Describe about the Accounting Theory for Accounting Relationship.
This paper examines positive accounting research in the broader sense and analyzes the relationships of human behavior with the accounting set up using statistical and hypothesis testing methods. The ontology and epistemology of this program is touched upon and the deficiencies of statistical methods like the casual construction of theoretical models for testing, insufficient replication to warrant confidence in the accepted finding due to lack of interest in the numerical parameters of the obtained values, so on and so forth (Tinker et.a l, 1982). The shortfalls in the research are traced and highlighted because it leads to incomplete findings or findings that are not totally dependable. The paper discusses how the positive accounting research can be made more effective and what can be done to make positive accounting research reach its full potential. Hence, in the article, the main stress will be on positive and how the impact can be made more pronounced in nature.
Summary of the article
The paper starts with an examination of a normal human being in normal circumstances and situations. Various religious beliefs are also discussed and it is concluded that man is guided by a scientific judgment that is free to act accordingly to the circumstances and situations. Therefore, the acts and practices are often influenced by a variety of factors. Thus it is highly probable that the same human being acts differently in two similar situations and this is the core point of positive accounting research. The different situation leads to different action and this varies according to different persons. Examples from various research papers have been taken and discussed that the rationality of human behavior is applicable in 80% of the cases (Antle et. al, 2006).
As accounting and operations are becoming more technical and automated, human interaction has reduced and everything has become system oriented. There is more reliance on the system and hence, it the rational of the human being is difficult to be perceived. In such situations, it is more difficult to understand the peculiar human behaviors (Hogget et. al, 2012). The ontological and epistemological assumptions made exposes the serious ways in which positive accounting research is performed and this prevents positive accounting research from making a meaningful contribution to the society (Tinker et. al, 1982). Positive accounting research is not just restricted to solving some complex puzzles that are not likely to make any meaningful and effective contribution towards the betterment of accounting. Hence, the contribution does not provide any backing to the situation which is faced every now and then and needs a good result. The ineffective versions of research that are currently being practiced need a direction for the future generations and to cope with the challenges that may be faced. Moreover, the outdated researches do not contribute anything to the field of research and hence is orthodox in nature. The onus is one the policy makers to filter positive accounting so that a better result is framed (Hogget et. al, 2012).
Positive accounting research is much broader than positive accounting theory as it encompasses standard setting by regulators and policy makers, pricing and reporting decisions by auditors and expert advice offered by academics. But the theoretical models selected for research do not draw an appreciable justification. Human beings are assumed to be rational in 80% of the cases which means there is 20% exception to this condition. This exception can possibly provide reasonable answers to the different ways in which managers tend to make mistaken decisions despite the accounting feedback pointing out the mistake (Humphrey, 2008). The main finding that is traced is the fact that the positive accounting theory is more linked to the firm’s contractual value. The contractual view stress immense pressure on the policies and methods of the accounting. Therefore, conservatism practices have led to big differences and hence, are criticized strongly.
Though there is no exhaustive list of exceptions to behavior, these illustrations only prove that positive accounting research is broader than positive accounting theory. Thus any research that aims at understanding the nature and causes of the particular accounting phenomenon qualifies to be positive even if its causes lie in non-rational aspects of human psychology (Antle et. al, 2006).
The statistical and hypothesis testing methods are used to test and analyze the rationality of human behavior but have miserably failed in the same. The real reasons cannot be interpreted as the hypothesis is largely dependent upon the sample selected and analyzed. A hypothesis restricts the research to one variable and proving it as true or false. But in the real world situations, there is more than one variable impacting the accounting systems and the actions of human beings in the rational accounting environment.
Due to these shortcomings, the paper focuses on the construction of better theoretical models for testing that are highly sophisticated and highly vulnerable to facilitate rigorous testing. Moreover, it is imperative to search for an alternative so that a better view can be framed and a better result can be achieved. Measurement concepts are established and the analysis progresses from one variable testing to the testing of linear relationships. In this way, better relationships with proxies are established and the focus shifts from hypothesis to the estimation of parameters. This opens up the way for a disciplined accounting research and the results of this will be seen in the form of confirmation of accuracy of measurements and the overall growth of the accounting systems leading to the better ability to predict.
This is the short summary of the paper as it explains the current status of positive accounting research and how it can be used to achieve maximum benefit.
There is always a reason behind everything as it is rightly said that to understand anybody’s behavior we have to step into the shoes of the person. Hence the research question analyzed in this paper is whether there is any rationale behind the actions of auditors. Why do they charge the varying amount of audit fees, why do they do a complete audit in some cases and not others, so on and so forth? These research questions are tested using the hypothesis method which checks for and against a condition as to say null hypothesis and alternative hypothesis. There are a variety of questions that needs to be solved and for which various methods are needed.
