Bullis, Debra A.

Kilpatrick, William C.

English

eGrove (Univ. of Mississippi)

Woman C.P.A. Volume 49 Issue 3 Article 3 7-1987 Accounting Theory and the CPA Exam Debra A. Bullis William C. Kilpatrick Follow this and additional works at: https://egrove.olemiss.edu/wcpa  Part of the Accounting Commons, and the Women's Studies Commons Recommended Citation Bullis, Debra A. and Kilpatrick, William C. (1987) "Accounting Theory and the CPA Exam," Woman C.P.A.: Vol. 49 : Iss. 3 , Article 3. Available at: https://egrove.olemiss.edu/wcpa/vol49/iss3/3 This Article is brought to you for free and open access by the Archival Digital Accounting Collection at eGrove. It has been accepted for inclusion in Woman C.P.A. by an authorized editor of eGrove. For more information, please contact egrove@olemiss.edu. Accounting Theory and the CPA ExamBy Debra A. Bullis and William C. KilpatrickThe Accounting Theory section of the Uniform CPA Examination may end on the November 1989 exam date. An exposure draft, “Proposed Changes in the Uniform CPA Exam­ination,” prepared by the AICPA Board of Examiners, advocates the combination of the AccountingTheo­ry and Accounting Practice sections. The current subject matter of these two sections would be reallocated into two new sections, Accounting and Reporting — A (Business Enter­prises) and Accounting and Report­ing — B (Taxation; Managerial; and Governmental and Not-For-Profit Organizations). The Board has pro­posed the combination of the two sections because of content overlap and to “eliminate duplication’’ [AICPA, 1987].The StudyThe purpose of this research was to determine if the Accounting The­ory section of past Uniform CPA Examinations was a duplication of accounting practices and proce­dures or if the exams actually tested candidates on their knowledge of accounting theory. The research con­sisted of:A. Developing criteria for differ­entiating between exam ques­tions dealing primarily with theory and those dealing primarily with practice;B. Reviewing the multiple choice questions of the theory por­tions of the Uniform CPA Examinations given from May 1980 through May 1985, and classifying the questions asked on those exams accord­ing to our established criteria;C. Analyzing and summarizing the results of the review;D. Drawing conclusions about what has been done in the past and what implications this may have for the profes­sion in the future.Differentiating Between Theory and PracticeTo develop criteria for differentiat­ing between exam questions deal­ing primarily with theory and those dealing primarily with practice, it was necessary to first differentiate between accounting theory and ac­counting practice. The profession has struggled in its effort to provide a central unifying theory; in the con­tinuing process, a variety of terms, sometimes without clear definitions, have been used. The words “con­cepts,” “principles,” “postulates,” “standards,” “rules,” “procedures,” and “methods” have been used in discussing accounting theory as well as accounting practice.Based on the criteria established, all multiple choice theory exam questions were evaluated and classified as either a theory question or a practice question.The AICPA has had a great influ­ence on the development of account­ing theories, policies, and proce­dures. From the beginning, the AICPA conducted research into spe­cific issues by appointing separate committees to find an “answer” to each practice problem that emerged. The Committee on Accounting Proce­dure, as the name implies, dealt primarily with questions concerning appropriate accounting treatment of specific items. However, in relation to this problem by problem ap­proach, George May [1958] encour­aged the AICPA to “issue a state­ment on the subject of the distinction between principles and the methods of implementing them.”The Accounting Principles Board (APB), successor to the Committee on Accounting Procedure, also is­sued a series of opinions on various subjects. A majority of these pro­nouncements dealt with specific questions of accounting treatment rather than discussing general ques­tions of accounting theory.At the time the APB was created, an Accounting Research Division was organized with its purpose being to reduce to writing (without regard to practice) what were considered generally accepted accounting prin­ciples. Both the APB and the Direc­tor of Accounting Research actively promoted research in an effort to establish a broad framework of ac­counting postulates and principles. Accounting Research Study No. 1, “The Basic Postulates of Account­ing,’’ and Accounting Research Study No. 3, “A Tentative Set of Broad Accounting Principles for Bus­iness Enterprises,” were issued. Af­terconsideration, these