Accounting Courses Online

Recent 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.

Economics Test – UMB PTN 2009

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 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 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.
ACCOUNTING THEORY
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 principles 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. 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.
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 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. 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. 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 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. Even if we accept the going concern assumption, using historical cost is somewhat questionable in many situations. 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.