BFA 715 Accounting Theory

June 2014
Sample of ExaminationType Questions

Section A short response questions 5

Marks
1. In your opinion can accounting be value free? Explain. 66

2. What expectations do accounting standard setters have about the

accounting knowledge of financial statement readers?Is this a
reasonable expectation?

3. Briefly outline the arguments in favour of regulating the practice of

financial accounting 20M3?

4. Given the process involved in developing accounting standards do

you believe that they can be neutral? Discuss 1?12?

5. What does measurement mean from an accounting perspective?

In what areas is measurement difficult?3?9?
6. What is the difference between a conceptual framework of
accounting and an accounting standard? 633

7. Why would a company produce a sustainability report? What

would be reported on in such a report?9
8. What is a critical perspective of accounting77

9. A general purpose financial statement meets the needs of all

stakeholders. Comment on this statement.6.415

10.
What do you understand by opportunistic behaviour?
Explain using an example.

Section B- medium response questions - 10

Marks
11.
What is a conceptual framework? Would it be considered a
positive or normative theory? Explain.1215

12.
Can we ever claim that a theory is proved? Can a theory
explain the world of accounting? Discuss.11?

13.
According to Hines (1991) it is in the interests of the
accounting profession to promote publicly a view that the
information it generates is objective. Why do you think this is the
case? 1,1, 1

14.
What do we mean when we say that financial accounting is
the outcome of a political process? Why is the process political?
2419

15.
In the context of financial accounting, what is harmonisation
and what is standardisation?

16.
Identify some factors that might be expected to explain why
different countries use different systems of accounting?

17.
Any effort towards standardising accounting practices on an
international basis implies a belief that a globalised one size fits
all approach is appropriate. Is this nave? 21M1 M8
18.
List some of the criticisms that can be made of historical cost
accounting?35L2 (related to profit)

19.
Compare and contrast level 1, level 2 and level 3 fair value
measurements. What implications do these different
measurement techniques have for the reliability of fair value
disclosures.

20.
Would Ruth Hines argue that financial statement readers or
the accounting profession will gain more from the establishment of
a conceptual framework

21.
The two main qualitative characteristics that financial
information should possess have been identified as relevance and
representational faithfulness. Is one more important than the
other or are they equally important? Discuss.M11

22.
What is the difference between a positive and a normative
theory of accounting. Is one better than the other? 25M15
23.
Explain the management bonus hypothesis and the debt
hypothesis of Positive Accounting Theory.

24.

What is an agency cost and what is an agency relationship?

How might agency costs be reduced?818 not exactly same

M9

same

25.
Explain the notion of social contract, and what relevance the
social contract has with respect to the legitimacy of an
organisation? L7

26.
What insights are provided by Political Economy Theory and
why are these insights relevant to accounting?

27.
What is accountability and what is its relationship to:
Accounting5, 18 20
An organisations responsibilities

28.
What assumptions about market efficiency are typically
adopted in capital markets research? What do we mean by
market efficiency? 5?5 both not exactly same, be careful

29.
How and why would the accounting profession use the results
of behavioural research in accounting?

30.
What are some general strengths and weaknesses of
behavioural research?

31. Researchers speculate that management is motivated to disclose

information voluntarily either because it feels accountable or because
it wishes to legitimise its activities. Which do you think is the more
likely reason and why? Others suggest management should solely
pursue profits. What do you think? 23, 29M16

32. Is the setting of accounting standards desirable for a society? If

so, who should have the responsibility to set accounting standards?
Justify your arguments.

Section C essay type questions - 20 Marks

33. Discuss and evaluate the following statement:
A conceptual framework provides an accounting standard setter with a
defence against claims that an accounting standard advances particular

economic interests or that it will generate particular economic

consequences.

