedies merely on the basis oftheir effectiveness but without complete causeand effect explanation in the scientific sense.Of course, it is better to know the cause and

effect nexus, even for finding the means-endrelation; but to abandon the search for thelatter, merely because the former has notbeen found, runs contrary to most applied dis-ciplines. And there is further similarity withmedicine: physicians are beseeched, thesedays, by patients who clamor for alternativechoices instead of the one-sided and exclusivetreatment with high-powered but potentiallydangerous drugs. If there is a parallel withaccounting, it is this: just as a good physicianwill inform his patient about alternative treat-ments (including n a t u r a l emedies), indicatingfor each alternative the pros and cons, so agood accounting academic or practitioner isthe one who offers his client a spectrum ofalternatives together with the pertinent infor-mation to help the client in making an intelli-gent choice depending on the latters needsand values.

Finance, a discipline close to ours, alsoseems to put greater emphasis on means-endrelations than we do. Take the case of choosingone among various portfolios (say, from afamily of mutual funds offered by a singlecompany). Each portfolio (model) has a differ-ent risk characteristic clearly revealed to theinvestor. This is a typical situation in whicheach model i n co rpo ra t e s another value judg-ment (e.g. the type of risk), such that theinvestor is free to choose one of those port-folios (or a specific mix of them) according tohis own risk preference. Such arguments,together with the fact that the p ra c t i c e ofaccounting is purpose-oriented, should beconvincing enough to analyse accountingissues (like the choice of a valuation methodor of some accounting standard, etc.) in asimilar means-end fashion. Take the readerof a particular set of financial statements: ifhe is concerned with the maintenance offinancial capital, would he not choose adifferent income and valuation model thanwhen concerned about the maintenance ofphysical capital ?The purpose of this paper is to outline amethodology which, first, pays more attentionto value judgments, second, promotes account-


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262 R. MATTESSICH

approach, r e a l f z a t f o n criterion, etc.). Such areturn to old times seems to be implied inChambers (1993) if I correctly interpret hiscriticism of positive accounting theory.Would this be a viable proposition? Would itnot be an attempt to turn the wheel of timebackwards? It certainly would ignore both,the call for better explication of value judg-ments, as well as the critical-interpretivecamps (see below) emphasis on ethical andsocial issues. It also might constitute a rejec-tion of the new empirical methods introducedto accounting in the late 1960s and dominatingit during the last decade or more.

(2) The second possibility lies in emphasiz-ing e t h i c a l (instead of pragmatic) norms -particularly those in accord with social goals.This might lead to a predominantly f n t e r p re t f v eand c r f t f c a lmethodology which argues that noaccounting theory is value free. Chua (1986)has summarized this position which rangesover a wide spectrum of researchers, fromHopwood (1988) to more radical authorssuch as Tinker (1985). Although this crltical-interpretive camp fuMls an important functionin present-day accounting, it does not seem tooffer enough flexibility in the choice of com-peting value judgments arising from the con-siderable variety of accounting objectives. Butthe advantage of the critical-interpretiveapproach lies in the openness with which itreveals its underlying ethical value judgments.In its less radical form, it may even convergewith the conditional-normative methodologypromoted in this paper (see alternative 4).

(3) Another possibility is the continuingembrace of positive accounting theory orrelated empirical approaches which implies

the exclusion of norms (as far as they are notNdden) from the set of premises, relegatingthem beyond the theory proper. Although thechoice of most value judgments may now bewith the user, a truly positive accounting the-ory leaves him on his own to infer the appro-priate means from the positive theory plus thechosen norms - see the comparison of posi-tive vs instrumental hypotheses (see Presentstatus of conditional-normative methodol-ogy). Although this approach is based onempirical and often statistical methods andlays claim to objectivity (in the traditionalscientific sense), in the view of some experts(e.g. the critical-interpretive camp) thisapproach possibly h ides value judgments inher-ent in its neoclassical economic basis which,for example, failed to take environmental andsocial issues sufficiently into account. For asummary of some accumulated criticism dlrec-ted toward positive accounting theory seeBoland & Gordon (1992) and Ballwieser(1993, pp. 127-128).

(4) Finally, there is the possibility of f n co r -p o r a t f n g v a l u e j u d gmen t s into the theoryproper and offering a b r o a d r a n g e of a l t er n a -t i ve pu r pose-o r i en ted m odel s to the users ofaccounting information. This is the condi-tional-normative accounting methodology(CoNAM) outlined in this paper. Its ultimatevision is to design a considerable number ofaccounting models, each with specific hypoth-eses t a f l o r ma d e to a specific accountingobjective or s t a n d a r d i z e d (just as cars orshirts, etc. are standardized), yet offering a con-siderable choice to consumers. The metho-dology lays claim to a kind of objectivity that isjustified, partly, by the d f sc losu r e o f i t s va l ue

For details about the distinction between pragmatic and ethical and other value judgments see the b f s h r f c a linvestigation of normative accounting (Mattessich, 1992b) where the following three categories are discussed:

(i) Bb f cu l - no rm a t i ve ho t i es: t h e Germ an Normative School: Nicklisch (1912, 1923, 1929-32); SC& (1890, 1911,1914). The British Normative School (i.e. the critical-interpretive camp): Cooper (1983); Cooper et a l . (1985); Hop-wood (1988); Hopper et al. (1987); Tinker el a l . (1982); Tinker (1985), etc.;

(ii) Pr agmu Hc-no rm a t i ve t beo r f es: Chambers (1966); Edwards & Bell (l%l); Moonitz (1961); Sprouse & Moo&z(1%2), etc.; and

(iii) Con&ion&norm&w the&es: Mattessich (1%4, 1972); Baker & Mattessich (1991) - see also Mattessichs(1995) entry on Normative accounting in Chatfields and Vangermeerschs forthcoming Encyc l oped f u o f t be H f sh r y o fA c coun t i n g and Accoun t f n g Bough t .


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CONDITIONAL-NORMATIVE ACCOUNTING METHODOLOGY 263

judgments and, partly, by the empirical pro-cedures conkming the relationship betweenthe purpose and the means to attain it.Although such a synthesis uses normative aswell as empirical elements, it is fundamentallydifferent from the positive approach. Thelatter term is irreconcilable with the presenceof value judgments as premises of the pertinenttheory or model; CoNAhI, on the other hand,requires normative premises. Since appliedsciences are not concerned with gaining pureor disinterested knowledge (in the sense of thenatural, biological or positive social sciences),but with applying this knowledge to the attain-ment of practical goals, CoNAM should be wellsuited to accounting as an applied science.Although many features of such a programmecan easily be implemented, the realization ofthe entire programme would require masteringmany obstacles, as the following analysis indi-cates. Yet where would science and technologybe without overcoming obstacles, applyingnovel methods, and aiming for difficult targets?

