GODFREY

HODGSON
HOLMES
TARCA

CHAPTER 4
A CONCEPTUAL FRAMEWORK
The role of a conceptual
framework

… a coherent system of interrelated objectives

and fundamentals that is expected to lead to
consistent standards and that prescribes the
nature, function and limits of financial
accounting and reporting.
FASB

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The role of a conceptual
framework
Benefits:
– consistent, logical reporting requirements
– greater compliance
– enhanced accountability
– fewer specific standards
– enhanced understanding of reporting
requirements
– more economical standard setting

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Objectives of conceptual
frameworks

Financial reporting should provide information

that is useful to present and potential
investors and creditors and other users in
making rational investment, credit and similar
decisions.
FASB

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Objectives of conceptual
frameworks

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Principles-based and rule-based
standard setting
• IASB mostly produces consistent, coherent
principles-based standards
• Rule-based standards may increase
comparability and verifiability and may reduce
earnings management

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Information for decision making
and the decision-theory approach
• Accounting data are required for decision
making or accountability purposes
– stewardship
– decision making
• users

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Information for decision making
and the decision-theory approach
Decision-theory process
Overall theory
of accounting

Individual Prediction Decision

accounting model of model of
system user user

8
International developments: the IASB
and FASB Conceptual Framework
• ED has several contentious areas:
– entity vs proprietorship perspective
– primary user group
– decision usefulness and stewardship
– qualitative characteristics

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A critique of conceptual
framework projects
• Approaches to developing a CF:
– scientific
• recourse to logic and empiricism or both
– professional
• prescribes the best course of action by recourse to
professional values

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Ontological and epistemological
assumptions
• Freedom from bias (neutrality)
– an information quality that avoids leading users to
conclusions that secure the particular needs, desires or
preconceptions of the preparers
• Solomons: freedom from bias as ‘financial
mapmaking’
• Feyerabend: scientific truth is not absolute
• Hines claims mainstream accounting is ‘taken-for-
granted’

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An unscientific discipline
• Is accounting a science?
– prescriptive by nature and value laden
• Stamp
Until we are sure in our minds about the nature of
accounting, it is fruitless for the profession to
invest large resources in developing a conceptual
framework to support accounting standards.

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The conceptual framework as a
policy document
– As a generalised body of knowledge, conceptual
frameworks fail a number of ‘scientific’ tests
– The distinction between theories and policies is
important
– CFs not produced in a political vacuum
– CFs may just be a reflection of the dominant
group’s will

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Conceptual framework for
auditing standards
• Auditing is a discipline based in logic
• The traditional verification role has evolved
into business risk auditing

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Summary
• The conceptual framework is intended to provide a coherent
and prescriptive guide to accounting practice
• If effective it should result in the communication of more
useful financial information to users
• Developing a conceptual framework has been a long and
complicated process
• Criticisms of conceptual framework projects exist
• Others debate the importance of these criticisms
• In auditing there has been a shift away from substantive
testing toward the role of client business risk
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• Theory Theory Theory Theory Theory Theory
Theory Theory Theory Theory Theory Theory
Theory Theory Theory Theory Theory Theory
Theory Theory Theory Theory Theory Theory
Theory Theory Theory Theory Theory

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• Theory Theory Theory Theory Theory Theory
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• Theory Theory Theory Theory Theory Theory
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• Theory Theory Theory Theory Theory Theory
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• Theory Theory Theory Theory Theory Theory
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• Theory Theory Theory Theory Theory Theory
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• Theory Theory Theory Theory Theory Theory
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• Theory Theory Theory Theory Theory Theory
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• Theory Theory Theory Theory Theory Theory
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• Theory Theory Theory Theory Theory Theory
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• Theory Theory Theory Theory Theory Theory
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• Theory Theory Theory Theory Theory Theory
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• Theory Theory Theory Theory Theory Theory
Theory Theory Theory Theory Theory Theory
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• Theory Theory Theory Theory Theory Theory
Theory Theory Theory Theory Theory Theory
Theory Theory Theory Theory Theory Theory
Theory Theory Theory Theory Theory Theory
Theory Theory Theory Theory Theory

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• Theory Theory Theory Theory Theory Theory
Theory Theory Theory Theory Theory Theory
Theory Theory Theory Theory Theory Theory
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• Theory Theory Theory Theory Theory Theory
Theory Theory Theory Theory Theory Theory
Theory Theory Theory Theory Theory Theory
Theory Theory Theory Theory Theory Theory
Theory Theory Theory Theory Theory

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Key terms and concepts

• Conceptual frameworks for accounting and

auditing
• Statement of accounting concepts
• FASB and IASB
• Principles-based and rule-based standards
• Decision making and decision-theory
• Professional values and self-preservation
• Business risk auditing
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