Accounting
Winter Theory:
2007
Missing in Action?
VOL.8 NO.2
B Y G . R . C L U S K E Y, J R . , D B A , C PA ; C R A I G R . E H L E N , D B A , C PA , C F E ;
A N D R I C H A R D R I V E R S , P H . D . , C PA
LITTLE
HAS CHANGED IN THE
“THEORY”
500 YEARS
SINCE LUCA PACIOLI INTRODUCED ACCOUNTING
BY DESCRIBING THE ACCOUNTING PRACTICES IN USE AT THE TIME AND
EXPLAINING THE RATIONALE BEHIND THE METHODS.
EXECUTIVE SUMMARY What is accounting theory? And where is it? Accounting theory seems similar in some respects
to generally accepted accounting principles—we know it exists, but no single source defines and enumerates it. Even
in our doctoral programs, where one would expect accounting theory to be studied and promulgated, little evidence
exists that accounting theory consists of anything more than a cursory review of current FASB issues or economic
transactions and firm value. Based on our recent review of 88 accounting doctoral-granting institutions in the United
States, we identify several different approaches to teaching accounting theory that have been or currently are used in
accounting doctoral curricula.
program. Lack of accounting theory (guiding and
informing practitioners) in accounting doctoral curricula
could indicate a need for change to those curricula.
Likewise, presenting accounting theory as anything
other than a conceptual framework smacks of following
rather than leading accounting practice. Is accounting
theory—the basic foundation of accounting—really
leading the profession or merely following its practices?
The basic explanation of accounting theory as the
conceptual framework for applying accounting principles
was debated throughout the last century. The American
Accounting Association (AAA) published a series of
“Statements of Accounting Principles” in The Accounting
ecent corporate and audit failures have
involved both accountants and auditors, the
very professionals expected to police and
stop corporate mugging of the public’s
investments. These practitioners need
accounting theory—a conceptual framework—to guide
and inform accounting practice, thus producing transparent reporting, which is the foundation of the investing public’s confidence.
Our study surveys accounting theory in doctoral programs. Specifically, the study attempts to identify how
doctoral programs define accounting theory and to measure the level of inclusion of accounting theory in each
R
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ples of historical cost, revenue recognition, matching,
full disclosure, materiality, and conservatism.6
Throughout history, accounting theory—a framework
of accounting principles—has always followed after
accounting practice. Luca Pacioli is considered the
father of accounting because one chapter of his Summa
Mathematica described double-entry bookkeeping practices. That chapter essentially explained accounting as
it was practiced at the time, but it also took the additional step of justifying why it made sense. More than
400 years later, Paton and Littleton described their
efforts on behalf of developing accounting theory as “a
coherent, coordinated, consistent body of doctrine” that
could be expressed as standards if desired. What then
followed was a set of definitions and (again) a justification of current accounting practice.7
All was relatively quiet until the Industrial Revolution and the rise of corporate entities. The need to
build factories and machines required vast amounts of
capital. Accounting for these very long-lived organizations was and continues to be a stretch for a system that
was developed to account for 18-to-36-month joint ventures. The most drastic efforts to first correct abuses
and then determine a coherent theory of accounting
generally were spurred by the investing public’s significant losses. Chief among the abuses during the latter
part of the 19th and early 20th centuries was the arbitrary write-off of significant expenses directly against
capital rather than through the income statement.
George May, representing the AIA (the American Institute of Accountants, a precursor of the American Institute of Certified Public Accountants (AICPA)), began
consulting with the New York Stock Exchange in 1927
and developed a Committee for Cooperation with the
stock exchange a few years later to determine voluntary
standards that would prevent such abuses.
And so it went. Public losses from the stock market
collapse of 1929 led to passage of the Securities Act of
1933 and the Securities and Exchange Act of 1934. The
Securities & Exchange Commission (SEC) was established, and public accounting just managed to continue
its self-policing. The first standard-setting body, the
Committee on Accounting Procedures (CAP), was created by the AICPA in 1939. Although conceived to get
ahead of practice by creating a theoretical foundation for
Review (1936, 1941, 1948, and 1957) in an attempt to
establish a basis for accounting statements and to develop accounting concepts.1 While accounting principles
were being debated and developed, accounting theory—
which would provide the conceptual framework for
application of accounting principles—was allowed to lag.
