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SPROUSE'S WHAT-YOU-MAY-CALL-ITS: FUNDAMENTAL INSIGHT OR MONUMENTAL MISTAKE?

35 citations0/0 files storedAccounting Historians Journal

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Accounting Theory and Financial Reporting Auditing, Earnings Management, Governance Accounting and Organizational Management

Abstract

We critically evaluate Sprouse (1966 Journal of Accountancy), which prodded FASB towards a balance sheet approach. We highlight 3 errors in this article. First, Sprouse confuses necessary and sufficient conditions by arguing that good accounting systems must satisfy the balance sheet equation. Second, Sprouse’s claim that financial analysts rely on balance sheet analysis is contradicted by contemporary and current security analysis textbooks, analysts’ written reports, and interviews with analysts. Third, and most crucially, Sprouse does not recognize that the primary role of accounting systems is to help managers discover and exploit profitable exchange opportunities, failing which firms cannot survive.

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References

1937The Nature of the Firm 1961The Economics of Information 1957Theory of the Consumption Function 2005Understanding the Process of Economic Change 1951The Division of Labor is Limited by the Extent of the Market 2004Information content of equity analyst reports 1983The Contractual Nature of the Firm 1964What Should Economists Do?

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