GODFREYHODGSONHOLMESTARCACHAPTER 4 A CONC.docx

GODFREY
HODGSON
HOLMES
TARCA
CHAPTER 4
A CONCEPTUAL FRAMEWORK
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The role of a conceptual frameworkA structured theory of
accountingStates the scope and objective of financial
reportingIdentifies and defines qualitative characteristics of
financial information and the basic elements of accountingDeals
with principles and rules of recognition and measurement, and
report disclosures
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The role of a conceptual framework
… a coherent system of interrelated objectives and
fundamentals that is expected to lead to consistent standards
and that prescribes the nature, function and limits of financial
accounting and reporting.
FASB
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Issues:Do we need a general theory of accounting?Is current
accounting too permissive?Are current accounting practices too
inconsistent?Is there too much political interference in the
neutrality of accounting reports?
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Benefits:consistent, logical reporting requirementsgreater

complianceenhanced accountability fewer specific
standardsenhanced understanding of reporting requirementsmore
economical standard setting
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Objectives of conceptual frameworks
Financial reporting should provide information that is useful to
present and potential investors and creditors and other users in
making rational investment, credit and similar decisions.
FASB
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Objectives of conceptual frameworksInformation should be
useful in making economic decisionsuseful in assessing cash
flow prospectsabout enterprise resources, claims to those
resources and changes in them
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Objectives of conceptual frameworks
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Developing a conceptual frameworkThe development of
conceptual frameworks is influenced by two key
issues:principles versus rules-based approaches to standard
settinginformation for decision making and the decision-theory
approach
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Principles-based and rule-based standard settingIASB mostly
produces consistent, coherent principles-based standardsRule-

based standards may increase comparability and verifiability
and may reduce earnings management
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Principles-based and rule-based standard settingThe standards
of the FASB have traditionally been rule-basedEmphasis now
being given to principlesTimely given the IASB/FASB
convergence program
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Information for decision making and the decision-theory
approachAccounting data are required for decision making or
accountability purposesstewardshipdecision makingusers
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approachThe decision-theory approach maps the process by
which the outputs of the accounting system provide inputs to
the decision model of a user
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approach
Decision-theory process
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Individual
accounting system
Prediction
model of user
Decision
model of user
Overall theory
of accounting

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International developments: the IASB and FASB Conceptual
FrameworkIn 2004 the FASB and IASB agree to undertake a
joint project to:develop an improved, common conceptual
framework goal of developing standards that are principles-
based, internally consistent and internationally convergedan
Exposure Draft was produced - June 2009deferred consideration
of not-for-profit sector issues
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FrameworkED has several contentious areas:entity vs
proprietorship perspectiveprimary user groupdecision usefulness
and stewardshipqualitative characteristics
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FrameworkAustralia follows an approach whereby issues for
both the not-for-profit and for-profit sectors are considered
togetherStandards are intended to apply to both sectorsIFAC’s
International Public Sector Accounting Standards Board has
begun a project to develop a public sector CF
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A critique of conceptual framework projectsApproaches to
developing a CF:scientific recourse to logic and empiricism or
bothprofessionalprescribes the best course of action by recourse
to professional values
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A critique of conceptual framework projects
Scientific criticisms:prescriptiveunspecified rules and
conventionsdo not resolve contemporary disclosure issuesvague
definitionsdo not address measurement issuesrisk of mechanical

decision makingframework may become an end in
itselfoverreliance on definitions
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Ontological and epistemological assumptionsFreedom from
bias (neutrality)an information quality that avoids leading users
to conclusions that secure the particular needs, desires or
preconceptions of the preparersSolomons: freedom from bias as
‘financial mapmaking’Feyerabend: scientific truth is not
absoluteHines claims mainstream accounting is ‘taken-for-
granted’
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Circularity of reasoningObjective of a conceptual framework:
guide the everyday practice of accountantsA superficial
viewdeducing principles from generalised theory
Existing frameworks typified by internal circularity:e.g. FASB
Statement No. 2qualitative characteristics are often stated in
terms of other qualities which are non-operationalised

