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The International Journal of Accounting

39 (2004) 431 – 436

Book reviews

W.R. Scott, Financial Accounting Theory, Third ed., Pearson Education Canada Inc.,
2003.

Bill Scott, Financial Accounting Theory has been recognized as one of the best
textbooks on accounting theory since the first edition was published in 1997. The book
steps back from the usual discourse about the standard-setting process, and places
accounting in its environment. The main topics facing accounting research for the last 40
years are discussed in the different chapters.
What is accounting theory? Few textbooks in accounting theory provide a straightfor-
ward answer to this question. And, when they do, the answer is often related only to
accounting. Scott, however, defines the fundamental problems (p. 8) of accounting theory
as the provision of different relevant information for both internal and external users. For
external users, the principal purpose of the information provided is to reduce adverse
selection while for internal users the goals are to motivate managers and avoid moral
hazard. His definition, based on a situation of fundamental information asymmetry, offers
a substantial improvement over past definitions expressed clearly or implicitly.
Zeff and Keller (1987) discuss in detail the standard-setting process and the constitution
of a conceptual framework that is, for them, the basis of accounting theory. Their book
reprints some of the most important articles written in accounting in the last 40 years.
Underdown and Taylor (1985) classical book of accounting theory discusses standard
setting, accounting measurement, and the disclosure of many different accounts. It is clear
that their definition of accounting theory: b. . . to provide a framework for (1) evaluating
current financial accounting practice and (2) developing new practice,Q cannot apply
anywhere outside the accounting domain. Wolk et al., 1992 propose another bstandard
settingQ definition of the accounting theory, while, in the same spirit, Kam (1990) writes a
definition that had been contested by Watts and Zimmerman: bA comprehensive theory of
accounting should provide rules for recognizing certain relevant economic objects and also
provide a basis for judging whether a given practice is dgoodT or dbad.TQ Most (1982)
confounds the conceptual framework, establishing the objectives of accounting, with the
theory itself: b(. . .), at the present time there is an unmistakable drive toward the
formulation of an accounting theory, often referred to as a conceptual framework.Q
Belkaoui (1992) definition seems to enter the modern era: bThe primary objective of an
accounting theory is to provide a basis for the prediction and explanation of accounting
behavior and events.Q Mathews and Perera (1996) also have some problems with the
concept of accounting theory. Their epistemological discussion of the question in chapter
432 Book reviews

four seems to have universal acceptance, but in chapter five, when they try to apply this to
accounting, they change the meaning of the words: bThere is a definite link between
accounting theory and accounting practice, in the sense that accounting theory
construction stems from the need to provide a rationale for what accountants do or
expect to be doing.Q Finally, Christensen and Demski (2003) are, after Scott, the first to
propose and apply a really coherent definition of accounting theory: bThe short answer is
that we want to study, to illuminate, the choice of accounting method. Our focus is on the
choice, not how to do the accounting per se (. . .). (. . .). This leads us to use economic
theory, in particular the economic theory of choice under uncertainty, as the workhouse in
studying this accounting choice.Q
With Scott’s book, accounting theory enters a new era. The basis of accounting
becomes an object of research and his discourse is theoretical. Since accounting is
supposed to provide information for decision making, the theory of accounting is firstly a
theory of decision.
Description of the content. After introducing the topic and establishing the theoretical
basis of the approaching chapter two provides a discussion of information under
certainty and uncertainty. Chapter three discusses the usefulness of decisions in
economic terms. Since these decisions are about investment in the market, Scott then
discusses the efficiency of security markets and includes a section on the Social
significance of properly working securities markets. Unfortunately, this section, based
implicitly on the Walrasian notion of equilibrium, presents an efficient market with
reasonable information as a possibility although none has ever been observed in the real
world. Accounting research had been driven by the notion of market efficiency for
decades. This book provides a very relevant survey of the economic, informational, and
financial implications of the provision of financial information. There is also a chapter
on measurement, which does not belong to accounting theory, per se. It is brought into
the debate, however, to demonstrate the great need for information to be accurate if it is
to be useful for the market. From this perspective, measurement becomes relevant for
theory as an object of research.
Next, the positive accounting theory is introduced and its economic and financial
origins are described at length. Its positivist origins, however, are totally ignored. There is
no mention of Comte as a possible epistemological source of the theory. The ties between
positive accounting and positive economics through the Rochester School are also totally
ignored. In this presentation, the positive theory results from adding one hypothesis (the
political cost) to agency theory and it can be added in a contractual–political paradigm.
Although this view obliterates at least half the message contained in the positivist position,
it is widespread in accounting research.
The next section reviews subsidiary topics. For example, the author underlines how
executive compensation has been revolutionized by agency theory. The question of
earnings management is also scrutinized, although there is no serious discussion of the
effect of such a practice on the efficiency of the market. A discussion of this topic is
also missing in the literature. To ignore the relationship between earnings management
and market efficiency can be intellectually risky. After the Enron affair, we can hardly
deny that there are some effects, and they seem to constitute a negation of market
efficiency.
Book reviews 433

