A Critique to Positive Accunting Theory

Question: Discuss about A Critique to Positive Accunting Theory. Answer: Introduction Theories may come and theories may go but the Truth Stays Forever. One such theory is the Positive Accounting theory which , though covers a part of scientific research with its sophistication, has largely been unsuccessful to apply in the core accounting research area[1] and to the wider area of intellectual scientific research. This paper gives a detailed description of the flaws in the theory, to improvise additional criteria for validating any theory with an aim to apply the accounting theory with a wider scope. The paper covers the basis for a potential theoretical model to be converted into a practically applicable theory with an aim to achieve its goal. Summary of the Article The Positive Accounting Theory has not engulfed a scope wider as required. It is applied for limited work, especially in the field of pricing, decision making helper for middle and top level management. The theory, being one of the most important by the authors point of view has failed to explain the many important perspectives from the practical application of it for any theory to prove its existence and usage. Thus, this study draws critical anaylsis of the authors viewpoint about the different aspects of the positive accounting theory not considered and proven otherwise else. Research Question Does the positive accounting theory has wider prospects than what is actually considered? The author [2]has systematically approached to explain the importance of mindset of major beings in the case of intellectual research, focusing on how the world thinks because of which it may become unacceptable or fail to prove its point. Further, if every single catastrophe or significant event is considered an act of an Omnipotent lordly being, then the scope of creativity, observation of the real world becomes restricted to ones mindset and Science can never prove everything happening around. This understanding of rational human beings is one of the major reason for underapplication of good scientific theory. He the same by saying that the wider area of the said theory has never been considered. Any research which gives an insight of how accounting settings can be utilised for successful audit, accounting and auditing decisions with the help of human psychology, the cause-effect established for any accounting event, the reasoning and usage for judging the implications, using that for further decision making, all forms part of the Positive Accounting Theory which should be considered. To prove , he has cited illustration of how a presentation change in accounting may be interpreted differently by different mindset of people. To add to the authors perspective, a person interprets differently while classifying a loan in financial statement as short term loan or long term loan. Theoretical Framework It is true that we interpret and decide something about the world based on our noted observations, based on our experience, interaction with others. Thus, if experience differ, perspectives differ, identifying cause effect relationship is bound to differ. In addition, the author has further cited that we cannot conclude human being to be different from other species in the planet, just on the basis of our interpretation without considering the fact that we have never experienced a life of an animal, how socially is it jewelling with others of same species. Hence, the base limitation of any theory is the different observation by each one of us. This will not prove the theory useless. However, it will surely show certain deviations from the base conclusion depending upon the individuals behaviour. To explain predictability of a human behaviour, how a general conclusion is drawn, is perfectly explained by the author with the example of insurance premium being set on the basis of burglar y rate, even though the act is completely at ones discretion. Thus, the probability of anything occurring is concluded on the basis of past occurrence and human psychology in a present given situation. A successful theory is validated when the theory is applicable to majority of people bearing rational mind-set and having general behavioural pattern. The world and the existing scenarios also have to be considered. As per the author, positive research even though, existed since a long time have to incorporate better observations, interpretations to be a success in itself. After knowing the base of any theory, largely depending on the observational power of the researcher, one should know the hypothesis of arriving at any theory. It states five steps of a theory, first being Observation, then developing a draft idea of theory, validating it with quantitative and qualitative measures, testing the theory [3]with new observations and correct or rectify or modify the draft theory with a fresh one. The last three steps are never ending cycle. Theories which come from a creative process have to be verified with observations. Hence, a good observer can be a good researcher. However, observation is one of the main criteria but not the only criteria. Hence, any model prepared cannot be invalidated just because it does not fit into certain observations. Though improvisations are continuously required in certain cases, it is true that observations cannot falsify a[4] theory till the time it is supported by other theory and the reason behind the falsification be e xplained. Thus, as long as quantitatively or qualitatively theories are justified with the rationale behind the working, the same can be used to the benefit of human kind. The author has focussed on both qualitative and quantitative research. Quantitative research, with a given set of sample data, is easier to prove than the qualitative aspect. The same can be validated and also form a base for a new super, improvised theory. Also, greater reliance can be placed on the quantitative method. If a given set of data works well with the theory, but others do not, the theory has to be looked for mistakes or unrealistic assumptions if any. Qualitative research is preceded by quantitative research. According to me, the best part about such theory is, it is difficult to derive a theory based solely on qualitative research and further more difficult is to falsify it. Data collection for research in positive accounting includes asking for experts opinion in the field of accounting and audit. Unless, there is an interaction with the people involved in the field area of research, establishing a theory cannot be thought of. The author has rightly nailed the point that researchers believe their theory to be crystal clear and gives a true perspective as well as results. However, they fail to understand that such qualitative research [5]may give different results based on the different working patterns. Quantitative results seldom fail at this juncture. Sometimes a theory is tested based on general relativity. Failure of a theory can be due to various reasons, especially non fulfillment of an assumption which is considered while testing. For example, in proving the Diminishing Marginal Utility[6], a person should be of rational mind. However, if a person consumes his favourite thing, then marginal utility may not work till a certain point of time. Sometimes, the theory is applied taking the perspective that since it is working in this condition, it will also work under other circumstances as well. It is both difficult to prove a theory and falsify the same. Until and unless one considers all possible situations under which theory is workable, practical implementation of theory is proven wrong. The author has mentioned the difficulties faced due to inadequate, impractical, infeasible assumptions in a theory. Certain theory are more about assumptions and less about any technicalities.