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An unscientific disciplineIs accounting a science?prescriptive
by nature and value ladenStamp
Until we are sure in our minds about the nature of accounting,
it is fruitless for the profession to invest large resources in
developing a conceptual framework to support accounting
standards.
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Positive researchConceptual framework projects ignore the
empirical findings of positive accounting researchin conflict
with each otherMounting evidence that capital markets are not
efficientIf the conceptual framework could ensure users receive
useful information this would serve a useful purpose
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The conceptual framework as a policy documentAs a
generalised body of knowledge, conceptual frameworks fail a
number of ‘scientific’ tests The distinction between theories and
policies is importantCFs not produced in a political vacuumCFs
may just be a reflection of the dominant group’s will
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Professional values and self-preservation‘Self-
preservation’implies the pursuit of self-interest‘Professional
values’suggests idealism and altruismGerbothsense of personal
responsibilityHinesprofessional legitimacy
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Conceptual framework for auditing standardsAuditing is a
discipline based in logicThe traditional verification role has
evolved into business risk auditing

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SummaryThe conceptual framework is intended to provide a
coherent and prescriptive guide to accounting practiceIf
effective it should result in the communication of more useful
financial information to usersDeveloping a conceptual
framework has been a long and complicated processCriticisms
of conceptual framework projects existOthers debate the
importance of these criticismsIn auditing there has been a shift
away from substantive testing toward the role of client business
risk
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Key terms and conceptsConceptual frameworks for accounting
and auditingStatement of accounting conceptsFASB and
IASBPrinciples-based and rule-based standardsDecision making
and decision-theoryProfessional values and self-
preservationBusiness risk auditing
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Level 1: Preconventional Morality 0-9 years
Stage 1 - Obedience and Punishment
Especially common in young children, but adults are capable of
expressing this type of reasoning. At this stage, children see
rules as fixed and absolute.
Obeys rules in order to avoid punishment
Determines a sense of right and wrong by what is punished and
what is not punished
Obeys superior authority and allows that authority to make the
rules, especially if that authority has the power to inflict pain
Is responsive to rules that will affect his/her physical well-
being
Stage 2 – Naively egotistical
At this stage of moral development, children account for
individual points of view and judge actions based on how they
serve individual needs. Reciprocity is possible, but only if it
serves one's own interests.
Is motivated by vengeance or “an eye for an eye” philosophy

Is self-absorbed while assuming that he/she is generous
Believes in equal sharing in that everyone gets the same,
regardless of need
Believes that the end justifies the means
Will do a favor only to get a favor
Expects to be rewarded for every non-selfish deed he/she does
Level 2: Conventional Morality 10-15 years
Stage 3 - "good boy-good girl" orientation,
This stage of moral development is focused on living up to
social expectations and roles. There is an emphasis on
conformity, being "nice," and consideration of how choices
influence relationships.
Finds peer approval very important
Feels that intensions are as important as deeds and expects
others to accept intentions or promises in place of deeds
Begins to put himself/herself in another’s shoes and think from
another perspective
Stage 4 – Law and Social Order
At this stage of moral development, people begin to consider
society as a whole when making judgments. The focus is on
maintaining law and order by following the rules, doing one’s
duty, and respecting authority.
Is a duty doer who believes in rigid rules that should not be
changed
Respects authority and obeys it without question
Supports the rights of the majority without concern for those in
the minority
Is part of about 80% of the population that does not progress
past stage 4

Level 3: Postconventional Morality – 16+
Stage 5 - Legalistic Social Contract
At this stage, people begin to account for the differing values,
opinions, and beliefs of other people. Rules of law are
important for maintaining a society, but members of the society
should agree upon these standards.
Is motivated by the belief in the greatest amount of good for the
greatest number of people
Believes in consensus (everyone agrees), rather than in majority
rule
Respects the rights of the minority especially the rights of the
individual
Believes that change in the law is possible but only through the
system
Stage 6 – Universal ethical Principles
Kolhberg’s final level of moral reasoning is based upon
universal ethical principles and abstract reasoning. At this
stage, people follow these internalized principles of justice,
even if they conflict with laws and rules.
Believes that there are high moral principles than those
represented by social rules and customs
Is willing to accept the consequences for disobedience of the
social rule he/she has rejected
Believes that the dignity of humanity is sacred and that all
humans have value

