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Working Papers

2005

Creating a Science of Accounting: accounting

theory to 1970
M. Gaffikin
University of Wollongong, [email protected]

Publication Details
This working paper was originally published as Gaffikin, M, Creating a Science of Accounting: accounting theory to 1970, Accounting
& Finance Working Paper 05/08, School of Accounting & Finance, University of Wollongong, 2005.

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 Creating a Science of

05/08 Accounting: accounting

theory to 1970

University of Wollongong
School of Accounting & Finance Working Papers Series

M J R Gaffikin

School of Accounting & Finance

University of Wollongong
Wollongong NSW 2522
Australia

Tel +61 (2) 4221 3718

Fax +61 (2) 4221 4297
eMail [email protected]
www.uow.edu.au/commerce/accy/
Creating a Science of Accounting:
accounting theory to 1970

Michael Gaffikin
University of Wollongong

This paper describes the development of what has been regarded as accounting theory
concentrating largely on that in the first 70 years of the 20th century. It demonstrates that
a major motivation for this theory was the generally accepted belief in the need for
greater conceptual rigour in accounting theory and research. A major part of this
theorising was designed to solve a major accounting problem, viz accounting in periods
of changing prices, notably inflation. In examining this early theorizing the paper
describes the elements of theories and their use by academic theorists, practitioner
theories and theories from various committees.

The general aim of theory is to provide a reasoned basis for practice. Attempts at
constructing accounting theory have been with a view to improving accounting practice.
Prior to the twentieth century there were few attempts at providing an accounting
“theory”, the main aim being to provide instruction in accounting. However, the twentieth
century can be seen as a period in which the accounting profession sought to determine a
more theoretical foundation for accounting from which appropriate practice could be
derived. This search took many forms from mere descriptions of extant practice to the use
of highly sophisticated data collection and analysis through the use of complex tests for
statistical significance as well as, at times, fiery philosophical debate. To be successful a
theory must win acceptance – it must be acceptable to the vast majority of those involved
with the practice of the discipline. Throughout the twentieth century there were very
many attempts to develop an acceptable theory and they appeared in many different
forms. This chapter is devoted to examining some of these, to determine why and how
they arose and to making some assessment as to their success.

Also, as indicted in the previous chapter, in order to understand how we gain our
understanding of ourselves and our environment and, therefore, how we create theories to
assist us in this understanding we need to examine the origins of the terms and ideas used
in the theories. Consequently we need to employ some of the tools of the historian.
However, this does not imply that we merely establish a chronology – a list of dates on
which events occurred – or that there is any linear cause and effect. What we want to do
is to uncover the context in which the ideas arose in order to better appreciate them. In
the twentieth century there were several major social upheavals which had a considerable
impact on all aspects of human societies, including how accounting is practiced.
Knowledge of the circumstances surrounding these social disruptions and changing
practices better helps us understand our present. It does not mean we recreate the past or
implement past solutions to present problems but merely that our understanding of such
past occurrences may assist in our better appreciating the present. For example, we could
ask ourselves what was the impact on accounting practice of world wars, economic
 Accounting Theory, Chpt 2, p 2

depression, increasing complexity in business ownership and control, rapidly changing

information technology, economic internationalisation then globalization, the
development of new financial instruments and many other things?

Early Attempts

Accounting as we know it is based on the system of recording known as double entry

bookkeeping. Although accounting did exist before double entry came to be widely used,
since its appearance its use rapidly spread across the world and today it is difficult to
imagine accounting without it. It has been so important that, to some extent, its
appearance may be viewed as the origins of modern accounting. No evidence exists that
can serve to date the appearance of double entry but the oldest, surviving written record is
in an appendix to a book by Fra Luca Pacioli published in 1494 and for many years he
was regarded as the inventor of double entry bookkeeping and the “father of accounting”.
Others have argued that it existed long before Pacioli’s book and had been in use outside
Europe many years before it was adopted in Europe – perhaps in China, perhaps in
Korea, perhaps in India or perhaps in the Arab dominated medieval world. This is not the
place to enter into debate on the origins of double entry bookkeeping. However, its use in
Europe since that date has been a dominant feature of the European business
environment.

If we are interested in the genealogy of (modern) accounting then the adoption of double
entry is a significant element in its origins. Why did double entry appear and very quickly
come to dominate the spread of accounting? An accounting writer, A C Littleton, has
suggested reasons for its appearance. He refers to the seven antecedents of accounting or,
in other words, the conditions that arose that made it inevitable that double entry would
emerge and be quickly adopted. He divided his antecedents into two groups. There were
those that he classified as media, namely, writing, arithmetic, money; and those he
referred to as institutional, namely, commerce, capital, private property and credit. All
have become so much a part of our everyday life now that we take them for granted but
there was a time when they did not exist as we now know them. All were either emerging
or becoming more important in the fifteenth century Italian states – in the Early
Renaissance – at the beginnings of modernity. Previts and Merino in a table in the
Preface to their book indicate that most of Littleton’s antecedent existed in some form
well before this time (1998, p xvi). However, what is important is that they coalesced -
came together - around this time to provide an impetus for the development and growth
of trade and commerce that forms the basis of the “modern economy”.

The Growth of the Modern Economy

As indicated in the last chapter, the terms modern, modernity and modernism are
constantly debated. In everyday use modern usually means up to date with recent
developments, whether it be fashions, music, technology or ideas. If it is used in
reference to art it often and popularly means non-representationlism, such as abstract art
or art since the middle of the nineteenth century. However, in respect of the history of
ideas the term modernity is used to indicate the break from traditional societies brought
about by the Renaissance or more particularly the Enlightenment. Traditional, feudal
 Accounting Theory, Chpt 2, p 3

societies are perceived as having hindered economic development. Modernity is viewed

as having brought about the radical changes in economies which resulted in
industrialisation, specialization and the greater and more creative use of capital resulting
in the development of a system that promoted the effective use of capital – capitalism.
Double entry bookkeeping was a device that facilitated the growth and expansion of
economic modernity. This is largely due to the fact that it is an ordered system of
maintaining financial records and was able to provide decision makers with information
vital to the maintenance of businesses and later, as it developed into accounting, it
enabled the establishment of systems of (cost) control. The Enlightenment ideals were an
essential foundation for modernity and many aspects of social activity went hand in hand.
For example, the growth of (modern) science produced new technologies that could be
exploited economically, hence the growth of trade and commerce and the expansion of
capital needed to develop the new technologies.

