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The subfield of accounting regulation examines the processes, institutions, and theories behind the establishment and enforcement of accounting rules. Its central questions revolve around why accounting is regulated, who should set standards, what form those standards should take (principles vs. rules), and how regulation impacts financial reporting quality, capital markets, and corporate behavior. Historically, the evolution of thought in this area has shifted from a focus on deriving ideal, normative standards to analyzing the political and economic forces shaping real-world regulatory outcomes.
The foundational phase was dominated by Normative Accounting Theory. From the early 20th century, scholars sought to prescribe "correct" or "true" accounting principles through deductive reasoning, often grounded in economic concepts like income measurement and capital maintenance. This tradition, which included efforts to develop a conceptual framework, assumed regulators could and should implement these theoretically sound standards to produce optimal social welfare. It dominated academic and professional discourse until the mid-20th century, providing the intellectual justification for standard-setting bodies.
A major paradigm shift occurred with the rise of Positive Accounting Theory (PAT) in the 1970s. Inspired by economics and the work of Watts and Zimmerman, PAT rejected normative prescription. Instead, it sought to explain and predict why managers choose particular accounting methods and why accounting regulation exists. It posited that regulation is a product of political and economic forces where various constituencies (managers, investors, politicians) lobby for standards that maximize their own utility. This shifted the focus from what should be to what is, framing standard-setting as a contested arena of self-interest.
Concurrently, Critical Accounting emerged as a radical challenge to both normative and positive traditions. Drawing from Marxist, sociological, and political-economic theories, critical scholars argued that accounting regulation is not a neutral, technical activity but a mechanism of power and ideology that maintains social order and serves dominant capitalist interests. It examines how regulation masks conflict, legitimizes corporations, and perpetuates inequality, moving the debate beyond efficiency to issues of emancipation and social justice.
Since the 1980s, Institutional Theory has become a central framework for understanding accounting regulation. It analyzes how regulatory structures, rules, and practices become institutionalized—taken for granted as legitimate—through coercive, mimetic, and normative pressures. This approach explains the global diffusion of standards (like IFRS), the role of professions and the state, and the decoupling between formal rules and actual practice. It highlights the social and cultural embeddedness of regulation.
More recently, the Economics-Based Standard-Setting approach has gained prominence, particularly following major accounting scandals and the financial crisis. This framework applies rigorous empirical finance and economics methodologies to assess the real effects of regulation on market behavior, cost of capital, and information asymmetry. It treats accounting standards as policy instruments to be evaluated through large-scale data analysis, influencing bodies like the FASB and IASB in a more evidence-based direction.
Today, the landscape is pluralistic. Positive Accounting Theory and Economics-Based Standard-Setting often dominate mainstream, North American journals, focusing on empirical market consequences. Institutional Theory provides the dominant sociological lens for comparative and international regulatory studies. Critical Accounting remains a vital, though smaller, tradition questioning foundational assumptions. Meanwhile, elements of the older Normative Accounting Theory persist within the ongoing projects of conceptual framework development by standard-setters, representing a continuous thread of prescriptive logic.