CONDITIONAL NORMATIVE ACCOUNTING METHODOLOGY INCORPORATING VALUE JUDGMENTS AND MEANS

Description
The growing interest in ethical and other normative aspects of accounting promotes the search for an
empirical-scientific methodology capable of handling normative issues. On the one side, traditional
normative accounting theories have been rejected as unscientific, on the other side, “positive accounting
theory” emphasizes the positive instead of the normative aspects of our discipline.

Pergamon
Accountin& Organizatfom and Society, Vol. 20, No. 4, pp. 259-284, 1995
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CONDITIONAL-NORMATIVE ACCOUNTING METHODOLOGY:
INCORPORATING VALUE JUDGMENTS AND MEANS-END RELATIONS
OF AN APPLIED SCIENCE*
RICHARD MATTESSICH
Faculty of Commerce and Business Administration, University of British Columbia
The growing interest in ethical and other normative aspects of accounting promotes the search for an
empirical-scientific methodology capable of handling normative issues. On the one side, traditional
normative accounting theories have been rejected as unscientific, on the other side, “positive account-
ing theory” emphasizes the positive instead of the normative aspects of our discipline. Thus accounting
possesses only a well-publicized positive methodology but no equally recognized normative counterpart
(as has positive economics in normative economics, physics in engineering, biology in medicine, etc.).
This eaposjtory paper attempts to fill the gap by outlining the methodological basis for a conditional-
normative accounting theory which recognizes different information goals (norms) but enables the
formulation of empirically confirmable relations between those goals and the means to achieve them.
Such a theory is o6jecNve insofar as it (i) discloses the underlying value judgments and (ii) empirically
tests whether the recommended means lead to the desired ends. The paper discusses past efforts and the
present status of this methodology as well as future requirements. It not only draws attention to the
relative neglect of policy analysis and purpose-oriented thinking, but shows the way to a synthesis of the
normative and the positive approach to accounting.
The value judgments which are forbidden to enter
through the front door of political science, sociology
or economics, enter these disciplines through the
back door (Strauss, 1959, p. 23; 1%9, p. 738).
Wherever a purpose is to be fuhilled, one has
to find the means for attaining this purpose
satisfactorily. Accounting systems, as well as
accounting standards, are meaningless without
such purpose-orientation. Indeed, the long-
established tradition in search for such objec-
tives (cf. Backer, 1966; the Trueblood Report:
AICPA, 1973; FASB, 1976, 1978, 198Oa, etc.)
gives testimony to the importance of such
undertaking. Such purpose-orientation leads
to the major premise of this paper, namely
that academic accounting is an applied rather
than a pure science (evidence for this shall be
presented in the third section).
One would assume that this concern for
objectives directly translates into the investiga-
tion of the means for attaining those objec-
tfves. However, rarely are such means-end
relations discussed explicitly in the accounting
literature (for illustrations of formalized
means-end relationships see the section en-
titled “Present status of conditional-normative
methodology”). These relations, although vital
for accounting practice, are usually obscured
by layers of standards, principles, rules, con-
straints, etc. Often even the value judgments
inherent in the objectives are not clearly
perceived.
l Financial support for this paper by the Social Sciences and Humanities Research Council of Canada is gratefully acknowl-
edged. Further thanks go to the two anonymous reviewers for valuable advice.
259
260 R. MATTESSICH
This attitude is aggravated by the positive
trend in accounting. The scientific and phlloso-
phic meaning of “positive” implies a theory free
of value judgments (except for “pre-scientific”
ones, necessary for scientific research in gen-
eral). In other words, a pure science cannot
accept value judgments as premises but can
encapsulate them only in observed facts.
Means-end relations are thus automatically
excluded from the theory itself, since the goal
or “end” is a value-laden premise for determin-
ing the means. Attention to value judgments
gives way to a concern with presumed caus-
alities based on statistical association. This pre-
disposes academic accountants to think in
terms of cause and effect relations, often with-
out awareness of the logical gap between the
latter and means-end relations or, at best, blur-
ring the difference between them. Such a trend
explains why so many academics try to turn a
basically applied discipline into a pure science.
As a consequence, many accountants seem
to be bewildered when confronted with a para-
digm that focuses on the relations between
means and ends ln accounting. Indeed, noth-
ing appears to be more difficult to change
than a preconception established by training,
professional habits or a life-long way of think-
ing. And yet anyone l ookfng at the practice of
accounting must admit that its objective is not
to represent economic reality in a purely scien-
tific way, but to approximate it pragmati cal l y
on the basis of particular norms. But just as the
opponents of Galileo refused to look through
his telescope to see the evidence in favour of
the heliocentric theory, so some academics
seem to be unwilling to see the evidence sup
porting the view that academic accounting is
an applied discipline.
The situation is different in other applied
sciences. Physicians, for example, have empha-
sized means-end relations from the very incep
tion of their discipline. Even today, medicine
officially recognizes innumerabie effective
treatments or remedies merely on the basis of
their effectiveness but without complete cause
and effect explanation in the scientific sense.
Of course, it is better to know the cause and
effect nexus, even for finding the means-end
relation; but to abandon the search for the
latter, merely because the former has not
been found, runs contrary to most applied dis-
ciplines. And there is further similarity with
medicine: physicians are beseeched, these
days, by patients who clamor for alternative
choices instead of the one-sided and exclusive
treatment with high-powered but potentially
dangerous drugs. If there is a parallel with
accounting, it is this: just as a good physician
will inform his patient about alternative treat-
ments (including natural remedies), indicating
for each alternative the pros and cons, so a
good accounting academic or practitioner is
the one who offers his client a spectrum of
alternatives together with the pertinent infor-
mation to help the client in making an intelli-
gent choice depending on the latter’s needs
and values.
Finance, a discipline close to ours, also
seems to put greater emphasis on means-end
relations than we do. Take the case of choosing
one among various portfolios (say, from a
family of mutual funds offered by a single
company). Each portfolio (model) has a differ-
ent risk characteristic clearly revealed to the
investor. This is a typical situation in which
each model i ncorporates another value judg-
ment (e.g. the type of risk), such that the
investor is free to choose one of those port-
folios (or a specific mix of them) according to
his own risk preference. Such arguments,
together with the fact that the practi ce of
accounting is purpose-oriented, should be
convincing enough to analyse accounting
issues (like the choice of a valuation method
or of some accounting standard, etc.) in a
similar means-end fashion. Take the reader
of a particular set of financial statements: if
he is concerned with the maintenance of
“financial capital”, would he not choose a
different income and valuation model than
when concerned about the maintenance of
“physical capital” ?
The purpose of this paper is to outline a
methodology which, first, pays more attention
to value judgments, second, promotes account-
CONDITIONAL-NORMATIVE ACCOUNTING METHODOLOGY 261
ing theories flexible enough to accept a variety
of exchangeable objectives and, third, tries to
relate those objectives di rectl y to the pertinent
means. Whether this viewpoint is worth pursu-
ing is up to each individual researcher to
decide, but one can hardly afford to close
one’s mind to an unusual point of view merely
because it requires thinking in terms less accus-
tomed to. If there is any barrier to this paper, it
may not Be in its presentation or structure but
in the break with a deeply rooted tradition that
hesitates to contemplate value judgments and
their relations to means. But as means-end rela-
tions abound in accounting practice, there
should be enough justification for trying to
analyse and understand those relations from
a scientific point of view. The second section
(“Value judgments in accounting”) clarifies
the historical background of the need for taking
value judgments more seriously in our disci-
pline, while the third section (“Accounting as
an applied science”) supplies major evidence in
support of the premise that academic account-
ing is an applied science. It also elaborates on
the need for means-end analysis. The fourth
section (“Normative theories and objectivity”)
clarities essential features of the conditional-
normative methodology (CoNAM), and shows
in which way it is considered to be objective.
Furthermore this section discusses the condi-
tional, logical and empirical structure of
means-end relations, their difference vfs-&vi s
positive statements, as well as the problems
and difficulties in testing their efficacy. The fifth
section (“Choosing accounting objectives”)
discusses accounting objectives, their choice,
the need for broadening the range of objectives
and for articulating a hierarchy of accounting
goals. The sixth section (“Present status of con-
ditional-normative methodology”) casts a
glance at the current state of the conditional-
normative approach, while the seventh
(“Accounting representation and reality”)
offers some discussion of reality issues. It distin-
guishes between the ri gorousposi ti ve represen-
tation and the pragmati c representation of
reality, and shows how the two are connected
-
thus explaining why financial statements are
often called “unrealistic”. The eighth section
(“Future requirements and conclusion” >
emphasizes future requirements as well as diffi-
culties to be overcome before CoNAM can be
fully implemented; it also recapitulates and
brings the paper to a close.
