PROFESSIONAL JUDGMENT AND ACCOUNTING STANDARDS

This essay explores relationships between accounting standards and people's inferences and judgments. Acknowledging that Demski's impossibility theorem implies that the standards will be ''social-preference incomplete'', the paper shows that they are also ''decision-procedure incomplete'' on three levels. These levels correspond to three kinds of professional judgment: semantic, pragmatic and institutional. The investigation facilitates understanding of (1) how accountants exercise judgment and deduction in applying incomplete standards; (2) how financial statement readers use the incomplete standards to draw deductive inferences from financial reports which are based on accountants' judgments; (3) the special kinds of judgments required of standard setters; and (4) the meaning and extent of professional liability, given the relationships identified between accounting standards, inferences and judgments.