Accounting Approaches: Deductive vs. Inductive Approaches Two

Accounting Approaches: Deductive vs. Inductive Approaches

Two major divisions exist regarding the classification of accounting approaches: the inductive and deductive method. "In the deductive or judgmental approach, relevant environmental factors are identified, and, by linking these to national accounting practices, international groupings or development patterns are proposed. In the inductive or empirical approach, individual accounting practices are analyzed, development patterns or groupings are then identified, and finally explanations keyed to a variety of economic, social, political, and cultural factors are proposed" (International accounting patterns, culture, and development, 2012, Wiley: 35-36). In other words, much as in philosophy, in the deductive approach, the analysis proceeds from the general to the specific, while in the inductive approach, the classification system proceeds from the specific to the general.

The first and still one of the most popular deductive methodologies was first developed in 1967 by Gerhard Mueller. Mueller identified four classifications of accounting approaches. In the first, "business accounting correlates closely with national economic policies" (International accounting patterns, culture, and development, 2012, Wiley: 36). This means that business accounting practices are used to support the government's overall national agenda, such as "to stimulate growth, special reserves created to promote investment, and social responsibility" (International accounting patterns, culture, and development, 2012, Wiley: 36). Examples include France, Germany, and Sweden. In the second approach, "accounting is viewed as a branch of business economics," and the aim is to maintain the real value of the capital invested in the enterprise (International accounting patterns, culture, and development, 2012, Wiley: 36). As an example, Mueller cited the replacement-value approach popular in the Netherlands.

A third approach is the "independent discipline pattern" which is cemented in pragmatism and designed to advance the interests of the enterprise, as practiced in the United States and United Kingdom (International accounting patterns, culture, and development, 2012, Wiley: 36). Accounting is independent and viewed as its own discipline, with its own concepts and sets of ethics. This can be seen in the generation of what is called GAAP, or generally-accepted accounting principles in the United States, which are not aligned to specific business or government policies, ethics, and practices but which are generated by the accounting profession itself. The fourth approach is a more scientific approach, and used by command economies such as the communist block nations and some government entities. In this "uniform accounting pattern, accounting is viewed as an efficient means of administration and control" (International accounting patterns, culture, and development, 2012, Wiley: 36).

Implicit within Mueller's groupings is the sense that different accounting needs, business, and regulatory environments will produce different types of accounting. However, one of the earliest criticisms of his approaches is that it failed to take into consideration cultural differences. In response to these criticisms, Mueller created another classification system, based upon ten country types. Nobes updated Mueller's classification of countries in 1983 and used the "importance of tax rules, the use of prudent/conservative valuation procedures, and the making of replacement cost adjustments" (all reflected in the original Mueller model) in a more refined way to understand international differences in approaching accounting (International accounting patterns, culture, and development, 2012, Wiley: 37).

Both Mueller and Nobes proceeded from certain specific categories that they believed characterized accounting, such as valuation procedures and tax rules, and then used such schema to classify specific policies. In contrast, the inductive model of Nair and Frank (1980) took the opposite approach. These two accounting theorists "carried out a statistical analysis of international accounting practices using the Price Waterhouse surveys of 1973 and 1975" as a touchstone (International accounting patterns, culture, and development, 2012, Wiley: 37).

Based upon the survey data, Nair and Frank created different national groupings: the British Commonwealth, Latin American/south European, northern and central European, and U.S. models (International accounting patterns, culture, and development, 2012, Wiley: 40). The intended advantage of taking an inductive approach was that it could more easily allow for cultural differences between the groupings. Some factors the researchers took into consideration were language, various economic structures, and trade blocs (International accounting patterns, culture, and development, 2012, Wiley: 40). However, the inductive approach was criticized because it was very difficult to find meaningful patterns between the different national and regional entities without erasing major differences.