1. Generally Accepted Accounting Principles:
Perspectives From Philosophy of Law. 1
Jagdish S. Gangolly2 Mohamed E.A. Hussein3
September 7, 1995.4
1The authors are grateful for valuable suggestions to Raymond Hogler (Colorado State University), Tim-
othy P. Hedley (State University of New York at Albany), Edwin Tucker and Martha Howe (University
of Connecticut), the participants at the Third Conference on Interdisciplinary Perspectives on Accounting
(University of Manchester in July, 1991) and the meetings of the European Accounting Association (Turku,
Finlandin April, 1993). They are also grateful for the commentsby Professors DavidSolomonsand Lawrence
Revsine at the Turku meetings.
2Associate Professor of Accounting, Faculty of Accounting and Law, School of Business, State University
of New York at Albany.
3Associate Professor of Accounting, Department of Accounting, School of Business, University of
Connecticut.
4Address for correspondence: Jagdish S. Gangolly, School of Business (BA 365), State University of New
York at Albany, Albany, NY 12222.

2. Abstract
This paper examines the nature of generally accepted accounting principles from the viewpoint of
the philosophy of law (or jurisprudence). It shows that the dominance of a form of utilitarian legal
positivism in accounting thought, at least in the United States, has inhibited the development of
accounting principles which promote fair nancial reporting.
Key words: accounting principles, fairness, jurisprudence, philosophy of law, positivism in ac-
counting.
Running Title: GAAP: Perspectives from Philosophy of Law.

