The role of accounting theory in the

development of accounting principles

D Coetsee
Department of Accountancy
University of Johannesburg

Abstract
Accounting theorists agree that no comprehensive theory of accounting has yet been
developed. In the absence of such a theory, the question arises whether sufficient
accounting principles are created through accounting research. This article acknowledges
that accounting principles are not solely the result of academic research and that current
accounting practice through its standard-setting process contributes far more to the
development of accounting principles. Hence the role that accounting theory and
research should play in developing accounting principles is a vital academic question.
The discussion in the article focuses on the normative and descriptive (or the more modern
positivistic) approach to the development of accounting theory, the positivistic nature of
mainstream accounting research, a possible decision-useful theory of accounting and the role
of interpretative and critical research. All of these developments are beneficial to accounting
since they open up accounting to a diversity of research approaches that will collectively
improve the status of accounting research and possibly accounting theory. The role that these
developments fulfil in creating appropriate accounting principles, however, is debatable.
Key words
Accounting theory; Positivistic research; Interpretative research; Critical research;
Decision-usefulness theory; Mainstream accounting research

1 Introduction According to Wolk, Dodd and Rozycki

Both the International Accounting
Standards Board (IASB) and the Financial
Accounting Standards Board (FASB) are
committed to developing principle-based
accounting standards (IASB 2008: para. P4;
Bullen & Crook 2005:1). A significant
question is whether the underlying
principles of accounting are sufficiently
developed to create appropriate accounting
standards. A related question is whether the
principles of accounting are sufficiently
developed in accounting theory.
(2008:5), theory is usually developed and
refined through the process of research.
Hence an appropriate question would be to
consider whether the principles of
accounting are sufficiently developed and
refined in the process of research. However,
it should be acknowledged that accounting
principles are not solely developed through
accounting research. Practice, through the
standard-setting process, is currently the
main driver of the development of the
principles of accounting. The role of
accounting research in developing

Meditari Accountancy Research Vol. 18 No. 1 2010 : 1-16 1

The role of accounting theory in the development of accounting principles
accounting principles and informing the
standard setters’ process is thus a key
academic question.
A crucial dilemma in accounting research
is that there is currently no comprehensive
theory of accounting on which accounting
research can be based (Riahi-Belkaoui
2004; Godfrey, Hodgson, Holmes & Tarca
2006; Schroeder, Clark & Cathey 2001).
This fact was identified by the American
Accounting Association in 1973. In A
Statement of Accounting Theory and Theory
Acceptance the Association reviewed the
status of accounting literature and practice
at that time and concluded that, given the
different valuation systems of accounting, it
was impossible for the profession to
develop a single valuation system for
accounting (Wolk et al. 2008:166). Watts
and Zimmer-mann (1979:301) concur that
there is no generally accepted accounting
theory to justify accounting standards and
contend that that this will never be
achieved. Riahi-Belkaoui (2004:108)
confirms that no comprehensive theory of
accounting has been developed and that
different theories arise from the use of
different approaches to the construction of
accounting theory.
Since no comprehensive theory of
accounting has been developed, the
question arises on what theoretical grounds
the principles of accounting are based. This
is a difficult question with different facets.
The aim of this article is to contribute to
this debate by considering the potential role
that different types of accounting theory
and research play in developing consistent
accounting principles. The issue is whether
accounting theory and research do in fact
contribute to the accounting principles
created by the standard setters.
In assessing this potential role, the article
follows a structured process by discussing
the following: (1) the nature and
development of accounting theory; (2)
2 Meditari Accountancy Research Vol. 18 No. 1 2010 : 1-16
major developments that have had a direct
influence on the status of accounting theory
today; (3) the first development – positive
accounting theory; (4) the second
development – the decision-usefulness
theory of accounting; and (5) other
developments in accounting research –
interpretative and critical research.
2 The nature of accounting
theory and the
development of theory
There are different schools of thought on
what represents accounting theory. The first
school focuses on the development of
accounting principles and describes
accounting theory as follows:
Thus, accounting theory may be defined as a
logical reasoning in the form of a set of broad
principles that (1) provide a general frame of
reference by which accounting practice can be
evaluated and (2) guide the development of
new practices and procedures (Hendriksen
1982:1).
Accounting theory is the basic assumptions,
definitions, principles and concepts that
underlie accounting rule making (Wolk et al.
2008:2).
The other school of thought explains
accounting theory as an activity to explain
and predict:
… the primary objective of accounting theory
is to provide a basis for the prediction and
explanation of accounting behavior and events
(Riahi-Belkaoui 2004:108).
The objective of accounting theory is to
explain and predict accounting practice (Watts
& Zimmerman 1986:2).
Theory attempts to explain relationships and
predict phenomena (Wolk et al. 2008:28).
While the first school focuses on the
principles of accounting, the second
endeavours to evaluate practice itself.
Hendriksen (1982:1) expresses his
preference for the first school as follows:

