Accounting Theory and Standard-Setting – Antecedents of Fair Value Accounting?

Posted by Graeme Dean - Mar 29, 2021

This blog entry arose because, coincidentally, in mid-February and March 2021  two articles appeared in Accounting History and Accounting Horizons respectively, discussing contributions to the literature of two members of the “Sydney School of Accounting”. One relates to the founder, Ray Chambers, the other to one its members, Frank Clarke. Both provide an understanding of the School’s focus, especially what is needed to reform accounting thought and practice. Reference to the Sydney School is attributed first to Murray Well’s July 1976 Accounting Review article, ‘A Revolution in Accounting Theory’ (pp. 471-82), while Clarke, Dean and Wells’ The Sydney School of Accounting: The Chambers Years (University of Sydney, 2012) provides a history of the School, especially its founder’s involvement, its main research and teaching ideas and its output.

The first article is Cambridge University’s Geffrey Whittington review of a biography of the Ray Chambers (Accounting Thought and Practice Reform: Ray Chambers’ Odyssey). First published online in Accounting History on 16 February 2021, it can be viewed at Whittington notes that he is a ‘critical’, but certainly ‘not hostile reviewer’. Footnote 1 of the article shows that he provided comments on drafts of the biography. EAA members might recall that an account of the biography had appeared as a January 2019 entry on the EAA ARC Blog that received thousands of views.

Whittington makes many useful points about Chambers and the School’s ideas in a well-informed and beautifully written analysis.  Points made include: Research since the 1960s has  often been misguided in respect of normative v. positive theory issues, with related implications for standards setters. Whittington aptly captures the reason for Chambers’ valuation preference (mentioning the need for “economic opportunities” in the form of his advocacy of a market (exit) price accounting appropriately adjusted for general price level changes) and he summarizes clearly why Chambers advocated the need for these data. Expectations, like forecast data, were rejected as being legitimate for inclusion in financial accounts by Chambers, hence there is a major difference between Chambers’ preferred accounting and fair value accounting. Similarly, apt are comments by Whittington about the difficulties in operationalizing the decision usefulness perspective and the related information perspective. Regarding the former, the AAA’s 1977 Statement on Accounting Theory and Theory Acceptance  monograph argued it  had its genesis in Chambers’ 1955 ‘Blueprint for a Theory of Accounting’ published in the UK’s Accounting Research journal (vol. 6:1).

Further, Whittington presciently argues for the so-called “theoretical” and “empirical” advocates to see worth in both approaches. He speculates why Chambers had failed to bring along other leading 1960s market price advocates (in their case advocating replace price without general price level adjustments that entail different capital maintenance notions) such as Mathews, Gynther and Edwards & Bell; this would prove to be another very important missed opportunity, especially around the time of the inflation accounting debates of the 1970s-‘80s. Whittington observes Chambers’ trenchant criticism and anathema of the use of committees evident in the typical standard-setting process involving debate and compromise between stakeholders. An example is the International Accounting Standards Board’s (IASB) due process intended to give standards legitimacy within their constituency. He explains: ‘Chambers appears to have believed that logic (“involved argument”) applied to assumptions based on “evidence” should be enough to derive a unique set of good standards’.

The second article, ‘Frank Lewis Clarke (1933-2020: An International journey in quest of a more serviceable accounting’, Accounting Horizons (March 2021; pp. 205-19;, is a memorial to Frank Clarke who died in 1 January, 2020. Co-authored by Graeme Dean, Martin Persson and Massimo Sargiacomo, the memorial details Clarke’s efforts in publishing widely, on myriad issues with a constant theme, namely that accounting has failed to produce serviceable data for the uses ordinarily involved in commerce.- Much of his research examined accounting anomalies revealed in analyses of corporate financial dilemmas and unexpected corporate collapses. During a career spanning several decades, Clarke published over 50 articles in scholarly journals, a dozen books, smaller pieces in professional outlets and popular press, and many submissions to professional and governmental inquiries. He often workshopped pieces, attending and presenting papers nearly every year at EAA Congresses from 1980 till 2012. He visited and presented papers at many European universities and acquired life-long friends on that journey, some of whom are noted in the memorial. Using historical methods Clarke shows in several works how the notion of fair value has mutated, highlighting its many forms — most notably: ‘Inflation Accounting and the Accidents of History’, Abacus (1980, vol. 16:2: 79–99; and ‘Commentary: Business Black Swans and the Use and Abuse of a Notion’, Australian Accounting Review (2010, vol. 20: 2, p. 185-194

Common to the memorial and Whittington’s review is a recognition that an academic should seek a better accounting, namely, one that is more serviceable in the context of the twin purposes of accounting — decision making and accountability. This entails professing false doctrines and seeking the truth. It also entails a broad notion of research, one that utilizes eclectic research methods.

The blog concludes with an extract from the Wittington review, noting that many lessons are evident in the Ray Chambers’ biography.

“Theoretical work and its application are still carried out in the world of accounting standard-setting and regulation. For example, the IASB has recently issued its revised Conceptual Framework, which has a direct lineage to Moonitz and, through him, to Chambers, whose correspondence is recorded in The Odyssey. Innovations in business and financial markets continue to generate new types of business transactions and new financial instruments, and these developments are likely to sustain the demand for analytical accounting theory to assist practitioners and regulators in devising appropriate accounting methods. This may encourage a revival of accounting theory research. If the revival occurs, Chambers should be recognised as one of the outstanding pioneers of accounting theory on whose work future scholars will build. This will include learning the context in which the ideas which we have inherited were developed: this is essential for understanding their relevance to the present and future. The Chambers Archive is a rich source for such studies, and we should be grateful to the authors of The Odyssey for reminding us of this.”

WordPress Cookie Plugin by Real Cookie Banner