Introduction to Positive Accounting Research
This assignment is a review of the article on the positive accounting research. This assignment examines a positive approach towards the research made on the entire theory of accounting. This assignment states the importance of the accounting research in the society and even the deficiencies the entire theory possess. Further, in this assignment the scientific research been discussed in detail. Then Popper's criteria towards hypothesis testing and falsification towards the theories are given. Lastly, the model used in the hypothesis testing and their results stating both the importance and the drawbacks of the theories are given.
Summary of Article:
In the given article by Paul V Dunmore, a critical evaluation of the entire theory of the accounting research has done by him. The usage of the accounting theory in understanding the human behaviour in various aspects regarding the decision-making and the interaction is helpful. According to the Disciplinary matrix concept given by the Kuhn the research made has various uses (Li, 2015, p.560). The uses such as optimal solving the puzzles provided within the social groups. Paul has mentioned a positive impact on the accounting research done especially based on the results achieved from the various testing models. Chan et al. (2014, p.158)have stated that despite the various positive impacts of the accounting theory Paul has even laid various deficiencies of the theory such as the practice of the ineffective versions of the accounting done on daily basis. Even there a lack in designing the techniques that is mandatory to provide the important minute details given.
Paul has even discussed the scientific theory and its various hypotheses on the independent imagination of a completely different world. Paul has laid his strong disbelief towards the acceptance of the imaginary world created by the existence of all non-living beings such as spirits, demons, and gods. There is need of an appropriate problem-solving technique and not any type of contribution made socially or done with an intellectual contribution. Further, in the article Paul has mentioned certain hypothesis regarding the scientific theory. There are even various philosophical paradigms drawn by him in order to make his point sound valid. As per the positive research, he has stated that there is gap found between both the positive theory of the accounting laid and the research done on it. Various models have used for the testing the entire research program has discussed in detail.
The Positive accounting theory came up with the various users even such as the firm managers of various firms. Even the auditors found it very helpful as the theory helped in providing the furnished audit reports. The audit report, which states the financial position of the company, includes various decisions such as pricing techniques and the management of the company. Regulators, politicians, and academicians who often use the theories to provide the advice, further used the theory (Bryman, 2015, p.19).
The entire article is on the research done to state whether the accounting theory is valid or not. After its critical evaluation, various shortcomings also came forward. In addition, there were rectifications provided by the experts so that the effective use of the theory to done. Paul found that even after the rectifications, the accounting theory is still not the effective way in those areas where the scientific research and its theory are applicable. The positive research has a broader continuum in comparison with the accounting theory. Further, the article has also focused on the observation of the various processes done.
There are numerous financial accounting theories laid by the experts out of which the most important was the positive accounting theory approach. Watts and Zimmerman have named the research as ‘Positive Accounting Theory”. Their study clearly mentions that the positive research is broader than any particular theory applied (Donaldson, Dollwet, and Rao, 2015, p.187). It even came out by the experts that after the accounting theory, the organizations were able to explain well their practice of accounting followed by them to the concerned persons such as auditors, investors, shareholders etc.
The accounting theory comprises of various hypotheses, the first one named as the bonus plan hypothesis. The second hypothesis referred as the financial leverage hypothesis and the third hypothesis was named as the political cost hypothesis (Eriksson and Kovalainen, 2015, p.17).
In general context, the positive accounting theory was prepared to provide help to the organization in explaining their own accounting policy and their reasons for the justification. The positive accounting theory was even helpful in identifying the areas such as the earnings manipulation of the company and the practice of creative accountancy. The purpose of these practices followed by the companies through the violation of the laws or norms stated for both the public limited and the private limited companies. For example, the practice such as bogus accounts are prepared to inflate the revenues; even general expenses shown as capital expenses in the books. To identify these practices the earnings management and smoothing of income of the firm done on regular basis.
The main purposes of adapting these practices were, in general, to attract more capital for the firm by increasing the investors. The capital requirement needed for firms for smooth functioning on its daily routine and further for the expansion. After the practice of the theory, the management was able to sustain the balance in fluctuation of the income of the company (Ball (2013, p.849).
