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The role of accounting theory in the

development of accounting principles

D Coetsee
Department of Accountancy
University of Johannesburg

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

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The role of accounting theory in the development of accounting principles

accounting principles and informing the major developments that have had a direct
standard setters’ process is thus a key influence on the status of accounting theory
academic question. today; (3) the first development – positive
A crucial dilemma in accounting research accounting theory; (4) the second
is that there is currently no comprehensive development – the decision-usefulness
theory of accounting on which accounting theory of accounting; and (5) other
research can be based (Riahi-Belkaoui developments in accounting research –
2004; Godfrey, Hodgson, Holmes & Tarca interpretative and critical research.
2006; Schroeder, Clark & Cathey 2001).
This fact was identified by the American 2 The nature of accounting
Accounting Association in 1973. In A
Statement of Accounting Theory and Theory theory and the
Acceptance the Association reviewed the development of theory
status of accounting literature and practice There are different schools of thought on
at that time and concluded that, given the what represents accounting theory. The first
different valuation systems of accounting, it school focuses on the development of
was impossible for the profession to accounting principles and describes
develop a single valuation system for accounting theory as follows:
accounting (Wolk et al. 2008:166). Watts Thus, accounting theory may be defined as a
and Zimmer-mann (1979:301) concur that logical reasoning in the form of a set of broad
there is no generally accepted accounting principles that (1) provide a general frame of
theory to justify accounting standards and reference by which accounting practice can be
contend that that this will never be evaluated and (2) guide the development of
achieved. Riahi-Belkaoui (2004:108) new practices and procedures (Hendriksen
confirms that no comprehensive theory of
accounting has been developed and that Accounting theory is the basic assumptions,
definitions, principles and concepts that
different theories arise from the use of
underlie accounting rule making (Wolk et al.
different approaches to the construction of 2008:2).
accounting theory.
The other school of thought explains
Since no comprehensive theory of accounting theory as an activity to explain
accounting has been developed, the and predict:
question arises on what theoretical grounds
… the primary objective of accounting theory
the principles of accounting are based. This is to provide a basis for the prediction and
is a difficult question with different facets. explanation of accounting behavior and events
The aim of this article is to contribute to (Riahi-Belkaoui 2004:108).
this debate by considering the potential role The objective of accounting theory is to
that different types of accounting theory explain and predict accounting practice (Watts
and research play in developing consistent & Zimmerman 1986:2).
accounting principles. The issue is whether Theory attempts to explain relationships and
accounting theory and research do in fact predict phenomena (Wolk et al. 2008:28).
contribute to the accounting principles While the first school focuses on the
created by the standard setters. principles of accounting, the second
In assessing this potential role, the article endeavours to evaluate practice itself.
follows a structured process by discussing Hendriksen (1982:1) expresses his
the following: (1) the nature and preference for the first school as follows:
development of accounting theory; (2)

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Accounting theory may also be used to explain and predicting the phenomena, and is
existing practices to obtain a better therefore more positivistic.
understanding of them. But the most important
goal of accounting theory should be to provide The result is that many accounting
a coherent set of principles that form the theorists do not distinguish between
general frame of reference for the evaluation normative and descriptive research, but
and development of sound accounting between normative and positive research
practices. (Schroeder et al. 2005; Deegan & Unerman
These two schools of accounting theory are 2006). Inanga and Schneider (2005)
grounded in the two main methodologies compare the normative and positive
for the development of theory in general theories as follows:
that is, normative and descriptive A normative theory is a goal-oriented theory
methodologies. Normative methodology that represents real world situations, not as
questions existing theory to describe what they are, but as they should be. It is
the theory should be, while descriptive prescriptive rather than descriptive theory that
methodology investigates the underlying explains, and sets out, principles
of what ought to be. Normative theories
phenomena to describe what they are are characterised by goal assumptions
(Hendriksen 1982; Riahi-Belkaoui 2004). and deduction (Inanga & Schneider
Normative metho-dology is more 2005:231).
concerned with what the outcome should be Positive theories attempt to describe real
and is more prescriptive (Deegan & world situations as they are. Research based
Unerman 2006:10). By contrast, descriptive on positive theories involves empirical
methodology describes, explains and observations of the relevant phenomena from
predicts the underlying phenomena which a problem is defined. Data relevant to
(Deegan & Unerman 2006:8). the problem are then collected and hypotheses
formulated and tested by independent process.
Normative and descriptive metho- If the theory that results is an accurate
dologies are also distinguished by the representation (description) of the empirical
process followed to develop theory. phenomena, such a theory can be used for
Normative methodology is a deductive predictive purposes. Induction follows
empirical observation and takes the form: “if
process in which objectives are formulated,
event Y takes place, the outcome will be Z”.
from which principles are developed. The greater the number of empirical
Descriptive methodology is an inductive observations, the better supported the related
process that focuses on observations of the induction will be (Inanga & Schneider
real world. The aim of the inductive process 2005:230).
is to record the underlying phenomena. To understand the role that these
However, a third process, the predictive methodologies of development of theory
process, is sometimes identified. This play in the development of accounting
process goes further than the inductive theory it is important to note the
process in that it not only records the developments in accounting research over
observations, but also explains and predicts the last few decades.
them – hence the fact that it is often
referred to as a positive research metho-
dology (Deegan & Unerman 2006:8). 3 Major developments in
he second school of accounting theory, accounting theory
the explain-and-predict school, although Two major developments in accounting
descriptive in observing the underlying occurred in the 1960s and early 1970s, and
phenomena, focuses more on explaining 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 necessarily be correct in terms of deductive

