Accounting Theory and Methodology Are a Waste of Time - Essay Example

Accounting Theory and Methodology Are a Waste of Time There are various definitions of accounting theory. According to Porwal (7), accounting theory can be defined as a set of logical principles that (a) give an enhanced perceptive of existing practices to managers, investors, practitioners and other users, (b) gives a theoretical framework for measuring existing accounting practices, and (c) gives guidelines for the development of new procedures and practices. Every practice is backed by a theoretical base and in accounting there are theories that back the practice. Accounting is regarded as what the accountants do. There is no practice that can succeed without a very strong theoretical base. There are rules and principles that have been developed and they are based upon past practices of successful accountants. A lot has changed in accounting due to the rapid changes in economic and social environments. Some of the principles and rules that were developed earlier on are longer applicable. Thus accountants are faced with new problems that can not be solved with the traditional explanations of accounting. New areas are emerging in accounting such as social accounting, inflation accounting and human resource accounting (Porwal 7). Methodology is important in creating an accounting theory. There are two methods of reasoning that are applied in accounting research methodologies; inductive and deductive. The two reasoning are as a result of differences in values, opinions and approaches between accounting research and accounting practice (Porwal 8). There are two types of accounting theories; the proposal or the normative type and the descriptive or the positive type. The normative type proposes alternative ways of accounting, for example, alternative method of assets valuation either by the market value or the present value. The positive type analyses and explains the existing modes of accounting, for, example, the real functions and social significance of today’s accounting systems (Fujita and Jinnai 283). Development of accounting theories began in the early 1900. The first attempt has been attributed to William Paton and John Canning. Paton was among the first people to propose the inclusion of the changes in the value of liabilities and assets in financial statements. The changes were to be measured on a current value basis. Canning’s framework of asset valuation was based on future expectations and a model to match expenses and revenues. DR Scott made contributions to the development of normative theory. His views are reflected in publications “The Basis for Accounting Principles” that were made between the 1931 and 1941 (Cathey, Clark and Schroeder 32). Scott argued that accounting theory was a progression towards continual adaptation to a changing and evolving environment. These are just a few; there are many theorists such as Littleton, Sweeney, Hatfield, Ijiri and others who have contributed to the development of accounting theories. The theory is based on a set of goals that their theorists maintain that they describe things the way they should be. However, the set of goals vary and there is no universally accepted set of goals by accountants. The normative accounting theories are based on the assumptions of their proponents and they are acceptable to those who support the assumptions (Cathey, Clark and Schroeder 123). Ijiri views normative theories as deductive theories. This is because deductive theories begin with a goal assumption and consequently formulates an accounting procedure that is later labelled as a normative theory. Thus in any normative theory there are two important elements; goal assumption and deduction. A theorist can either set goals that are not inherent to the current accounting practice (Chambers falls in this category) or derive goals from a current accounting practice and use it to make suggestions that would improve the current accounting system (Ijiri falls in this category). Others like Paton and Littleton come up with basic assumptions and use them to formulate accounting measurements. Thus there are three approaches to the normative accounting theory; the inductive model, deductive model and the decision usefulness approach (Kabir 2). Inductivists include Hatfield (1927), Littleton (1953), Ijiri (1975) and others. These theorists have tried to examine the scope of the current accounting practice, rationalized and at times justified major elements of the present accounting practice. Deductivists include Paton (1922), Canning (1929), Sweeney (1936), Chambers (1966) and others. Deductivists are reformers and they come up with new methods of accounting measurements. Most of them are advocates of current costs or values in accounting measurements. It is difficult to classify work as being inductive or deductive only because most of the works by these theorists have integrated both approaches (Kabir 3). Most of the accounting theories are based on particular objectives of financial reporting and thus they are normative (Cathey, Clark and Schroeder 123). Descriptive theory is also known as positive accounting theory. The theory was developed by Watts and Zimmerman between 1978 and 1979. The theory was developed in two papers; (a) The Accounting Review (1978 and 1979). In 1979, they described accounting theories as providing the market for excuses. (b) The Journal of Accounting and Economics was later formed as result of discontentment of their achievements. The journal received worldwide recognition because of its candid explanation of the empirical studies they did. Presentation of their views is single-minded and dismisses the works of early theorists and they call those theories excuses (Whittington 388). The positive accounting theory attempts to analyse and explain the existing modes of accounting, for, example, the real functions and social significance of today’s accounting systems. In other words, it tries to make predictions of the actual world events and translate them into accounting transactions. They try to predict and explain what actions a firm can choose on accounting policies and how they should react to newly introduced accounting procedures. Positive accounting theory recognizes the economic consequences that exist. Watt and Zimmerman came up with three hypotheses in positive accounting theory. They include: (a) the bonus plan hypothesis: firm managers with bonus plans tend to choose accounting procedures that are capable of shifting the reported earnings from the future period to the current period. They do so to increase their bonuses for the present year. (b) The debt/equity hypothesis: if the firm’s debt or equity ratio is large, the firm’s manager will tend to choose accounting procedures that would shift the reported earnings from the future period to the present period. Increasing the present