VALUE JUDGMENTS IN ACCOUNTING
Among the many changes which account-
ing research experienced during the second
half of this century, none was more intluential
than the shift of emphasis from analytical con-
cerns (lasting from about the late 1950s to the
early 1970s) to empirical-statistical research
which slowly began in the late 1960s and gath-
ered momentum in the 1970s and 1980s. But
the “empirical revolution” could not prevent
the fragmentation of accounting into several
opposing camps. In the wake of mounting criti-
cism of business practices (including those of
public accountants) during the last decade,
many normative and particularly ethical ques-
tions have arisen (e.g. Briloff, 1981, 1986, 1987,
1990; Belkaoui, 1984, 1989; Gaa, 1988a,b,
1994; Hopwood, 1988; Mazes, 1992). Such a
new shift may neither affect the analytical
insights gained since the late 1950s nor the
empirical achievements attained during the
last 25 years, but it suggests that normative
issues (originally dominating academic
accounting - cf. Mattessich, 1992b) can no
longer be pushed to the fringe.
Which alternatives are available for accom-
modating normative aspects in accounting?
There seem to be at least four major options:
(1) One possibility would be a return to the
traditional normative approach of the 1960s
and early 197Os, as found in the works of
Edwards & Bell (1961) Chambers (1966), and
others. This would mean the i mpl i ci t incor-
poration of some absol ute pragmatic value
judgments (acceptance of a specific val uati on
262 R. MATTESSICH
approach, real fzatfon criterion, etc.).’ Such a
return to old times seems to be implied in
Chambers (1993) if I correctly interpret his
criticism of “positive accounting theory”.
Would this be a viable proposition? Would it
not be an attempt to turn the wheel of time
backwards? It certainly would ignore both,
the call for better explication of value judg-
ments, as well as the critical-interpretive
camp’s (see below) emphasis on ethical and
social issues. It also might constitute a rejec-
tion of the new empirical methods introduced
to accounting in the late 1960s and dominating
it during the last decade or more.
(2) The second possibility lies in emphasiz-
ing ethi cal (instead of pragmatic) norms -
particularly those in accord with social goals.
This might lead to a predominantly fnterpretfve
and crftfcal methodology which argues that no
accounting theory is value free. Chua (1986)
has summarized this position which ranges
over a wide spectrum of researchers, from
Hopwood (1988) to more radical authors
such as Tinker (1985). Although this crltical-
interpretive camp fuMls an important function
in present-day accounting, it does not seem to
offer enough flexibility in the choice of com-
peting value judgments arising from the con-
siderable variety of accounting objectives. But
the advantage of the critical-interpretive
approach lies in the openness with which it
reveals its underlying ethical value judgments.
In its less radical form, it may even converge
with the conditional-normative methodology
promoted in this paper (see alternative 4).
(3) Another possibility is the continuing
embrace of “positive accounting theory” or
related empirical approaches which implies
the exclusion of norms (as far as they are not
Ndden) from the set of premises, relegating
them beyond the theory proper. Although the
choice of most value judgments may now be
with the user, a truly “positive accounting the-
ory” leaves him on his own to infer the appro-
priate means from the positive theory plus the
chosen norms - see the comparison of posi-
tive vs instrumental hypotheses (see “Present
status of conditional-normative methodol-
ogy”). Although this approach is based on
empirical and often statistical methods and
lays claim to objectivity (in the traditional
scientific sense), in the view of some experts
(e.g. the critical-interpretive camp) this
approach possibly hi des value judgments inher-
ent in its neoclassical economic basis which,
for example, failed to take environmental and
social issues sufficiently into account. For a
summary of some accumulated criticism dlrec-
ted toward “positive accounting theory” see
Boland & Gordon (1992) and Ballwieser
(1993, pp. 127-128).
(4) Finally, there is the possibility of fncor-
poratfng val ue j udgments into the theory
proper and offering a broad range of al terna-
ti ve purpose-ori ented model s to the users of
accounting information. This is the condi-
tional-normative accounting methodology
(CoNAM) outlined in this paper. Its ultimate
vision is to design a considerable number of
accounting models, each with specific hypoth-
eses tafl or made to a specific accounting
objective or standardi zed (just as cars or
shirts, etc. are standardized), yet offering a con-
siderable choice to “consumers”. The metho-
dology lays claim to a kind of objectivity that is
justified, partly, by the dfscl osure of i ts val ue
’ For details about the distinction between “pragmatic” and “ethical” and other value judgments see the bfshrfcal
investigation of normative accounting (Mattessich, 1992b) where the following three categories are discussed:
(i) Bbfcul -normati ve hoti es: the “German Normative School”: Nicklisch (1912, 1923, 1929-32); SC& (1890, 1911,
1914). The “British Normative School” (i.e. the critical-interpretive camp): Cooper (1983); Cooper et al . (1985); Hop-
wood (1988); Hopper et al. (1987); Tinker el al . (1982); Tinker (1985), etc.;
(ii) PragmuHc-normati ve tbeorfes: Chambers (1966); Edwards & Bell (l%l); Moonitz (1961); Sprouse & Moo&z
(1%2), etc.; and
(iii) Con&ion&norm&w the&es: Mattessich (1%4, 1972); Baker & Mattessich (1991) - see also Mattessich’s
(1995) entry on “Normative accounting” in Chatfield’s and Vangermeersch’s forthcoming Encycl opedfu oftbe Hfshry of
Accounti ng and Accountfng Bought.
CONDITIONAL-NORMATIVE ACCOUNTING METHODOLOGY
263
judgments and, partly, by the empirical pro-
cedures conkming the relationship between
the purpose and the means to attain it.
Although such a synthesis uses normative as
well as empirical elements, it is fundamentally
different from the “positive approach”. The
latter term is irreconcilable with the presence
of value judgments as premises of the pertinent
theory or model; CoNAhI, on the other hand,
requires normative premises. Since applied
sciences are not concerned with gaining pure
or disinterested knowledge (in the sense of the
natural, biological or positive social sciences),
but with applying this knowledge to the attain-
ment of practical goals, CoNAM should be well
suited to accounting as an applied science.
Although many features of such a programme
can easily be implemented, the realization of
the entire programme would require mastering
many obstacles, as the following analysis indi-
cates. Yet where would science and technology
be without overcoming obstacles, applying
novel methods, and aiming for difficult targets?
ACCOUNTING AS AN APPLIED SCIENCE
The need for a conditional-normative meth-
odology cannot be comprehended without the
notion of accounting as an appNed or “mission-
oriented” discipline. The following presents
supporting evidence for the applied nature of
academic accounting:
(a) The major task of an applied science is
the application of law-statements and other
research findings (of the corresponding pure
science) to practical goals - contrary to pure
science, its task is not to find but to appZy those
law-statements.* I do not suggest that account-
ing lacks basic laws, but these are the ones
belonging to pure science (just as the natural
laws underlying engineering and medicine are
found in physics, chemistry, biology, etc.). Thus
the question arises whether there exist any posi-
tive laws pertaining to accounting beyond eco
nomics or the behavioural sciences. One would
have to demonstrate, first, that the regularities
inferred by empirical accounting research are
genuine scientific laws, and second, that they
are laws of accounting instead of economics or
other pure disciplines.
Chambers (1991) tried to conceptualize a
series of “accounting laws”, but the postula-
tion of the law statements neither follows strin-
gent scientific inductive and deductive
requirements, nor do they enjoy general recog-
nition as reflecting scientific laws. Despite
some attempts to declare ad hoc hypotheses
as empirical laws of accounting, I have not
yet encountered a single “accounting law”
which enjoys general scientific consensus.
This “vacuum” might even jeopardize the
entire enterprise of a “positive accounting the-
ory”. Of course, one could always tinker with
the semantics and speak of a “positive eco-
nomic-behavioural theory of accounting” as
part of either economics or the behavioural
sciences in general - cf. Mouck (1993) who
seems to regard “positive accounting theory”
as belonging to the “normal” scientific effort
(in the Kuhnian sense) of economics. Such an
alternative might remove a good deal of the
controversy around “positive accounting the-
ory”. But the fact that some accounting
researchers engage in pure economic research
does not make accounting a pure science, just
as the pure research of some physicians does
not change the applied status of medicine. To
speak of a “positive theory of medicine”, or a
“positive theory of engineering” would bear
little meaning because the initiated knows
that the positive theories of those subjects are
to be found in biology, chemistry, physics, etc.
Would it not be equally meaningful to find the
positive basis of accounting in such pure dis
’ To avoid semantic confusion one distinguishes between “scientific laws” which are presumed structures of reuZi#y
(related to the ontological question) and “law-statements” which are attempts of the pure sciences to conceptilize those
structures (the eplstemic question).
264 R. MATTESSICH
ciplines as economics and the behavioural
sciences?
(b) Accounting cannot be practised without
accepting certain norms and frequent val ue
j udgments (beyond “pre-scientific” ones). An
academic discipline claiming to explore and
serve such a practical field as accounting can
no less afford to ignore those norms than the
sciences of medicine and engineering could
disregard the norms handed down to them
and applied by their practitioners. It is no coin-
cidence that one has begun to realize that
“agency theory . . . forms a (possible) basis
for a positive as well as a normative [i.e. con-
ditionally-normative] theory of cost account-
ing” and that, in the case of the latter, “cost
accounting is dependent of the user and thus of
the goal” (see Wagenhofer, 1993, pp. 164,
169). While value judgments (other than pre-
scientific ones) are strictly prohibited as pre-
mises in any pure science, normative premises
are an indispensable requirement for all
applied sciences. Among the many value judg-
ments of accounting, one category is special
and important enough to be discussed sepa-
rately in the next item.