Accounting theory may also be used to explain
existing practices to obtain a better
understanding of them. But the most important
goal of accounting theory should be to provide
a coherent set of principles that form the
general frame of reference for the evaluation
and development of sound accounting
practices.
These two schools of accounting theory are
grounded in the two main methodologies
for the development of theory in general
that is, normative and descriptive
methodologies. Normative methodology
questions existing theory to describe what
the theory should be, while descriptive
methodology investigates the underlying
phenomena to describe what they are
(Hendriksen 1982; Riahi-Belkaoui 2004).
Normative metho-dology is more
concerned with what the outcome should be
and is more prescriptive (Deegan &
Unerman 2006:10). By contrast, descriptive
methodology describes, explains and
predicts the underlying phenomena
(Deegan & Unerman 2006:8).
Normative and descriptive metho-
dologies are also distinguished by the
process followed to develop theory.
Normative methodology is a deductive
process in which objectives are formulated,
from which principles are developed.
Descriptive methodology is an inductive
process that focuses on observations of the
real world. The aim of the inductive process
is to record the underlying phenomena.
However, a third process, the predictive
process, is sometimes identified. This
process goes further than the inductive
process in that it not only records the
observations, but also explains and predicts
them – hence the fact that it is often
referred to as a positive research metho-
dology (Deegan & Unerman 2006:8).
he second school of accounting theory,
the explain-and-predict school, although
descriptive in observing the underlying
phenomena, focuses more on explaining
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and predicting the phenomena, and is
therefore more positivistic.
The result is that many accounting
theorists do not distinguish between
normative and descriptive research, but
between normative and positive research
(Schroeder et al. 2005; Deegan & Unerman
2006). Inanga and Schneider (2005)
compare the normative and positive
theories as follows:
A normative theory is a goal-oriented theory
that represents real world situations, not as
they are, but as they should be. It is
prescriptive rather than descriptive theory that
explains, and sets out, principles
of what ought to be. Normative theories
are characterised by goal assumptions
and deduction (Inanga & Schneider
2005:231).
Positive theories attempt to describe real
world situations as they are. Research based
on positive theories involves empirical
observations of the relevant phenomena from
which a problem is defined. Data relevant to
the problem are then collected and hypotheses
formulated and tested by independent process.
If the theory that results is an accurate
representation (description) of the empirical
phenomena, such a theory can be used for
predictive purposes. Induction follows
empirical observation and takes the form: “if
event Y takes place, the outcome will be Z”.
The greater the number of empirical
observations, the better supported the related
induction will be (Inanga & Schneider
2005:230).
To understand the role that these
methodologies of development of theory
play in the development of accounting
theory it is important to note the
developments in accounting research over
the last few decades.
3 Major developments in
accounting theory
Two major developments in accounting
occurred in the 1960s and early 1970s, and
these have had a significant influence on
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The role of accounting theory in the development of accounting principles
the development of accounting theory
today. The first was the move from the
normative to positive accounting
methodology, resulting in positive
accounting research becoming the thrust of
mainstream accounting research. The
second was the move to a decision-
usefulness orientation in accounting.
The years, 1956 to 1970, were regarded
as the normative period (Godfrey et al.
2006:6; Mattessich 2002:186) in which the
norms for best practice were developed. In
terms of the normative approach “very little
concern was exhibited for the empirical
validity of the hypothesis on which
normative prescriptions rest” (Watts &
Zimmerman 1986:4). Wolk et al.
(2008:135) agree that this “postulated-
principle approach” had died out by 1970.
One of the main reasons why the normative
approach is not used is that there is
uncertainty about whether any particular
normative theory would be accepted by
accounting scholars (Godfrey et al. 2006:8).
Normative research has been regarded as
“nonscientific” (Mattessich 2002:186). The
result of the move from normative to
positive research was that the focus in
accounting research shifted from the
development of accounting principles and
what they should be to a more scientific
methodology of explaining and predicting
the practice. The effect of this positive
research methodology is discussed in
section 4.
According to Godfrey et al. (2006:11),
while the emphasis in academic research
remains in the area of positive accounting
theory, the profession has sought a more
normative approach by seeking theories that
would unify accounting practice and make
it more useful. However, this is not a pure
normative approach and the question can be
posed whether practice is creating theory.
Wolk et al. (2008:93) contend that
accounting standards that have developed
from a pragmatic process would not
4 Meditari Accountancy Research Vol. 18 No. 1 2010 : 1-16
necessarily be correct in terms of deductive
logic. They (2008:98) state that the process
is more pragmatic because perfect standards
are for all intents and purposes impossible.
Watts and Zimmermann (1979:273) argue
that government regulation creates the
incentive for individuals to lobby and that
accounting theories justify political
lobbying. The result of this pragmatic
process on the part of the standard setters is
that accounting researchers cannot rely on
the outcome of the process as academically
accepted theory on which research can be
based.
The second development, the decision-
usefulness orientation in accounting, started
with research in the 1960s. The Statement
of Basic Accounting Theory, generally
referred to as ASOBAT, was issued by the
American Accounting Association in 1966,
and is regarded as the starting point of this
orientation (Hicks 1966; Sterling 1967).
Based on this orientation, Riahi-Belkaoui
(2004:41) describes the role of accounting
as follows:
The role of accounting is to produce
information about the economic behavior
resulting from a firm’s activities within its
environment. The result is best represented by
what the FASB calls “the information
spectrum”.
Through the decision-usefulness orient-
tation, the focus shifted from the principles
of accounting to the outcome of the
accounting process – the information that is
provided. A more detailed discussion of the
possible effects of decision-usefulness
theory is provided in section 5.
Over the last two decades, many scholars
have been calling for accounting to enter
the broader research domain of the social
sciences (Reiter & Williams 2002:602;
Baker & Bettner 1997:294). They argue
that accounting is a human activity that
should include all research approaches
included in the social sciences, such as
interpretative, critical and behaviour

