The Contribution of Academic Research to Accounting and Financial Regulation - Essay Example

?The Contribution of Academic Research to Accounting and Financial Regulation Academic research has greatly contributed to the development of accounting and to the techniques of financial regulation. In particular, it has contributed much in the development of accounting principles and theory (Coetsee 2010, p. 1). The relationship between academic research and theory is two-way because the theories improved or forwarded by academic research have advanced accounting science and the science of financial regulation (Coetsee 2010, p. 1). Despite the contribution of academic research in advancing theory, however, Coetsee (2010, p. 1) pointed out that no comprehensive theory in accounting has emerged. I have used only accounting journals except one which is a journal in management. I believe that the definitions of “accounting” and “financial regulation” in the journals have the same standard and the definitions are basically common in the profession. There can significant variations, however, in the area of financial regulation as the definitions can reflect theories on how financial regulation can best be implemented. In any case, the specific definition of accounting and financial regulation follows what the author or authors have used in their works. Some of the authors do not even have a definition of “accounting” and “financial regulation”, perhaps as a tacit assumption that there is a usual definition of the concepts in the accounting journals anyway. Perhaps, one of the more significant achievements of academic research pertains to the international harmonization of financial accounting standards. The most significant achievement of academic research in this area has been the harmonization of accounting standards in Europe: beginning January 1, 2005, all companies domiciled in the European Union listed in the stock exchange had been required to prepare their accounts based on the International Financial Reporting Standards (Baker and Barbu 2007, p. 272). According to Baker and Barbu (2007, p. 272), harmonization has been the goal of professional and academic accountants during the last 40 years. As an evidence of this, they pointed out that there were 200 research articles published between 1965 and 2004 dealing with harmonization in international accounting standards (Baker and Barbu 2007, p. 273). Academic research is usually associated with research that is undertaken for its own sake, something done for the advancement of knowledge. It is different from the other kind of research which is usually described as policy-oriented. Academic research is usually found in journals while policy institutes, government, financial regulators, and consultancy groups usually undertake policy research. Although academic research is usually described as theory-oriented, in accounting it seems difficult to separate the theory part and the parts that are relevant for corporate governance. Baker and Barbu credited the academic community for improving rigor and theoretical underpinning in their research and the said factors contributed a lot in the major step in the harmonization of accounting standards in Europe (Baker and Barbu 2007, p. 273). Between 1965 to 2004, the academic community had an increasing output of academic research related to the international harmonization of financial standards (Baker and Barbu 2007, p. 276). However, the idea of creating a conceptual framework to facilitate accounting harmonization was introduced much earlier or in the 1940s (Baker and Barbu 2007, p. 280). In the 1980s, an important role played by accounting academic research is that the research pointed out that cultural and economic factors play important roles in shaping differences in accounting practices by countries (Baker and Barbu 2007, p. 280-281). Another sub-theme that had been prominent during the 1980s is the role played by history in shaping the accounting practices adopted by countries (Baker and Barbu 2007, p. 281). During the mid-1990s, the arguments towards accounting uniformity played an important role in the shift towards the adoption of an International Financial Reporting Standards (IFRS) in 2005. Also in the mid-1990s, academic research has focused on the role of political factors in the adoption of accounting standards (Baker and Barbu 2007, p. 286). The importance of an international accounting framework that was pointed out in the 1940s was reinvestigated in 2001 and the arguments shaped much the opinion in the accounting profession for the adoption of an IFRS (Baker and Barbu 2007, p. 283). The academic research on how accounting system can influence share prices and equity were also instrumental in the eventual adoption of an IFRS in Europe (Baker and Barbu 2007 p. 288). An academic research in 1999 that focused on the acceptance of a uniformed international financial reporting system in the capital market was also influential towards the adoption of international standards in the accounting profession. Today, one of the themes in the academic research is the need for developing measures for assessing the extent of international harmonization (Baker and Barbu 2007, p. 289). Some of the measure proposed are the Herfindahl’s index, I index, adjusted I index, and the C index (Baker and Barbu 2007, p. 289). Earlier, in 1990, the chi-square was proposed to measure the extent of international harmonization (Baker and