today. The first was the move from the logic. They (2008:98) state that the process
normative to positive accounting is more pragmatic because perfect standards
methodology, resulting in positive are for all intents and purposes impossible.
accounting research becoming the thrust of Watts and Zimmermann (1979:273) argue
mainstream accounting research. The that government regulation creates the
second was the move to a decision- incentive for individuals to lobby and that
usefulness orientation in accounting. accounting theories justify political
The years, 1956 to 1970, were regarded lobbying. The result of this pragmatic
as the normative period (Godfrey et al. process on the part of the standard setters is
2006:6; Mattessich 2002:186) in which the that accounting researchers cannot rely on
norms for best practice were developed. In the outcome of the process as academically
terms of the normative approach “very little accepted theory on which research can be
concern was exhibited for the empirical based.
validity of the hypothesis on which The second development, the decision-
normative prescriptions rest” (Watts & usefulness orientation in accounting, started
Zimmerman 1986:4). Wolk et al. with research in the 1960s. The Statement
(2008:135) agree that this “postulated- of Basic Accounting Theory, generally
principle approach” had died out by 1970. referred to as ASOBAT, was issued by the
One of the main reasons why the normative American Accounting Association in 1966,
approach is not used is that there is and is regarded as the starting point of this
uncertainty about whether any particular orientation (Hicks 1966; Sterling 1967).
normative theory would be accepted by Based on this orientation, Riahi-Belkaoui
accounting scholars (Godfrey et al. 2006:8). (2004:41) describes the role of accounting
Normative research has been regarded as as follows:
“nonscientific” (Mattessich 2002:186). The The role of accounting is to produce
result of the move from normative to information about the economic behavior
positive research was that the focus in resulting from a firm’s activities within its
accounting research shifted from the environment. The result is best represented by
development of accounting principles and what the FASB calls “the information
what they should be to a more scientific
methodology of explaining and predicting Through the decision-usefulness orient-
the practice. The effect of this positive tation, the focus shifted from the principles
research methodology is discussed in of accounting to the outcome of the
section 4. accounting process – the information that is
provided. A more detailed discussion of the
According to Godfrey et al. (2006:11),
possible effects of decision-usefulness
while the emphasis in academic research
theory is provided in section 5.
remains in the area of positive accounting
theory, the profession has sought a more Over the last two decades, many scholars
normative approach by seeking theories that have been calling for accounting to enter
would unify accounting practice and make the broader research domain of the social
it more useful. However, this is not a pure sciences (Reiter & Williams 2002:602;
normative approach and the question can be Baker & Bettner 1997:294). They argue
posed whether practice is creating theory. that accounting is a human activity that
Wolk et al. (2008:93) contend that should include all research approaches
accounting standards that have developed included in the social sciences, such as
from a pragmatic process would not interpretative, critical and behaviour