ACCOUNTING AS AN APPLIED SCIENCEThe need for a conditional-normative meth-

odology cannot be comprehended without thenotion of accounting as an appNed or mission-oriented discipline. The following presentssupporting evidence for the applied nature ofacademic accounting:

(a) The major task of an applied science isthe application of law-statements and otherresearch findings (of the corresponding purescience) to practical goals - contrary to purescience, its task is not to find but to appZy hoselaw-statements.* I do not suggest that account-ing lacks basic laws, but these are the onesbelonging to pure science (just as the naturallaws underlying engineering and medicine arefound in physics, chemistry, biology, etc.). Thus

the question arises whether there exist any posi-tive laws pertaining to accounting beyond economics or the behavioural sciences. One wouldhave to demonstrate, first, that the regularitiesinferred by empirical accounting research aregenuine scientific laws, and second, that theyare laws of accounting instead of economics orother pure disciplines.

Chambers (1991) tried to conceptualize aseries of accounting laws, but the postula-tion of the law statements neither follows strin-gent scientific inductive and deductiverequirements, nor do they enjoy general recog-nition as reflecting scientific laws. Despitesome attempts to declare ad hoc hypothesesas empirical laws of accounting, I have notyet encountered a single accounting lawwhich enjoys general scientific consensus.This vacuum might even jeopardize theentire enterprise of a positive accounting the-ory. Of course, one could always tinker withthe semantics and speak of a positive eco-nomic-behavioural theory of accounting aspart of either economics or the behaviouralsciences in general - cf. Mouck (1993) whoseems to regard positive accounting theoryas belonging to the normal scientific effort(in the Kuhnian sense) of economics. Such analternative might remove a good deal of thecontroversy around positive accounting the-ory. But the fact that some accountingresearchers engage in pure economic researchdoes not make accounting a pure science, justas the pure research of some physicians doesnot change the applied status of medicine. Tospeak of a positive theory of medicine, or apositive theory of engineering would bearlittle meaning because the initiated knowsthat the positive theories of those subjects areto be found in biology, chemistry, physics, etc.Would it not be equally meaningful to find thepositive basis of accounting in such pure dis

To avoid semantic confusion one distinguishesbetween scientific laws which are presumed structures of reuZi y(related to the ontological question) and law-statements which are attempts of the pure sciences to conceptilize thosestructures (the eplstemic question).


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264 R. MATTESSICHciplines as economics and the behaviouralsciences?

(b) Accounting cannot be practised withoutaccepting certain norms and frequent va luej u d gmen t s (beyond pre-scientific ones). Anacademic discipline claiming to explore andserve such a practical field as accounting canno less afford to ignore those norms than thesciences of medicine and engineering coulddisregard the norms handed down to themand applied by their practitioners. It is no coin-cidence that one has begun to realize thatagency theory . . . forms a (possible) basisfor a positive as well as a normative [i.e. con-ditionally-normative] theory of cost account-ing and that, in the case of the latter, costaccounting is dependent of the user and thus ofthe goal (see Wagenhofer, 1993, pp. 164,169). While value judgments (other than pre-scientific ones) are strictly prohibited as pre-mises in any pure science, normative premisesare an indispensable requirement for allapplied sciences. Among the many value judg-ments of accounting, one category is specialand important enough to be discussed sepa-rately in the next item.(c) Some of the most crucial value judg-ments entering accounting stem from cos then-ef l t cons fder a t fons . T he norm that the long-runbenefit of an information system must exceedits long-run costs, should be trivially obvious -yet despite paying lip service to it, accountantsignore this maxim often enough, particularlywhen asking why financial statements andtheir valuations are so unrealistic. Take, forexample, a fairly realistic but highly sophisti-cated valuation procedure which, however,costs more than it benefits in the long run;obviously, it has to be rejected in actual prac-tice. The difficulty of measuring those costsand, even more so, of estimating the corres-ponding benefits, is a separate problemwhich, in principle, does not change the issueor need for cost/benefit criteria.

(d) Accounting is taught and researched pre-dominantly at faculties of commerce, businessadministration, management, etc. The latter areconsidered to be p r o fessi ona l scbook l i k e

those of medicine, engineering and law. Andthese are called professional because theirtask is to teach and research primarily theapp l f c a t f o n of scientific insights to specificprofessional goals.

These are factual premises that can be con-tirmed. Thus the claim that accounting is anapplied science is supported (but not necessi-tated) by the p robab f l f s t i c inference followingfrom these premises. This neither excludespure and basic research from being pursuedat such schools, nor does it mean that theapplied sciences themselves are not amenableto foundational research. It merely means thatthe major research goal of those institutions isfound in the creation of knowledge and the-ories d f r e c t l y applicable to practical or profes-sional problems. Such schools arose out of thevery need to spare the practitioner the toil ofadapting for her/himself positive hypotheses toher or his objectives.

NORMATIVE THEORIES AND OBJECTIVITYThe major criticism directed against norma-tive accounting theories, and the reason for

their dismissal by many leading accountingresearchers during the past decades, lies inthe claim that such theories are subjective,hence unscientific. Indeed, value judg-ments, underlying every normative theory,are neither objective nor accessible to empiri-cal refutation or verification. But a conditional-normative methodology can circumvent thislimitation and impart a degree of objectivityto a normative framework. The objectivityclaim of the conditional-normative methodol-ogy is to be found in the following circum-stances:(1) CoNAM recognizes that different groupsor individuals pursue different goals in account-ing, management, finance, and business in gen-eral. It thus rejects the notion of absolutevalues or objectives, but tries to comprehendthe entire spectrum and hierarchy of compet-ing as well as complementary objectives. Thismethodology does not regard any single norm


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or goal (profit maximization, current exit valua-tion, equal access to information, etc.) as theonly valid one, but offers a free choice of valuejudgment to the decision maker. Above all, itinsists on the disclosure of the value judgmentsincorporated in any accounting theory, modelor system. In opting for one of those alternativeobjectives, a certain objectivity is attained byopenly disclosing the value judgment behindit. This is no novel insight and has beenexpressed best by Myrdal (1970, p. 55) theNobel laureate, with the following words:

The only way in which we can strive for strict objec-tivity in theoretical analysis is to expose the valuationsinto full Light, make them conscious, specific and expli-cit, and permit them to determine the theoreticalresearch.

Therefore, the first objective aspect of a con-ditional-normative theory lies in the clearexposition of its underlying value judgment(or set of value judgments) and in the admis-sion that the pertinent norm is but one amongmany possible alternatives. Thus a conditional-normative methodology makes a pragmatic-scientific approach possible (the empiricalaspects of means-end relations, discussedbelow will reinforce this claim). This is con-firmed by such views as that of Mozes (1992,p. 94) who interprets the FASBs call for nor-mative research,3 obviously, in the condi-tional-normative sense:

The Boards call for normative research can be inter-preted as a request for accounting researchers to inves-tigate whether the user-specific qualities that standard-setters require are present in accounting data. Suchresearch can be conducted in accordance with thescientific method since a normative research hypoth-esis addresses only the issue of whether the standard-setters objective function, and not the issue of whetherthe accounting rule maximizes societal welfare.

(2) In a conditional-normative theory the

recommended means are predicated on theunderlying norms or value judgments. Thisrequires expressing the relationship betweenthose norms and their means in an appropriateanalytical as well as empirical way. The struc-ture of such formalized means-end relations isdifferent from that of scientific law-statementsof pure science, and it is crucial to recognizethe relevant structure. Kaplan (1983, p. 345)seems to stress this particular point:

a knowledge of the underlying structure is necessary ifresearchers wish to make normative recommendationsto change some aspect of the environment Butoccasionally researchers are not as careful in this regardand fail to recognize that even when they obtain amodel that predicts well, the model does not providea basis for making nonnative recommendations aboutpreferences among accounting methods But it isknowledge of the underlying structure that is requiredif we are to consider the impact of alternative actionswithin the context of the assumed structure.

