Abstract
This dissertation offers an analysis of financial disclosures by accounting entities as framed by the two major accounting schools of thought, the measurement school and the information school. We conclude that there are philosophical flaws inherent in both schools; moreover, we propose an explicit accounting of the uncertainty arising from managerial intentions regarding the usage and disposal of the means available to the accounting entity.
The issue with the measurement school lies in its reliance on the correspondence theory of truth as the antecedent for representational faithfulness and the consequent claim as to the objectivity of economic reality. Because a crucial layer of economic reality is subjective in nature and is generated by a thinking entity’s teleological intentions for fulfilling their individual and subjective purposes, we make the case that financial statements cannot faithfully correspond to the underlying economic reality that they represent without the explicit acknowledgement and disclosure of this layer.
The information school of accounting theory circumvents the philosophically thorny issue of the nature of economic reality by focusing on the subjective uncertainty faced by the recipients of accounting information. The nature of ‘true’ economic reality is not in question; the focus is on the recipient’s perceived reality and the ability of accounting information to update that perceived reality. The dissertation critiques this school of thought on two counts.
First, the epistemological strategy used in this approach is one of elimination. By accessing new information, the recipient reduces their subjective uncertainty regarding the state of the world. However, elimination as a means of gaining knowledge requires that the recipient has complete prior knowledge of the state space from which the actual state of the world eventuates, a rather implausible assumption. The model no longer functions when this assumption is relaxed.
Secondly, the approach follows the ‘states-acts-outcome’ model of decision theory proposed by Savage (1954). Accordingly, the subjective uncertainty of the observer holds only with regards to the identity of the obtaining state, out of all possibilities available within the state space. The ontological implication is that subjective uncertainty is due only to the stochastic nature of the process by which the actual state obtains. Entities have no agency over the choice of the state that obtains and, critically, they have no ability to influence that state or change the set of possible states in the state space.
The dissertation recommends incorporating the explicit disclosure of intentions in financial reporting. It proposes a framework for the disclosure of intended plans, milestones, and foreseeable outcomes to those plans, and describes how a blockchain-based system would work to secure these disclosures. Some examples are presented to illustrate how an entity’s principals and other stakeholders might contrast ex-ante intentions against ex-post outcomes such that the stewardship and the economic performance of managers may be evaluated accordingly.
The dissertation has a ‘traditional’ structure, the argument constructed across interrelated chapters, one building upon the other. However, the three main chapters will be updated to a published-paper format.