research. The effect of this broader
approach to accounting research is
discussed in section 6.
4 The positive accounting
theory
4.1 Background
Henning, Van Rensburg and Smit
(2004:17), experts on research metho-
dologies in the social sciences, describe a
positivist framework as follows:
In its broadest sense, positivism is a rejection
of metaphysics. It is about finding truth and
providing it through empirical means. It is a
philosophical position that holds that the goal
of knowledge is simply to describe and, in
some designs, to explain and also to predict
the phenomena that we experience (whether
quantitatively or qualitatively). The purpose of
science is thus what we can observe and
measure.
The focus of a positivist framework is to
find truth by describing the reality. The
empirical tool gives the research process
validity. The starting point is a descriptive
approach, but by incorporating the
empirical testing tools to explain and
predict the phenomenon, positivism is
created. Under the positivist approach,
accounting theory is developed by
formulating hypotheses or designing
models and testing them. Science is deemed
to be a process of trial and error. A
hypothesis or model is never absolute truth,
but as long as it is not refuted through
research, it is regarded as the truth.
Positive theories combine the activities
of describing, explaining and predicting
(Godfrey et al. 2006:55). Today, the bulk of
positive theory is concerned with
explaining the reasons for current practice
and predicting the role that accounting and
related information play in economic
decisions (Godfrey et al. 2006:55).
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One major reason for the move away
from normative theories was the availability
of financial economics principles and
testing methods (Godfrey et al. 2006:6;
Watts & Zimmerman 1986:5). Gaffikin
(2006:n.p.), in a working paper, argues that
the reason for the development and
explosion of the neoempirical research
methods in accounting, including positive
research, was
… the development of doctoral programmes in
accounting where students were given
rigorous training in quantitative research
methods, neoclassical economics and finance
theory and the use of new information
processing technologies (especially the use of
computers).
and also Gaffikin (2006:n.p.):
…. the growing availability of large scale
stock market data bases.
Hahn (2007) tested this reality in 2001, by
making an assessment of the theories used
in doctoral dissertations. He (2007:318)
found that the theories deployed were
drawn from finance, economics,
psychology and sociology. His conclusion
was that 53% of the theories were drawn
from economics and finance and 27% from
psychology (Hahn 2007:305). He
(2007:319) also found that not all the
dissertations identified their theoretical
basis clearly. Reiter and Williams
(2002:583 & 585) examined the work of
various authors and concluded that most
accounting journals in North America are
positivistic and economics based.
4.2 Finance theory
Capital market research in finance is
particularly important in positive
accounting theory (Godfrey et al.
2006:261) since it creates a link between
accounting data and quoted share prices.
Capital market research is normally based
on the efficient market hypothesis and
includes capital asset pricing models.
5
The role of accounting theory in the development of accounting principles
According to Godfrey et al. (2006:261),
the efficient market hypothesis is “a
prevailing paradigm in financial
economics”, and “is based on the
assumption that capital markets react in an
efficient and unbiased manner to publicly
available information” (Deegan & Unerman
2006:210). According to this hypothesis,
accounting information is in competition
with other market information to establish
share prices (Scott 2006:88). As applied to
finance, the efficient market hypothesis is
used to test the impact of accounting
information on share prices as well as
the effect of changes in accounting policies
on share prices (Watts & Zimmerman
1986:15).
The assumption of the effective market
hypothesis was discredited in the recent
credit crises (Ball 2009). The issue is
whether the market is still as efficient as
presumed. Certain accounting measure-
ments, such as fair value accounting, rely
on efficient markets to determine the
accounting value. One of the accounting
issues identified in the credit crises was the
appropriateness of fair value measures in
inactive markets or illiquid markets (IASB
2010). Resolving issues surrounding the
efficient market hypothesis is crucial in the
application of fair value accounting
(Milburn 2008) and the striving of the
standard setters to create comprehensive
and consistent accounting standards for all
capital markets.
Capital asset pricing models identify
factors that affect share price valuations and
build models to value the equity of entities
(Godfrey et al. 2006:263). Capital asset
pricing models normally apply linear
modelling (Deegan & Unerman 2006:211)
to determine the equity value or returns.
Linear modelling is also used under the
efficient market hypothesis to determine the
relationship between accounting data and
share prices.
6 Meditari Accountancy Research Vol. 18 No. 1 2010 : 1-16
The capital asset pricing and relationship
models focus more on the use of accounting
data to determine the relationship or
value of share prices, and thus not on
the accounting principles themselves.
Holthausen and Watt (2001:62) comment as
follows on the models used in finance:
The valuation models employed in the value-
relevance and capital markets literature have
no role for accounting. … The valuation
models supply no theory of accounting.
Value relevance research assesses how well
accounting amounts reflect information
used by equity investors (Barth, Beaver &
Landsman 2001:77). Holthausen and Watts
(2001:3) also express the following view on
value relevance research:
Our evaluation concentrated on the theories of
accounting, standard setting and valuation
that underlying those inferences. Unless those
underlying theories are descriptive of
accounting, standard setting and valuation,
the value-relevance literature’s reported
association between accounting numbers and
common equity valuations have limited
implications or interferences for standard
setting; they are mere associations. We argue
that the underlying theories are not descriptive
and hence drawing standard-setting inferences
is difficult.
Holthausen and Watts (2001:4 & 63) argue
that descriptive theories are needed to
interpret the associations of value relevance
research and that the literature does not
seek to develop a descriptive theory of
accounting and standard setting. They
(2001) contend that such theories are
needed for assurance of validity, and that
value relevance ignores other roles of
accounting and other forces that determine
accounting standards and practice. They
(2001:64) therefore call for accounting
literature to explore the influences of these
other factors more directly. They (2001:75)
believe that such research would lead to a
more fully developed theory of accounting.
However, value relevance research has
information relevance to the standard