The Enlightenment influenced very many aspects of societies. Some of the influences
were very positive but some were not so desirable. So, while in some parts of the world
the new ideals led to political revolutions (for example, in France and the United States of
America), in Great Britain, a “nation of shopkeepers” was bringing about an industrial
revolution which gradually spread to other parts of the world. The legacy of the
Enlightenment has been constantly debated through the centuries by scholars with very
diverse interests. What is certain is that, through the progress of modernity, it has greatly
influenced all aspects of life and continues to do so today.

The Birth of Modern Accounting?

While this is a rather simplified description it draws attention to some of the implications
of the spread of modernity. Whether double entry bookkeeping resulted from the growth
in industrialization and the development of business organization or whether
bookkeeping made possible the growth of industrial development and business
organizations has been debated in other places. What is clear is that the ordered system of
double entry bookkeeping was extended with new and additional developments to
accommodate the expanded forms of business and economic activity and organizational
structures. It could be claimed that at this stage bookkeeping became “modern”
accounting. That is, previously bookkeeping fulfilled a stewardship function in that it
made possible the recording of the results of economic activity to indicate to the
providers of the capital the success or failure of various ventures. However, with the
growth of factories and industry financial information was used to assist in everyday
decision making – what was the cost of material, the cost and productivity of labour, how
were price and cost related (break-even analysis)? Gradually these activities became part
of what was regarded as accounting – information of a financial nature became the
domain of the bookkeepers and later accountants.

It should be noted that manufacturing and industrialization had existed earlier and it is
claimed that
. . . a market-based economy led to the development of techniques for
gathering cost information for manufacturers in, for instance fourteenth-
 Accounting Theory, Chpt 2, p 4

century Italian, English, Flemish and German commerce. (Chatfield and

Vangermeersch, 1996, p 180)
Nevertheless, it was the greatly increased manufacturing activity of the Industrial
Revolution starting in the latter part of the 1700s that created increased demand for
different and new forms of financial reports and information. 1

The Joint Stock Company

The Industrial Revolution also contributed to major changes in the form of business
organization and ownership. The magnitude of some new economic activities required
additional financial resources. It became increasingly difficult for individuals or small
groups of individuals to provide these resources so larger groups of people contributed
the necessary capital which led to the development of the modern corporation – the joint
stock company. The company enabled the greater accumulation of capital needed to meet
the greater costs associated with industrialization. It also resulted in the increasing
separation of management from ownership as management became more specialized. A
new accountability relationship developed between the management and owners. New
laws were created to facilitate the development of the company and protect all those who
dealt with these new organizations – especially the shareholders as providers of the
capital. This accountability was satisfied with the provision of information on the
management of the companies to the shareholders. A large part of this was in the form of
an annual report containing financial statements. This was reinforced by the additional
legal requirement of an independent assessment of the veracity of the financial
statements; this was the birth of modern financial auditing.

As mentioned above, this is a simplified description of the history of accounting.

However, the intention is to draw attention to the fact that accounting has grown in
response to social and institutional developments. Thus, accounting is very much a social
construction. It has grown in response to a demand created by dominant economic and
social forces. Modernity brought about new processes of economic activity and
accounting grew to facilitate these developments. Therefore, accounting has been very
much a part of the dominant economic ideology, the belief in certain economic ideas that
were seen as best suited to economic progress and development. As the economic activity
expanded it needed novel concepts of cost determination and control, capital
accumulation and accountability, periodic profit determination and many other aspect of
accounting which are now taken for granted. In so doing it served to protect the interests
of capital providers, a notion which went unquestioned until the latter part of the
twentieth century. For example, employees were seen as a “factor of production” and as
such there was a belief that cost of labour needed to be controlled like all other costs. As
a result many systems for the monitoring and control of labour were devised by
innovative entrepreneurs and their accountants who sometimes seemed to have been
unaware that workers were their fellow humans.

1
There are several works on the history and development of cost and management accounting; see for
example, Wells, M C, “Some Influences on the Development of Cost Accounting, Accounting Historians
Journal, 1977, pp 47-61. One of the most influential sources is Paul Garner’s Evolution of Cost Accounting
to 1925, Garland, New York, 1990 (reprint) although it makes the modernist assumption of steady progress
and development, that is, evolution.
 Accounting Theory, Chpt 2, p 5

Professionalisation of Accounting
Another consequence of the additional demand for accounting and accountants was the
formation of professional accounting bodies to protect and monitor the activities of those
offering accounting services. Professionalisation is a process of socialisation. That is, if
the activities of those offering accounting services can be controlled this may be a great
social advantage and protect societies from the behaviour of unscrupulous individuals and
also ensure some consistency in what services accountants provide. However,
professional bodies can also then control and direct activities of their members. In so
doing, the question arises as to whose interests the professional bodies see themselves as
serving – their members, the business community or societies at large?