The aim of the hypothesis testing is to prove that the null hypothesis is false and these results are also largely dependent upon the samples selected for testing. The sampling technique plays a major role when it comes to research. The high level of misspecification leads to Type I error. It is more like a questionnaire filled up by the auditor during the audit as a part of the requirement of working papers without really analyzing the validity and relevance of these for the audit under review. Similarly, the results obtained by hypothesis might not be close to reality as it leads us to doubt the actual facts which appear to be contrary from the results. It would not be wrong to say that the value of hypothesis is quite weak in positive accounting research (Fogarty & Markarian, 2006).
As a part of literature review, the paper is set to test whether the qualitative and quantitative aspects of positive accounting research are tested sufficiently using the appropriate methods. It needs to be determined so that answers can be fetched. Arguments for and against are discussed with the critics occupying a major and stronger position to prove the fact that seeing theories succeed is almost a surprise.
The accountancy and auditing profession has to be carried out in accordance with the set of rules and regulations like accounting standards, taxation and statutory requirements and any deviation from these is seen to attract penal provisions. This is practiced so that a uniform set of action prevails and there are no shortfalls. Despite these checks, the varying actions of auditors are observed for different audits and hence there is the need to study and analyze the reasons behind the same (Fogarty & Markarian, 2006).
Auditors are all human beings and this attracts discussion on the concept of rationality and independence. Both the factors play a determining role. There is no real independence as a human mind is always subject to some sort of bias or prejudice or a soft corner, say for a client belonging to the same race. Hence, it leads to error and biases thereby influencing the entire course of action.
Thus, the theoretical framework of this paper is the study of these behaviors and the analysis methods used for the same. The behavior is important in the course of study and needs proper investigation so that the framework is not impacted. In hypothesis, it is assumed that the sample chosen is a representative of the population. For this condition to be true in the real world, all the different alternatives and possibilities have to be listed down and it should be checked if the sample has at least one item from each alternative to rule out the misinterpretation of the results obtained (Hogget et. al, 2012). There are innumerable alternatives and hence, it might lead to the issue because cross checking each and every method is not possible in any scenario.
But it is a sorry state of affairs as statistical methods have their own limitations and this type of qualitative testing is not carried out. Another drawback is that the hypothesis considers testing of only one condition at a time but in reality, an audit might be governed by more than one condition at a given point of time.
Significance and Limitations of the Article
The article is significant in the way that it has opened up the topic of discussion of the loopholes in the current system. Even if it is currently not very effective, it has at least encouraged more quality work to be done in this direction. More of such papers should be published to pave the way for more research to be undertaken with levels of improvement in each research. The results obtained from the hypothesis prove that human behavior is rational (Humphrey, 2008). It is done from a scientific point of view and displays that humans think before judging and taking an important decision.
The limitation of the article can be said in a way that it has focused more on the critical part and it could have provided more suggestions with examples to make this research stream more meaningful. The article also assumes that the existing theories are true and applicable though the applicability of these theories has changed from time to time and also new theories have evolved which are not tested (Dunmore, 2009). The presence of the theories and various other frameworks indicates that the development of theories happens from time to time.
As accounting is subject to limitations and measurement errors, statistics should be used but again the results could be misleading as it is bound to differ from sample to sample. Sample plays an important consideration because it is a representation of the entire population (Hogget et. al, 2012). However, assuming the whole population to be determined and judged from a sample is again another issue.
The conclusions drawn are that the positive accounting research is currently not achieving its required aims and objectives and a more systematical and methodical research needs to be undertaken. It has encouraged the use of vulnerable models and analytical modeling. More and more replication encourages stringent testing which has the ability to provide successful solutions for the positive accounting research program. There are constraints in every field but these constraints can be used to benefit and can be turned to opportunities to create a theoretically sound framework is seen as the light at the end of the tunnel. Moreover, new techniques are needed in the due course of time as it enhances the validity of the research and makes it better adapted to the situation. Therefore, positive accounting research needs to be updated so that it can be well versed with the present scenario and provides a better result.
Antle, R., Gordon, E., Narayanamoorthy, G., Zhou, L 2006, ‘The joint de-termination of audit fees, non-audit fees, and abnormal accruals’, Review of Quantitative Finance & Accounting vol. 27, no. 3, pp. 235-266
Dunmore, P.V 2009, Half a Defense of Positive Accounting Research, Massey University, Wellington, New Zealand
Fogarty, T. J., Markarian, G 2007, ‘An empirical assessment of the rise and fall of accounting as an academic discipline’, Issues in Accounting Education vol. 22, no. 2, pp. 137–161
Hogget, J., Edwards, L., Medlin, C & Tiling, M 2012, Financial accounting, 8th edition, John Wiley
Humphrey, C., 2008, ‘Auditing research: A review across the disciplinary divide’, Accounting, Auditing & Accountability Journal vol. 21, no. 2, pp. 170 – 203.
Tinker, T, B. Merino, & Neimark M 1982, ‘The Normative Origins of Positive Theories: Ideology and Accounting Thought’, Accounting, Organizations and Society vol. 2, pp. 167–200.