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research. The effect of this broader One major reason for the move away
approach to accounting research is from normative theories was the availability
discussed in section 6. of financial economics principles and
testing methods (Godfrey et al. 2006:6;
Watts & Zimmerman 1986:5). Gaffikin
4 The positive accounting (2006:n.p.), in a working paper, argues that
theory the reason for the development and
explosion of the neoempirical research
4.1 Background methods in accounting, including positive
Henning, Van Rensburg and Smit research, was
(2004:17), experts on research metho- … the development of doctoral programmes in
accounting where students were given
dologies in the social sciences, describe a
rigorous training in quantitative research
positivist framework as follows: methods, neoclassical economics and finance
In its broadest sense, positivism is a rejection theory and the use of new information
of metaphysics. It is about finding truth and processing technologies (especially the use of
providing it through empirical means. It is a computers).
philosophical position that holds that the goal
and also Gaffikin (2006:n.p.):
of knowledge is simply to describe and, in
some designs, to explain and also to predict …. the growing availability of large scale
the phenomena that we experience (whether stock market data bases.
quantitatively or qualitatively). The purpose of Hahn (2007) tested this reality in 2001, by
science is thus what we can observe and making an assessment of the theories used
in doctoral dissertations. He (2007:318)
The focus of a positivist framework is to found that the theories deployed were
find truth by describing the reality. The drawn from finance, economics,
empirical tool gives the research process psychology and sociology. His conclusion
validity. The starting point is a descriptive was that 53% of the theories were drawn
approach, but by incorporating the from economics and finance and 27% from
empirical testing tools to explain and psychology (Hahn 2007:305). He
predict the phenomenon, positivism is (2007:319) also found that not all the
created. Under the positivist approach, dissertations identified their theoretical
accounting theory is developed by basis clearly. Reiter and Williams
formulating hypotheses or designing (2002:583 & 585) examined the work of
models and testing them. Science is deemed various authors and concluded that most
to be a process of trial and error. A accounting journals in North America are
hypothesis or model is never absolute truth, positivistic and economics based.
but as long as it is not refuted through
research, it is regarded as the truth.
4.2 Finance theory
Positive theories combine the activities
Capital market research in finance is
of describing, explaining and predicting
particularly important in positive
(Godfrey et al. 2006:55). Today, the bulk of
accounting theory (Godfrey et al.
positive theory is concerned with
2006:261) since it creates a link between
explaining the reasons for current practice
accounting data and quoted share prices.
and predicting the role that accounting and
Capital market research is normally based
related information play in economic
on the efficient market hypothesis and
decisions (Godfrey et al. 2006:55).
includes capital asset pricing models.

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The role of accounting theory in the development of accounting principles

According to Godfrey et al. (2006:261), The capital asset pricing and relationship
the efficient market hypothesis is “a models focus more on the use of accounting
prevailing paradigm in financial data to determine the relationship or
economics”, and “is based on the value of share prices, and thus not on
assumption that capital markets react in an the accounting principles themselves.
efficient and unbiased manner to publicly Holthausen and Watt (2001:62) comment as
available information” (Deegan & Unerman follows on the models used in finance:
2006:210). According to this hypothesis, The valuation models employed in the value-
accounting information is in competition relevance and capital markets literature have
with other market information to establish no role for accounting. … The valuation
share prices (Scott 2006:88). As applied to models supply no theory of accounting.
finance, the efficient market hypothesis is Value relevance research assesses how well
used to test the impact of accounting accounting amounts reflect information
information on share prices as well as used by equity investors (Barth, Beaver &
the effect of changes in accounting policies Landsman 2001:77). Holthausen and Watts
on share prices (Watts & Zimmerman (2001:3) also express the following view on
1986:15). value relevance research:
The assumption of the effective market Our evaluation concentrated on the theories of
hypothesis was discredited in the recent accounting, standard setting and valuation
credit crises (Ball 2009). The issue is that underlying those inferences. Unless those
underlying theories are descriptive of
whether the market is still as efficient as accounting, standard setting and valuation,
presumed. Certain accounting measure- the value-relevance literature’s reported
ments, such as fair value accounting, rely association between accounting numbers and
on efficient markets to determine the common equity valuations have limited
accounting value. One of the accounting implications or interferences for standard
issues identified in the credit crises was the setting; they are mere associations. We argue
that the underlying theories are not descriptive
appropriateness of fair value measures in
and hence drawing standard-setting inferences
inactive markets or illiquid markets (IASB is difficult.
2010). Resolving issues surrounding the
efficient market hypothesis is crucial in the Holthausen and Watts (2001:4 & 63) argue
that descriptive theories are needed to
application of fair value accounting
interpret the associations of value relevance
(Milburn 2008) and the striving of the
research and that the literature does not
standard setters to create comprehensive
seek to develop a descriptive theory of
and consistent accounting standards for all
capital markets. accounting and standard setting. They
(2001) contend that such theories are
Capital asset pricing models identify needed for assurance of validity, and that
factors that affect share price valuations and value relevance ignores other roles of
build models to value the equity of entities accounting and other forces that determine
(Godfrey et al. 2006:263). Capital asset accounting standards and practice. They
pricing models normally apply linear (2001:64) therefore call for accounting
modelling (Deegan & Unerman 2006:211) literature to explore the influences of these
to determine the equity value or returns. other factors more directly. They (2001:75)
Linear modelling is also used under the believe that such research would lead to a
efficient market hypothesis to determine the more fully developed theory of accounting.
relationship between accounting data and
However, value relevance research has
share prices.
information relevance to the standard

