Chapter 02

The events and behavioural

approaches
 New approaches in
accounting theory
• Among the new approaches, we may
distinguish:
– the events approach
– the behavioural approach
– the human information processing approach
– the predictive approach
– the positive approach
• Each of these approaches has generated new
methodologies and interest, and has employed
unique ways of looking at accounting problems
 The nature of the events
approach
• The events approach was first explicitly
stated after a divergence of opinion
among the members of the Committee
of the American Accounting Association,
which issued a Statement of Basic
Accounting Theory in 1966
• A majority of the Committee members
favoured the value approach to
accounting
 The value school

The value school, also called the use-

need school, considers that needs of
users are known sufficiently to allow
the deduction of an accounting
theory that provides optimal input to
the specified decision models
Conventional accounting model
weaknesses
The conventional accounting model, based on
the value approach, suffers from the following
weaknesses:
• its dimensions are limited
• its classification schemes are not always
appropriate
• its aggregation level for information is high
• its degree of integration with the other
functional areas of an enterprise is too
restricted
 The events approach
• The events approach suggests that the purpose
of accounting is ‘to provide information about
relevant economic events that might be useful in
a variety of decision models’
• The characteristics of an event may be directly
observed and are of economic significance to the
user
• Given the number of characteristics and the
number of events susceptible to observation that
might be relevant to the decision models of all
types of users, the events approach suggests a
tremendous expansion of the accounting data
presented in financial reports.
 Financial statements
• In the value approach:
– the income statement is perceived as an
indicator of the financial performance of
the firm for a given period
– the statement of cash flows is perceived
as an expression of the changes in cash
• In the events approach:
– the income statement is perceived as a
direct communication of the operating
events that occur during a given period
 Financial statements (cont’d)

– the statement of cash flows is better

perceived as an expression of financial
and investment events
– in other words, an event’s relevance
rather than its output on cash flow
determines the reporting of an event in
the statement of cash flow
 The normative events theory
of accounting
• The normative events theory of accounting has
been tentatively summarised as follows:
– ‘In order for interested persons … to better
forecast the future of social organizations, … the
most relevant attributes … of the crucial events
… which affect the organization are aggregated
… for periodic publication free of inferential bias’
• The objective of the normative events theory of
accounting is to maximise the forecasting accuracy
of accounting reports by focusing on the most
relevant attributes of events crucial to the users
 The normative events theory of
accounting (cont’d)
• The theory calls for:
1. an explicit taxonomy of real events,
which the accountant is to report
2. more effective classification schemes,
with particular reference to labels that
make it possible to associate
observations of particular events with
other related events
3. the structuring of an events-based
accounting information system
 Events-based accounting
information systems
• One way to meet the objective of the normative
events theory is to integrate it with database
approaches to information management that
assume an enterprise creates a centrally
managed database for sharing among a wide
range of users with highly diverse needs
• Such accounting systems include:
– hierarchical models
– network models
– relational models
– entity-relationship models
– REA accounting models
 The hierarchical model
• The hierarchical model is based on the idea of
an events-accounting information system that
allows users to make enquiries of a database
• The components of such a system include:
– a mass database that contains a record of
all events in some generalised format
– a user-defined structure that provides each
user with his or her own conceptual
structure (and aggregation levels) of the
events
– user-defined functions, or operations, for
manipulating the data
 The network model
• The network model is based on the
concept of multidimensional accounting
presented by Ijiri, and Charnes,
Colantoni & Cooper
• The network model uses as input the
initially unstructured database and a
collection of queries or data requests to
