Research Methodology and Theories

on The Uses of Accounting

Information
1110534006 Yuri Annisa
1110534017 Olfa Resha

Research Methodology
Accounting theory can be developed by using
several research methodology:
1. Deductive Approach
2. Inductive Approach
3. Pragmatic Approach
4. Scietific Method of Inquiry
5. Other Research Approaches

1. Deductive Approach
going from general to
spesific
Includes : objectives
of accounting, the
environment in which
accounting is
operating, the
definitons and
assumtions of system,
and procedures and
practices, all of which
follow by logical
pattern

2. Inductive Approach
going from spesific
to general
Making observation
first, and drawing
the conclusions from
those obeservations
3. Pragmatic Approach
Based on based on the
concept of utility or
usefulness
Problems identified,
find a solution to solve
the problem
4. Scientific Method of
Inquiry
Was developed for natural
and physical sciences
Limitation for accounting:
influence of people and
economic environment
make it impossible to hold
variables constant
It received only limited
attention in accounting
research
5. Other research approach
a. Ethical Approach
Concept of truth ,
justice, and fairness
It may difficult to use in
the development of
accounting theory but,
it renew as critical
perspective
b. Behavioral Accounting
Study of behavioral
accountant or non
accountants as they
influenced bu accounting
function and report
Has been as studying
relevant issues, but not
having impact on practices
it should
The Outcomes of Providing Accounting
Information
Fundamental analysis
The efficient market hypothesis
The capital asset pricing model
Normative vs positive accounting theory
Agency theory
Human information processing
Critical perspective research

1. Fundamental Analysis
Fundamental analysis is
an attempt to identify
any individual stocks
prices to see all the
available financial
information. Investment
analysis can also be
done by investors
themselves or through
the securities analysis.
2. Efficiency of Market
Hypothesis
Based on demand and
supply in the market
Price is determined by
the consensus of buyers
knowledge about
information of product,
known as Efficient
Market Hypothesis
(EMH)
EMH issues :
1) What information
about a company value
to investor
2) Does the form of
disclosure of various
types of corporate
information affect the
understandability of
information
EMH has three forms :
a) Weak Form : The historical price
of a stock provides an unbiased
estimated of its future price
b) Semistrong Form : All publicly
available information including
past prices is assumed to be
incorporated into the
determination of security prices
c) Strong Form : All available
information, including insider
information is immediately
incorporated into the price of
securities as soon as it is known
leaving no room for excess
returns

5. The Capital Asset Pricing Model
The goal of investors is
to minimize risk and
maximize returns.



Risk : Systematic and
Unsystematic Risk
Financial information
about a firm can help
determine the amount
of systematic risk
associated with a
particular stock

Investors will not be
compensated for
bearing unsystematic
risk since it can be
diversified away
The only relevant risk is
systematic risk
Criticized because it
causes
managers to seek only
safe
investments


Dividends + increases (or - decreases) in value
Purchase Price
6. Normative vs. Positive
theory
Normative theory
based upon a set of
goals that its
proponents maintain
prescribe the ways
things should be
Positive theory
attempts to explain
observed phenomena
(One positive theory is
termed agency theory)
7. Agency Theory
Agency theory is based
on the
assumption that
individuals act to
maximize their own
expected utilities.
An agency is a
consensual relationship
between two parties
whereby one agrees to
act on behalf of the
other

8. Human Information
Processing
Studies attempting
to assess an
individuals ability to
use accounting
information
Results - individuals
have limited ability
to process large
amounts of
information

9. Critical Perspectives
Research
Critical perspective
research concerns itself
with the ways societies
and institutions have
emerged.
Three assumptions:
1 Society has the potential
to be what
it isnt
2 Human action can help
this process
3 Critical theory can assist
human action

Accounting Research, Education and
Practice
How are research, education and practice
related in most disciplines?
How are they related in accounting?
Recent frauds have resulted in new schools of
thought

ACCOUNTING THEORY CONSTRUCTION
Pragmatic theories

Descriptive pragmatic approach:
based on observed behavior of
accountants
theory developed from how
accountants act in certain situations
tested by observing whether
accountants do act in the way the
theory suggests

Criticisms of descriptive pragmatic
approach:
does not consider the quality of an
accountants action
does not provide for accounting
practices to be challenged
focuses on accountants behaviour
not on measuring the attributes of
the firm


Psychological pragmatic approach:
theory depends on observations of
the reactions of users to the
accountants outputs
a reaction is taken as evidence that
the outputs are useful and contain
relevant information

Criticisms of the psychological
pragmatic approach:
some users may react in an
illogical manner
some users might have a
preconditioned response
some users may not react when
they should


Syntactic and semantic theories
Syntactic Theories
Theoritical interprestasion of
traditional historical cost
accounting
Related to the processes of
collecting data and financial
reporting
Predict what accountant should
responds in certain situations
Only has the semantic
component in their input basic.
There is no independent
empirical operation ; profit and
total assets
Semantic Theories
Useful to give the explanation
about the accounting concepts,
so between accountant and the
users have the same meaning
about accounting concepts.
Semantic inputs are the
transactions and exchanges
recorded in vouchers, journals
and ledgers
Semantic inputs are the
transactions and exchanges
recorded in vouchers, journals
and ledgers

Normative Theory
True Income
a single measure for assets
a unique and correct profit figure

Decision Usefulness
the basic objective of accounting
is to aid the decision-making
process of certain users of
accounting reports by providing
useful accounting data

concentrated on deriving:
true income (profit)
practices that enhance decision-usefulness
based on analytic and empirical propositions
Positive theories
Based on experiences or facts of
the real world
Explain the reasons for current
practice
Predict the role of accounting
information in decision-making


The main differences between
normative and positive theories is
that normative theories are
prescriptive, whereas positive
theories are descriptive,
explanatory or predictive

Different perspectives
Scientific approach:
has an inherent assumption that
the world to be researched is an
objective reality
is carried out by incremental
hypotheses
has an implied assumption that a
good theory holds under
circumstances that are constant
across firms, industries and time

Naturalistic approach:
implies that there are no
preconceived assumptions or
theories
focuses on firm-specific real-
world problems

Scientific approach applied to accounting
Misconceptions of purpose
Make scientists out of accounting
practitioners
Researchers = practitioners
The desire for absolute truth

The scientific method does not
claim to provide truth
It attempts to provide persuasive
evidence which may describe,
explain or predict

Issues for auditing theory construction

Auditing is a verification process that is applied to the accounting inputs and
processes
Auditors provide an opinion on
whether the financial statements accord with the applicable reporting
framework
whether the statements give a true and fair view