Early Theorising of Accounting

One of the problems the historian faces is that history is always the subject of
interpretation of those presenting it. Therefore the claim that accounting theory is a
twentieth century phenomenon is likely to be questioned. However, for the present
purposes the claim will be made. Prior to this, much of the accounting literature was
designed to serve for instruction in (bookkeeping and) accounting. By the end of the
nineteenth century dissatisfaction with the existing texts led some to attempt to provide a
more intellectually rigorous treatment of the subject.2 In 1908 Charles Ezra Sprague
published his The Philosophy of Accounts which, over the next fifteen years went through
five editions in an attempt to add theoretical rigour and consistency to the teaching of
accounting and to replace the previous practice of students having to learn by rote a series
of rules with a logical and rational system. It was he who also introduced the algebraic
notation of the accounting equation (A = L + P). Some of the ideas in his book had been
determined by earlier writers but Sprague was one of the first authors to present a
rationalization of accounting and the articulation of its various elements. For example,
proprietorship increased through profits. In so doing he restated what had been alluded to
by several authors before him – capital represented the owners’ interest in the entity. This
stressing of the ownership elements was referred to as the proprietorship theory: the
owner (proprietor) is the centre of accounting interest. This became the dominant view
presented in most texts published in the first four decades of the twentieth century.

At about the same time as proprietorship theory was being formalized and accepted an
alternative view emerged. This was known as the entity theory.3 Its emergence as an
important consideration for accounting at this time is directly related to the changing
nature of the modern corporation. As corporations grew in size and significance the
separation of ownership and control became more pronounced. Some believed that as the
corporation existed as a separate legal entity, accounting for the company should reflect
the interests of the company and not what the proprietorship theorists held: the
shareholders (the owners). In entity theory, the shareholders become just one group of
equity providers so profit measurement should not be viewed as the determination of
potential dividends for shareholders. Profit is what is available to management to
2
For example, George Soule published his Soule’s New Science and Practice of Accounts in 1881.
3
Once again the history of the entity theory has been traced back much earlier than the turn of the century.
 Accounting Theory, Chpt 2, p 6

distribute to owners and to other parties such as through interest payments and taxes.
Therefore, management had a right to retain profits for the future development of the
company because it accrued to the company not the owners.

Taken at face value there appears to be little difference in terms of bookkeeping between
the two theories. However, each represents a very different set of assumptions.
Assumptions form an important part of theorising so the differences will be reflected in
the elements that comprise the accounting theory. For example, the proprietary theory
holds that profits are increases in the capital of the shareholders. On the other hand, entity
theory holds that it is attributable to the company itself. Consequently the important
elements of its determination may change such that the former will view the balance
sheet as the most significant statement and all measurements should be at historical costs.
Entity theory is designed to reflect economic rather than legal considerations and profit
then becomes a major element in the company’s survival such that the profit and loss
statement becomes the more significant document with resources measured in terms of
their future economic benefits (that is, to maintain the future continuation of the
company). With entity theory, profit became a measure of managerial efficiency and an
indication of future earnings.

The best known exponent of the entity theory was William Paton and its expression is
found in his book of 1922, Accounting Theory. Paton was to exert an immense influence
on accounting in the United States but his strong advocacy of the entity theory never won
full acceptance by the accounting community for very many years. However, elements of
it did find their way into accounting thought and practice. His realisation of the changing
nature of the corporation was perceptive as the corporation has come to dominate the
economic affairs of most societies and they have long since departed from what was
probably the original intention of merely accumulating capital to permit expanded
economic activity.

Corporations, Crises and Accounting

In the twentieth century there were several major social disruptions which impacted on
accounting. The development of accounting thought and theory for most of the century
was dominated by developments in the USA. Although there were some developments in
some European countries, the ideas behind which significantly impacted on US
accounting thought, most of the overt developments in accounting found expression in
the USA.

Consolidated Financial Statements

As alluded to earlier, there were significant developments in the corporate form of
business organization towards the end of the nineteenth century. The dominant economic
ideology was laissez-faire capitalism – minimum government regulation of economic
activity. Businesses developed and grew stronger, and bigger. One method of growth was
by stronger businesses subsuming weaker ones. As legal entities, companies started
buying the shares of other companies leading to some corporations owning a proportion
 Accounting Theory, Chpt 2, p 7

of the issued capital sufficient to enable them to “control” that company: the former
became the holding company, the latter its subsidiary. Consistent with an entity theory
type of philosophy, the holding company then issued consolidated financial reports which
reflected the financial position of the economic unit rather than the strictly defined legal
entity (entities). Because corporate financial reporting was regulated through the
Companies Acts in the UK and Commonwealth countries, such as Australia, consolidated
financial statements were not commonly encountered until after their recommendation in
the legislation of the 1930s. However, in the USA they were common before the First
World War (1914-18) and were expected to be prepared by investors and investment
advisors in the 1920s. Thus, the changing nature of the company was shaping
developments in accounting which supports the view that accounting responds to social
pressures.

Economic Disaster
The business optimism of the 1920s is well known as is its abrupt end in the “Crash” of
1929 which started in the US but soon spread around the (Western) world. This crisis
proved to be one of the most important influences on accounting thought. There was first
the issue of professionalism – who could be an accountant or offer accounting services.
Then, how were the activities of these “accountants” to be regulated? Thirdly, there were
questions concerning the lack of a conceptual or theoretical basis for accounting practice
which would lead to consistent and uniform practices. Accounting practices in the 1920s
were many and varied, some deliberately designed to mislead, some were highly
questionable as a result of the ignorance of those carrying them out but all were lacking a
“principled” basis. In the rest of the twentieth century the accounting profession sought
those principles which would be generally accepted by the practicing community –
GAAP, generally accepted accounting principles.

The Professional Bodies’ Search for Principles

One immediate consequence of the economic crash and the ensuing public outcry was the
establishment of the Securities and Exchange Commission (SEC), a governmental
regulatory body whose responsibilities included ensuring appropriate and full disclosure
of accounting information by listed companies to their shareholders. Regulation was
viewed as a challenge to the professional status of accountants so to avoid total
government regulation of accounting the profession responded by seeking those GAAP
that would ensure accounting information would be reliable. This “search” lasted for the
rest of the century, taking slightly different forms but with essentially the same basic
idea, namely, the establishment of a theoretical foundation for accounting.

