Institutional Theory in Financial Accounting: Scope and Significance

This essay provides an overview of institutional theory and its significance in the context of financial accounting. It defines institutional theory as a means of understanding the relationship between formal management systems and interpersonal processes, emphasizing how it drives businesses to standardize their organizational structures and procedures. The essay also discusses institutional isomorphism, which can be achieved through coercive, mimetic, and normative processes. Furthermore, it highlights the scope of institutional theory, noting that organizations often embrace institutional myths ceremonially to establish legitimacy. The essay references the work of Rowan, Tolbert, and Zucker to support the theory, demonstrating how consensus within an institutional context leads to stable transmission of innovative structures. Concluding with a list of references, this assignment aims to clarify the role and impact of institutional theory in shaping financial accounting practices. Desklib offers a platform for students to access this assignment and other valuable study resources.

FINANCIAL ACCOUNTING
THEORY

Table of Contents
 What is Institutional Theory
 Institutional Isomorphism
 Significance of institutional theory in context of
Accounting
 Scope of Institutional Theory
 Support for Institutional Theory: Rowan, Tolbert,
and Zucker

What is Institutional Theory
In general, institutional theory is a means of understanding about the
relationship between formal management systems and the interpersonal
processes that influence their evolution. This pushes businesses to
standardise their organisational structures and procedures. Organizations
are viewed as working inside a conceptual structure of conventions,
values, and implicit expectations about what constitutes suitable or
acceptable economic action, according to institutional theory.

Institutional Isomorphism
Institutional isomorphism can be achieved in three ways, according to
institutional theory academics Paul DiMaggio and Walter Powell.
 Coercive process - Organization's implement changes that are compatible
with the larger institution as a result of pressures from other organizations
on which they rely or are controlled, such as state regulations or supplier
expectations.
 Mimetic processes - Symbolic processes are when companies adopt the
methods of other companies to deal with internal uncertainty regarding
their own activities, strategy, and so on.

Significance of institutional theory in
context of Accounting
 Institutions are considered as the social systems that have shown to be
extremely resilient. They are made up of cultural-cognitive, normative,
and regulative aspects that, when combined with other activities and
resources, provide social existence with stability and meaning. Symbolic
systems, relational systems, routines, and facts are all examples of carriers
that transfer institutions. From the global system to localized individual
ties, institutions operate at various levels of jurisdiction. Institutions, by
definition, imply stability, although they are prone to both incremental and
discontinuous change processes.

Scope of Institutional Theory
Meyer & Rowan suggest that "institutional myths" are frequently embraced
just ceremonially in order for the company to establish or maintain
legitimacy in the institutional environment. Organizations adopt
"structural vocabularies" such as job titles, procedures, and organizational
positions that are prevalent in their context. The adoption and prominent
display of these institutionally approved "trappings of legitimacy" helps to
maintain the appearance of "good faith" organizational behavior.
Organizational survival is aided by legitimacy in the institutional
environment.

Support for Institutional Theory: Rowan,
Tolbert, and Zucker
From the perspective of institutional theory, Rowan looked studied the
evolution of three administrative services in California public schools
(school health, psychology, and curriculum). He discovered that the
transmission of innovative structures is stable and long-lasting when there
is a high level of consensus and cooperation within the institutional
context. When the institutional environment is tumultuous and unfocused,
however, innovative structures are adopted slowly and cautiously.

References
 Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial
accounting theory and analysis: text and cases. John Wiley & Sons.
 Shou, Z., Zheng, X.V. and Zhu, W., 2016. Contract ineffectiveness in
emerging markets: An institutional theory perspective. Journal of
Operations Management, 46, pp.38-54.
 Vollmer, H., 2019. Accounting for tacit coordination: The passing of
accounts and the broader case for accounting theory. Accounting,
Organizations and Society, 73, pp.15-34.

Thank You