Research in Accounting Regulation 21 (2009) 11–18

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Research in Accounting Regulation

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Understanding the changes in accounting thought

Rebecca Toppe Shortridge *, Pamela A. Smith
Department of Accountancy, Northern Illinois University, DeKalb, Illinois, United States

a r t i c l e i n f o a b s t r a c t

Keywords: Financial accounting and reporting are in the midst of one of the most significant revolu-
Kuhnian theory tionary changes in modern history. The purpose of this paper is to provide a framework
Accounting paradigm shift that will contribute to the dialogue surrounding these developments. We use Kuhn’s
Changes in accounting thought [Kuhn, T. S. (1970). The structure of scientific revolutions. Chicago, IL: The University of
Conceptual framework
Chicago Press] framework on the theory of scientific revolution to describe how changes
in the need for information, coupled with the lack of relevant accounting information,
led to reporting anomalies that have spurred a revolutionary shift in accounting paradigms.
We are moving from an accounting paradigm that existed in the age of an industrial econ-
omy to an accounting paradigm that fits the economy in an information age. This redirec-
tion has resulted in the following: a change in the conceptualization and application of
relevance and reliability, an increased use of fair value versus historical cost measure-
ments, a renewed emphasis on principles versus rules, and an evaluation of the composi-
tion of the basic financial statements.
Ó 2008 Elsevier Ltd. All rights reserved.

Introduction can assist in the understanding of these changes and may

Financial accounting appears to be transforming, so
much so that we are in the midst of one of the greatest
revolutions since Pacioli invented double-entry accounting
( King, 2006). The purpose of this paper is to provide a
framework that will contribute to the dialogue surround-
ing these developments. The increased emphasis on fair
value reporting, the reevaluation of the conceptual frame-
work, the redesign of the basic financial statements, and
the push toward principles-based accounting provide evi-
dence of the advances. We use Kuhn’s (1970) description
of change as a mechanism to understand the impact of
the economic environment on accounting and the resulting
shift that is emerging in accounting. Kuhnian theory has
been used to describe the changes in accounting thought
in the 1960s and 1970s (Wells, 1976) and to describe the
scientific foundations of accounting research (Badua, Pre-
vits, & Vasarhelyi, 2007). The dialogue from our discussion
* Corresponding author.
E-mail addresses: shortridge@niu.edu (R.T. Shortridge), pamsmith@
niu.edu (P.A. Smith).
lead to refinements and wider acceptance of the revolution
that is occurring.
Thomas Kuhn’s, The structure of scientific revolutions
(1970), describes the catalysts that cause a body of knowl-
edge to transform paradigms, what happens during the
transformation process, and the impact on practice as a re-
sult of the changes. Kuhn’s work focuses on paradigms and
revolutions in the context of the hard sciences; however,
the process he describes provides insight about change in
the social sciences as well. One difference between Kuhn’s
scientific revolutions and the transformation in accounting
is that the catalysts of change in the hard sciences (e.g.
astronomy, physics, dynamics, and optics) are the physical
laws of nature, while the catalysts of change in the social
sciences are the social environments in which they operate.
According to Kuhn, change occurs in two forms: evolution-
ary and revolutionary (Kuhn, 1970, pp. 1–9). Evolutionary
progress occurs when a body of knowledge is advanced on
an incremental basis over time. Accounting has typically
followed this pattern with slowly evolving standards issued
in response to changes in practice. Revolutionary change
occurs when a significant anomaly or crisis results in a