Occasionally the relations connecting endsto pertinent means are purely analytical (e.g.the relationship between valuation model andcapital maintenance basis) but in many casesmeans-end relations should lend themselvesto some kind of empirical testing, confirmingstatistically that the inferred means can satis-factorily attain the desired end. Conventionalaccounting research, following the path ofpure science, cannot formulate means-endrelations in any direct way; it has to bridgethe gap between is and ought in someindirect fashion. Let me ihustrate this througha quote from Watts Zimmerman (1986, p. 9)which says that:

Normative propositions are concerned with prescriptions. They take the form Given the set of conditionsC, alternative D should be chosen . This proposi-tion is not refutable. Given an objective, it can be maderefutable thus given an objective, a researcher canturn a prescription into a conditional prediction and

The FASBs (1930~) Conceptual Framework contains, according to Mazes (192, p, 94), a methodology for selectingaccounting rules of which the first provides the standard-setters objective and the second provides the accounting dataqualities necessary to achieve that objective. But the FASB, in contrast to the present sNdy, focuses mainly on one majorobjective, namely to procure in the tinancial statements information that helps to assess the amounts, timing, anduncertainty of future cash flows to an enterprise.


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266 R. MATTESSICHassess the empirical validity. However, the choiceof the objective is not the theorists, it is the theoryusers

At first glance these sentences seem to con-form to the maxims of CoNAM; but there isan important difference, and it lies in theexpression conditional prediction whichwould be conditional prescription underCoNAM - this should be obvious, as a positivetheory is concerned with statements of fact(descriptions), while the latter is concernedwith recommendations (prescriptions) basedon revealed norms. This structural differenceindicates that a positive theory cannot makerecommendations in a direct way; it requiresadditional steps, outside the theory proper, totransform the description into a recommenda-tion. Thus, wherever a positive theory istempted to aim at policy recommendations, itcannot do this but in the indirect way justdescribed. Hence the decisive question is:who is to make the jump from is or will be,to ought to be (i.e. from description to pre-scription) ? According to Watts and Zimmermanit seems to be the practitioner (who gets fromthe academic descriptions or conditionaldescriptions at best), but under CoNAM it isthe academic who formulates the means-endrelations, and is supposed to present the practi-tioner with prescriptions for alternative ends(see the examples given in the section entitledPresent status of conditional-normative meth-odology). In other words, the question is: shallthe recommendations for actions be done with-in the theoretical framework, or outside of it?

My answer is this: the ve7y essence of anappli ed science li es in prepar ing inadvance theoretical solut ions for an enti rebattery of alternati ve objectives. Only thencan the user - be she or he a medical practi-tioner, engineer, lawyer or accountant - takethe theory and apply it to actual practice with-out getting her/himself involved in cumber-some inferences of means-end relations. Thecrucial question is: to what extent can practi-tioners rely on academic accounting to supplythem with appropriate models and systems for

their particular Information requirements? Ibelieve one cannot expect practitioners tobuild, in each situation anew, a bridgebetween a statement of positive accountingtheory and the means required for attaining aspecific objective. This may be one reason whymany practitioners have lost interest in theresults of modern accounting research, andwhy there exists such a gap between the the-ory and practice of accounting.

As academic accountants are not used todealing with means-end relations directly, con-siderble research and training will be requiredbefore such a methodology will be fully opera-tional. It also has to be borne in mind thattesting procedures of CoNAM may not alwaysbe as rigorous as those of positive accountingtheory. Any applied science has to supplementits testing by trial and error and other non-statistical procedures (depending on the situa-tion, such empirical testing may be statistical ornon-statistical: questionnaires, interviews,coherent tests, etc.). It is important to bear inmind that even in the pure sciences statisticaltesting (the reliance of which may be overratedby some academics) constitutes a relativelysmall, though increasing, part in the arsenalof evaluating empirical hypotheses - forfurther details see, for example, Bunge (1983,pp. 132-154).

(3) Another programmatic feature of CoNAMis the estimation of the degrees of efficiency and/or effectiveness of the means fuhilhng a specificend. This is an important secondary goal, but toattain it rigorously may prove to be even moredifficult than the determination and testing ofmeans-end relations themselves. Yet suchdifhculties neither imply that a conditional-normative approach is arbitrary nor thatmeasurement or estimation of its effectivenessand efficiency is impossible.

I pleaded above for greater emphasis onobjectives as well as a better insight into theconnection between those objectives and themeans to attain them. Yet this may not beenough; to overcome the shortcomings of pre-sent-day accounting, the range of objectivesitself may have to be extended. An essential


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feature of a relevant methodology is the identi-fication and incorporation of different macro-and micro-objectives pursued by society ingeneral or a specific group or an individual.Obviously a whole hierarchy of objectives willhave to be conceived. As my previous refer-ence to capital maintenance methods andenterprise context has indicated, the objec-tives would range far beyond those presentedin FASB (1976, 1978, 1980a, etc.) and preced-ing studies such as the Trueblood Report ofthe AICPA (1973). Also goals beyond financialaccounting and profit maximization wouldhave to be included. Above all, a better dis-tinction between short- and long-term wealthmaximization, as two distinct goals, mighthave to be made.* There is a growing ten-dency to extend the economic basis ofaccounting (e.g. Belkaoui, 1984) from neo-classical economics to ecological economics.5

CHOOSING ACCOUNTING OBJECTIVESA conditional-normative accounting method-

ology is the basis for a general framework thatrelates accounting objectives to the means capable of attaining those objectives. It provides aframework capable of accommodating manyspecific normative theories of accounting.Such a framework is in conformity with thenotion of theory in the Post-Kuhnian philo-sophy of science. There, a theory is regardedas an entir e network of more specific theories( theory elements in the structuralist termi-nology) - see Balzer et al. (1987) Balzer &Mattessich (1991) and Mattessich (1992a).

While a methodology provides the guide-lines and basis for developing theories, a the-oty offers the structure and network ofsentences and models for the description,

explanation and (at times) prediction of phe-nomena. And positive accounting theoryrefers at least as much to a specific method-ology as to a theory. But this fact is usuallyhidden since its proponents abhor method-ological disputes, implying to be in possessionof the only proper accounting methodology.The choice of an objective may occur on afairly general level as, for example, in the set-ting of accounting and auditing standards, oron a more specific level when, for instance,choosing one among several competing valua-tion and capital maintenance concepts. Thelatter example is well suited to illustrate thisissue.

