Positive Accounting Theory Propagated By Watts And Zimmerman
Task: Discuss and analyze the theory of positive accounting with reference to observations by Watts and Zimmerman.
Positive accounting theory is sometimes termed as practical approach and it helps in looking at the current business of a company. Theory helps in analyzing the nature of accounting, its relationship with the economy, role and act of accountants. It is unlike normative theory which lays stress on how accounting procedure and policies should be. The theory uses statistics and real data to scrutinize the transactions being made by a company. It tries to highlight the discrepancies in the incoming and outgoing transactions which help to determine the company’s position in terms of profit or loss. It helps an accountant to predict about the future transactions. The present paper will help in providing a discussion and critical analysis on positive accounting theory keeping in mind the assertions made by Watts and Zimmerman. The content of the article will be analyzed covering the different aspects of positive accounting theory. As per Watts and Zimmerman (1986), positive accounting theory is used with an objective to explain and foresee accounting practice. According to them, explanation refers to the reasons behind observing a practice for example, looking at the reason behind a company using historical cost accounting method and why others use a different accounting method. Prediction refers to the actual accounting practice being practiced by the company.
Source: (Watts and Zimmerman, 1986)
The theory was developed to understand how accounting practices should be actually used. The article lays importance on the interest of the managers and how financial accounting is reported (Kaya, 2017). It is claimed that the methodology of the article written by Watts and Zimmerman does not influence the accounting research. The present paper will deal with the gaps and limitations in the paper prepared by Watts and Zimmerman with the help of other economic reviews and studies based on philosophical science. The usage of literature in the article written by the two authors will be analyzed in the present article.
How did positive accounting theory originate?
The positive accounting theory came into existence due to the emphasis being exercised by different forces. The theory depends upon market hypothesis, capital asset pricing model and agency theory. The theory came into existence in the year 1960 with the usage of economic models and statistics. Porporato (2007) in his article stated that Ball and Brown and Beaver in the year 1968 were the first to discuss about the positive research. The authors stated that earnings reflected some information’s related to security prices. There article gave birth to different literatures on capital market which showed a shift from the normative research to positive research. The article gave significance to research methodologies based on hypothesis and testing. They investigated the theory of economic consequences and analyzed the behavior of the managers while making an accounting choice. As per Jeanjean and Ramirez (2009), the traditional view of accounting as a technical and independent method has been overshadowed by positive accounting theory which lays importance on accounting as a dominant factor.
Findings from the article
As per the article, the research should not be direct rather different social aspects needs to be considered with proper justifications. The article has not considered the theoretical aspect of the research. The central idea of the article resolves around two concepts, epistemology and ontology and how it leads to positive research. The author has argued that in the present world there is a lack of better accounting practices which can help in the development of programs related to positive accounting theory. The article suggests certain practices which can be used for accounting research purposes like developing a model, creating a better measuring procedure, method to appropriately channel the primary research and framework. Positive accounting is more into what and why of accounting procedures and policies.
The paper discusses about the outcome of the survey conducted and the issues raised through different findings. One of the issues was the gap in the application of the theory in real life and other factors which can be considered to form an intellectual program. The article provides a solution to the gaps being identified and one of the most important solutions was the modification of the system. It is perceived that the research is a cultural activity instead of being scientific which can be validated by certain individuals who are involved in the research. It helps in predicting the choices made by the firm to reduce their costs (Whittington, 2012).
The article on positive accounting theory provides a valid hypothesis which can be used by other researchers while building their paper. The researchers should be able to exploit the work being done independently in the cultural world. Intellectual observation should be used by the accountants while conducting a research (Booth, 2018). Application of human behavior may result into rational practices being adopted in accounting including positive research.
Contribution of the article in the field of positive accounting
The article discusses about different ways which can be adopted so that the company can adhere to positive accounting research to improve its accounting practices. The article helps different writers to critically analyze different approaches to accounting which will help in maintaining positive accounting. The authors have stated that using quantitative models or mathematical model may help in achieving positive research in the field of accounting. The authors lay stress on the parties who are involved into the accounting field to use accounting models which suit their operations. The authors have explained the importance of empirical studies while developing a literature work. Watts and Zimmerman have identified three important hypotheses which are bonus plan, debt/equity and political cost hypothesis. The management compensation that is the bonus plan hypothesis is adopted by managers who are looking for bonus (Kaya, 2017). They adopt the accounting methods which can increase the income in the current financial year. The debt/equity hypothesis pay importance to a scenario where the debt or equity of any firm is higher it is likely that the mangers will look into some accounting methods to increase the income of the firm. If a firm is under scrutiny by the political forces then it is definite that they will adopt the accounting methods.
Discussion on the research question
The primary research question of the article focuses on the requirement for the development of a successful positive accounting research programs. The research question lacks support from different literature reviews but it summarizes the objective behind writing the paper. Although the research question does not get a support from various literature reviews but the content of the article clearly establishes its objectives to adhere to positive accounting from the beginning till the end.
The article has used different models to meet the purpose of the article. The research question has not been tested for its correctness as the authors did not believe in thesis testing. The hypothesis justifies the issues raised in the article with the help of quantitative and mathematical models.
The article covers different theories related to positive accounting. The methodology deals with systematic study and certain inter related concepts has been discussed in the article. The author uses certain literature sources to prove his point and discusses about scientific factors including ontology and epistemological theories which gives a cultural support (Kaya, 2017). Various surveys were conducted in order to justify the cultural aspect and various philosophies were considered to explain the relevance of science and culture in the accounting research. The article uses falsification, hypothesis, quantitative and qualitative aspects of analysis. Theoretical aspect of the article justifies the research as a philosophical and cultural science.