1052-0457/$ - see front matter Ó 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.racreg.2008.11.010
12 R.T. Shortridge, P.A. Smith / Research in Accounting Regulation 21 (2009) 11–18
movement of an entire body of knowledge away from a par-
ticular stream of thought. Currently, accounting is undergo-
ing a revolutionary change in thought regarding the core
fundamentals upon which financial accounting is based.
The catalysts for the transformation can be attributed to
the movement from an industrial economy to an informa-
tion economy, increased globalization, improvements in
data availability, and increased information processing
capabilities.
We refer to the change in accounting fundamentals as a
paradigm shift. The old paradigm, hereafter referred to as
the industrial paradigm, existed during the industrial
economy and was based on the FASB’s original conceptual
framework. It emphasized historical cost measurements,
was rules-based, and was focused on transactions and allo-
cations (Fig. 1). This paradigm reflected rules that allowed
estimates and judgments but thrived on the certainty and
precision garnered from historical cost measurements. The
application of industrial age accounting practices in the
new economy resulted in several anomalies in financial
reporting that spurred significant changes in accounting
thought. As a result of these developments, a new financial
reporting paradigm emerged.
The fundamentals of the new paradigm, hereafter re-
ferred to as the information paradigm, exists in an infor-
mation economy and is based on the proposed conceptual
framework. Further, the new paradigm is principles-
based, emphasizes fair value, and focuses on economic
events (see Fig. 1). It is important to note that although
the change from historical cost to fair value measure-
ments currently has high visibility, this change alone is
not what we are conceptualizing as a paradigm shift. All
of the factors presented in the diagram are part of the
paradigm shift. In the information model, the FASB
(2006a) has proposed that the notion of reliability be re-
placed with faithful representation. The new terminology
is indicative of the FASB’s movement to emphasize the
substance of economic events over their form. This new
focus leads to an increased emphasis on principles versus
Accounting in
an Industrial
Paradigm
Reliability synonymous
with verifiability
Allocation of Historical
costs costs
Transaction focused
Rules - based
Fig. 1. Paridigms depicted.
rules and fair value versus historical cost measures. Fig. 1
highlights the overlap that is occurring as the financial
reporting environment moves from an industrial age to
an information age. The shift in accounting paradigms is
not complete, and therefore the standards issued during
the transition period have characteristics from each
paradigm.
The remainder of this paper will expand our conceptu-
alization of these paradigms and the shift that is occurring
in the context of Kuhn’s framework. This paper first utilizes
Kuhn’s theories to explain how accounting fundamentals
can be described as a paradigm and why the change in fo-
cus is a revolutionary movement. The next section pro-
vides a brief discussion about the evolution of economies
from a hunter-gatherer society to an information economy.
This discussion is important because, as a social science,
changes in the economic environment are the vehicles of
changes in accounting. Because accounting did not evolve
at the same rate as the economic environment, financial
reporting anomalies arose. Ultimately, these deficiencies
in accounting led to dissatisfaction with the accounting
information generated under the industrial paradigm.
These deficiencies highlight how economic advances influ-
ence accounting and why the new paradigm in accounting
is emerging. Finally, utilizing Kuhn’s theories, we discuss
the stages of change occurring in the financial reporting
revolution: the rejection of old traditions, the changes in
the problems to be solved, and the alterations in the work-
ing world.
Anatomy of a paradigm shift
Kuhn defines a paradigm as a body of knowledge that
includes theory, application, and instrumentation, which
produces ‘‘particular coherent traditions” (Kuhn, 1970, p.
10). A paradigm is based on the common models of
thought that are used to establish rules of practice. The
theories and applications are perpetuated through
Accounting in an
Information
Paradigm
Relevance prioritized in
proposed conceptual framework
Globalization
Faithful representation
Fair values replaces reliability
Economic event focused
Principles - based
 R.T. Shortridge, P.A. Smith / Research in Accounting Regulation 21 (2009) 11–18
textbooks and instruction based on existing doctrines that
are ingrained in the thoughts of those in the field. This
reinforcement results in a paradigm that exists for decades
and is applied by generations of practitioners and
researchers. Despite the indoctrination of a paradigm,
exceptions to that body of knowledge arise. These incon-
sistencies are generally addressed with a series of incre-
mental modifications that fit within the existing
framework. Kuhn refers to successive alterations within a
paradigm as evolutionary changes in the body of
knowledge.
Kuhn’s framework also discusses radical changes in
thought that result in shifts in paradigms and thus gener-
ate new theories and applications for those theories. In
particular, Kuhn discusses three ways in which revolution-
ary movements occur: (1) a search to explain an anomaly,
(2) the emergence of new discoveries, or (3) in response to
a crisis. Because of these events, an inconsistency emerges
when the existing paradigm no longer satisfies the current
state of being. Thus, a revolution begins to seek new theo-