(c) Some of the most crucial value judg-
ments entering accounting stem from costhen-
efl t consfderatfons. The norm that the long-run
benefit of an information system must exceed
its long-run costs, should be trivially obvious -
yet despite paying lip service to it, accountants
ignore this maxim often enough, particularly
when asking why financial statements and
their valuations are so “unrealistic”. Take, for
example, a fairly realistic but highly sophisti-
cated valuation procedure which, however,
costs more than it benefits in the long run;
obviously, it has to be rejected in actual prac-
tice. The difficulty of measuring those costs
and, even more so, of estimating the corres-
ponding benefits, is a separate problem
which, in principle, does not change the issue
or need for cost/ benefit criteria.
(d) Accounting is taught and researched pre-
dominantly at faculties of commerce, business
administration, management, etc. The latter are
considered to be professi onal scbook l i ke
those of medicine, engineering and law. And
these are called “professional” because their
task is to teach and research primarily the
appl fcatfon of scientific insights to specific
professional goals.
These are factual premises that can be con-
tirmed. Thus the claim that accounting is an
applied science is supported (but not necessi-
tated) by the probabfl fsti c inference following
from these premises. This neither excludes
pure and basic research from being pursued
at such schools, nor does it mean that the
applied sciences themselves are not amenable
to foundational research. It merely means that
the major research goal of those institutions is
found in the creation of knowledge and the-
ories dfrectl y applicable to practical or profes-
sional problems. Such schools arose out of the
very need to spare the practitioner the toil of
adapting for her/ himself positive hypotheses to
her or his objectives.
NORMATIVE THEORIES AND OBJECTIVITY
The major criticism directed against norma-
tive accounting theories, and the reason for
their dismissal by many leading accounting
researchers during the past decades, lies in
the claim that such theories are subjective,
hence “unscientific”. Indeed, value judg-
ments, underlying every normative theory,
are neither objective nor accessible to empiri-
cal refutation or verification. But a conditional-
normative methodology can circumvent this
limitation and impart a degree of objectivity
to a normative framework. The objectivity
claim of the conditional-normative methodol-
ogy is to be found in the following circum-
stances:
(1) CoNAM recognizes that different groups
or individuals pursue different goals in account-
ing, management, finance, and business in gen-
eral. It thus rejects the notion of “absolute”
values or objectives, but tries to comprehend
the entire spectrum and hierarchy of compet-
ing as well as complementary objectives. This
methodology does not regard any single norm
CONDITIONAL-NORMATIVE ACCOUNTING METHODOLOGY 265
or goal (profit maximization, current exit valua-
tion, equal access to information, etc.) as the
only valid one, but offers a free choice of value
judgment to the decision maker. Above all, it
insists on the disclosure of the value judgments
incorporated in any accounting theory, model
or system. In opting for one of those alternative
objectives, a certain objectivity is attained by
openly disclosing the value judgment behind
it. This is no novel insight and has been
expressed best by Myrdal (1970, p. 55) the
Nobel laureate, with the following words:
The only way in which we can strive for strict “objec-
tivity” in theoretical analysis is to expose the valuations
into full Light, make them conscious, specific and expli-
cit, and permit them to determine the theoretical
research.
Therefore, the first objective aspect of a con-
ditional-normative theory lies in the clear
exposition of its underlying value judgment
(or set of value judgments) and in the admis-
sion that the pertinent norm is but one among
many possible alternatives. Thus a conditional-
normative methodology makes a pragmatic-
scientific approach possible (the empirical
aspects of means-end relations, discussed
below will reinforce this claim). This is con-
firmed by such views as that of Mozes (1992,
p. 94) who interprets the FASB’s call for nor-
mative research,3 obviously, in the condi-
tional-normative sense:
The Board’s call for normative research can be inter-
preted as a request for accounting researchers to inves-
tigate whether the user-specific qualities that standard-
setters require are present in accounting data. Such
research can be conducted in accordance with the
scientific method since a normative research hypoth-
esis addresses only the issue of whether the standard-
setter’s objective function, and not the issue of whether
the accounting rule maximizes societal welfare.
(2) In a conditional-normative theory the
recommended means are predicated on the
underlying norms or value judgments. This
requires expressing the relationship between
those norms and their means in an appropriate
analytical as well as empirical way. The struc-
ture of such formalized means-end relations is
different from that of scientific law-statements
of pure science, and it is crucial to recognize
the relevant structure. Kaplan (1983, p. 345)
seems to stress this particular point:
a knowledge of the underlying structure is necessary if
researchers wish to make normative recommendations
to change some aspect of the environment But
occasionally researchers are not as careful in this regard
and fail to recognize that even when they obtain a
model that predicts well, the model does not provide
a basis for making nonnative recommendations about
preferences among accounting methods But it is
knowledge of the underlying structure that is required
if we are to consider the impact of alternative actions
within the context of the assumed structure.
Occasionally the relations connecting ends
to pertinent means are purely analytical (e.g.
the relationship between valuation model and
capital maintenance basis) but in many cases
means-end relations should lend themselves
to some kind of empirical testing, confirming
statistically that the inferred means can “satis-
factorily” attain the desired end. Conventional
accounting research, following the path of
pure science, cannot formulate means-end
relations in any direct way; it has to bridge
the gap between “is” and “ought” in some
indirect fashion. Let me ihustrate this through
a quote from Watts & Zimmerman (1986, p. 9)
which says that:
Normative propositions are concerned with prescrip
tions. They take the form “Given the set of conditions
C, alternative D should be chosen “. This proposi-
tion is not refutable. Given an objective, it can be made
refutable thus given an objective, a researcher can
turn a prescription into a conditional prediction and
’ The FASB’s (1930~) Conceptual Framework contains, according to Mazes (192, p, 94), a methodology for selecting
accounting rules of which “the first provides the standard-setters’ objective and the second provides the accounting data
qualities necessary to achieve that objective”. But the FASB, in contrast to the present sNdy, focuses mainly on one major
objective, namely to procure in the tinancial statements “information that helps to assess the amounts, timing, and
uncertainty of future cash flows to an enterprise”.
266 R. MATTESSICH
assess the empirical validity. However, the choice
of the objective is not the theorist’s, it is the theory
user’s
At first glance these sentences seem to con-
form to the maxims of CoNAM; but there is
an important difference, and it lies in the
expression “conditional prediction” which
would be “conditional prescription” under
CoNAM - this should be obvious, as a positive
theory is concerned with statements of fact
(descriptions), while the latter is concerned
with recommendations (prescriptions) based
on revealed norms. This structural difference
indicates that a positive theory cannot make
recommendations in a direct way; it requires
additional steps, outside the theory proper, to
transform the description into a recommenda-
tion. Thus, wherever a positive theory is
tempted to aim at policy recommendations, it
cannot do this but in the indirect way just
described. Hence the decisive question is:
who is to make the jump from is or will be,
to ought to be (i.e. from description to pre-
scription) ? According to Watts and Zimmerman
it seems to be the practitioner (who gets from
the academic descriptions or “conditional
descriptions” at best), but under CoNAM it is
the academic who formulates the means-end
relations, and is supposed to present the practi-
tioner with prescriptions for alternative ends
(see the examples given in the section entitled
“Present status of conditional-normative meth-
odology”). In other words, the question is: shall
the recommendations for actions be done with-
in the theoretical framework, or outside of it?
My answer is this: the ve7y essence of an
applied science lies in preparing ‘in
advance” theoretical solutions for an entire
battery of alternative objectives. Only then
can the user - be she or he a medical practi-
tioner, engineer, lawyer or accountant - take
the theory and apply it to actual practice with-
out getting her/himself involved in cumber-
some inferences of means-end relations. The
crucial question is: to what extent can practi-
tioners rely on academic accounting to supply
them with appropriate models and systems for
their particular Information requirements? I
believe one cannot expect practitioners to
build, in each situation anew, a bridge
between a statement of positive accounting
theory and the means required for attaining a
specific objective. This may be one reason why
many practitioners have lost interest in the
results of modern accounting research, and
why there exists such a gap between the the-
ory and practice of accounting.
As academic accountants are not used to
dealing with means-end relations directly, con-
siderble research and training will be required
before such a methodology will be fully opera-
tional. It also has to be borne in mind that
testing procedures of CoNAM may not always
be as rigorous as those of positive accounting
theory. Any applied science has to supplement
its testing by trial and error and other non-
statistical procedures (depending on the situa-
tion, such empirical testing may be statistical or
non-statistical: questionnaires, interviews,
coherent tests, etc.). It is important to bear in
mind that even in the pure sciences statistical
testing (the reliance of which may be overrated
by some academics) constitutes a relatively
small, though increasing, part in the arsenal
of evaluating empirical hypotheses - for
further details see, for example, Bunge (1983,
pp. 132-154).
(3) Another programmatic feature of CoNAM
is the estimation of the degrees of efficiency and/
or effectiveness of the means fuhilhng a specific
end. This is an important secondary goal, but to
attain it rigorously may prove to be even more
difficult than the determination and testing of
means-end relations themselves. Yet such
difhculties neither imply that a conditional-
normative approach is arbitrary nor that
measurement or estimation of its effectiveness
and efficiency is impossible.
