Loading field map
Accounting regulation is not a purely technical exercise. Every time a standard-setter decides how to measure an asset, what to disclose, or whom to prioritize as the primary user of financial reports, a set of assumptions about the purpose and politics of regulation is at work. The subfield of accounting regulation studies those assumptions: why standards exist, who shapes them, and whose interests they serve. Over the past century, nine major frameworks have offered competing answers, and the history of the subfield is the story of their debates, reactions, and partial coexistences.
The earliest systematic framework for thinking about accounting regulation was normative accounting theory. From the 1920s through the 1970s, theorists such as William Paton, John Canning, and later Raymond Chambers and Robert Sterling argued that accounting should be based on a single, logically derived ideal—usually current cash equivalents or replacement cost—rather than on the mixed historical-cost conventions that practitioners had inherited. Normative theorists were prescriptive: they believed that if researchers could identify the correct valuation model, standard-setters should impose it. The framework dominated academic accounting for decades, but by the late 1970s it faced a crisis of credibility. Its prescriptions were internally coherent yet untestable; different theorists proposed incompatible ideals, and there was no empirical way to adjudicate between them. The pressure to move beyond untestable ideals gave rise to several competing frameworks, each of which defined itself partly in reaction to normative theory.
While normative theorists debated ideal measurement rules, a separate line of thinking emerged from welfare economics. Public interest theory holds that regulation exists to correct market failures—monopoly power, information asymmetries, externalities—and that regulators act as benevolent agents of the public good. In accounting, this framework justifies mandatory disclosure and standard-setting as remedies for the information asymmetry between corporate managers and outside investors. The public interest view remains influential in regulatory rhetoric and in the official justifications of bodies such as the International Accounting Standards Board (IASB). Yet it has always coexisted uneasily with a more skeptical observation: regulators often seem to serve the very industries they are supposed to oversee.
That skepticism crystallized into capture theory, which argues that regulated industries eventually dominate the regulators appointed to control them. In accounting, capture theory predicts that standard-setters will tend to favor the interests of large preparers over those of investors or the public. George Stigler’s 1971 article "The Theory of Economic Regulation" pushed the argument further. Stigler proposed that regulation is not a correction of market failure at all but a commodity bought and sold in a political marketplace: well-organized industry groups demand regulation that protects them from competition, and politicians supply it in exchange for votes and campaign contributions. This economic theory of regulation transformed capture theory from a vague suspicion into a testable model of interest-group competition. In accounting research, the economic theory of regulation underpins the prediction that standard-setting outcomes reflect the relative power of preparers, auditors, and investors rather than any public-interest ideal. Today, both capture theory and the broader economic theory remain active frameworks for analyzing regulatory politics, with the economic theory offering a more general model of which groups win and why.
At roughly the same time that Stigler was modeling regulation as a market, a very different critique was emerging from Marxist and post-structuralist traditions. Critical accounting rejects both normative theory’s faith in neutral ideals and positive accounting theory’s reliance on market-based explanations. Instead, it argues that accounting standards are instruments of power that sustain class inequality, obscure exploitation, and naturalize capitalist social relations. Critical researchers examine how standard-setting processes exclude marginalized voices, how accounting concepts such as "fair value" embed ideological assumptions, and how the profession’s claim to objectivity masks its role in maintaining elite control. Unlike the economic theory of regulation, which treats interest-group competition as a normal feature of democratic politics, critical accounting sees the entire regulatory apparatus as part of a deeper structural domination. The framework has never dominated mainstream accounting journals, but it has sustained a vibrant scholarly community for over five decades and continues to challenge the self-image of the profession.
The most direct empirical challenge to normative theory came from positive accounting theory (PAT), developed by Ross Watts and Jerold Zimmerman in a series of papers beginning in 1978. PAT explicitly rejected the prescriptive stance of normative theory, arguing that accounting research should explain and predict actual accounting choices rather than dictate what choices firms ought to make. Drawing on agency theory and the economic theory of regulation, PAT models managers’ accounting policy decisions as rational responses to contracting costs, political costs, and compensation incentives. For example, a firm with high debt covenants is more likely to choose income-increasing accounting methods to avoid violating those covenants. PAT became the dominant framework in North American accounting research for much of the 1980s and 1990s, and it remains a major empirical tradition. Its relationship with earlier frameworks is layered: it absorbed the economic theory of regulation as a core assumption, coexisted with public interest theory by treating it as a hypothesis to be tested rather than a premise, and stood in sharp methodological opposition to critical accounting, which rejects PAT’s rational-actor model as ideologically loaded.
By the early 1990s, some researchers began to argue that PAT’s rational-choice framework could not fully explain why accounting practices converge across countries or why firms adopt standards that do not obviously maximize their economic interests. Institutional accounting theory, drawing on sociological institutionalism, offered an alternative. It emphasizes that organizations adopt accounting standards not only for efficiency reasons but also because they seek legitimacy in the eyes of regulators, investors, and the public. The framework identifies three mechanisms—coercive (government mandates), mimetic (copying successful peers), and normative (professional training and networks)—that drive the global diffusion of International Financial Reporting Standards (IFRS). Institutional theory does not reject PAT outright; rather, it coexists with it by explaining a different layer of regulatory behavior. Where PAT explains firm-level variation in accounting choices, institutional theory explains field-level convergence and the persistence of practices that lack clear efficiency rationales.
The most recent major debate in accounting regulation is not about why standards are set but about how they should be written. The collapse of Enron and WorldCom in the early 2000s exposed the dangers of a rules-based system in which preparers could structure transactions to meet the letter of a rule while violating its spirit. In response, the FASB and the SEC issued proposals in 2002 advocating a principles-based approach: standards that state broad objectives and rely on professional judgment rather than detailed bright-line tests. Principles-based standard-setting revives, in a pragmatic form, the normative theorists’ faith that accounting can be guided by coherent ideals. Its advocates argue that it produces more faithful representation and reduces opportunities for manipulation. Critics, however, warn that principles-based standards reduce comparability, increase legal uncertainty, and place excessive trust in auditors’ and managers’ judgment. Rules-based standard-setting, which had dominated U.S. GAAP for decades, defends detailed guidance as necessary for consistency and enforceability. The two frameworks remain in active tension today. The IASB leans toward principles, while the FASB maintains a hybrid approach. Neither side has won, and the debate connects directly to earlier frameworks: principles-based thinking echoes normative theory’s search for conceptual coherence, while rules-based pragmatism aligns with PAT’s skepticism about untestable ideals.
No single framework has displaced all others. Instead, the subfield today operates as a pluralistic landscape with a clear division of labor. Positive accounting theory dominates empirical research on firm-level accounting choices and market reactions. Institutional accounting theory leads studies of global standard-setting diffusion and organizational legitimacy. The economic theory of regulation and capture theory remain the default lenses for analyzing the politics of standard-setting bodies. Critical accounting continues to offer a radical alternative that questions the premises of all the other frameworks. The principles-based versus rules-based debate shapes the practical work of standard-setters themselves. What the leading frameworks agree on is that accounting regulation is not a neutral technical process; it is shaped by economic incentives, political power, institutional pressures, and ideological commitments. Where they disagree is on which of those forces is most fundamental and whether the goal of research should be to explain, to predict, or to emancipate. That disagreement is what keeps the subfield alive.