Some scholars, for instance, have persistently argued that current exit-values are theonly proper evaluation for most assets. Con-trary to such an absolute value notion,CoNAM regards the evaluation method as acondition of, among others, the capital mainte-nance approach to be chosen. But the latter, inturn, depends on the type of enterprise andsimilar circumstances. Why did those experts,who regarded the current value method as theonly valid one, not perceive this connectionbetween context and valuation method? Firstof all, they may have accepted too narrow aneconomic basis; and second, they may haveneglected cost/benefit considerations andother practical constraints. As accountantsargued for several decades which valuationapproach is the only proper one, it is no sur-prise that the younger generation turned itsback on those kinds of measurement pro-blems.Let me use this particular issue to sketch theargument that favours CoNAM: the linkbetween various methods of valuation (includ-ing inflation adjustment) and different ways ofmaintaining capital (e.g. nominal vs real vs

* But this must not be misinterpreted as promoting indiscrimina teIy long-term over short-term wealth and profit max-imization. There are situations, particuIarly on the micro-economic level, where short-term maximization is appropriate. Ecological economics is not so much in competition with traditional economics, but is rather its extension. It is found insuch works as Hotellitq (1931) Arrow & Fisher (1974) Dasgupta & Heal (1979), Fisher (1981). Lind (1982), Baumol &Oats (1988) Ahmad et a l . (1989) Daly & Cobb (1989) Pearce & Turner (19B9), Constanza (1991). DaIy (1991) vonAmsberg (1992). and others.


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268 R. MATTESSICH

physical capital) is analytical, and the inter-dependence is fairly obvious (e.g. Mattessich,1986, p. 163). But there are situations whichare complex enough and, above all, fraughtwith contingencies, such that the type of infor-mation required cannot simply be deducedfrom the context but must be inferred induc-tively. It seems, for example, that the linkbetween desired capital maintenance methods,on one side, and the ultimate objective of theorganization or persons involved, on the otherside, is empirical. Assume the accounting orinformation objective is to supply data forincome taxation; in this case it has to be shownfactually (based on the tax legislation as evi-dence) that the proper basis (in this particularplace, but not necessarily in all countries) ishistorical cost valuation, from which followsthat nominal capital maintenance is thedesired managerial objective of the fiscus.But some minority shareholders, for example,are likely to have very different desires - againthis would have to be confirmed empirically.Such investigation might show that minorityshareholders (e.g. pensioners) want to obtainincome figures on which their spending patterncan be based, e.g. such that their standard ofliving (under general inflation adjustment) issecured. From this information jhancial capi-tal maktenance can easily be inferred as thepersonal objective. Finally, take the situation oftop management in a capital intensive firm withlots of price-volatile inventory on hand (e.g. anoil refinery); empirical research might fmd thatmanagement desires data based on currentvalues, which means that the managerial objec-tive ispbysicalcapital maintenance. In all thesecases the relationship between the capital main-tenance method (as an intermediate or informa-tional objective) and the valuation method (asan intermediate means) was analytical, but therelationship between capital maintenancemethods (as the ultimate means) and the per-sonal or group objective (ultimate objective)was empirical. Notice that in this example thecapital maintenance method played the role ofboth, means (in the intermediate situation) aswell as end (in the ultimate situation).

A further example, illustrating the traditionaltendency towards single objectives in con-ventional accounting, is taken from Lev(1988). This is one of the most respectedaccounting policy papers of the last decade,and is also concerned with such problems asthe relativity of information relevance, theeffectiveness with which certain means attainan objective, as well as the general difficulty ofhandling policy issues:

what is highly useful information for some investorsmight be irrelevant or even damaging for others.So what public interest criterion does and/or shou l ddetermine the choices made by accounting regulators.Or, yet another largely unanswered policy question -how should the social consequences of accounting con-sequences be evaluated and the effectiveness of thesepolicies determined? One must conclude, therefore,that despite increasing awareness of these issues, littleprogress has thus far been made in addressing the basicaccounting policy issues (Lev, 1988, pp. 2-3).

But ultimately Levs paper pivots on a singleobjective, namely equal access to informationrelevant for asset evaluation (p. 3). Otherobjectives, such as fairness, eliminatingfraud, protecting the uninformed investoragainst exploitation by insiders are brushedaside as vague, anachronistic, and unattrac-tive notions (p. 1).

Lev presents forceful arguments that his exante equality of opportunity concept is stateof the art as well as operational. Indeed, thefact that it can be better operationalized (thanso-called moralistic notions) is a strongincentive for adopting it. However, a condi-tional-normative methodology aims for a fra-mework in which the user freely choosesamong a variety of objectives - and not onlywhere competing objectives are involved, butalso in cases like Levs, where complementaryobjectives (as fairness, etc.) do not necessarilyexclude the one promoted by a specific expert.In the future some of those other objectivesmight also become easier to operationalize -apart from the fact that the difficulty of opera-tionalization may (for a particular decisionmaker) not be critical for excluding a specific


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objective. But most importantly, the choice ofthe objective should remain with the decisionmaker (i.e. the ultimate user of the linancialinformation). The applied scientist is obligedto submit the relevant range of objectives tothe user and inform him about the means forreaching each of those objectives as well as itsconsequences. Thus, the academic or his proxy(the practitioner) will offer a palette ofaccounting models from which one canchoose according to ones information needs.Based on such stipulation, or in anticipation ofit, the academic may recommend certain stra-tegies, but be must not impose any objectiveupon the user.

Another example of a single objective over-riding all others is the FASBs tendency to putdecision-relevant information over other goalssuch as accountability. Even if Mozes (1992, p.96) points out that the FASB (198Ob, 1985)accepts the following six normative cate-gories in establishing accounting rules, thesecategories are subordinated to the making ofinvestment decisions: (i) consistency (withother accounting rules); (ii) understundubil-ity; (iii) relevance; (iv) neutru li ty; (v) repre-sentational faithfulness; (vi) cost/benefitrelation. Mozes subsequently discusses perti-nent literature dealing with these issues, thuspointing to a potentially important researcharea for conditional-normative accountingresearch.

As to the conditional-normative approach incost accounting, an illustration can be found inthe German literature, first by Riebel (1978)who developed a decision-oriented cost con-cept different from the pagatoric as well asthe opportunity cost notions, and later bySchneeweiB (1993, pp. 1025,1028,1031; trans-lated) who, continuing Riebels endeavours,sketches his methodology in the following way:

Embedding the cost problem in the general frame of aprescriptive administrative decision theory [footnoteomitted], one notes that decision-oriented and value-based cost notions belong to different levels of abstrac-tion and relaxation. These notions are therefore not tobe used in an independent but in a complementary way@. 1025).

The adaptation of parameters will then be such that thedecision maker employs goal-values [Zielwerte] whichconstitute for him an acceptable compromise (p. 1028).

The entire problem of valuation can then be repre-sented as follows: the decision maker hrst speciliesthe goal-system [Zielsystem] and the value-prefer-ences [Hohenpriiferenxen] Then he designs a decisiongenerator and evaluates the pertinent cost parameter k(together with the non-cost parameter a) in the goal-system of the reality model [Realmodell] (p. 1031).

And as the past success or failure in solvingmajor issues of accounting is concerned, Beaver& Demski (1994, pp. l-3) are pointing out that:

The nature of income and valuation remains as elusiveas when we were graduate sNdents. Yet issues ofincome measurement and valuation remain at the heattof the institutional setting of hnanckd reporting, not tomention the practice and use of accounting throughoutthe economy Clearly we have not been successful inresolving or even reducing the set of specialized notionsof income or accounting value. This is hardly surprising,since under these market conditions [imperfect andincomplete] it is possible to generate illustrations orexamples where any notion of accounting will fail tocapture some supposedly relevant aspect of the entityslife. This follows from the fact valuation is not fullydefined in the absence of perfect and complete mar-kets, except ln special cases (e.g. derivative securi-ties). More deeply, our understanding here islimited by the fact [that] we have not developed atheory of accounting measurement in which demandfor accounting measurement is endogenous.

