A Good Theory

Article excerpt

Theory of Accounting and Control by Shyam Sunder South-Western Publishing Cincinnati, Ohio, 1997 212 pages

Dealing with the role of accounting and control in organizations and society, this book attempts to link together the functions of accounting into a coherent framework. The author is the Richard M. Cyert Professor at Carnegie Mellon's Graduate School of Industrial Administration. Contract theory in accounting, which is the focus of the book, views organizations as "sets of contracts among individuals..." Sharing information among those individuals helps to execute the contracts. Additionally, control represents a form of equilibrium among the participants in organizations. All such entities can be considered "games of incomplete information."

Part I provides an introduction to accounting inthe context of contracting. Part II deals with what Sunder calls the "microtheory" of accounting, including: contracting for managers, the role of managers in accounting decisions, the management of income, accounting policy decisions and investors, accounting and the stock market, and the role of auditors. Part III is concerned with what the author terms the "macrotheory" of accounting, including social decision criteria, standardization of accounting,the role of the government as a contracting agent and "superfirm," and accounting for public-good organizations.

Organizations are composed of individuals who provide services and seek compensation in return. These individuals may conflict in pursuing their own self-interests. Accounting serves to emphasize cooperation rather than conflict among individuals by measuring and reporting their contributions and entitlements. Contracts between shareholders, managers, workers and customers take various forms. Accounting is concerned with all of those contracts.

Accounting systems generate data on the performance of managers, which is also monitored by investors and auditors. Income to large firms, in particular, serves to reward managers and to encourage them to "manage income" in their own self-interests.

Shareholders represent a second key group of contracting agents, whose resource entitlements constitute a residual and whose contractual rights are transferable. …

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