studies were rejected by the APB because they were felt to be too different from the accounting principles which were in use at the time.With the rejection of the above studies, the opinions issued by the APB continued to deal primarily with specific problems of presentation or calculation. Even with the rejection, the need to establish a general frame­work of theory was still recognized within the profession and continued to be discussed in the literature. For example, the American Accounting Association published A Statement of Basic Accounting Theory in which theory was described as a “coherent set of conceptsexplaining and guid­ing the accountant’s action in identi­fying, measuring, and communicat­ing economic information” [1966, p. 2]. And according to Robert R. Ster­ling, “the theory of accounting ought to be concerned with accounting phenomena, not practicing accoun­tants, in the same way that theories of physics are concerned with phys­ical phenomena, not practicing phys­icists” [1970, p. 450].The Financial Accounting Stan­dards Board (FASB) has been com­10/ The Woman CPA, July, 1987mitted to the development of a theo­retical framework since its inception in 1973. The FASB has explained its Concepts Statements as follows:This statement of Financial Ac­counting Concepts is one of a se­ries of publications in the Board’s reporting. Statements in the series are intended to set forth objectives and fundamentals that will be the basis for development of financial accounting and reporting stan­dards. The objectives identify the goals and purposes of financial reporting. The fundamentals are the underlying concepts of finan­cial accounting — events, and cir­cumstances to be accounted for, their recognition and measure­ment, and the means of summariz­ing and communicating them to interested parties. Concepts of that type are fundamental in the sense that other  concepts flow from them and repeated reference to them will be necessary in establishing, interpreting, and applying account­ing and reporting standards [SFAC No. 2].The FASB considers the theoreti­cal framework of accounting to con­sist of the objectives and fundamen­tal concepts of financial accounting and reporting, separate from the procedural aspects of standards. The former, objectives and concepts, underly and give theoretical direc­tion to the latter, standards and prac­tices.A consensus exists in accounting literature for separating elements of theory, which are referred to as fun­damental and general, from the ele­ments of practice, which are referred to as specific and deal with ques­tions of presentation and measure­ment.CPA Exam Questions — CriteriaIn establishing the criteria by which the CPA Exam questions were evaluated, all of the foregoing infor­mation was considered. The differ­entiation between accounting the­ory and accounting practice was used to make a distinction between what constituted a theory question as opposed to a practice question. Thus, theory questions would do one or more of the following:1. Deal with the why of mea­surement, recognition, and reporting as opposed to the how and when2. Include specific references to the concepts, postulates or principlesPractice questions would do one or more of the following:1. Require that mathematical calculations be performed in order to answer the question2. Ask how or when a specific amount is calculated (ex: earnings per share, deprecia­tion, interest, etc.)3. Ask how or when a specific item should be recognized or recorded in the accounts (ex: date of recognition, what type of account, which account is debited or credited, etc.)4. Ask how or when specific financial statements are pre­pared (ex: handling inventory change on the statement of changes in financial position, etc.)5. Ask how or when specific items are presented in the financial statements (ex: con­tingencies, changes in accounting estimates and principles, prior period adjustments, etc.)6. Ask how or when specific dis­closures are made in conjunc­tion with the financial state­ments (ex: loss contingencies, etc.)Review, Classification, and ResultsBased upon the criteria estab­lished, all multiple choice theoryTABLE 1Summary of Numerical FindingsPractice TheoryExam Date Questions Percent Questions PercentMay 1980 53 88 7 12Nov. 1980 53 88 7 12May 1981 55 92 5 8Nov. 1981 55 92 5 8May 1982 53 88 7 12Nov. 1982 57 95 3 5May 1983 54 90 6 10Nov. 1983 55 92 5 8May 1984 56 93 4 7Nov. 1984 53 88 7 12May 1985 56 93 4 7Totals 600 91 60 9The results of the research indicate that the theory exam is not, in fact, an examination of Accounting Theory, but rather an extension of the practice exam.exam questions were evaluated and classified as either a theory question