Knowledge that Transforms

1. SUMMARY IN two previous papers [1] [12], a family of normative models of the individual's economic decision problem under risk were presented. At the same time certain implications of these models with respect to individual behavior were deduced for a class of utility functions. In a separate article [7], it was demonstrated that these models also give rise to an induced theory of the formation and operation of firms under risk for the aforementioned class of utility functions. In the present paper, it will be shown that the same models, developed with the individual in mind, have as further off-spring an induced theory of accounting for all firms so formed. In Section 2, the basic approach of the present study to the development of normative accounting theory is discussed. This section also considers some of the relationships of the present paper to other studies concerned with the development of prescriptive theories of accounting. In Section 3, the various components of the basic decision model used in the present paper are constructed. The individual's objective is postulated to be the maximization of expected utility from consumption as long as he lives and from the bequest left upon his death; his lifetime is presumed to be a random variable. The individual's resources are assumed to consist of an initial capital position (which may be negative) and a noncapital income stream. The latter, which may possess any time-shape, is assumed to be known with certainty and to terminate upon his death. In addition to insurance available at a "fair" rate, the individual faces both financial opportunities (borrowing and lending) and an arbitrary number of productive investment opportunities. The interest rate is presumed to be known but may have any time-shape. The returns from the productive opportunities are assumed to be random variables, whose probability distributions may differ from period to period but are assumed to satisfy the...

Reviews the book, "Statistical Sampling for Auditing and Accounting Decisions: A Simulation," by Robert W. Vanesse.

The best available indication of the present state of college level auditing education can be deduced by considering widely used textbooks. A recent survey of textbooks used by members of the American Association of Collegiate Schools of Business revealed that the five leading textbooks are used in over eighty-seven percent of, the schools. In all of these books predominant emphasis is placed on verification of financial statement categories and a majority of the chapters are directed to serial treatment of specific general ledger accounts. Within these chapters a great deal of detailed procedural advice is given. There are certain current trends in accounting education, in addition to a preference for conceptual material, that must be considered in shaping the content of the auditing course. There is not room enough for remedial courses in the present accounting curriculum. The auditing course should not be used as a review of accounting theory, which should have been learned in intermediate accounting, and there is not time to cover many features of internal control, which are more appropriately covered in the systems course.

The article reports on American accounting association research projects. Research projects and authors have been selected by the Director of Research who serves as chairman of each Project Editorial Consulting Committee. The actual research is being conducted by the named individuals who are solely responsible for the procedure followed and the research conclusions. Members of the Project Editorial Consulting Committees are expected to suggest ideas and offer comments on the scope of the research project, the research methodology and the researcher's findings. The project, Impact of the Behavioral Sciences on Accounting, is being conducted by Carl Thomas Devine and David Green, Jr. The consulting committee includes, Robert N. Anthony of the Harvard University, Ivar E. Berg of the Columbia University, Jack Gray of the University of Minnesota, Roger H. Hermanson of the University of Maryland, David H. Li of the University of Washington, etc. The project, A Study of the Effects on Investment Valuations from Adjusting Published Financial Reports for Price Changes, will be conducted by Thomas R. Dyckman. The consulting committee includes, William Beaver of the University of Chicago, William J. Bruns, Jr. of the University of Washington, Allan R. Drebiri of the Cornell University, Bertrand N. Horwitz of the Syracuse University, etc.

Reviews the book, "The Law of Federal Income Taxation," by John C. Chommie.