Discuss about the Accounting Theory for Theoretical Framework.
Positive accounting research is the branch of accounting research which deals with the actual practices which are applied in the field of accounting. This explains the actual situations in accounting and is in contrast to the concept of normative accounting research under which the most optimal methods of accounting practices are suggested which should ideally be adopted in various circumstances. The positive accounting theory has been propounded by Ross L. Watts and Jerold L. Zimmerman from the University of Rochester. This theory tries to explain the events taking place in the real world situations and makes an attempt to convert them into the accounting transactions. It specifies what actions the accounting firms will take in certain pre identified situations and the reactions of various stakeholders associated with the firms after such a step. The intention of the firms is to maximize the chances of their survival within the industry and thus they make every effort to conduct their operations in the most efficient manner. The firms also try to adopt such policies which minimize their cost of operation so as to increase their profitability in the long run. This sometimes leads to the problem of opportunistic behavior under which the management may try to fulfill their own personal interests keeping at stake the objectives of the overall organization.
In order to achieve the objectives of positive accounting theory, various methods can be adopted. This includes a change in the overall accounting policies being followed in the firm, managing the accruals effectively; keeping the knowledge up to date about the various changes taking place in the field of finance and accounting and timely implementation of various new accounting standards that are introduced by the accounting board. Methods that help in reducing the overall costs of operation should be adopted to increase the profits of the firm. Also the method of accounting adopted by the firm must be flexible enough to be altered in accordance with the needs of the situation.
The aim behind this critique is to examine the various methods of positive accounting research through the study of an assigned article. This paper is a critical analysis of the article titled ‘Half a Defence 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. The research paper broadly discusses the practice of positive accounting research and considers some of the parts of this research to be a part of the overall scientific research projects which are mostly based on the establishment of cause and effect relationships between the various elements in the world. 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.
The author talks about the scientific research projects under which there are various events occurring in the world which are independent in nature. These may be random in nature or may be a result of various circumstances prevailing. The reasons for such events are also random in nature and the people with a normal mind set can easily have an idea of the events occurring by observing them carefully. The observation may not be 100% correct and may have many misconceptions. 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. This helps in identifying the cause and effect of various actions taking place in the world. He also discusses the views of the Greeks and the Sophists based on the enquiry they conducted on what the world is all about. He also talks about the well known story in which most of the theologians 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. The author is of the view that such thinking process proves to be hurdle in making real advancements in the study about the world. Keeping our knowledge confined to what is already known and not keeping our minds open for the future research becomes a major setback in enhancement of our knowledge about various things.
The author then deals with some examples of positive research in the field of accounting like use of accounting information by the investors before making any investment decisions and also utilization of such information for the development of control systems. There are various stakeholders that are interested in the accounting results of various firms. These include the shareholders; creditors, debtors, suppliers, customers etc. and each one of them have their own personal interest in the accounting information. The author also makes it clear that the concept of positive research is much broader than the term ‘Positive Accounting Theory’ as propounded by Watts and Zimmerman. He also discusses the concept of agency under which the human beings have free will and while exercising their will they may deviate from the objective behind the research and their behavior would then be located far above from the objectives which are intended behind the research. Our ancestors would not have been able to manage their social life along with gathering of food and the development of a settled life if they would have not behaved in the predictable ways. If that would not have been done in the past, we would not have been able to enjoy our lives in the way we do it today and it would have been filled with various difficulties. However, departing our behavior from the pre determined patterns is sometimes beneficial and helps in the discovery of new opportunities which can be utilized for further development. However, each opportunity has many risks associated with it and in a similar manner there are many threats and challenges associated with every new innovation and there are equal chances of failure. Thus, the human behavior varies from person to person and it changes in accordance with the needs of the situations.
The author prefers and explains the Popper’s criterion for scientific research instead of using qualitative and quantitative methods for the collection of data as used by most other researchers. The process involves careful observation and then development of ideas on a preliminary basis. This helps in getting a thorough understanding of the various prospects involved with the research. The next step is development of a formal theory on the basis of various evidences available and testing the predictions on the basis of various situations After such an examination is to disregard the ones under which the theory as developed fails or is not operative. This concept is known as falsification of theory. 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 among the manmade objects to cross our solar system and enter the interstellar space. But after so many years it has been discovered that both these objects as travelling at a much slower speed in comparison to the speed predicted by the general relativity theory.
The author also examines the weaknesses of statistical hypothesis testing including the problems associated with the technical assumptions on which the research is based. He also suggests that to overcome such limitations, the theories must be developed with sufficient details making each and every aspect very clear so as to arrive at specific predictions which are functional in nature.
The author also suggests the requirements for successful positive research program. The models that are developed for testing must be theoretical and should be designed seriously and not in a hurry. They should also be tested as accurately as possible and in case of failures, we should try to learn from them and should avoid the mistakes in the next turn. He explains the development of model through the example of audit fees model developed in another recent article. The author also suggests analytical modeling to be adopted as a specialized activity along with the theoretical modeling. There should be a focus on the measurement of concepts through precise methods rather than just testing as this area is generally ignored in the process of accounting research. Thus the concepts should be defined and measured through ways that are valid and reliable. He also gives the example of the invention of the periodic table by Mendeleev and says that there is always an acute shortage of raw data for the development of a good accounting theory. Even after many difficulties we all are very much thankful to Mendeleev for this contribution in the field of science. Also there should be continuous replication of the previous studies that are conducted. This may help in identification of sampling errors in case if any exists in the findings and also identification of the limitations of the previous findings. All this methods when adopted helps in overcoming the previous mistakes and performing better in further research operations.
The survey by the author revealed that a wide gap existed between the way positive accounting technique is actually practiced in the real world situations and the way it should have been practiced so that it contributes the most for the intellectual program. There are various variations from the methods that should ideally have been adopted for the research process.
The author thus concludes that the existing method of accounting research followed is not up to the mark to conduct the research proposals successfully and has also suggested various methods which can be implemented to conduct the quantitative positive researches more effectively and efficiently. Better theoretical models should be developed and they should be taken seriously. There is also requirement for better measurement so that the models are capable enough to be rigorously tested. He explains that positive accounting research techniques have a lot to offer towards understanding the human behavior much of which is quite unpredictable.
The author is of the opinion that there is a need to develop various cause and effect relationships among the various variables in order to conduct the research in the most effective manner. The real world situations are required to be converted in the accounting terms so that these are better expressed in terms of accounting transactions and are capable of being better understood. He states that as currently positive research is practiced in accounting, it is not capable of achieving the scientific objectives. 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. These variables are not constant and changes in accordance to the needs of the situations and the people.
Conclusion
The article is thus of much significance as it tries to bring out the various aspects of positive accounting research. The author does an examination of the various methods of research adopted by various scholars in this field and mentions the conclusions drawn by each one of them in their research. 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 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 findings of the research are very clear and are capable enough to be implemented in the real life situations while undergoing various accounting researches. Thus, the article is a complete solution which can be referred while undertaking positive accounting researches. (Paul V Dunmore,2009).
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