Appendix A: The Ethical Leadership Debate
Motion – “Ethical leadership (EL) is impossible in a
shareholder focused economy, and
should business schools be bothered on ethical leadership”
(653 words)
Mike Gustavsson’s representation was against the motion – they
regarded top managements’
behaviour key in creating and sustaining EL within an
organisation, hence supporting EL
education. As a retired lecturer and Greenpeace activist, he
seemingly possessed high moral
principles (Virtue ethics with Rights and Justice) and replaces
rules with internal principles. He is a
discretionary stakeholder demonstrating Maxim 3 of
Universality (Kant, 1785) and characterised at
stage 6 of Kohlberg’s (1971) moral stages of development
(universal ethical-principle orientation)
for regarding humanity and preserving its value and dignity.
However, concurring with the floor, the
author regards him in stage 5 (social-contract legalistic
orientation) because he failed to respect
the equality and rights of his daughter as an individual
deviating from his stakeholders’ beliefs and
siding shareholder views while protesting against the Alfaraft
AB’s management.
Jan Edwards’s team stance stood against the motion. They
championed EL alongside profitability
as demonstrated by Clean
Solution

Inc.’s success with considerable charitable involvements. They
emphasised EL education in inculcating graduate’s all-
roundedness (interpersonal skills, social
responsibility etc.) besides shareholder principles. As Chief
Executive she wielded power,
legitimacy and therefore, dominant stakeholder (Agle et al.,
1999); she instilled triple bottom line
elements (Spreckley, 2013) through egoism (Longenecker et al.,
1989) and feminist ethics
(Jaggar, 1992) – imposing her altruistic beliefs organisational
wide; justifying moral development
at stages 3 (interpersonal concordance orientation) and 5.
Opposition viewed her at stage 2
(instrumental-relativist orientation) seeking esteem and self-
actualisation (Maslow, 1943) with act
utilitarian overtones; questioning her basis of EL’s mutual
respect, showing justice and building
community (Brown et al., 2005). The author augments her to
stage 6 by wanting to “change this
trend” through self-chosen ethical principles besides social
rules and customs – even if it conflicts
with laws/rules (potential workplace discrimination lawsuits
etc.).
Mei-Hua Felung’s group opposed the motion. Despite similar
undertones with Jan, they stressed

EL in shareholder economies and education due to external
influences (legal obligations, public
perceptions etc.) and deontology (Waller, 2008) as opposed to
intrinsic purposes. With Maxim 1 of
consistency (Kant, 1785) and rule utilitarian aspects (Garner &
Rosen, 1967) conceivably from
training and profession in accountancy (codes, rules etc.), she
was at stages 3 and 5 of moral
development substantiated by negative public sentiments. The
floor differed in views, notably at
stage 4 (law-and-order orientation) in establishing her need to
maintain legitimacy as an
accountant. Upon deeper evaluations, the author disagrees and
categorises her at stage 1
(punishment and obedience orientation). “…playing within the
rules; not breaking them” infers the
ab initio intent in avoiding law infringements (punishment)
through adherence (obedience) and
when achieved, exploiting sequential actions at sole discretion
and henceforth, “nothing wrong” in
facilitating tax evasion, contradicting her prima facie view of
upholding accountants’ image through
EL with related codes/ethics while balancing social and
commercial aims, debunking her
standpoint.

