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Feb 1993

Toward understanding academic research. (Accounting)

by Bricker, Robert

    Abstract- The lack of understanding of academic research in the field of accounting has created a gap between accountants in the academe and those in the business community. All too often, CPAs in the business sector come to the conclusion that their counterparts in learning institutions lack interest in practical accounting concerns. Academicians, on the other hand, tend to view accountants in business as placing too much importance on short-term issues. There is a clear need for the two components of the field of accounting, practice and academia, to gain a common understanding of academic research. If this is achieved, CPAs in the business world may come to utilize, and even influence the direction of, accounting research. Better ties between accounting practitioners and accounting faculty may even be established.

In 1960, academic accounting was principally comprised of faculty with master's degrees, professional certification, and significant practical experience. Teaching and applied research were emphasized. The Pierson and Gordon and Howell reports published in the late 1950s, sharply criticized the practical focus of college business programs, resulting in profound changes in business education. The American Association of Colleges and Schools of Business was given responsibility for business school accreditation, which eventually included a change in accounting's terminal faculty qualifications from an MBA/CPA to a PhD.

As a result, enrollments in doctoral programs rose, as did the number of PhD qualified faculty. Emphasis upon theoretically grounded, sophisticated research increased, but sometimes at the expense of teaching. In addition, the new tenure requirements favored the academic with good research skills, who might or might not have good teaching and communication skills and who might or might not have a significant practical accounting background.

Tenure and promotion standards correspondingly evolved towards a social science model of research. By the 1980s, practical research was frowned upon in many accounting faculties. Much research was highly mathematical, used sophisticated statistics, employed theories that were at times exotic, and addressed issues of little concern to practitioners.

Academic Accounting Journals

Most academic research is published in accounting journals to which practitioners have little exposure. The number of these journals has grown dramatically since the 1970s. The American Accounting Association (AAA), the principal academic organization for accounting faculty, publishes several journals. These include the Accounting Review, and Accounting Horizons, the latter of which is intended as a bridging journal between academia and practice. The AAA also publishes Issues in Accounting Education. Many of the AAA's special interest sections also publish journals.

There are also numerous non-association journals. Among the most influential are the Journal of Accounting Research (University of Chicago), the Journal of Accounting and Economics, (University of Rochester), Contemporary Accounting Research, (the Institute of Chartered Accountants in Canada), and Accounting, Organizations and Society, (London School of Economics).

While some journals are "mainstream," publishing studies of interest to broad groups of accounting faculty, others are more specialized. While there are several mainstream accounting research areas, there are also many in which a relatively small number of academicians are active.

Market Efficiency Research

In the 1960s, many financial accounting studies used economic logic to derive accounting theory and prescribe financial reporting standards, such as Edwards and Bell's The Theory and Measurement of Business Income |U. California Press, 1961. In 1968, the Journal of Accounting Research published Ball and Brown's article, "An Empirical Evaluation of Accounting Income Numbers," and in the same year Beaver's "The Information Content of Annual Earnings Announcements." These studies borrowed portfolio theory and the capital asset pricing model from economics and finance and tested stock price reactions to corporate earnings announcements. They electrified academic accounting, and in the next two decades, no line of research more thoroughly pervaded academic accounting thought than "market efficiency" studies.

The history of market efficiency research is one of cyclical optimism and pessimism. The underlying hypothesis states that the stock market is efficient (reacts almost instantaneously) with respect to publicly available information. It implies that investors cannot earn better profits than the market by analyzing publicly available information and that neither the use of particular accounting methods nor the presentation form of financial reports matters since financial analysts will sort it all out. This does not mean that accounting is unimportant, but rather accounting standard setters should concentrate on prescribing what new information should be reported, not how it should appear.

Market efficiency research has been criticized for lack of a theoretical base, excessive attention to advances in methods, and an inability to adequately define market efficiency. However, the most serious criticism involves the underlying hypothesis about market efficiency.

Anomalous findings have continued to trouble this research area, to the point that some of its former proponents openly challenge its basic hypothesis. For instance, Victor Bernard, of the University of Michigan, has argued that accounting research should now move towards designing studies that will help to identify the sources and cases of apparent stock market inefficiency. If there is indeed a significant degree of stock market inefficiency, then accounting methods and financial statement presentation are important issues to consider.

Positive Accounting Research

The tenuous foundations of market efficiency theory seem to have, in part, motivated two researchers (Watts and Zimmerman) to pioneer "Positive Accounting Research" in the late 1970s. They began with an efficient markets perspective and in two well known articles laid out a research program that proposed investigating how managers choose among accounting methods. To promote positive accounting research, they established the Journal of Accounting and Economics.

