=Paper=
{{Paper
|id=Vol-2835/paper13
|storemode=property
|title=What is in an Accounting Ontology? Discussion Paper
|pdfUrl=https://ceur-ws.org/Vol-2835/paper13.pdf
|volume=Vol-2835
|authors=Hans Weigand
|dblpUrl=https://dblp.org/rec/conf/vmbo/Weigand21
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==What is in an Accounting Ontology? Discussion Paper==
https://ceur-ws.org/Vol-2835/paper13.pdf
What is in an Accounting Ontology? Discussion Paper
HansWeigand[0000-0002-6035-9045]
1
Tilburg University, P.O.Box 90153, 5000 LE Tilburg, The Netherlands
H.Weigand@uvt.nl
Abstract. The REA accounting model of McCarthy is often taken as a reference
for accounting ontologies. The focus of these ontologies is on economic ex-
changes. This paper argues that accounting is more: it is about accounts and re-
ports of economic exchanges. This suggests that accounting ontologies should
broaden their scope to include Accounting Information System and Financial Re-
port artefacts. Such an accounting ontology can not only accommodate the con-
ditional-normative rules that play an important role in Accounting, but also al-
lows to formulate questions on the ontological status of concepts like Asset and
Equity.
Keywords: Exchange Ontology; REA; Mattessich; Design Science Research.
1 Exchange ontologies
There are currently several economic exchange ontologies such as OntoREA [12],
COFRIS [1], and ATE [11]. Most of them are derived from or refer to the REA ac-
counting model originally proposed by McCarthy [8]. REA modeled “what has oc-
curred in a business process”. The subtitle of the article speaks about a generalized
framework for accounting systems in a shared data environment. It was clearly inspired
by the Entity Relationship Model of Chen that proposed a generalized or unifying con-
ceptual model for data and achieved this by moving into the semantic direction. Simi-
larly, REA aimed to unify the accounting perspective and the management perspective
on accounting information systems [8], and also made a semantic move, building on
the work of Ijiri [6]. The move is from data fields (debit and credit positions) to events
in the economic exchange and their effects on resources. Further developments have
worked out the exchange process and its different steps [9] and added commitments as
first-class citizen concepts.
However, is an accounting ontology equivalent to the economic exchange ontology?
According to Wikipedia, accounting is “the measurement, processing, and communi-
cation of financial and non-financial information about economic entities. Accounting
measures the results of an organization's economic activities and conveys this infor-
mation to a variety of users, including investors, creditors, management, and regula-
tors”. Clearly, economic activities are the object of accounting, and for assessing the
firm value, the exchange activities are key (although some might argue that production
is the central economic activity). However, accounting is not the study of economic
exchanges (that is Economics), but the study of the processing of information about
these exchanges, as the Wikipedia definition says (cf. [2]). It also talks about accounting
as the language of business. Nowadays such a language or text takes the form of a
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 organiza-
tions 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 syno-
nym. 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 be-
tween them [6]. In this way, (double entry) accounting enabled the development of
economic thinking. Pacioli’s work heavily depended on paper technology. For exam-
ple, he writes: “The businessman must then prepare his Inventory in the following way:
First of all, he must write on a sheet of paper or in a separate book…” [10]. In contrast,
REA builds on relational database technology.
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 ac-
counting 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
[3], but it is not in the REA model. Neither in the exchange ontologies. The ontology
describes the basic exchange concepts. These are the same in all enterprises, whatever
recording system they use. There are also requirements for and a general design of an
AIS, following from the FR requirements. These apply to all AIS as well. Then, on a
third level, there are variants that are implementation-specific, such as double entry
bookkeeping.
The economic exchange ontology does not include the AIS and the choices that have
to be made in FR. The OntoREA accounting model [12] goes beyond an exchange on-
tology, starting from the central accounting concepts Asset/Liability/Equity. It also has
a wider scope than accounting. However, I do not see in [12] a clear distinction between
the economic phenomena and the accounting of them and the recognition of the Finan-
cial Report as a research object. In the following, I argue for accounting ontology as an
explicit combination of exchange ontology and artefact ontology, where artefact is
taken in the Design Science Research sense.
2. Mattessich on accounting
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 [7] ar-
gues that accounting should be seen as an applied science. However, he also argues that
is should be taken seriously as applied science (not exactly the same, but similar to
Simon’s plea to take engineering seriously as a science of the artificial [13] that lead to
the notion of Design Science Research [5,4]). “Anyone seriously looking at the practice
of accounting must admit that its objective is not to represent economic reality in a
purely scientific way, but to approximate it pragmatically on the basis of particular
norms”. He compares the situation of accounting with the (applied) science of medi-
cine. In principle, the effectiveness of medical treatments is based on physiological
properties of the body such as studied in biology. However, the complexity of the body
and the diversity between people make it necessary to develop (design and test) treat-
ments that are effective even if the mechanism is not completely clear.
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 follow-
ing. 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 deprecia-
tion”.
The former is an empirical positivist statement that can be shown statistically signif-
icant, 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 pre-
scriptive. 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 [14], for the make plan of the artefact and its use plan. The correspondence is
related, I claim, to the artefact character of accounts and its derivations in the form of
financial reports (I guess the same could be said about the artefact character of treat-
ments/drugs in medicine). Financial Reports are symbolic artefacts: they have a mate-
rial aspect (writing technology, nowadays digital) and an information capacity. They
are artefacts that can be studied from a Design Science Research perspective. An ac-
counting ontology should include the concepts that are used in the formulation of the
pragmatic rules, such as Record or Representation, Agent, Goal, Value and specific
accounting constructs.
3. Accounting artefacts
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 Finan-
cial 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, con-
trols), 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 se-
mantically 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 [3] that
does not build on the artefact concept, but on the sign triangle. From a Design Research
perspective, the accounting artefacts would be relevant research objects.
Still, the question is whether they should be conceptualized in an accounting ontol-
ogy. That depends on what it could achieve. I want to make one suggestion. REA on-
tology 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 eco-
nomic 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 short-
comings (or its strength, some would counter), it is necessary to compare this represen-
tation with other representations (in terms of usability etc.) and to the object of repre-
sentation (in terms of completeness and precision). REA is another representation – a
model for the accounting system database – and we compare its features with a tradi-
tional 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.
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