Critical Perspectives on Accounting (1992) 3, 93-97

ISSUES IN ACCOUNTING RESEARCH DESIGN

EDUCATION
WILLIAM R. KINNEY, Jr.
Graduate School of Business, University of Texas at Austin

Cooper and Zeff (1990) present what I believe are three major complaints
about Kinney (1986). The first is that Kinney “is too narrow (much too narrow)
both in his prescriptions for empirical research in science and in his definition
of research in general” (p. 8). The second is that the paper omits the approach
of using data to suggest theory. Third, the paper gives inadequate attention to
normative theory development and to solving practical problems of the
profession.
Some of Cooper and Zeff’s complaints relate to me, some to the paper and
some to the present state of scholarship in accounting. Thus, I have varying
degrees of responsibility and I cannot resolve all of them. My responses to the
three major complaints are presented in order. Before the responses,
however, I must admit that I may not fully understand their complaints or
their agenda and, my response may miss the mark.

Kinney (1986) “Is Much Too Narrow”

The article in question had a limited objective. It was designed efficiently to
introduce beginning Ph.D. students to contemporary empirical accounting
research. The focus of the article is on empirical research planning. I did not
and do not presume to provide guidance in all possible methods of
conducting scholarly inquiry in accounting. The article does not, for example,
provide suggestions on how to do analytical research or historical research in
accounting. There is, of course, no statement in the article that can be
construed to imply that the definitions or guidance was intended to apply to
all of science or even to all empirical research in accounting. I don’t apologize
for the exclusions since no such claim was made.

Empirical Work and the Role of Theory

As to the role of theory, the focus of Kinney (1986) is planning empirical

research in accounting based on preconceived ideas about possible causal
factors. One can, of course, discover interesting relations by accident without
planning. For example, in 1975, Mike Rozeff and I were considering the
unequal arrival over calendar months of accounting information. We casually
Address for correspondence: Professor William R. Kinney, Jr., University of Texas at Austin,
Department of Accounting, College of Business, Austin, Texas 78712-1172, USA
Received 19 December 1990; accepted II April 1991.
93
1045-2354/92/010093 + 05 $03.00/O 0 1992 Academic Press Limited
94 W. R. Kinney, Jr

hypothesized that January probably had higher variance of stock returns than
did other months.
Our logic was that, since most firms report on a calendar year basis, arrival
during January of unexpected good news and bad news on earnings would
lead to higher variance of ex post returns than would exist in “no news”
months. We had no reason to expect that the mean return differed for January
since good news and bad news would average out over time. We found that
variances by month were about equal but the January return was far above
the mean for any other month for a period of over 70 years. The finding was
quite accidental! (As an aside, my exposure to writings of R. A. Fisher in ag
school statistics classes was important since the ARIMA or Box Jenkins
multiplicative time-series approach didn’t show a seasonal effect.)
One can also conduct research using a theory to guide the inquiry. For
example, in 1981, the Auditing Standards Board was developing guidance for
auditors applying non-statistical sampling. Some board members wanted to
give alternative, but equivalent, ways of evaluating audit samples. The
alternatives were: (a) to assess error at a specified level of risk; or (b) to
assess risk of specified levels of error (e.g. “material” error). I knew from
discussions with Wil Uecker that psychological theories predicted different
behavioural biases for the two approaches. We worked out the direction of
expected bias for each method, wrote experimental materials to test the
hypotheses, administered the experiments to practicing auditors, and re-
ported back to the ASB within a 10 week period. On seeing the report, the
Board threw out the guidance that both the theory and the data indicated
would lead to increased risk of incorrect acceptance of balances in error.
Ex post, the accidental finding of Rozeff and Kinney (1976) has had more
notoriety than the planned Kinney and Uecker (1982) results. In fact, a group
of finance papers attempt to explain the phenomenon [see Keim and
Starnbaugh (1985) for references]. However, this doesn’t suggest that one
should proceed without a theory ex ante. Ordinarily, it is not efficient
haphazardly to gather data and see whether any relations exist. There are
hundreds of silly relations that might be explored, including some with
statistically significant measured associations. Almost all of them will prove to
be silly, however. Theories about how observable facts are related guide the
researcher to those possible relations that have higher probability of being
important (and statistically significant).
Cooper and Zeff (1990) are very specific in bemoaning the exclusion of
exploratory data analysis and the exclusion of “exploratory work”. I interpret
the latter to be support for case studies that describe what the observer
observes [analogous to their characterization of the microscope work of
Leeuwenhoeck (Cooper & Zeff, 1990, p. S)]. In their view, data can sometimes
suggest why data are related. I agree that pretheoretical or non-theoretical or
atheoretical exploratory data analysis and case studies can be useful. In fact, I
have tried to encourage the latter by implementing the “Small Sample
Studies” section of the Accounting Review (Kinney, 1990). A similar section
now exists in the Journal of financial Economics (Editorial, 1989). Most of
these inquiries have been based on some a priori theory as a guide to which
“facts” are relevant, however.
 Issues in accounting research design education 95