3. 1 Introduction
The generally accepted accounting principles (GAAP) or their constituent parts have been sub-
jected in the accounting literature to intensive analysis inspired by theories in economics, history,
psychology and sociology. Debates that subject them to analysis from the perspectives of philos-
ophy of law (or jurisprudence) are, however, conspicuously absent1. This void in the literature
is to be lamented because of the close but rather incongenial historical connections between the
professions of accounting & law, and the political nature of the institutional setting in which GAAP
as well as the laws are adopted. It is a widely accepted notion that generally accepted accounting
principles constitute a system of norms to be observed in the same sense that laws are, and derive
their authority from appeals to fairness and justice that, in general, laws also do. We believe, there
is a lot to be gained by analysis of the nature of accounting principles in a jurisprudential spirit.
Accounting is the language in which the rights (or, rather claims in the traditional accounting
lexicon) of people to resources are expressed. Spacek (1969) has stated that the purpose of ac-
counting is fair and objective reporting on rights that are established by law. The communication
of accounting information also re ects, as Cyert & Ijiri (1974) have observed, the rights that peo-
ple have to such information. In as much as the description, communication and adjudication of
rights is the central theme of law, it would seem that law and accounting complement each other
in that accounting without law is vacuous and, at least commercial (and much of civil) law, with-
out accounting is, inadequate. In a fundamental sense both law and accounting deal with human
communication, are riddled with ambiguities and, as we shall argue here, both must seek their
foundations ultimately in the deontological underpinnings of moral and political philosophy.
It is fashionable to draw sharp contrasts between the professions of law and accounting (words
vs. numbers, qualitative vs. quantitative and similar dichotomies come to mind). However, even
a cursory examination of the evolution of the disciplines underlying these two professions, so bril-
liantly accomplished by Moore (1991), reveals parallel developments: demotion of normative analy-
sis (of Scott (1941) in accounting; of Fuller (1940) in law) followed by the paramountcy of positivist
dogma at least in the English speaking world (positive accounting, e cient markets & behavioral
research in accounting; legal positivism and law & economics in law) culminating in the critical
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4. stream of research that studies the role of power (in the society) in determining rules of the game,2
unmasks the normative underpinnings of supposedly `objective' positive research3, and asserts the
undecidability of textual interpretation4 (critical accounting theory; critical legal theory). Such
parallels suggest epistemic a nity of the two disciplines and their derivative professions despite
apparent di erences.
In this paper we ask certain fundamental questions concerning the nature and function of
accounting principles. Are individual accounting principles norms to be observed? Or are they
social facts to be contended with in accounting for entities? If they are norms, do such principles
in the aggregate constitute a system of norms that is complete in the sense that it has an answer
to every accounting question that may arise? On the other hand, if they are social facts, do they
constitute a propositional system subject to analysis in traditional logic? Is such a system of factual
propositions closed by some generally recognized axiom of closure? If the GAAP is a system of
norms, can individual norms in that system be con icting or mutually inconsistent? If it is a system
of factual propositions, how are inconsistencies resolved to preserve consistency? If the GAAP is a
system of norms, does it have a `right' answer to every accounting question? Can such an answer
be derived through reasoning? If the GAAP is not complete, i.e.,there are gaps in the GAAP, do
accountants have an obligation to search for the right answer? Or do they have discretion to follow
any accounting method that they fancy? Do the accountants unconsciously create new GAAP
when they choose an accounting method where the GAAP is silent? Analogous questions lie at
the heart of philosophy of law. An examination of these questions in the context of accounting
is important, in our opinion, to provide an enduring ontological perspective of the nature of the
GAAP.
Our motivation in addressing these questions is not to suggest that they have not been raised
before, nor to propose that a study of jurisprudential thought is a panacea for all the controversies
in accounting. It is rather to clarify the nature of accounting by deriving a rich description of
the accounting domain from the discussion of these questions. Our objective here is thus rather
narrow in that we do not address the issues pertaining to the process of accounting policymaking
(including the study of political arrangements facilitating it). Such a task would require us to
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5. examine generally accepted accounting principles from the point of view of political philosophy; a
task clearly beyond the scope of this paper.
In the next section we examine the nature of accounting principles in order to answer some of
the questions raised above. In section 2.1 we draw analogies between legal rules and accounting
principles. Our objective here is to study the nature of accounting principles in the context of
the debates over fact/value distinctions that have raged in the philosophy of language and legal
philosophy. In section 2.2 we discuss accounting principles as norms as a prelude to the study of
the function of accounting principles and standards in section 2.3. Here we adopt the framework of
Wright (1986) which provides a way of bridging the gap between facts and values by interpreting
norms as guidelines for action in a description of an ideal world. We next examine the consequences
of acceptance of what we call naive positivism to accounting in section 3. The naive positivist
conception of accounting principles and standards is characterized by a hierarchical structuring
of norms, a narrow interpretation of the concept of fairness, assumptions made regarding the
completeness and consistency of accounting principles & standards, and the adoption of the concept
of discretion which states that accountants have discretion where a situation is not covered by
accounting principles. In section 3.1 we discuss the positivist hierarchical structuring of norms and
its impact on discussions of accounting principles and standards. In section 3.2 we examine the
naive positivist conceptions of fairness underlying the accounting principles as manifested in the
allocative e ciency criteria (section 3.2.1) and the neutrality principle (section 3.2.2). In sections
3.3and 3.4we study the the positivist conceptions of completeness and consistency in the accounting
context. Section 3.5 brie y discusses the positivist notion of discretion. In section 4 we provide
brief concluding observations.
2 The Nature of Accounting Principles
In this section, we rst assume that the accounting principles are norms, and study the implications
of the is{ought (or fact{value) controversy in the philosophy of law for gaining an understanding of
the nature of accounting principles. Accepting the legal positivist distinction made between facts
and norms from the perspective of logical entailment, we discuss the role of accounting principles in
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6. the normative interpretation of real world events of interest in accounting. Second, we question this
assumption that accounting principles are norms, in order to sharpen the precise meaning attached
to words such as doctrines and practical necessities, and then study the role of norms in bridging
the gap between the ideal and the real.
2.1 Facts, Values and Hume's Guillotine
As a starting point, it is reasonable ad arguendo to assume that the speci c rules within the
GAAP are norms to be observed in the sense that they permit, require or forbid speci c accounting
treatment of transactions, and provide sanctions when they are not observed. Kohler (1963, p.36)
has observed that present-day accounting principles are probably best described as normative |
preferred or prescribed procedures in actual use, designed to conform to common standards such as
those that could be created by the profession or might be required in the public interest. The Norms
in accounting, seen this way, are like the norms in law, not statements (or facts) about the real-world
events but refer to such events; real-world events (or facts), however, derive their meaning from
the interpretation of such norms. Spacek (1969) has observed that accounting principles constitute
the de nitions by which we speak to one another, and that only by exchanging and understanding
such de nitions do words mean what we want them to mean. For example, the rules on accounting
treatment of leases stated in the Statement of Financial Accounting Standard (SFAS) No. 13 are
not declarative statements about leases per se, but a speci c lease transaction derives its meaning
in the language of accounting through its interpretation according to the norms set forth in that
standard.
Norms (or imperatives), according to Kelsen (1945), can be distinguished from statements (or
assertions) in that the former are meanings of acts of human will whereas the latter are meanings
of acts of thought or cognition. Norms in accounting, for example, arise through human acts of will
implicit in the pronouncements of the Financial Accounting Standards Board (FASB), the Securities
& Exchange Commission (SEC), the American Institute of Certi ed Public Accountants (AICPA)
as well as customs and traditions which have `substantial authoritative support'. Norms specify
how one `ought' to behave, not how one `does' behave. They are usually stated in the imperative
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7. mood (`ought' or `shall', which are deontic modalities) while statements about the real-world are
usually stated as declarative sentences in the indicative mood (`is', which is an alethic modality).
Since norms are not statements about the real world, they are not capable of being true or false
and consequently do not have truth values. One can not therefore derive descriptive sentences in
the indicative mood from them through the application of deductive logic. Such a deductive bond
of entailment can exist only between propositions expressed in the indicative sentences.(Wright
1986, Kelsen 1945, Jorgensen 1938). This gap between `is' and `ought', referred to by Black (1970)
as `an unbridgeable gap' or `Hume's Guillotine', has been the object of intense debate in philosophy.
While norms can not be true or false, they can be either valid or not-valid. For example, while
the accounting norms pertaining to accounting for research and development expenses in SFAS No.
2 can not be said to be true or false, one can make a statement as to whether they are valid or not.
The concept of validity is entirely unrelated to the concept of truth. As Kelsen (1945, p.110) has
so forcefully remarked,
The reason for the validity of a norm is not, like the test of the truth of an `is' statement,
its conformity to reality.... The question why something ought to occur can never be
answered by an assertion to the e ect that something occurs, but only by an assertion
that something ought to occur.... when the mother says to her child: `You ought to
go to school because your father has ordered it'... the fact that the father has ordered
the child to do something is only apparently the reason for the validity of the norm in
question. The true reason is norm tacitly presupposed because taken for granted. The
reason for the validity of the norm, `You ought to go to school', is the general norm,
`Children ought to obey their father'.... The reason for the validity of a norm is always
a norm, not a fact. The quest for the validity of a norm leads back, not to reality, but
to another norm from which the rst norm is derivable....
To continue with the example of the norms in SFAS No.2, the FASB cites the norms pertaining
to measurability in asset recognition (paras 43{46), matching (paras 47{50) and usefulness of the
resulting information (para 50) as justi cation for its conclusions. In a Kelsenian world, a norm
is valid if it exists and belongs to a system of norms that is e cacious; such norm exists if it has
binding force for those whose behavior it regulates" and a system of norms is e cacious if it is
being obeyed and applied. A norm can lose its validity either through the loss of certain minimum
e cacy (termed desuetudo in jurisprudence) or through promulgation of a new norm that repeals
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8. the validity of an earlier norm (termed derogation in jurisprudence). The loss of validity of SFAS
No. 19 on oil & gas accounting due to the loss of minimum e cacy (occasioned by actions of SEC in
mandating reserve recognition accounting) is an example of desuetudo whereas the various SFASs
that essentially invalidate earlier SFASs are examples of derogation.
In the legal context, Kelsen (1967, p.4) has observed that the meaning of an act is derived from
a `norm' whose content refers to such an act and that the
judgement that an act of human behavior, performed in time and space, is `legal' (or
`illegal') is the result of a speci c, namely normative interpretation. And even the view
that this act has the character of a natural phenomenon is only a speci c interpretation,
di erent from the normative, namely a causal interpretation.
As a system of norms, the GAAP provides a scheme for the interpretation of real world facts
pertaining to certain classes of business transactions. In preparing the nancial statements, we aim
to interpret the e ect of transactions and events a ecting the nancial condition of an entity in a
purposive (or normative) way, and not in a causal way as, Dworkin (1986) would say, a biologist
explains a frog's croak.5 Financial reporting is a form of constructive interpretation where we
impose purpose (and not seek causes) on the nancial statements in order to make of it the
best possible example of the form or genre to which they] are taken to belong." (Dworkin 1986,
p.52) The measurements and disclosures in the nancial statements can be viewed in this light as
normative interpretations of the nancial position and results of operations of the reporting entity.
The relevance of this is{ought controversy to accounting theory becomes apparent if we examine
the well-known monograph by Moonitz (1961) on The Basic Postulates of Accounting. Accepting
the AICPA special committee (on research program) position that postulates are the basic assump-
tions on which (accounting) principles rest, that such postulates are necessarily derived from the
economic & political environment and from the modes of thought & customs of all segments of the
business community, Moonitz (1961) proceeded to explore the economic & political environment
as it relates to the issues with which the accountants deal. He rejected the axiomatic approach
of Mattesich (1957) for its inability to deal with the empirical" aspects of accounting relating to
valuation, but concluded that heavy reliance had to be placed on deductive reasoning in the devel-
opment of accounting postulates & principles. His modus operandi was to recognize and de ne the
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9. problems to be solved (positing what `is' the case) and move to their solution by careful attention
to what `ought' to be the case. Considering that such a deductive bond of entailment can not be
established between what `is' the case and what `ought' to be the case 6 , it is not surprising that
the results in the Postulates as well as the Principles study were a confusing mixture of what `is'
and what `ought to be'. Apart from some rather innocuous (quanti cation, exchange, entities and
tentativeness) or vague ( nancial statements and market prices) postulates, they include norms set
forth as postulates containing modalities such as `must' or `shall'. In the absence of a framework
for reasoning with such diverse postulates and norms, it is not surprising that these studies did not
provide a resilient foundation on which to build a sound theoretical superstructure for the GAAP7.
2.2 Accounting Principles as Norms.
Now let us question our initial assumption that all GAAPs are norms. Are they conventions
generally agreed upon, doctrines derived from ethical or moral considerations, norms posited by
some competent authorities with provisions for sanctions in cases of delict, or simply practical
necessities (or means) to achieve certain objectives (ends)? If they include some or all of these,
collectively what is the function of the generally accepted accounting principles? We examine these
questions in this section.
It is a trivial matter that there are certain conventions in accounting. We post debits on the left
side in the ledgers and use generally agreed upon formats for the nancial statements. Such conven-
tions are convenient in communicating with the users of such statements, and in fact establish what
Lewis (1986) calls co-ordination equilibrium. However, when we speak of the GAAP, we usually
refer to what Vatter (1963) calls doctrines and principles. Doctrines, according to Vatter, represent
normative ideas | notions as to what ought to represent good practice. These ideas represent
attitudes of the profession with respect to how accountants ought to react to certain conditions;
they have a normative, ethical, if not actually a moral avor" and principles are generalizations
as to the way in which certain objectives may be reached".
Doctrines, so de ned in a Vatterian sense, are generally referred to in the jurisprudential liter-
ature as norms since they can be viewed as genuine commands or orders. Principles as de ned by
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10. Vatter, on the other hand, are referred to as technical norms, practical necessities (Wright 1986) or
hypothetical imperatives (Kant 1956). An action statement A is a practical necessity (or a technical
norm) if some desirable objective B is not achieved unless such action statement is carried out. We
can then say that one `ought' to do A, or that the desirable objective B has given rise to a practi-
cal necessity to do A. Ijiri (1975) calls statements of such practical necessities normative theories;
Mattesich (1978) calls them instrumental hypotheses. See also Gaa (1988).
Most opinions of the Accounting Principles Board as well as the statements of nancial account-
ing standards of the FASB are appropriately interpreted as technical norms which are necessitated
by accounting principles. For example, the Statement of Financial Accounting Concepts (SFAC)
No. 1 stipulates the norm that nancial reports should provide information that is useful. SFAS
No. 57 (para 34), after a comprehensive discussion of issues (in paras 12 { 17) arrives at a factual
statement (in para 18) that information about related party transactions is useful. Based on this
factual statement and the norm stated above, the FASB concludes (in para 18) that such infor-
mation should be disclosed. This conclusion, it should be clear, is an elliptical way of saying that
unless related party transactions information is disclosed, the accounting norm of usefulness is not
satis ed. One can say that a genuine norm (usefulness) has engendered a practical necessity to
disclose information about related party transactions.
Conversely, as Wright (1986) has observed, such practical necessities often give rise to genuine
norms in a positivist's sense. For example, derivation of the technical norm pertaining to disclosure
of related party transactions is stated in the Background Information and Basis for Conclusions
section of SFAS No. 57. The norm engendered by such derivations is then posited in paragraph
2 of the same statement. It is not an exaggeration to state that in most cases the FASB derives
the practical necessities in Basis for Conclusions for the norms which are posited in the Standards
for Financial Accounting and Reporting section. It is important to observe that such derivation of
technical norms does not bridge the gap between `ought' and `is', but in case of nancial accounting
standards sets in motion a process that eventually results in positing of new accounting norms.
The above discussion provides a hierarchical schema for generally accepted accounting princi-
ples. At the top level there are norms which are accounting principles, and at a lower level there are
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11. practical necessities (engendered by those norms) which are posited as standards by the appropriate
norm positing authority. We can now answer the question whether all generally accepted account-
ing principles are norms, by stating that the GAAP includes genuine norms as well as practical
necessities or standards. We now proceed to answer the question: collectively, what is the function
of generally accepted accounting principles and standards?
2.3 The Function of Principles & Standards
In as much as we consider such principles to be norms, recourse to their justi cation based on
actual accounting practice is not warranted. The generally accepted accounting principles, viewed
as norms, are generally accepted not necessarily because they are generally followed in practice,
for otherwise there would be no need for o cial rule-making institutions such as the FASB. They
are generally accepted because they are expected to embody what our society believes to be the
ideal state of a airs | a sort of accounting utopia.8 If such an ideal state of a airs were to obtain,
then the GAAP would be super uous; if such ideal state of a airs were impossible, then it would
be a fabrication. The generally accepted accounting principles, seen in this light as a normative
order, ought therefore to describe an ideal world, a world that has been called by Hintikka (1969)
deontically perfect, in which no obligation is ever neglected and everything permitted is sometimes
the case". We can do no better than to quote the eloquent statement of Wright (1986, p.273):
The function of norms, one could say, is to urge people to realize the ideal, to make them
act in such a way that the description of the real approximates the description of the
ideal. In an important sense we could say that the purpose of the norms is to `bridge the
gap' between is and ought, although not in the sense of establishing a deductive bond
of entailment between the two. Such a bond is out of the question, can not possibly
exist.....
To summarize our discussions thus far, nancial reporting involves normative interpretation of
phenomena of interest in accounting, and the GAAP provides a scheme for such an interpretation.
The speci c norms in the GAAP include genuine norms as well as practical necessities which are
posited as standards by authoritative bodies. Collectively, the function of such accounting principles
is to describe an ideal world, and the reason for their existence is to exhort people to behave in a
way that the real world approximates the ideal one that they imply.
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12. 3 The GAAP as a System of Norms
Our inquiry thus far is in broad agreement with that of a school of jurisprudential thought called
legal positivism and its application to the domain of accounting principles. While the contribution of
this line of inquiry, in clarifying the semantics of accounting principles, has indeed been profound,
a blind acceptance of the consequences of positivism, without a framework for reasoning about
principles and standards such as the one provided by Hintikka and von Wright, in our estimation,
has inhibited the development of accounting thought. In attempting to answer the remaining
questions posed at the outset in this paper, we will study the consequences to accounting of the
acceptance of the tenets of this school of thought, which we may call naively positivist. We will
organize our discussion, in this section, around ve consequences of the acceptance of what we
have called naive positivism on the development of accounting principles in the United States:
the hierarchical structuring of norms, a narrow conception of fairness, completeness of the GAAP,
consistency of the GAAP and the notion of discretion. This exercise is necessary, since our view
in the rest of this paper is fundamentally at variance with the naive positivist ideology; and even
when in agreement, our justi cation is radically di erent.
3.1 Norm Hierarchies and Hume's Guillotine
Positivist idea of the separation of what is and what ought to be, in the absence of bridging of
the gap between them by the conception of norms as the articulation of a society's vision of the
ideal, has led to the development of norm systems that are hierarchical with a `supernorm' at the
helm. Examples include the grundnorm of Kelsen (1945), rule of recognition of Hart (1961), the
utilitarian norm in the study of Law & Economics (see for example Posner (1986) and Landes &
Posner (1987)), and in the case of accounting, the SFAC No. 1 norm of decision usefulness. Here
we will limit our discussion to the Kelsenian system.
Legal positivism believes in the strict separation of what is (analytical or expository jurispru-
dence) from what ought to be (normative or censorial jurisprudence) and considers the former the
preoccupation of legal "science"9. This approach is in the tradition of Max Weber who advocated
that social sciences be value-free (wertfrei), and is, with the exception of Kelsen (1945) , utilitarian
10