Conceptual framework of accounting is defined as a coherent system of

interrelated objectives and fundamentals that is expected to lead to
consistent standards and that prescribes the nature, function and limits
of financial accounting and financial statements. It attempts to provide
a logical structured theory of accounting and relies on qualitative
characteristics such as representational faithfulness, neutrality, freedom
from bias, and so forth. This essay will discuss the benefits of
conceptual frameworks promoted by accounting standard-setters. Then,
it also will look at certain argument, which suggests that conceptual
frameworks may play a part in legitimizing the existence of the
accounting profession.
There are some perceived benefits that have been advanced by
standard-setting bodies as being likely to follow from the development
of conceptual framework. Firstly, developing a conceptual framework
effectively forces accountants to think about what they are doing and
why they are doing it. If projected properly, conceptual framework
would contribute to perspectives that a group of people belongs to a
profession of high standing. That is, a well-designed conceptual
framework (with reliance on neutrality, objectivity and so forth) can
arguably make the accounting profession appear even more
professional. Secondly, accounting standards should be more
consistent and logical because they are developed from an orderly set
of concepts. That is, the accounting standards will be developed on the
basis of agreed principle. It has been proposed that unless there is
some agreement on fundamental issues, such as the objective and
qualitative characteristics of financial reporting, accounting standards
will be develop in a rather ad hoc or piecemeal manner, with limited
consistency between the various accounting standards developed over
time. Thirdly, the standard-setters should be more accountable for their
decisions because the thinking behind specific requirements should be
more explicit, as should any departures from the concepts that may be
included in particular accounting standards. In addition, the
development of accounting standards should be more economical
because the concepts developed will guide the standard-setter in their
decision-making. There is also a perspective that having a conceptual
framework should alleviate some of the political pressure that might
otherwise be exerted when accounting standards are developed. In a

sense, the conceptual framework could provide a defence against

political attack.
While accounting standard-setters have promoted the benefits of
conceptual frameworks, some of which have been discussed above, a
number of writer have suggested that conceptual frameworks are
created primarily to provide benefits to the parties that actually develop
or commission the frameworks, and one that does not provide benefits
to financial statement users. It has been argued that conceptual
frameworks have been used as devices to help ensure the ongoing
existence of the accounting profession by boosting their public
standing. Hines suggests that conceptual frameworks provide a means
of increasing the ability of a profession to self-regulate, thereby
counteracting the possibility that government intervention will occur. He
provide evidence that conceptual framework projects were actually
initiate at times when professions were under threat- that they are a
strategic manoeuvre for providing legitimacy to standard-setting boards
during periods of competition or threatened government intervention.
Hines states that conceptual frameworks presume, legitimise and
reproduce the assumption of an objective, which is the central premise
of our society. Legitimacy is achieved by tapping into this central
proposition because accounts generated around this proposition are
perceived as normal. Then, conceptual Framework projects continue to
be undertaken which rely on information qualities such as
representational faithfulness, neutrality, reliability, etc., which
presume a concrete, objective world. Therefore, conceptual frameworks
provide social legitimacy to the accounting profession and we would
consider that the development of conceptual frameworks was a political
action to ensure the survival of the profession. Once a document or a
framework is perceived as being of high standing, or legitimate, then to
the extent that stand-setters can justify particular decisions by
reference to the legitimate framework, any level of criticism and
attack can be countered or minimised. Decisions about what is included
within a particular accounting standard can be justified to the extent
they are consistent with the conceptual framework, which has
widespread acceptance.
Therefore, we would accept that conceptual frameworks provide
accounting standard setters with a defence against claims that an
accounting standard advances particular economic interests or that it
will generate particular economic consequences.

34. If an organisation was involved in a major accident or incident,

would you expect it to use vehicles such as an annual report or a
sustainability report to try to explain the incident? Explain.
When an organisation has been involved in a major accident or event
(such as loss of oil at sea or a mine-collapse) then the annual report will
be used as a means to bolster the damaged image of the organisation
involved. In this essay, the legitimacy theory will be applied to explain
the motivation of the organisations disclosure of the major accident. It
also will discuss the rationale that organisation use an annual
report or a sustainability report as a legitimation technology in detail,
which will be followed by some examples of studies about the
organisations disclosing activities responding to major incident.
According to legitimacy theory, organisations will undertake various
actions to ensure that they appear to be operating in a manner
consistent with the norms and expectations of the community in which
they conduct their operations. Failure to undertake those activities that
are expected by society may result in the entity no longer being
considered legitimate, which will impact on the support it receives form
the community, and hence its survival. Legitimacy itself can be
threatened even when an organisations performance is not deviating
from societys expectations of appropriate performance. This might be
because the organisation has failed to make disclosures that show it is
complying with societys expectations. That is, legitimacy is assumed to
be influenced by disclosures of information, and not simply by
(undisclosed) changes in corporate actions. Hence, various social
responsibility disclosures will be made in an effort to legitimise the
ongoing existence of the organisation.
The strategies that can be used by corporate management in an effort
to gain, maintain or regain legitimacy are considered. Most of the
proposed legitimation techniques appear to relate to regaining
legitimacy in the light of particular crises, which are within the social
and environmental accounting area. Dowling and Pfeffer (1975) and
Lindblom (1993) suggest several strategies that an organisation can
adopt to legitimate its where it perceives that its legitimacy is in
question because its actions or operations are at variance with societys
expectations and values. Therefore, consistent with their suggestions,
the public disclosure of information in such places as annual reports or
other publicly available reports, such as sustainability reports or annual
reports, can be used by an organisation to implement each of their
suggested strategiesused to distract attention from the event itself and
to highlight positive aspects of the organisations performance. For

