Contemporary Issues in Accounting

CH1: Accounting Theory

* Is a practical discipline: - Rule focussed?

- With little use for theory.

* can mean a lot of different things such as:

Accounting theories is principles or idea that is guides, intended, or suggested to
explain, descriptions, or prediction a fact, event, actions, or something. Based on
observations &/or logical reasoning.
• Logical reasoning: a set of principles that (1) provide a general framework of
reference by which accounting practice can be evaluated and (2) guide the
development of new practice and procedures.

* All accounting is depending on theories through:

1- Concepts of Materiality.
2- Recognition Criteria (Relevance, Faithful Representation).
3- The Conceptual Framework.
4- Measurement Bases.

* theory is necessary to:

1- Understand the world we live in:
Affect
 (To help us predict what will happen)
 drive many real-world situations
2- Provide a basis for decision making:
 (provide an explanation of what is happening.) theories
3- informs decisions about:
 Tax
 Interest Rates
 Global Warming Theory needed
 Education
 Construction
4- Almost every aspect of our lives.
 (Even partial or inaccurate theories can be of (limited) use.)

Different Theories
1- Some of these theories explain.
2- Some of these theories predict.
3- Some of these theories conflict.
Positive Theories (empirical theories) normative theories.
• are about the world as it is.
• They:
– Describe what is happening
– Explain what is happening
– Make predictions about what
will happen
• Based around Hypotheses
Where Positive theories come from:
-induction.
-deduction.
Ex:
• Initial Observation.
• Theory and Prediction.
• Observation and Testing.
The different
Different Accounting Theories
Some accounting theories
 Describe and explain current practice.
(Capital Market Theory)
 Predict practice.
(Agency Theory)
 Identify problems and deficiencies and offer solutions.
(The conceptual framework)
 Provide principles for decision making.
Types of Theories
• Make suggestions about
– What should happen
– What ought to be
• Observations or facts are considered in
development of normative theories
Ex:
• Goal
• Premises
• Conclusion
Evaluating And Testing Theories:

 There are often competing theories about an issue or observation

- E.g. how should accounting items be measured
 Which theory is correct?
 A range of approached are taken:
1- Simple: Intuitive or anecdotal approaches
2- Systematic Approaches
3- Scientific Approaches

Acceptance of Theories

 A good theory should

1- Be logical in its construction
2- Be clearly articulated
3- Be testable
4- Be consistent with observation
 A theory can never be proved true.
 A single observation can prove a theory false.
Understanding The Role Of Research
 Research is the ‘diligent and systematic enquiry or investigation
into a subject to discover facts or principles’.
 Research is often repeated and adjusted, so that knowledge is expanding.
 Most research studies will not provide definitive answers.
 Instead each study should contribute to our understanding of the issue.

Relationship Between Theory and Research

 Research is used at all stages of the theory process
 Research can be:
- Exploratory
- Experimental
- Observational
- Theoretical
- Quantitative
- Qualitative
Research Of or About Accounting

 Research of or about accounting considers the role of accounting

itself.
 It considers questions such as:
- What is the role of accounting?
- Is accounting information useful in investment
decisions?
- Should accountability or decision usefulness be
the key goal of accounting?
- What impact does culture have on accounting?
- What role has accounting played in the rise of
capitalism or environmental degradation?
Research In Accounting

 Research in accounting focuses at the more micro level on issues

within accounting.
 It considers questions such as:
- What measurements are being used?
- What measures should be used?
- What impact do changes in specific accounting
policies have on share prices?
Research Areas In Accounting
• Capital Markets Research
• Accounting Policy Choice Research
• Accounting Information Processing Research
• Critical Accounting Research
• International Accounting Research