Seventh Ijiri Lecture: August 5, 2025

On The Economics of Accounting in Firms: A Contracting-usefulness Perspective

Decision-usefulness theory (Staubus, 1959, 1961) – the thesis that the economic function of accounting is to aid users in deciding among alternative courses of action – fails to explain the existence and form of important accounting methods and practices, even though it forms the foundation of the FASB (2024) and IASB (2028) Conceptual Frameworks. Decision-usefulness does not explain why accountants take a transactional rather than holistic view of the firm. Nor does it explain the existence and form of accounting depreciation and cost allocations, which provide no information relevant to alternative uses. However, these and other accounting methods and practices can be explained by their contracting-usefulness: they play important roles in incenting managers to make efficient use of resources. Much has been written about the important contracting role of accounting in markets. Much also can be learned from contemplating how accounting methods and practices facilitate the contracting that takes place in firms.

Lecturer: Ray Ball, The University of Chicago