Knowledge that Transforms

The article presents suggestions made by the author on the need for a critical reappraisal of the continued validity of the basic objectives of accounting and the methods on accounting. According to the author, new events have created new differences and inconsistencies in the meantime, there is general recognition that the areas of difference and inconsistency in financial reporting have been narrowed substantially in the last quarter century and that this could not have been achieved except through the acceptance of the concept of a body of generally accepted accounting principles as criteria. Present methods of accounting research give no opportunity to test new ideas, in fact, there is some justification for a belief that they tend to stifle creative thinking. The author has suggested that the development of accounting principles should be regarded as in the nature of pure research, an adequate research organization should be provided, the research organization should be staffed with personnel having proper academic and experience back-ground. Statements issued by the research organizations should be submitted for approval or rejection of basic ideas to the Council of the American Institute of Certified Public Accountants.

Recent development which promises to have considerable effect on future accounting practice is the application of statistical sampling techniques to accounting. Sufficient experimentation has already taken place in both public and private accounting to indicate that sampling will shortly become an indispensable accounting tool. This raises challenging problems to accounting educators that can hardly be ignored any longer. The authors, in this article, are directing questions on the best way of teaching advanced sampling method to the accounting students and in developing competence in this area. The American Institute of Certified Public Accountants has recognized its increasing importance to auditors by establishing a committee to deal with the problem. The Institute of Internal Auditors has created a similar committee. Statistical sampling not only can produce equivalent or greater accuracy than a complete investigation, but it can also accomplish this in less time and at less cost.

The thought processes inherent in creative development of accountancy require definition. In his daily practice a professional accountant must devise practical solutions, and always be concerned with the impact of his actions on both clients and colleagues. But productive thought on a newly-conceived hypothesis may be hampered by such professional considerations. Technical face-lifting may be the principal result in these circumstances. Thus the professional man's dilemma is the need to be concerned simultaneously about the meaning of his work, and to face the daily chore of problem-solving with realism. The notion that basic research can be productive without the presence of predetermined technical objectives is just as applicable in accountancy as in any other art or science. Purposeful theorizing or abstract analysis is part of the intellectual responsibility of the professional man. The creative accounting approach to problem-solving starts with a belief that the objectives of any analysis dictate the nature of the input and output valuations adopted. Creative thinking in accounting research leaves room to wonder whether the proven usefulness of extant accounting concepts and technique precludes the possibility of devising a better system of accounting measurement and analysis. Creative accounting can provide the unrestricted search requisite to such improvement.

Reviews the book "Accounting Principles," 7th ed., by Howard S. Noble and Rollin Niswonger.

Many firms use an accelerated depreciation method for calculating the depreciation deduction to be made on the income tax return, but employ the straight-line depreciation method for calculating the depreciation expense figure for financial statements. In considering the effect of this action on income tax expense and income tax liability, attention must be centered on the taxpaying entity, the firm as a whole. For a static or growing firm, current tax savings from this source will not adversely affect income tax charges of future years. In fact, the growing firm can look forward to an ever-increasing annual tax saving continuing year after year. Only a moribund firm with declining investment in capital assets is likely to be faced by a substantial deferred tax liability, and then only if its dying years are profitable ones. Although the analysis indicates that a liability for future taxes from this source should be recognized only in rare cases, disclosure of any difference between the amount of depreciation claimed on the tax return and that shown in the income statement is a desirable reporting practice and should be employed regularly.