develop a hierarchical data structure
that will minimise the number of
records to be accessed to answer the
desired set of queries
The entity-relationship model
• The entity-relationship model assumes that
an accounting system is most naturally
modelled in a database environment as a
collection of real-world entities and
relationships among those entities
• This model basically replaced the
traditional chart of accounts and double-
entry bookkeeping procedures by viewing
entity-relationship in the form of entity
tables and relationship tables
 Evaluation of the events
approach
• The events approach offers certain advantages
and certain limitations
• The advantages predominantly take the form
of efforts to provide information about
relevant economic events that might be useful
to a variety of decision models
• As a result, more information may be available
to users who can then use their own utility
function to determine the nature and level of
aggregation of the information they need to
make their particular decisions
The usefulness of the events
approach
The usefulness of the events approach may
depend on one or more of the following five
factors:
1. the psychological ‘type’ of the decision
maker
2. information overload, which may result
from the attempt to measure the
relevant characteristics of all crucial
events affecting the firm
3. an adequate criterion for the choice of
the crucial events has not been
developed
 The usefulness of the events
approach (cont’d)
4. measuring all the characteristics of an
events approach may prove to be
difficult, given the state of the art of
accounting
5. more research may be needed to
examine the impact of different design
approaches to the events approach
theory, such as the hierarchical,
network, relational, entity-relationship
and REA models
The nature of the behavioural
approach
• Most traditional approaches accounting theory
construction have failed to consider user behaviour
in particular and behavioural assumptions in
general
• The behavioural approach to accounting theory
formulation emphasises the relevance to decision-
making of the information being communicated,
and of the individual and group behaviour caused
by the information being communicated
• The behavioural approach to accounting theory
formulation is concerned with human behaviour as
it relates to accounting information and problems
 Behavioural accounting
• Although relatively new, the behavioural
approach has generated enthusiasm and a
new impetus in accounting research that
focuses on the behavioural structure within
which accountants function
• A new multidisciplinary area in the field of
accounting has been conveniently labelled
‘behavioural accounting’
• The basic objective of behavioural accounting
is to explain and predict behaviour in all
possible accounting contexts
 Behavioural effects of
accounting information
• A more recent and exhaustive attempt by
Dyckman, Gibbins and Swieringa illustrates the
nature of studies of the behavioural effects of
accounting information
• We may divide these studies into five general
classes:
1. adequacy of disclosure
2. usefulness of financial statement data
3. attitudes about corporate reporting practices
4. materiality judgements
5. decision effects of alternative accounting
procedures
 Adequacy of disclosure
• Three approaches were used to examine the
adequacy of disclosure:
1. the first examined the patterns of use of
data from the viewpoint of resolving
controversial issues concerning the inclusion
of certain information
2. the second examined the perceptions and
attitudes of different interest groups
3. the third examined the extent to which
different information items were disclosed in
annual reports and the determinants of any
significant differences in the adequacy of
financial disclosure among companies
 Adequacy of disclosure (cont’d)
• The research on disclosure adequacy and use
showed:
– general acceptance of the adequacy among
financial statements
– recognition that the differences in disclosure
adequacy among financial statements are
due to such variables as company size,
profitability, and size and listing status of
the auditing firm
 The usefulness of financial
statement data
• Two approaches were used to examine the
usefulness of financial statement data:
1. the first examined the relative importance of
the investment analysis of different
information items to both users and
preparers of financial information
2. the second examined the relevance of
financial statements to decision-making,
based on laboratory communication of
financial statement data in terms of
readability and meaning to users in general
 The usefulness of financial
statement data (cont’d)