Deshi Chen’s representation supported the motion through
irrelevance in today’s commercial
context and argued that EL education hindrances practicality.
He furthered his shareholder views
that practicing EL (or lack thereof) was neither rewarded nor
recognised, both in his home country
and western companies (allegedly claiming absent and
piecemeal at best) compared to profit
generation. He illustrated egoism by deeming himself morally
upright and merely pursuing
personal interests (Longenecker et al., 1989) through a degree,
portraying stage 2 (instrumentalrelativist
orientation) while failing to align ethics with his agenda.
Opposing views contested stage
3 on social expectation conformities (family and of himself).
The author concurs with stages 2 and
facets of 3 (through peer approval) – differing on contradictory
grounds of seeking peer approval
only from his family and himself – yet not others pertaining
ethics.
Corporate codes of governance and EL education strongly
resonated with all parties except Deshi.
Jan firmly views it being a way of life. The author concludes
Deshi as the most trustworthy due to
transparency; while Mei-Hua is most unethical from speech-act

contradictions and persecution
delusions (Freeman & Garety, 2004) while relying on legal
technicalities in defending viewpoints.
Appendix B: The Seminar Case
(643 words)
Having reviewed and debated on ‘The Case of the Holiday‘, the
author identified residing
dilemmas from every character and deliberating Boris’s
perspective in greater details.
Team 1 recognised Boris’s ethical dilemma by the planned
holiday’s status quo or forgoing in the
interest of the client, company, manager and himself to some
extent. His options were: to not
facilitate the earlier product launch and dilute prospects of
repeat businesses; or acceding in
exchange for greater professional regard from the client and
manager alongside increased
business possibilities while attaining a personal sense of
achievement – at the relationship’s
expense and Swee Lan.

Swee Lan’s ethical dilemma illustrated by Team 2 pertained to
the post-discussion response upon
Boris’s dilemma. Implicitly, Swee Lan had certain influences
over Boris’s decision in supporting his
intrinsic professional desires or asserting on relationship
commitments, both of which she valued.
The former ensued subsequent dilemma from her parents’
reactions, while the latter posed
concerns on relationship fundamentals.
Team 3 depicted the manager’s ethical dilemma by evaluating
the client’s request versus the
company’s gain, faltering the appropriateness of Boris’s
planned holiday albeit its legitimacy. The
manager had a duty to uphold the company’s interest by
conforming, or be cognizant of the
holiday’s significance, declining and jeopardising a lucrative
account in the process.
Representing Marcus and friends was Team 4, portraying their
dilemma by the reaction towards
Boris upon knowledge that he had sacrificed his holiday for the
company. Marcus and friends
could respond empathetically to him due to the excessive duress
in making a difficult decision
between the manager and Swee Lan; or per the context – to
perceive as a form of betrayal,

expressing disappointment through initiating “better employee
standards” to be adhered in future.
The author would further analyse Boris’s ethical dilemma as it
is the crux of the issue.
Due to competitive conditions the company operated in, they
held a shareholder view (Dufrene &
Wong, 1996) where dismissals were based on ‘misalignments’
with organisational performance to
sustain competitiveness. Ab initio, Boris was in Kohlberg’s
(1971) stage 1 of moral development
(punishment and obedience orientation) when the launch was
brought forward. This is explained
by the negligible room for manoeuvre – if he declines the
request; he would be considered as
‘unsuitable’ by the company and the manager (authority),
leading to redundancy (punishment) as
per context. It obviously affects his well-being and hence,
simply obeyed by cancelling the holiday
to avoid punishment. This can be furthered by his display of
rule utilitarianism where Boris
acceded to the request (rule) which brought the about greatest
good for his career, manager and
client (Garner & Rosen, 1967).
Both the context and Bruck & Allen (2003) corroborates with
Boris’s Type ‘A’ traits (ambitious,

competitive, aggressive etc.). Along managing the account for
an extended period with the “work
hard, play hard” culture, it heightened his sense of ownership
and self-interest, displaying egoist
principles with a high internal locus of control, disregarding
affiliated opportunity costs (Krause &
Stryker, 1984) by emphasising solely on the task completion
(Kurman, 2001). Meanwhile, Boris
advanced to stage 2 (instrumental-relativist orientation),
assuming the result of being rewarded by
the client’s future businesses and manager’s acknowledgement
as a quality employee, justifying
the holiday cancellation as means to its ends.
Boris’s moral intensity (Jones, 1991) is characterised by
magnitude of consequences, social
consensus and proximity. The consequences ranged from
jeopardising his career or Swee Lan
and/or Marcus and friends from relationship spectrums. For
social consensus, it was evident that
both Swee Lan and Marcus and friends voiced displeasure
regarding Boris’s decision in cancelling
the holiday, thereby increasing moral intensity. On relationship
positions, he had a near proximity
with the scenario’s stakeholders (client, manager, Swee Lan and
Marcus and friends), leading to