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setters. According to Barth et al. (2001:77), It should be noted, as Deegan and Unerman
the primary focus of financial statements is (2006:206) observe, that this definition
equity investments. Specifically, developed only one particular positive
contracting and other uses of financial theory of accounting. Boland and Gordon
statements do not eliminate the importance (1992:143) concur, stating that this
of value relevance (Barth et al. 2001:98). definition of positive accounting theory
They (2001:99) state that value relevance specifically incorporated empirical research
research is designed to assess whether based on economic explanations and
investors use particular accounting amounts predictions in accounting research in an
in valuing equity and not to estimate the attempt to explain the effect of accounting
firm value. choices.
Since value relevance research is Boland and Gordon (1992) reviewed the
designed to assess the usefulness of critiques of Watts and Zimmerman’s
accounting information to the capital positive accounting theory and concluded
markets, it could be helpful to standard that any critique of the philosophy of
setters. Although Holthausen and Watts science followed by Watts and Zimmerman
(2001) are correct in asserting that the might not be effective, but questions the
valuation models do not create a theory of limitations of following an economics-
accounting, they still provide information based analysis (Boland & Gordon
that is valuable to standard setters. (1992:142). In a working document,
However, value relevance research is Gaffikin (2006:n.p.) concurs, stating that
merely informative and does not create accounting deals with the economic
principles of accounting per se. phenomena from a different viewpoint and
that several aspects of accounting are
4.3 Economic theory different from simple economic analysis.
Reiter and Williams (2002:585) make the
Deegan and Unerman (2006:207) identify
following vital remark:
the focus on economic theory in positive
accounting theory as follows: Thus, rather than becoming “solvers of
accounting problems” the application of
Positive Accounting Theory as developed by positive economic theories to accounting turns
Watts and Zimmerman and others, is based on accounting researchers simply into economic
the central economics-based assumption that scientists.
all individuals’ actions are driven by self-
interest and that individuals will always act in Reiter and Williams (2002:601) believe that
an opportunistic way to the extent that their no theory is sacred and that accounting
actions will increase their wealth. researchers should be free to alter theories.
Watts and Zimmerman (1986:13) explain They (2002:585) believe that accountants
their theory in their book, Positive are currently testing economic theories, and
Accounting Theory, as follows: therefore propose that economic theories
This book presents the theory and
should be used as applied theories to solve
methodology underlying the economics-based accounting problems. To apply economic
empirical literature in accounting. The theories, the role and relevance of the
concept of theory underlying that literature is background assumptions of the theories
the scientific concept of theory; the objective should be explicitly debated (Reiter &
of theory is to explain and predict phenomena Williams 2002:601).
(in this case, accounting practice). In
economics, that concept has come to be called The question is whether such applied
“positive theory”. application exists. Can accounting
researchers develop their own theories that

