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CENTRAL LIBRARY STUDIES IN Accounting Thought Editor G. Sinha I’ftjffiwu. L,'[iLv(nily a( CilCOHU Department of Commerce University of Calcutta 1995 CENTRAL LIBR6ARY ??- C6 © University of CidcuUa Sen*l* Bquad, Calcutta 700073 C O 282 & Puhli^hed by Departmentol Commerce University ofCalcutta W]9 i ^ \ /. Printed in IikJjs by Prodip Kuro»rOhosh at llic Calculi University Press. 4)t, HflZlfl Road, Calcutta: 700019 Price: Rs. 100 $ 15 CENTRAL LIBRARY Our Contributors Atari Kumar BasU University of Calcutta Univcfsily of Calcutta G. Siuha At RangansltKin Madras University R. Atadhummhi Madras University Anartda AJohan Pci/ Universily of Calcutta A Mattik Burdwan Un i versity S. Ghosh KlulisJTll College The Institute of Chartered T r Ghosh Accountants of India Prangopdt Bhatipchotya University of Calcutta A A rup Choudhun Uni vcrstiy of Calcutta P. R. Chbwdhuri University of Calcutta I S SfJddar Gauhali University Gauhali University P. L. Ifazariku University of Calcutta A fit Kumar Sengupta BhahiiWSh Bauer jet University of Calcutta University of Calcutta Kanika Mookerjee CENTRAL LIBRARY Contents Prtficc in L C'unci^kluui hvin l Pvisilivt Aaoui^iin^ Ikory ’ An Overview 3 Af Utl KUrrulf fitlSU Agency Theory 1 *> G Smha Behavioural Aspects of ActouniJng 4H M Ranganathan ft Miltthitmcithf Concept or Triple - Entry B^>k- Keeping 59 Ananda Mohan Pat Accounting Dynamism : The Need for Integration 82 bei*-cen Research. Teaching and Practice A Maffick S. Ghoih 11, Issues in Accounting Practice 91 Accounting Standards Recent Developments and Contradictions 95 T. P Ghosh Disclosure of True and Fair View of the Slate of Affairs of Companies : An Overview 105 Pratt gopat Bfuittacharya Impact of Globalisation on Accounting 120 Itulrajit Dhar AccountingEducation nnd Financial Reporting Systems of the Third World: A Mismatch of indigenous Environment and Alien Concepts 14 | Arttp Choudhttn MI, Issues in Social Aspects of1 Accounting 169 Corporate Social Responsibility Reporting ; A Cost Benefit Analysis IT) P R Chowdhurt Human Resources Accounting in a Non-profit Making Organism ion 193 S. Sikidar P L. ftmanka Accounting for Natural Resource Depletion and Environmental Degradation A fit A umar Sttixupta 200 CENTRAL LIBRARY VI [V. Eihknl Issues m Accounting 209 Ethics in Accounting in ImJia: 2) I An Emphasis on Education and Training Fituibaiosh BitnerjCG Green Reporting : Honing the Ethical Edge of 220 'Black and While' Accounting Kauiku Mookerjee CENTRAL LIBRARY Preface Today, itu1 accounting world is at a crosirasdl* Serious challenges besiege it. For instance, should accounting continue to remain primarily an instrument ol pursuing self-interest of different factors of production asso ciated with u firm? Or. should ii be an instrument lor serving the social inter* cst in a pluralistic system? Or. should accounting he neutral between the two polar sets of interests and seek. instead. to represent only the reality of the economic world? Or. should accounting lake a radical ethical stance, spelling oui m clear terms to one and all. the right and the wrong of our socio-po)it icocconomic activities? these and many olhcr issues have been provoking the "thinking' accountant, lor the lasl few decades and the ensuing strands of thought fea ture prominently m accounting Literature. Considerable deliberation, dis cuss ion and debale on such issues are also facilitated by way of seminars, publication of conference proceedings, papers* academic and professional journals and books. However, rarely are the fruits of these endeavours shared with graduate students and enthusiastic research scholars who, too, are legitimate members of The accounting community, Afier all. they arc responsi Me for shaping the future COUtse and role of accounting. The teachers of our department fell the crying need for a publication aiming specifically al Such an audience and formally proposed in a meeting of the Department of Special Assistance (DSA) Committee to bring out ihe present collection of readings. It was unanimously felt that this work could only he the outcome ol a cooperative effort of a number of academics in the accounting discipline. Accordingly, invitations fur articles were extended to academic mus all over India. to which there was a ready response. However, since the contrib utors to the volume did not have the opportunity of coming together to delib erate and selccl a topic of their interest in consonance with a common theme, it has been, indeed, very difficult to idem i fy a central theme from among the collection of articles. Under these circumstances, an attempt has been made to group them into four sections according to the proximity of the ideas expressed by the authors. The first seel ion is devoted to clarifying a few conceptual aspects of accounting, while the second section probes theeiti- cacy or otherwise of some issues concerning financial reporting practices. The third section focuses on the social responsibility dimension of corpo rate financial accounting anti