In 1966, AAA published A Statement of Basic Accounting Theory. To do this, it created the Committee to Prepare a Statement of Basic Accounting Theory, which
attempted “...to establish a foundation of concepts from
which particular practices can be judged.”2 Later, in
1977, AAA published Statement on Accounting Theory and
Theory Acceptance. In it, the Committee on Concepts and
Standards for External Financial Reports admitted that
“...a single universally accepted basic accounting theory
does not exist at this time.”3
In the first volume of his five-volume Essays in
Accounting Theory, Carl Devine describes accounting
theory as “the entire complex of logical rules, primitive
terms, semantic rules of correspondence, interpretations, definitions, theorems, etc., necessary to explain
...behavioral or physical observations.”4 Thomas Evans
defines theory as “a coherent set of hypothetical, conceptual, and pragmatic principles forming a general
frame of reference for a field of study.”5 Evans refers to
William Paton and A.C. Littleton when he defines
accounting theory as “a coherent, coordinated, consistent body of doctrine expressing the standards by which
corporation accounting may be judged.” Both of
Evans’s definitions are consistent with the 1966 and
1977 AAA publications.
We see that several accounting theorists have defined
accounting theory as being a conceptual framework
consisting of accounting principles to guide and inform
accounting practitioners, educators, and researchers. In
reality, however, accounting principles—the basis of
accounting theory—have followed rather than led
practice.
AC CO U N T I N G T H E O RY
In their book, Intermediate Accounting, Donald Kieso,
Jerry Weygandt, and Terry Warfield note that the basic
assumptions of accounting theory are monetary unit,
economic entity, going concern, and periodicity. And
accounting theory’s foundation is based on the princi-
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tower to do—defer to practice?
The upshot of accounting practice being based on
certain underlying assumptions (monetary unit, going
concern, historical cost, and consistency) is that
accounting theory has a rather shaky foundation. For
instance, the monetary unit assumption depends on a
known fallacy (stable dollar assumption), hardly a solid
beginning for accounting theory. Likewise, the going
concern assumption is a necessary element for using
historical cost, but it is a rather bold assumption, to say
the least. Even if we accept the going concern assumption, using historical cost is somewhat questionable in
many situations. It is also said that we are to be consistent as well as conservative in the application of
accounting principles. The FASB’s 2004 exposure draft,
Fair Value Measurements, however, presents a single standard on fair value measurements for those standards
that require a departure from historical cost.10
The bottom line is that accounting theory is based on
a set of generally accepted accounting practices rather
than principles or theory. For practice to be based on
these assumptions, perhaps in the hopes of protecting
the investing public, is one thing. But to offer as sound
accounting theory what is basically no more than recommended best practices is intellectually to bankrupt
the discipline. Even the august Journal of Accounting
Research has published a witty set of sayings from The
Quotations of Chairman Mao Tse-Tung as accounting
theory.11 The result has been that, without an accepted
underlying theory, it is virtually impossible to do meaningful theoretical research.
In search of theories to permit the development and
testing of hypotheses, accounting researchers have borrowed from other disciplines—economic theory, financial
theory, information theory, and agency theory, to name
but a few. Ross Watts and Jerrold Zimmerman have even
combined the concepts of these and other theories into
what they refer to as “Positive Accounting Theory.”12
With this background, it is no wonder that we found
that doctoral programs do not agree on what constitutes
accounting theory. It did seem worthwhile, however, to
determine if any of the borrowed theories holds sway or
if existing doctoral programs are continuing the tradition
of treating practice (current events/issues) as theory.
the standards issued, this body essentially became a referee, choosing best practices from those available at the
time. It did, however, establish certain codas, perhaps
most significantly the all-inclusive income statement.
Later, recognizing that the CAP was not meeting its
intended purpose, the Accounting Principles Board
(APB) was created for the same purpose, but with a
research mission added to its charge. The APB was given funding for a research staff to enable it to meet the
expected goal. Unfortunately, as that research mission
stepped out toward a more coherent theory, the AICPA,
the parent body of the APB, issued what was essentially
a disclaimer of opinion on the APB’s work.8
Ten years later, to avoid having standards set by a
governmental entity, the APB was replaced by the
Financial Accounting Standards Board (FASB). The
FASB’s formation, with the attendant Financial
Accounting Foundation for funding and for insulating
the FASB from “politics,” was preceded by the same
sort of fanfare about research and the establishment of
theory. The evidence so far is that the FASB has been
neither insulated from politics nor on the forefront of
the establishment of theory. It has stepped out to have
holding gains and losses in securities and in foreign
exchange recognized, but it softened on the “all-inclusive income statement” by having both reported for the
most part directly against equity.