ries, which will answer questions the old ones could not
resolve. Kuhn describes a revolution as a process that relin-
quishes one set of beliefs for a different set of beliefs cham-
pioned by a new regime (Kuhn, 1970, p. 93). Resistance to
the new paradigm is inevitable as the old paradigm is in-
grained in current professionals through both formal edu-
cation and on-the-job experiences.
Throughout the 1900s, accounting changes were evolu-
tionary. When a new or updated accounting treatment was
needed, a new standard or guidance was issued that fit
within the existing paradigm. The evolution of capital lease
accounting standards is a good example of this piecemeal
progression. Since the 1970s, companies have tried to de-
velop transactions that would achieve off-balance sheet
financing, and accounting standards reacted to each new
transaction in incremental steps. Standard setters imple-
mented rules to address the new off-balance sheet transac-
tions and then companies developed slightly different
transactions to avoid the new rules. Over time, this led to
the FASB providing lease guidance in more than 75 pro-
nouncements (Shortridge & Myring, 2004). This prolifera-
tion of rules occurred because the FASB made
incremental changes that were consistent with the indus-
trial paradigm. These rules produced numerous reporting
anomalies and an information crisis, which has prompted
the users of financial reporting to demand change. As a re-
sult, the accounting profession is in the midst of recon-
structing some of the most basic fundamentals in the
existing body of knowledge. Kuhn defines a reconstruction
of this magnitude as a revolutionary paradigm shift (Kuhn,
1970, p. 85).
Identifying the beginning of the revolution is difficult.
Alfred King, the vice-chairman of Marshall and Stevens,
Inc. and a founding member of Appraisal Issues Tasks
Force, indicates that the Financial Accounting Standards
Board (FASB) and the International Accounting Standards
Board (IASB) have been moving toward fair value
accounting and away from historical cost accounting for
30 years (King, 2006, xiii). Linsmeier (2003) FASB Board
member, suggested that the impetus for the revolution
occurred in the 1970s when the demand for financial
13
derivatives grew as a result of increased risk from foreign
currency transactions1 and increased volatility in oil
prices2. He argues that the increased use of financial instru-
ments resulted in a schism in what is reported under the
industrial paradigm and what information is needed in
the new economy. Regardless of when the revolution be-
gan, the time for a change in the core fundamentals of
financial reporting has come.
The change in the core fundamentals is most evident in
the changes occurring in the conceptual framework. Fig. 2
presents the hierarchy of accounting qualities developed
by the FASB in Statement of Financial Accounting Concepts
2 (FASB, 1980). In this hierarchy, relevance and reliability
are the primary qualitative characteristics of decision-use-
ful accounting information. The FASB never intended reli-
ability to become synonymous with precision or certainty
( FASB, 1980, para 72). However, over time, reliability of
information became synonymous with the verifiability of
measurements and many began to believe that accounting
information was precise. This is most clearly evident in the
business press, where reference to accounting information
is with terms like ‘‘correct”, ‘‘accurate”, and ‘‘right” (Gomes,
2004). Of course accounting information is not ‘‘accurate”,
but is fairly represented given the facts, estimations, and
judgments at the time. The connotations embedded in his-
torical cost information also fueled the ‘‘expectations gap”
between what information is reported and what users ex-
pected from the information (Australian Education Re-
search, 2007).
Fig. 3 depicts the authors’ interpretation of the hierar-
chy of accounting qualities in the proposed conceptual
framework currently being deliberated by the FASB (FASB,
2006a). In this hierarchy, decision-useful information is
information that is relevant, faithfully represented, compa-
rable, and understandable. These characteristics are ap-
plied sequentially when determining what information is
reported, because the application of the characteristics
follows a logical sequence (numbered 1, 2, 3, and 4 in
Fig. 3). The first and most important characteristic is rele-
vance ( FASB, 2006a, QC43). Relevance helps ‘‘identify
which economic phenomena” need to be reported (FASB,
2006a, QC43). Relevant information has predictive and
confirmatory value and is timely. Once the relevant infor-
mation is identified, the second qualitative characteristic
requires it to be faithfully represented. This means that
the information depicts the economic phenomena in a
faithful manner ( FASB, 2006a, QC16). Faithfully repre-
sented information is verifiable, neutral, and complete. In
the 1980 conceptual framework, faithful representation
was a component of reliability; in the proposed conceptual
framework it stands alone and replaces the term reliability.
1
Corporations experienced increased risk from foreign currency trans-
actions in the mid-1970s after President Nixon broke the Brenton Woods
Accord. The Accord, established after World War II, tied all foreign
exchange rates to the US dollar, which was based on the ‘‘Gold Standard”.
In 1972, President Nixon broke the treaty (other countries had already done
so) and US currency entered the ‘‘Free Float” system (Michael Ryan
Associates, 2007).
2
Volatility in oil prices increased dramatically after the creation of OPEC
because the market no longer adjusted supply and demand with floating
prices.
14 R.T. Shortridge, P.A. Smith / Research in Accounting Regulation 21 (2009) 11–18