If the valuation issue has been intractable forsuch a long time, might it not be that the neo-classical economic basis, on which theseattempts rest, is too narrow? This basis is stilldominated by the single goal of wealth maximi-zation, and rarely allows consideration of otherpurposes and norms.

Finally, Ijiri (1980, p. 33) Griffin (1987) Gaa(198813) and, above all, Swieringa (1989, p.182) all emphasize that the FASB, or standardsetters in general, need from researchers notonly facts, concepts, theories, and frameworksbut also identif ication and evaluation of alter-natf ves as well as justij kati ons. In otherwords, they need application of a condi-tional-normative methodology. And Bernard


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270 R. MATTESSICH

(1989, pp. 73-74) referrlng to the disenchant-ment with economic consequent studies,indicates, as Frecka (1989, p. 15) confums, thatour existing research technology is not ade-quate for addressing economic consequenceissues.

PRESENT STATUS OF CONDITIONAL-NORMATIVE METHODOLOGY

(1) Philosophers have been working fordecades on the formal analysis of normativelogic which includes the logic of commandsand other imperatives, as well as that ofmeans-end relations.6 That this is an excruciat-ingly complex problem area is manifested bysome quotes from one of the great pioneersof normative logic:

Dissatisfaction with my earlier attempts to deal withpractical inference urged me to return to the topictime and time again. . Ever since the appearance ofmy Brst paper on deontic [i.e. normative logic] in M i n di n 1951 I felt that there was some philosophically essen-tial aspect of norms (normative concepts and discourse)which the formal system I had constructed either didnot capture at aII or tried to capture in the wrong way.In the 30 years which have passed I have again andagain returned to the topic - often with a new ideawhich I thought would at last put things essentialIyright. But always so far, to be disappointed

For my part I regard my passage through the wild-erness of deontic logic as terminated. I hope the ReIIngI now have wiIl last, that the new essay Norms, Truthand Logic has eventuaIly removed the uneasiness I feltabout advancing with instruments of logic beyond thefrontiers of truth and falsehood (van Wright, 1983, pp.vii-ix).

It is a common misconception to believe thatnormative inferences obey the same formallaws as conventional logic; in the long run,accountants cannot atford to disregard theefforts to clarify the problems of practical infer-

ences. This does not mean that accountantshave to get formal training in normative (i.e.deontic) logic, but they should be betterinformed about the difference between the tra-ditional (i.e. declarative) logic governing posi-tive propositions and the deontic logicgoverning normative statements. It is impossi-ble for a paper l&e this to convey the details ofsuch problems; it can merely draw attention tothe existence of pertinent differences and offersome references. There are several reasonswhy declarative logic cannot be applied tonormative arguments. Ross (1944, p. 32) forexample, points out that according to theusually accepted definition of a logical lnfer-ence, an imperative is precluded from being aconstituent part of such an inference. AndRescher (1%6b, p. S), in dealing with com-mands (one of the most common groups ofimperatives), states that:

giving a command is a performance. From thisangle, a logic of commands is diffkult to envisage.Performances cannot stand in logical relations withone another, and spechically, one performance cannotentail or imply another, nor can the descnptionof oneperformance entail that of another.

Already Aristotle, realizing the limitations ofconventional logic, hinted in his N f c omacheanEtb fcs (Book 7, Chap. 3) at a logic of action.Modern logicians have devised various alterna-tive schemes to deal with this problem - fordetails see (Mattessich, 1978, pp. 128-140).Some of these approaches use declarative sen-tences but construct an extended logic ofaction (e.g. von Wright, 1968, 1983). In theapplied disciplines, it is legal science which- under the eminent legalistic scholar HansKelsen (e.g. 1934, 1979) - has taken leader-ship in exploring the application of normativelogic. In this connection Archer (1992, p.205) even suggests some association between

Normative (or deontic) logic comprises the logic of actions, Imperatives, comman ds and other normative statements. Foran overview of deontlc logic see the anthologies editcd by Rescher (1966b) and HiIpinen (1971); for individuaI connibu-tlons to deontlc logic, practical inferences and the logic of action, see von Wright (e.g. 196t3, 1983), and for the logic ofcommands, see Rescher (1966a).


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Kelsens work and my own efforts (Mattessich,1964, 1972) - though Archer may have doneme too much honour. At this time I was notaware of Kelsens work, merely of his reputa-tion (the social science library at UC, Berkeleywas named after him Hans Kelsen Library ).

Herbert Simon (1965, 1966), too, has beendeeply concerned with normative aspects andtheir role in the applied sciences. But heopposes a separate logic of action and recom-mends simple conversion rules to supple-ment declarative logic for the purpose of prac-tical reasoning. Binkley (1966, pp. 22-23)succinctly summarizes Simons procedure asfollows:

Simon says, roughly, that decisions are made in thefollowing way. (Or perhaps that they are to be madeln the following way. We begin with an imperativewhich specifies the end. We convert this to a declara-tive: that is, we assume that the end is achieved. Com-big this with other declaratives which define thecircumstances, we draw an inference about whataction must have been done. These action declarativesare finally converted to imperatives which tell us toperform the means to our end. It is a logical processwith imperatives at the top and imperatives at thebottom, but with a lot of declarative reasoning inbetween.

A theory of decision is mainly interested in the lnter-vening declarative logic. However, from the pointof view of the philosopher concerned with the pro-blem of practical reason, it is the l i n k w f t b f t n per u -t f ves a t t op and bo t t om that hold the interest.And, given this interest, the philosopher will focushis attention on the rules connecting fmp er a t f ves totbe mean s-end sta tement , Simons conversionrules. These rules will have so great an importancefor the philosopher that he will be bound to refer tothem as a special logic of imperatives [emphasisadded].

Table 1 (later in this section) may furtherindicate that the connection between impera-tives (objectives) and means-end statementsare not only relevant to philosophers but alsoto applied scientists as well as practitioners. Oflesser priority to the Latter might be the contro-versy whether Simons conversion rules, or asimilar system, should be regarded as a specialkind of logic or not. The fact remains tbattraditional logic without some supplementa-

tion - be t a ul l-f ledged logic of action or onlysome conversion ru les - cannot proper lymaster means-end relations.

(2) Conditional-normative theories arc quitecommon in the economic and managementsciences. Ultimately such theories depend noless on empir ical research than the cause andeffect relations of positive theory, but theyclearly reveal the underlying goals and valuejudgments. In operations research (OR) theessence of conditional-normative theories isbest manifested, and most concisely character-ized, by Lute & Raiffa (1957, p. 63) whoemphasize that

it is crucial that the social scientists recognize that gametheory is not dexr fp t f ve , but rather (conditionally) nor-mative. It states neither how people do behave norhow people should behave in an absolute sense, buthow they should behave lf they wish to achieve certainends.