There are three broadly defined periods in which the profession in the USA attempted to
determine this theoretical base, each marked by a different organizational structure:
1. 1938 to 1958 - the Committee on Accounting Procedure (CAP),
2. 1959 to 1973 - the Accounting Principles Board (APB), and
3. 1973 on - the Financial Accounting Standards Board (FASB).

It was the express intention of CAP to develop a theory of accounting to help solve the
problems in accounting. However, the task proved too big and CAP was reduced to
 Accounting Theory, Chpt 2, p 8

issuing, over its life, fifty-one Accounting Research Bulletins (ARBs). Although well
intentioned these pronouncements were criticised as representing a “bushfire” approach,
that is, a problem emerged and an ARB was issued to “put out the fire”. CAP was a
volunteer organization comprising members voluntarily giving their time. It never
succeeded in ever achieving a firm authoritative status. Consequently it could not
“enforce” its pronouncements and even its own members disagreed significantly over
proposed solutions to problems (see Zeff, 1984).

In 1959 a new approach to determining an acceptable accounting theory was created: the
APB was established with a semiautonomous, full time, research division, the
Accounting Research Division (ARD) which was charged to provide Accounting
Research Studies (ARS) which were to be the basis of the accounting standards, called
Opinions, issued by the ABP. The APB had eighteen to twenty-one members who, like
the CAP were all part timers and all were accountants. The APB did not last as long as its
predecessor and, after considerable controversy and debate, it was replaced by the
Financial Accounting Standards Board (FASB), a body that continues to exist today.
Members of the FASB are full-time and not all are accountants as other “interested
parties” (other stakeholders) are represented.

The Search of Others for Principles

The professional body’s response to the demand for principles on which to base
accounting practice was mainly through its committees described above. Some felt that it
would not be possible for practitioner bodies to develop a sound theoretical foundation as
there was always the potential for a conflict of interests if a proposal affected the reported
financial position of a major client. Therefore attention was turned towards the largely
academic body, the American Accounting Association (AAA), which it was felt was
more disinterested and therefore capable of establishing accounting principles. The AAA
issued a series of statements, the first of which was published in 1936 under the heading
of “A Tentative Statement of Accounting Principles Affecting Corporate Reports”. It was
re-issued in revised form in 1944 and 1948. Practitioners believed the statement departed
too much from practice – accounting principles should be no more than reflections of
existing practice. Therefore, the professional body responded by commissioning another
report which was published in 1938 and entitled a Statement of Accounting Principles and
was written by Sanders, Hatfield and Moore. The report consciously sought to catalogue
best practice and the statement was merely a listing of what practitioners believed to be
best practice with no “theoretical” speculation or conceptualisation.

In 1940 the AAA published a sponsored monograph by W A Paton and A C Littleton

entitled An Introduction to Corporate Accounting Standards. This was to be one of the
most influential works in the accounting literature (AAA, 1977, p 9) and it went through
various reprints and is still used in some university courses today. It was significant in
that it represented the work of two of the most influential accounting professors in the
USA and took a conscious “theoretical” approach. It introduced notions such as the
matching concept and, unlike other works of the same period, represented a serious
attempt to establish an entity theory perspective.
 Accounting Theory, Chpt 2, p 9

Elements of Theories

The reason for the brief historical background to the search for accounting principles
above is that such search was for a theoretical foundation for accounting, a rational basis
for accounting practice. In each of the attempts described above (and others) there are
features the authors believed were necessary for the construction of a theory of
accounting. Various terms are used to indicate these elements. In fact so many terms were
introduced into the literature that there was at times confusion as to what they indicated.
It is important to appreciate these terms in order to appreciate the process of theorising,
the construction of theories.

So much energy was expended in the search for generally accepted accounting principles
(GAAP) that it seems that most people believe a principle to be an important and
fundamental element in a theory. The word principle has various shades of meanings. In
one sense it means a rule, law or belief which determines actions. For example, you live
by your principles. It also means a fundamental truth or proposition on which many other
truths or propositions depend. The American Institute of CPAs (AICPA) in sponsoring
the search for GAAP of the ARD used the term in both senses by describing a principle
as
A general law or rule adopted or professed as a guide to action; a settled
ground or basis of conduct or practice . . . . (Moonitz, 1961. p 1)

They also claimed that postulates would form the basis of principles:
. . . initially, accounting postulates are derived from experience and
reason; after postulates so derived have proved useful, they become
accepted as principles of accounting. (quoted in Moonitz, 1961, p 1)

Accounting research Studies

Consequently, the ARD first undertook to establish the basic postulates of accounting
(Moonitz, 1961) on which broad principles for business enterprises (Sprouse and
Moonitz, 1962) could be built. In seeking the principles the authors claimed that GAAP
to date had been directed to accounting for large corporations; they intended to establish
principles to apply to accounting for all entities.

Both ARS 1 and ARS 3 were consciously developed on modernist theory construction
lines. Many other terms are employed such as axioms, concepts, assumptions, definitions,
propositions, hypotheses, premises, primitives and others. There is very little difference
in the meanings of postulates and axioms as both are regarded as self evident truths and
cannot be proved; similarly with definitions and primitives. There are fine shades of
differences in the meanings but for everyday purposes these differences are not important
However, the terms are used by different writers in different situations which tends to
confuse the uninitiated. Propositions, hypotheses and premises are also similar in
meaning but are generally used in different contexts. They are all conjectural statements.
Premises are statements used in (deductive) logic; propositions are used in theory
construction and hypotheses are used in research used to establish theories. Unlike the
 Accounting Theory, Chpt 2, p 10

earlier described terms, propositions, hypotheses and premises can be true or false and
research is often designed to prove their truth or falsity. Concepts are not true or false but
are single or compound terms.

