Accounting Theory And Current Issue For Positive Accounting Demand

Introduction to Positive Accounting Theory

Describe about the Accounting Theory and Current Issue for Positive Accounting Demand.

Accounting research has various branches among which positive accounting is the research which deals with events in real world situations  and tries to convert them in accounting transactions .Here the variables are selected according to the needs of the individual and a systematic approach i.e. positive accounting approach is followed in solving their queries. This research is in contrast to the normative accounting as this research aims at finding the best optimal methods of accounting that should be ideally executed in different cases.  The positive accounting theory has been propounded by Ross L. Watts and Jerold L. Zimmerman from the University of Rochester. It  focuses on the actual practices which are applied in the field of accounting. It is a boon for the firms, creditors, debtors and stakeholders. It helps in identifying the steps the accounting firms will take in certain pre determined circumstances and the impact of such steps on its stake holders(Watts and Zimmerman 1978,1986,1990).But, it has been found that many firms at their management level in an attempt to get the maximum profit follow illegal methods and fails to achieve the intended objectives of the organization which is a drawback, this sometimes leads to the problem of opportunistic behavior. Firms can aim at increasing their profit in the long run by fulfilling the objectives of the positive accounting theory , for that the firm should manage the accounting policies effectively , keeping the knowledge base up to date with latest happenings in the field of accounting and finance. Methods that help in reducing the overall costs of operation should be adopted to increase the profits of the firm.  Care should be taken that the accounting methods set up by the accounting board should be sincerely followed in order to reduce the risk factor in accounting decisions in different situations. Moreover, the methods of accounting followed should be flexible in order to modify them according to the situations.

 Different methods of positive accounting research are examined through the study of an assigned article. This paper is a critical analysis of the article titled ‘Half a Defense of Positive Accounting Research’ written by Paul V Dunmore from the University of Massey, Wellington, New Zealand which is mainly centered on the concept of Positive Accounting Theory or PAT(Popper 1959). The paper discusses the importance of positive accounting research and different sections of the paper are results of the scientific projects, which shows the various events in the world are dependent on each other thus setting an example of cause and effect relationship(Kuhn 1970) Similarly, PAT which is a part of accounting research also shows the cause and effect relationship in the accounting practices. This implies that for every action there is an equal and opposite reaction and similarly in the case of accounting practice there also exist a cause and effect relationship. By converting the real life situations in accounting terms the situations can be understood in a much better manner. The author speaks about the thinking process of the people where he gives an example of the theologians who refused to look through Galileo’s telescope because they thought most of it was already known and the unexplored part had already been corrupted by the devil spirits. From this, he wants to covey that people want to confine to the knowledge about the worldly things they already have and do not want to enhance and open their minds to the new research and thus resulting in the backdrop of the enhancements in the field of knowledge(Fogarty and Markarian,2007).The author explains how the investment decisions have improved over the decade using the positive accounting research technique and also the stakeholders are able to understand the terminology related to the accounting results of the firms.   The author also makes it clear that the concept of positive research is much broader than the term ‘Positive Accounting Theory’ as proposed by Watts and Zimmerman. He also discusses that following predetermined patterns is also necessary as our ancestors did but departing from them is equally important to see new opportunities which may result in the further developments. As we are well aware of every opportunity there is an equal probability of its success and failure thus it’s the human behavior which can be the deciding factor in such situations(Watts and Zimmerman 1978,1986,1990).

Advantages of Positive Accounting Theory

According to the author, most of the researchers are using qualitative and quantitative approach in their research work but author suggests Popper’s criterion. This criterion is widely accepted as it it follows certain steps and goes through a systematic approach. It emphasis on the qualitative and quantitative approach.The process involves careful observation and then the development of ideas on a preliminary basis. Here the variables are selected data is arranged , tables are made. The next important step is to follow the falsification theory. According to this theory a formal data is collected on the basis of evidence available and testing is done to find out in which situations the theory is a success and where it fails. It is highly recommended to use this technique as this gives many precise results. The author also supports the falsification of theory by giving the examples of Pioneer 10 and 11 aircraft which were launched in the 1970’s and these were the first to cross our solar system and enter the interstellar space(Popper 1959) Years of observations of the above aircrafts it has been found that they have made lesser journey as predicted which shows the lacking of the precisely and accurate information at that time. The author also comments that the theories should be made more precise such that each and every aspect of it is clear so that the final results are functional in nature, hence avoiding the weakness of the statistical hypothesis testing method, according to which the testing of the data is done only on statistics figure not on the practical data .