DECISION MAKERS
AND THEIR CHARACTERISTICS
USERS OF (FOR EXAMPLE, UNDERSTANDING
ACCOUNTING INFORMATION
OR PRIOR KNOWLEDGE)

PERVASIVE BENEFITS > COSTS

CONSTRAINT

USER-SPECIFIC
QUALITIES UNDERSTANDABILITY

DECISION USEFULNESS

PRIMARY
DECISION-SPECIFIC
QUALITIES
RELEVANCE RELIABILITY

TIMELINESS

VERIFIABILITY REPRESENTATIONAL
PREDICTIVE FEEDBACK FAITHFULNESS
INGREDIENTS OF VALUE VALUE
PRIMARY QUALITIES

SECONDARY AND COMPARABILITY

INTERACTIVE QUALITIES (INCLUDING CONSISTENCY) NEUTRALITY

THRESHOLD FOR
RECOGNITION MATERIALITY

Fig. 2. Industrial paradigm conceptual framework.

PERVASIVE
BENEFITS > COSTS
CONSTRAINT

OBJECTIVE DECISION USEFULNESS

1 2 3 4

RELEVANCE FAITHFUL REPRESENTATION COMPARABILITY UNDERSTAND-

ABILITY

PREDICTIVE / TIMELINESS VERIFIABILITY NEUTRALITY COMPLETENESS CONSISTENCY

CONFIRMATORY
VALUE

THRESHOLD
FOR
MATERIALITY
RECOGNITION

Fig. 3. Information paradigm proposed conceptual framework.