But in OR (and occasionally in other manage-ment and economic sciences) the empiricalaspect is often hidden because the only goalsconsidered are those of profit or wealth maxi-mization, usually assumed to be pre-scientzfk.Then the problem of optimizing this singleobjective is amenable to a purely mathematicalsolution without much need for either a deon-tic logic or the testing of means-end relations.

(3) First steps towards a conditional-norma-tive accounting approach can be found inMattessich (1964, pp. S-9, 232-291, 429431).There the need for more purpose-orientation(and mono-purpose or limited-purposeaccounting systems) is repeatedly mentioned.Above all, this book introduced to accountingthe notion of pragmatic hypotheses (i.e. form-alized means-end relations), distinguishingthem clearly from positive hypotheses. Aboveall, this work separates unequivocally the morepermanent basic assumptions of accounting(assumption Nos 1-18; pp. 19, 32-45) fromthose specific, pragmatic andpulpose-orientedhypotheses (see Mattessich, 1964, pp. 30-45,232-239,419,424-430, etc.).Yet in spite of thefact that some experts began (during the 1960sand 1970s) to see that each valuation method


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272 R. MATTESSICH

might serve a different objective (e.g. as far ascapital maintenance is concerned), mostaccountants continued to search for the oneand only correct valuation method.

The next step was a paper (Mattessich, 1972)in which the separation between basic assumptions and their purpose-oriented interpretationwas further analysed. This article emphasizedthat The heart of the problem might rest inthe difJiculty to ormu late specij lc well 42 nedpurposes, and to match them to a set of speci-fic hypotheses (Mattessich, 1972, p. 479). Asthis paper was accorded an official recognition(AICPA/AAA award), there was some hope thatthe notion of a purpose-oriented (i.e. condi-tional-normative) accounting theory mightnow receive wider attention. Indeed, duringthe late 1970s and early 1980s the complemen-tary price-level adjustment standards promul-gated by the Financial Accounting StandardsBoard (SFAS No. 33, 1979) and the CanadianInstitute of Chartered Accoumants (CICA,1982, Handbook, Section 4510) could be inter-preted as a step toward such a conditional-normative approach, as statement readerswere offered a current cost model, in additionto the historical cost model. The CIGl Hand-book went even farther by offering (in additionto the traditional basis) an option from threedarerent valuation models. Although suchoptions are sti ll r ecommended in those coun-tries, the legislations themselves have beenabandoned under the impact of politics as wellas the positive accounting trend - cf. Beaver &Landsman (1983) whose publication seems tohave influenced the pertinent FASB decision.Some reasons for this reluctance on the partof academic accountants were the previouslymentioned lack of training, insufficient back-ground research, and too little interest in thepertinent philosophical foundations. But the

decisive factor seems to have been the applica-tion of empirical-statistical methods (owing tothe quantitative revolution in the social scien-ces), which during the 1970s absorbed theattention of most of the bright young account-ing researchers. Yet in the 1990s the urgencyof settling ethical and other normative pro-blems in accounting offers new opportunitiesto explore a purpose-oriented approach, itsnorms and means-end relations.

(4) A glance at other applied sciences showsthat, for example, practising physicians, engi-neers, etc., routinely apply means-end rela-tions no less than practising accountants do.This gave rise to investigating the nature ofmeans-end relations from a more generalpoint of view; it was done in Mattessich(1978) where the epistemological problems ofapplied sciences in general were explored.This book (I nstrumental Reasoning and Sys-tems Methodology) was preceded by severalpapers (e.g. Mattessich, 1974, 1976) all ofwhich foreshadowed related ideas.

As far as formalized means-end relations (orinstrumental hypotheses - in contrast topositive hypotheses) are concerned, their fivemajor characteristic features are:

(i) they are goal-oriented and their simplestlogical form is of the following fmperativetype: To attain end E, under circumstancesC, choose means M (as compared with a posi-tive hypothesis of a form like If event Aoccurs, under circumstance C, then event Bwill occur);

(ii) they are highly efficiency responsive (i.e.cost/benefit and attainment sensitive);

(iii) their acceptance criteria are based onthe preceding two characteristics;

(iv) their degree of generality is limited incomparison to law-statements; and

IfAccounting and naZytfcaI Metbods (Mattcssich, 1964) found wide response in the accounting literature (particularlyin the 1960s and 197Ck), it was partly because of its Introduction of dgorous analytical methods and financiaI simulationmodels to our dIscipIIne, partly because of the formulation of basic assumptions and their axiomatizatIon. However, t ecrudal aspect of tbfs book, tbat of kauncbing apurpose-orknted, and bence wnditional-nonnative tbeo?y of acwunt-fng, aroused little attention - though the need for a functIonal and purposedented approach was poInted out In theIntroduction (pp. 8-9) and elaborated in Chap. 7 (patticularly pp. 232-239).


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TABLE 1. Ilh mtion of a simplified instrumentalhypothesis

1. Minority shareholdersobjective

2. Empirical relationship

3. Analytical relationship

4. Inductive inference

To maintain a moderatestandard of living (throughregular dividends) withouteroding his investment incompany XMaintenance of a moderateliving standard is (undergiven circumstances) likely tobe attained by maintainingfinancial capitalMaintaining financialcapital implies measuringincome adjusted for generalinflation onlyMeasure income on the basisof general inflation

(v) they are predominantly decision- oraction-oriented.

A simplified illustration of such an instrumen-tal hypothesis is offered in Table 1. It is basedon the presumed usefulness of general inflationadjustments of financial statements from theviewpoint of a minority shareholder of com-pany X. A first glance at Table 1 may not revealthe fundamental difference between an instru-mental vs a positive hypothesis. After all, theempirical and analytical relations (items 2 and3) as well as the inductive inference (item 4)Seem to be the same in both hypotheses.

Hence the question arises: is CoNAM and thepositive approach not pretty much the same? Ido not deny the existence of a common basis;but apart from the differences pointed outabove (items i-v), CoNAM not only articulatesthe objective or norm within the argumentproper, but would actively support the searchfor an extended economic basis capable ofaccommodating a plurality of goals (beyondmere wealtb maximization). Furthermore, itwould make a concerted effort towards devel-oping an entire catalogue of such instrumentalhypotheses for most or all of the importanteventualities arising in accounting. Depending

on the specific, preconceived objective, theappropriate instrumental hypothesis could bepulled from this catalogue and applied (hencethe term conditional in CoNAM).

Let me illustrate the fundamental differencebetween the positive hypotheses of PAT vs theinstrumental hypotheses to be formulatedunder CoNAM by juxtaposing two hypotheses(H 4 and H 7) formulated by Watts (1992, pp.15, 22) to the corresponding instrumentalhypotheses (IH 4 and IH 7):

Hrpothesis 4: The greater the value of a corporationsfixed assets, the greater the likelihood that its financialstatements included an allocation of profits for renewals,repairs, maintenance or depreciation.HyPotbeA 7: The larger the size of a corporation whosenet income is increased (decreased) by a proposedaccounting standard, the greater the likelihood that itsmanagers will lobby against (for) the standard.

