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Book reviews


representatives of the leading international accounting and consulting companies or

international universities. This has led to a deeper understanding of questions analyzed in
Chapters 11, 18, 19, 20, and 21. The text provides very good coverage of both theoretical
and practical questions in the field of comparative international accounting.
Even though the book's origin is the United Kingdom, the eleventh edition seems fully
like an international book that does not have its borders just in Europe.
The book can be applied in both undergraduate and postgraduate programs in courses
devoted to international aspects and peculiarities of accounting, although students should
already have a good background in basic accounting. The book provides general
information on differences in accounting systems supported by very obvious and clear
examples from several countries with specific examples on companies and a cross-country
comparison of the main issues. As the book is devoted to different international aspects of
accounting, another book may be needed for more advanced accounting courses where
more practical details of IFRS application and its influence on preparation of financial
statements will be studied.
The book is very well organized for teaching purposes. Every chapter starts with the
main objectives and ends with a summary, which includes the most important information
from the text of the chapter, and references, which can be very useful in case of group work
or written reports on specific topics. There are also discussion questions at the end of each
chapter with answers at the end of the book, which provides very good preparation for
classes. There is also a manual for teachers and lecturers online, which contains more
discussion questions and multiple-choice questions with answers. PowerPoint presentations
with slides on the topic can also be found online.
Overall, this eleventh edition includes all the main revisions and additions needed to
update it for the intended audience, with its emphasis on the comparative aspects of
international accounting.
Tatiana Garanina
Saint-Petersburg State University, Graduate School of Management, Russia

William R. Scott, Financial accounting theory, 5th edition, Pearson education,

Toronto, Canada, (2009), xiii + 546 pages, CDN$ 122.35, 70.03, ISBN: 978-0-13207286-1
This book is written in a friendly style with clear explanations and provides a
comprehensive overview of the role of financial accounting and reporting in our society
from both a securities markets and an information-economics-based perspective. Drawing
from a large body of relevant research, the author presents the book in a manner that may be
suitable for professionally oriented students, in particular, senior undergraduate and
professional master's level students. This review assesses the validity of this book for the
intended cohort of students. An instructor's resource CD accompanies the book, which


Book reviews

includes the instructor's manual and PowerPoint lecture slides. At the end of chapter,
questions and problems are given to facilitate a better understanding of the issues under study.
This edition improves upon the previous edition by orienting the coverage of accounting
standards to those of the International Accounting Standards Board (IASB). Convergence of
domestic financial reporting practices with International Financial Reporting Standards
(IFRS) is gaining rapid momentum. For example, the Canadian Accounting Standards Board
is adopting IFRS for public companies beginning in 2011. Furthermore, collaboration by the
IASB and the U.S. Financial Accounting Standards Board (FASB) on further development of
IFRS and U.S. GAAP, and the U.S. Securities and Exchange Commission's (SEC) decision to
allow foreign companies that have prepared their financial statements on the basis of IFRS to
list on U.S. stock exchanges, has abated a major obstacle to convergence of financial reporting.
The orientation toward IFRS should appeal to prospective users of this book not only in
Canada and the United States, but also in other countries that have adopted IFRS. A further
change includes coverage of financial reporting issues arising from the global integration of
capital markets as well as improvements in the discussion and presentation of agency theory.
The text consists of 13 chapters. After providing brief introductory remarks in Chapter 1,
the book introduces the financial accounting theory by outlining the present value and
historical cost model in Chapter 2. In the context of these models, the relevant information
about the firm's economic prospects, including its dividends, cash flows, and profitability,
are defined. A strength of this book is that it explores both the conditions under which
market values of assets and liabilities can serve as indirect measures of present value (under
ideal conditions) and also highlights the fact that if the conditions are not ideal fundamental
problems can be encountered while carrying out asset valuation and income measurement.
While Chapter 2 concludes that the present value model faces some severe problems in
practice, Chapter 3 looks at how to tackle this problem. In order to make financial
statements more useful, the concept of decision usefulness in accounting is introduced. In
particular, decision theories and capital markets theories are used to conceptualize the
meaning of useful financial statement information. I concur with the author that this issue is
becoming more relevant as major accounting standard-setting bodies have been
increasingly utilizing these theories while formulating and promulgating accounting
standards and pronouncements.
Chapter 4 considers the interaction of rational investors in a securities market. This
chapter outlines the properties of a fully efficient securities market and their implications for
accountants. This chapter also introduces the capital asset pricing model and emphasises
that efficiency is a model of how a securities market operates and that, like any model, it
does not capture the full complexity of such a market. Chapter 5 examines the relevant
capital market research in accounting. Many studies in accounting have tested the
implications of decision usefulness showing that security market prices do respond to
accounting information. With the initial discussion of Ball and Brown (1968), which
provided the pioneering evidence of the reaction of securities market to earnings
announcements, the chapter also highlights the findings of a number of other empirical
studies that have documented additional aspects of securities market response.
The author was vigilant in identifying that more recently there have an increasing
number of concerns raised about whether investors are rational and whether markets are
efficient. The measurement approach to decision usefulness is examined in Chapter 6,