13. in the tradition of Bentham (1961)10. It is our view that, at least in the United States, a similar
school of thought, naively positivist in spirit and utilitarian in its orientation, has dominated both
accounting research and the policy-making scene . We now justify this view.
Even a casual reading of the literature on the accounting principles reveals a pernicious inclina-
tion to reject fairness of nancial statements as a pervasive accounting principle. Moonitz (1961)
in Basic Postulates, for example, rejected the proposal of Scott (1941) to treat justice, truth and
fairness as a starting point for the discussion of accounting principles as `subjective' as opposed
to the implied `objective' nature of his inquiry. SFAC No 1 on Objectives of Financial Reporting
by Business Enterprises went one step further by essentially purging the idea of `fairness' from the
manifest of accounting principles. While not alluding to fairness even obliquely, it enshrines the
utilitarian notion of usefulness as the fundamental norm of nancial reporting.11
The proponents of fairness-as-basic- nancial-reporting-principle view in practice (Spacek 1969)
and in academia (Brilo 1976) have very eloquently o ered justi cation for their position. However,
such a view has been rejected, in naive positivist spirit, as unsatisfactory because of its deemed
subjectivity while recognizing that ultimately the results of any purposive human activity must
be judged in the light of the value judgments inherent in ethical concepts"(Moonitz 1961). The
reviewer of Brilo 's More Debits than Credits in Business Week has gone so far as to state rather
boldly, Fairness is an empty box, and the sooner we bury the term, the better o we will be"(Brilo
1981).
The naive positivist zeal in jurisprudence to rid itself of even allusions to fairness and such
other concepts with moral or ethical connotations has not quite succeeded and, in our view, as
it will become clear below, analogous e orts in the discussions of the GAAP are bound to fail in
accounting. Legal positivism has had di culties wrestling with profound questions such as the
following: Are transparently unjust laws (such as those in Nazi Germany) laws at all? Even Hart
(1983, p.77), a stalwart of the legal positivist school has had to grudgingly concede the importance
of moral issues in the matter of laws. In discussing a case in which a post second-war West German
appeals court, in holding a wife (who in wishing to be rid of her husband had deprived her husband's
liberty by denouncing him to the Nazi authorities for his alleged statements against Hitler) guilty,
11