example, an organisation may provide information to counter or offset

negative news that is publicly available, or it may simply provide
information to inform the interested parties about attributes of the
organisation that were previously unknown. In addition, organisations
may draw attention to their strengths, for instance environmental or
community awards won or safety initiatives that have been
implemented, while neglecting or downplaying information concerning
negative implications of their activities, such as pollution or workplace
accidents.
There have been numerous accounting researchers who have elected to
study social and environmental reporting practices. By studying on the
change in the extent of environmental disclosure made by North
American oil companies both before and after the Exxon Valdes incident
in Alaska, Patten (1992) argues that if the Alaskan oil spills resulted in a
threat to the legitimacy of the petroleum industry, and not just to
Exxon, companies operating within that industry would respond by
increasing the amount of environmental disclosures in their annual
reports. Deegan and Rankin (1996) also use legitimacy theory to
explain that the public disclosure of that organisations were successfully
prosecuted for breaches of various environmental protection laws had
an impact on the corporate annual report environmental disclosure
policies of the organisations involved. Furthermore, Deegan, Rankin and
Vought (2000), by applying legitimacy theory, explain that companies
did appear to change their disclosure policies following major companyand industry-related social incidents.
To conclude, I expect that the organisation would use an annual report
or a sustainability report to explain the incident the organisation
involved as a legitimation strategies to gain, maintain or regain the
legitimacy, which is threatened by the major incident.

35. Legitimacy theory, stakeholder theory and institutional theories are

considered to be system orientated theories. What does this mean?
34L1
System orientated theories are permit us to focus on the role of
information and disclosure in the relationship (s) between organisations,
the State, individuals and groups. Systems-oriented theories have also
been referred to as open-systems theories. According to Suchman
(1995), Open-system theories have reconceptualised organisational
boundaries as porous and problematic Many dynamics in the
organisational environment stem not from technological or material

imperatives, but rather, from cultural norms, symbols, beliefs and

rituals. Corporate disclosure policies are considered to represent one
important means by which management can influence external
perceptions about their organisation. Within a systems-based
perspective, the entity is assumed to be influenced by and in turn, to
have influence upon, the society in which it operates. Within these
theories, accounting disclosure policies are considered to constitute a
strategy to influence the organisations relationships with the other
parties with which it interacts. Legitimacy Theory, Stakeholder Theory
and Institutional Theory are all systems-based theories. In recent times,
stakeholder theory and legitimacy theory have frequently been applied
to explain why organisations make certain social responsibility
disclosures within their annual reports or within other corporate reports.
However, these theories could also be applied to explain why
companies adopt particular financial accounting techniques.
Legitimacy Theory
Legitimacy theory asserts that organisations continually seek to ensure
that they are perceived as operating within the bounds and norms of
their respective societies- that is, they attempt to ensure that their
activities are perceived by outside parties as being legitimate. These
bounds and norms are not considered to be fixed, but change over time,
thereby requiring organisations to be responsive to the ethical
environment in which they operate. Legitimacy Theory has been used
to understand corporate action, particularly in social and environmental
issues. It is a positive theory based on the social contract. In other
words, you cannot talk about the economic or business issues without
considering the social impacts.With development of the Organisational
legitimacy, currently the business are expected to consider the issues
relates to the environmental and social consequences.
Stakeholder Theory
Stakeholder theory considers the relationships that exist between the
organisation and its various stakeholders. It linked with legitimacy
theory and should not be treated separately due to the political base.
However, the essential difference is that stakeholder theory considers
the relationships that exist between the organisation and its various
stakeholders, while the legitimacy theory, relates to organisational
consideration of society in general.
There are two branches of Stakeholder Theorythe ethical (or
normative, or moral) branch and the managerial branch. Under the
ethical branch of stakeholder theory, it argues that all stakeholders