Watts and Zimmerman loosely borrowed from Milton Friedman's Essays in Positive Economics |University of Chicago Press, 1953 as a philosophical basis for positive accounting and then applied Jensen and Mechkling's |Journal of Financial Economics, October 1976 "agency" model of owner/manager contracting, to explain managers' choices of accounting methods. For instance, managers are hypothesized to choose accounting methods to maximize their compensation, which is often based on reported accounting numbers.

While positive accounting research has shown that the choice of accounting methods often involves managers' self-interest, it has also been heavily criticized. Its reliance on positivism has been widely indicted as naive and misleading. More importantly, positive accounting is so broad that its basic theory contains the potential for contradictory hypotheses. Watts and Zimmerman assert that the methods and hypotheses of these studies are appropriate because authors continue to use them and referees and editors continue to accept them. However, other scholars believe that this is an inadequate basis for evaluating positive accounting research.

Accounting Information Processing Research

Economics and finance have not provided the only interdisciplinary basis for accounting research. Even before the appearance of market efficiency research, accounting information processing research borrowed theories and methods from psychology. Experiments, typically in a business game setting, explored the value of financial reporting alternatives (e.g. LIFO vs. FIFO) to users. Functional fixation in accounting information users was identified; that is, an over-reliance on original information and a failure to adequately consider new information.

In the 1970s, the "lens model" was borrowed from psychology and applied in accounting. It allowed researchers to investigate how a number of different accounting information cues are used in applied settings. In one study, Robert Libby explored the use of 14 financial ratios by bank loan officers to predict corporate failure. Presently, this research is published in a variety of accounting journals; most frequently in the AAA section journal Behavioral Research in Accounting and in Advances in Accounting.

While this research has yielded some interesting findings, a number of questions have been raised about individual studies, including subject motivation, subjects' level of experience, a lack of realism in some experiments, the variety of psychological theories borrowed, and the adequacy of some research designs.

Research Into the Role of Accounting Organizations and Society

The 1980s also saw the growth of interest in research into the role of accounting in organizations and society. Some of this research takes a social welfare perspective and questions the values furthered by accounting in the hands of managers in a free market system. It is principally published in Accounting, Organizations and Society, Critical Perspective on Accounting (the term "critical" reflects a specific philosophical spirit, not as in "to critique") and Accounting, Auditing, and Accountability, an Australian journal which recently published a special issue on "green accounting" (accounting and the environment).

Early studies borrowed contingency theory (managerial control systems are contingent on the characteristics of the organization) and later expectancy theory (various expected intrinsic rewards motivate behavior), depending heavily on Thompson's Organizations In Action |McGraw-Hill, 1967, and Cyert and March's The Behavioral Theory of the Firm |Prentice-Hall, 1963. Research has explored the role of managerial accounting in control settings such as budgeting in organizations. This includes studies into the relationships among budgeting, individual characteristics, and leadership style. A related line of research has investigated motivation, job satisfaction, and staff turnover in CPA firms. While the rich field settings of these studies give them exceptional realism, they also lead to difficulties in forming general conclusions.

Other research relies on modern philosophical thought, such as found in (among others) Kabermas--who considers the effect of technology on people; Foucault--who explores the relationship between knowledge and power; and Rorty--a relativist who writes that meanings are personally derived from the study of "texts," which can include accounting reports. Similar in spirit is "radical" accounting research, which asserts that "accounting is inextricably infused with interests, such that its very nature is constructed by the exercise of social and political power."(1)

Auditing Research

Auditing research is published in almost every academic journal and provides an example of research that generally has practical implications. In part, this may be attributable to the interest in auditing by CPA firms, their financial encouragement and support, and the availability of auditors as subjects.

One area of auditing research explores methods of statistical sampling. A second takes theories from psychology and examines the decisions CPAs make in audit settings, including internal control and audit risk assessment, materiality judgments, analytical procedures, and opinion formation and expression. One specific research area explores the revision of probability estimates made by auditors when they receive new information. These studies show that auditors have important limitations when assessing probabilities intuitively. A related group of auditing studies show the quirky nature and biases of human decision making and their effects in accounting settings, or how these biases can be surmounted.

Auditing judgment research has also explored how particular auditing approaches, auditor experience, and task complexity affect audit judgment accuracy. Because of the difficulty in determining judgmental accuracy (particularly because some accounting firms are disinclined to share relevant data), consensus (agreement) in judgment among groups of auditors is commonly used as a proxy (admittedly weak) for judgment accuracy. Studies show wide differences among consensus levels, possibly due to different settings, task characteristics, and auditor and firm characteristics.

Another auditing research area examines auditing as an industry. The original impetus for these studies appears to have been the congressional investigation of the profession in the late 1970s as summarized in The Accounting Establishment, including the changes of monopolistic practices among the "Big 8."