14. rejected the argument that her husband had been so deprived by a German court (for violating a
statute) on the ground that such a Nazi statute was contrary to the sound conscience and sense
of justice of all decent human beings", he grudgingly yet eloquently admits,
...if we have learned anything from the history of morals it is that the thing to do with
a moral quandary is not to hide it. Like nettles, the occasions when life forces us to
choose the lesser of two evils must be grasped with the consciousness that they are what
they are. The vice of this use of the principle that, at certain limiting points, what is
utterly immoral can not be law or lawful is that it will serve to cloak the true nature of
the problems with which we are faced and will encourage the romantic optimism that
all the values we cherish ultimately will t into a single system, that no one of them
has to be sacri ced or compromised to accommodate another.
Hart speaks of minimum morality of law; even Austin (1954) and Bentham (1961) have consid-
ered it a moral obligation to resist grotesquely iniquitous laws.
Kelsen (1945) faces an analogous dilemma. A norm must rely on another norm for its justi-
cation. For example, the norm `children must obey father' justi es the norm `child must go to
school' when the father has so ordered. If one continues to ask for the justi cation of norms, one
soon reaches a point when further justi cation is not possible in a Kelsenian positivist world. For
example, why children must obey fathers can be answered by saying that it says so in the bible; if
one asks why one should obey what is in the bible, however, a Kelsenian positivist can not provide
an answer that is devoid of moral or ethical connotations which would pull the rug from under
the Kelsenian thesis. Kelsen, being a non-utilitarian, is not even able to take refuge in utilitarian
arguments. Moreover, as we have earlier shown, such arguments are not necessarily fool-proof. At
such an ultimate norm (that he calls basic norm or grundnorm) where his normative theory comes
to a dead end, Kelsen is forced to choose between treating such a basic norm as a social fact (which
would crash the barrier between what is and what ought to be that, as a positivist, he has built for
himself) and injecting metaphysical concepts which are certainly not in the positivist spirit that
he espouses. While he vacillates in his writings, in the classic General Theory of Law and State
p.437] he is unequivocal in choosing the latter ,
..it is the function of the basic norm not only to recognize a historically given material
as law, but also to comprehend it as a meaningful whole. It must be frankly admitted ...
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15. that such an accomplishment would not be possible by means of pure positivism. ... The
basic norm has here been described as the essential presupposition of any positivistic
legal cognition. If one wishes to regard it as an element of a natural-law12 doctrine
despite its renunciation of any element of material justice, very little objection can be
raised. What is involved is simply the minimum... of natural law...without which a
cognition.... of law is not] possible. ... the theory of basic norm may be considered a
natural-law doctrine in keeping with Kant's transcendental logic.
Moonitz (1961) did not envisage a hierarchical structuring of accounting norms. But soon
after the publication of Basic Postulates, at least some of the discussions revolved around the ap-
propriate structuring of such norms. The Chambers{Spacek{Solomons (Chambers 1963, Spacek
1969, Solomons 1977) debates considered if accounting principles should have an over-riding pos-
tulate (Spacek{Solomons view) or a multitude of postulates (Chambers view). Spacek advocated
fairness as the over-riding criterion whereas Solomons advocated accuracy as the over-riding cri-
terion with his cartographic example. For Solomon's views to prevail, the crucial requirement is
an underlying economic theory with primitives (such as concepts of costs, income, etc.) which
are unambiguous and operational. That this is not so is obvious and Boulding (1962, p.54) has
observed,
What the accountant tells us may not be true but, if we know what he has done, we
have a fair idea of what it means. For this reason I am somewhat suspicious of many
current e orts to reform accounting in the direction of making it more `accurate'.
Spacek's fairness view-point did not make much headway. While suspecting it, we must leave
it to the historians of accounting thought to determine if the positivist ideology contributed to the
neglect of his view. One can consider the views of Chambers as a case for axiomatization of a
species of current cost accounting similar to the axiomatization of historical cost accounting in Ijiri
(1975). The axiomatic approaches too, in our view, did not gain overall acceptance although many
of the ideas expressed therein (for example certain departures from historical cost assumption) have
found acceptance.
The view adopted in the conceptual framework of FASB as evidenced in the SFAC No.1 and
2 is decidedly Kelsenian in its spirit ( in terms of its hierarchical organization) and utilitarian
in its orientation with decision usefulness occupying a central position. There are two possible
interpretations of these statements in the light of our discussions so far. In the rst interpretation,
13

16. the norms in the conceptual framework of accounting may be viewed as a part of the overall legal
system. Here, we must make assumptions about a certain minimum fairness requirement of the
GAAP analogous to a Benthamite or Austinian presupposition of minimum morality of law. In the
second interpretation, such norms may be viewed as a normative order for the GAAP in a Kelsenian
sense, with usefulness as the basic norm. Here, the basic norm of usefulness must be construed as
a natural law doctrine that Kelsen would consider a `condition of experience' as opposed to `data
of experience'. In either interpretation, we have no escape from some notion that positivists would
consider metaphysical.
3.2 Fair Presentation and the GAAP
The accounting profession in the United States has generally construed fairness of nancial state-
ment presentation to mean fairness in the context of the GAAP. The auditing standards, for exam-
ple, state (AU.411.03),
The independent auditor's judgement concerning the `fairness' of the overall presenta-
tion of nancial statements should be applied within the framework of generally accepted
accounting principles. Without that frameworkthe auditor would have no uniform stan-
dard for judging the presentation : : : (emphasis added)
While such narrow construal of fairness in nancial statement presentation is consistent with
positivist thought, it has not been bought by the legal community, at least in the United States,
and if jury verdicts are any indication of public sentiments, it has not been bought by the American
public either.
Legal positivist conception of obligation is limited by positive legal rules; i.e., to say that one
is legally obligated to do something is to say that there is a positive legal rule that states that
one is so obligated (Dworkin 1977). The contra-positive statement of this conception would assert
that if there is no obligation arising out of a positive rule to which one can point, then such an
obligation does not exist. Such a conception of obligation can lead to decisions that would be
considered unjust even by many positivists. One only needs to examine the decisions of Justice
Lemuel Shaw of Massachusetts who, by upholding the fugitive slave laws in pre-civil war United
States in a positivist spirit, consigned Thomas Sims, a fugitive slave, to his master in Savannah
14