Characteristics three and four of the proposed concep-
tual framework are comparability and understandability.
Once it is determined that the information is relevant
and faithfully represented, that information must be com-
parable. ‘‘Comparability is the quality of information that
enables users to identify similarities in and differences be-
tween two sets of economic phenomena” ( FASB, 2006a,
QC35). This also implies that the same policies are consis-
tently applied through time and across different situations.
Finally, the information needs to be understandable. In the
1980 conceptual framework, this characteristic applied to
the user of the information. In the proposed conceptual
framework, the FASB recognizes that understandable infor-
mation must be ‘‘classified, characterized, and presented
clearly and concisely” (FASB, 2006a, QC39).
The transformation of the conceptual framework is just
one piece of evidence that there is a paradigm shift. As de-
picted in Fig. 1, there are other changes that parallel the
changes in the conceptual framework. For example, there
is a shift to fair value measurements, an increased empha-
sis on principles versus rules, and an increased focus on
economic events versus transactions. The information
economy enables all of these changes because there is
more information technology, more sophisticated valua-
tion methodology, more globalization, and greater data
accessibility.
 R.T. Shortridge, P.A. Smith / Research in Accounting Regulation 21 (2009) 11–18
Because accounting is a social science, the driver of
change is the environment in which it operates. Thus, in
the next section, we discuss the evolution of the economic
environment and how it impacts the transition from an
industrial paradigm to the information paradigm.
Changes in the economy impacts the demand for
information
As economies develop, the need for information in
those environments changes. For example, counting with
tokens met the needs of a hunter-gatherer society but does
not meet the needs of a society that can move funds wire-
lessly around the globe in an instant. Elliott and Jacobson
(2002) described the emergence of economic environ-
ments and how they altered the demand for information.
Hunter-gatherer, agricultural, and industrial economies
The first economy described by Elliott and Jacobson is
the hunter-gatherer economy. In this economy, members
of a tribe settled in regions that provided game and wild
vegetables. Information consisted of technical knowledge
about making tools, how to hunt, etc., and was presumably
passed down from generation to generation in an informal
setting. The agricultural economy followed in which farm-
ing became the predominant occupation. Basu and Way-
mire (2006) describe the development of seals or tokens
that were used as a method of redistributing agricultural
surplus. Written communication permitted the transfer
of information, such as the knowledge of seasons and
technology, which resulted in increased productivity. The
surplus from agricultural productivity aided the develop-
ment of commerce, social organizations, and government
that could not function without a system of measurement
and records (Basu & Waymire, 2006; Mattesich, 1987). This
led to the rise of scribes and stewards who kept records for
religious organizations and manors to ensure they were
running efficiently. Pacioli also developed double-entry
bookkeeping during this economy.
The development of machines created production
surplus and is a key characteristic of the industrial age. As
enterprises grew in size, ‘‘corporate” organizations devel-
oped, which led to a separation between owners and the
managers. The corporate form ‘‘had a great effect on
information needs” (Elliott & Jacobson, 2002, p. 73). Reliable
information was needed for the efficient allocation of
resources; hence audits developed to validate that informa-
tion. An essential part of the industrial age was long-lived
factories, machinery, and equipment. Historical cost
accounting provided a reliable measure of these assets that
were held for long periods of time. Performance measure-
ment during the industrial age was dependent on the
delivery of goods, not payment of services. Hence, the focus
of accounting was the allocation, or matching, of costs with
revenues.
The information economy
The US and many other developed countries have en-
tered the information economy. DeLong and Summers
15
(2001) discussed the emergence of the information econ-
omy by highlighting the proliferation of technology and
information processing power. Technology and the ease
of obtaining information have also supported the global-
ization of business. These changes, along with an increased
reliance on the service industry, led former SEC Chairman
Alan Greenspan to comment that in our economic environ-
ment, ‘‘goods are increasingly valued not for their physical
mass or other physical properties but for weightless ideas”
(DeLong & Summers, 2001, p. 35).
There is convincing evidence that the accounting infor-
mation supplied to decision makers in the information
economy is not meeting their needs. In 1991, Elliott called
for a measure of rates of change and improved off-balance
sheet disclosures in order to meet user needs ( Elliott,
1991). In 1992, he again called for internal and external
accounting to change in light of the post-industrial econ-
omy, in order to support the decision-making of manage-
ment and third party users (Elliott, 1992). The Association
for Investment Management and Research (AIMR) report,
Financial Reporting in the 1990s and Beyond, presented the
financial analysts’ call for more current value measure-
ments (Knutson, 1993). The Jenkins Committee Report also
called for enhanced transparency in the financial state-
ments (AICPA, 1991).
Another indicator of the shortcomings of current
accounting practice is the change in the relationship be-
tween a company’s book value and market value. For
example, a study of more than 10,000 companies found
that shareholders’ equity represented 95% of the market
value in 1979, but represented 28% of market value in
