The Nature Of ing Theory And The Development Of Theory 3q6a3f

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Introduction There are different schools of thought on what represents ing theory. The first school focuses on the development of ing principles and describes ing theory as follows: Thus, ing theory may be defined as a logical reasoning in the form of a set of broad principles that (1) provide a general frame of reference by which ing practice can be evaluated and (2) guide the development of new practices and procedures (Hendriksen 1982:1). ing theory is the basic assumptions, definitions, principles and concepts that underlie ing rule making (Wolk et al. 2008:2). The other school of thought explains ing theory as an activity to explain and predict: … the primary objective of ing theory is to provide a basis for the prediction and explanation of ing behavior and events (RiahiBelkaoui 2004:108). The objective of ing theory is to explain and predict ing practice (Watts & Zimmerman 1986:2). Theory attempts to explain relationships and predict phenomena (Wolk et al. 2008:28). While the first school focuses on the principles of ing, the second endeavours to evaluate practice itself. Hendriksen (1982:1) expresses his preference for the first school as follows: ing theory may also be used to explain existing practices to obtain a better understanding of them. But the most important goal of ing theory should be to provide a coherent set of principles that form the general frame of reference for the evaluation and development of sound ing practices. These two schools of ing theory are grounded in the two main methodologies for the development of theory in general that is, normative and descriptive methodologies. Normative methodology questions existing theory to describe what the theory should be, while descriptive methodology investigates the underlying phenomena to describe what they are (Hendriksen 1982; Riahi-Belkaoui 2004). Normative metho-dology is more concerned with what the outcome should be and is more prescriptive (Deegan & Unerman 2006:10). By contrast, descriptive methodology describes, explains and predicts the underlying phenomena (Deegan & Unerman 2006:8). Normative and descriptive methodologies are also distinguished by the process followed to develop theory. Normative methodology is a deductive process in which objectives are formulated, from which principles are developed. Descriptive methodology is an inductive process that focuses on observations of the real world. The aim of the inductive process is to record the underlying phenomena. However, a third process, the predictive process, is sometimes identified. This process goes further than the inductive process in that it not only records the observations, but also explains and predicts them – hence the fact that it is often referred to as a positive research methodology (Deegan & Unerman 2006:8). he second school of ing theory, the explain-and-predict school, although descriptive in observing the underlying phenomena, focuses more on explaining and predicting the phenomena, and is therefore more positivistic. The result is that many ing theorists do not distinguish between normative and descriptive research, but between normative and positive research (Schroeder et al. 2005; Deegan & Unerman 2006). Inanga and Schneider (2005) compare the normative and positive theories as follows: A normative theory is a goal-oriented theory that

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represents real world situations, not as they are, but as they should be. It is prescriptive rather than descriptive theory that explains, and sets out, principles of what ought to be. Normative theories are characterised by goal assumptions and deduction (Inanga & Schneider 2005:231). Positive theories attempt to describe real world situations as they are. Research based on positive theories involves empirical observations of the relevant phenomena from which a problem is defined. Data relevant to the problem are then collected and hypotheses formulated and tested by independent process. If the theory that results is an accurate representation (description) of the empirical phenomena, such a theory can be used for predictive purposes. Induction follows empirical observation and takes the form: “if event Y takes place, the outcome will be Z”. The greater the number of empirical observations, the better ed the related induction will be (Inanga & Schneider 2005:230). To understand the role that these methodologies of development of theory play in the development of ing theory it is important to note the developments in ing research over the last few decades

The positive ing theory 4.1 Background Henning, Van Rensburg and Smit (2004:17), experts on research methodologies in the social sciences, describe a positivist framework as follows: In its broadest sense, positivism is a rejection of metaphysics. It is about finding truth and providing it through empirical means. It is a philosophical position that holds that the goal of knowledge is simply to describe and, in some designs, to explain and also to predict the phenomena that we experience (whether quantitatively or qualitatively). The purpose of science is thus what we can observe and measure. The focus of a positivist framework is to find truth by describing the reality. The empirical tool gives the research process validity. The starting point is a descriptive approach, but by incorporating the empirical testing tools to explain and predict the phenomenon, positivism is created. Under the positivist approach, ing theory is developed by formulating hypotheses or deg models and testing them. Science is deemed to be a process of trial and error. A hypothesis or model is never absolute truth, but as long as it is not refuted through research, it is regarded as the truth. he generalizability of PAT hypotheses is limited by ing environments and time. For example, the three widely tested hypotheses of earnings management (i.e., the bonus plan hypothesis, debt-equity hypothesis, and the political cost hypothesis) have particular institutional environmental backgrounds and may not be equally valid in all cultures (Sunder, 1999; Sawabe & Yamaji, 1999). Ali and Hwang (2000) found that value relevance of earnings and book value of equity depended on country-specific factors. More recent research has found that earnings quality depends on institutional factors such as ownership structure, tax-book conformity, importance of the stock market in the country’s economy, rule of law, etc. (Ball, Robin, & Wu,