reporting, The final section turns the spotlight on matters re kiting to ethical foundations of the accounting discipline. In particular, the first section deliberates on Such issues as how people associated with accounting activities influence these activities loserve their sclf-inicrcsis, how they are automatic ally res I ritled. why perceptions regarding accounting information differ, how the dynamic nature of busi ness, L.e.rutc ol change indie rate of business income can be communicated through the accounting system, and how teaching, research and practice in accounting can he harmonised lor making the discipline dynamic enough to adapt to (he fast-changing economic scenario. CENTRAL LIBRARY Com nadici ions prevalent within accounting standards* I he accoumants* (JiliMItrmi in presenting true and lair view ol business, impact of globalise tion on account mg techniques and reporting systems, and the problems iisson'imeJ with thirti'wnrld accounting education and financial reporting systems are the issues raised in the second section. The third section acknowledges that business activities affect not only contracting panics hal also third parties — a fuel that traditional corporate reporting overlooks. He porting of corporate social responsibility and reporting of environmental degradation are hvoof the topics discussed here. All lempt is also made here to account for (he romriliunon cat human eii resources in profit-seeking organisations and to enquire ifllo the possibility of accounting for human resources tn not-for-profitentities. Accounting, as such, deals with multi-person activities when* (here is ample scope for the application of personal value judgements to suitably serve the self-interests of accountants, lo the demmem oT the interests of intended users of accounting information* Such a conflict of interests can be mitigated hy carefully drafted rules and codes of professional cihics and conduct; however, clhtcal dilemmas would still continue to confront accountant inspire of well-documented rules and procedures. The Kourih sec i ion aims to analyse ihe nature of such ethical dilemmas, to stick out ways to resolve them and to search for ways to instil ethical awareness among accountants through accounting education, AM this may go far towards restraining the Conflict of sclf-intcrcsfs bui wilt surely not guarantee (he eradication of the major driving forces underlying self-interest motives. The las! article of (his volume addresses this crucial problem and tries to work out possible solutions to this end. H beckons the accounting fraternity to transcend ihe limii$ of rational sclf-iniercsi and to gradually, ycl increas ingly. be imbued with an intuitive wisdom inherent in human creativity* This, by far, is Ihe foremost prerequisite for any (human)activity committed to the pursuit and promotion of ‘social* welfare. 11 must be menl toned [hal lunds for publication of this volume which were initially to be obtained from the DSA programme were subsequently not available. Hence, we approached our Hon'hie Vice-Chancellor, Professor R. N. Basuand the Mien Hon’bit Pro-Vice Chancellor (Business Affairs & Finance) and present Pro-Vice Chancel lor (Academic Affairs}* Professor P. w. Roy lo kindly provide us with financial assistance Tor die publication* which was immediately granted. We express our he an fu! grati tude lo them for their advice, assistance ;md valuable guidance without which this work could not be brought out. A sincere acknowledgement is due lo Ihc contributors, especially those outside Calcutta University, w ho promptly responded to our request by sending their valuable articles, I (hank I nil y acknowledge my dcbl lo my col leagues in the department, particularly, Professors R. G. Mukherjec. S> CENTRAL LIBRARY XI Scnguptu, B. Bancrjcc. a . K. P. R Choudhuri, arul s. Bancrjea, for Iheincontinuous support.encouragement and advice during the processor bringing oul the book. I express my hcanfut gratitude lo my revered ieoeb- ers. Professors Gr D. Roy and A. K. DiLnugupi u for Iheir blessings and advice in ibis endeavour. \ must offer special word *>l thunks to my col- a leujiue Ms. Knnika Mookcrjtic and my beloved student 5n Arup Cboudhitti tor l be It ungrudging and untiring assistance m proof-reading and a number of other strenuous lasks that precede publication of such a volume. They have endeavoured to make (he work as error-free as possible. For errors that might soil be present. I hold myself responsible, I also regret the unavoid able delay in the publication of this volume which was due sometime earlier. Lastly. I extend my (hunks to die people at the Calcutta University Press, particularly the Superintendent.Sri Pradip KumarGhosh, for their cqopeca- Lon in bringing out this publication. Department of Commerce G. Siuhu University of Calcuita Editor December. 