1998 (Boulton, Liber, & Samek, 2000, p. 15). Much of this
difference is likely attributable to historical cost measure-
ments and intangible assets that are not recorded. Baruch
Lev, professor of accounting at New York University, esti-
mates that ‘‘intangibles comprise well over half the market
value of public companies. Yet, with statements prepared
under US generally accepted accounting principles, inves-
tors can only guess at their value” (Aston, 2002, p. 110).
In an information economy, a company’s revenue source
is not only from selling products, but also from selling ser-
vices. Almost half of the Fortune 100 companies provide a
service rather than sell a product. Most of those companies
provide some type of financial services. The entity in the
information economy is no longer brick and mortar with
tangible assets needed to produce revenues.
The accounting in the industrial paradigm produced
financial information that does not match the economic
activities of the entity, or the needs of the financial state-
ment user in an information age ( Clements, 1993). The
incongruence of the industrial paradigm in an information
age results in reporting anomalies and inconsistencies.
A revolutionary shift in accounting paradigms
Kuhn (1970, p. 6) expounds on three characteristics that
he believes define scientific revolutions. First, revolutions
mandate that practitioners reject one set of traditions in fa-
vor of another set that is not compatible with the first (i.e.
historical cost versus fair value). Second, the adoption of a
16 R.T. Shortridge, P.A. Smith / Research in Accounting Regulation 21 (2009) 11–18
new paradigm changes the problems to be solved (i.e. the
estimates and judgments needed to determine fair value).
Finally, revolutions alter the world of the practitioner in
which the new paradigm is applied (i.e. education and
training in valuation techniques and the need for more
professional judgments). In this section, we will discuss
evidence of each characteristic as accounting transforms
from the industrial to the information paradigm.
Rejection of old traditions
The FASB, in conjunction with the IASB, is redefining the
current conceptual framework (Fig. 2), which will result in
a new set of fundamentals as depicted in Fig. 3. Perhaps
one of the most substantial changes is the role of relevance
and reliability. Historically, relevance and reliability were
portrayed as equal qualities that led to information that
was useful in decision-making. As mentioned earlier, in
the industrial age paradigm, the reliability of information
became synonymous with verifiability. In the proposed
conceptual framework, reliability is replaced with faithful
representation and is secondary to relevance (see Fig. 3).
The proposal is intended to move financial reporting away
from transactions-based accounting that focuses on verifi-
ability to an emphasis on faithful representation that re-
flects economic substance over form.
The movement to faithfully represent economic sub-
stance will require practitioners to rely more on professional
judgment. Thus, instead of focusing on the application of a
rule, practitioners will need to understand the economic
substance of the event so that the phenomenon is faithfully
represented on the financial statements. The movement to-
ward more principles-based standards is also consistent
with the effort to achieve convergence with international
standards. The Fitch Ratings (2006) confirm this by stating,
‘‘IFRS consist primarily of principles rather than a list of
rules. Reporting thus includes a change in mindset rather
than merely ensuring that ‘all the boxes are ticked.’”
In addition to revising the conceptual framework, the
basic financial statements are being re-evaluated. The
working principles established by the FASB and IASB staff
include the idea that financial statements ‘‘should present
information in a manner that separates an entity’s financ-
ing activities from its operating and other activities” (FASB,
2006b, Attachment E, p. 3). This principle will likely result
in a statement of financial position and an income state-
ment that includes operating, investing, and financing sec-
tions. In addition, the bottom-line net income number may
disappear. This movement is a dramatic rejection of old
traditions and is a construction of new ideas. In defense
of the movement, Robert Herz, chairman of the FASB, indi-
cated, ‘‘I know the world likes single bottom-line numbers
and all of that, but complicated businesses are hard to
translate into one number” (Reilly, 2007).
Change in the problems to be solved
The second characteristic of a revolution is a change in
the problems that are to be solved. Problems under the
industrial paradigm frequently revolved around measure-
ment and recognition of costs and revenues. One signifi-
cant issue in the information paradigm is how to
determine fair value. In an effort to resolve this issue, the
FASB issued Concept 7, Using Cash Flow Information and
Present Value in Accounting Measurements (FASB, 2000b)
and Statement 157, Fair Value Measurements (FASB,
2006c). Statement 157 does not require the use of fair val-
ues in the financial statements; instead, it provides a defi-
nition of fair value and a three-tier hierarchy for measuring
fair value. Further, it attempts to provide a consistent def-
inition of fair value using an exit price. If no market-based
exit price is available (Level 1), the standard requires firms
to use utilize estimation models to determine value. The
guidance in the standard intends to alleviate some of the
concerns about comparability.
Another key problem to address in the information par-
adigm is how to recognize revenues in the income state-
ment. Specifically, in the industrial economy, revenue
was included on the income statement when it was realiz-
able and earned. This definition presented several anoma-
lies in the industrial paradigm resulting in the issue being
addressed more than 180 times in current GAAP (Fitch
Ratings, 2006). One particularly important issue will be