Having said that I agree that atheoretical studies can be useful, I do not
apologize for omitting the other approaches in my brief Education Research
article in the Accounting Review. It seems to me that large sample studies,
guided by a priori theories and using data to test the theories are, indeed, in
the mainstream of contemporary accounting scholarship for a reason-they
are useful and cost effective. It also seems to me that beginners can be
assisted in learning about theoretically-based large sample studies in ac-
counting. Providing some assistance in the task was the purpose of Kinney
(1986).

Normative Theory and Practice vs. Scholarship

There are two uses of the word “theory” in accounting and many are
confused about them. One is a prescription for how accounts ought to be kept
and the other is a description of how and why different accounting methods
have an effect on the state of the world. The first is a theory ofaccounting and
the second is a theory about accounting.
I have no complaint about inquiry that tries to prescribe the optimal
accounting under certain assumptions about how the world works. Such
analyses can be very useful in understanding the real world and providing a
starting point for finding out why real world accounts aren’t kept that way.
While not the subject of Kinney (19861, I do have a complaint with normative
or prescriptive theory in the way in which it has traditionally been
conducted-i.e. I question the adequacy of the assumptions on which it has
been based.
There are two broad uses of accounting data (Beaver & Demski, 1979). One
is as predecision information about the state of the firm and the other is
postdecision data to facilitate contracting with respect to the state of the firm.
f believe that a prescriptive accounting “theory” for either predecision or
postdecision purposes could be very useful and a simultaneous or joint
solution would be even better. For example, consider a prescription for public
reporting for predecision information purposes based on assumptions such
as:
l imperfect and incomplete markets under uncertainty [Beaver (1981,
Chapter 411;
l there are alternative sources of information for the investor;
l the investor holds a diversified portfolio; and
l the capital market is efficient with respect to publicly available
information.
In such a setting, should inventory accounts be kept on a FIFO, LIFO or some
other basis? Should costs be measured using historical costs from the
checkbook or should input price adjustments be made? Should provision be
made for possible future tax payments?
Asprescriptive paper based on the four assumptions above would, in my
judgment, be a prime candidate for the /MA’s “seminal contribution to the
accounting literature award” created by Steve Zeff. No one was developed
such a prescription, of course, and I’m not suggesting this as a dissertation
96 W. R. Kinney, Jr

