The REA accounting model of McCarthy is often taken as a reference for accounting ontologies. The focus of these ontologies is on economic exchanges. This paper argues that accounting is more: it is about accounts and reports of economic exchanges. This suggests that accounting ontologies should broaden their scope to include Accounting Information System and Financial Report artefacts. Such an accounting ontology can not only accommodate the conditional-normative rules that play an important role in Accounting, but also allows to formulate questions on the ontological status of concepts like Asset and Equity.
computerized accounting system as was the subject of McCarthy’s seminal paper, or a blockchain shared ledger.
In the Netherlands, business economics is the field that studies business
organizations from an economic perspective and now includes not only accounting but also e.g.
finance and management. The term “business administration” is used as a near
synonym. Historically, accounting has been the core of business economics. Accounting
dates back to the origins of writing technology in the big empires of Antiquity (Egypt,
Babylonia). The development of double entry bookkeeping in the early Middle Ages,
formalized later in the famous work of the Venetian mathematician Pacioli in 1494,
was an important step in rationalizing business. “Ubi non est ordo, ibi est confusio
(Where there is no order, there is confusion)”, according to Pacioli. In particular, it
allowed not just recording economic events but also to analyze causal relationships
between them [
The REA accounting model is not just about economic exchanges, but specifically
refers to accounting information systems (AIS) recording these exchanges. The model
defines the core structure of such systems. The processing that is done in accounting
information systems, the way data are aggregated into financial reports (where FR
accounting standards are all about) and how quality of these data is assured (the typical
auditing question) are not in the REA model. That does not mean that it is not possible
to build accounting information systems including aggregation etc. based on REA –
this has been shown already, to some extent at least, in the work of Gal and McCarthy
[
The economic exchange ontology does not include the AIS and the choices that have
to be made in FR. The OntoREA accounting model [
In spite of its respectful age, accounting is still wrestling with its status as scientific
discipline. It has often been remarked that there is a big gap between the accountancy
practice and the mainly positivist academic research. The goal of practitioners is to
assure the accuracy and relevancy of financial reports, thus serving the practical goals
of management and investors. Because of this purpose-orientation, Mattessich [
Central to Mattessich’s proposal is the recognition of purposes and related values (as opposed to a positivist account that tries to keep these out of the picture), and the use of conditional-normative rules. An illuminating example in the paper is the following. Consider the following published hypothesis: “The greater the value of a corporation’s fixed assets, the greater the likelihood that its financial statements included an allocation of profits for renewals, repairs, maintenance or depreciation”.
And compare this rather vague statement with the reformulation in a rule: “Company X wants to maximize its wealth. The value of fixed assets of company X is above so and so many dollars (…) Then it is recommended to include in its Financial Statements an allocation of profits for renewals, maintenance or depreciation”.
The former is an empirical positivist statement that can be shown statistically significant, but in fact, it hides what is really going on. The latter describes the why, and is directly applicable by management.
The conditional-normative rule, as in the example, refers to a purpose and is prescriptive. The prescriptive rule is not an absolute law. It may be refined on the basis of accumulated experience. Perhaps there are situations where it is better not done this way, so the rules must be interpreted as default logic.
Rules are also important in Design Science Research. An artefact contains pragmatic
rules [
The conclusion of the above is that accounting is about a kind of symbolic artefacts. The core Record artefact types seem to be Accounting Information System and Financial Report (both with many variants). The relationship between the two is of course that the former is used in making the latter. Like most artefacts, both are made of atomic construct. In symbolic artefacts, these take the form of language primitives, e.g. XBRL tags – these are (secondary) artefacts as well.
In the case of Financial Reports, accounting should answer questions like: Why are they relevant? Identification of agents involved (user, designer, maker), their goals and relevant social norms. What is their structure? How are they composed (recording, aggregation, controls), what are the quality criteria? This is described in make plans consisting of conditional-normative rules. Make plans can be improved over time. What is their use? Who uses them for what, what are the use conditions, what is the effect in the business practice (described in the form of pragmatic rules)? How do these effects differ in the case of new variants, such as promoted by the Continuous Auditing movement? What are they about? Symbolic artefacts differ from other artefacts in having a representational function. The structure follows a grammar, and this is semantically related to some domain. Here the economic exchange ontology comes in – including the question of the mapping between the constructs and syntactic structure and the semantics.
Of course, the questions are not new. They are at the core of the work of Standard
Committees. There is overlap with the research question types formulated in [
Still, the question is whether they should be conceptualized in an accounting ontology. That depends on what it could achieve. I want to make one suggestion. REA ontology is often contrasted to double entry bookkeeping. Where exactly is the contrast? Double entry bookkeeping is not an exchange ontology but a way of representing economic exchanges and their effects, for a business purpose. The representation has its shortcomings, as has been argued by McCarthy and others, but to understand the shortcomings (or its strength, some would counter), it is necessary to compare this representation with other representations (in terms of usability etc.) and to the object of representation (in terms of completeness and precision). REA is another representation – a model for the accounting system database – and we compare its features with a traditional GL system. An economic exchange ontology is the domain semantics of both representations. Such a representation/domain relationship can be formulated if we take the representations, embodied in artefacts, to be first-class citizens in the accounting ontology.
Another question that can be formulated is whether terms like Asset and Equity exist in the economic world or exchanges, or are recording/reporting constructs that build on economic exchange concepts but are defined for a financial reporting purpose and do reflect stakeholder goals. This influences their ontological status.