Additional studies, such as AAA’s A Statement of Basic
Accounting Theory and Ray Ball and Philip Brown’s “An
Empirical Evaluation of Accounting Income Numbers,”
follow this same pattern of theory contenting itself by
merely being the disclosure and justification of current
practice.9 Even when the FASB was charged with providing Statements of Financial Accounting Concepts (SFAC)
as an underlying basis for accounting theory, many of
the same existing objectives and definitions reappeared
in the SFACs.
In the 1970s, academia entered a debate that conceptualized accounting theory as a struggle between two
groups—“true income” advocates vs. “decision useful”
proponents. Should accounting (theory) provide financial information that represented “true income” but was
not useful, or should it provide financial information
that was useful for decision making but not “fair,”
“objective,” “verifiable,” or “true”? What was the ivory
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SURVEY
OF
AC CO U N T I N G P R O G R A M S
FINDINGS
Using Hasselback’s 2002-2003 Accounting Faculty
Directory, we identified 88 accounting programs that
offer doctoral degrees in the United States (Table 1).
These 88 accounting doctoral programs were sent a survey (see Table 2) that addressed three major questions:
what resources are being used (readings, texts, etc.)?
2. Is accounting theory “integrated” into their curriculum? If so, at what level (undergraduate, masters, or
doctoral)?
3. Regardless of the answers to the first two questions,
what did they consider accounting theory to be?
We identified five approaches to teaching accounting
theory by examining the syllabi collected online from
graduate accounting programs and from a review of
accounting theory textbooks (Table 3). A sixth approach
was added based on telephone inquiries to accounting
doctoral programs.
OF THE
SURVEY
Of the 79 accounting doctoral programs that participated in our survey, 59 programs (75%) contain some
element of accounting theory. Forty-one programs
(52%) offer at least one accounting theory course (or a
course they consider to be accounting theory) at the
undergraduate, master’s, or doctoral levels or at more
than one level. Eighteen of the remaining 38 programs “integrate” accounting theory into their curricula at some level. Of the 59 accounting programs that
either offer accounting theory courses or integrate
accounting theory, 37 use readings only, 14 use other
texts, and 19 use accounting theory textbooks (see
Table 4). Some programs use a combination of textbooks and readings.
Accounting theory was defined by 60% of the
respondents as being “Current FASB Issues” and/or
“Economic Transactions and Firm Value” (see Table
5). Only 11% declared accounting theory to be “traditional,” which includes Edwards and Bell, Patton and
Littleton, etc. Some respondents described their programs by selecting more than one accounting theory
approach.
M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY
CONCLUSIONS
Accounting theory seems to be alive and well in the
majority of accounting doctoral programs participating
in our survey. The lack of consistency in what constitutes accounting theory, however, makes the outcome
problematic. The notion that accounting theory primarily reflects current FASB topics and/or economic transactions and firm value—and not a guiding and informing
conceptual framework for either accounting practice or
theoretical accounting research—is less than ideal. This
failing is reinforced by our finding that 63% of accounting doctoral programs offering accounting theory use
readings from current research journals as source materials for their accounting theory courses rather than
accounting theory textbooks.
Accounting theorists still seem content to explain
and rationalize practice as accounting theory rather than
creating a conceptual framework of true accounting
theory—an accounting theory that is both internally
consistent and that serves as a model to guide and
inform practice, much like a mission or vision statement
guides organizations.
Given these shortcomings, it appears that the current
curricula of accounting doctoral programs need to
change with respect to the basic foundation of accounting (accounting theory). The theory we teach (and what
students hopefully learn) in our accounting doctoral
programs should be:
1. Do they offer an accounting theory course? If so,
R E S U LT S
AND
1. A framework to guide accountants in the develop-
ment of accounting practice,
2. A theory against which accounting courses can be
measured and through which accounting programs
can be validated, and
3. A framework to guide accounting research.
L I M I TAT I O N S
AND
FUTURE RESEARCH
As in all self-report surveys, the reported data are subject to the biases of the individuals responding—in this
case, the faculty members or administrators responding
on behalf of the accounting doctoral programs. The
focus of future research will be to expand, explore, and
validate these survey findings from accounting doctoral
programs to undergraduate and master’s accounting programs. Specifically, the questions of defining accounting
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WINTER 2007, VOL. 8, NO. 2
Table 1:
1
2
3
4
5
6
7
8
Doctoral Accounting Programs Surveyed from Hasselback’s
Directory 2002–2003
University of Alabama
University of Arizona**
Arizona State University
University of Arkansas
Boston University
University of California-Berkeley
University of California-Irvine
University of California-LA
45
46
47
48
49
50
51
52
University of Minnesota
University of Mississippi
Mississippi State University
University of Missouri-Columbia
University of Nebraska
New York University
University of North Carolina
University of North Texas
9 Carnegie Mellon University*
10 Case Western Reserve University
53 Nova Southeastern University
54 Ohio State University
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
University of Central Florida
University of Chicago
University of Cincinnati
CUNY-Baruch College
University of Colorado-Boulder
Columbia University
University of Connecticut
Cornell University
Drexel University*
Duke University
University of Florida
Florida Atlantic University
Florida State University
George Washington University
University of Georgia
Georgia Institute of Technology
Georgia State University
Harvard University
University of Houston*
University of Illinois
Indiana University
University of Iowa
Jackson State University
University of Kansas
Kent State University
University of Kentucky
Louisiana State University
Louisiana Tech University
University of Maryland*
University of Massachusetts*
Massachusetts Institute of Technology
University of Memphis
University of Michigan
Michigan State University
**No Data—Did Not Respond
University of Oklahoma
Oklahoma State University
University of Oregon
University of Pennsylvania*
Penn State University
University of Pittsburgh
Purdue University
University of Rochester
Rutgers University-Newark
University of South Carolina
University of South Florida
University of Southern California
Southern Illinois University
Stanford University
SUNY-Binghamton
SUNY-Buffalo
Syracuse University
Temple University
University of Tennessee
University of Texas-Arlington*
University of Texas-Austin
University of Texas-Dallas
Texas A&M University
Texas Tech University*
Tulane University
University of Utah
University of Virginia-Graduate
Virginia Commonwealth University
Virginia Polytechnic Institute and State University
University of Washington
Washington University
Washington State University
University of Wisconsin-Madison
Yale University
**Elected Not to Participate
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Table 2:
1.
2.
[University]
Survey
currently grants a doctoral degree in accounting:
YES
NO
Which approach(es) to Accounting Theory do you prefer:
Circle All That Apply
A.
CPA Review Course
B.
Traditional (Edwards and Bell, Paton and Littleton, Sterling and Chambers, Hatfield, Devine, etc.)
C.
Contemporary (Current Issues Facing FASB)
D.
Historical (History of Accounting and Review Development of GAAP)
E.
Economic (Economic Transactions—Firm Value)
F.
Accounting Matters in the World—Information for Decisions
G. Other: _______________________________________________________
3.
Do you offer a course titled “Accounting Theory” or is a course considered to deliver
“Accounting Theory” offered at either the undergraduate, master’s, or Ph.D. level:
YES
A.
If NO, is Accounting Theory “integrated” into the accounting curriculum at any level:
B.
If Accounting Theory is offered or “integrated,” at what level:
C.
If YES (Accounting Theory Course is offered), then what course materials are used:
Undergraduate
NO
YES
M.S.
NO
Ph.D.
Circle All That Apply
1.
READINGS—Journal Articles
2.
TEXTBOOK (Title, Author) ____________________________________
3.
COMBINATION
If you would like a summary of our research, please leave your e-mail address: ___________________________
Please return via FAX
Table 3:
Accounting Theory Textbooks
William H. Beaver, Financial Reporting: An Accounting Revolution, 3rd ed., Prentice Hall, 1998.
Carl T. Devine, Studies in Accounting Research # 22 (I-V), AAA, 1985.
Thomas G. Evans, Accounting Theory: Contemporary Accounting Issues, 1st ed., South-Western, 2003.
Vernon Kam, Accounting Theory, 2nd ed., Wiley, 1990.
Richard G. Schroeder, Myrtle W. Clark, and Jack M. Cathey, Financial Accounting Theory and Analysis,
7th ed., Wiley, 2001.
William R. Scott, Financial Accounting Theory, 1st ed., Prentice Hall, 1997.
Ross L. Watts and Jerrold L. Zimmerman, Positive Accounting Theory, 1st ed., Prentice Hall, 1986.
Harry I. Wolk, Michael G. Tearney, and James L. Dodd, Accounting Theory: A Conceptual and Institutional
Approach, 5th ed., South-Western, 2001.