I pleaded above for greater emphasis on
objectives as well as a better insight into the
connection between those objectives and the
means to attain them. Yet this may not be
enough; to overcome the shortcomings of pre-
sent-day accounting, the range of objectives
itself may have to be extended. An essential
CONDITIONAL-NORMATIVE ACCOUNTING METHODOLOGY 267
feature of a relevant methodology is the identi-
fication and incorporation of different macro-
and micro-objectives pursued by society in
general or a specific group or an individual.
Obviously a whole hierarchy of objectives will
have to be conceived. As my previous refer-
ence to capital maintenance methods and
enterprise context has indicated, the objec-
tives would range far beyond those presented
in FASB (1976, 1978, 1980a, etc.) and preced-
ing studies such as “the Trueblood Report” of
the AICPA (1973). Also goals beyond financial
accounting and profit maximization would
have to be included. Above all, a better dis-
tinction between short- and long-term wealth
maximization, as two distinct goals, might
have to be made.* There is a growing ten-
dency to extend the economic basis of
accounting (e.g. Belkaoui, 1984) from neo-
classical economics to ecological economics.5
CHOOSING ACCOUNTING OBJECTIVES
A conditional-normative accounting method-
ology is the basis for a general framework that
relates accounting objectives to the means cap
able of attaining those objectives. It provides a
framework capable of accommodating many
specific normative theories of accounting.
Such a framework is in conformity with the
notion of “theory” in the Post-Kuhnian philo-
sophy of science. There, a theory is regarded
as an entire network of more specific theories
( “theory elements” in the structuralist termi-
nology) - see Balzer et al. (1987) Balzer &
Mattessich (1991) and Mattessich (1992a).
While a methodology provides the guide-
lines and basis for developing theories, a the-
oty offers the structure and network of
sentences and models for the description,
explanation and (at times) prediction of phe-
nomena. And “positive accounting theory”
refers at least as much to a specific method-
ology as to a theory. But this fact is usually
hidden since its proponents abhor method-
ological disputes, implying to be in possession
of the only proper accounting methodology.
The choice of an objective may occur on a
fairly general level as, for example, in the set-
ting of accounting and auditing standards, or
on a more specific level when, for instance,
choosing one among several competing valua-
tion and capital maintenance concepts. The
latter example is well suited to illustrate this
issue.
Some scholars, for instance, have persis
tently argued that current exit-values are the
only proper evaluation for most assets. Con-
trary to such an “absolute” value notion,
CoNAM regards the evaluation method as a
condition of, among others, the capital mainte-
nance approach to be chosen. But the latter, in
turn, depends on the type of enterprise and
similar circumstances. Why did those experts,
who regarded the current value method as the
only valid one, not perceive this connection
between context and valuation method? First
of all, they may have accepted too narrow an
economic basis; and second, they may have
neglected cost/benefit considerations and
other practical constraints. As accountants
argued for several decades which valuation
approach is the only proper one, it is no sur-
prise that the younger generation turned its
back on those kinds of “measurement” pro-
blems.
Let me use this particular issue to sketch the
argument that favours CoNAM: the link
between various methods of valuation (includ-
ing inflation adjustment) and different ways of
maintaining capital (e.g. nominal vs real vs
* But this must not be misinterpreted as promoting indiscrimina teIy long-term over short-term wealth and profit max-
imization. There are situations, particuIarly on the micro-economic level, where short-term maximization is appropriate.
’ Ecological economics is not so much in competition with traditional economics, but is rather its extension. It is found in
such works as Hotellitq (1931) Arrow & Fisher (1974) Dasgupta & Heal (1979), Fisher (1981). Lind (1982), Baumol &
Oats (1988) Ahmad et al . (1989) Daly & Cobb (1989) Pearce & Turner (19B9), Constanza (1991). DaIy (1991) von
Amsberg (1992). and others.
268 R. MATTESSICH
physical capital) is analytical, and the inter-
dependence is fairly obvious (e.g. Mattessich,
1986, p. 163). But there are situations which
are complex enough and, above all, fraught
with contingencies, such that the type of infor-
mation required cannot simply be deduced
from the context but must be inferred induc-
tively. It seems, for example, that the link
between desired capital maintenance methods,
on one side, and the ultimate objective of the
organization or persons involved, on the other
side, is empirical. Assume the accounting or
information objective is to supply data for
income taxation; in this case it has to be shown
factually (based on the tax legislation as evi-
dence) that the proper basis (in this particular
place, but not necessarily in all countries) is
historical cost valuation, from which follows
that nominal capital maintenance is the
desired managerial objective of the fiscus.
But some minority shareholders, for example,
are likely to have very different desires - again
this would have to be confirmed empirically.
Such investigation might show that minority
shareholders (e.g. pensioners) want to obtain
income figures on which their spending pattern
can be based, e.g. such that their standard of
living (under general inflation adjustment) is
secured. From this information jhancial capi-
tal maktenance can easily be inferred as the
personal objective. Finally, take the situation of
top management in a capital intensive firm with
lots of price-volatile inventory on hand (e.g. an
oil refinery); empirical research might fmd that
management desires data based on current
values, which means that the managerial objec-
tive ispbysicalcapital maintenance. In all these
cases the relationship between the capital main-
tenance method (as an intermediate or informa-
tional objective) and the valuation method (as
an intermediate means) was analytical, but the
relationship between capital maintenance
methods (as the ultimate means) and the per-
sonal or group objective (ultimate objective)
was empirical. Notice that in this example the
capital maintenance method played the role of
both, means (in the intermediate situation) as
well as end (in the ultimate situation).
A further example, illustrating the traditional
tendency towards “single” objectives in con-
ventional accounting, is taken from Lev
(1988). This is one of the most respected
accounting policy papers of the last decade,
and is also concerned with such problems as
the relativity of information relevance, the
effectiveness with which certain means attain
an objective, as well as the general difficulty of
handling policy issues:
what is highly useful information for some investors
might be irrelevant or even damaging for others.
So what public interest criterion does and/or shoul d
determine the choices made by accounting regulators.
Or, yet another largely unanswered policy question -
how should the social consequences of accounting con-
sequences be evaluated and the effectiveness of these
policies determined? One must conclude, therefore,
that despite increasing awareness of these issues, little
progress has thus far been made in addressing the basic
accounting policy issues (Lev, 1988, pp. 2-3).
But ultimately Lev’s paper pivots on a single
objective, namely “equal access to information
relevant for asset evaluation” (p. 3). Other
objectives, such as “fairness, eliminating
fraud, protecting the uninformed investor
against exploitation by insiders” are brushed
aside as “vague, anachronistic, and unattrac-
tive notions” (p. 1).
Lev presents forceful arguments that his “ex
ante equality of opportunity concept” is state
of the art as well as operational. Indeed, the
fact that it can be better operationalized (than
so-called “moralistic” notions) is a strong
incentive for adopting it. However, a condi-
tional-normative methodology aims for a fra-
mework in which the user freely chooses
among a variety of objectives - and not only
where competing objectives are involved, but
also in cases like Lev’s, where complementary
objectives (as fairness, etc.) do not necessarily
exclude the one promoted by a specific expert.
In the future some of those other objectives
might also become easier to operationalize -
apart from the fact that the difficulty of opera-
tionalization may (for a particular decision
maker) not be critical for excluding a specific
CONDITIONAL-NORMATIVE ACCOUNTING METHODOLOGY 269
objective. But most importantly, the choice of
the objective should remain with the decision
maker (i.e. the ultimate user of the linancial
information). The applied scientist is obliged
to submit the relevant range of objectives to
the user and inform him about the means for
reaching each of those objectives as well as its
consequences. Thus, the academic or his proxy
(the practitioner) will offer a palette of
accounting models from which one can
choose according to one’s information needs.
Based on such stipulation, or in anticipation of
it, the academic may recommend certain stra-
tegies, but be must not impose any objective
upon the user.
Another example of a single objective over-
riding all others is the FASBs’ tendency to put
decision-relevant information over other goals
such as accountability. Even if Mozes (1992, p.
96) points out that the FASB (198Ob, 1985)
accepts the following six normative cate-
gories in establishing accounting rules, these
categories are subordinated to the making of
investment decisions: (i) consistency (with
other accounting rules); (ii) understundubil-
ity; (iii) relevance; (iv) neutrulity; (v) repre-
sentational faithfulness; (vi) cost/benefit
relation. Mozes subsequently discusses perti-
nent literature dealing with these issues, thus
pointing to a potentially important research
area for conditional-normative accounting
research.
As to the conditional-normative approach in
cost accounting, an illustration can be found in
the German literature, first by Riebel (1978)
who developed a decision-oriented cost con-
cept different from the pagatoric as well as
the opportunity cost notions, and later by
SchneeweiB (1993, pp. 1025,1028,1031; trans-
lated) who, continuing Riebel’s endeavours,
sketches his methodology in the following way:
Embedding the cost problem in the general frame of a
prescriptive administrative decision theory [footnote
omitted], one notes that decision-oriented and value-
based cost notions belong to different levels of abstrac-
tion and relaxation. These notions are therefore not to
be used in an independent but in a complementary way
@. 1025).