1995 CENTRAL LIBRARY Section 1 Conceptual Issues Etve essays presented in this section arc conceptual in nature and relate to some trustt thoughts in accounting. Aran Kumar Basu in Positive Accounting Theory : An Overview exam ines the contributions of Positive Acccounting Theory (PAT), originally postulated hy the Chicago School of Economics, towards the development of accounting thought. PAT seeks to explain why accounting is h hat if is, and why accountants do what they do. Here, a firm is seen as a nexus of contracts' between set/-interested parties where people, both individually and in groups, act to maximize their own notifies Accounting procedures arc adopted likewise, to justify their self-interest maximizing actions Though PA T does contribute significantly tv the understanding of account * ing practices, if is certainly not a substitute for other theories. The author identifies several areas where further investigation is necessary. In the present-day complex business world, where a firm is viewed as a 'nexus of contracts'. each contract involves two parties—the principal and the agent. The 'nexus' or the team ra the principal and alt others arc agents. G. Sip ha in Agency Theory, points out that in such contractual relation ships, some decision making authority is delegated to the agents who seek self-interest Consequently, in multi-person activities based on cooperative behaviour, some participants might try to grab the benefits generated from cooperative ejforts, which inevitably leads to inter-personal conpict. Agency theory explains why, tn such situations, economic agents of the organisation behave as fhev do, why organisations lake the forms they do, and »'/r> accounting practices are the wt/v they are. tn spite of its limitations, the theory serves to guide accounting policy makers in adopting decision alternatives that aim to mitigate conflicts among agents. Real-world business situations provide enough evidence to jfr(?uh that managers in organisations, motivated by their self-interest seeking inclina tions, very often seiecl accounting policy options and procedures to serve their personal ends Conversely, accounting information also influences individual behaviour — a fact that has been extensively researched by behavioural accounting researchers M. Ranganathan andR Madhumatht in Behavioural Aspects of Accounting, summarise the major works and findings in this direction aftei spelling out that the primary concern of behavioural accounting is to identify rhe reason (s) for different perceptions of users of specific accounting information, ft is strongly felt that such research would help in establishing the hidden pattern of decision makers and the way in which accounting information is perceived by experts surh as investors, auditors and financial analysts In order to understand better the dynamism attained by business* it is necessary to know the rate of change in the rate of earning of business in addition to the income relating to the accounting year. In this connection CENTRAL LIBRARY the idea of tripie entry book-keepingj introduced by Yuji Ijiri appropriately incorporates tr i-dimensional measures of economic events. Ananda Mohan Pal in Concept of Triple-Entry Hook-keeping elucidates Ijiri' $ concept by stressing the dichotomy of wculth and capital in place of the notions of assets and equities that form the basis of double entry book-keeping, In this framework, wealth accounts represent financial Status of an enterprise and are considered equivalent to stock accounts, whereas, capital accounts, w hii h summarise changes in h calth, may he considered to be flow accounts. ihe double entry system provides us with two dimensions of economic events-—wealth and income — where changes in the first are explained by the second. Here, a third dimension, namely, union, is added to explain 1 hanges in the second dimension a result, kt have as mans wealth- income statements as the number of action accounts. Third dimensional information is relevant to today's managers and investors and can be fruitfully provided in the near future by availing of the advancements in information technology applied to computer-based accounting systems. Dwelling on the theme of dynamism in business environments, A Mailik and S Ghosh in Accounting Dynamism : The Meed for Integration between Research . Teaching and Practice emphasise the need far account- tng systems to respond to changes in the economic world. Harmony among accounting practice, research and teaching is the key to initiating such change. Adaptability is rendered easier when problems in practice are observed* analysed and their underlying causes arc identified. Solutions arising from such a process will definitely equip practitioners to face the unc ert(linti es of real- world problems This process of enquiry a rid seeking solutions is the function of accounting research Accounting educators, as pari of their teaching assignments should familiarize students {i.e. would- be practitioners) with the fruits of accounting research work, so that they may subsequently be applied to improving accounting practice. This would generate a self-reinforcing triangle of accounting research. education and practice in the interest of injecting much needed dynamism into the disci pline.