Stephen A. Zeff and Bala G. Dharan, Readings & Notes on Financial Accounting, 5th ed., Irwin/McGrawHill, 1997.
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Table 4:
Accounting Theory Course Materials
Materials used in the accounting theory courses consisted of:
Readings (Journal Articles)
37
Other Texts, Intermediate, Advanced, FASB, GAAP, Gleim, Delaney, etc.
14
Accounting Theory Textbooks:
19
Beaver
3
Devine
0
Evans
2
Kam
0
Schroeder, et al.
5
Scott
3
Watts and Zimmerman
1
Wolk, et al.
3
Zeff and Dharan
2
Table 5:
Accounting Theory Defined
Sixty-one of the 79 programs described an approach to “Accounting Theory” as one or a combination of:
Contemporary (Current FASB Issues)
40
Economic (Economic Transactions—Firm Value)
39
Historical (History of Accounting and Review of GAAP)
21
Accounting Matters in the World—Information for Decisions
15
Traditional (Edwards and Bell, Paton and Littleton, etc.)
14
CPA Review Course
3
TOTAL
132
theory, offering accounting theory courses or curricula
integration, and determining source materials used will
be surveyed to determine if possibly a “trickle down
effect” exists from doctoral programs. ■
Craig R. Ehlen, DBA, CPA, CFE, is professor of accounting at the University of Southern Indiana, Evansville, Ind.
He can be reached at (812) 464-1785 or [email protected].
Richard Rivers, Ph.D., CPA, is associate dean, College of
Business Administration, Southern Illinois University—
Carbondale, Carbondale, Ill. He can be reached at
(618) 453-7966 or [email protected].
G.R. Cluskey, Jr., DBA, CPA, CFE, is professor of accounting at Troy University Dothan, Navarre, Fla. He can be
reached at (334) 983-6556, ext. 1266, or [email protected].
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E N D N OT E S
1 American Accounting Association (AAA) Executive Committee, “A Tentative Statement of Accounting Principles Affecting Corporate Reports,” The Accounting Review, June 1936,
pp.187-191; AAA, “Accounting Principles Underlying Corporate Financial Statements,” The Accounting Review, June 1941,
pp. 133-199; AAA Committee on Concepts and Standards
Underlying Corporate Financial Statements, “Accounting Concepts and Standards Underlying Corporate Financial Statements,” 1948 Revision, The Accounting Review, October 1948,
pp. 339-344; AAA Committee on Concepts and Standards
Underlying Corporate Financial Statements, “Accounting and
Reporting Standards for Corporate Financial Statements: 1957
Revision,” The Accounting Review, October 1957, pp. 536-546.
2 AAA, A Statement of Basic Accounting Theory, 1966.
3 AAA, Statement on Accounting Theory and Theory Acceptance, 1977.
4 Carl T. Devine, Essays in Accounting Theory (Studies in Accounting
Research), AAA, 1985, p. 15.
5 Thomas G. Evans, Accounting Theory, Thomson South-Western,
2003, p. 16.
6 Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield,
Intermediate Accounting, 11th ed., John Wiley & Sons, 2004,
pp. 36-39.
7 William A. Paton and A.C. Littleton, An Introduction to Corporate Accounting Standards, AAA, 1940.
8 Robert T. Sprouse and Maurice Moonitz, A Tentative Set of
Broad Accounting Principles for Business Enterprises, AICPA, 1962.
9 A Statement of Basic Accounting Theory, 1966; Ray Ball and Philip
Brown, “An Empirical Evaluation of Accounting Income
Numbers,” Journal of Accounting Research, Autumn 1968,
pp. 159-178.
10 AAA Financial Accounting Standards Committee, “Fair Value
Measurements,” Accounting Horizons. September 2005, pp. 187196.
11 Paul Frishkoff, “Some Radical Thoughts on Accounting Theory,” Journal of Accounting Research, Spring 1976, pp. 178-180.
12 Ross L. Watts and Jerrold L. Zimmerman, “Towards a Positive
Theory of the Determination of Accounting Standards,” The
Accounting Review, January 1978, pp. 121-133; Watts and Zimmerman, “The Demand for and Supply of Accounting Theories: The Market for Excuses,” The Accounting Review, April
1979, pp. 273-301; Watts and Zimmerman, “Positive Accounting Theory: A Ten Year Perspective,” The Accounting Review,
January 1990, pp. 131-153.
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