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The role of accounting theory in the development of accounting principles

could be used to test accounting principles specific reasons for the failure of
directly? The article proposed that this accounting research to improve accounting
could be a focus that accounting researchers practice. According to them (2005:227)
could debate. For instance, can a fair value there is a fundamental flaw in the
theory be developed that identifies under accounting research process as summarised
which instances fair value accounting below.
should be applied? The central problem of accounting theory is
Accounting researchers need to realise that there is no known theory to use as a
that accounting and economics are different reference for creating hypotheses or models to
be empirically researched. The absence of
disciplines. Economic theory has a role to theory can be seen in education, practice, and
play in accounting research but should not the research literature itself. Practitioners, for
be the dominant force. Accounting example, because of their training and lack of
researchers should always understand the experience with an interest in research tend
link between accounting and economics, not to look to research findings to meet their
and how accounting information influences professional needs. Accounting researchers,
on the other hand, have created what appears
broader economic decisions. The objective
to be a highly advanced research context
of global financial reporting is to create which, in fact, is an environment dominated by
decision-useful information. Accounting sophisticated methodology, rather than theory.
and economics are related and always will The research basically emulates the hard
be – however, for accounting to prosper as sciences, which makes its pursuit academically
an academic discipline, elements acceptable, but it lacks substance. This
specifically germane to accounting also explains the failure of accounting research to
improve accounting practice.
need to be researched.
The flaw is not in the positive research
methodology itself but in the theories on
4.4 Mainstream accounting which positive research methodologies are
research based. The view expressed in this article is
Notwithstanding the critiques of the also that positive methodology is valid
economic influence, the positive methodology. The use of financial and
methodology has become the methodology economic theories in accounting research
of mainstream accounting research has a role to play, since accounting is not
(Williams 2009; Gaffikin 2006; Baker & unrelated to other disciplines. However, for
Bettner 1997). According to Ryan, Scapens accounting researchers to fulfil a more
and Theobald (2002:41), mainstream prominent role in the development of
accounting research is primarily concerned accounting principles, hypotheses based on
with the functioning of accounting. They the underlying principles of accounting
(2002:41) explain it as follows: need to be identified as input into any
Such work starts from an objective view of positivistic research methodology.
society, regards individual behavior as Positive accounting research seeks to
deterministic, uses empirical observations and
explain and predict accounting practices
a positive research methodology.
and accounting policy choices and is not
As Boland and Gordon (1992) state above, focused on establishing the principles of
positive methodology is a valid research accounting. Baker and Bettner (1997:293)
methodology that can be applied in further state the following:
accounting research. In accepting the
Additionally, we argue that the type of
validity of positive research methodology, research prevalent in mainstream accounting
Inanga and Schneider (2005) advance journals, which is characterized by a positivist

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methodological perspective and an emphasis frameworks. Laughlin (2007:278)

on quantitative methods, is incapable of summarises the current status of decision-
addressing accounting’s complex social usefulness as follows:
… ”decision usefulness” and its interpretation
However, the insights drawn from such in relation to one set of stakeholders (financial
research could be valuable to standard providers), has largely persisted. The “softer”
setters in understanding the reactions that decision usefulness, stewardship emphasis,
changes in accounting principles may have. which still privileges finance providers, has
As stated previously, positive accounting dominated standard setting by the UK’s
research is only informative. Currently, the Accounting Standards Board (ASB), and the
IASB and their respective forbears. However,
main driver of positive accounting research a stronger decision usefulness emphasis, with
is not to develop the principles of its continuing emphasis on the information
accounting. It is therefore essential for needs of finance providers, is currently
fundamental accounting researchers to seek gaining new ground with the initial chapters in
other avenues that could contribute to the the conceptual framework that the IASB and
core of accounting itself. the FASB have recently published (IASB,
2006). Unlike in previous eras, this new
framework seems set to expunge stewardship
5 The effect of the decision- reporting and remains largely indifferent to
the information needs of any other
usefulness theory stakeholders apart from finance capitalists).
The argument for accepting the decision-
5.1 Nature and development usefulness approach was that if
As mentioned earlier, the decision- theoretically correct financial statements
usefulness approach started in the 1960s. cannot be prepared then they should at least
ASOBAT, issued in 1966, is regarded as be more useful (Scott 2006:51). The
the starting point of this approach (Hicks question is whether historical cost
1966; Sterling 1967). ASOBAT defines information (which is useful for assessing
accounting as follows (as cited in Riahi- stewardship) is useful for making economic
Belkaoui 2004:38): decisions (Deegan & Unerman, 2006:178).
… the process of identifying, measuring, and This approach started with the question on
communicating economic information to how the financial statements based on
permit informed judgments and decisions by historical cost could be made more useful
users of information. (Scott 2006:51). Decision usefulness is thus
Although this definition still refers to the starting point of the debate on how fair
accounting as a process, it introduces the value or other valuations should be
purpose of the communication process: “to incorporated into financial reporting, a
permit informed judgments and decisions debate that is still relevant today.
by users of information”. The Trueblood From an academic perspective, the
Commission Report in 1973 reinforced the question needs to be asked whether an
decision-usefulness approach by asserting adequate decision-usefulness theory of
that the basic objective of financial accounting has been developed on which
statements future research, such as positivistic
… is to provide information useful for making research, can be based. The question is
economic decisions (Wolk et al., 2008:160). whether the decision-usefulness approach
These developments resulted in both the adopted by the FASB and IASB can be
FASB and IASB adopting the decision- regarded as establishing a theory of
usefulness objective in their conceptual accounting.