A Conceptual Framework
Unfortunately, all these terms and expressions are found in the accounting literature so it
is important to be aware of their meaning if there is to be an understanding of accounting
theory. This is evident in the Accounting Research Studies 1 and 3 – one refers to
postulates, the other to broad accounting principles. In fact, the profession, as described
above, was searching for generally accepted accounting principles which would form the
basis of a theoretical foundation of accounting. With the demise of the APB and its ARD
the profession turned to establishing a conceptual framework for financial reporting. This
was to be the theoretical basis on which to build an accounting theory.

Figure 2.1 presents a simplified visual scheme of the process of theory construction. The
starting point for the process of theorising will be based on assumptions. These will be
beliefs about the area to be subject to the research or theorising. They will include what
some writers refer to as objectives. That is, an objective will emerge from an assumption
that there is some “problem” worth theorising or researching. Advocates of modernist
theorising could not provide an answer to the question of how assumptions emerged.

SCIENTIFIC THEORY CONSTRUCTION

ASSUMPTIONS

Axioms/postulates/principles/definitions

HYPOTHESIS
testing
CONCEPTS THEORY
deduction

induction
replication

measurement
EVERYDAY WORLD
SCIENTIFIC LAW

FIGURE 2.1 Scientific theory construction.

 Accounting Theory, Chpt 2, p 11

In order to overcome the problem of not being able to describe the initial stages of
theorising, philosophers of science distinguished between a context of discovery and a
context of justification. It was to the latter that they directed attention because they
believed that it was not possible to reconstruct (and describe) the former which was
“psychologism”. That is, they believed it was not possible to recreate and explain how
theorists came up with their original ideas – it was a creative activity and part of their
psychology (mind) in the same way an artist conceives of a work of art. Therefore,
descriptions of modernist, scientific method have concentrated on how theories are
“proved” and demonstrated to solve problems – how they can be justified.

Assumptions will be based on past knowledge, or knowledge and understanding gained to

date. Some will clearly be derived from observations of the everyday world and they are
said to be derived a posteriori – knowledge derived from experience. Its opposite is a
priori – knowledge independent of experience: ideas we have but cannot precisely state
why in terms of direct experiences. Although the terms are Latin ones, the distinction
between the two types of knowledge are derived from Aristotle. They have been the
subject of considerable debate in Western philosophy. They have also been employed in
the accounting with a priori coming to mean an inferior type of knowledge.4 The field of
ethics relies on a priori knowledge in that we assess it in terms of prior beliefs and
prejudices the derivation of which we cannot necessarily specify other than through
general statements such as “it is a result of my upbringing”. On the other hand we can
observe the effect on share prices of a change in accounting method so, our knowledge is
directly related to experience and is said to be derived a posteriori.

False Dichotomies
The claim that some accounting theories are a priori theories and others are a posteriori
is, as will become clear later, one of great misconceptions in accounting. Another great
accounting misconception is the claim that some theories are deductive theories and some
are inductive.5 It is clear from Figure 2.1 that modernist theory construction employs both
inductive and deductive (recall the syllogism described in the previous chapter)
reasoning. The only difference is in the emphasis placed on deduction or induction.
However, they are tools of theorising not different types of theorising. Hypotheses will be
derived from a process of deduction using concepts derived from a priori knowledge
(such as postulates and principles) and a posteriori knowledge (a process of induction
through observations of the everyday world). Some theories will make greater use of
induction (claiming to describe reality) while others will combine observations
(induction) with previously held theories and beliefs. However, even the so-called
descriptive theories will be based on a set of prior beliefs and assumptions about the

4
See Nelson, Carl L, “A Priori Research in Accounting”, in Dopuch N and L Revsine (eds) (1973),
Accounting Research 1960-1970: A Critical Evaluation, Champaign Urbana, Centre for International
Education and Research in Accounting.
5
This was probably introduced into accounting by one of the earliest textbooks in accounting theory,
Hendriksen, E S (19 ), Accounting Theory, Richard D Irwin, but has persisted in theory texts and other
accounting literature since.
 Accounting Theory, Chpt 2, p 12

phenomena being theorised or researched6. The emphasis will then turn to the context of
justification; that is, how systematic the testing is (for example see Nelson, 1973,
especially pp 14-16). Consequently, there will certainly be a difference in emphasis but
all will employ the same basic tools of theorising – induction and deduction – as well as a
priori and a posteriori knowledge.7

A simpler description of this theorising process is referred to as hypothetico-

deductivism (sometimes referred to as the covering law model or deductive-nomological
method) which philosophers such as Karl Popper believe to be the essence of scientific
method. In this form an hypothesis is proposed and certain statements are made as
premises (antecedent conditions) from which a conclusion (theory?) is deduced which
will then need to undergo a process of rigorous empirical testing to determine whether the
hypothesis is “true” or not. For example, we could start with an hypothesis that lead is
heavier than water from which we can deduce certain conclusions such that lead will sink
in water. We then test the proposition by experimentation – placing lead in water. If it
sinks we have confirmed the original hypothesis. While this is a simple example a series
of such confirmed hypotheses can be interrelated and make up a complex system of
theories. The emphasis is on empirical testing to confirm the proposition. As explained in
the previous chapter, testing was initially thought to be able to verify theories. However,
because of the problem of induction, Popper proposed that testing should be used to try to
falsify a proposition and until, after extensive testing. A proposition is demonstrated to be
false it should be accepted as “true” or confirmed. His ideas are referred to as
falsificationism or critical rationalism.