Book reviews


which eventually concludes that while actual securities markets are not fully efficient, they
are close enough that accountants can be guided by efficiency implications and the rational
decision theory underlying them. This chapter also indicates that if securities markets are
not fully efficient, the role of financial reporting becomes more important.
Chapter 7 reviews and evaluates some of the measurement-oriented standards, including
financial instruments and intangibles. A number of examples of accounting standards that
use current values in financial reporting are provided. The author claims that while the
movement to measurement-oriented accounting standards is growing, its impact on the
decision usefulness of accounting information is yet to be seen. However, this chapter could
have gained by making reference to the recent global financial crisis. In particular, the use
of fair value accounting to recognize assets and liabilities has been subject to much
criticism, and the current debate focuses on whether the recent distress in financial
institutions is due to the application of fair value rules in accounting standards.
To this point, the book has made a limited attempt to highlight management's interests in
financial reporting. Chapters 811 are devoted to this issue, and the author acknowledges
that providing information to evaluate manager stewardship is equally important as a role of
financial accounting as the provision of useful information to investors. The concept of
economic consequences and positive accounting theory is discussed in Chapter 8 to
highlight management's interest in financial reporting. This discussion on stewardship
comes relatively late in the book; however, this may not pose much of a problem as most of
the chapters in the book are self-contained and thus can be read in any order. Chapter 9
further considers the questions of the manager/shareholder alignment that underlies
economic consequences and positive accounting theory. Some models from game theory
are used to predict the outcome of conflict between rational individuals. The chapter also
discusses agency theory in order to shed light on the process of contracting between two or
more persons where each party may attempt to get the best deal for themselves.
Chapter 10 specifically examines executive compensation plans and shows that an
executive compensation plan is an agency contract between the firm and its manager. It can be
usefully designed to align the interests of owners and managers by basing the manager's
compensation on one or more measures of the manager's performance in operating the firm. In
particular, the two major performance measures net income and share price are considered
in detail. The analysis presented in the chapter in light of prior empirical research suggests that
multiple performance measures can increase contracting efficiency. Chapter 11 further
considers issues relating to management and financial reporting. In particular, it discusses
patterns of earnings management, both from a financial reporting and a contracting
perspective. The chapter outlines the motivations of earnings management, practices of good
and bad earnings management, and the implications for financial reporting.
The final part of the book involves two chapters devoted to examining the process of
standard setting. In particular, Chapter 12 considers the fundamental problem of financial
accounting theorythat is, how to reconcile the financial reporting and efficient
contracting roles of accounting information and how to determine the socially right
amount of information. Chapter 13 then examines the political issues surrounding the
process of standard setting. Theories of regulation are used to shed further light on this
process. The chapter also briefly discusses international convergence of accounting


Book reviews

In summary, the author did an excellent job in organizing this large body of research into a
unifying framework and explaining it in a manner that professionally oriented students will be
able to easily understand and appreciate. While this text is suitable for such students, it must be
used carefully when directed to accounting students where the emphasis is on explaining
various dimensions of financial accounting theory. For example, while the title is Financial
Accounting Theory, the text is quite different when compared to other financial accounting
theory texts, which usually consider various dimensions of financial accounting theory and
provide an in-depth discussion of alternative asset valuation and income determination
Furthermore, while this edition of the book is oriented toward IFRS, the author may
consider revising the final two chapters in future editions to include more details on
international convergence of accounting standards and the political issues surrounding this
process. This is probably the major limitation of this edition of the book. Exploring the
differences and similarities between U.S. GAAP and IFRS in greater detail could also assist
students to develop a more sophisticated understanding of the role of financial accounting and
reporting in our society both from a securities market and from an information-economicsbased perspective.
Ball, R., & Brown, P. (1968). An empirical evaluation of accounting income numbers. Journal of Accounting
Research, 6(2), 159178.

Parmod Chand
Macquarie University, Sydney, Australia