setters. According to Barth et al. (2001:77),
the primary focus of financial statements is
equity investments. Specifically,
contracting and other uses of financial
statements do not eliminate the importance
of value relevance (Barth et al. 2001:98).
They (2001:99) state that value relevance
research is designed to assess whether
investors use particular accounting amounts
in valuing equity and not to estimate the
firm value.
Since value relevance research is
designed to assess the usefulness of
accounting information to the capital
markets, it could be helpful to standard
setters. Although Holthausen and Watts
(2001) are correct in asserting that the
valuation models do not create a theory of
accounting, they still provide information
that is valuable to standard setters.
However, value relevance research is
merely informative and does not create
principles of accounting per se.
4.3 Economic theory
Deegan and Unerman (2006:207) identify
the focus on economic theory in positive
accounting theory as follows:
Positive Accounting Theory as developed by
Watts and Zimmerman and others, is based on
the central economics-based assumption that
all individuals’ actions are driven by self-
interest and that individuals will always act in
an opportunistic way to the extent that their
actions will increase their wealth.
Watts and Zimmerman (1986:13) explain
their theory in their book, Positive
Accounting Theory, as follows:
This book presents the theory and
methodology underlying the economics-based
empirical literature in accounting. The
concept of theory underlying that literature is
the scientific concept of theory; the objective
of theory is to explain and predict phenomena
(in this case, accounting practice). In
economics, that concept has come to be called
“positive theory”.
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Coetsee
It should be noted, as Deegan and Unerman
(2006:206) observe, that this definition
developed only one particular positive
theory of accounting. Boland and Gordon
(1992:143) concur, stating that this
definition of positive accounting theory
specifically incorporated empirical research
based on economic explanations and
predictions in accounting research in an
attempt to explain the effect of accounting
choices.
Boland and Gordon (1992) reviewed the
critiques of Watts and Zimmerman’s
positive accounting theory and concluded
that any critique of the philosophy of
science followed by Watts and Zimmerman
might not be effective, but questions the
limitations of following an economics-
based analysis (Boland & Gordon
(1992:142). In a working document,
Gaffikin (2006:n.p.) concurs, stating that
accounting deals with the economic
phenomena from a different viewpoint and
that several aspects of accounting are
different from simple economic analysis.
Reiter and Williams (2002:585) make the
following vital remark:
Thus, rather than becoming “solvers of
accounting problems” the application of
positive economic theories to accounting turns
accounting researchers simply into economic
scientists.
Reiter and Williams (2002:601) believe that
no theory is sacred and that accounting
researchers should be free to alter theories.
They (2002:585) believe that accountants
are currently testing economic theories, and
therefore propose that economic theories
should be used as applied theories to solve
accounting problems. To apply economic
theories, the role and relevance of the
background assumptions of the theories
should be explicitly debated (Reiter &
Williams 2002:601).
The question is whether such applied
application exists. Can accounting
researchers develop their own theories that
7
The role of accounting theory in the development of accounting principles
could be used to test accounting principles
directly? The article proposed that this
could be a focus that accounting researchers
could debate. For instance, can a fair value
theory be developed that identifies under
which instances fair value accounting
should be applied?
Accounting researchers need to realise
that accounting and economics are different
disciplines. Economic theory has a role to
play in accounting research but should not
be the dominant force. Accounting
researchers should always understand the
link between accounting and economics,
and how accounting information influences
broader economic decisions. The objective
of global financial reporting is to create
decision-useful information. Accounting
and economics are related and always will
be – however, for accounting to prosper as
an academic discipline, elements
specifically germane to accounting also
need to be researched.
4.4 Mainstream accounting
research
Notwithstanding the critiques of the
economic influence, the positive
methodology has become the methodology
of mainstream accounting research
(Williams 2009; Gaffikin 2006; Baker &
Bettner 1997). According to Ryan, Scapens
and Theobald (2002:41), mainstream
accounting research is primarily concerned
with the functioning of accounting. They
(2002:41) explain it as follows:
Such work starts from an objective view of
society, regards individual behavior as
deterministic, uses empirical observations and
a positive research methodology.
As Boland and Gordon (1992) state above,
positive methodology is a valid research
methodology that can be applied in
accounting research. In accepting the
validity of positive research methodology,
Inanga and Schneider (2005) advance
8 Meditari Accountancy Research Vol. 18 No. 1 2010 : 1-16
specific reasons for the failure of
accounting research to improve accounting
practice. According to them (2005:227)
there is a fundamental flaw in the
accounting research process as summarised
below.
The central problem of accounting theory is
that there is no known theory to use as a
reference for creating hypotheses or models to
be empirically researched. The absence of
theory can be seen in education, practice, and
the research literature itself. Practitioners, for
example, because of their training and lack of
experience with an interest in research tend
not to look to research findings to meet their
professional needs. Accounting researchers,
on the other hand, have created what appears
to be a highly advanced research context
which, in fact, is an environment dominated by
sophisticated methodology, rather than theory.
The research basically emulates the hard
sciences, which makes its pursuit academically
acceptable, but it lacks substance. This
explains the failure of accounting research to
improve accounting practice.
The flaw is not in the positive research
methodology itself but in the theories on
which positive research methodologies are
based. The view expressed in this article is
also that positive methodology is valid
methodology. The use of financial and
economic theories in accounting research
has a role to play, since accounting is not
unrelated to other disciplines. However, for
accounting researchers to fulfil a more
prominent role in the development of
accounting principles, hypotheses based on
the underlying principles of accounting
need to be identified as input into any
positivistic research methodology.
Positive accounting research seeks to
explain and predict accounting practices
and accounting policy choices and is not
focused on establishing the principles of
accounting. Baker and Bettner (1997:293)
further state the following:
Additionally, we argue that the type of
research prevalent in mainstream accounting
journals, which is characterized by a positivist