how changes in fair value will be recognized on the income
statement. In the industrial paradigm, some fair value
changes are recognized on the balance sheet (in other com-
prehensive income) and others are recognized on the in-
come statement. Finding a solution to the issues related
to revenue recognition is critical to successfully move to
the information paradigm.
In summary, the types of estimates and judgments used
in determining fair value are much different than those
used in cost allocation. David Larsen, a Managing Director
at Duff and Phelps, says that even though it is difficult to
estimate fair values, using consistent approaches to make
estimates represents substantial improvement from
historical costs (MacFadyen, 2007). In order to make the
estimates and judgments associated with valuation,
accounting professionals will need to retool their skill set.
Alterations of the working world
The final characteristic that results from a revolutionary
shift to a new paradigm is that the working world of
practitioners is altered. All of the changes described in this
paper will have a dramatic impact on the accounting pro-
fession. In the past, because of the historical cost measure-
ment attribute, accountants might have been appropriately
called ‘‘allocators.” In today’s environment, they might
better be known as ‘‘estimators.”
As an indication of the changes in the working world,
the AICPA has established the Accredited in Business
Valuation (ABV) credential in order to add marketability
and training to its membership. On June 21, 2007, the AIC-
PA issued its first standard for valuation services, Statement
on Standards for Valuation Services No. 1 to provide guid-
ance for those in practice ( AICPA, 2007). In June 2007,
the FASB began the process to establish a Resource Group
on Valuation Guidance to assist practitioners with
implementation issues. BDO Seidman, LLP noted in their
February 2007 newsletter ‘‘it seems clear that the stan-
dards issued or exposed for comment during 2006 laid
 R.T. Shortridge, P.A. Smith / Research in Accounting Regulation 21 (2009) 11–18
the groundwork for expanded requirements to use fair va-
lue in the future” (BDO Seidman, 2007). This suggests that
practitioners, both public and private, need to think about
how they will implement these standards. As the imple-
mentation date is pending, a tremendous amount of work
still needs to be done. This means that education and train-
ing of the accounting professional will need to change in
response to the working environment.
The new paradigm will also emphasize principles ver-
sus rules. As a result, practitioners are adjusting to the idea
of making more professional judgments, not just applying
bright-line rules. The movement toward principles-based
standards is in conjunction with FASB’s effort to converge
with the IASB. This shift is occurring despite constituent
concerns about litigation. Practitioners desire specific
guidance that they can point to in defense of their deci-
sions. This has led to bright-line standards in the past.
The efficacy of the movement to principles will hinge on
whether standard-setting bodies can avoid the temptation
to meet the demands of practitioners.
In summary, the overhaul of the current financial
reporting environment will dramatically impact practice.
The Wall Street Journal notes that ‘‘if adopted, the changes
will likely force every accounting textbook to be rewritten
and anyone who uses accounting—from clerks to chief
executives—to relearn how to compile and analyze infor-
mation” (Reilly, 2007).
Conclusion
The discussion presented in this paper is intended to
stimulate thought and dialogue about why changes in
accounting are occurring rather than a debate about what
changes are occurring. We applied Kuhnian theory as a
framework to explain the revolutionary shift in accounting
paradigms. Kuhn (1970) indicates that revolutionary
changes result in the reconstruction of the most basic fun-
damentals of an existing body of knowledge. Accounting is
in the midst of this type of transformation as it is creating
new fundamentals that change the questions to be an-
swered and the work life of practitioners.
According to Kuhn’s framework, the paradigm shift in
accounting will follow a series of identifiable steps. First
is the recognition of anomalies. The anomalies in financial
reporting were spurred on by a change in the economic
environment and lack of change in the existing accounting
paradigm. Dissatisfaction with the existing theoretical
framework led to the development of new ideas about
how to address the shortcomings. Over time a new school
of thought has emerged from these ideas. The emergence is
of such significance that it is transforming the old para-
digm into a new paradigm of thought. Because the old par-
adigm was ingrained over decades, we are now in a period
of resistance to the new school of thought. Kuhn notes that
acceptance of the new paradigm will take time, ‘‘Its assim-
ilation requires the reconstruction of prior theory and the
reevaluation of prior fact, an intrinsically revolutionary
process that is seldom completed by a single man and
never overnight” (Kuhn, 1970, p. 7). During the period of
change, standards may be in conflict with each other. Kuhn
states that, ‘‘During the transition period there will be large
17
but never complete overlap between the problems that can
be solved by the old and by the new paradigm. But there
will be a decisive difference in the modes of solution”
(Kuhn, 1970, p. 85).
As a social science, changes in accounting have the
added dimension of human behaviors that interact with
the accounting paradigm. Much of the debate in practice
integrates the behavioral dimension, and rightfully so.
Although accounting must respond to the changes in the
economic environment, it cannot control the behaviors of
individuals within the practice, no more than it can control
the economic environment. Both are unpredictable. There-
fore, the paradigms adjust as best as they can in the con-
text of an ever-changing environment.
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