Accounting in 2036 a learned profession part II a learned research and education environment

This brilliant text of less than 200 pages points to the revolution of accounting thought that has followed the adoption of the informational view of financial statements.. The informati

Vol 93, No 6 DOI: 10.2308/accr-10628 November 2018

pp 387–390

PRESIDENTIAL SCHOLAR Accounting in 2036: A Learned Profession Part II: A Learned Research and Education Environment

John Christensen University of Southern Denmark ABSTRACT: My assignment is to analyze the development of accounting thought and its position within the university The focus is on the expected development in the next 20 years, despite the fact that that is an impossible task I will ruthlessly extrapolate from my personal observations of the activities in the accounting community In doing this, I will deal with accounting research, the relationship between research and teaching within the field of accounting, and the relation to other disciplines in the business school This will be done in three steps I will give a brief review of the recent history of accounting thoughts, then comment on current status of 2016, and, finally, give some perspectives The road ahead is going to be bumpy as many institutional barriers are in the way This has to change for the accounting academics to retake their space in the academic community

I AN ACCOUNTING REVOLUTION—1989

I n 1989, Bill Beaver publishedFinancial Reporting: An Accounting Revolution This brilliant text of less than 200

pages points to the revolution of accounting thought that has followed the adoption of the informational view of financial statements This view was heavily inspired by the developments in information economics and finance The basic idea was that the financial statements should be viewed as an information system instead of a measurement of the value and income of the firm This is a much more forgiving perspective, as the purpose of the financial reporting is to provide information and not necessarily to measure the value of the firm More importantly, the measurement perspective suffers from some fundamental problems, as the value of a firm is not well defined when the markets of its assets are not complete The information view penetrated all types of accounting research and included empirical financial accounting, analytical accounting, and behavioral accounting research The early contributions were Ball and Brown (1968),Beaver (1968), Demski (1980), Feltham (1972), Demski and Feltham (1976), Watts and Zimmerman (1978), and Hopwood (1974)

When describing the development in accounting research as a revolution, Beaver (1989) expected this view to have dramatic effects on ‘‘the way financial reporting is viewed, evaluated, and regulated.’’ Now, 50 years after the publication of Ball and Brown (1968), it is possible to evaluate the effect of the revolution

II 50 YEARS LATER—WHAT HAPPENED TO THE REVOLUTION Much has been accomplished in accounting research throughout the last 50 years, demonstrating fundamental properties of accounting information However, the revolution is by no means complete, and there are several shortcomings in our progress according to some of our esteemed colleagues The quotes below speak for themselves:

 Kaplan (2011): Much has been accomplished much has also been overlooked

 Hopwood (2007): We still have little more insights into competitive markets in corporate information

I thank the president of the American Accounting Association 2015–2016, Bruce K Behn, for inviting me to give this part of the Presidential Scholar Remarks Furthermore, I thank Mary Barth, Bruce Behn, Joel Demski, Kazuo Hiramatsu, the anonymous reviewer, and Mark L DeFond (editor) for helpful and insightful comments to this paper.

This commentary is based on the Presidential Scholar Lecture presented at the 2016 American Accounting Association (AAA) Annual Meeting in New York City, New York, requested by 2015–2016 President Bruce K Behn The written commentary was commissioned by Senior Editor Mark L DeFond consistent with the AAA Board of Directors’ goal to promote broad dissemination of the AAA Presidential Scholar Lecture.

Editor’s note: Invited.

Submitted: April 2018 Accepted: July 2018

 Kaplan (2011): Accounting research is too cautious and conservative, too rigid and traditional.

From a research perspective, the revolution has certainly been carried through Almost all research within accounting has adopted an information perspective The pioneering works of Ball, Brown, Beaver, Demski, Feltham, Watts, and Zimmerman have been followed by a steadily increasing amount of accounting research based upon the information perspective An indication of the importance of the information perspective for current research can be found in the American Accounting Association (AAA) Seminal Contribution to Accounting Literature Award winners:Ball and Brown (1968),Beaver (1968), Demski and Feltham (1978),Watts and Zimmerman (1978), Johnson and Kaplan (1987),Ohlson (1995), andSloan (1996)

In the next 20 years, I expect that our discipline will continue to have three major subdisciplines: financial, managerial, and auditing They serve different purposes More importantly, they share a common history of thought This is nearly forgotten in today’s research agendas; we hardly look into the other subdisciplines One scary observation on this is that in some European schools, the Ph.D degree is awarded within one of the subdisciplines: Financial Accounting, Management Accounting, or Auditing