The adaptation of parameters will then be such that the
decision maker employs goal-values [Zielwerte] which
constitute for him an acceptable compromise (p. 1028).
The entire problem of valuation can then be repre-
sented as follows: the decision maker hrst specilies
the goal-system [Zielsystem] and the value-prefer-
ences [Hohenpriiferenxen] Then he designs a decision
generator and evaluates the pertinent cost parameter k
(together with the non-cost parameter a) in the goal-
system of the reality model [Realmodell] (p. 1031).
And as the past success or failure in solving
major issues of accounting is concerned, Beaver
& Demski (1994, pp. l-3) are pointing out that:
The nature of income and valuation remains as elusive
as when we were graduate sNdents. Yet issues of
income measurement and valuation remain at the heatt
of the institutional setting of hnanckd reporting, not to
mention the practice and use of accounting throughout
the economy Clearly we have not been successful in
resolving or even reducing the set of specialized notions
of income or accounting value. This is hardly surprising,
since under these market conditions [imperfect and
incomplete] it is possible to generate illustrations or
examples where any notion of accounting will fail to
capture some supposedly relevant aspect of the entity’s
life. This follows from the fact valuation is not fully
defined in the absence of perfect and complete mar-
kets, except ln special cases (e.g. derivative securi-
ties). More deeply, our understanding here is
limited by the fact [that] we have not developed a
theory of accounting measurement in which demand
for accounting measurement is endogenous.
If the valuation issue has been intractable for
such a long time, might it not be that the neo-
classical economic basis, on which these
attempts rest, is too narrow? This basis is still
dominated by the single goal of wealth maximi-
zation, and rarely allows consideration of other
purposes and norms.
Finally, Ijiri (1980, p. 33) Griffin (1987) Gaa
(198813) and, above all, Swieringa (1989, p.
182) all emphasize that the FASB, or standard
setters in general, need from researchers not
only facts, concepts, theories, and frameworks
but also identification and evaluation of alter-
natfves as well as justijkations. In other
words, they need application of a condi-
tional-normative methodology. And Bernard
270 R. MATTESSICH
(1989, pp. 73-74) referrlng to the disenchant-
ment with “economic consequent studies”,
indicates, as Frecka (1989, p. 15) confums, that
“our existing research technology is not ade-
quate for addressing economic consequence
issues”.
PRESENT STATUS OF CONDITIONAL-
NORMATIVE METHODOLOGY
(1) Philosophers have been working for
decades on the formal analysis of normative
logic which includes the logic of commands
and other imperatives, as well as that of
means-end relations.6 That this is an excruciat-
ingly complex problem area is manifested by
some quotes from one of the great pioneers
of normative logic:
Dissatisfaction with my earlier attempts to deal with
practical inference urged me to return to the topic
time and time again. . Ever since the appearance of
my Brst paper on deontic [i.e. normative logic] in Mi nd
i n 1951 I felt that there was some philosophically essen-
tial aspect of norms (normative concepts and discourse)
which the formal system I had constructed either did
not capture at aII or tried to capture in the wrong way.
In the 30 years which have passed I have again and
again returned to the topic - often with a new idea
which I thought would at last put things essentialIy
right. But always so far, to be disappointed
For my part I regard my passage through the wild-
erness of deontic logic as terminated. I hope the ReIIng
I now have wiIl last, that the new essay “Norms, Truth
and Logic” has eventuaIly removed the uneasiness I felt
about advancing with instruments of logic beyond the
frontiers of truth and falsehood (van Wright, 1983, pp.
vii-ix).
It is a common misconception to believe that
normative inferences obey the same formal
laws as conventional logic; in the long run,
accountants cannot atford to disregard the
efforts to clarify the problems of practical infer-
ences. This does not mean that accountants
have to get formal training in normative (i.e.
deontic) logic, but they should be better
informed about the difference between the tra-
ditional (i.e. declarative) logic governing posi-
tive propositions and the deontic logic
governing normative statements. It is impossi-
ble for a paper l&e this to convey the details of
such problems; it can merely draw attention to
the existence of pertinent differences and offer
some references. There are several reasons
why declarative logic cannot be applied to
normative arguments. Ross (1944, p. 32) for
example, points out that “according to the
usually accepted definition of a logical lnfer-
ence, an imperative is precluded from being a
constituent part of such an inference”. And
Rescher (1%6b, p. S), in dealing with com-
mands (one of the most common groups of
imperatives), states that:
giving a command is a performance. From this
angle, a “logic of commands” is diffkult to envisage.
Performances cannot stand in logical relations with
one another, and spechically, one performance cannot
entail or imply another, nor can the descnption of one
performance entail that of another.
Already Aristotle, realizing the limitations of
conventional logic, hinted in his Nfcomachean
Etbfcs (Book 7, Chap. 3) at a logic of action.
Modern logicians have devised various alterna-
tive schemes to deal with this problem - for
details see (Mattessich, 1978, pp. 128-140).
Some of these approaches use declarative sen-
tences but construct an extended logic of
action (e.g. von Wright, 1968, 1983). In the
applied disciplines, it is legal science which
-
under the eminent legalistic scholar Hans
Kelsen (e.g. 1934, 1979) - has taken leader-
ship in exploring the application of normative
logic. In this connection Archer (1992, p.
205) even suggests some association between
” Normative (or deontic) logic comprises the logic of actions, Imperatives, comman ds and other normative statements. For
an overview of deontlc logic see the anthologies editcd by Rescher (1966b) and HiIpinen (1971); for individuaI connibu-
tlons to deontlc logic, practical inferences and the logic of action, see von Wright (e.g. 196t3, 1983), and for the logic of
commands, see Rescher (1966a).
CONDITIONAL-NORMATIVE ACCOUNTING METHODOLOGY 271
Kelsen’s work and my own efforts (Mattessich,
1964, 1972) - though Archer may have done
me too much honour. At this time I was not
aware of Kelsen’s work, merely of his reputa-
tion (the social science library at UC, Berkeley
was named after him “Hans Kelsen Library” ).
Herbert Simon (1965, 1966), too, has been
deeply concerned with normative aspects and
their role in the applied sciences. But he
opposes a separate logic of action and recom-
mends simple conversion rules to supple-
ment declarative logic for the purpose of “prac-
tical reasoning”. Binkley (1966, pp. 22-23)
succinctly summarizes Simon’s procedure as
follows:
Simon says, roughly, that decisions are made in the
following way. (Or perhaps that they are to be made
ln the following way. ) We begin with an imperative
which specifies the end. We convert this to a declara-
tive: that is, we assume that the end is achieved. Com-
big this with other declaratives which define the
circumstances, we draw an inference about what
action must have been done. These action declaratives
are finally converted to imperatives which tell us to
perform the means to our end. It is a logical process
with imperatives at the top and imperatives at the
bottom, but with a lot of declarative reasoning in
between.
A theory of decision is mainly interested in the lnter-
vening declarative logic. However, from the point
of view of the philosopher concerned with the pro-
blem of practical reason, it is the l i nk wftb ftnperu-
tfves at top and bottom that hold the interest.
And, given this interest, the philosopher will focus
his attention on the rules connecting fmperatfves to
tbe means-end statement, Simon’s “conversion
rules”. These rules will have so great an importance
for the philosopher that he will be bound to refer to
them as a special logic of imperatives [emphasis
added].
Table 1 (later in this section) may further
indicate that the connection between impera-
tives (objectives) and means-end statements
are not only relevant to philosophers but also
to applied scientists as well as practitioners. Of
lesser priority to the Latter might be the contro-
versy whether Simon’s “conversion rules”, or a
similar system, should be regarded as a special
kind of logic or not. The fact remains tbat
traditional logic without some supplementa-
tion - be it a full-fledged logic of action or only
some conversion rules - cannot properly
master means-end relations.
(2) Conditional-normative theories arc quite
common in the economic and management
sciences. Ultimately such theories depend no
less on empirical research than the cause and
effect relations of positive theory, but they
clearly reveal the underlying goals and value
judgments. In operations research (OR) the
essence of conditional-normative theories is
best manifested, and most concisely character-
ized, by Lute & Raiffa (1957, p. 63) who
emphasize that
it is crucial that the social scientists recognize that game
theory is not dexrfptfve, but rather (conditionally) nor-
mative. It states neither how people do behave nor
how people should behave in an absolute sense, but
how they should behave lf they wish to achieve certain
ends.
But in OR (and occasionally in other manage-
ment and economic sciences) the empirical
aspect is often hidden because the only goals
considered are those of profit or wealth maxi-
mization, usually assumed to be pre-scientzfk.
Then the problem of optimizing this single
objective is amenable to a purely mathematical
solution without much need for either a deon-
tic logic or the testing of means-end relations.
(3) First steps towards a conditional-norma-
tive accounting approach can be found in
Mattessich (1964, pp. S-9, 232-291, 429431).
There the need for more purpose-orientation
(and “mono-purpose” or “limited-purpose”
accounting systems) is repeatedly mentioned.