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2003; Soderstrom & Sun, 2007). Begley and Freedman (2004) found that the role of ing numbers in public debt contracts changed during the 1975-2000 period. The frequency of ing-based restrictions on dividends and borrowings declined significantly from the 19751979 sample to 1999-2000. Large number of academicians and theorists consider positive approach to be much more practical and sensible than the normative approach because the positive approach is based more on theory and real time data as opposed to the normative approach but one thing that again raises question towards the credibility of the approach is the possibility of the capitalization of personal conveniences and benefits by the management, shareholders and controllers of a firm. There is no determination of why an organization chooses one alternative over another and hence it is obvious that the decision makers of the firm would include their own conveniences while making a selection. (Boland, et. al 1992) Positive theory helps in evaluating the pros and cons of the alternatives adopted by any firm or institution but while doing so, it fails in establishing the efficiency of any option or methodology adopted. The approach only helps in analyzing and assessing the nature of the methodologies adopted but does not really provide any evidence if the approach is efficient or not. There is hardly any evidence that proves and establishes if the adopted practices are fruitful or not. And hence it still leads to the generation of suspicion and speculation in of the efficacy of the approaches being used. The positive approach to the development of ing theory relies on one basic assumption and that is that all he policy makers and decision makers of an organization are completely rational in nature. It assumes that all the decisions that are being made would be a result of rationality where the ants can follow the best of options. But that is not what actually happens. The decision makers always have some factors that act as biases in the development of the required theories and approaches. (Sinha, 2008) The positive approach does not even provide alternatives to the existing approaches or principles in case they are considered as irrelevant. Where the normative approach presents an explanation of the things that the companies should do, the positive ing approach only examines and analyzes the existing principles and makes no recommendation for the principles that need to be used.

The Flaws of Positive ing Theory – The premises. The Flaws of Perfect Markets. The first flaw that can be found with a premise of PAT is that of economics and its reliance on the theoretical perfect market. A perfect market relies on (amongst other things) perfect information and no transaction costs. This point of view finds problems because “ing exists because of transaction costs” (Boland & Gordon 1992). It is also difficult to imagine equilibrium for information when ing information contributes to this equilibrium. Watts and Zimmerman also say that regulation and political costs interfere with the operation of perfect markets. In saying this they are effectively conceding that perfect markets do not exist as they

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call for the removal of regulation to assist in the more efficient allocation of resources (Boland & Gordon 1992

The Lack of Development of PAT. When Positive ing Theory was first developed in the 1970’s it relied upon three hypotheses, the debt hypothesis, the bonus plan hypothesis and the political cost hypothesis. Since this period however there have been no additions to these three, nor has there been any development or expansion of them. Although much research has been performed throughout the 1980-90’s PAT has remained stagnant in its development and this has perhaps led to the present decline in interest in PAT (Deegan 2000). Sterling (1990) has argued that PAT doesn’t have any potential for future development and that it will continue indefinitely in its present form without any new ideas. This lack of development and PATs recent decline in research are firm arguments that PAT will be deemed a failure in the light of hindsight. Critical theory and the popularity of PAT. Positive ing Theory has been the predominant research paradigm of the 1980’s and 1990’s however upon reading PAT this becomes something of a curious phenomenon (Mouck 1992). Watts and Zimmerman would claim this ‘success’ is due to its scientific or empirical basis however the evidence of this is threadbare at best and rhetoric is the main instrument used in getting PATs message across. This leads us to examine other reasons for PATs popularity. The positive/empirical paradigm became popular around the same time that new age conservative governments were elected in the USA and the UK. A connection can therefore be made between the rise of governments ruled by ideologies based around deregulation and ‘small government’ and an ing theory that argues the same point. It is also plausible that universities in the USA that benefit from corporate funding were conducting ing research as a tool to promote the deregulation argument that forms the foundation of Positive ing Theory. This means that the apparent success of PAT in the ‘research market’ has little to do with the merits or applicability of PAT, and much more to do with its ideological arguments that preserve the power of those who presently hold capital (Deegan 2000). Those who stand to reap the benefits of a deregulated government have in effect ‘captured’ the ing research movement so as to glorify and justify their position.