or practice question. (The essay ques­tions on the theory portion of the exam were not considered within the scope of this research.) A total of 660 questions were evaluated from the 11 exams, starting with the May 1980 exam and including the May 1985 exam. From the 660 questions, 600 were classified as practice-type questionsand only 60 (or 9 percent) were classified as theory questions. Table 1 presents a summary of each exam with a percentage breakdown by question type.ConclusionsIn the past five years, has the pro­fession truly required an understand­ing of accounting theory by those persons entering the profession? Based on this research, the answer to this question is NO! The results of the research indicate that the theory exam is not, in fact, an examination of Accounting Theory, but rather an The Woman CPA, July, 1987/11extension of the practice exam. If the proposed change of combining the Accounting Practice and Ac­counting Theory sections of the Uni­form CPA Examination takes place, one problem will have been solved — the duplication of the Accounting Practice and Accounting Theory sec­tions of the exam.There is the other problem of the possibility that theory will be even more ignored in the future than in the past. The total elimination of theory questions is a distinct possi­bility since the “Proposed Changes” plainly state that the primary pur­pose of the examination is to test a candidate’s technical competence [AICPA, 1987].Assuming these conclusions are true (or even partially true), what implications do they have for the accounting profession in general? They imply that the practicing seg­ment of the profession may be with­out a theoretical base. It means the­ory, as described in this paper, is almost nonexistent where it matters the most — in the practice of the discipline itself.In 1918, Middletech called for a theoretical development within the profession to handle the “serious and devastating” problems in ac­counting caused by inflation [Mid­dletech, 1918]. Today, more than 65 years later, the same issue remains unresolved. In a professional envir­onment as complex and dynamic as accounting, it seems only reasona­ble that another 65 years should not pass while long-term solutions to the serious issues confronting the profession are ignored. How else can such issues be resolved except with the help of theoretical guid­ance?The total elimination of theory questions is a distinct possibility since the“Proposed Changes” plainly state that the primary purpose of the examination is to test a candidate’s technical competence.RecommendationsAccounting theory needs to be­come a more integral part of the pro­fession. This can begin within the educational system, the great force for change in society. The gulf be­tween academicians and practition­ers must be bridged. It is recom­mended that the educational curricu­lum in universities be modified so that undergraduates have a more intense exposure to accounting theo­ry; students of accounting must re­ceive a more thorough exposure to theoretical principles, principles that will then be carried with them into professional practice.It is recommended that the Ac­counting Theory section of the Uni­form CPA Examination be continued and, at the same time, that the dupli­cation between the Practice and Theo­ry sections be eliminated. The Ac­counting Theory section shouldDebra A. Bullis, CPA, is presently working toward a Ph.D. degree at the University of Texas-Austin. She received her B.A. degree from East­ern Montana College. Her practical experience includes being a partner in a local CPA firm.focus entirely on theory so that CPA candidates will, in turn, focus on theory. ΩREFERENCESAmerican Accounting Association, A State­ment of Basic Accounting Theory (1966), p.2.American Institute of Certified Public Accoun­tants, Exposure Draft, Proposed Changes in the Uniform CPA Examination (1987), pp. 1, 8 and 19.Financial Accounting Standards Board, State­ment of Financial Accounting Concepts No. 2, “Qualitative Characteristics of Ac­counting Information” (1980), p. i.May, GeorgeO.,“Generally Accepted Princi­ples of Accounting,” The Journal of Ac­countancy (January 1958), p. 27.Middletech, Livingston, Jr. “Should Accounts Reflect the Changing Value of the Dollar,” Accounting Principles (February 1918), pp. 114-20.Sterling, Robert R., “On Theory Construction and Verification,” The Accounting Review (July 1970), p. 450.William C. Kilpatrick, CPA, CMA, Ph.D., is professor of accounting at Colorado State University. He re­ceived his Ph.D. from the Univer­sity of Illinois-Champaign-Urbana.12/The Woman CPA, July, 1987

Accounting Theory and the CPA Exam

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