methodological perspective and an emphasis
on quantitative methods, is incapable of
addressing accounting’s complex social
ramifications.
However, the insights drawn from such
research could be valuable to standard
setters in understanding the reactions that
changes in accounting principles may have.
As stated previously, positive accounting
research is only informative. Currently, the
main driver of positive accounting research
is not to develop the principles of
accounting. It is therefore essential for
fundamental accounting researchers to seek
other avenues that could contribute to the
core of accounting itself.
5 The effect of the decision-
usefulness theory
5.1 Nature and development
As mentioned earlier, the decision-
usefulness approach started in the 1960s.
ASOBAT, issued in 1966, is regarded as
the starting point of this approach (Hicks
1966; Sterling 1967). ASOBAT defines
accounting as follows (as cited in Riahi-
Belkaoui 2004:38):
… the process of identifying, measuring, and
communicating economic information to
permit informed judgments and decisions by
users of information.
Although this definition still refers to
accounting as a process, it introduces the
purpose of the communication process: “to
permit informed judgments and decisions
by users of information”. The Trueblood
Commission Report in 1973 reinforced the
decision-usefulness approach by asserting
that the basic objective of financial
statements
… is to provide information useful for making
economic decisions (Wolk et al., 2008:160).
These developments resulted in both the
FASB and IASB adopting the decision-
usefulness objective in their conceptual
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Coetsee
frameworks. Laughlin (2007:278)
summarises the current status of decision-
usefulness as follows:
… ”decision usefulness” and its interpretation
in relation to one set of stakeholders (financial
providers), has largely persisted. The “softer”
decision usefulness, stewardship emphasis,
which still privileges finance providers, has
dominated standard setting by the UK’s
Accounting Standards Board (ASB), and the
IASB and their respective forbears. However,
a stronger decision usefulness emphasis, with
its continuing emphasis on the information
needs of finance providers, is currently
gaining new ground with the initial chapters in
the conceptual framework that the IASB and
the FASB have recently published (IASB,
2006). Unlike in previous eras, this new
framework seems set to expunge stewardship
reporting and remains largely indifferent to
the information needs of any other
stakeholders apart from finance capitalists).
The argument for accepting the decision-
usefulness approach was that if
theoretically correct financial statements
cannot be prepared then they should at least
be more useful (Scott 2006:51). The
question is whether historical cost
information (which is useful for assessing
stewardship) is useful for making economic
decisions (Deegan & Unerman, 2006:178).
This approach started with the question on
how the financial statements based on
historical cost could be made more useful
(Scott 2006:51). Decision usefulness is thus
the starting point of the debate on how fair
value or other valuations should be
incorporated into financial reporting, a
debate that is still relevant today.
From an academic perspective, the
question needs to be asked whether an
adequate decision-usefulness theory of
accounting has been developed on which
future research, such as positivistic
research, can be based. The question is
whether the decision-usefulness approach
adopted by the FASB and IASB can be
regarded as establishing a theory of
accounting.
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The role of accounting theory in the development of accounting principles
5.2 Decision-usefulness theory
Inanga and Schneider (2005) assessed the
decision-usefulness approach of the
standard setters to determine whether a
related theory had been created. They
(2005:246) concluded as follows:
We have suggested that the “decision
usefulness” theory of accounting, on which
GAAP is based, is a grounded theory. It is
normative, based on a set of assumptions
which have not been tested. Accounting, as a
discipline, is not a science and as suggested by
Golgratt, research results in this context are
limited to correlation analysis. The use of
sophisticated scientific research
methodologies does not change this basic
situation.
Inanga and Schneider (2005:231) quote
Straus and Corbin’s definition and
explanation of grounded theory as theory
that is “derived from the study of a
phenomenon it represents”, and that it
“begins with an area of study and what is
relevant to that area is allowed to emerge”.
On this basis, Inanga and Schneider
(2005:231) explain grounded theory as
follows:
Conceptually, grounded theory is a technique
for building theory based on observed social
science phenomena, using data derived from
the research activity.
Grounded theory is in essence a research
approach developed to create theory
directly from data (Glaser, 2004; Strauss &
Corbin, 1990). According to Suddaby
(2006:636), “grounded theory describes an
overall method for systematically gathering
and analyzing data” to create a theory.
Many accounting academics have reviewed
grounded theory as a methodological
approach to create theory (Gurd, 2008;
Joannidès & Berland, 2008; Kirk & Van
Staden, 2001; Lye, Perera & Rahman,
2006). They all agree that grounded theory
is a theory-discovered method or
methodology. However, nobody has used
this methodology to create any theory of
10 Meditari Accountancy Research Vol. 18 No. 1 2010 : 1-16
accounting itself.
Inanga and Schneider’s (2005)
suggestion that the decision-usefulness
theory is a grounded theory has not been
academically tested. Such a suggestion can
only be upheld if the method or
methodology of grounded theory is applied
to accounting to confirm that such a
grounded theory for accounting exists. Only
when this theory-creation methodology is
applied to the decision-usefulness approach
can the question about whether or not a
grounded theory has been created be
answered. Without such an assessment, it is
doubtful whether the decision-usefulness
approach creates a theory or base for
accounting research. Mattessich (1993:182)
for instance, asked
… whether, for the sake of a more practice-
orientated theory, it might be worth the while
to revive the more or less abandoned
normative paradigm or research tradition.
The decision-usefulness approach created
by the standard setters has been
documented but is not based on any
scientific research process to create a
grounded theory. It has instead emerged
through a consultative process over time. It
is grounded in the due process of the
standard setters, which is assessed and
recorded on a continuous basis. A complete
trail of its existence has been created over
time, and it continues to be reassessed
through the joint framework process of the
standard setters. Hence indirectly it has
emerged from data and is grounded in the
data that have been recorded. Further
relevant research may assess whether the
decision-usefulness approach of the
standard setters is creating any theory. A
paper by Llewelyn (2003), which discusses
various levels of theory, may be helpful in
such an assessment.
Since accounting academics currently
agree that no comprehensive theory of
accounting exists, grounded theory as a
theory-generated methodology should be