increased moral intensities.
In conclusion, Boris sought a utilitarian framework by weighing
cost and benefits throughout the
case, generally satisfying all parties whilst containing
repercussions.
Appendix C: Interpersonal and Team-working skills
(301 words)
In a team of professionals with different backgrounds, conflicts
are bound to occur. Therefore, my
reflection focuses on teamwork commitment and interpersonal
communication from differing
views. I identify individual factors with stages 2, 3 and 5 of
moral development (Kohlberg, 1973)
and national culture (Geert & Jan, 1991) while reward systems
(Kerr, 1975) and social consensus
(Jones, 1991) accounted for situational factors.
Stage 2 (instrumental-relativist orientation) is best illustrated

by ‘quid pro quo’. Despite absence of
social connectedness beyond academia and lacking interpersonal
gratitude and loyalty, we shared
a common goal to excel with relative ease, motivating us to
work cooperatively and reciprocally in
debates and assignments. It was deemed pragmatic to divide
workloads towards fulfilling module
requirements for it eased one’s effort while serving everyone’s
best interests and needs –
solidifying commitment in performing the activities related to
the reward system by attaining high
and beneficial module marks. Garrett et al. (2006) supported
strong collectivism within
Singaporeans – representing a preference to help each other in
exchange for group loyalty,
concurring and progressing towards stage 3 (interpersonal
concordance orientation), which is
socially considered as “good behaviour” to work collectively
while attaining peer approval and
social consensus by majority.
Unavoidably, disagreements surfaced repeatedly throughout
discussions. As team leader, I
practised ethical leadership by respecting all team members’
views (Brown, Treviño & Harrison,
2005), even when it differed from mine and/or the majority.

With authority demonstration (Milgram,
1965) of fair and transparent dialogues, it enhanced team
community and commitment (Levy,
1994), progressing to stage 5 (social-contract legalistic
orientation) collectively; where members
displayed tolerance and willingness to analyse other’s
perspectives while formulating a
consensus.
To conclude, this module allowed me to witness the relevance
of Kant’s (1785) Formula of
Humanity – as when we treat others with respect; it
harmoniously brings out the best in everyone.
The Case of the Holiday (based on actual events)
This case concerns a young medium sized advertising agency in
Germany. It had had grown rapidly in the four years since it
was founded and had just opened a new office in the US. The
company operates in a highly competitive market in which
failure to meet customers’ deadlines incurs substantial
penalties. Work is almost exclusively project-based, in a high
pressure but largely informal environment where teams
predominate and hierarchy is little in evidence. The company
pays well, and its employees are highly skilled, overwhelmingly
graduates and equally overwhelmingly young with over 35 year-
olds a rarity.

Employees work an average of 50 hours a week and when
deadlines are tight some arrive as early as 5 a.m. and leave as
late as 1 a.m. If there is a personnel ‘problem’ it is that
turnover is high. Employees tend either to be dismissed quickly
after their unsuitability emerges or leave voluntarily after only
two or three years. While there however, involvement and
‘ownership’ of tasks is evident and employees enjoy a culture
which emphasizes working hard and playing hard. Much of the
employees’ social time is spent, unsurprisingly, with other
employees and strong bonds of friendship have developed
between staff.
The company is privately owned by its two founders who work
from their German Head Office. Employees are not represented
by a trade union. Unlike publicly limited and/or government
organizations where a variety of stakeholder organizations can
be identified and corporate governance may be contested (by
shareholders, government, regulatory authorities, consumer
associations, trade unions, pressure groups and so on), internal
relations here are far clearer and the voices that count are those
of management and customers.
The incident that forms the focus for this case concerns an
Account Executive, Borries, who was due to go on holiday in a

