Accounting Theory – Literature Critique

Introduction

The selected article titled “Half a Defence of Positive Accounting Research” that has been written by Paul V Dunmore has selected that introduced the importance of Positive Accounting Theory and its implications in practical life. The article looks over the importance of Positive Accounting in the corporate world, and how it is adding value to the productivity and efficiency of the entities.

The main objective of this assignment is to post a critical analysis of the arguments initiated in the selected article. Critical analysis should be completely differentiated from Critiques, as critiques would be initiated to identify the negative points of a certain thing. A specific structure that needs to be followed for this assignment includes the summary of the article, research questions, theoretical framework, and the potential limitations associated with the article. It is important to complete each of the parts accordingly and simultaneously.

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Summary of the Article

The selected article has been made based on predictions in the real world. It has been presented to combat the stance that the behavior, as well as the intensity of the financial and capital markets, cannot be predicted. The article has highlighted the importance of Behavioural Finance in terms of predicting (Beneish 2011). The author of the article has posted their critiques on the theory of Efficient Market Hypothesis (EMH). The article has highlighted the importance of Positive Accounting Theory and referred to the theory to be used accordingly in comparison to EMH. The main findings of the authors are as follows

Positive Accounting Theory tries to make good and fruitful predictions in real-world events and transform its importance towards accounting transactions. In accounting, it is not important to examine what should be done, but it is more important to identify and explicit the main reason or idea behind a specific event. Moreover, accounting theory is more likely to predict the unprecedented events that may associated with an organization. The article has emphasized the utilization of PAT to predict the sustainability of an organization in a highly competitive market. A mix of arguments has been found in a similar capacity, as according to Cheng and Warfield (2015), it is important for finance managers to have a strong and complete idea about their financial capability, and should ascertain their growth based on those predictions. However, the findings of Chen et al. (2014) are the opposite. According to them, an investor, as well as financial officials, can’t predict the market and unprecedented events with the utilization of theories such as Positive Accounting. More sophisticated techniques such as Altman A-Score cannot predict the efficiency of a company in good and hard times. Decision-making is significant for the sake of an organization, and it is equally the same which has been highlighted in the scenario of this article related to the Positive Accounting aspect. The more transparent and clear the decision-making aspect, the more effectiveness could have been added to the company, especially in the long run.

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The article has also raised the idea that the stance of predicting depends solely on the usable accounting policies and standards that are used by companies to manage their well-being in the market. It means the more efficient and favorable the accounting techniques and policies, the more fruitful be prediction for the company. After having a critical and closer look at this argument, it is found that the argument is right. The usable accounting standards and policies are highly efficient as far as managing the well-being of the companies is concerned. The same idea was revealed by Jiraporn et al. (2014) in their study, as according to the recent economic crisis, most financial practitioners have recommended that companies adopt International Financial Reporting Standards (IFRS), by totally ignoring the idea of Generally Accepted Accounting Principles (GAAP). IFRS has been designed in a more ethical manner that describes the importance of managing the financial aspect of a company more reasonably. The article has emphasized the utilization of such an Accounting Treatment, through which the company can add value to their productivity and within their goodwill excellently and efficiently.

The article has emphasized the element of survival of the companies, as compared to increasing their profitability. According to the main crux of the article, while utilizing PAT, firms want to maximize their prospects for survival rather than maximizing the shareholder’s equity to become more unique in the Universe and in front of the eyes of their shareholders. The idea is not right at all, the main objective of every organization is to maximize the potential of their shareholders and provide sufficient opportunities to them that can increase their interest in the productivity of the company. However, the idea of PAT is backed by Kasanen, Kinnunen, and Niskanen (2016), according to them, the current era has been referred to as the era of industrialization and technological efficiency in which organizations have to create different opportunities for their shareholders through which they can increase their competitiveness. Increasing competitiveness has a strong connection with the long-term survival of a company.