Finally, the book discusses the standard-setting question against an economic


background. However, the question of standard setting as a market failure is discussed
only slightly as are transformations of the theory by notions such as Simon’s bounded
rationality or Stiglitz’s asymmetry of information. To ignore this topic is like saying that
accounting theory never evolves and that the basic notions had not been modified since
Jensen and Meckling (1976) or Watts and Zimmerman (1978). Even the most blind and
stubborn researcher in finance can no longer seriously contend that markets are efficient.
But, in accounting research it continues to be done explicitly or implicitly. If the possibility
of inefficiency is discussed, it is through the question of anomalies and is rapidly discarded
in favor of the notion of imperfectly efficient markets.
The question and problems at the end of the chapters are more practical than in many
other textbooks. Students have to prepare statements under specific conditions, calculate
probabilities, adjust utility functions, or calculate Beta. There are also questions that are
more traditional in accounting theory, as well as more original questions about important
pieces of research.
New edition. I compared the third edition with the first. The changes are not very major,
in part because the first edition was published in 1997, not very long ago. The most
important change is in regard to measurement. In the first edition there was a long chapter
on measurement and a relatively short one on the economic consequences of accounting
standards. In the new version, the topic of measurement situated in two chapters and the
discussion of economic consequences has been shortened and presented together with
positive accounting theory. The content of the book has not really changed appreciably
since the first edition. But, that edition constituted a radical improvement in financial
accounting theory textbooks.
In substance. The book flows well and although it is research oriented, there are
practical examples to illustrate various points that should make them easy for students to
grasp when they do the work at the end of the chapter.
If I had to pick a book to use to teach an undergraduate accounting theory course, it
would be this one, which I think this is actually the best on the market, by far. It can also
be used in many master-level courses as a main or subsidiary reference, as intended by the
author. Although there is no mention of the international context, where accounting is
supposed to inform the participants about the stock market, the topics covered are mostly
relevant.

References

Belkaoui, A. R. (1992). Accounting theory (3rd ed.). London7 Academic Press.


Christensen, J. A., & Demski, J. S. (2003). Accounting theory, an information content perspective (p. 465). New
York7 McGraw-Hill Irwin.
Jensen, M. C., & Meckling, W. H. (1976). The theory of the firm: Managerial behaviour, agency costs and
ownership structure. Journal of Financial Economics, 3, 305 – 360.
Kam, V. (1990). Accounting theory (2nd ed.). New York7 Wiley.
Mathews, M. R., & Perera, M. H. B. (1996). Accounting theory and development (3rd ed.). South Melbourne7
Nelson.
Most, K. (1982). Accounting theory (p. 568). Columbus7 Grid Publishing Inc.
434 Book reviews

Underdown, B., & Taylor, P. J. (1985). Accounting theory and policy making (p. 349). Oxford7
Butterworth-Heinemann.
Watts, R., & Zimmerman, J. (1978). Towards a positive theory of the determination of accounting standards. The
Accounting Review, 53(1), 112 – 134.
Wolk, H. I., Francis, J. R., & Tearney, M. G. (1992). Accounting theory, a conceptual and institutional approach
(3rd ed.). Cincinnati7 South-Western Publishing Co.
Zeff, S. A., & Keller, T. F. (1987). Financial accounting theory (3rd ed.). Singapore7 McGraw-Hill International.

Gaétan Breton
École des Sciences de la Gestion,
Université du Québec à Montréal, Canada

28 February 2004

doi:10.1016/j.intacc.2004.02.005

A. Pierce, N. Brenman, Principles and Practice of Group Accounts: A European


perspective, Thomson Learning, London, 2003 (XX+564 pp.).

For most large companies, consolidated financial statements are the preferred channels
of financial communication with investors. Textbooks on consolidation, group accounts,
or business combinations consequently are important. This textbook deals with
consolidation, so it is highly relevant, and because it has a European focus, it is especially
welcome. Few accounting textbooks cover accounting practices in different European
countries, and those that do focus on specific accounting regulations in just one European
country. The books that go beyond a specific institutional environment generally discuss
the entire domain of financial accounting, devoting only one or two chapters to
consolidation.
This book will be especially welcomed by European accounting academics. In
European universities, curricula for accounting degrees often include separate courses on
consolidation. In many continental European countries, there is a significant difference
between single-entity accounts and group accounts. The single-entity accounts often serve
as the basis for tax declaration, resulting in distortions of accounting figures for tax
reasons. Although fiscal consolidation is the rule in some countries, other countries require
that consolidated financial statements be corrected for tax-driven entries in the underlying
single-entity statements.
The decision of the European Commission to require the use of International Financial
Reporting Standards for the consolidated financial statements of listed companies from
2005 onwards will lead to the adaptation of local accounting laws and regulations. It is
hoped that the increased comparability of financial statements of listed companies will
have a positive effect on the European financial markets. In light of this development, this
book has a significant market potential. Although it begins with the U.K. and Irish
accounting regulations, it later emphasizes IAS/IFRS GAAP.
The regulatory frameworks are discussed in the fourth part of the book. The preceding
chapters deal with the mechanics of preparing consolidated financial statements. The book

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