17. (Georgia)13. Fuller (1940), a champion of natural law, has found an eloquent expression of the
consequences of positivism in Alfred Lord Tennyson's celebrated poem The Charge of the Light
Brigade 14 where, the unfortunate soldiers of the light cavalry brigade, in not questioning Lord
Raglan's orders, charged their way to their own graves.
The trial court judge in U.S. vs. Simon (421 F 2d. 796 1970]), in charging the jury, has stated
that the critical test is whether the nancial statements as a whole fairly present the nancial
position of Continental Vending Co., and whether they accurately report the operations; proof of
compliance with generally accepted accounting principles is evidence which may be persuasive but
not necessarily conclusive evidence of the accountant's good faith which needs to be established
when fair presentation is lacking. The Securities & Exchange Commission, in the Associated Gas
& Electric Co. (11 S.E.C. 975 1942]) case, stated,
Compliance with generally accepted accounting principles is not necessarily su cient
for an accountant to discharge his public obligation. Fair presentation is the touchstone
for determining the adequacy of disclosure and nancial statements. While adherence
to generally accepted accounting principles is a tool to help achieve that end, it is
not necessarily a guarantee of fairness : : : Too much attention to the question whether
the nancial statements formally comply with principles, practices and conventions
accepted at the time should not be permitted to blind us to the basic question whether
the nancial statements performed the function of enlightenment, which is their only
reason for existence. (emphasis added)
In Herzfeld vs. Laventhol (378 F.Supp 112 1974]), the judge stated:
Much has been said by the parties about generally accepted accounting principles and
the proper way for an accountant to report : : : We think this misses the point. Our
inquiry is properly focused not on whether Laventhol's report satis es esoteric accounting
norms, comprehensible only to the initiate, but whether the report fairly presents the
true nancial position of Firestone as of November 30, 1969, to the untutored eye of an
ordinary investor. (emphasis added)
The transcendent theme of fairness is plainly there to be seen in the legal decisions involving
accounting principles. But even a cursory examination of the positivist literature in accounting
would reveal the paramountcy accorded to the criterion of allocative e ciency in social choice
relative to criteria based on notions of fairness having to do with liberal principles to which we, as
a democratic society, are committed (Markovits 1993). While the courts in the United States have
15

18. looked beyond the GAAP in the interpretation of fairness in the context of nancial disclosures, in
the `true and fair' world of British accounting, the courts seem to give far greater prominence to
current `approved' practices. The works of Walton (1993), Chastney (1975) and Rutherford (1985)
also suggest that `true and fair' is de ned by current practice. While code law countries in Europe
have in the past been ba ed by `true and fair' construction, they have been forced to contend with
it by the Fourth Directive of the European Community15. In the rest of this section we study the
genesis and implications of the this situation along two dimensions: the naive acceptance of the
criteria for allocative e ciency (embodied in the Pareto-superior criterion and the Kaldor-Hicks
criterion), and the importance of neutrality as an accounting principle. In a fundamental sense it is
precisely the issues of marginalist economic notions of e ciency and the moral philosophical notions
of equity that have dogged the debates between critical accounting and the prevailing dogma.
3.2.1 Criteria for allocative e ciency
The concept of allocative e ciency lies at the heart of the FASB Conceptual Framework. The
SFAC 1 Objectives of Financial Reporting by Business Enterprises states, The public interest is
served by allocation of scarce resources to their most e cient uses" since E cient uses of scarce
resources enhance the standard of living". The criteria of Pareto-superior allocative e ciency16 and
of Kaldor-Hicks17 are enshrined in the FASB's conceptual framework by the pervasive bene t-cost
constraint in SFAC 2.
That using Pareto-superior criterion of Allocative e ciency can not provide a value-neutral
yardstick for policy evaluation has been vigorously supported on at least three grounds in the ac-
counting as well as legal theory literature. First, Williams (1987) and Markovits (1993) have argued
that de ning allocative e ciency as a value followed by its use as a yardstick involves a category
mistake that renders value-free Pareto-superior allocations contradictory or, as Markovits (1993)
has stated rather bluntly, oxymoronic. Second, such usage is also an easy prey to the positivist's
own Humean guillotine, since it involves the derivation of an `ought' statement from antecedents
that contain `is' as well as `ought' statements. Third, Puxty & Laughlin (1983) have attacked
the FASB assumption of Pareto-optimality of market allocations as unfounded on the grounds of
16

19. market imperfections, and argued that the improvement of decision-usefulness of information will
not necessarily lead to an improvement in the general economic welfare.
Markovits (1993) has convincingly shown that Kaldor-Hicks criterion is also awed, since di-
minishing marginal utility of money entails positive wealth-elasticity of equivalent dollar valuations
of policy choices, leading to a bias in favour of the status quo. Moreover, as Rescher (1966) has
observed, the Kaldor-Hicks criterion abstracts from the distributional aspects of choice (by its
assumption that no party would experience pure-distributive-preference related equivalent-dollar
gains/losses) since in principle it is possible to devise appropriate distribution schemes. This as-
sumption is quite unrealistic specially in our rights-based culture" where, as Markovits (1993, p.
519) has observed, rights trump over the pursuit of any ultimate value or non-rights-related social
goal, including any of the various goals which are furthered by increases in allocative e ciency".
The tacit assumption that any choice that is allocatively e cient is both morally permissible and
desirable overall (and that any choice that is allocatively ine cient is undesirable), is tantamount
to accepting allocative e ciency as a value in itself. There is no reason why one should accept any
allocative e ciency criterion as a value a priori. It is no less metaphysical than, say, `fairness',
which most positivists would vouch to be fuzzy. Even in a positivist's world, to be considered a
value without any metaphysical connotations, allocative e ciency must be derived endogenously
as an element of a contract. Hume (1978) in his classic A Treatise of Human Nature characterised
values whose process of determination is exogenous to human social interaction as vulgar . In an
eloquent passage in the Treatise, Hume (1978, p. 483) observed:
: : : We have naturally no real or universal motive for observing the law of equity, but
the very equity and merit of that observance; and as no action can be equitable or
meritorious, where it can not arise from some separate motive, there is here an evident
sophistry and reasoning in a circle. Unless, therefore, we will allow, that nature has
establish'd a sophistry, and render'd it necessary and unavoidable, we must allow, that
the sense of justice and injustice is not deriv'd from nature, but arises arti cially, tho'
necessarily from education, and human conventions. (emphasis added).
There is a wealth of literature, contractualist in spirit, dealing with such analyses that, with
the exception of the works of Rawls, seem to have been all but ignored in the accounting literature.
In the accounting literature, one nds seeds of such contractualist arguments in Ijiri (1983), who
17

20. has stated quite bluntly:
As long as the information satis es the quality of objectivity and veri ability, its content
and rules of preparation can be anything on which the accountor and accountee agree
: : : When there is explicit agreement, the accountant has no business getting involved in
the issue of whether such information is useful for anything : : : It is only when such an
agreement is not explicitly stated that the accountant must nd the underlying intent
of the two parties and develop an accounting system accordingly.
3.2.2 Neutrality
The FASB Conceptual Framework, in SFAC 2, states that neutrality is an important virtue of
accounting standard setting that bestows credibility on such process since the standard setters
would not have to tack with every change in the political wind", and mitigate the possibility
the standards that are otherwise defensible are tainted with guilt by association". It goes on to
de ne neutrality as absence in reported information of bias intended to attain a predetermined
result or to induce a particular mode of behavior." It goes on to say, neutrality in the context of
standard setting means an emphasis on relevance and reliability of information, not the e ect that
the new rule may have on a particular interest. This goes counter to at least two other statements
that FASB has itself made, and reduces the whole discussion on the matter to a buzzing beehive
of ambiguities. First, in SFAC 1 (para 28) states that objectives of general purpose nancial
statements stem primarily from the informational needs of external users who lack the authority
to prescribe the nancial information they want from the enterprise : : : ", an objective that can
not possibly be accomplished without considering the di erential impact of pronouncements on
particular interests. Second, SFAC 2 (para 105) states that to be neutral it is not necessary to
treat everyone alike in all respects, and goes on togive an example of di erential disclosures based on
the size of the enterprises. It is precisely the consideration of consequences of the pronouncements
that lead to statements such as these, considerations that would be proscribed under FASB's own
earlier de nition of neutrality. FASB adds to the confusion by stating (in para 109) that while
reliability and absence of bias (in the sense of representational faithfulness) implies neutrality, it is
entirely possible for neutral information to be unreliable, biased, or both. It is curious that FASB
should extoll virtues of a concept (neutrality) that may, in its own account, lead to provision of
18