Measurement

Many people believe accounting is a measurement-communications process. Sterling

believes that “accounting ought to measure something and then communicate that
measurement” (Sterling, 1970, p 454). Christensen and Demski state that “surely
accounting is a formal financial measurement system. It . . . reports measures of
accounting stocks on the balance sheet and accounting flows on the income statement.”
(2003, p 4)

If measurement is the application of numbers to properties or attributes of things or

events then it is an important aspect of accounting. Financial reports are money number
representations of economic events and resources or commitments of an entity. However,
there has been debate in accounting as to what properties of these events, resources and
commitments are being measured. To Sterling they would be measuring values, while
Christensen and Demski claim that, as accountants, they are measuring informative

6
Similalry with so-called positive and normative theorising: for example, Hakansson makes the statement
“In examining the literature of the social sciences, one is struck by the intertwinement of the positive, or
descriptive, and the normative, or prescriptive” (1973, p 139)
7
This was first made clear by the great philosopher, Immanuel Kant in the eighteenth century and has been
a part of the western philosophical tradition ever since: see his Critique of Pure Reason (1781), Dover
Publications (2003), New York; translated by J M D Meiklejohn.
 Accounting Theory, Chpt 2, p 13

events. Thus, the latter claim that the goals are different – the first views valuations as an
end in itself whereas the other perspective views valuation as necessary only to convey
some information (content). The distinction is difficult to discern as those who see
accounting as measuring values are, as Sterling asserts above, only doing to so to
communicate to users that information.

There are various aspects to measurement. There is a hierarchy of measurement types –

measurement scales. On the simplest level if numbers are simply replacing names as in
the numbers allocated to a football team there is very little we can do with the numbers.
The number may represent the position of the footballer so that is the information being
conveyed by the measures. Adding the numbers would not produce any meaningful
information. This measurement is referred to as the nominal scale. If we ranked objects in
order - first, second, third and so on, it would similarly not produce any meaningful
information if the numbers were added. This is referred to as the ordinal scale. In neither
of these two scales is there any indication of magnitude between measures. Someone
could just come first in a race but the third place getter could be quite a distance back. So,
while the ordinal scale provides more information than the nominal scale both are very
restricted in the information they convey and would not seem to be of much use in
accounting. Accounts could be represented by numbers rather than verbal descriptions
and they could be ranked in some order of importance but neither type of measure would
be useful in conveying financial information to users. A third scale, the interval scale,
comprises numbers with a fixed interval between each measure. This is much more
relevant to accounting as numbers in monetary units indicate considerably more
information. Two dollars is twice one dollar and the reason is that there is a rational zero
and then numbers in equal increments (one dollar is 100 cents). Most accounting
measures would be on this scale. A fourth scale is the ratio scale in which, as its name
implies, the relationship between two or more measures is the objective. For example, in
accounting, financial analysis involves determining the relationship between different
measures – the measure of current assets is twice that of current liabilities.

The significance in being aware of measurement scales lies in the permissible

mathematical operations – addition, division, multiplication etc– how the numbers can be
used and related to each other?

A further distinction in measurement is how the measures are obtained. If they are
directly derived from the object or event they are said to be fundamental measures. If
they are the result of two or more fundamental measures they are said to be derived
measures. A fundamental measure is supposed to bear a direct relationship to the
properties being measured. For example, the statement I have $200 in my wallet means
that I have notes (and coins) that add to 200 monetary units, that is dollars, which can be
directly observed. Although in some instances there would be general agreement as to the
measure there are very significant ontological implications of measures – to what extent
they represent a “reality” or the “truth”. Largely as a result of the inability to get
agreement as to the most appropriate measures there is another type of measurement
being increasingly used in accounting: measurement by fiat. This is where a measure is
arbitrarily determined and mandated. As the world moves toward global accounting
 Accounting Theory, Chpt 2, p 14

standards – international financial reporting standards (IFRS) – there is a strong tendency

for the regulators to dictate how to measure various items. Measurement by fiat is
measurement by decree.

Measurement in theory construction

Measurement is important in modernist theory construction (see Figure 2.1) as it relates
to how and what information is used to construct the theory and to determine the success
or not of the theory. Observations are inductively derived so if they are to be useful they
will probably have to be converted to a common basis as the input to the theory. This will
usually involve conversion to numbers. For example, many theories rely on descriptions
of stock market reactions to an accounting event so will be reflected in share prices at a
point in time or over a period of time. Once the hypotheses have been determined it will
be necessary to test them. This will also necessitate comparison of data (numbers) with
observations. This will provide the feedback to the theory – if the observations conform
to the prediction in the hypotheses then the theory will be accepted; if not, the theory
process will continue. Consequently it is vital to know whether the numbers used are
dependable, reliable and accurate. Here too there are epistemological and ontological
questions but they will need to be raised in detail later as a modernist position holds that
the numbers can accurately reflect reality.

Two Statements on Accounting Theory

It seems that the American Accounting Association (AAA), the primarily academic
accounting professional body, was to publish a statement of accounting theory in every
decade. Earlier it had issued tentative and other statements on accounting principles and
standards. In 1966 it published A Statement of Basic Accounting Theory (popularly
known by its acronym ASOBAT) and in 1977 it published A Statement on Accounting
Theory and Theory Acceptance (SATTA). Both statements were the work of committees
of very senior members of the profession. Their contents indicate a major shift in thinking
about theories that took place after the first and before the second were published. In
ASOBAT there is an optimism about the possibility of a single accounting theory; in
SATTA there is a distinct pessimism about this possibility as they found little common
acceptance of the various attempts that had been made to create an accounting theory.
Whereas ASOBAT consciously set out to determine parameters for an accounting theory
(Preface, p v), the SATTA Committee viewed its task as surveying the accounting theory
literature (p 49).