The author has laid down certain points to be kept in mind for the success of the positive research method . Firstly we should follow the testing of models theoretically and as accurately as possible and we can even go further and use the specialized analytical modeling technique to enhance the success rate of our model and if any error occurs we must make sure to overcome it in the next turn. Once the modelling is done then using quantitative and qualitative methods we can put it under testing. He explains the development of the model through the example of audit fees model developed in another recent article. The author has a view point that methods of accounting should be valid and follow viable rules thus he believes more in measurement of concepts through precise methods rather than just testing as this area is generally ignored in the process of accounting research(Davila and Foster, 2007). There is always a shortage of data in the making of a good accounting theory which the author proves by quoting an example of Mendeleev’s triads rule where in spite of having insufficient data he made the first periodic table and later studies and researches helped in modifying his concept and we got our new periodic table, also there should be continuous replication of the previous studies that are conducted. This helps in finding any limitations in the results and if any sampling error is there in the findings which can be corrected at a later stage. All these methods when adopted helps in overcoming the previous mistakes and performing better in further research operations(Crombie,1994).

Drawbacks of Positive Accounting Theory

Positive accounting technique is a wide concept and its use in the real world situations is far different from the way it should have been actually practiced this has been confirmed by a survey showing a wide gap in the theoretical and practical application of the Positive accounting theory technique. It is still not associated with the practical situations in life as a result of which desired outcomes are not achieved. The observation may not be 100% correct and may have many misconceptions(DeAngelo, 1981). However, even these observations help in building a cause and effect relationship and in clearly mapping all the casual processes that are occurring in the world. So to reduce the error rate and get the precise results it is a necessity to link the situations to accounting terms and then get the accurate results.

The author makes an important point that the accounting research that is done nowadays is not up to the standards and has suggested newer and better approach get the desired and more precise results in the field of accounting. The author says that better qualitative and quantitative methods should be developed and executed and emphasis should be put on the correct testing of the theoretical information and using the advantages of analytical modeling better models should be made(Lee,1997)There is also a requirement for better measurement so that the models are capable enough to be rigorously tested. Even the human behavior is highly unpredictable and these positive accounting techniques can prove to be a boon in understanding the human needs and behavior. As describe earlier all the real world situations can be described in the positive accounting terms by developing a cause and effect relationship. The different variables of the cause and effect relationship need to be properly studied and different real life situations can be converted In accounting transactions which can be later solved by positive accounting approach. However, positive accounting research in the broader perspective can be considered to be a part of a wider intellectual project of scientific research which intends to clearly examine the cause and effect relationships between various variables. But the main thing is these variables are not constant or fixed they change according to the needs of the people so need to be carefully selected and used in the testing of the data. All of the scientific projects are related to the real world situations and the research on them shows that all have cause and effect relationship(Fukuyama,1995).

The article by the author is of high importance as it signifies the importance and necessity of the positive accounting approach in our life and how one can relate one’s life situations to accounting and express them more efficiently(Gibbins). The author has studied thoroughly the work of other scholars and examined their approach of research and has found out some of the remarkable findings in their work. He also acknowledges the work of each and every scholar. He clearly states both the negative and positive aspects of each and every method that he mentions in his article. The author also identifies various limitations associated with various positive accounting researches and suggests various methods to overcome these limitations. The detailed explanation by the author of various concepts related to positive accounting research and its applications in the real life situations is of much importance for all those who are not very much familiar with the topic. The author has also included various real life examples in the article so as to make it much more practical and easy to understand. The emphasis on correlating the accounting terms with the different situations and fixing parameters according to the situations is a huge success. Moreover, qualitative analysis of the data and testing of the data on simulators is an added advantage(Schulz and Cheng,2002) The findings of the research are very clear and are capable enough to be implemented in the real life situations while undergoing various accounting researches. This approach helps in explaining the real life circumstances in accounting terminology making it more easy to understand in a practical way. The aim behind this critique is to examine the various methods of positive accounting research through the study of an assigned article and understanding the need of this approach in today’s fast paced life. Thus, the article is a complete solution and proper guidance is obtained from this astonishing discovery which can be referred while undertaking positive accounting researches.

References:

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