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The article has revealed that organizations are not recognized for the revenue and net income they generate, but they are recognized for the contracts and projects they undertake in a specific scenario (Leuz, et al. 2013). The idea is not right, as organizations are meant to increase financial potential and decrease operational expenses proficiently. The same idea was revealed by Milne (2012), as according to them every single organization that is operating has a mindset to increase its financial potential and efficiently maximize its earnings. The study also revealed that striving for income efficiency doesn’t mean that they consider every single project. The more efficient the undertaking of projects, the higher will be the capacity of a company to enlarge its economic and strategic potential (Peasnell, et al. 2011).

In connection to the last argument raised related to contracts and projects, PAT has a great capacity to minimize the cost of the contracts accordingly. This is because PAT enables an organization to put its nose only in those projects or contracts that can increase its financial potential with the utilization of minimum cost of operations.

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Research Questions

The existence of research questions is extremely important for the sake of a research report. It can be said that a research report cannot be completed without thought-provoking research questions. The same applies to a selected article which is as follows

How can PAT be beneficial for strengthening the financial structure of organizations?
How can PAT be beneficial for strengthening the strategic structure of the organizations?
How PAT can help companies to sustain the environment?
Why the concept of PAT is increasing for companies all over the Universe?
What is the linkage between PAT and the management of Accounting Policies

All of these research questions are very broad, and the researcher has used a perfect technique to answer them comprehensively and completely.

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Theoretical Framework

By definition, a theoretical framework is like a structure that can hold or support a specific theory for study and sheer analysis. The theoretical framework tends to describe and evaluate the research problem under a specific study (Subramanyam 2010). Every research report that consists of a Quantitative Method and Hypothesis has the factor of Theoretical Framework underlying the same. The same applies to this particular research study as well. The article has evaluated the importance of PAT in terms of strengthening the financial and strategic structure of the company, and how PAT can help the companies to maximize their sustainability in a competitive market. The Diagram of the PAT is as follows

Accounting Theory - Literature Critique

The aforementioned theoretical framework has been used in the article. It is not designed in the same way, however, the analysis of the PAT has been organized under the same context. The Impact of the PAT has been analyzed on the financial and strategic well-being of the company, along with its sustainability factor. The article has devoted limited word counts to its theoretical framework, which is not an efficient sign from the viewpoint of research. A research that has different hypotheses to test should devote sufficient word count based on their theoretical framework to inform the readers accordingly, about the procedure and technique used by the researcher to conduct the research efficiently.

The Significance and Limitations of the Article

This particular part of the assignment is very important from the standpoint of this research. The research has been conducted on one of the most important concepts related to Accounting Management, therefore, its importance is very high (Subramanyam 2010). The level of significance of this research is very broad, as it can satisfy the appetite of different readers. Firstly, the research can be used by companies who are looking forward to implicating PAT in their workability factor. Secondly, it is equally beneficial for the researchers who are likely to research the same topic. The researcher has used the Quantitative Research Method for the analysis of the PAT, which is right, and has its rationale because it is an accounting-based research. However, the research design used by the research is not effective. The research design about the research is “Exploratory” in which the researcher assumes that the research has not been conducted before, and it will be a masterpiece in the current economic scenario. However, it is not right, certain studies have been conducted in the same domain such as the studies of Van Tendeloo and Vanstraelen (2014) and Kasanen, et al. (2016). It is suggested to use a Causal research design instead for this research, as the research design will help the research to examine the cause and effect relationship among the implication of PAT and its impact over the elements discussed in the theoretical framework.

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Conclusion

The entire article is based on the importance of PAT, and its applicability to the functioning of the companies. The research has included some very interesting points about PAT and its core importance. From this entire analysis, it is found that PAT will help the companies to maximize their sustainability along with maximizing the shareholder’s equity professionally. Moreover, the research has emphasized undertaking the research contracts and projects into consideration that help a company to maximize its potential accordingly. In short, the main points raised in the article about PAT are right, and most of the firms across the globe are taking advantage of the same concept.