earnings, the management of the company will be relieved of the constraints in running the company. (c) The size hypothesis: a firm manager tends to choose an accounting procedure that defers the reported earnings from the present period to the future period if the firm is large (Milne 3). Normative theory depends on the judgement of what is good and bad and an element of subjectivity is usually involved. For such a theory there is need for verification and testing. Thus separation of normative from positive is quite impossible. This is because it is derived from the belief of the real situation. Thus the possibility of finding a comprehensive accounting theory is null. This is attributed to the perceptions of the environment and the user. Despite these occurrences, methodologies are being adopted for the creation of accounting theories. The normative theories will try to justify accounting practices that are a must for adoption and descriptive theories will try to justify accounting practices that seem useful (Porwal 11). The study of accounting theories is vital as it helps us understand some of the accounting procedures. They are vital because they assist an individual or a firm on how to use the information provided in the theory. Accounting is not limited and it encompasses other disciplines like economics, organizational, legal, and social. These disciplines have their own theories and thus it becomes important to link them to accounting theories (Sunder and Yamaji 189). Thus accounting theory and methodologies are not a waste of time. A management accounting practice can be explained by various theories of which some are borrowed from other disciplines. Psychology theory gives explanations at the individual level and at subunit level (a group of two or three individuals) and it includes explanations of attributes and events. This theory attempts to explain the differential level events that result from higher level attributes, a top-down model. Contingency theories attempt to explain attributes at subunit and organizational levels. Economic theories attempt to give explanations at the individual and the higher levels (Chapman, Hopwood and Shields 58). Although these theories provide useful information in creating models, they have their own limitations. Thus they are not conclusively useful but in one way or another they attempt to explain the situation as it is or as it ought to be. The positive accounting theory can assist a firm in clearing its debts or reducing the burden within the management in running the firm. The debt/equity hypothesis developed by Watts and Zimmerman can be of great help. The hypothesis explains what a firm can do to offset the debts and ensure the firm runs smoothly. The hypothesis proposes the adoption of accounting procedures that are favourable to the firm at that particular time. The size hypothesis also known as political cost hypothesis gives an explanation of how corporations can reduce pressure and intrusion from politicians. The hypothesis is helpful if a corporation has to thrive amidst political mediocrity. The hypothesis provides information on what the corporation can do to reduce political influence such as selecting certain accounting procedures to reduce reported earnings, social responsibility campaigns in the media and government lobbying (Milne 3). On the other hand accounting theory and methodology can be viewed as a waste of time. There are many reasons as to why they are a waste of time. As described by Watts and Zimmerman, the accounting theories serve the interests of managers and accounting policy makers. They argue that there is no comprehensive accounting theory because accounting theories are excuses negotiated and demanded for in market place theories. Examples include the hypotheses of positive accounting theory; the bonus plan hypothesis allows managers to manoeuvre with the reported earnings in order to increase their bonuses for that year. Sometimes the manager is forced to come up with the financial results in order to fulfil his or her interest. Watts and Zimmerman propose a different approach to accounting other than total reliance of accounting theories (Lehman 27). The impact accounting theory has on accounting practice and accounting policy formulation is very little. This is because (a) most of these theories formulated are entirely dependent on personal interests rather than public interests. (b) The theories are built on weak methodological research, and (c) researchers fail to agree on objectives of financial statements and methods of deriving objective prescriptions. One key problem is the failure to satisfy all the practising accountants and to have a generally accepted accounting standard setting body (Tinker and Puxty 20). Accounting theory and methodology are and are not a waste of time. They give the accountant the ability to understand some concepts that are used in accounting procedures. These procedures sometimes need a theoretical backing to make sense. The world is changing and challenges the accountants face are very much different from those faced in the early 19th century. To some extent experiences from the past give the accountants a clue on what to do. The theories also offer favour to managers and accounting policy makers. They give them an opportunity to alter accounting procedures for their benefit. If this is the case, then there is no need for accounting theory and methodology, it is a waste of time. Thus, the accounting theory and methodology serves their interests and not the public interest. Works Cited Cathey, J. M., Clark, M. W. & Schroeder, R. G. Financial Accounting Theory and Analysis: Texts and Cases. Hoboken, NJ: John Wiley and Sons, 2010. Print. Chapman, C. S., Hopwood, A. G. & Shields, M. D. Handbook of Management Accounting Research, Volume 1. Oxford, UK: Elsevier, 2007. Print. Fujita, Masaya & Jinnai, Yoshiaki. “What is the Object of Accounting? A Dialogue.” The Real Life Guide to Accounting Research: A Behind-the-Scenes View of Using Qualitative Research Methods. Elsevier, 2004. 281-283. Print. Kabir, Humayun. “Normative Accounting Theories.” (2005): 1-30. Print. Lehman, Cheryl. Accounting’s changing role in social conflict. Princeton, NJ: Markus Wiener Publishers, 1995. Print. Milne, Markus. “Positive Accounting Theory, Political Costs and Social Disclosure Analyses: A Critical Look.” (n.d.): 1-23. Print. Porwal, L. S. Accounting Theory, 3E. New Delhi: Tata McGraw-Hill, 2001. Print. Sunder, S. & Yamaji, H. The Japanese Style of Business Accounting. Westport, CT: Greenwood Publishing Group, 1999. Print. Tinker, T. & Puxty, A. G. Policing Accounting Knowledge: The Market for Excuses Affair. Princeton, NY: Markus Wiener Publishers, 1995. Print. Whittington, Geoffrey. Profitability, Accounting Theory and Methodology: The Selected Essays of Geoffrey Whittington. Oxon, OX: Routlegde, 2007. Print. Read More