attractive as a starting point to develop
theory in accounting. This is an alternative
avenue for research in accounting that could
be further explored by accounting
researchers. Through the grounded theory
methodology, core principles, concepts and
hypotheses can be developed on which
further positivistic research could be based.
6 Interpretative and critical
research
Many scholars call for a focus on the
broader social effect of accounting. Baker
and Bettner (1997:307) believe that
accounting has an effect on social issues
such as distribution of wealth, social
justice, political ideology and
environmental degradation. They and others
(Macintosh, 2004; Broadbent, 2002) call for
the use of interpretive and critical
perspectives to understand the impact of
accounting on people. Gaffikin (2006:n.p.)
concurs, and explains as follows:
Consequently, rather than attempting to
recreate the methods of the natural sciences, it
is more appropriate that accounting turn to
the methods that recognise the human aspects
of the discipline rather than claim an
intellectual status akin to the natural sciences.
The question is not only how interpretative
and critical research can contribute to the
broader social effects of accounting, but
whether such research can contribute to
establish consistent principles of
accounting. It has been posited above that
grounded theory, which is part of
interpretative research, may be helpful in
establishing such principles. The issue is
that accounting researchers have battled to
define interpretative research (Ahrens et al.
2008). Accounting academics explain
interpretative research rather loosely:
This research is concerned with understanding
the social world, and includes work that seeks
to understand the social nature of accounting
practice (Ryan et al. 2002:42).
Meditari Accountancy Research Vol. 18 No. 1 2010 : 1-16
Coetsee
The term interpretative research reflects a
methodology perspective. In a general sense,
interpretative research attempts to describe,
understand and interpret the meanings that
human actors apply to the symbols and the
structure of the setting in which they find
themselves (Baker & Bettner 1997:293).
Interpretative research involves more than
describing (descriptive methodologies) and
explaining (positivistic methodologies) the
underlying phenomena being researched: it
goes further and incorporates the
perceptions and feelings of people – the
reasons why they acted in a certain way.
Interpretative research offers insights into
how a given person, in a given context,
makes sense of a given phenomena. It is not
theory driven by setting and testing
hypotheses. It reports on the theory
identified. For instance, grounded theory
undergoes a consistent process of
conceptualisation of data until a basic
theory emerges.
In a polyphonic debate conducted in
2006, many accounting researchers
discussed the future of interpretative
accounting research (Ahrens et al. 2008).
These authors (2008:841) explain the
purpose of this debate as follows:
In the literature, interpretive accounting
research is frequently characterized by what it
is not, i.e., “non-mainstream” or alternative.
We are concerned by this lack of an
independent intellectual identity. We thus
thought of creating an opportunity to discuss
in a small group what we view collectively as
valuable in our research. We are looking to
establish a more positive identity for ourselves
as scholars interested in the interpretation of
accounting practices. This seems appropriate
because there is, by now, a very significant
body of work that could be loosely labeled as
“interpretative accounting research”. What
seems so far to be lacking, however, is a
shared intellectual agenda that would allow
for a clearer articulation of the achievements
of interpretative research. Two issues that we
would see important for this effort are to
reconnect interpretative research with
11
The role of accounting theory in the development of accounting principles
