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Subject Area: Accounting and Finance
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Article citation: Gerry Gallery, Natalie Gallery, (2011) "Advancing innovation in accounting research", Accounting Research Journal, Vol. 24 Iss: 3, pp. -
We live in uncertain times. The sub-prime crisis that commenced in the USA in 2007, the global economic crisis that followed, and the recent sovereign debt crisis in various European countries have led to ongoing instability in global financial markets that continues to receive daily media attention. These uncertain times create enormous opportunities for researchers across many disciplines to research capital markets and business practices. From an accounting perspective, accounting regulators have been active in developing new standards to address risk management issues arising from the crises and have continued to develop and refine financial reporting standards. With the adoption of, or transition to international financial reporting standards (IFRS) in many countries, the globalisation of financial reporting standards is close to becoming a reality. However, doubts still remain about whether the IFRS will lead to any real long-term improvement in financial reporting and transparency (Sunder, 2011).
The accounting profession itself has gone through rapid change over the last decade and will continue to do so as it adapts to further globalisation, transaction complexity, changes in technology and demographic shifts. As technology expands and data collection and accounting processes become more automated, it is predicted that the focus of accounting will shift from computation to a broader role of consulting. The shift to consultancy will be necessary to meet the increasing reliance of clients on their accountants to analyse business information, support decisions and provide strategic advice (Intuit 2020 Report, 2011).
Although the uncertain economic environment and rapid changes in accounting practice offer opportunities for accounting research, it is questionable whether accounting researchers are in a position to take advantage of these opportunities. Criticisms of a lack of innovation in accounting research prevail among prominent accounting academics (Demski, 2007; Hopwood, 2007; Waymire, 2011). Given the gravity of these criticisms, it is an opportune time to consider the role, direction and effectiveness of accounting research. In commenting on the role of accounting research we note Hopwood’s (2007, p. 1367) emphasis on the need for innovation in both understanding accounting and informing practice:
[…] the very role of accounting research is in part to make both accounting and our knowledge of it different – to move forward our understandings of accounting and, at times, the practice of accounting itself.
To understand the role of accounting research and how it informs practice, we need to consider the obstacles to innovation and how they might be overcome.
A number of distinguished accounting academics have expressed their views about the state of accounting in recent years and the obstacles to innovation. In a speech delivered at the American Accounting Association (AAA) 2011 Annual Meeting, Greg Waymire, incoming President, characterised the “evolution” of accounting scholarship as “stagnant”. He views accounting research as having become too narrow with too much focus on financial accounting, principally using archival methods, with increasing homogeneity and lack of innovation representing a “recipe for extinction”.
Hopwood (2007, p. 1370) similarly observed that accounting research has not met the challenges of rapidly changing business environments, but instead is “seen as too cautious and conservative, too rigid and traditional, and insufficiently attuned to grapple with the new and to embrace novel insights and bodies of knowledge.”
Kaplan (2011, p. 367) expresses concern that accounting scholars have “distanced themselves from the accounting process itself” and have missed opportunities to contribute to practice. He cites risk measurement and management issues as some neglected areas. Consistent with Waymire and Hopwood, he observes that accounting scholars exhibit strong “herding” behaviour and “[…] follow where others have already gone rather than forging a new path by studying a new issue in an innovative way” (Kaplan, 2011, p. 369). Kaplan further suggests that the prevalence of “a narrow set of generally accepted research methods” (primarily empirical-archival methods) has resulted in “reactive” research, limiting innovation and the ability to rapidly address emerging issues. He notes that empirical-archival researchers must delay their research of a particular phenomenon until sufficient archival data becomes available. Kaplan attributes the narrowness in research methods to various factors including, lower levels of engagement with industry relative to other academic disciplines (leading to a lack of integration of practice and theory), and a lack of innovation in accounting education.
Like Kaplan, both Waymire and Hopwood suggest that inter alia the principal drivers of accounting research becoming so narrow in the topics investigated and methods applied are the nature of accounting research training and the incentive structures for accounting academics. Quantification of research output in terms of citations indices and quality assessed by rankings of journals in which the work is published is pushing accounting scholars to conform to the status quo, and produce research which makes small incremental advances in relatively limited research fields.
In reflecting on the revolution of innovative research that emerged from the Chicago School in the 1960s and 1970s, Hopwood (2007) comments on the strongly interdisciplinary orientation of that new knowledge, interfacing with and drawing on insights and approaches in finance, economics, statistics, social psychology and organisational psychology. While much of the financial accounting research which emerged from the Chicago School has continued to be firmly grounded in finance, economics and statistics, it appears to have become so entrenched that accounting is being left behind when those other disciplines are moving into new, exciting research fields. For example, since the corporate scandals and financial crises in the early and late 2000s, a new wave of behavioural research has emerged in finance and economics, embracing behavioural theories from psychology. However, research in accounting has been much slower to respond, with perhaps just a few exceptions.