• The overall conclusions of these studies were

that:
– some consensus exists between users and
preparers regarding the relative
importance of the information items
disclosed in financial statements
– users do not rely solely on financial
statements when making their decisions
 Attitudes about corporate
reporting practices
• Two approaches were used to examine
attitudes about corporate reporting
practices:
1. the first examined preferences for
alternative accounting techniques
2. the second examined attitudes about
general reporting issues, such as how
much information should be available,
how much information is available, and
the importance of certain items
Attitudes about corporate reporting
practices (cont’d)
• These research items showed the
extent to which some accounting
techniques proposed by the
authoritative bodies are accepted, and
also brought to light some attitudinal
differences among professional groups
concerning reporting issues
 Materiality judgements
• Two approaches were used to examine
materiality judgements
1. the first examined the main factors
determining the collection, classification
and summarisation of accounting data
2. the second focused on what items people
consider to be material, and sought to
determine the degree of difference in
accounting data that is required before
the difference is perceived as material
• These studies indicated that several factors
appear to affect materiality judgements, and
that these judgements differ among
individuals
 Linguistic effects of accounting
data and techniques

• Linguistics and accounting have many

similarities
• Belkaoui argues that accounting is a language
and that according to the Sapir-Whorf
hypothesis its lexical characteristics and
grammatical rules will affect both the linguistic
and the non-linguistic behaviour of users
 Linguistic effects of accounting data
and techniques (cont’d)
• Four propositions derived from the linguistic
relativity paradigm to conceptually integrate
the research findings of the impact of
accounting information on the user’s
behaviour, are as follows:
1. users who make certain lexical distinctions
in accounting are enabled to talk and/or
solve problems that cannot be solved by
users who do not
2. users who make certain lexical distinctions
in accounting are enabled to perform tasks
more rapidly or more completely than
those who do not
 Linguistic effects of accounting data
and techniques (cont’d)
3. users who possess the accounting
(grammatical) rules are more predisposed
to different managerial styles or emphases
than those who do not
4. accounting techniques may tend to
facilitate or render more difficult various
managerial behaviours on the part of users
• These propositions have been empirically
tested and verified in two studies that
emphasise the importance of linguistic
considerations in the use of accounting
information and international standard-
setting
 Functional and data fixation
• Functional fixation originated as a concept in
psychology, arising from an investigation of
the impact of past experience on human
behaviour
• Dunker introduced the concept of the
functional fixation to illustrate the negative
role of past experiences
• He investigated the hypothesis that an
individual’s prior use of an object in a
function dissimilar to that required in a
present problem would serve to inhibit the
discovery of an appropriate, novel use for
the object
 Ijiri, Jaedicke and Knight
• Ijiri, Jaedicke and Knight viewed the decision
process as being characterised by three
factors:
– decision inputs
– decision outputs
– decision rules
• They introduced the conditions under which a
decision maker cannot adjust his or her
decision process to a change in the accounting
process
• They attributed the inability to adjust, if it
existed, to the psychological factor of
functional fixation
Concepts of functional and data
fixation in accounting
Various hypotheses exist for both the
functional and data fixation results in
accounting studies, namely:
– The conditioning hypotheses: It
may be that the subjects of
experiments, mostly accounting
students, have been conditioned to
react to some form of accounting
outputs and have failed to adjust their
decision processes in response to a
‘well-disclosed’ accounting change
 Concepts of functional and data
fixation in accounting (cont’d)
– Prospect theory and framing
hypothesis: Framing occurs because
the wording of a question has the
potential to alter a subject’s response
– Primary versus recency ego
involvement: In matters of ego
involvement with an accounting
technique just learned, subjects will give
importance to what is perceived as
relevant, significant or meaningful
 Information inductance
• The individual’s behaviour is influenced by
information in two ways:
1. through information use when acting as a
recipient
2. through information inductance when acting
• As stated by Prakash and Rappaport:
‘An individual’s anticipating the consequences of
his or her communication might lead him or her –
before any information is communicated and,
hence, even before any consequences arise – to
choose to alter the information, or his or her
behaviour, or even his or her objectives. This is
the process of information inductance’
Time factors and information
inductance
According to Prakash and Rappaport, time
factors seem to govern inductance as follows:
• ‘First, communication of information that is
either in fact a description of the sender’s
behaviour, or is regarded as such by the
information sender, or concerning which the
information sender has some apprehension
that it could be so regarded by the
information recipient, will be strongly
conducive to information inductance
• ‘Second, consequences that represent
possible feedback effects on the information
sender will be strongly conducive to
information inductance’
 The human information
processing approach
• Interest in the human information processing
approach arose from a desire to improve both the
information set presented to financial data users
and users’ ability to use such information
• Theories and models from human information
processing psychology provide a tool for
transforming accounting issues into generic
information processing issues
• There are three main components of an
information processing model:
– input
– process
– output
 Input
• Studies of the information set input (or cues)
focus on the variables that are likely to affect
the way people process information for
decision making
• The variables examined are:
1. the scaling characteristics of individual
cues
2. the statistical properties of the information
set
3. the informational content or predictive
significance
4. the method of presentation
5. the context
 Process
Studies of the process component
focus on the variables affecting the
decision maker, such as:
1. characteristics of judgement
2. characteristics of decision rules
 Output
• Studies of the output component focus
on variables related to the judgement,
prediction or decision that are likely to
affect the way the user processes the
information
• The variables examined include:
1. the qualities of the judgement
2. self-insight
Four different approaches
The varying emphasis on any of the
three components of an information
processing model led to the use of
four different approaches:
1. the lens model approach
2. probabilistic judgement
3. pre-decisional behaviour
4. the cognitive-style approach
 The lens model
• Brunswick’s lens model allows explicit recognition of
the interdependence of environmental and
individual-specific variables
• The model is used primarily to assess human
judgemental situations in which people make
judgements on the basis of a set of explicit cues
from the environment
• The model emphasises the similarities between the
environment and the subject response
• Most accounting research using the lens model has
been motivated by the need to build mathematical
models that represent the relative importance of
different information cues, and by the need to
measure the accuracy of judgement and its
consistency, consensus and predictability
 The lens model (cont’d)
• Various accounting-decision problems have
been examined using the lens model. These
include:
1. policy-capturing studies, which examine
the relative importance of different cues in
the judgement process, and consensus
among decision makers
2. accuracy of judgements made on the basis
of accounting cues
3. effects of task characteristics on
achievement and learning
 Probabilistic judgement
• The probabilistic judgement approach,
sometimes known as the Bayesian
approach, focuses first on a comparison
of intuitive probability judgements and
the normative model
• The normative model for probability
revision, known as Bayes’ Theorem, is
used as the descriptive model of human
information processing
 Bayes’ Theorem
The a posteriori probability form of Bayes’
Theorem states that:

