An Essay on Data, Propositions, and Truth in Accounting and Auditing

An Essay on Data, Propositions, and Truth in Accounting and Auditing

This paper attempts to critically examine the nature of the propositional statements aspresented in financial statements that are prepared based on a set of data partially derivedfrom observable economic events of external nature and partly from non-observablebusiness transactions of internal nature such as adjusting entries. The examination isconducted along the philosophical line of metaphysics–man’s philosophical search fortruths and absolute knowledge about the reality.The subject of data reliability has occupied a great deal of space in the history ofphilosophy. The fundamental assumption for the philosophical excursion over datareliability by many philosophers is that truth is revealed only through reliable data. Datamay be formulated from pure logical reasoning as in the case of Euclidian Geometry,from man’s perceptions as in the case of sense data, from scientific observations andanalyses of the cause-effect relationships of events as in the case of positivism, and fromman’s subjective evaluation based on a set of biased rules and dogmas. Thus, there arethree basic accounting data: empirical, logical, and ethical. These three basic data, afterentering the accounting system, are aggregated in the accounting cycle and the results areaggregated data with those three elements. These aggregated data then serve to presentfinancial propositions in the form of the financial statements.Financial assertions based on accounting data have been assumed to be empirical only.Consequently, the AICPA’s Statement of Auditing Standards recommends that sufficientcompetent evidential matter is to be obtained through inspection, observation, inquires and confirmation. The recommendation implies that all accounting data are verifiablethrough senses. The AAA’s A Statement of Basic Accounting Theory suggests that“verifiability” is a necessary attribute of accounting data. However, logical and ethicalprimitive data and aggregated data of combined empirical, logical, and ethical contents arenot empirically verifiable and therefore, accounting data of this nature are not ascertainableand financial propositions cannot be confirmed to be truths.Accordingly, accountants avoid the data reliability issue by adopting the fair concept -which means that they will present the best approximation of the financial reality of thefirm. The best approximation is implied when the generally-accepted accounting principlesare followed. The fair concept derives its powerful utility force from the fact that it iswidely accepted in business practice and the fact that it is legally sanctioned bygovernments. It is embraced psychologically by investors and creditors alike. Accountingcreates not sheer numbers, but psychic numbers.