Much of the published accounting research is ignored by the accounting profession and the business community generally, to the great chagrin of accounting scholars. However, we need to pause and consider why this is the case. Subject to the nature of a research project, we advise our research students that their work is expected to make a contribution to both the academic literature and practice. If their study is addressing a problem in the business world, then the outcomes of the research should go some way towards offering possible solutions to the problem, or illuminating the issues in a way that may guide practitioners, regulators or others to finding solutions. Yet little of the published accounting research offers practice something that is relevant and can be immediately applied or further developed. Consequently, it is not surprising that relative to other disciplines, the accounting profession and wider business community has been reluctant to use and support accounting research.
As highlighted by Clarke et al. (2011) in this issue, over the past decade accounting research in Australia has lagged far behind other business-related disciplines in securing government funding from the Australian Research Council (ARC) for either Discovery projects (conducted independently) or Linkage projects (conducted in partnership with one of more industry organisations). Innovation is one of the criteria applied in the selection of successful proposals and it could be inferred from the lack of success that accounting proposals are not sufficiently innovative. This view may be a little simplistic, and the reader is encouraged to read the Clarke et al. article for a more comprehensive analysis of possible reasons for lack of success, but it is a reasonable expectation, given that the ARC’s mission is “to deliver policy and programs that advance Australian research and innovation globally and benefit the community” (emphasis added). Thus, research funded by the ARC is expected to be both innovative and make some contribution to the betterment of society.
Judging by the comments of some of the leading accounting scholars over recent years (Hopwood, 2007; Demski, 2007; Kaplan, 2011; Waymire, 2011), and their use of such words as “whither” and “extinction” in relation to the current direction of accounting research, the accounting research landscape appears to be rather bleak. With existing research areas progressing in only small incremental steps, and making few advances into new areas of knowledge, the outlook does not seem good. However, the situation may not be as grim as it is painted when we consider some of the recent innovative empirical work in the area of corporate reporting.
A prominent example is the much-cited study by Graham et al. (2005) in which the authors surveyed and interviewed corporate executives about earnings reporting and disclosure decisions. In this timely study, which was conducted shortly after the accounting scandals in the early 2000s, the respondents were surprisingly frank. A large proportion of respondents admitted that they would sacrifice long-term firm value to smooth reported earnings, providing direct evidence of earnings management. This study sits in contrast with the large body of earnings management studies developed over more than a decade that had almost exclusively relied on archival data to make indirect inferences about earnings management behaviour. This reliance on archival evidence also gave rise to a range of concomitant debates about the appropriateness of methodologies and measurement used to test for earnings management. The new insights provided by the Graham et al. (2005) study represented a significant advancement in our understanding the earnings management and disclosure behaviour. By adopting the more direct and relevant methods of interviews and surveys they were able to provide hard evidence that had largely eluded researchers relying on just archival data. It is disappointing that the Graham et al. study did not lead to a new wave of non-archival and mixed method research.
There are of course many other examples of interesting and innovative research in corporate reporting and other areas of accounting, but unfortunately there are too few in number to be considered a major change. This lack of change suggests that the obstacles highlighted above need to be addressed prior to the realisation of significant innovation in accounting research. We call on our accounting academic colleagues to consider broadening their research topics to include contemporary and emerging issues that are relevant to practice. For example, in the aftermath of the global financial crisis Kaplan (2011) identifies a need for greater research focus on risk measurement and management issues. Other areas that are directly relevant to accounting practice include fair value accounting, sustainability and environmental accounting, and reporting and disclosure by entities other than publicly listed companies. The expected shift of accounting services more towards consultancy will create a need for research that accounting academics can exploit. For example, the rapid growth of the financial services industry, demographic changes (e.g. aging populations, changing work patterns) and increased wealth, provide opportunities for accounting researchers to explore wealth management issues, engage with practitioners, and contribute to the development of this field. However, because wealth management requires expertise that extends beyond accounting, interdisciplinary approaches are also needed to comprehensively address research issues arising in this context. By drawing on the expertise and methods of other disciplines, and bringing those together in a holistic approach to investigating challenging issues arising in business, government and society in general, accounting research is more likely to deliver the benefits expected by the broader community.
We also call on our colleagues to be less risk-averse in their choice of research activities. Such risk-taking of course would have to come from the top, with senior academics taking the lead and encouraging research students and junior staff to consider researching issues and drawing on theory and methods from other disciplines, other than those traditionally applied in accounting research. Similarly, we call on senior accounting academics who are journal editors and reviewers to actively encourage and promote innovative research that does not necessarily conform to established research clusters. Unless there is such leadership in innovation from our leading scholars, we are unlikely to see a return to a new and exciting accounting research environment, such as existed at the time of the Chicago School in the 1960s and 1970s.
Gerry Gallery, Natalie Gallery
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