A feature of later modernity, or late capitalism, is the increasing process of

commodification. This is the process in which goods and services are increasingly
produced for “the market”. In western societies almost every aspect of social life is
discussed in terms of its commodification. This has spread to non-western societies so it
can be considered a hallmark of globalisation. The change in the emphasis from
ASOBAT to SATTA is evidence that accounting was not immune to the processes of
commodification in that accounting was increasingly seen as a “commodity” to be
exchanged in markets. That is, accounting produced information and the information was
 Accounting Theory, Chpt 2, p 15

seen as a “good” subject to the conventionally viewed economic pressures of supply and
demand. The implications of this are that new concepts emerge such that there is an
emphasis on users of accounting information and usefulness to these users. Previously,
accounting had been viewed as an “institutional structure”, now it was a process of
information generation that was subject to the vagaries of market supply and demand.
Therefore, whereas ASOBAT, like ARS 1 and ARS 3, was seeking structural elements
which could serve as the foundations for an accounting theory, they were irrelevant in
this newer view. This is illustrated in the view of Milton Friedman (the well known
economist) that the realism of the underlying assumptions of a theory is irrelevant so long
as its predictions are accurate8.

Therefore, despite the statement in ASOBAT that “No one really knows what individuals
or any organization wants [in respect of accounting information], or what they should
want” ( p 69), there was a change in accounting theory formulation to an emphasis of
satisfying users’ wants and this was a major message implicit in SATTA.

The Contribution of Accounting Theorists

Throughout the twentieth century there were several individual accounting writers who
made major contributions to accounting thought. SATTA presents a useful summary of
the work of many of these writers9.

One very important feature of twentieth century accounting thought is the close
association with the discipline of economics. In fact, so strong is this relationship it led
many to view accounting merely as applied economics and others to believe accounting
must be based on current dominant economic theory. If this is true then there seems little
point in attempting to develop an accounting theory as accounting becomes a
technological extension (the measurement aspect) of economic theory! The influence of
economics came early as the teaching of accounting in universities (first in the USA and
then in other countries) was invariably carried out from departments of economics.10
Consequently, the doctoral dissertations of early accounting professors were written by
members of economic departments as economics theses (for example Paton’s Accounting
Theory). Some were written by people who referred to themselves as economists. For
example, J B Canning, was professor of economics and head of the Division of
Accountancy at Stanford University, and wrote a book entitled The Economics of
Accountancy (1929) in which he attempted to restate accounting in economic terms, for
example, assets to be measured as future economic benefits rather than as the result of
other valuation processes. The evidence of the strong influence of economics is seen in
other accounting writers and it is interesting to note the differing economic theories. DR
8
This is a very well-known feature of Friedman’s methodological position and further information on it can
be obtained a very wide range of references to neo-classical economics and the work of Friedman.
9
However, it classifies them as inductivists or deductivists thus perpetuating the mistaken classification of
textbooks writers such as Hendriksen as mentioned above.
10
This was not always the case – remember Sprague wanted a reliable statistical base for accounting
practice. However, long before the twentieth century both disciplines were concerned with similar
phenomena, for example the notion of capital – each arriving at a distinctly different conclusion.
 Accounting Theory, Chpt 2, p 16

Scott’s book, The Cultural Significance of Accounts (1931) shows the influence of
Thorsten Veblen’s institutional economics; Chambers’s work, Accounting, Evaluation
and Economic Behavior (1966) appears to have been influenced by von Mises (Austrian
economics) and Hayek. The work of late twentieth century accounting writing is heavily
dependent on neo-classical economic theory and will be discussed in the next chapter.
There are many other examples.

To many, this influence of economic theory on accounting would not be at all surprising.
However, what is often forgotten is that economic theory does not remain constant.
Accounting will then reflect the current economic hegemony – the current dominant
economic ideology. As such, accounting is ontologically reliant on economic ideology. It
is evident, after examining the perceived major accounting problems in the twentieth
century, that accounting thought changed to reflect an economics basis for attempted
solutions. Thus, there was a change in emphasis away from the balance sheet as a
statement of valuations at a point in time (stock concept) to the income statement to
reflect the return on investment/capital (flow concept). This became so strong in the later
part of the century that accounting was believed by many researchers to reflect the
interests of one group of stakeholders – the investors in publicly listed corporations. This
belief stills holds dominance in this century despite many economic crises and accounting
catastrophes.

In the middle of the 1950s there was a marked change in the type of accounting theory
literature. Two articles, one by Raymond Chambers (1955) and the other by Richard
Mattessich (1956), made calls for greater intellectual rigour in accounting through the use
of the works and ideas of philosophers of science and in making such calls they were
clearly aligning themselves with the modernist movement. One outcome of this a decade
of considerable methodological debate and the publication of several major theoretical
books. These works represent a major part of the intellectual heritage of accounting. In
other disciplines the works of “past masters” are respected and studied. For example in
physics the work of Newton, Maxwell and many others have not been forgotten even
though many of their theories have been replaced by those of Einstein and twentieth
century quantum mechanics. Similarly, the works of Marx, Weber and Durkheim are
studied in sociology despite many of their notions being replaced by newer theories.

A major issue in accounting in the 1960s was asset measurement in times of rapidly
changing price levels – how was it possible to present users with reliable financial
statements when there was such rapid inflation that the figures in the traditional accounts
were quickly outdated and became meaningless? Theorists made various suggested
solutions some of which were relatively conservative, others requiring a radical overhaul
of accounting as it was then practiced. Some even tried to justify the status quo.

Two economists were among the first to publish a major theoretical work in the 1960s –
Edwards and Bell (1961). As economists they argued that the use of historical cost
measures by accountants resulted in totally meaningless information for those concerned
with the survival of the firm (company).Accountants should try to produce information of
what it would cost the firm to continue operating at the same level. Thus they advocated
 Accounting Theory, Chpt 2, p 17

measuring resources at their current market prices – it was replacement cost accounting.
Although revenues would remain much the same as under historical cost, expenses would
reflect the replacement cost at the time they were incurred. Deducting these expenses
from the revenues would result in a measure of current operating profit. A complication
was that the system also required recognizing that if assets are measured at replacement
cost during periods of rising prices there will be what they called a holding gain or loss.
For example the increased (replacement cost) measure of an asset over its (recorded)
historical cost would indicate a “holding gain”. These holding gains (and any holding
losses) should be separated from current operating profits and disclosed as such.