Despite the positive accounting, theory considered as the mainstream still it faced various critics from the researchers. As the accounting, theory failed to provide any necessary recommendations to the management. Secondly, the accounting theory failed to state that whether the firm is able to show a biased or unbiased picture of its financial position. The famous Faucladian theory got its foundation due to the positive accounting theory. According to this theory in every organization, the powers comprised only in hands of few situated in the organizational hierarchy rather than the equal distribution in the organization.
Significance and Limitations of Article:
After the examination of the entire article, it was seen that the drawbacks of the accounting theory that Paul came across based upon his research were found valid. According to him the theory of the entire positive accounting is done on a positive research based on both the accounting and economics aspects. Even as per the research was done by the Watts and Zimmerman concluded that the accounting theory could have become better by adapting some wider concepts of accounting. Despite, of the various predictions done by the experts, the income of the firm was mainly projected due to the financial statements provided by the company to the investors, creditors to lend the credit to the firms (Malsch and Salterio, 2015, p.19).
Further, the accounting theory's main motive depends upon the desire of the human beings. The human being cannot be neglected as they possess the power of their own judgment. Thus, a huge difference is created in the positive accounting theory as each individual has his own way of handling the adjustments done in general in the financial statements.
The entire article also covers some limitations. Firstly, in the article the author Paul, has stated its argument well but has done completely on the theoretical basis. The author did not consider the quantitative data, which is equally important to make the argument valid point. Secondly, the author did not provide any support to his argument through any required documents such as graphs, data's or other information provided by the law especially made for the companies.
Even the entire accounting theory stresses only on huge range such as the big corporate houses and leaves rest. The corporate houses are in the very well state of financial capital, employee workforce, spread across national and international boundaries and covers political support too. Thus, the small companies or the private firms neglected by the research done on the accounting theory. Thus, the small companies or the private firms neglected by the research done on the accounting theory. Further, the Paul has not given enough weight age to the theories relevant to the field of accountancy i.e. the accountings were not talked much, rather more philosophies were discussed.
As per the certain drawbacks, the Paul has laid it, stated that there was a lack of correspondence. However, he has made a good use of the hypothesis to make certain test and drive various results but he lacked in providing a proper mathematical support to his argument in the article. As, with the help of the mathematical support, core based accounting theories, and the relevant data the argument would have weighed better.
In this assignment, there we have discussed the importance of the accounting theory, which on broader aspect has stated with the term ‘Positive Accounting Research". The accounting theory has widely accepted by many of the corporate houses and also both the small and the medium scale enterprises. Despite the drawbacks that are stated by the author, the Paul, V, Dunmore the organizations has accepted the theory well. Further, in the assignment, there has been a discussion of the scientific research done and its importance and the drawbacks are given. Lastly, the significance of the article and certain limitations that the author was unable to cover is discussed.
- Ball, R., 2013. Accounting informs investors and earnings management is rife: Two questionable beliefs. Accounting Horizons, 27(4), pp.847-853.
- Bryman, A., 2015. Social research methods. Oxford university press.
- Chan, L.H., Chen, K.C., Chen, T.Y. and Yu, Y., 2014. Substitution between real and accruals-based earnings management after voluntary adoption of compensation clawback provisions. The Accounting Review, 90(1), pp.147-174.
- Donaldson, S.I., Dollwet, M. and Rao, M.A., 2015. Happiness, excellence, and optimal human functioning revisited: Examining the peer-reviewed literature linked to positive psychology. The Journal of Positive Psychology, 10(3), pp.185-195.
- Eriksson, P. and Kovalainen, A., 2015. Qualitative Methods in Business Research: A Practical Guide to Social Research. Sage.
- Li, X., 2015. Accounting conservatism and the cost of capital: An international analysis. Journal of Business Finance & Accounting, 42(5-6), pp.555-582.
- Malsch, B. and Salterio, S.E., 2015. “Doing Good Field Research”: Assessing the Quality of Audit Field Research. Auditing: A Journal of Practice & Theory, 35(1), pp.1-22.