ACCOUNTING THEORY: TEXT AND READINGS

RICHARD G. SCHROEDER MYRTLE CLARK JACK CATHEY

CHAPTER 1
THE DEVELOPMENT OF ACCOUNTING THEORY

Introduction

What is theory?

Webster defines theory as:

Systematically organized knowledge, applicable in a relatively wide variety of circumstances, a system of assumptions, accepted principles and rules of procedure to analyze, predict or otherwise explain the nature of behavior of a specified set of phenomena.

Normative theory (what should be) Positive theory (what is) A good theory should cover the two of them

Why is the development of a general theory of accounting important? What is the relationship of accounting research to accounting theory?

Introduction

What is theory?

Webster defines theory as:

Systematically organized knowledge, applicable in a relatively wide variety of circumstances, a system of assumptions, accepted principles and rules of procedure to analyze, predict or otherwise explain the nature of behavior of a specified set of phenomena.

Theory may be described as:

Normative theory (what should be) Positive theory (what is) A good theory should cover the two of them

The goal of accounting theory is to provide a set of principles and relationship that explains observed practices and predicts unobserved practice

Introduction

What is theory?

Webster defines theory as:

Systematically organized knowledge, applicable in a relatively wide variety of circumstances, a system of assumptions, accepted principles and rules of procedure to analyze, predict or otherwise explain the nature of behavior of a specified set of phenomena.

Theory may be described as:

Normative theory (what should be) Positive theory (what is) A good theory should cover the two of them

THE EARLY HISTORY OF ACCOUNTING

The Zenon Papyri (30 B.C, founded in 1915) The impact of the Renaissance

Fra Luca Pacioli Summa de Arithmetica Geometria Proportioni et Proportionalita (1419)

The evolution of joint ventures into ongoing businesses The impact of the industrial revolution and the progressive movement The concept of capital maintenance The accountant as a protector of business interests

ACCOUNTING IN THE UNITED STATES SINCE 1930

Meetings between NYSE and AIA AAA SEC

Securities Act of 1933 Securities Exchange Act of 1934

Committee on Accounting Procedure Accounting Principles Board Financial Accounting Standards Board

THE ACCOUNTING PRINCIPLES BOARD

Formation and structure Types of pronouncements

APB Opinions

The flap over accounting for the investment tax Credit Rule 203 Criticism of the APB

THE FINANCIAL ACCOUNTING STANDARDS BOARD

The Wheat Committee The Trueblood Committee The FASB was established The structure of the FASB is illustrated in the following diagram

Structure of the FASB

Appoint and fund ------| | |

Financial Accounting Foundation

Govern

Board of Trustees

Appoint Electors

Appoint and fund Financial Accounting Standards Board (7 members)

Financial Accounting Standards Advisory Committee (approx. 20 members)

Appoint

Task Forces of the Standards Board

Admin. Staff

Research Staff

FASB

Mission
Types of pronouncements
Statements of Financial Accounting Concepts Statements of Financial Accounting Standards Interpretations Technical Bulletins

FASB

Emerging Issues Standards Overload Standard setting as a political process Economic Consequences

GAAP

Evolution of phrase:

Changed wording of auditors certificate brought about by meetings between NYSE and AIA The APBs definition The Auditing Standards Executive Committees definition

The current sources of GAAP consist of four levels described as A, B, C, and D by Statement of Auditing Standards No 69

GAAP Hierarchy
LEVEL A: FASB Statements FASB Interpretations SEC Rules and Interpretive Releases Accounting Principles Board Opinions (unless amended) Account Research Bulletins (unless amended)

LEVEL B: FASB Technical Bulletins AICPA Industry Audit Guides that have been reviewed by the FASB

GAAP Hierarchy

LEVEL C: AcSEC Practice Bulletins that have been reviewed by the FASB Consensuses reached by the EITF

LEVEL D: AICPA Accounting Interpretations (no longer issued) FASB Implementation Guides Other widely recognized or prevalent accounting practices

The Business Reporting Research Project

Steering Committee Working Groups

THE ROLE OF ETHICS IN ACCOUNTING

The public accountant as a watchdog

Accounting in Crisis The Events of the Early 2000s

Enron and the Accounting Scandals

Accounting in Crisis The Events of the Early 2000s

1.

Two major changes in the accounting profession have taken place in the wake of the accounting scandals: Arthur Andersen

formerly one the Big 5 audit firms has gone out of business

2.

Sarbanes-Oxley Act
President Bush signed into law July 2002 imposes a number of corporate governance rules on publicly traded companies (Discussed in Chapter 17).

International Accounting Standards

1.

The concept of harmonization The IASB The IASBs objectives:

To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance To work generally for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements.

2.

41 Statements of Accounting Standards and 5 Statements of Financial Reporting Standards to date