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The role of accounting theory in the development of accounting principles

5.2 Decision-usefulness theory accounting itself.

Inanga and Schneider (2005) assessed the Inanga and Schneider’s (2005)
decision-usefulness approach of the suggestion that the decision-usefulness
standard setters to determine whether a theory is a grounded theory has not been
related theory had been created. They academically tested. Such a suggestion can
(2005:246) concluded as follows: only be upheld if the method or
We have suggested that the “decision methodology of grounded theory is applied
usefulness” theory of accounting, on which to accounting to confirm that such a
GAAP is based, is a grounded theory. It is grounded theory for accounting exists. Only
normative, based on a set of assumptions when this theory-creation methodology is
which have not been tested. Accounting, as a applied to the decision-usefulness approach
discipline, is not a science and as suggested by can the question about whether or not a
Golgratt, research results in this context are
grounded theory has been created be
limited to correlation analysis. The use of
sophisticated scientific research answered. Without such an assessment, it is
methodologies does not change this basic doubtful whether the decision-usefulness
situation. approach creates a theory or base for
Inanga and Schneider (2005:231) quote accounting research. Mattessich (1993:182)
Straus and Corbin’s definition and for instance, asked
explanation of grounded theory as theory … whether, for the sake of a more practice-
that is “derived from the study of a orientated theory, it might be worth the while
to revive the more or less abandoned
phenomenon it represents”, and that it
normative paradigm or research tradition.
“begins with an area of study and what is
relevant to that area is allowed to emerge”. The decision-usefulness approach created
On this basis, Inanga and Schneider by the standard setters has been
(2005:231) explain grounded theory as documented but is not based on any
follows: scientific research process to create a
grounded theory. It has instead emerged
Conceptually, grounded theory is a technique
for building theory based on observed social through a consultative process over time. It
science phenomena, using data derived from is grounded in the due process of the
the research activity. standard setters, which is assessed and
Grounded theory is in essence a research recorded on a continuous basis. A complete
approach developed to create theory trail of its existence has been created over
directly from data (Glaser, 2004; Strauss & time, and it continues to be reassessed
Corbin, 1990). According to Suddaby through the joint framework process of the
(2006:636), “grounded theory describes an standard setters. Hence indirectly it has
overall method for systematically gathering emerged from data and is grounded in the
and analyzing data” to create a theory. data that have been recorded. Further
Many accounting academics have reviewed relevant research may assess whether the
grounded theory as a methodological decision-usefulness approach of the
approach to create theory (Gurd, 2008; standard setters is creating any theory. A
Joannidès & Berland, 2008; Kirk & Van paper by Llewelyn (2003), which discusses
Staden, 2001; Lye, Perera & Rahman, various levels of theory, may be helpful in
2006). They all agree that grounded theory such an assessment.
is a theory-discovered method or Since accounting academics currently
methodology. However, nobody has used agree that no comprehensive theory of
this methodology to create any theory of accounting exists, grounded theory as a
theory-generated methodology should be

