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Current issue for financial Accounting Research
Financial Accounting is the field of accountancy is based on the grounding of financial statements for decision makers that include people like; stockholders, banks, workers, government agencies, proprietors in addition to other stockholders. The purpose of Financial Accounting in any field is to offer the information that is required for better financial decision-making. It also helps in preparing financial reports that give the required information about any organization performance to the parties that are external for example, shareholders, tax collectors in addition to creditors. Financial Accounting is prepared according to Generally Accepted Accounting Principles guidelines. There are two approaches for accounting research. These include, Positive Approach and Critical Approach to research. This paper aims at explaining these approaches.
Positive approach is appropriate when the rules and the idea of positive laws are applied to recognizable situations instead of unspecific principles that involve the individuals who use them to put together subjective decisions with the aim of understanding and following them. Positive accounting theory has a complete important involvement in the understanding of company or any organization account information. Through this positive approach, one of the study has been conducted by Moses (1987) coming with the idea that positive approaches been of use to the executives’ option among accounting methods following to founding in the being of motivation for wages management. The existing range in the present UK coverage set of laws indicate the choices that have being classified by use of amazing objects to offer a new decision-making choice background where positive accounting theory can be tested. Research has shown that 53 per cent of 700 companies are presently reporting amazing matters (Financial Reporting Council, 1991). The major essential hypothesis in positive accounting theory is to facilitate agents and individuals to advance their own character and interest. The main aim for inspiration for accounting strategy option is to gather round verification about the dynamics that pressure the managerial action.
Positive accounting theory linked with Zimmerman and Watts (1986), shows effect in market efficiency. Through introduction of positive approaches, the inducement rationale for wages management is produced. There are results in the opportunistic performance, well-organized contracting together with awareness in information. These elements depend on accounting numbers (Holthausen, 1990). Under opportunistic performance setting, executives are believed to have taken full advantage of their own wealth, which depends in the performance related to cash bonuses. As a result, there is arising in the employment risk that being arise from the possibility of company breakdown or else takeover and the company’s divided value. The share value possessions has outcome in executives grasping their shares and in the value of their human capital. This therefore means that executives are in a position to make decisions that capitalizes on the organization cash flow contributing thereafter to the organization-becoming firm. Executive’s incentives also tend to arise in the cases when accounting choices lack direct cash flow effect. This happens in cases where accounting choices are impacted on share prices by means of effect on the expected political cost in the firm. In consequence, it is foresee that, the executives of firms that have elevated political cost will tend to opt for the present wages reducing in accounting strategies. In additional to this the current executives of firm that have elevated organization costs of justness and debit will tend to choose the current wages increasing. Researches have shown that most of the empirical job is determine on the opportunistic performance of assumption (Holthausen, 1990).
Resourceful constricting settings together with contracts that reduce organization cost may give confidence in payments management. The agreements are, nonetheless, resourceful for they may end resulting to the exploitation of the firm value. It therefore hard to make a distinction based on the awareness gotten from those produced in the opportunistic performance surroundings. Based on the information gotten from hypothesis deviation between executives and the genuine claim holders, this approach sets up why such diplomacy to smooth can be in the excellent interest of the current shareholders. According to Dye (1988), this benefit in increasing the firm value reduces the level of risk in bankruptcy. Several studies show that this awareness put forward that accounting method are been chosen to make known the outlook of the executives and their upcoming cash flows of the organization. It is however advised, that for this smoothing to be effective, the executives accounting choices must be observable (Suh and Titman, 1990).
Positive accounting theory has been tested by use of different studies. According to Christie (1990), concluded that six substitutes have descriptive power across range of learning: dimension, hazard managerial reward, influence, and restrictions of attention cover up together payment expense. There is few wages smoothing studies that try to give clarification in the incidence of smoothing and in terms of the variety of the organization in particular uniqueness relating to enticements. According to Suh (1990), argues that the parting of ownership from supremacy increases the likelihood of smoothing behavior. Different researchers have offered Numbers of reasons. According to Kamin (1975), he came up with the first reason, even as controlling outside owners have shortest access to the organization they do not depend on the printed information to tell what will happen in the future. Executives are likely to engage in smoothing as they reduce the risk in employment and improve the worth of their capital (Hunt and Ronen.1990).
Critical theory is the second theory in accounting. There are three means of uniqueness in Critical theory that can be recognize with observation to clarify the practical and social characteristic of accounting method. The first critical theory suggests with vitality connecting theory that entails practice. The second critical theory tends to see analysis, change as well as advance as the crucial factor of the practically in research attempt with a need to attain a better life in accounting. The third critical theory tends to outlook, social organizations in both the past and societal environment. Critical theory may provide helpful understanding in transforming the accounting method in the organization perspective (Hunt and Ronen.1990).