Such hypotheses say nothing about whatmanagement ought to do, but merely offer avague picture of what is presently being doneby some management, without confirming thatthis is the right way of doing things. But suppose such c o n j b n a t i o n might be obtained,then the following instrumental hypotheses(II-0 could be formulated on the basis of H 4and H 7 plus further research:

ZH 4: Company X wants to maximize itswealth. The value of fixed assets of companyX is above so and so many dollars (the amountwould be stated as precisely as possible underthe circumstances). Then it is recommended toinclude in its Financial Statements an allocationof profits for renewals, repairs, maintenance ordepreciation.

ZZZ 7: Company X wants to maximize itswealth. The companys assets exceed a certainamount (to be stated as precisely as possibleunder the circumstances) and its net incomewould be increased (decreased) by a proposedaccounting standard. Then, it is recommendedthat its managers should initiate lobbyingagainst (for) such standards.

Whereas the positive hypotheses are some-what vague and of little use to the practitioner,


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274 R. MATTESSICH

the instrumentaI hypotheses give clear direc-tions for attaining the stipulated end, providedthe underlying empirical research can be reliedupon. Thus, means-end relations play animportant role in everyday life as well as inbusiness dealings; they also have a decisiveplace in the applied sciences. And yet, theserelations are rarely explored by conventionalempirical research - at least not openly ordirectly.8 Why is this so, and what are themajor difficulties in formulating means-endrelations in a more scientific fashion? Someanswers to this question may be found in theabove-mentioned criteria themselves; for exam-ple, in the limited degree of their generality(compared with positive law statements) andtherefore in their restricted range of applica-tion. Another reason lies in the fact that meansas well as ends rarely have one-to-one corre-spondences (a specific tool may serve severalpurposes to various degrees, and a specific endcan be achieved by various means, again prob-ably at various degrees of efficiency and effec-tiveness). And as to the argument that theultimate basis of instrumental hypotheses,namely their use or objective, may not alwaysbe obvious, this is no obstacle but rather anincentive. Because it is high time to establisha methodology that would make those usesmore transparent.

This section has hopefully dispelled thebelief that CoNAM is merely a vision withoutany roots in present-day academic research.Although this paper has a programmatic com-ponent, the conditional-normative methodol-ogy is based on a long-standing tradition inrelated disciplines and even ln accounting lit-erature. Here, one might also add that theadvent of expert systems in accounting mayimpart particular urgency to the search forthe underlying norms and means-end rela-tions. In medicine, for example, expert systems

are capable of diagnosing diseases and recom-mending corresponding therapies. Yet they dothis not on a purely positive basis, but by meansof principles typical for an applied science. Inthese expert systems, objectives and means-end relations play a decisive role. The success-ful operation of expert systems in medicine,engineering, meteorology and other appliedsciences is irrefutable evidence that those sys-tems are based on practical inference and somekind of conditional-normative theory. In design-ing an expert system, one must first have a clearpicture of the goal or goals which a particularsystem is to achieve (e.g. whether it should pro-duce financial statements on the basis of nom-i n a l , or real f i n a n c i a l , or phys i c a l capitalmaintenance). Furthermore, one must knowexactly the means (the structure of the inflationaccounting model if, for example, financial capi-tal maintenance should be the basis of choice)through which the objective is attained effi-ciently. Thus the future advent of viable accoun t -i n g exp er t systems may stimulate the interest inCoNAM, and could become a welcome ally in thepromotion of the latter.

ACCOUNTING REPRESENTATION ANDREALITY

The problem of whether accounting can ordoes represent reality, and to what extent itmay do so, has engendered much contraversy. First of all, one has to make clear wb a tone means by rea l i t y . have tried to explainthis through the so-called onion model (seeMattessich, 1991) which envisages reality as ahierarchy, consisting of many layers (from ulti-mate to physical, chemical, biological, mental,and social reality), each of which is character-ized by its emergent properties, whereby alower or more basic layer is enveloped by the

As commendable as the FASBs (19BCk, 19B5) attempt is to encourage conditional-normative research, it hardly aspiresto the logical and epfstemologtcul exploration of means-end relations. Yet, already In the 196Os, it was recognized, asHakansson (1%9, p. 39) points out, that to advance knowledge signiticantly in normadve accounting, the method ofpostulation and deduction cannot be dispensed with.


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next higher layer, as in an onion. Thus itbecomes essential to distinguish, for example,between physical and social reality, and to qual-ify a certain manifestation of reality either asphysical, social, etc.

The second question concerns the dlstinc-tion between a specif ic segment of reali tyand the attempt to represent it conceptual ly.Occasionally, accountants confuse these twostages; Heath (1987, pp. 2-4) for example,asserts that owners equity and income arenot real but mere concepts, ignoring thatbehind these concepts stands the social realityof ownership right and its growth. Sterling(1988, pp. 4-5) similar to Heath, insists thatwith rare exceptions accounting numeralsdo not represent phenomena, any phenomena.

Another problem, occasionally raised bymembers of the critical-interpretive camp,concerns the assertion that accountants donot represent reality but create it. I wouldrather say they do both. Obviously, realitychanges with every event and with everyhuman thought and action (whether it is thebirth of the atom bomb, the emergence of anovel virus, the introduction of a new socialinstitution, or the advent of computerizedspreadsheets). Hence we are faced with achoice: either to abandon any kind of science(or other conceptual representation, like speak-ing and writing) out of fear that by doing so wemight influence reality to such an extent thatthose representations are no longer accurateenough or, alternatively, go ahead with ourconceptualizations, but later check anddescribe to what extent a particular measureor representation has influenced the situation- though sometimes this is not possible (cf.the Heisenberg Principle of quantum mech-anics). Thus, there is no reason to deny eitherthat accountants create new realities or thatthey try to represent them.However, it is crucial to distinguish betweenthat segment of reality which serves as a tool ofrepresentation from the one which is theobject of cognition and representation. Thisduality is so deeply rooted in our mental andlinguistic habits that without it we could under-

stand neither the nature of language nor that ofscience. And let us not forget that the conceptual structures which usually serve to representreality have always some kind of physical mani-festation (e.g. ink and paper, air and soundwaves, tapes with magnetized dots, neuronsand electric charges as well as neural trans-mitters, etc.). In other words, we cannot repre-sent some parts of reality without employingother parts of it. Already prehistoric people didthis when they represented real economicgoods and events by transferring real claytokens from one container into another (a typi-cal example of the transition from figurative orpictorial to conceptual thinking).

The philosophical attitude here assumed isnot so much that of naive realism, but corre-sponds to the critical realism of Hartmann(1964) and the hypothetical realism ofCampbell (1966a,b) which the renowned ethol-ogist and Nobel laureate Konrad Lorenz (1977)enriched in a profound and insightful way. Thisattitude recognizes that our awareness of rea-lity is based on the interdependence of theobjective and the subjective, in which theformer constantly adjusts the latter step bystep. Of course, we see reality through glassestinted by the utilitarian trend of the evolution-ary process. But this does not imply that whatwe see is unrelated to such a reality. AndKants notion of a priori knowledge (whetheranalytical or synthetical) can also be adapted; itstill is prior to an individuals experience, yetacquired by experi ence in the evolutionaryprocess of the species and its precursors. Lorenzregards the idealist as concentrating only on themirror (i.e. the mind) without admitting the rea-lity beyond it, while he regards the (naive) realistas focusing on the outside, but neglecting themirror as part of reality: Zbus, both are inbib-i ted from seeing that there is an obverse toevery mirror. But tbe obverse does not reflect,and to this extent the mi r ror is in the samecategory as the objects that it refl ects (Lorenz,1977, p. 19). After all, is not the biologicalmechanism that enables us to reflect realityjust as real as that which is being reflected?The affirmative answer to this question leads


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276 R. MATTESSICH

to Fig. 1, where the accountants conceptualrepresentation is deliberately shown as partof his reality.