Above all, this book introduced to accounting
the notion of “pragmatic hypotheses” (i.e. form-
alized means-end relations), distinguishing
them clearly from positive hypotheses. Above
all, this work separates unequivocally the more
permanent basic assumptions of accounting
(assumption Nos 1-18; pp. 19, 32-45) from
those specific, pragmatic andpulpose-oriented
hypotheses (see Mattessich, 1964, pp. 30-45,
232-239,419,424-430, etc.).‘Yet in spite of the
fact that some experts began (during the 1960s
and 1970s) to see that each valuation method
272 R. MATTESSICH
might serve a different objective (e.g. as far as
capital maintenance is concerned), most
accountants continued to search for the “one
and only correct” valuation method.
The next step was a paper (Mattessich, 1972)
in which the separation between basic assump
tions and their purpose-oriented interpretation
was further analysed. This article emphasized
that “The heart of the problem might rest in
the difJ iculty to formulate specijlc well42$ned
purposes, and to match them to a set of speci-
fic hypotheses” (Mattessich, 1972, p. 479). As
this paper was accorded an official recognition
(AICPA/AAA award), there was some hope that
the notion of a purpose-oriented (i.e. condi-
tional-normative) accounting theory might
now receive wider attention. Indeed, during
the late 1970s and early 1980s the complemen-
tary price-level adjustment standards promul-
gated by the Financial Accounting Standards
Board (SFAS No. 33, 1979) and the Canadian
Institute of Chartered Accoumants (CICA,
1982, Handbook, Section 4510) could be inter-
preted as a step toward such a conditional-
normative approach, as statement readers
were offered a current cost model, in addition
to the historical cost model. The CIGl Hand-
book went even farther by offering (in addition
to the traditional basis) an option from three
darerent valuation models. Although such
options are still recommended in those coun-
tries, the “legislations” themselves have been
abandoned under the impact of politics as well
as the positive accounting trend - cf. Beaver &
Landsman (1983) whose publication seems to
have influenced the pertinent FASB decision.
Some reasons for this reluctance on the part
of academic accountants were the previously
mentioned lack of training, insufficient back-
ground research, and too little interest in the
pertinent philosophical foundations. But the
decisive factor seems to have been the applica-
tion of empirical-statistical methods (owing to
the quantitative revolution in the social scien-
ces), which during the 1970s absorbed the
attention of most of the bright young account-
ing researchers. Yet in the 1990s the urgency
of settling ethical and other normative pro-
blems in accounting offers new opportunities
to explore a purpose-oriented approach, its
norms and means-end relations.
(4) A glance at other applied sciences shows
that, for example, practising physicians, engi-
neers, etc., routinely apply means-end rela-
tions no less than practising accountants do.
This gave rise to investigating the nature of
means-end relations from a more general
point of view; it was done in Mattessich
(1978) where the epistemological problems of
applied sciences in general were explored.
This book (I nstrumental Reasoning and Sys-
tems Methodology) was preceded by several
papers (e.g. Mattessich, 1974, 1976) all of
which foreshadowed related ideas.
As far as formalized means-end relations (or
“instrumental hypotheses” - in contrast to
positive hypotheses) are concerned, their five
major characteristic features are:
(i) they are goal-oriented and their simplest
logical form is of the following fmperative
type: “To attain end E, under circumstances
C, choose means M” (as compared with a posi-
tive hypothesis of a form like “If event A
occurs, under circumstance C, then event B
will occur’);
(ii) they are highly efficiency responsive (i.e.
cost/benefit and attainment sensitive);
(iii) their acceptance criteria are based on
the preceding two characteristics;
(iv) their degree of generality is limited in
comparison to law-statements; and
’ IfAccounting and AnaZytfcaI Metbods (Mattcssich, 1964) found wide response in the accounting literature (particularly
in the 1960s and 197Ck), it was partly because of its Introduction of dgorous analytical methods and financiaI simulation
models to our dIscipIIne, partly because of the formulation of “basic assumptions” and their axiomatizatIon. However, t&e
crudal aspect of tbfs book, tbat of kauncbing apurpose-orknted, and bence wnditional-nonnative tbeo?y of acwunt-
fng, aroused little attention - though the need for a functIonal and purposedented approach was poInted out In the
Introduction (pp. 8-9) and elaborated in Chap. 7 (patticularly pp. 232-239).
CONDITIONAL-NORMATIVE ACCOUNTING METHODOLOGY 273
TABLE 1. Ilh&mtion of a simplified instrumental
hypothesis
1. Minority shareholder’s
objective
2. Empirical relationship
3. Analytical relationship
4. Inductive inference
To maintain a moderate
standard of living (through
regular dividends) without
eroding his investment in
company X
Maintenance of a moderate
living standard is (under
given circumstances) likely to
be attained by maintaining
“financial capital”
Maintaining “financial
capital” implies measuring
income adjusted for general
inflation only
Measure income on the basis
of general inflation
(v) they are predominantly decision- or
action-oriented.
A simplified illustration of such an instrumen-
tal hypothesis is offered in Table 1. It is based
on the presumed usefulness of general inflation
adjustments of financial statements from the
viewpoint of a minority shareholder of com-
pany X. A first glance at Table 1 may not reveal
the fundamental difference between an instru-
mental vs a positive hypothesis. After all, the
empirical and analytical relations (items 2 and
3) as well as the inductive inference (item 4)
Seem to be the same in both hypotheses.
Hence the question arises: is CoNAM and the
positive approach not pretty much the same? I
do not deny the existence of a common basis;
but apart from the differences pointed out
above (items i-v), CoNAM not only articulates
the objective or norm within the argument
proper, but would actively support the search
for an extended economic basis capable of
accommodating a plurality of goals (beyond
mere wealtb maximization). Furthermore, it
would make a concerted effort towards devel-
oping an entire catalogue of such instrumental
hypotheses for most or all of the important
eventualities arising in accounting. Depending
on the specific, preconceived objective, the
appropriate instrumental hypothesis could be
pulled from this catalogue and applied (hence
the term “conditional” in CoNAM).
Let me illustrate the fundamental difference
between the positive hypotheses of PAT vs the
instrumental hypotheses to be formulated
under CoNAM by juxtaposing two hypotheses
(H 4 and H 7) formulated by Watts (1992, pp.
15, 22) to the corresponding instrumental
hypotheses (IH 4 and IH 7):
Hrpothesis 4: The greater the value of a corporation’s
fixed assets, the greater the likelihood that its financial
statements included an allocation of profits for renewals,
repairs, maintenance or depreciation.
HyPotbeA 7: The larger the size of a corporation whose
net income is increased (decreased) by a proposed
accounting standard, the greater the likelihood that its
managers will lobby against (for) the standard.
Such hypotheses say nothing about what
management ought to do, but merely offer a
vague picture of what is presently being done
by some management, without confirming that
this is the right way of doing things. But sup
pose such conj bnati on might be obtained,
then the following instrumental hypotheses
(II-0 could be formulated on the basis of H 4
and H 7 plus further research:
ZH 4: Company X wants to maximize its
wealth. The value of fixed assets of company
X is above so and so many dollars (the amount
would be stated as precisely as possible under
the circumstances). Then it is recommended to
include in its Financial Statements an allocation
of profits for renewals, repairs, maintenance or
depreciation.
ZZZ 7: Company X wants to maximize its
wealth. The company’s assets exceed a certain
amount (to be stated as precisely as possible
under the circumstances) and its net income
would be increased (decreased) by a proposed
accounting standard. Then, it is recommended
that its managers should initiate lobbying
against (for) such standards.
Whereas the positive hypotheses are some-
what vague and of little use to the practitioner,
274 R. MATTESSICH
the instrumentaI hypotheses give clear direc-
tions for attaining the stipulated end, provided
the underlying empirical research can be relied
upon. Thus, means-end relations play an
important role in everyday life as well as in
business dealings; they also have a decisive
place in the applied sciences. And yet, these
relations are rarely explored by conventional
empirical research - at least not openly or
directly.8 Why is this so, and what are the
major difficulties in formulating means-end
relations in a more “scientific” fashion? Some
answers to this question may be found in the
above-mentioned criteria themselves; for exam-
ple, in the limited degree of their generality
(compared with positive law statements) and
therefore in their restricted range of applica-
tion. Another reason lies in the fact that means
as well as ends rarely have one-to-one corre-
spondences (a specific tool may serve several
purposes to various degrees, and a specific end
can be achieved by various means, again prob-
ably at various degrees of efficiency and effec-
tiveness). And as to the argument that the
ultimate basis of instrumental hypotheses,
namely their use or objective, may not always
be obvious, this is no obstacle but rather an
incentive. Because it is high time to establish
a methodology that would make those uses
more transparent.
This section has hopefully dispelled the
belief that CoNAM is merely a vision without
any roots in present-day academic research.