Normative Approach The normative approach to ing theories is a special approach, which is based on defining the things that should be instead of defining what actually is. Different approaches to ing theories include the analysis of different elements and carrying out studies in different ways,

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which the help in the formulation and development of different ing theories that define the basis and construct of ing practices. In the normative approach, the policymakers discuss their opinions and judgment on different ing practices and explains what a theory should include. The theorists make use of their past experiences and analyses and thus depending on that they explain and define the things that the ing theories should include. Some of the main things included in the normative approach are the personal outlooks, deductive reasoning and use of inductive techniques. (Mattessich, 1992) The normative approach has been there since long time and has been adopted for the formulation of different ing theories. Theorists make use of the approach because of one main reason and that is to match up to the changing world environment and the ing procedures. The world, operations of businesses and everything else related to an organization are highly dynamic in nature and nothing remains stagnant after a point of time. And hence normative approach is expected to help the ants keep up with the current changes and make changes in the established ing theories according to current observations and analysis. But at the same time, there is also a possibility that there may occur some major changes in the existing theory without any sound basis. The ants may analyze the changing environment in different ways, thus causing major impact on the existing practices and theories. (Demski, 1976) Despite of using logics and logical reasoning for the development of different theories, one question that always arises while using the approach is if it actually reflects the actual ing practices. Most of the normative theories are completely based on observations and hence it is not always possible to determine if they actually make sense in the ing world. For example, a simple methodology of the valuation of assets would be interpreted and seen in different ways. Some ants would focus more on the social and environmental impacts whereas some would focus more on the historical costs. Some theorists believe that the normative approach is the most logical way because it is not based on what is happening but provides a clear picture of what and how the ing practices should be. But then again the assumptions behind each ing theory and the development of practices would depend on the policymaker’s opinions. One wrong assumption or one loophole in the reasoning and logical analysis can cause serious problems and hence this demonstrates the possibility of manipulating ing theories. (Hakansson, 1969) Thus, it is clear that though the normative approach presents an extremely practical way and methodology for the development and formulation of the ing theories, it still has some severe drawbacks and hence whether to be used or not is still a question that needs to be answered A normative ing theory seeks to prescribe some basis of ing measurement, particular ing procedures, and the contents of financial reports (Ijiri 1975; W & Z 1986).4 Ijiri views normative theories as a special case of deductive theories. Deductive theories that start with some goal assumptions and deduce ing procedures therefrom are labeled normative theories.5 Thus, there are two important elements of a normative theory: (a) goal assumption, and (b) deduction. A theorist may set his own goals that are not inherent to current ing practice. Chambers (1966) falls in this group. Again, a theorist may inductively derive goals

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from ing practice and use those goals to suggest improvements in current practice. Ijiri falls into this group. Such theories are also categorized as normative in this paper. It is to be noted that not every theorist is explicit on goal statement. Some state the basic assumptions and deduce ing measurement from these. Paton and Littleton (1940) fall in this group. So far three approaches have been employed in normative ing research. These are (a) inductive model, (b) deductive model, and (c) the decision usefulness approach.

Conclusion. ing is a system, which incorporates numerous special activities and information management techniques to make the available information more presentable to the readers and s of the information. There are several ing theories that have been developed and keep developing for enhancing the current ing system or for introducing something new in the system. And hence in order to efficiently develop these ing theories, theorists and academicians usually adopt different approaches to reach to their conclusions. Two approaches that are commonly used for the formulation of ing theories are normative and positive approaches. Where normative approach believes in elaborating on the things that should be done, positive approach is focused more on the existing techniques and principles. Both the approaches have different pros and cons and hence can be used under different circumstances. However, the final selection of one of the two approaches depends on the given scenario and even on the people involved in making the decisio