where H1 and H2 are the alternative

hypothesis and D is the datum
 Probabilistic judgement and
Bayes’ Theorem
• The basic question examined in the
early research in probabilistic
judgement is whether probabilities are
revised in the direction indicated by
Bayes’ Theorem
• The findings suggest that this occurs to
a lesser extent than Bayes’ Theorem
suggests
• The phenomenon had been labelled
conservatism
 Heuristics and probabilistic
judgement
• Tversky and Kahneman reported that people
rely on a number of heuristics to reduce the
complex task of assessing probabilities and
predicting values to simpler judgemental
operations
• These heuristics include:
– representativeness, which refers to the
heuristic people use when they assess the
probability of an event on the basis of its
degree of similarity, or representativeness,
to the category to which it is perceived to
belong
 Heuristics and probabilistic
judgement (cont’d)
– availability, which refers to the heuristic
people use when they assess the
probability of an event on the basis of
the ease with which it comes to mind
– adjustment and anchoring refer to the
heuristic people use when they make
estimates by starting with an initial
value and then adjusting the value to
yield the final answer
 Pre-decisional behaviour
• Most of the experiments based on the lens
model or on probabilistic judgement involve
highly repetitive situations in which the task
is well-defined, the subject is exposed to
the right cues, and the problems are pre-
specified, meaning that these experiments
fail to explore the stages of pre-decisional
behaviour
• Pre-decisional behaviour applies to the
dynamics of problem definition, hypothesis
formation and information search in less
structured environments
 Pre-decisional behaviour (cont’d)

• Pre-decisional behaviour is generally

examined using process-tracing methods
• Process tracers tend to rely on four
methods:
1. eye movements
2. information search behaviour
3. information cue attending or response
time
4. verbal ‘think aloud’ introspective
protocols
 The cognitive-style approach
• ‘Cognitive style’ is a hypothetical construct used to
explain the mediation process between stimuli and
responses
• Five approaches to the study of cognitive style in
psychology have been reported:
– authoritarianism
– dogmatism
– cognitive complexity
– integrative complexity
– field dependence
• Accounting studies based on these five approaches
have focused on classifying information users by their
cognitive style and on designing information systems
that are best suited to the decision maker’s cognitive
style
 Cognitive relativism in
accounting
• Cognitive relativism in social psychology has
created strong interest in the knowledge
structure used in memory, and also in how
people learn
• Gibbins describes professional judgement in
public accounting as a five-component process:
1. schemas or knowledge structures accumulated
through learning or experience
2. triggering event or stimulus
3. judgement environment
4. judgement process
5. decision/action
 Cognitive relativism in accounting
(cont’d)

• The essence of cognitive relativism in

accounting is the presence of a cognitive
process that is assumed to guide the
judgement/decision process
Cultural relativism in accounting
• Cultural relativism postulates that culture
shapes the cognitive functioning of
individuals who are faced with an accounting
or auditing phenomenon
• This view holds that culture determines the
judgement/decision process in accounting
• The definition of the components of culture is
provided by Hofstede as four dimensions that
reflect a country’s cultural orientations and
explain 50 per cent of the differences in value
systems among countries, being:
1. individualism versus collectivism
2. large versus small power distance
 Cultural relativism in accounting
(cont’d)
3. strong versus weak uncertainty
avoidance
4. masculinity versus femininity
• This cultural relativism model assumes that
differences among these four dimensions
create different cultural arenas that have
the potential to dictate the organisational
behaviour that may shape the judgement
decision process in accounting
 Cross-cultural research in
accounting
There are at least five possible basic approaches
to cross-cultural research in accounting, which
are:
1. parochial studies, being the approach
comprising studies of the USA conducted by
Americans
2. ethnocentric studies, comprising studies that
attempt to replicate American accounting
research in foreign countries
3. polycentric studies, which comprise studies
that describe accounting phenomena in
foreign countries
 Cross-cultural research in
accounting (cont’d)
4. comparative accounting studies, which
focus on identifying the similarities in
accounting phenomena and cultures
around the world
5. culturally synergistic studies, which
focus on creating universality in
accounting while maintaining an
appropriate level of cultural specificity
Reasons for cross-cultural
research
Cross-cultural research is needed in
accounting for the following five
reasons:
1. it would establish the boundary
conditions for accounting models
and theories
2. it would enable evaluation of the
impact of cultural and ecological
factors on behaviour in accounting
Reasons for cross-cultural research
(cont’d)

3. although variables are often generally

confounded, the confounding is not
complete, as a few ‘cultunits’ may
present deviant cases
4. cultures act as ‘natural grain-
experiments’ by being high or low on
variables of particular interest
5. cultures determine aspects of
psychological functioning