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attractive as a starting point to develop The term interpretative research reflects a

theory in accounting. This is an alternative methodology perspective. In a general sense,
avenue for research in accounting that could interpretative research attempts to describe,
understand and interpret the meanings that
be further explored by accounting human actors apply to the symbols and the
researchers. Through the grounded theory structure of the setting in which they find
methodology, core principles, concepts and themselves (Baker & Bettner 1997:293).
hypotheses can be developed on which Interpretative research involves more than
further positivistic research could be based. describing (descriptive methodologies) and
explaining (positivistic methodologies) the
6 Interpretative and critical underlying phenomena being researched: it
goes further and incorporates the
research perceptions and feelings of people – the
Many scholars call for a focus on the reasons why they acted in a certain way.
broader social effect of accounting. Baker Interpretative research offers insights into
and Bettner (1997:307) believe that how a given person, in a given context,
accounting has an effect on social issues makes sense of a given phenomena. It is not
such as distribution of wealth, social theory driven by setting and testing
justice, political ideology and hypotheses. It reports on the theory
environmental degradation. They and others identified. For instance, grounded theory
(Macintosh, 2004; Broadbent, 2002) call for undergoes a consistent process of
the use of interpretive and critical conceptualisation of data until a basic
perspectives to understand the impact of theory emerges.
accounting on people. Gaffikin (2006:n.p.)
In a polyphonic debate conducted in
concurs, and explains as follows:
2006, many accounting researchers
Consequently, rather than attempting to discussed the future of interpretative
recreate the methods of the natural sciences, it
accounting research (Ahrens et al. 2008).
is more appropriate that accounting turn to
the methods that recognise the human aspects These authors (2008:841) explain the
of the discipline rather than claim an purpose of this debate as follows:
intellectual status akin to the natural sciences. In the literature, interpretive accounting
The question is not only how interpretative research is frequently characterized by what it
is not, i.e., “non-mainstream” or alternative.
and critical research can contribute to the
We are concerned by this lack of an
broader social effects of accounting, but independent intellectual identity. We thus
whether such research can contribute to thought of creating an opportunity to discuss
establish consistent principles of in a small group what we view collectively as
accounting. It has been posited above that valuable in our research. We are looking to
grounded theory, which is part of establish a more positive identity for ourselves
interpretative research, may be helpful in as scholars interested in the interpretation of
accounting practices. This seems appropriate
establishing such principles. The issue is because there is, by now, a very significant
that accounting researchers have battled to body of work that could be loosely labeled as
define interpretative research (Ahrens et al. “interpretative accounting research”. What
2008). Accounting academics explain seems so far to be lacking, however, is a
interpretative research rather loosely: shared intellectual agenda that would allow
for a clearer articulation of the achievements
This research is concerned with understanding
of interpretative research. Two issues that we
the social world, and includes work that seeks
to understand the social nature of accounting would see important for this effort are to
reconnect interpretative research with
practice (Ryan et al. 2002:42).