Although this paper has a programmatic com-
ponent, the conditional-normative methodol-
ogy is based on a long-standing tradition in
related disciplines and even ln accounting lit-
erature. Here, one might also add that the
advent of expert systems in accounting may
impart particular urgency to the search for
the underlying norms and means-end rela-
tions. In medicine, for example, expert systems
are capable of diagnosing diseases and recom-
mending corresponding therapies. Yet they do
this not on a purely positive basis, but by means
of principles typical for an applied science. In
these expert systems, objectives and means-
end relations play a decisive role. The success-
ful operation of expert systems in medicine,
engineering, meteorology and other applied
sciences is irrefutable evidence that those sys-
tems are based on practical inference and some
kind of conditional-normative theory. In design-
ing an expert system, one must first have a clear
picture of the goal or goals which a particular
system is to achieve (e.g. whether it should pro-
duce financial statements on the basis of nom-
i nal , or real fi nanci al , or physi cal capital
maintenance). Furthermore, one must know
exactly the means (the structure of the inflation
accounting model if, for example, financial capi-
tal maintenance should be the basis of choice)
through which the objective is attained effi-
ciently. Thus the future advent of viable account-
i ng expert systems may stimulate the interest in
CoNAM, and could become a welcome ally in the
promotion of the latter.
ACCOUNTING REPRESENTATION AND
REALITY
The problem of whether accounting can or
does represent reality, and to what extent it
may do so, has engendered much contra
versy. First of all, one has to make clear wbat
one means by “real i ty”. I have tried to explain
this through the so-called “onion model” (see
Mattessich, 1991) which envisages reality as a
hierarchy, consisting of many layers (from ulti-
mate to physical, chemical, biological, mental,
and social reality), each of which is character-
ized by its emergent properties, whereby a
lower or more basic layer is enveloped by the
’ As commendable as the FASB’s (19BCk, 19B5) attempt is to encourage conditional-normative research, it hardly aspires
to the logical and epfstemologtcul exploration of means-end relations. Yet, already In the 196Os, it was recognized, as
Hakansson (1%9, p. 39) points out, that “to advance knowledge signiticantly in normadve accounting, the method of
postulation and deduction cannot be dispensed with”.
CONDITIONAL-NORMATIVE ACCOUNTING METHODOLOGY 275
next higher layer, as in an onion. Thus it
becomes essential to distinguish, for example,
between physical and social reality, and to qual-
ify a certain manifestation of reality either as
physical, social, etc.
The second question concerns the dlstinc-
tion between a specific segment of reality
and the attempt to represent it conceptually.
Occasionally, accountants confuse these two
stages; Heath (1987, pp. 2-4) for example,
asserts that owner’s equity and income are
not real but mere concepts, ignoring that
behind these concepts stands the social reality
of ownership right and its growth. Sterling
(1988, pp. 4-5) similar to Heath, insists that
“with rare exceptions accounting numerals
do not represent phenomena, any phenomena”.
Another problem, occasionally raised by
members of the critical-interpretive camp,
concerns the assertion that “accountants do
not represent reality but create it”. I would
rather say they do both. Obviously, reality
changes with every event and with every
human thought and action (whether it is the
birth of the atom bomb, the emergence of a
novel virus, the introduction of a new social
institution, or the advent of computerized
spreadsheets). Hence we are faced with a
choice: either to abandon any kind of science
(or other conceptual representation, like speak-
ing and writing) out of fear that by doing so we
might influence reality to such an extent that
those representations are no longer accurate
enough or, alternatively, go ahead with our
conceptualizations, but later check and
describe to what extent a particular measure
or representation has influenced the situation
- though sometimes this is not possible (cf.
the Heisenberg Principle of quantum mech-
anics). Thus, there is no reason to deny either
that accountants create new realities or that
they try to represent them.
However, it is crucial to distinguish between
that segment of reality which serves as a tool of
representation from the one which is the
object of cognition and representation. This
duality is so deeply rooted in our mental and
linguistic habits that without it we could under-
stand neither the nature of language nor that of
science. And let us not forget that the concep
tual structures which usually serve to represent
reality have always some kind of physical mani-
festation (e.g. ink and paper, air and sound
waves, tapes with magnetized dots, neurons
and electric charges as well as neural trans-
mitters, etc.). In other words, we cannot repre-
sent some parts of reality without employing
other parts of it. Already prehistoric people did
this when they represented “real” economic
goods and events by transferring “real” clay
tokens from one container into another (a typi-
cal example of the transition from figurative or
pictorial to conceptual thinking).
The philosophical attitude here assumed is
not so much that of naive realism, but corre-
sponds to the “critical realism” of Hartmann
(1964) and the “hypothetical realism” of
Campbell (1966a,b) which the renowned ethol-
ogist and Nobel laureate Konrad Lorenz (1977)
enriched in a profound and insightful way. This
attitude recognizes that our awareness of rea-
lity is based on the interdependence of the
objective and the subjective, in which the
former constantly adjusts the latter step by
step. Of course, we see reality through glasses
tinted by the utilitarian trend of the evolution-
ary process. But this does not imply that what
we “see” is unrelated to such a reality. And
Kant’s notion of a priori knowledge (whether
analytical or synthetical) can also be adapted; it
still is prior to an individual’s experience, yet
acquired by experience in the evolutionary
process of the species and its precursors. Lorenz
regards the idealist as concentrating only on the
mirror (i.e. the mind) without admitting the rea-
lity beyond it, while he regards the (naive) realist
as focusing on the outside, but neglecting the
mirror as part of reality: “Zbus, both are inbib-
ited from seeing that there is an obverse to
every mirror. But tbe obverse does not reflect,
and to this extent the mirror is in the same
category as the objects that it reflects” (Lorenz,
1977, p. 19). After all, is not the biological
mechanism that enables us to reflect reality
just as real as that which is being reflected?
The affirmative answer to this question leads
276 R. MATTESSICH
to Fig. 1, where the accountant’s conceptual
representation is deliberately shown as part
of his reality.
We humans simply cannot do without con-
stantly representing the world around us by all
kinds of things, foremost by pictures and con-
cepts - even if this reality is not static but
dynamic. And this includes accountants who
try to represent segments of economic reality
by accounts, financial statements, and so on.
Take the following situation in which there is
hardly a problem of distinguishing between
observable economic phenomena and equally
observable accounting abstractions describing
such phenomena. For example, the economic
phenomenon of a cash purchase of merchan-
dise to the amount of $1000. This is observable
by the handing over of cash and merchandise
and the accompanying bill. The accountant’s
abstraction is observed by his debiting in the
ledger the Inventory account and crediting the
cash account to the amount of $1000. Each is
part of a different segment of “reality”, but
there is hardly any danger of confusing the
tW0.
A more challenging question is whether the
distinction between rear@ and its conceptual
representati on does not smack of Cartesian
mind-body duality untenable in the face that
mind itself is but a function of the body. But I
am far from invoking the Cartesian duality. In
this paper the distinction between reality and
its conceptual representation is based merely
on the fact that the human mind, as much
physical as it might be, is a mi rror for reflect-
ing our environment, as well as envisioning
new possibilities for this environment. And if
there exists a pertinent fundamental question
in accounting, it concerns the extent to whi ch
accountants can and do represent segments
of reul f~. I s it a representation in a rigorous
positive sense, or in a pragmatic sense, or
merely in the intuitive scnsc of everyday life?
Let us try to answer this question.
The argument pivots on the schematic out-
line of Fig. 1 in which the conceptual represen-
tation (CoNAT) is shown (as a special segment
of total reality) on the left-hand side. Let us
assume that “positive accounting theory” or
any similar “pure” economic theory is capable
of representing economic reality in a rigorous
scientific sense by means of probabilistic pre-
sent value models or other sophisticated pro-
cedures. This posi tfve representation is
depicted in the small box on the top left (Fig.
1). But, obviously, this is neither the way prac-
tical accountants represent reality nor the way
most academics recommend that it ought to be
done. Accountants actually represent reality
pragmati cal l y, and this is depicted in the
small box at the bottom (left).
It seems that an explanation is called for
why, and to what extent, this “pragmatic”
representation deviates from the “scientific”
one. Since a conditional-normative accounting
theory (CoNAT, i.e. the large vertical rectangle
on the left - Fig. 1) embodies both such repre-
sentations, it should be possible to connect the
two, perhaps even analysing where and why
such a discrepancy occurs. In other words
one should be able to answer the perennial
I
Positive Conceptual
Representation
Instrumental Hypotheses
(Means-End Relations)
I
REALITY
Li
I
I
I
I
Accountants
I
I
10 1 Decision Makers
- (CEO, Managers, etc
Fig. 1. Conditional-normative accounting theory and
reality.
CONDITIONAL-NORMATIVE ACCOUNTING METHODOLOGY 277
question: “why does accounting practice seem
to be so ‘unrealistic’ or inconsistent with a
rigorous academic view? “. Understanding the
transition from the positive to the pragmatic
representation (here indicated in several
steps), may shed light on this important ques-
tion. Figure 1 reveals concisely the major ele-
ments and relations involved in those
representations.
For a realist the primary task of any positive
science is the representation (i.e., the approx-
imation) of the structure of a segment of reality
as accurately as possible under the optimal
research conditions available at a certain time.
But in the case of an applied science an addi-
tional constraint is imposed on such a represen-
tation. Its accuracy is subject to the cost/bene$t
criterion and other norms (see relations 2-4
below). This assures, for example, that (in the
long-run) the costs of such representation do not
exceed the expected benefits.