I think we should develop cooperation to a larger extent in the future, as the subdisciplines are tightly connected Financial accounting is based upon costing from management accounting, yet insights from management accounting are not carried into our research in financial accounting The financial statements are routinely audited, but how the auditability of the financial statements is maintained when we consider changes in the accounting standards is hardly researched The decision usefulness

of management accounting implicitly relies on the reliability of the accounting system, and auditing is an important element of that characteristic The challenging task of developing our field requires deep insight into the comparative advantage of the accounting system, including financial, managerial, and auditing thought This is even more important when we acknowledge that we live in the information age where information is instantaneously available on the internet, such that the audited financial statements have to compete with other sources of perhaps more timely information Finally, I think that we have an overdue obligation to produce a new theoretical underpinning for a renewed conceptual framework for financial reporting

III RESEARCH AND TEACHING ARE INSEPARABLE Unfortunately, we have failed to give our accounting students insights into how our research has developed our field and about all of the exciting and challenging problems accounting research is facing Therefore, I am less convinced that users have changed their view on accounting, and I believe that a majority continue to believe that accounting delivers an absolute truth in the financial statements Finally, I also believe that the same is true for the regulators, as the conceptual framework more or less dates back to a time before the information perspective became the norm in the research community

Today, we teach accounting as we did 40 years ago; not much has changed—again, I am unfair When I look at some of the main textbooks for our accounting courses, the research is almost hidden from view

My longtime favorite management accounting text isHorngren, Datar, and Rajan (2015), which, over several editions, has converged into containing virtually no references to the vast research in accounting Another favorite isPenman (2013) This text takes an information perspective, but it is almost devoid of references to the vast literature that has formed the basis for the text The origin of our thought is not presented, and the motivation for pursuing academic insight into the fundamentals of the teaching material is not there

Finally, most financial accounting texts take the conceptual framework as the theory on which the financial statements are built The students are given to believe that the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are the center of accounting thought The framework, or at least the qualitative characteristics, dates back toPaton and Littleton (1940)and the reportA Statement of Basic Accounting Theory (ASOBAT) (AAA 1966) to a large extent The underlying problem, which is a complex stew of organizational, economical, and regulations issues, is hardly recognizable Unfortunately, I am not the first to make this observation, as the quotes below suggest:

 Fellingham (2007): We teach rules and de-emphasize contributions to academy

 Kaplan (2011): Accountants have outsourced estimating fair values Students only learn to enter the debit and credits

 Demski (2007): Our textbooks are intellectually embarrassing

As a consequence, we should integrate our research and teaching to make them inseparable—not only in the classroom, but also in our textbooks Thus, I envision the future textbooks to include some of the fundamental results of accounting research The insights should guide and encourage students to become members of the learned society They should also guide professionals to use accounting information wisely and not be misled by earnings management Incentives are at work in all aspects of accounting!

The Accounting Review Volume 93, Number 6, 2018

IV HOW IS THE RELATION TO OTHER DISCIPLINES OF THE BUSINESS SCHOOLS?

Accounting is central to businesses and central to all activities in business schools Accounting maintains the information system that guides decisions Consequently, there is a close connection between accounting and all of the other disciplines we teach in business schools Yet this is hardly evident today, as suggested by the infrequent cross-referencing of academic works

of business school faculty, as suggested by Biehl, Kim, and Wade (2006) The main consumers of accounting research are fellow accounting researchers A similar statement is valid for our teaching

In 2036, I expect that we will regularly demonstrate how accounting knowledge is built upon research from other parts of the university and, most prominently, the other fields of business schools Simultaneously, we should ensure that the other disciplines also acknowledge that accounting has something to offer and use accounting thought in their research

Finance is concerned with the relation between the firm and the financial markets in which the firm operates just like financial reporting Market participants and the finance researchers use financial reports This opens a demand for a two-way communication Accounting learns from finance how accounting statements are used, and finance learns from accountants about the pitfalls of accounting Understanding accounting information is vital to the efficiency of capital markets

Accounting provides the financial information system of the organization As the theorists develop new ways of designing organizations, the accounting system has to evolve On the other hand, the success of new organizational structures depends upon the supporting accounting system Some forms of organizations are inefficient due to the limitations of the accounting system Therefore, accounting researchers should work closely with organization researchers to improve our understanding of the working and limitations of organizations

