Methodology Accounting Theory and Current Issues †Click on Sample

Question: Discuss about the Methodology for Accounting Theory and Current Issues. Answer: Criticism of Positive Accounting Theory Accounting can be considered as a system of thought, which is developed to assist decision-making process and influence human behavior within a particular setting (Higson, 2003). There is a wide range of accounting theories or approaches among which the Positive Accounting Theory (PAT) has recently been emphasized in different accounting literatures. The theoretical approach was first highlighted by Ross Watts and Jerold Zimmerman in the year 1978 and 1979 respectively. Both of these articles have represented criticism based on three different dimensions of accounting theories such as problems in research methods, philosophy of science and a lack of economics-based accounting investigation (Setyorini Ishak, 2012). PAT has been portrayed as the demonstration of economic positivism. Drawing the scenario from the positive accounting research based on the economic perspective, it has been apparent that the positive accounting theory includes rhetoric as compared to methodology. This ind icates that the theory mainly concentrates on accounting practices rather than focusing on prescribing correct method. Based on the definition presented by Watts and Zimmerman, there is a lack of transparency on the actual objective of PAT. The initial objective of PAT is to predict accounting practices along with proper explanation in contrast to the normative accounting theories (Christenson, 1983). Positive accounting research can be defined as a specific mode of empirical research that has been designed to demonstrate financial practices of different companies. This research aims to develop a PAT, which can provide transparent future potential along with proper explanation on the accounting practices of organizations. In this regard, Watts and Zimmerman have outlined three fundamental hypotheses, which include bonus plan hypothesis, debt equity hypothesis and political hypothesis (Setyorini Ishak, 2012). All these hypotheses concentrate on different perspectives based on which the firms can implement accounting choices and can remain informed about the impact of accounting profit on the monopoly profits as well. Accounting theory usually underpins the enhancement of discipline within the firm by outlining human behavior and other aspects that have an impact on the firms growth. While implementing accounting theories or approaches within a firm, one of the major concerns is th at there is no universal theory that has addressed every subject or field. Thus, the firms have to adopt multiple theories as accounting theories with a precise focus on different subject matters (Gaffikin, 2006). A number of descriptions and classifications of the approaches have been adopted to construct accounting theories. While discussing the accounting theories the concentration mostly revolves around financial reporting and financial accounting (Kabir, 2010). One of the common differences between accounting and reporting is that initially firms engage in generating accounting data and with time they start to communicate the data with the outside reporting entities (Higson, 2003). Similarly, the financial accounting theories focus on relating the contents in the financial statement. While establishing accounting theories, the researchers or accounting theorists emphasize a particular shape to evaluate the world of organizations or managements, which reflect the theme of their investigation (Smith, 2014). In this regard, Higson (2003) defined the term theory as a transparent set of conceptual and hypothetical principle, which helps to form a basic frame of suggestions for a particular fie ld of the investigation. The theories therefore help to enhance understanding regarding the process of generating probable activities in the long-run (Higson, 2003). Based on the present discussion, it has therefore been apparent that PAT concentrates on representing a set of guidance to organizations, which will assist them to determine the suitability of the accounting method or reporting theories. However, concerning the organization requirements, it does not suggest appropriate methods or theories for further development or surviving in the competitive market. This factor can force to reduce the effectiveness of PAT as it cannot provide any suggestion to enhance company growth, which is the preliminary goal of every organization. Besides, organizations adopt accounting theories to stimulate their financial position so that they can gain competitive advantages in the market. PAT in this perspective cannot help the organization to provide expected outcome based on its current accounting practices. PAT is a group of academic research conducted to explain the accounting practices during the current scenario (Kabir, 2010). On the other hand, prior to the establishment of PAT the normative theories were mostly utilized by organizations, which generally emphasized long-term values of economic limitations, which cannot be validated through financial data. The normative theories focus on long period of time for which evaluating financial data and implementing objective will not provide expected outcomes as the theories involve prescribing correct approach (Kabir, 2005). PAT does not concentrate on prescribing correct approach rather it is concerned about evaluating external environment based on which actual decision can be implemented (Kabir, 2010). PAT considers certain factors within an organization that have an impact on its operations such as risk faced by auditors, legal liability and probable loss of clients among others. The theory therefore targets to provide proper explanation regarding the accounting practices through examination along with producing hypothesis (Lukka, 2010). Both of the methods are different based on their priorities as PAT continues to emphasize the dimension of testing whereas normative theories are comparatively less focus on testing. The utilization of PAT leads towards better understanding and prediction whereas normative theories limit standardizing of practices and training to adopt those practices (Kabir, 2005). With respect to these factors, it can be affirmed that the use of PAT will definitely provide better outcomes as compared to other theories. However, the method can be criticized based on the characterizations and current situations. The theory although has better understanding with regard to the accounting practices still it does not provide any clear perspective about the appropriate approaches to organizations (Setyorini Ishak, 2012). On the other hand, organizational development has become one of the most vital concerns in this contemporary business scenario due to high competition and frequent changes in clients preferences. In this perspective, accounting theories help the organizations to enhance their performance along with ensuring high financial capabilities (Smith, 2014). Organizational development further involves enhancing organizational behavior by changing work processes and techniques to control the workforce. Therefore, adopting an appropriate accounting theory will help a business entity to enhance its efficiency in the market. PAT does not provide any proper guidance to organizations about the correct process based on which it can be criticized in terms of adopting for organizational development in the current market context (Setyorini Ishak, 2012). Organizations nowadays need to evaluate the accounting practices to increase the efficiency of decision-making process. Therefore, based on the definition of Watts and Zimmerman, PAT has highlighted certain factors that were not considered for establishing previous accounting theories (Kabir, 2010). However, the major responsibility of these academic theories includes providing guidance to enhance organizational operations along with prescribing an appropriate system for development, which PAT does not include in its priority. Thus, it can be ascertained that PAT represents an abrogation in terms of performing responsibilities of academics as it must include a transparent guideline to the organization through financial accounting or reporting theories (Higson, 2003). References Christenson, C., 1983, The methodology of positive accounting, The Accounting Review, vol. 58, no. 1, pp. 1-22. Gaffikin, M., 2006, The critique of accounting theory, Faculty of Commerce-Accounting Finance Working Papers, pp. 1-21. Higson, A., 2003, Corporate Financial Reporting: Theory and Practice, Sage, Thousand Oaks. Kabir, H., 2005, Normative accounting theories, Islamic Azad University of Ahvaz, pp. 1-30. Kabir, H., 2010, Positive accounting theory and science, Journal of Centrum Cathedra, vol. 3, no. 2, pp. 136-149. Lukka, K., 2010, The roles and effects of paradigms in accounting research, Management Accounting Research, vol. 21, no. 2, pp. 110-115. Setyorini, C. T. Ishak, Z., 2012, Corporate social and environmental disclosure: A positive accounting theory view point, International Journal of Business and Social Science, vol. 3, no. 9, pp. 152-164. Smith, M., 2014, Research methods in accounting, Sage, Thousand Oaks.