Relation 1 (between positive conceptual
representation and reality) has to be estab-
lished by empirical research and corresponds
in its broad features to the factual research of
the received view. To illustrate the situation,
let us assume that the scientifically correct
valuation model is some kind of “present value
model” (be it deterministic or probabilistic),
though indeterminate for situations of imper-
fect and incomplete markets. This model would
be used for thepositive but not for apragmatic
representation (shown at the bottom left side of
Fig. 1).
Relation 2 (between positive representation
and the set of feasible norms or objectives)
contains various competing as well as comple-
mentary value judgments. From this pool of
relevant norms, one or several will be chosen
for determining (under relations 5 and 8) the
pragmatic representation suitable to a specific
information purpose and managerial objective.
Among these norms are also constraints as, for
example, cost-benefit and “cost or market
which ever is lower” conditions.
Relation 3 (between norms and reality) is
necessary to ensure the incorporation of a fea-
sible set of objectives (e.g. during the standard-
setting process, on the macro-level, or while
choosing the relevant capital maintenance con-
cept, on the micro-level). The objectives are
found in the social reality of the needs and
desires of individuals as well as of entire
groups of persons.
Relation 4 (between norms and account-
ants) is merely an extension or subdivision of
relation 3, but focusing on norms arising from
accountants rather than the public at large.
Relation 5 (formulating means-end relations
on the basis of chosen norms) is particularly
important. Everyday life constantly operates
informally with such means-end relations; yet
the logical gap between “ought” and “is” (to
be bridged in step 2) has always been an impe-
diment to the direct positive formulation of
those relations. Another reason for the tradi-
tional neglect of empirical means-end
research may be concisely described by para-
phrasing a saying of Bertrand Russell: it is easier
to scientifically discover truth than usefulness.
In everyday life one handles those means-ends
problems by trial and error; but the challenging
question is whether there exist more system-
atic ways to analyse and solve those pro-
blems. On a general level, this difficult task is
common to all applied sciences; and every one
of them has to solve it in its particular fashion.
Relation G(between instrumental hypotheses
and accountants) arises from the empirical
search for and testing of formalized means-end
relations. It also refers to their use by prac-
titioners. In present-day accounting, these rela-
tions are often implied rather than stated
explicitly.
Relation 7 (between means-end relations
and reality in general) arises out of the fact that
the implicit or explicit means-end relations of
accounting are determined by a wide setting
that may reach far beyond the accounting
community.
Relation 8 (between means-end relations
and pragmatic conceptual representation) con-
stitutes the last link in the chain of possibly
connecting, or even reconciling, the positive
to the pragmatic representation of financial
reality. This leads to the box reflecting actual
278 R. MAITESSICH
accounting records and Iinancial statements,
all of which are, obviously, normatively
tainted.
Relation 9 (between accountants and the
pragmatic conceptual representation) is only
all too familiar. It constitutes the keeping of
accounts and the construction of financial
statements, as well as the pertinent auditing
activity.
Relation 20 (between other decision makers
and the pragmatic representation) is nothing
but an extension of the preceding relation; it
relates the accounting records and financial
statements to management and to the financial
community at large.
FUTURE REQUIREMENTS AND
CONCLUSION
(1) The fact that means-ends relations are
multi-ended and often difficult to analyse, for-
mulate, and confirm by supporting evidence,
should be a challenge for science rather than
a deterrent. The confirmation of such instru-
mental hypotheses may be statistical, but need
not be so. The kind of testing will depend on the
circumstances, and has to be in accord with the
required degree of rigour and the methodology
appropriate for the specific purpose.’
Apart from some limited mathematical tech-
niques, as offered in operations research and
decision theory, in most cases one will have
to rely on empirical methods. Although statis
tical techniques may prove most helpful, non-
statistical methods, such as case and J ield
studies, heurfstks, systemktized trial and
error procedures, and systems methodology,
can hardly be dispensed with in any applied
science. The solutions of the latter are rarely
perfect; their degree of accuracy, for example,
is always constrained by cost/benefit considera-
tions.
(2) The analysis of value judgments and
objectives, and the formulation of an entire
hierarchy of goals is another important require-
ment. There exist numerous attempts along
these lines (cf. Backer, 1966; Heinen, 1978;
the “Trueblood Report” of the AICPA, 1973;
FASB, 1976, 1978, 198oa) but most of those
efforts were limited to financial accounting,
and none of them express any awareness of
the problems involved in formulating means-
end relations. But these previous studies could
possibly be adapted, revised or extended for
the purpose of CoNAM.
(3) A major argument for pursuing such a
methodology is the simple fact that (as far as
accounting objectives are concerned) the prac-
titioners usually find some means to achieve
their goals, however imperfect this may be.
Since such means-end relations exist in actual
practice, then science should be able to analyse
the process of their creation, to show whether
the means are effective or not, to formalize the
relations and, hopefully, to improve them.
(4) The crucial prerequisite for any success
along those lines will be the cooperation of
leading accounting academics. This kind of
research requires a great variety of empirical
and analytical expertise, as well as elaborate
investigations, often of an unconventional
sort. A single person or even a small group
cannot master such a task. Ultimately it will
depend on the entire accounting community
whether they can muster the will to bring the
persistent normative problems of their disci-
pline under an “objective” umbrella.
Recapitulation
Absolute normative theories (e.g. ethical-
normative or pragmatic-normative) might be
considered as “unscientitic” since they are
neither conlirmable nor refutable. But this
can be remedied by a condittonal-normative
methodology. The latter reveals the specific
objective as only one among several alterna-
tives, and requires the formulation of means-
9 Mattessich (1978) explains the natore of “systems methodology” and why applied sciences are mote amenable to it than
a positive methodology (see particularly pp. 1-51, 247-323).
CONDITIONAL-NORMATIVE ACCOUNTING METHODOLOGY 279
end relations, indicating the means that lead
(under specific circumstances) to a stipulated
goal. These relations, so characteristic of the
applied sciences, have to be found and con-
firmed empirically, but usually their determina-
tion and confirmation is difficult and imprecise,
and goes beyond the bounds of positive
methodology.
While other applied sciences have taken
advantage of exploiting conditional-normative
methodology, the received view of accounting
has spurned attempts to go beyond its positive
basis. In medicine, for example, expert systems
reflect the value judgments and means-end
relations, and in legal science the logic of
norms has been explored and applied. Can
accounting afford to shut itself off from this
trend and behave as though it were a pure
science? Have our leading researchers learned
nothing from the history of science and the
price to be paid for a narrow outlook? Who
believes that statistical empiricism can solve
all accounting problems? Are not the many con-
tradictions between theory and practice vivid
evidence that in accounting we have not done
enough to serve the practitioner, the stock-
holder and, above all, society at large? Have
accountants lost their initiative to experi-
ment? Don’t they see that an applied science
cannot be conducted in the same fashion as a
pure science, or do they really believe that
accounting is an instance of the latter?
Accounting shows the major characteristics
of an applied science (resting only on law-
statements of other disciplines, such as eco-
nomics and the behavioural sciences; contain-
ing many norms; depending on cost/benefit
considerations; and being researched at pro-
fessional schools). Therefore a general frame-
work of accounting requires more than a
positive basis. But the normative extension
(means-end relations, etc.) of accounting,
though practised and taught informally, is
neglected in conventional accounting theory.
There are many present and future accounting
needs (many of them not provided for in neo-
classical economics) that may encourage the
application of a conditional-normative account-
ing methodology, for example: those expressed
by the FASB; closing the gap between practice
and theory; ethical considerations; greater
emphasis of policy research; the endeavour
to construct accounting and auditing expert
systems; the quest for the most realistic repre-
sentations permitted under a cost/benefit cri-
terion; the revelation of hidden value judg-
ments in standard-setting; the advent of expert
systems, and so on.
Thus this paper has sketched a methodology
that could explain valuation, income measure-
ment, and other accounting phenomena - and
which, in time, may serve actual practice as
well. The major features of this methodology
are: (i) recognition that academic accounting
is an appZied science; (ii) more attention to
value judgments and the peculiarities of the
hypotheses that relate means to ends; (ii)
recognition that the neoclassical economic
basis of present accounting theory is too narrow
to accommodate the many goals and subgoals
pursued in accounting; and (iv) the need for a
comprehensive catalogue of objectives and the
corresponding (empirically determined)
means-end relations. This catalogue might
serve the “customers” of accounting either in
a “tailor-made” or “customized (standar-
dized)” way, supplying them information that
fits their particular needs and value judgments.
Obviously, the implementation of such a
methodology would have to be step by step,
but even the first one, a clear disclosure of
all the pertinent value judgments, would
already constitute a major advance. The result-
ing conditional-normative framework would
conform to the requirements of the applied
sciences in general; one may thus have to be
satisfied with less rigorous testing procedures
than those of the pure sciences. Yet the result-
ing theories need not forego objectivity.
Indeed, the major criterion of objectivity of an
applied discipline is the clear revelation of its
value judgments (among feasible alternatives)
and the empirical testing of its prescriptions.
280 R. MATTESSICH
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