This was, according to Professor Raymond Chambers, of the University of Sydney, too
artificial. In his work he argued that those making decisions about possible courses of
future action most need to know what resources that had at their command which would
enable them to undertake future activities. The replacement price of an asset indicated the
amount needed to replace an asset but gave no indication of how that cost could be met.
Therefore, he argued the most relevant measure of all items was the current market
selling price and his system became to be known as continuously contemporary
accounting (CoCoA). Critics argued that this was contrary to the going concern postulate
as it implied the sale of assets. However, they missed his point – he never advocated the
sale of assets (which would likely result in “low” prices as in a forced sale situation) but
what measure of resources the company had at its command if it sold its asset(s) in the
normal everyday course of business. The was the current cash equivalent at the
command of the managers. A shift to CoCoA would require a radical change in the
actions of accountants and this seemed too much for the professional community as his
ideas were never fully accepted. However, some companies did produce published
financial statements with CoCoA measures. Nevertheless, it is now interesting to note
that regulators require some assets to be reflected in the accounts at “mark-to-market”
which, of course, is essentially the current market selling price advocated by Chambers.

CoCoA was not the only contribution Chambers made to accounting thought and he is
probably the largest single contributor to the accounting literature. As indicated above,
Chambers sought to add greater intellectual rigour to accounting thought and his work
covered many aspects of accounting theory and related fields. He also believed he should
not remain in the “academic ivory tower” so took an active role in the affairs of the
professional bodies and was at one stage the National President of (what is now known
as) CPA Australia. In his work he drew from a diverse range of disciplines and he was
committed to making accounting a discipline which was equal to any science so he can be
classified as a modernist thinker.

Richard Mattessich was as committed to establishing an intellectually rigorous discipline

of accounting as Chambers. However, they differed in how to achieve this and at times
they clashed intellectually. Whereas Chambers was intent on creating a new theory of
accounting (CoCoA), Mattessich was more concerned with establishing a sound
intellectual base for accounting practice as he saw it. He too was a modernist thinker,
with a strong conviction to establishing the scientific credentials of accounting and also
drew from a diverse range of disciplines for his support. In his early career Mattessich
 Accounting Theory, Chpt 2, p 18

was situated at the University of California, Berkeley where he worked with many other
major contributors to accounting thought such as Moonitz (the author of ARS1 and ARS3
discussed above), Carl Devine and others.

Another author of a major work published in the 1960s was Yuji Ijiri whose prime
objective was to establish a sound theoretical base for historical accounting. The central
theme of Ijiri’s work is measurement and his book is entitled The Foundations of
Accounting Measurement: A Mathematical, Economic and Behavioral Inquiry, which
gives an indication of its contents.

There were many other major contributors to the accounting theory literature during this
period but it is not appropriate to discuss them all here11. It is important to note that there
was a large response to the call for greater intellectual rigour by Chambers and
Mattessich. It is also important to note that these efforts were consistent with the general
thrust of the profession since the 1930s, namely, a search for the theoretical foundations
of accounting. All shared a modernist vision; that is, they sought to establish a science of
accounting, believing that science represented the highest standard in determining
intellectual rigour. However, around 1970 these efforts took a new turn and that is the
subject of the next chapter.

11
A fuller discussion can be found in Gaffikin (2003).
 Accounting Theory, Chpt 2, p 19

References

American Accounting Association (AAA) (1966), A Statement of Basic Accounting

Theory, AAA, Evanston, Illinois.

American Accounting Association (AAA) (1977), A Statement on Accounting Theory and

Theory Acceptance, AAA, Sarasota, Florida.

Chambers, R J (1955), “Blueprint for a Theory of Accounting”, Accounting Research, v

6, pp 17-25.

Chatfield, Michael and Richard Vangermeersch (eds) (1996), The History of Accounting,
An International Encyclopedia, Garland Publishing Inc, New York.

Christensen, John A and Joel S Demski (2003), Accounting Theory, An Information

Content Perspective, McGraw-Hill, New York.

Dopuch, N and L Revsine (eds) (1973), Accounting Research 1960-1970: A Critical

Evaluation, Center for International Education and Research in Accounting, Illinois.

Gaffikin, M J R (2003), The A Priori Wars: The Modernisation of Accounting Thought”,

Accounting Forum, vol 27, pp 292-311

Hakansson, Nils H (1973), “Empirical Research in Accounting, 1960-70: An Appraisal”,

in Dopuch and Revsine (1973) pp 137-73.

Ijiri, Yuji (1967), The Foundations of Accounting Measurement: A Mathematical,

Economic and Behavioral Inquiry, New York, Prentice Hall.

Mattessich, R V (1964), Accounting and Analytical Methods: Measurement and

Projection of Income and Wealth in the Micro- and Macro-Economy, Homewood,
Illinois, Irwin.

Merino, Barbara D (1993), “An Analysis of the Development of Accounting Knowledge:

A Pragmatic Approach”, Accounting, Organizations and Society, vol 18, pp 163-86.

Moonitz, M (1961), The Basic Postulates of Accounting, (ARS 1) AICPA, New York.

Nelson, Carl L (1973), “A Priori Research in Accounting”, in Dopuch and Revsine

(1973) pp 3-19.

Previts, Gary John & Barbara Dubis Merino (1998), A History of Accountancy in the
United States, Ohio State University Press, Columbus.
 Accounting Theory, Chpt 2, p 20

Sprouse, R and M Moonitz (1962), A Tentative Set of Broad Accounting Principles for
Business Enterprises, (ARS 3) AICPA, New York.

Sterling, Robert R (1970), “On Theory Construction and Verification”, The Accounting
Review, v , pp 444-57.

Zeff, Stephen (1984), “Some Junctures in the Evolution of the Process of Establishing
Accounting Principles in the U.S.A.: 1917-1972”, The Accounting Review, pp 459-
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