21. information that can conceivably be unreliable, biased or both.
Neutrality has received considerable attention in the Chambers{Solomons{Spacek debates re-
ferred to earlier, and more recently by the Tinker{Solomons debate(Tinker 1992, Solomons 1992).
Solomons (1992) reverts to his favorite theme of neutrality couched in terms of accuracy (repre-
sentational faithfulness) in a cartographic sense where accounting is reduced to a`science' of scal
mensuration. This rather mechanical conception of neutrality can be attacked on three grounds.
First, as Tinker (1992) has argued, it is neither socially re ective nor critically self-conscious. Sec-
ond, Tinker (1992) has examined at depth the realist pedigree of this argument that assumes that
there is a reality out there" that lends itself to reliable and veri able mensuration. In as much as
the language of accounting is one of constructive and normative interpretation, as we have argued
earlier in the paper, neutrality as expounded by Solomons can not be supported as a foundation
for the GAAP18 Third, the indeterminacy (or rather co-determinacy) of prices forming the core
of Cambridge controversies would make neutral" measurements in accounting impossible(Tinker
1980).
The problem, as the critical accounting literature views it, with which we agree, is the narrow
construal of neutrality in the present accounting standard-setting process dominated by investor-
creditor concerns. What is needed is a concept that encompasses not just ideas of pareto superior
e ciency (which encapsulate co-operation for `justice as mutual advantage') but those of equity or
fairness that Barry (1989) calls `justice as impartiality'19. Such construal, sadly lacking in account-
ing presently, would elevate the role of accounting from that of preparation of nancial disclosures
(pretentious cartographer) to that of facilitator of contracts in an information age. Such an ex-
panded role for accounting would require it to contend not only with prescriptive conceptions of
normative systems and their realization in actual professional practice in the sense of von Wright,
but also indulge in the contemplation of `established arrangements' and `drastic ways of reimagining
society' with a view to obtain what Unger (1983, p.19) calls visionary insight that] begins with the
picture of a reordered human world". This perspective puts the development of accounting prin-
ciples and nancial disclosures squarely in the arena of social and political thought; a perspective
that is characteristic of critical accounting thought.
19

22. 3.3 Completeness of the GAAP
Legal positivism postulates that legal systems are necessarily closed (sometimes referred to in
jurisprudence as hermeneutic plenitude); that there are no gaps in the law. One interpretation
of this postulate states that the legal order consists of general norms as well as individual norms
which are posited by judges in their decisions and thus such legal order is complete with respect
to any situation that can arise; what the law has not foreseen, the judges cover. This is clearly an
unsatisfactory proof of completeness. As Alchourron & Bulygin (1971) state, this is tantamount to
saying that trousers (the law or, in our case, the GAAP) can have no holes (gaps) because there are
always tailors (judges or, in our case, accountants)to patch them. In the second interpretation, legal
orders are closed because of the principle of prohibition which states that `everything which is not
prohibited is permitted' or equivalently `everything is either permitted or prohibited'. Alchourron
& Bulygin (1971) show that de ning prohibitions and permissions as negations of each other makes
the principle of prohibition ambiguous in that it either presupposes completeness of law (in our
case, the GAAP) or is consistent with gaps in law (GAAP). The third interpretation, due to Kelsen
(1967) in his Pure Theory of Law, de ning a gap as a case to which it is impossible to apply the
legal order", stated that there are no gaps in the law since if there is no applicable norm for a given
case the judge can apply the whole legal order; all acts not expressly prohibited by such order being
permitted . This reasoning is not satisfactory since it is not clear why this version of prohibition
principle should be a part of every legal order and the interpretation with respect to judges ts the
above `holes-in-trousers' analogy.
The obsession in legal positivism with completeness can be attributed, as Alchourron & Bulygin
(1971) state, to its commitment to a uni ed science as well as a confusion of the ideal with reality.
Natural sciences have as an ideal what Leibnitz called the Principle of Su cient Reason which
states that every phenomena has a reason, or in particular that any phenomena can be causally
explained. It is the acceptance of this principle that enables us to say that failure to explain any
phenomena in terms of our current knowledge is not a proof of non-existence of such an explanation.
If, on the other hand, we start with the presupposition that certain phenomena are not causally
explicable, any scienti c investigation of such phenomena is pointless. Natural sciences consider
20

23. the principle of su cient reason as stating an ideal that drives all analytical as well as empirical
work.
It is quite reasonable for normative systems, including those in law and accounting, to have an
analogous principle of su cient reason which states that such systems should be complete in the
sense that any case (or transaction or disclosure issue) can be `solved' or normatively `interpreted'.
By insisting that legal orders as normative systems are complete, positivism confuses the ideal
with reality. In accounting we nd the echoes of the above in the attempts to codify the GAAP
and in the insistence on accountability based on GAAP-fair reporting. Such insistence is based
on the presupposition that if an accountant's position is not explicitly prohibited by the positive
GAAP, then it is ipso facto permitted. This view yields the positivist notion of discretion which we
discuss later in this paper. The clamor for codi cation of professional standards20 is a characteristic
tendency of positivist thinking since maintaining the distinction between the GAAP that is and the
GAAP that ought to be is best accomplished by positing quasi-legislated professional standards21.
Once a GAAP norm is posited as an act of human will, positivism can fall back on the premise of
separation doctrine in not asking for a normative justi cation for such a posited norm; they are
`justi ed' in a positivist's world by a suitable rule of recognition as in Hart (1961) or basic norm as
in Kelsen (1945) or substantial authoritative support as in accounting.
3.4 Consistency of the GAAP
Legal philosophers, even in the positivist school, generally admit that inconsistencies in any norma-
tive system are possible. Even Kelsen (1945), who in Pure Theory of Law and General Theory of
Law and State had emphatically denied the possibility of such inconsistencies (since, in his opinion,
the task of legal science is to remove such inconsistencies from positive law; to reduce the 'chaos' of
existing law to `cosmos' of a consistent legal order) changed his opinion in the essay Law and Logic
(Kelsen 1973) to allow for such inconsistencies. He however stated there that such inconsistencies
are removed by the o ending norms losing their e cacy or through their derogation.
Practicing lawyers and jurists have always recognized that inconsistencies in positive law are a
fact of life and have therefore developed heuristics to cope with them. Examples of such heuristics
21

24. are lex superior (relative competence of the norm positor), lex posterior (relative dates of promul-
gation of the norms), lex specialis (relative generality of the norms), ultravires (conformity with
the constitution) and stare decisis (let the decision stand). Legal literature abounds with vigorous
discussions of such heuristics, and such discussions have sharpened the analysis and interpretation
of normative systems.
In accounting, similar heuristics are used, but we nd in the literature no formal analysis of
their use. The di culty arises because some of the most fundamental norms in accounting are
not posited as norms at all. For example, pervasive norms such as `substance over form' and
`adequate disclosure' are posited not as norms of nancial reporting at all but referred to indirectly
as rules of conduct for certi ed public accountants. Moreover, both the Accounting Principles
Board (APB) and the FASB have issued what would be considered the most fundamental norms
of nancial accounting not as norms to be observed but as a description of `concepts and relations
that will underlie future nancial accounting standards and practices and in due course serve as a
basis for evaluating existing standards and practices'. The advantage of this strategy is that when
inconsistencies do arise in the positive GAAP, they are usually trivial. Inconsistencies of a more
fundamental nature can not be so labelled since norms of a fundamental nature are not posited
norms at all. For example, Accounting Research Bulletin (ARB) No. 43 in Chapter 3A required
exercise of professional judgement in discovering the substance of the underlying transaction to
determine the classi cation of long-term obligation (as current or non-current). The SFAS No. 78,
which superseded ARB 43, on the other hand requires classi cation of obligations based strictly on
the legal terms of the underlying transaction. This standard demotes the importance of professional
judgement (thus reducing accounting for such transactions to a rather mechanical activity) while
being inconsistent with the over-riding norm of `substance over form'. We can not, however, in a
positivist world label it an inconsistency since the principle of substance over form is not a posited
norm. It is perhaps not an exaggeration to say that it is precisely the omission of such important
norms that makes the positive GAAP relatively consistent. It is also fair to say that such omissions
make the GAAP, at least from the point of view of practice, ambiguous in the absence of literature
on reasoning about accounting principles.
22