Barbu 2007, p. 289). Other statistical measures proposed to assess harmonization were the Cramer’s V test in 1997, and linear regression models in 1996. Another new theme or current academic research interest is on how the international financial reporting system can be implemented in specific countries or on how specific countries can adopt the international financial reporting system (Baker and Barbu 2007, p. 290). Related to this, a research program in Germany studied the evolution of German attitudes towards financial reporting standards (Baker and Barbu 2007, p. 290). Another academic research that can be very useful to accountants and financial regulators is that by Ardersson et al. (2010). The research results of Anderssons et al. (2010) enabled the authors to conclude that in the absence of sensible financial information, narratives on corporate pipeline progress can be communicated to investment analysts who can be asked to make preliminary assessments (Anderssons et al. 2010, p. 641). The assessments can be the preliminary bases for assessing share prices and market value for developing financial statements (Anderssons et al. 2010, p. 641). The work of Laux and Leuz (2009, p. 826) serves to define the debate with regard to the use of fair value accounting, with one camp arguing that its use contributed to the ongoing world crisis and the other camp arguing that the use of fair value accounting merely allowed the accounting system to play the role of a messenger. Laux and Leuz argued (2009, p. 832) that the arguments against the use of fair value accounting does not hold against scrutiny. Further, Laux and Leuz emphasized (2009, p. 832) that it is useful to design prudential regulation that employs the fair value accounting as the starting point. Ultimately, the Laux and Leuz (2009) arguments may or may not be found as sound arguments but they advance knowledge within the profession and can help the accounting profession as well as financial regulators improve systems. The academic research of Penman (2007) identifies the issues associated with the use of fair value in the accounting profession. The author pointed out that there are three notions of fair value and identified the limitations or deficiencies of each measure in capturing the value of a company (Penman 2007, p. 33-35). Given the said limitations and deficiencies, Penman proposed a demand approach to valuation (2007, p. 35, 42). His proposal for a demand approach may or may not be eventually supported in the accounting profession but the issues he presented against fair valuation are useful because they can treated as take-off points from which the accounting profession can improve its practice. The academic research of Lee (2006) focused attention on the possible role of qualitative research in accounting. Lee (2006, p. 180) correctly pointed out that qualitative research is an undeveloped research method in accounting but has a good potential for widespread use in the profession. Earlier, the academic research of Lee and Humphrey (2004, p. 66) compiled an edited collection of narratives on how qualitative research was used in a variety of social and organizational contexts and made a case that qualitative research be included as one of the methodologies for accounting research. The work of Lee and Humphrey even pointed out that qualitative research has added much to accounting knowledge (p. 66). An academic research that can have a potential contribution to the science of financial regulation is the one by Arnold and Lange (2004). In their article, the authors examined “how information asymmetry and opportunistic behaviour of agents (executives, auditors, and legal firms) and the inability of principals (owners and agents) made the Enron collapse catastrophic” (Arnold and Lange 2004, p. 751). The authors emphasized that a continuing challenge for financial regulators is to supplement current approaches to regulation by strengthening principal access to agent information and principal control over corporate culture (Arnold and Lange 2004, p. 764). Thus, given the narrative, the contribution of academic research to accounting and financial regulation is real. Academic research enabled companies to govern themselves better and probably helped many countries avoid economic crises. References Andersson, T., Gleadle, P., Haslam, C., and Tsitsianis, N., 2010. Critical Perspectives on Accounting, 21, 631-641. The International Journal of Accounting, 42, 272-304. Arnold, B. and Lange, P., 2004. Enron: Examination of agency problems. Critical Perspectives on Accounting, 15, 751-765. Baker, C. and Barbu, E., 2007. Trends in research on international accounting harmonization. The International Journal of Accounting, 42, 272-304. Coetsee, D. 2010. The role of accounting theory in the development of accounting principles. Meditari Accountancy Research, 18 (1), 1-6. Laux, C. and Leuz, C., 2009. The crisis of fair-value accounting: Making sense of the recent debate. Accounting, Organization and Society, 34, 826-834. Lee, B., 2006. More than a numbers game: Qualitative research in accounting. Management Decision, 44 (2), 180-197. Lee, B. and Humphrey, C., 2004. The real life guide to accounting: A strategy for inclusion. Qualitative Research in Accounting and Management, 1 (1), 66-84. Penman, S., 2007. Financial reporting quality: Is fair value a plus or a minus. Accounting and Business Research. Special Issue: Accounting Policy Forum, 33-44. Read More