month’s time for two weeks at his girlfriend’s home in Hong
Kong. This was an important holiday, especially because
Borries only took one week’s holiday throughout the previous
year and because his girlfriend Swee Lan would be returning to
Germany immediately after the holiday to continue her studies.
This was therefore an opportunity for Borries to meet Swee
Lan’s parents and to experience her environment for the first
time.
About a month before the holiday Borries’s manager called him
in for a meeting and told him the news that one of Borries’s
clients had to bring forward their product launch as they had
heard that a rival was launching in the week that was originally
scheduled. The new product launch would be in the middle of
Borries’s holiday period. Work would need to be brought
forward on the design of advertisements, campaign roll out,
viral marketing, web support and so on.
The manager at no point suggested that Borries would face
sanctions for taking his holiday, nor was his right to it contested
but the manager did say emphasize the importance of the client
and the high regard they had for Borries’s work. If this launch
was a success then they would likely generate further contracts.
After a difficult conversation with Swee Lan, who told Borries
that her parents would be very upset not to meet him for at least

another year, Borries cancelled his holiday. The company
reimbursed his costs in full.
It was only then that Borries’s friends from the company found
out what had happened. Borries could not believe their
reaction. They argued that he was wrong to give up his holiday.
His friend Marcus said: “Borries, you are a coward. They had
no right to ask you to do this and you were too weak to say no.
You have jeopardized your relationship with Swee Lan and let
us down. How are any of us going to be able to say no if we are
asked to give up our holidays now? You are supposed to be a
friend. You have given so much to this company, the least they
could do is to get someone else to cover your work.”
Borries replied: ‘I was just trying to do my best. I have been
working on that account for a long time so how can I leave it at
the end of the project? Don’t you understand I have to balance
what is right for the company and the client against what is
right for everyone else and in this case giving up my holiday is
better than letting down the client. So get off my back.”
Mike Gustavsson
Mike is a retired lecturer from Malmo, Sweden. Mike taught
Business Ethics at a well-regarded University for many years,

and has been an active member of Greenpeace since 1992. Mike
had believed that ethical behaviour of corporations is set by the
behaviour at the top of the organisation, if you have good
people at the top of the company, making good decisions, and
using good rules, then the company itself will be ethical.
Alongside this, Mike had argued that a virtuous set of rules for
directors, and effective oversight of these rules, were key to
producing good behaviour.
In recent years Mike has become a little disillusioned with this
viewpoint. Mike’s daughter Anna graduated from the Stockholm
School of Economics in 2005 and has since quickly risen to the
role of a hedge fund manager at Alfaraft AB (an international
profitable hedge fund). Mike has found himself in fierce
arguments with his daughter who, since taking on the job, has
changed greatly in his eyes. To him, she has changed from
someone who used to care about the environment and social
problems, to someone who works tremendously long hours and
now seems utterly focused on her next bonus payment. Worse
(to Mike), now that Anna is a part of management, Anna seems
to be strongly espousing (advocating) is “get-rich-quick” bonus
making message to her subordinates.
Mike is aware that Alfaraft AB has a well-written corporate
ethics and governance code, and even donates to several local
Swedish charities, but now wonders at what kind of company
they are. Mike was at first extremely happy that his daughter

had a good job, but now he’s worried at the type of business
environment which is generated at companies which takes
idealistic young graduates fresh out of Business Schools and
turns them into bonus seeking executives. Where are these good
governance guidelines acted upon, how is the company actually
led? Why do young executives seem to “mouth” the words of
corporate codes, but not act the actions?
Mike participated in his first Occupy protest on 16th October
2011. The protesters occupied the ground floor of the Alfaraft
AB building in Goteborg, Sweden, in protest of their heavy
financial investment into major companies who were supplying
dubious third world regimes.
Jan Edwards
Jan is the CEO (Chief Operating Officer) and founder of Clean

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