[7] Such theories where theoretical framework only works and practically the same is not possible, can be used for further research and study in practical areas but cannot be of much help ahead.Alternative situations, hypothesis is a must for a positive accounting theory. Further, one of the major issue arises with the sample data selected. If the sample data does not testify the theory, neither can the theory be proven justified nor can any new learning be done. Also, an explanationthat to the theory which apparently seems to[8] be true is not always so and the most complicated part is to prove which part of theory is true and which can be falsified. This limitation persists frequently in theories and is also a limitation to Positive Accounting Theory[9]. With an illustration of a model formulae for calculating audit fee[10], the author has tried to convey that theories are meant for practical implications and the same should be designed in a structured manner to be taken seriously and not just a study paper. Thus, from observation to choosing of variables and data samples till the final validation, everything should be taken care while proposing a theory. In the case of audit fee calculation, certain variables like probability [11]of a managers competence will be difficult to establish. Moreover, after a certain stage audit complexity variable (referred as k) will remain stable or diminish. Thus, the users have to first know the implications of usage before using or discarding any theory or proving it falsified. Significance and Limitation According to me, a research work can be successful if one has the potential to understand the aim, importance, conditions and circumstances under which the theory can be applied. Also, the author agrees by stating that presence of a new planet, if established should specify the mass, position and its distance from the sun. The author has rightly pointed out the fact that a person who has tested theories through experience, even in the most secured form has known how difficult to prove the theory is. There are always other side of everything. Positive accounting theory[12] also has distinct patterns for different practioners and even with such distinction, the same is replaced by newer mind sets. Hence a theory becomes outdated if a highly developed theory replaces it or a revolutionised set of people change it. Kuhn has rightly considered it as puzzle game[13]. With due respect to his thoughts,the author has contradicted his own views in the article at various points. He has well stated the wider gap between existing Positive Accounting theory and how its scope is wider and can be further widened. He has mentioned that theory has to be testified and checked for falsification. On the other hand, he states that to prove a hypothesis incorrect is quite difficult because what actually is true and what is not cannot be claimed. In the audit fee model, the author has stated about the anomaly in the audit complexity and legal regime parameters stating that regression analysis at certain point is inconsistent. However, the author should have first stated the circumstance prevailing at that point of time for the theory before falsifying it. It is quite possible that the point which proves theory wrong would never occur practically. The author should have first analysed it in a detailed manner to arrive at any conclusion. The author has successfully carved out the different aspects of any theory to be looked into but failed to provide any concrete solution for the same. There are inherent limitations and assumptions in each case because of which a proposed theory cannot be explained. He agrees that in case of statistics, estimation and not hypothesis should be tested. The author could not draw a solution for social accounting, wherethere is free [14]will present in a humans behaviour. Certain beliefs like existence of Supernatural powers, religious sentiments[15] are unexplainable and therefore any theories having the above elements involved can be justified for some and falsified by others. In such cases, the author should acknowledge that disbelief will persist and a research in such areas may prove futile. Conclusion The author has very well brought out the gap in the Positive accounting theory[16] , addressing various aspects of any theory and justified the need of more detailed , testified theories to be developed. Except for certain vague suggestions, the solutions given are worthwhile to be considered for the theories including positive accounting to be success. Bibliography Paul V Dalmore, Half a Defence of Positive Accounting Research,(1 October , 2011)www.massey.ac.nz/~pvdunmor/HalfaDefence.pd Ross L. Watts, Jerold L. Zimmerman, The Accounting Review, (Vol. 53, No. 1 Jan.,2012)112 Karl Popper, (ed)The Logic of Scientific Discovery,(Routledge, 2012) Karl Popper, The Two Fundamental Problems of the Theory of Knowledge, (Routledge, 2014) Mark Hirschey, (ed),Fundamentals of Managerial Economics, (Cengage Learning, 2013) Sokal, Alan, Beyond the Hoax: Science, Philosophy and Culture,(Oxford University Press, 2013) (182-183) Hay, D. C., Knechel,Audit fees: A meta-analysis of the effect of supply and demand attributes,(2011) Encyclopedia Britannica,(2011)https://www.britannica.com/ Thomas S Kuhn,(ed) The Structure of Scientific Revolution,(2012) Brian P West, (ed)Professionalism and Accounting Rules,(Routledge Taylor and Frends Group, 2012)8 Maurice Cornforth, The Open Philosophy and the Open Society (International Publishers, 2012) Chua, W F, (ed) ,Radical Developments in Accounting Thought(American Accounting Association, Oct, 2012) Richard Mattessich, Reality and Accounting,(Routledge, 2013) Benjamin Libet, Mind Time: The Temporal Factor in Consciousness, (Harvard University Press, 2011) R.A. Fisher, Statistical Methods for Research Workers, (Genesis Publishing Pvt Ltd, 2012) ZahirulHoque,(ed) Methodological issues in Accounting Research,(Spiramul Press, 2012)