Economics is the science of efficient resource allocation It is also the key to understanding the interaction between individuals when information is incomplete or markets are missing The last 40 years have taught us many facets of how to understand decisions under uncertainty, the economics of organization, and the economics of information This will continue to change and challenge accounting research, as accounting information takes over when we are faced with such market imperfections

The collaboration of accounting scholars is not confined to the classical disciplines Accounting is about the exchange of information, and to fully understand such interpersonal relationships requires collaboration with researchers who study culture, psychology, sociology, and even neurosciences Similarly, political science is relevant for standard setting

The accounting research community will continue to produce important insights based upon the use of accounting information within and between organizations

V WHAT DO WE NEED TO DO TO ACHIEVE THIS VISION?

First, we should integrate our research into our teaching, show how accounting thought has developed over time, and show how accounting thought is related to the other teaching activities of the business school and the university Second, we should seek to be more innovative in our research The AAA might facilitate this by providing the editors more freedom to commission papers The AAA might also provide a forum for innovation; for example, in the Research Monograph series

More fundamentally, the incentive systems in our schools are malfunctioning Our research is producing too little fundamental insights Professors are too cautious, both when it comes to teaching and research due to the metric (naı¨ve course evaluations and numbers of publications) used in performance evaluations of professors A new model for evaluating business schools is called for Perhaps the route is to too long and winding That might lead the individual researcher to follow the advice from Demski: Don’t play the game—redefine the game

It is high time for us to complete the Revolution We can certainly do great and innovative research

REFERENCES

American Accounting Association (AAA) 1966 A Statement of Basic Accounting Theory Sarasota, FL: American Accounting Association

Ball, R., and P Brown 1968 An empirical evaluation of accounting income numbers.Journal of Accounting Research 6 (2): 159–178

https://doi.org/10.2307/2490232

Beaver, W H 1968 Information content of annual earnings announcements.Journal of Accounting Research 6 (3): 67–92.https://doi org/10.2307/2490070

Beaver, W H 1989.Financial Reporting An Accounting Revolution Upper Saddle River, NJ: Prentice Hall

Biehl, M., H Kim, and M Wade 2006 Relationships among the academic business disciplines: A multi-method citation analysis.Omega

34 (4): 359–371.https://doi.org/10.1016/j.omega.2004.12.002

Demski, J S 1980.Information Analysis Boston, MA: Addison-Wesley

Demski, J S 2007 Is accounting an academic discipline?Accounting Horizons 21 (2): 153–157.https://doi.org/10.2308/acch.2007.21.2 153

Demski, J S., and G A Feltham 1976.Cost Determination: A Conceptual Approach Ames, IA: Iowa State University Press Demski, J S., and G A Feltham 1978 Economic incentives in budgetary control systems.The Accounting Review 53 (2): 336–359 Fellingham, J C 2007 Is accounting an academic discipline?Accounting Horizons 21 (2): 159–163.https://doi.org/10.2308/acch.2007 21.2.159

Feltham, G A 1972.Information Evaluation Sarasota, FL: American Accounting Association

Hopwood, A G 1974.Accounting and Human Behaviour London, U.K.: Haymarket Publishing

Hopwood, A G 2007 Whither accounting research?The Accounting Review 82 (5): 1365–1374.https://doi.org/10.2308/accr.2007.82.5 1365

Horngren, C T., S M Datar, and M V Rajan 2015.Cost Accounting: A Managerial Emphasis Volume 15 Upper Saddle River, NJ: Prentice Hall

Johnson, H T., and R S Kaplan 1987.Relevance Lost: The Rise and Fall of Management Accounting Boston, MA: Harvard Business School Press

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Ohlson, J A 1995 Earnings, book values, and dividends in equity valuation Contemporary Accounting Research 11 (2): 661–687

https://doi.org/10.1111/j.1911-3846.1995.tb00461.x

Paton, W., and A Littleton 1940.An Introduction to Corporate Accounting Standards Sarasota, FL: American Accounting Association Penman, S H 2013.Financial Statement Analysis and Security Valuation 5th edition New York, NY: McGraw-Hill

Sloan, R G 1996 Do stock prices fully reflect information in accruals and cash flows about future earnings?The Accounting Review 71 (3): 289–315

Watts, R L., and J L Zimmerman 1978 Towards a positive theory of the determination of accounting standards.The Accounting Review

53 (1): 112–134

The Accounting Review Volume 93, Number 6, 2018

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