Meditari Accountancy Research Vol. 18 No. 1 2010 : 1-16 11

The role of accounting theory in the development of accounting principles

accounting technique and to explore points of … the critical accounting project challenges
contact with functionalist accounting thought. the manner in which accounting has
The reconnection to accounting as a conventionally privileged technical issues and
knowledges over those demonstrating that the
discipline itself (Ahrens et al. 2008:846 & accounting is not created in a social vacuum
848) is a positive development and may and as a result of which much of it may be
contribute to the development of accounting highly contestable. The emergence of a
as a research discipline. Interpretative complementary set of critical insights is now
research could be attractive in the pragmatic widely recognised as a sign of accounting’s
and political process of standard setting to maturity as an academic discipline, as well as
providing a basis for developing accounting as
establish the reasons behind this
a set of socially responsible practices.
consultative process. This article therefore
concurs that the nature and intellectual The main issue in critical research is
position of interpretative research in that the researcher must reveal his or
accounting research must be clarified in her assumptions. This is a question of
order to create the opportunity for the intellectual or theoretical framework
researchers to research the reasons behind that the researcher has used to critique
accounting practice and thus contribute to the underlying research phenomena.
knowledge about accounting. Ryan et al. Traditional critical accounting research uses
(2002:42) specifically state the following: the boundaries of a Marxist framework
(Broadbent 2002:435; James 2008:643).
The starting point for interpretative (and also
for critical) research is the belief that social However, Broadbent (2002:435) responded
practices, including management accounting, as follows:
are not natural phenomena; they are socially … to locate “critical accounting” solely within
constructed. Consequently, they can be such boundaries can be seen to be
changed by the social actors themselves. exclusionary of other theoretical approaches
However, the goal of interpretative research and this I see as problematic.
is not to change the social order. Broadbent (2002:435), for example,
The primary goal is to record the data as also refers to the feminist approach.
they are – hence a neutral stance. In However, an important consideration is
contrast, the main goal of critical research is whether there are more accounting-related
to promote change (Ryan et al. 2002:87). frameworks under which critical research
The difference between interpretative and could be undertaken. Can a researcher,
critical research is explained as follows: for instance, adopt the stance of a
Some critical accounting researchers … object historical cost perspective, a fair value
to interpretative research because it does not accounting perspective or a decision-useful
seek to promote a social critique and promote perspective? For critical research to effect a
radical change. Nevertheless, interpretative change in the principles of accounting, such
work is concerned with making sense of the frameworks in which critical research can
social character of daily life (Ryan et al.
be undertaken must be clarified. The
question is whether adequate frameworks to
Critical research can also be interpretative,
but critical research adopts a particular point
ground critical research in accounting have
of view regarding the research question, been developed.
whereas interpretative research purports to The pragmatic and political dimensions
take a ”neutral” stance (Baker & Bettner of the development of accounting principles
1997:293). by the standard setters are based on human
Roslander (2006:247) interprets the critical intervention. Hence interpretative and
accounting project as follows: critical research can both play a role in

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


developing accounting principles and positivistic approach, because the former

related theory. These research approaches seemed to be subjective and not neutral.
should not be limited to the broader social This resulted in the positivistic approach
aspects of accounting only, but can be used becoming the main approach of mainstream
to evaluate the principles of accounting accounting research. Currently neither
itself. Critical research can be an avenue for positive nor normative research (in its
accounting researchers to explore in order absence) has created a comprehensive
to move back to assessing the principles of theory of accounting. Accounting therefore
accounting directly, but then the has no commonly accepted theories on
frameworks within which such research is which accounting research can be based,
situated should be clarified. which will in turn generate sound
accounting principles. The theories guiding
research in other disciplines, such as
7 Conclusion finance and economics, are important, but
This article investigated the potential role should never be the main theories on which
that different types of accounting theory accounting research is based. The question
and research play in developing consistent is whether accounting researchers can
accounting principles. The article develop more accounting-focused or
acknowledged that no comprehensive applied theories that can contribute more to
theory of accounting exists, that accounting the development of accounting principles in
principles are not solely the result of practice. Mainstream accounting research is
academic research and that current regarded as simply providing useful
accounting practice through its standard- information to the standard-setting process
setting process has contributed much more and not creating the principles of
to the development of accounting accounting per se.
principles. It is therefore important to This article disagrees with the suggestion
consider the link, if any, between of Inanga and Schneider (2005) that the
accounting theory and research, and the decision-usefulness approach of the
standard-setting process. standard setters creates a grounded theory.
In the process of considering the In the absence of the application of the
perceived role that accounting theory and grounded theory methodology to test this
research play, the discussion focused on the suggestion, the suggestion remains
normative and descriptive (or the more premature. Researchers may apply the
modern positivistic) approach to grounded theory methodology to assess
development of accounting theory, the whether the decision-usefulness approach
positivistic nature of mainstream adopted by the standard setters creates a
accounting research, a possible decision- grounded theory, and to deploy it
useful theory of accounting and the role of accordingly. The grounded theory
interpretative and critical research. methodology might also be used by
Traditionally, the view has been accounting researchers to create core
expressed that theory is created through a principles, concepts and hypotheses of
normative or descriptive approach; accounting on which the positivistic nature
however, the more modern view is that of mainstream accounting research could be
accounting theory could be created through based. This is a field that accounting
a normative or positivistic approach. In researchers still need to explore.
accounting research the application of the Many scholars are calling for accounting
normative approach was replaced by the researchers to enter the broader research

Meditari Accountancy Research Vol. 18 No. 1 2010 : 1-16 13

The role of accounting theory in the development of accounting principles

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

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