A book about accounting theory must draw on accounting research, which is contained in academic journals. There are two complementary ways that we can view the role of research. The first is to consider its effects on accounting practice. For example, the essence of the decision usefulness approach that underlies the Conceptual Framework is that investors should be supplied with information to help them make good investment decisions. One has only to compare the current annual report of a public company with a similar report issued in the 1960s and prior to see the tremendous increase in disclosure over the 40 years or so since decision usefulness formally became an important concept in accounting theory. Furthermore, as we will see, the theory has been subjected to extensive empirical testing, which has established that, on average, investors use financial accounting information much as the theory predicts.

Independently of whether it affects current practice, however, there is a second important view of the role of research. This is to improve our understanding of the accounting environment, which we argued above should not be taken for granted. For example, fundamental research into models of conflict resolution, in particular agency theory models, has improved our understanding of managers’ interests in financial reporting, of the role of executive compensation plans in motivating and controlling management’s operation of the firm, and of the ways in which such plans use accounting information. This in turn leads to an improved understanding of managers’ interests in accounting policy choice and why they may want to bias or otherwise manipulate reported net income, or, at least, to have some ability to manage the “bottom line.” Research such as this enables us to better understand corporate governance issues such as the boundaries of management’s legitimate role in financial reporting. It also helps us understand why the accountant is frequently caught between the interests of investors and managers.

References:

  • Scott, W. R. (2015). Financial Accounting Theory 7th Pearson Canada Inc. ISBN 978-0-13-298466-9
  • Google Image (2021).