topic. The payoff for successful completion would be great but the risk-
adjusted expected return on an attempt to write it is rather small. I am
suggesting that deriving the optimal accounting for, say, a taxicab company
assuming certainty, perfect and complete markets, an investor with no
alternative sources of information, no alternative investments and no ability to
adjust for accounting method differences, is not a very useful exercise-even
if one owns or wants to own a taxicab company.
As an aside, I do not agree with Cooper and Zeff that positive theorists have
ignored history. In trying to explain present accounting practices they have
had to consider the past. For example, I believe that Watts and Zimmerman
have used more obscure historical references than almost any other contem-
porary accounting researcher. It is the normative theorists that ignore the past
since their models are based on simplistic hypothetical situations in a timeless
environment. Also, and possibly contrary to Cooper and Zeff, I believe that
descriptive theorists necessarily start with practical problems. In Kinney (1986)
I recommended beginning with a practical problem that is causing someone
grief in the real world and trying to solve it using theories! That is also the
way that I have conducted most of my own work.
Frankly, I am puzzled by Cooper and Zeff’s apparent belief that empirical
research (and especially descriptive theory-based research) in accounting
ignores accounting practice. Prescriptive theory development can ignore any
aspect of practice that it wishes. However, real world data arises from real
world situations. The real world is rich in examples of behaviour with
alternative accounting methods. Accounting reports based on the checkbook
and adjustment for accruals seems to have stood the test of time. For
whatever reasons, it existed prior to regulation by the SEC and has survived
the use of accounting policy as a political football by those with vested
interests in prescribed accounting. Why is accrual accounting so resilient? I
believe that we should try to find out what differences accounting methods
make and why. Is it the information it provides, the contract facilitation? Its
relevance? Its low cost? Who demands that accounting be as it is? Who resists
changes? Why do they resist? If the world’s institutions seem peculiar (e.g.
differ from the normative theorists’ prescriptions) yet they have been that way
for a long time, then there is probabily a reason-someone wants it that way.
A positive empirical researcher’s job is to try to figure out who wants it that
way and why.
When I was a lad studying accounting, whether purchase discounts were
properly considered income or expense reduction was an accounting
“theory” issue (of the theories of accounting variety). I wasn’t particularly
interested in becoming an accounting theorist. Now I believe that theories
about accounting hold a lot of promise for explaining why businesses and
society are organized as they are and why and how things are accounting for
really does make a difference.
A section of Cooper and Zeff (1990) concerns to what extent a professor
should be a scholar and to what extent he or she should be a quasi-
practitioner making policy recommendations. Part of the confusion -about
professorial roles is that accounting is both a business and an academic
discipline. Some accounting teachers view themselves as accountants who
 Issues in accounting research design education w

happen to be on the education side of the profession. Others view themselves

as professors whose academic discipline is accounting. The implications of
one’s orientation are important in understanding behaviour. The first profes-
sor will worry that the school isn’t teaching all that future practitioners need to
know in their first year on the job. The second will worry about whether they
understand why their work is as it is and how it might change in the future.
As to Cooper and Zeff’s concern that Ph.D. students are not being trained to
make policy recommendations to practitioners, I can say only that, while that
may be a worthy objective, it was not the objective of Kinney (1986).

Conclusion
I agree with some of what Bill and Steve have said. There is obviously more to
science than is covered in Kinney (1986). Some will find it economical to
follow their suggestion for Ph.D. education. Others will find their advice not to
be cost effective. I am in the latter group.
In conclusion, if Cooper and Zeff believe that Ph.D. students in accounting
need an introduction on: (a) how to conduct atheoretical research; (b) how to
conduct historical research; (c) how to develop normative theories of
accounting; and (d) how to advise practitioners how to run their business,
then I believe that they should write an article to provide such an introduction.
Also, if they want a more comprehensive definition of empirical accounting
research, accounting research or research for all scientific endeavour, then
they should write one.

References
Beaver, W. H., Financial Reporting: An Accounting Revolution (Englewood Cliffs, New Jersey:
Prentice-Hall, 1981).
Beaver, W. H. & Demski, J. S., “The Nature of Accounting Measurement”, The Accounting
Review, January, 1979, pp. 38-46.
Cooper, W. W. & Zeff, B. A., “Kinney’s Design for Research in Accounting”, (forthcoming, 1990).
Editorial, “Clinical Papers and their Role in the Development of Financial Economics”, Journal of
Financial Economics, September, 1989, pp. 3-6.
Keim, D. B. & Stambaugh, R. F., “Predicting Returns in the Stock and Bond Markets”, Journal of
Financial Economics, December, 1986, pp. 357-390.
Kinney, W. R., Jr., “Empirical Accounting Research Design for Ph.D. Students”, The Accounting
Review, April, 1986, pp. 338-350.
Kinney, W. R., “Editorial, The Accounting Review: 1987-1989”, The Accounting Review, 1990,
pp. 258-270.
Kinney, W. R. & Uecker, W. C., “Mitigating the Consequences of Anchoring in Auditor
Judgments”, The Accounting Review, January, 1982, pp. 55-69.
Rozeff, M. S. & Kinney, W. R., Jr., “Capital Market Seasonality: The Case of Stock Returns”,
Journal of Financial Economics, 1976, pp. 379-402.