accounting technique and to explore points of
contact with functionalist accounting thought.
The reconnection to accounting as a
discipline itself (Ahrens et al. 2008:846 &
848) is a positive development and may
contribute to the development of accounting
as a research discipline. Interpretative
research could be attractive in the pragmatic
and political process of standard setting to
establish the reasons behind this
consultative process. This article therefore
concurs that the nature and intellectual
position of interpretative research in
accounting research must be clarified in
order to create the opportunity for
researchers to research the reasons behind
accounting practice and thus contribute to
knowledge about accounting. Ryan et al.
(2002:42) specifically state the following:
The starting point for interpretative (and also
for critical) research is the belief that social
practices, including management accounting,
are not natural phenomena; they are socially
constructed. Consequently, they can be
changed by the social actors themselves.
However, the goal of interpretative research
is not to change the social order.
The primary goal is to record the data as
they are – hence a neutral stance. In
contrast, the main goal of critical research is
to promote change (Ryan et al. 2002:87).
The difference between interpretative and
critical research is explained as follows:
Some critical accounting researchers … object
to interpretative research because it does not
seek to promote a social critique and promote
radical change. Nevertheless, interpretative
work is concerned with making sense of the
social character of daily life (Ryan et al.
2002:42).
Critical research can also be interpretative,
but critical research adopts a particular point
of view regarding the research question,
whereas interpretative research purports to
take a ”neutral” stance (Baker & Bettner
1997:293).
Roslander (2006:247) interprets the critical
accounting project as follows:
12 Meditari Accountancy Research Vol. 18 No. 1 2010 : 1-16
… the critical accounting project challenges
the manner in which accounting has
conventionally privileged technical issues and
knowledges over those demonstrating that the
accounting is not created in a social vacuum
and as a result of which much of it may be
highly contestable. The emergence of a
complementary set of critical insights is now
widely recognised as a sign of accounting’s
maturity as an academic discipline, as well as
providing a basis for developing accounting as
a set of socially responsible practices.
The main issue in critical research is
that the researcher must reveal his or
her assumptions. This is a question of
the intellectual or theoretical framework
that the researcher has used to critique
the underlying research phenomena.
Traditional critical accounting research uses
the boundaries of a Marxist framework
(Broadbent 2002:435; James 2008:643).
However, Broadbent (2002:435) responded
as follows:
… to locate “critical accounting” solely within
such boundaries can be seen to be
exclusionary of other theoretical approaches
and this I see as problematic.
Broadbent (2002:435), for example,
also refers to the feminist approach.
However, an important consideration is
whether there are more accounting-related
frameworks under which critical research
could be undertaken. Can a researcher,
for instance, adopt the stance of a
historical cost perspective, a fair value
accounting perspective or a decision-useful
perspective? For critical research to effect a
change in the principles of accounting, such
frameworks in which critical research can
be undertaken must be clarified. The
question is whether adequate frameworks to
ground critical research in accounting have
been developed.
The pragmatic and political dimensions
of the development of accounting principles
by the standard setters are based on human
intervention. Hence interpretative and
critical research can both play a role in