Significance and drawbacks of the article
The article tries to motivate other writers to write upon the development of the positive accounting research. The positive accounting theory is based on the development of mathematical and quantitative models which can be applied through measurements. The addition of the models encourages the other writers to use these models in developing and conducting proper research related to accounting field. The inclusion of models provides value to the article. The authors have used the measurement techniques instead of conducting a test which has garnered positive reviews. The authors have paid importance to some of the past reviews on the same topic to fulfill the importance of the research method. The paper lays a foundation for other research work and it will help the upcoming writers in understanding about the positive research theory (Adebayo and Abdul-Lateef, 2017).
The article may have a lot of significance in contributing in the field of positive accounting theory but it has certain drawbacks in the form of models which has been missed to be included. Many researchers have reflected the criticism of positive accounting theory. The information and ideas are less as compared to the latest articles that have been written on the same topic. The authors apply critical analysis of the hypothesis testing and methods and state that the tests can only provide a probability and it is not compatible with null hypothesis (Boland and Gordon, 1992). The methods mentioned for testing the positive accounting theory is weak therefore an alternative method needs to be chosen which can curb the drawbacks of the accounting research.
It is recognized that the usage of hypothetical testing gives weak evidence about the theory and the same cannot be justified. The authors take help from different articles written by the scholars but they are unable to justify their opinion. The article states that research testing does not provide accurate information about positive accounting and is unable to state how the study should have been undertaken. As per Dunmore (2011), the issues found in the Watts and Zimmerman article can only be resolved basis numerical values and different levels of testing methods.
There is no discussion on how to improve the accounting practices. The efficient market hypothesis has been rejected after the financial crisis in 2008. The paper does not focus on the success of natural sciences and it lacks to establish the relationship between positive accounting theory and science (Kabir, 2010).
The author could not provide a justification for the claims that were made against the usage of positive accounting theory through the limitations mentioned in the form of hypothesis. The results which were generated through different findings on the application of the accounting research were considered as invalid. The limitation of the article makes the deductions unauthentic and so the conclusions deduced cannot be accepted. When it is not feasible to accept the findings and the justifications, it invalidates the contribution made by the article in the field of accounting. If a new writer is thinking to use the article developed by the authors then he or she should deeply analyze its content before using it in the research paper.
The present paper has provided an in-depth analysis of the article written by Watts and Zimmerman. Positive research is more influenced by social impediments than being practical. The positive accounting theory should be universally accepted which is a logical requirement for all the firms. As per the authors positive accounting theory plays an important role the accounting field. The paper discussed the aims and objectives defined in the article related to the development of positive accounting theory. The paper has highlighted the limitations of the article written by the authors on positive accounting. The paper has also highlighted the importance of the hypothesis and how it helped in achieving the objective of the article. The authors have written the article to provide help to the new writers by highlighting certain skills which is required while conducting a research on the positive accounting. The paper has also highlighted the usage of models and data collection techniques used by the authors while conducting the research. The present article on positive accounting theory helps in developing certain skills which is required to be achieved while conducting a research on positive accounting. The paper has highlighted that measurement tests can replace the hypothetical testing. It provides assistance to accountants to use the best methods for data collection. It can be concluded that application of measurement and quantitative models are best for conducting a real research.
The present article on positive accounting theory helps in developing certain skills which is required to be achieved while conducting a research on positive accounting. The paper has highlighted that measurement tests can replace the hypothetical testing. It provides assistance to accountants to use the best methods for data collection. It can be concluded that application of measurement and quantitative models are best for conducting a real research. Positive accounting theory assignments are being prepared by our accounting assignment help experts from top universities which let us to provide you a reliable assignment help online service.
Adebayo, A. S and Abdul-Lateef, M. O. (2017) Accounting Numbers and Management’s Financial Reporting Incentives: Evidence from Positive Accounting Theory. Noble International Journal of Economics and Financial Research, 2(2), pp. 50-53.
Boland, L. A and Gordon, I. M. (1992) Criticizing positive accounting theory. Wiley online library.
Booth, P. (2018) Management control in a voluntary organization: Accounting and Accountants in Organizational Context, Routledge: Londond and New York.
Dunmore, P. V. (2011) Half a defense of positive accounting research. Political Science. DOI:10.2139/ssrn.1955419
Jeanjean, T and Ramirez, C. (2009) Back to the Origins of Positive Theories: A Contribution to an Analysis of Paradigm Changes in Accounting Research. Accounting in Europe, 6(1), pp. 107-126.
Kabir, H. (2010) Positive accounting theory and Science. Journal of Centrum Cathedra, 3(2), pp. 136-149.
Kaya, I. (2017) Accounting choices in corporate financial reporting: A literature review of positive accounting theory. Retrieved from https://books.google.co.in/books?hl=en&lr=&id=QQWQDwAAQBAJ&oi=fnd&pg=PA129&dq=positive+accounting+theory+watts+and+zimmerman&ots=D2sqKdReI7&sig=lfbMdL3m_CkrbImnLJS5ofHKYg8&redir_esc=y#v=onepage&q=positive%20accounting%20theory%20watts%20and%20zimmerman&f=false
Porporato, M. (2007) The relevance of recent financial accounting literature for standard setting: a literature review. Enfoque: Reflexão Contábil, 26(3), pp. 9-27. Retrieved from https://www.redalyc.org/pdf/3071/307124256001.pdf
Watts, R.L and Zimmerman, J.L. (1986) Positive Accounting Theory. Prentice-Hall Inc. Whittington, G. (2012) Positive accounting: A review article. Accounting and Business Research, 17(68), pp. 327-336.