Historical was far from different philosophy that had views about the truth of this theory. According to Adorno (1966), viewed history as an even domination of human individuals to attain a better world. Adorno propounded a critical methodology that was intended to expose this domination and later create transform and enlighten the world. According to Max Horkheimer (1966), he interpreted during his life that things were not as the way they should be but the longing and capability to modify and accomplish was in the humankind. Habermas theory of social progression preserves that society member. He centered on different languages, which would produce greater progression (Habermas, 1965).
Basing Habermas approach in both the language and ways of communication there is the important aspect in allowing understanding to take place and change to take place in non-violent circumstances. From this aspect, accounting system can be seen, as the useful element and language system need that need to be understood and changed through language. By use of Harbermas’ aspect in an accounting context, one is required not to start with the perfect design but evaluate the real things and find out the enhancement that is required. This addresses a subject that is significant to those that perceive accounting system as not anything more than scientific phenomenon and those who outlook themselves as possessing significant essential root.
Based on accounting context, this means that accounting has been restricted to talk about approaches in concepts for instance price, turnover or other professional system of assessment by this means limiting the understanding about accounting system aim. This also results to the probability and the answer as to why so many textbook form of accounting stay unused in account practice. For this to be changed change process should happen in the linguistic and the language used for explanatory understanding about the natural world of accounting. Critical theory sets the scenery of understanding wholly into context of lasting significant change and progress. It is important for the academics of those who have specialized in accounting to get involved not only to the accounting practices but also in advance to apprehension. Accounting system in diverse firms needs not to be assumed but rather be in a position to possess the important qualities to open the opportunity in future (Hunt and Ronen.1990).
Conclusion
Currently, accounting is a key ingredient in business, organizations or else institutions. Accounting research has been formulated to help in managerial practices in helping identify sources of problems by eliminating causative elements and providing solutions to the same.
Accounting research has been used has been used to gauge how efficient managers are. The theory seeks to explain how they would choose an accounting research methodology that would give a clear representation of the institution is financial and equity performance. The hypothesis is that managers who accrue added benefits that is determined by a company’s good or bad financial performance are more likely to interfere with an accounting methodology for the figures to favor the organization (Richard M, 2007).
The use of Positivist approach to accounting research has been used to explain how things happen by observing past happenings and predicting the most probable expected results. In a positivistic approach the researcher seeks to understand the causes and the effects in particular phenomenon. Examples of these financial recession include, a researcher that seek to find what caused the 1930’s financial recession and compare it with 2009 financial recession in order to come up with an argument to support such considering the factors remain constant, thereby predicting when such a case will arise again (Richard M, 2007).
In accounting research one may use positivistic approach if it solely wants an objective explanation because that’s what the positivistic approach goal is. In a social setting, the theory sets social control, implies that it is rational, and moves towards establishing integration in the society.
A firm opts to use the critical approach in its accounting research in order to establish and challenge assumptions on why people may perceive, conceive or even act a certain way. Rather than a positivistic approach who accepts things as they are since the theory states that action is always rational and that rules and norms are created to create integration and they are created for the common good.
A critical approach is suitable in cases where or when they may actually interrupt what is considered normal routines and the known way of doing things in pursuit of exploring and discovering other hidden alternatives. For example a company that has solely relies on its auditors previously, may venture into modern technology. It may update its accounts using software, despite the anomalies that may occur thereof ,if it means getting more accurate information or cutting off expenses that a firm may do without e.g. paying auditors for various departments when new technology can ease that (Richard M, 2007).
Accounting research tends to rule out the possibilities of managers who have opportunistic intentions. They tend to implement accounting methodology that helps them gain in the institutions. Due to this motives it make it possible to prefer an accounting policy over the other. In this case, critical approach is of use for helps established how a manager’s belief and his actions may be influenced by history, social status and culture. This is because critical approach may again go beyond finding faults and seek to understand w things happen t way they do. Firms in corporate world have been known to evade taxes. Even worse, is that they incorporate in their systems accounting methodologies that shows that they have accrued lesser annual profits than they really have in order not to attract attention of the government who tends to place tight and tougher regulations on high earning firms than low profit making firms. This is more so especially, if they are foreign companies. In this case, the critical approach to accounting in research is used since its more skeptical about any knowledge or information or even a solution that may be deemed as ordinarily truth or as the alternative.
References
Robert L.P (2004).Financial Accounting, Canberra: New York University Publishers.
Moses D.G (1987) Positive Accounting Theory, New York: New York University Press.
Dye N.A (1988), Impact of Accounting Research, London: Duke University Publishers.
Adorno A.B (1966), History in Critical Theory, London: Duke University Press.
Max Horkheimer (1966), Positive Accounting Theory, Canberra: New York Publishers.
Richard M (2007), Two Hundred Years of Accounting, London: Stanford Press
David H (1980), Introduction to Critical theory, Los Angeles: University of California
Press
Kieran J (2006), Approaches in Critical Theory, Newderhi: Sterling Publishers
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