developing accounting principles and
related theory. These research approaches
should not be limited to the broader social
aspects of accounting only, but can be used
to evaluate the principles of accounting
itself. Critical research can be an avenue for
accounting researchers to explore in order
to move back to assessing the principles of
accounting directly, but then the
frameworks within which such research is
situated should be clarified.
7 Conclusion
This article investigated the potential role
that different types of accounting theory
and research play in developing consistent
accounting principles. The article
acknowledged that no comprehensive
theory of accounting exists, that accounting
principles are not solely the result of
academic research and that current
accounting practice through its standard-
setting process has contributed much more
to the development of accounting
principles. It is therefore important to
consider the link, if any, between
accounting theory and research, and the
standard-setting process.
In the process of considering the
perceived role that accounting theory and
research play, the discussion focused on the
normative and descriptive (or the more
modern positivistic) approach to
development of accounting theory, the
positivistic nature of mainstream
accounting research, a possible decision-
useful theory of accounting and the role of
interpretative and critical research.
Traditionally, the view has been
expressed that theory is created through a
normative or descriptive approach;
however, the more modern view is that
accounting theory could be created through
a normative or positivistic approach. In
accounting research the application of the
normative approach was replaced by the
Meditari Accountancy Research Vol. 18 No. 1 2010 : 1-16
Coetsee
positivistic approach, because the former
seemed to be subjective and not neutral.
This resulted in the positivistic approach
becoming the main approach of mainstream
accounting research. Currently neither
positive nor normative research (in its
absence) has created a comprehensive
theory of accounting. Accounting therefore
has no commonly accepted theories on
which accounting research can be based,
which will in turn generate sound
accounting principles. The theories guiding
research in other disciplines, such as
finance and economics, are important, but
should never be the main theories on which
accounting research is based. The question
is whether accounting researchers can
develop more accounting-focused or
applied theories that can contribute more to
the development of accounting principles in
practice. Mainstream accounting research is
regarded as simply providing useful
information to the standard-setting process
and not creating the principles of
accounting per se.
This article disagrees with the suggestion
of Inanga and Schneider (2005) that the
decision-usefulness approach of the
standard setters creates a grounded theory.
In the absence of the application of the
grounded theory methodology to test this
suggestion, the suggestion remains
premature. Researchers may apply the
grounded theory methodology to assess
whether the decision-usefulness approach
adopted by the standard setters creates a
grounded theory, and to deploy it
accordingly. The grounded theory
methodology might also be used by
accounting researchers to create core
principles, concepts and hypotheses of
accounting on which the positivistic nature
of mainstream accounting research could be
based. This is a field that accounting
researchers still need to explore.
Many scholars are calling for accounting
researchers to enter the broader research
13
The role of accounting theory in the development of accounting principles

domain of the social sciences, since it is
acknowledged that accounting is a social
activity. These scholars believe that the
positivistic nature of mainstream
accounting research is not the only
acceptable research methodology for
accounting research. The development of
accounting principles by the standard
setters is a pragmatic and political process
based on human intervention. Hence both
interpretative and critical research can fulfil
a role in developing accounting principles
and related theory. These research
approaches should not be limited to the
broader social aspects of accounting only,
but can be used to evaluate the principles of
accounting itself. Ongoing debate is needed
on how interpretative and critical research
can be incorporated into the fundamentals
of accounting.
All of these developments are beneficial
to accounting since they break the
stranglehold of the positivistic regime and
open accounting up to a diversity of
research approaches that will collectively
improve the status of accounting research
and possibly accounting theory. The issue,
however, is whether all of this will lead to
the development of solid accounting
principles through research, or whether the
gap between accounting practice and
research will continue to widen.

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