25. In the world of accounting principles, adherence to positivist ideals, it would appear, subjects
one to a dilemma of Godelian proportions. One can posit a comprehensive code of accounting
principles that is complete in some sense, but perhaps inconsistent; or one can posit a code that
is consistent but not complete. In either case one would need heuristic rules to aid professionals
obtain a clear understanding as to what the GAAP is. The problem arises in such a world because
of the positivist conception of application of rules in an all-or-nothing fashion and the neglect of
issues having to do with the lack of a hermeneutic tradition.
In the positivist view, if the facts in a given situation satisfy all the conditions in the antecedent
of a valid GAAP rule then the consequent of such rule should be observed(Dworkin 1977). Such a
conception of accounting rules is not consistent with positing norms such as `substance over form' or
`completeness' or `adequate disclosure' since as concepts they are ingredients of society's conception
of what is fair nancial reporting | a conception that is not necessarily immutable but certainly
amorphous.
We had stated earlier in this paper that norms describe an ideal world. In law there is a well-
established tradition of explicating what that ideal is and a critical examination of the norms to
ensure that they do in fact re ect such ideal world. In jurisprudence, there is also a hermeneutic
tradition of interpretation of legal principles and rules, which goes by the name `legal dogmatics'.
These traditions are fostered in most democratic societies by the openness of the deliberations of
issues and a public examination of arguments for and against various alternative positions relative
to the norms. In our opinion, the dominance of the positivist ideology has stunted the development
of an analogous tradition in accounting.
3.5 Accountants and discretion?
It is the premise of positivism that when judges face a hard case22 where they have no legal prece-
dents, they have the discretion in the sense of not bound by any rules; that under such circumstances,
legal disagreements are really pretentious and disguised arguments about what the law should be
and not what it is(Dworkin 1986). Arguing that the disagreements are neither pretentious nor
about what the law should be23, Dworkin (1986, p.176) suggests a pervasive principle underlying
23

26. the law which he calls political integrity". It consists of a legislative component (that `asks the
lawmakers to try to make the total set of laws morally coherent') and an adjudicative component
(that `instructs that the law be seen as coherent in that way'). While there are considerable philo-
sophical di erences with Dworkinian jurisprudential ideas, we nd similar sentiments in the critical
legal theoretic program of enlarged doctrine as expounded by Unger (1983, p.21) who has stated:
Legal rules and doctrines de ne the basic institutional arrangements of society. These
arrangements determine the limits and shape the content of routine economic or gov-
ernmental activity. The rules that de ne these formative practices must be interpreted
and elaborated as expressions of a more or less coherent normative order, not just as
a disconnected series of trophies with which di erent factions mark their victories in
the e ort to enlist governmental power in the service of private advantage.24(emphasis
added)
The principle of political integrity, in the words of Dworkin (1986, p.189-90),
: : : fuses citizens' moral and political lives: it asks the good citizen, deciding how to treat
his neighbor when their interests con ict, to interpret the common scheme of justice to
which they are both committed just in virtue of citizenship. : : : Political obligation is
then not just a matter of obeying the discrete political decisions of the community one
by one, as political philosophers usually represent it. It becomes a more protestant idea:
delity to a scheme of principle each citizen has a responsibility to identify, ultimately
for himself, as his community's scheme. (emphasis added)
Dworkin (1977, p.33) has argued that judges do not have discretion in the sense of being free to
decide `without recourse to standards of sense and fairness', and that it is the duty of the judge (he
calls Hercules) to bring to bear upon the case the scheme of principles that convey the community's
conception of justice. He cites, for example, the case of Riggs v. Palmer (22 N.E. 188 1889]) where
the court had to decide whether an heir who had murdered his grandfather in order to inherit
under the will could do so. Even though all the legal rules pertaining to wills had been full lled,
the court, quite contrary to positivist expectations, held that he could not inherit, reasoning as
follows:25.
All laws as well as contracts may be controlled in their operation and e ect by general,
fundamental maxims of the common law. No one shall be permitted to pro t by his
own fraud, or take advantage of his own wrong, or to found any claim upon his own
iniquity, or acquire property by his own crime.
24

27. While these maxims are not positive legal rules, they reveal our society's conception of fairness.
Dworkin calls them principles as opposed to rules26. Principles are often con icting, and the judges
need to resolve such con icts for individual cases so that the resolution in the context of cases before
the court provides a coherent interpretation of the law as they see it. For example, in the Riggs
case, the judges resolved the con ict between the principle `court decisions must be in accordance
with the statute law' and the principle `no one shall be permitted to pro t by his own fraud' in
favor of the latter. The reported opinion in this case makes clear that the disagreements between
the judges (Riggs was not a unanymous decision) was clearly not one as to what the law should be,
but as to the interpretation of the statute `not in historical isolation but against the background
of what he Judge Earl] called general principles of law: : : : that judges should construct a statute
so as to make it conform as closely as possible to the principles of justice assumed elsewhere in the
law'(Dworkin 1986, p.19).
In accounting too one can pro er an analogous principle of `political integrity' with legislative
(GAAP-making) and adjudicative (rather compliance, audit opinion) components. The legislative
component would require coherence of the set of posited GAAP, and the compliance component
would instruct audits to see a coherent conception of the GAAP. Such a principle is specially
important for accounting because of the lack of a hermeneutic tradition and the consequent absence
of explicit statement of principles such as `substance over form' or `adequate disclosure' in the
posited GAAP.
When the GAAP is silent on a speci c issue or is ambiguous, as long as the positive GAAP is
incomplete or inconsistent (or both), in the Dworkinian framework, the accountants have a duty
to analyze the issue in the context of principles including those which have to do with the society's
conception of what is fair. In this sense, the accountants' discretion is rather limited. The decisions
in U.S. v. Simon, Herzfeld v. Laventhol and a number of other cases embrace this view.
4 Concluding Observations
In this paper we have shown why positivist philosophy and utilitarianism can not provide resilient
foundation for the development of a conceptual framework for accounting, and argued for the
25

28. development of a rights based contractualist framework based on ideas in the philosophy of law.
We have argued for a conceptual framework that is guided by concerns of fairness while recognizing
the rights of parties.
We have also argued for a return of accounting to its roots as an information service function
in a world of contracts, individual as well as social. In such a world, fairness in accounting has
to do with reporting on existing contracts as well as facilitating the formation of new contracts.
This return behooves us, in our opinion, to view accounting from the perspective of philosophy of
law. The perspective we so obtain puts the development of principles for accounting and nancial
accounting squarely in the arena of social and political thought.
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29