Simunic's |Journal of Accounting Research, 1980 study, entitled "The Pricing of Audit Services--Theory and Evidence," largely refutes these charges. Subsequent research has explored issues such as audit quality differences between large national firms and smaller firms and among large national firms; audit pricing, particularly whether firms "lowball" fees to obtain engagements; and differences in auditing methods among firms.

Modeling Research

One of the most difficult areas of research to read is analytical modeling research. These studies are exercises in symbolic logic that apply information economics to accounting settings. They are most often published in the Journal of Accounting Research and have been applied in financial reporting, managerial accounting, and auditing. One classic article is Joel Demski's "The General Impossibility of Normative Accounting Standards" (The Accounting Review, Fall 1973).

While modeling research allows the researcher to focus on very specific issues, it is also usually very abstract, with conditions and assumptions that make generalization to business settings exceptionally difficult. Models often consider only a single time period. Accounting information problems are often finessed with assumptions that are hard to regard as realistic, for example by assuming the existence of a perfect monitor that would always report managers' lying.

Laboratory Markets/Experimental Accounting Research

One interesting and growing area is laboratory market/experimental accounting research. These studies develop economic models of behavior and then test them in laboratory experiments, which often involve auctions or markets for stock or other goods. This research had its genesis in the field of experimental economics, which was pioneered by Vernon Smith of the University of Arizona.

In recent years, accounting studies have used experimental economics and laboratory markets to explore financial reporting, auditing, managerial accounting, and tax. Until the past few years, few of these studies were published in academic accounting journals. However, this condition is changing, and laboratory market/experimental accounting studies have been encouraged by a number of leading journals. In January 1992, for instance, the Accounting Review published a forum of experimental auditing articles.

Accounting History Research

The Academy of Accounting Historians provides an organizational basis for interaction among scholars interested in accounting history, while The Accounting Historians Journal provides an important publication outlet. Other academic accounting journals regularly publish accounting history, including the Australian journals Abacus and Accounting, Auditing, and Accountability, the English journals Accounting and Business Research and Accounting. Organizations and Society, and U.S. journals such as the Accounting Review, Journal of Accounting and Public Policy and Accounting Horizons.

There are two overlapping communities in accounting history. One takes a traditional view of history and historiography, and seeks to describe and document accounting history and to draw inferences relevant to contemporary accounting, such as Previts and Merino's book A History of Accounting in America |John Wiley & Sons, 1979. A second area attempts to provide interpretations of accounting history from a perspective of particular social philosophies, such as Tinker and Neimark's "The Role of Annual Reports in Gender and Class Contradictions at General Motors, 1917-1976" |Accounting, Organizations, and Society, 1987.

Tax Research

There are several areas of tax research. Legal research explains tax law, its application in particular settings, and creative ways in which tax law can be practically employed. It is often published in journals such as The Journal of the American Taxation Association (the ATA is the AAA's tax section). A report of the 1985-86 committee of the ATA expressed the concern that "In the eyes of our colleagues, tax academicians engaged in legal research may have emphasized quantity at the expense of quality."

A second area of research uses data gathered through the IRS or other sources to test hypotheses about possible impacts of the features of or changes in tax law on matters such as taxpayer compliance, security pricing, and economic activity (e.g. Porcano's "The Perceived Effects of Tax Policy on Corporate Investment Intentions" |JATA, 1984.) A third uses laboratory market methods, described above, for instance to explore the effects of different tax systems on a securities market, such as Swenson's "Taxpayer Behavior in Response to Taxation: An Experimental Analysis" |Journal of Accounting and Public Policy, 1988.

Other Active Research Areas

There are other active accounting research areas, such as international accounting which also has an AAA section. Interest in international research has grown as business has become increasingly international in character. One important topic is the harmonization and reconciliation of financial reporting standards across countries. The International Accounting Journal is a dedicated publication outlet.

Interest in accounting regulation has also grown, both in practice and academia. Regulation research is published in general interest journals, and in Research in Accounting Regulation and the Journal of Accounting and Public Policy.

Another large research area is in accounting information systems, which is represented by a AAA section that publishes the Information Systems Journal. Its research overlaps a number of academic disciplines.

Working Together

Both sides of the equation--practice and academia--will benefit from a closer working relationship. Academic research will be of greater benefit if it is impacted by the experiences of those in public practice. Those in public practice will benefit if academic research can deal more directly with actual practice problems.

1 Tinker, A.H., C. Lehman, and M. Neimark, "Marginalizing the Public Interest" in Behavioral Accounting Research: A Critical Analysis, K.R. Ferris, ed., (Century "VII Publishing, 1982), p. 117-143.

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