Institutions as Collectively Accepted Norms

Formal institutions constitute and regulate corporate accounting. Accounting standards are a typical example of such formal institutions. This chapter explores the nature of the institution rather than taking it for granted. First, it highlights the essential characteristics of institutions by drawing on earlier work in institutional theory, which has long taken institutions themselves as the object of study. A central issue in understanding institutions is the ontological foundation of institutions, and if this point is not clarified, the construction of a theory of institutional dynamics would be challenging. This chapter does not argue that institutions emerge as a by-product of individual behaviors in society; rather, it assumes that institutions do exist in society and exert significant influence on individual and organizational behaviors. This chapter therefore draws on the insights of social ontology to argue that there is normativity in the nature of social institutions that acts on individuals beyond their personal desires. What, then, is the nature of normativity? It is collective acceptance, and a discourse that is more widely and collectively accepted is accompanied by greater normativity. From this perspective, this chapter classifies the normativity that constitutes social institutions. It particularly argues that belief-based observable social norms play a significant role in institutional reality. In other words, rule-makers or standard setters, referred to in this book as operative members, make decisions about institutions under uncertainty. Their decisions are influenced by collective social norms, which are not always explicit and are usually discovered by analysts such as social scientists.