32. Notes
1In some sense, as stated by Freedman & Power (1992), this is a post 50's phenomenon. They
indicate an LSE tradition founded by William Baxter, Harold Edey and Basil Yamey among others,
who studied the area bordering accounting and law. There has been a considerable shift since the
1950s, at least in the received accounting literature in the United States, from realist{pragmatic
perspective emphasizing semantic, substantive and foundational issues to a positivist perspective
dwelling on syntactic, procedural and structural ones. Our work here may be seen, in a way, as a
call for accounting's return to its roots in the LSE tradition, but with a jurisprudential twist. The
1991 special issue of The Modern Law Review on Law and Accountancy and the publication of
Accounting and the Law by Bromwich & Hopwood (1993) too are perhaps a trend in this direction.
2See for example, Miller & O'Leary (1987) & Hoskins & Macve (1986) in accounting; Heller
(1984) & Boyle (1985) in law.
3See for example, Tinker & Neimark (1982) in accounting; Unger (1983) in law.
4See for example Arrington & Francis (1989)
5Most physical and natural sciences aim at a causal explanation of phenomena under study.
Infact the laws in such sciences are essentially causal in nature and are expressed as counterfactual
conditionals. Society, unlike nature, is not in any sense, so causally ordered, nor is it determinate
in the same sense that the nature is. The crucial element that di erentiates social from natural
sciences is human will and freedom. Moonitz (1961) in fact obliquely refers to this. The principle
of causality that is paramount in the natural and physical sciences, therefore, is not an adequate
anchor for the social sciences. Kelsen (1973) suggests what he calls the principle of accounting,
according to which a person is accountable (i.e., can face consequences or sanctions) for his wrong-
doing.While this principle of accounting is perhaps an adequate anchor for criminal law, it is not
adequate for accounting and in general for civil laws. In accounting, as in civil law, the purpose
of norms is not merely to prescribe sanctions, but to facilitate human social interaction. Norms
in contract law or even in many accounting standards are not so much concerned with wrongful
behavior as with suggestions as to how the objectives of the interacting parties can be accomplished.
For details see Hart (1983). Ijiri (1971) considers a version of Kelsenian accounting which he calls
sanctions.
6For a lively discussion of this topic see Rescher (1967).
7This is not to belittle the importance of these studies in the development of accounting thought
in the United States.
8Expecting generally accepted accounting principles to embody the ideals of society does not
necessarily mean accepting any promulgated standard as embodying those ideals. More impor-
tantly, individuals and groups in the society have diverse views on what constitutes the society's
ideals. The same can be said about laws where people expect laws to embody the ideals of the soci-
ety. However, it is rare that any law passed by the Congress is embraced universally as embodying
the ideals of our society. Even the U.S. Constitution, which comes close to universal acceptance, is
subjected to amendments and interpreted to meet the exigencies of the times.
9The word science here has been written in quotes not to identify it as an illegitimate concept but
to highlight the controversy surrounding the objective of any social science. Positivists generally
30

33. consider causal explanation of social phenomena to be the paramount objective of any social science.
In the Philosophy of Science, this view is associated with those who believe in a uni ed science.
See (Hempel 1965) and (Pitt 1988). In the accounting literature, this view forms the foundation
of `positive accounting'. See (Watts & Zimmerman 1986), and for a critique of this position,
Christenson (1983). While such a positivist view is probably dominant in accounting, it is no
longer the dominant view in philosophy. The prevailing view, while acknowledging the importance
of causal explanations, considers obtaining an understanding of the social phenomena the primary
objective of any social science. For diverse approaches to this view, see Dilthey (1962), Gadamer
(1989), and Apel (1984).
10The utilitarian view, as has been amply demonstrated by the literature in political philosophy
and jurisprudence, can lead to arguments that many would consider absurd. Bentham, for example,
rejected slavery not because it is unjust but because it is ine cient. Hart (1983) has observed,
..it seems clear that utilitarian principles alone can not give any account of the moral
importance attached to equality and in general to the notion of just, as distinguished
from an e cient, distribution as a means of happiness.
Also see (Rawls 1971).
11While usefulness does not necessarily con ict with fairness, useful information is not ipso facto
fair. Puxty & Laughlin (1983) have argued that FASB's assumption that improvement in decision-
usefulness will lead to improvement in general welfare is unfounded because of market imperfections.
12The natural law tradition in jurisprudence denies the possibility of a rigid separation of the is
and the ought, and .. tolerates a confusion of them in legal discussion". A natural law philosopher
draws no hard and fast line between law and ethics, and ... considers that the `goodness' of his
natural law confers on it a kind of reality which may be temporarily eclipsed, but can never be
wholly nulli ed, by the more immediate e ective reality of enacted law". See Fuller (Fuller 1940).
13This may not be a very fair characterization of Justice Shaw's role. Historians have also
attributed the motivation for his fugitive slave law decisions to other factors such as his federalist
convictions or the dependence of the then ourishing Massachusetts textile industry on southern
cotton plantations. For an excellent study see Levy (1957).
14
Theirs not to make reply,
Theirs not to reason why,
Theirs but to do and die.
See Tennyson (1898).
15For a comparative study of Germany and France, see Alexander (1993).
16The criterion of Pareto-superior allocative e ciency states that a choice is superior if and only
if it leaves one or more `parties' better o (in a preferred position) and no `party' worse o (in a
dispreferred position)". (Markovits 1993)
17The Kaldor-Hicks criterion of allocative e ciency states that a choice is allocatively e cient
based on certain assumptions if the number of dollars the choice's bene ciaries could pro tably
31

34. pay to obtain it exceeds the number of dollars for which its victims could pro tably sell their
(hypothetically assumed) right to veto it". (Markovits 1993)
18See also (Williams 1987), (Chua 1986), (Hines 1989), (Hopper & Wilmott 1987), and (Puxty
& Laughlin 1983) for analogous arguments.
19Barry (1989)traces this all the way back to the pre-utilitarian era where Hume (1978)observed:
: : : self-interest is the original motivation for the establishment of justice: but a sym-
pathy with the public interest is the source of moral approbation, which attends that
virtue. This latter principle of sympathy is too weak to controul our passions; but
has su cient force to in uence our taste, and give us the sentiments of approbation or
blame.
20In law, attempts at codi cation goes back at least to the nineteenth century French exegetic
school(see for example, Alchourron & Bulygin (1971)). In accounting, it can be traced at least as
far back as Sanders & Moore (1938).
21Fuller (1940) quotes Somlo who likened natural law theory adherents who would introduce
their ideas into law to the hungry man in a Mark Twain novel who after having eaten a shoe,
when asked which part he liked best, answered the holes". Resort to legislation is the preferred
alternative under positivism since it mitigates the possibility of in ltration of natural law concepts
into positive law and ts in with its utilitarian philosophy. It, however, can be looked upon as the
scholastic equivalent of `passing the buck' from the jurisprudential (or accounting) to the legislative
(or `political') arena. See Fuller (1940) for an early stinging criticism of the positivist tradition.
22 a hard case is ususlly de ned as one which is not covered by any legal rule, is covered by
multiple rules that are contradictory, or is covered by a unique rule the application of which leads
to irrational results.
23For detailed arguments, see chapter 1 in (Dworkin 1986)
24This quote is not to be misinterpreted out of context, specially since Unger (1983) is highly
critical of the positivist Posnerian law & Economics and Dworkinian Rights & Principles schools.
Ungerian analysis crashes the traditional boundaries between empirical and normative theorising,
and confronts head on the ideological con icts by shattering the traditional `jurisprudential silence
over the divergent schemes of social life that are manifest in con icting bodies of rule, policy, and
principle'(Unger 1983, p.21). The quote is provided here to stress the rather uncontroversial nature
of the political integrity principle.
25In addition to the Justinian and Napoleonic codes, the court appealed to the maxim: He who
considers merely the letter of an instrument goes but skin deep into its meaning (Qui h ret in litera
in cortice) and the Aristotelian maxim: Equity is the correction of that wherein law, by reason of
its generality, is de cient ( quitas est correctio legis generaliter lat , qua parte de cit)
26Rules are rigid in their application in that if its premisses are true, then its conclusion is
necessarily true. Unlike a rule, a principle is not invalidated when it is not used or violated and,
unlike a rule (which provides us a decision), it leans us towards one solution or another. One does
not nd such principles in a positivist's compendium of rules since they do not meet the positivist
de nition of rules.
32