We humans simply cannot do without con-stantly representing the world around us by allkinds of things, foremost by pictures and con-cepts - even if this reality is not static butdynamic. And this includes accountants whotry to represent segments of economic realityby accounts, financial statements, and so on.Take the following situation in which there ishardly a problem of distinguishing betweenobservable economic phenomena and equallyobservable accounting abstractions describingsuch phenomena. For example, the economicphenomenon of a cash purchase of merchan-dise to the amount of 1000. This is observableby the handing over of cash and merchandisea n d the accompanying bill. The accountantsabstraction is observed by his debiting in theledger the Inventory account and crediting thecash account to the amount of 1000. Each ispart of a different segment of reality, butthere is hardly any danger of confusing thetW0.

A more challenging question is whether thedistinction between rear@ and its concep tua lr ep re sen ta t i o n does not smack of Cartesianmind-body duality untenable in the face thatmind itself is but a function of the body. But Iam far from invoking the Cartesian duality. Inthis paper the distinction between reality andits conceptual representation is based merelyon the fact that the human mind, as muchphysical as it might be, is a m i r r o r for reflect-ing our environment, as well as envisioningnew possibilities for this environment. And ifthere exists a pertinent fundamental questionin accounting, it concerns the ex t en t t o wh i c haccoun ta n t s can an d do r ep r esen t segmen t so f r eu l f~ . Is it a representation in a rigorouspositive sense, or in a pragmatic sense, ormerely in the intuitive scnsc of everyday life?Let us try to answer this question.

The argument pivots on the schematic out-line of Fig. 1 in which the conceptual represen-tation (CoNAT) is shown (as a special segmentof total reality) on the left-hand side. Let us

assume that positive accounting theory orany similar pure economic theory is capableof representing economic reality in a rigorousscientific sense by means of probabilistic pre-sent value models or other sophisticated pro-cedures. This pos i t fve representation isdepicted in the small box on the top left (Fig.1). But, obviously, this is neither the way prac-tical accountants represent reality nor the waymost academics recommend that it ought to bedone. Accountants actually represent realityp r a gma t i c a l l y , and this is depicted in thesmall box at the bottom (left).

It seems that an explanation is called forwhy, and to what extent, this pragmaticrepresentation deviates from the scientificone. Since a conditional-normative accountingtheory (CoNAT, i.e. the large vertical rectangleon the left - Fig. 1) embodies both such repre-sentations, it should be possible to connect thetwo, perhaps even analysing where and whysuch a discrepancy occurs. In other wordsone should be able to answer the perennial

I Positive ConceptualRepresentation

Instrumental HypothesesMeans-End Relations)

I REALITY

Li IIII

AccountantsI

I10 1 Decision Makers- CEO, Managers, etc

Fig. 1. Conditional-normative accounting theory andreality.


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end relations, indicating the means that lead(under specific circumstances) to a stipulatedgoal. These relations, so characteristic of theapplied sciences, have to be found and con-firmed empirically, but usually their determina-tion and confirmation is difficult and imprecise,and goes beyond the bounds of positivemethodology.

While other applied sciences have takenadvantage of exploiting conditional-normativemethodology, the received view of accountinghas spurned attempts to go beyond its positivebasis. In medicine, for example, expert systemsreflect the value judgments and means-endrelations, and in legal science the logic ofnorms has been explored and applied. Canaccounting afford to shut itself off from thistrend and behave as though it were a purescience? Have our leading researchers learnednothing from the history of science and theprice to be paid for a narrow outlook? Whobelieves that statistical empiricism can solveall accounting problems? Are not the many con-tradictions between theory and practice vividevidence that in accounting we have not doneenough to serve the practitioner, the stock-holder and, above all, society at large? Haveaccountants lost their initiative to experi-ment? Dont they see that an applied sciencecannot be conducted in the same fashion as apure science, or do they really believe thataccounting is an instance of the latter?

Accounting shows the major characteristicsof an applied science (resting only on law-statements of other disciplines, such as eco-nomics and the behavioural sciences; contain-ing many norms; depending on cost/benefitconsiderations; and being researched at pro-fessional schools). Therefore a general frame-work of accounting requires more than apositive basis. But the normative extension(means-end relations, etc.) of accounting,though practised and taught informally, isneglected in conventional accounting theory.There are many present and future accountingneeds (many of them not provided for in neo-classical economics) that may encourage the

application of a conditional-normative account-ing methodology, for example: those expressedby the FASB; closing the gap between practiceand theory; ethical considerations; greateremphasis of policy research; the endeavourto construct accounting and auditing expertsystems; the quest for the most realistic repre-sentations permitted under a cost/benefit cri-terion; the revelation of hidden value judg-ments in standard-setting; the advent of expertsystems, and so on.

Thus this paper has sketched a methodologythat could explain valuation, income measure-ment, and other accounting phenomena - andwhich, in time, may serve actual practice aswell. The major features of this methodologyare: (i) recognition that academic accountingis an appZied science; (ii) more attention tovalue judgments and the peculiarities of thehypotheses that relate means to ends; (ii)recognition that the neoclassical economicbasis of present accounting theory is too narrowto accommodate the many goals and subgoalspursued in accounting; and (iv) the need for acomprehensive catalogue of objectives and thecorresponding (empirically determined)means-end relations. This catalogue mightserve the customers of accounting either ina tailor-made or customized (standar-dized) way, supplying them information thatfits their particular needs and value judgments.

Obviously, the implementation of such amethodology would have to be step by step,but even the first one, a clear disclosure ofall the pertinent value judgments, wouldalready constitute a major advance. The result-ing conditional-normative framework wouldconform to the requirements of the appliedsciences in general; one may thus have to besatisfied with less rigorous testing proceduresthan those of the pure sciences. Yet the result-ing theories need not forego objectivity.Indeed, the major criterion of objectivity of anapplied discipline is the clear revelation of itsvalue judgments (among feasible alternatives)and the empirical testing of its prescriptions.


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Campbell, D. T., Pa t t er n Ma t c h i ng as an Essen t h l I n L I f s t a l now i n g (New York: Rinehard Winston,1 6b).

Canadian Institute of Chartered Accountants (CICA), Reporting the Effects of Changing Prices, in CICAHandbook , Section 4510 (Toronto: CICA, 1982).

Chambers, R. J., Accountfng, Eva l ua t i o n and Econom i c Bebav i ou r (EngIewood Cliffs: Prentice-Hall,1966; reprinted in the Accounting Classics Series, Houston: Scholars Book Co., 1975).Chambers, R. J., Metrical and Empirical Laws in Accounting, Accoun t i n g Ho r i z ons (December 1991) pp.1-15.

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