have the right to be treated fairly by an organisation. Regardless of

whether stakeholder management leads to improved financial
performance, managers should manage the business for the benefit of
all stakeholders.
By contrast, under the managerial branch, it attempts to explain when
corporate management will be likely to attend to the expectations of
particular stakeholders. This perspective of stakeholder theory
specifically considers the different stakeholder groups within society
and how they should best be managed if the organisation is to survive.
The organisation will not respond to all stakeholders equally, but rather
will respond to those stakeholders that are deemed to be powerful.
Institutional Theory
Broadly speaking, institutional theory considers the forms organisations
take and provides explanations for why organisations within a particular
organisational field tend to take on similar disclosure strategies might
be undertaken to gain, maintain or regain legitimacy, it also considers
how rules become established as powerful guidelines, and considers
how these elements are created, adopted and adapted over time. It
comes from management literature.The practices within organisations
can be predicted from perceptions of legitimate behaviour derived from
cultural values, industry tradition, entity value etc. It explores how at
a broader level- particular organisational forms might be adopted in
order to bring legitimacy to an organisation.
To conclude, Legitimacy Theory, Stakeholder Theory and Institutional
Theory are all systems-based theories, which are focus on the role of
information and disclosure in the relationships between organisations,
the State, individuals and groups. Within a systems-based perspective,
the entity is assumed to be influenced by and in turn, to have influence
upon, the society in which it operates.

36. Is stakeholder theory a single well defined theory or a broad

umbrella term for a whole lot of different theories? Explain.
Stakeholder theory is a broad umbrella term for a whole lot of different
theories, while it has both a normative branch and a positive branch. To
explain the reason, this essay will consider what is stakeholder theory
first. Then, it will discuss the two branch of stakeholder theory.
Stakeholder theory has both an ethical (moral), or normative, branch
(which is also considered as prescriptive) and a positive (managerial, or

as it is also sometimes called instrumental) branch. The name

Stakeholder Theory itself can be a confusing term. Many different
researchers have stated that they have used Stakeholder Theory in
their research, yet when we look at the research we see that different
theories with different aims and assumptions have been employed, and
all have been labelled Stakeholder Theory. As Hasnas (1998) states:
Stakeholder Theory is somewhat of a troublesome label because it is
used to refer to both an empirical theory of management and normative
theory of business ethics, often without clearly distinguishing between
the two. Therefore, more correctly, we can think of the term
Stakeholder Theory as an umbrella term that actually represents a
number of alternative theories that address various issues associated
with an organisations relationships with stakeholders, including
considerations of the rights of the rights of stakeholders, the power of
stakeholders or the effective management of stakeholders.
The moral or ethical (also referred to as the normative) perspective of
Stakeholder Theory argues or prescribes that all stakeholders have the
right to be treated fairly by an organization, and that issues of
stakeholder power are not directly relevant. That is, regardless of
whether stakeholder management leads to improved financial
performance, managers should manage the business for the benefit of
all stakeholders. According to the normative stakeholder theory,
management must give equal consideration to the interests of all
stakeholders and, when these interests conflict, manage the business
so as to attain the optimal balance among them. The boarder ethical
(and normative) perspective that all stakeholders have certain
minimum rights that must not be violated can be extended to a notion
that all stakeholders also have a right to be provided with information
about how the organization is affecting them, even if they choose not to
use the information, and even if they cannot directly have an impact on
the survival of the organization.
Managerial perspective of stakeholder theory attempt to explain when
corporate management will be likely to attend to the expectations of
particular (typically powerful) stakeholders. The more important the
stakeholder to the organization, the more effort will be exerted in
managing the relationship. Like Legitimacy theory, it is considered that
the expectations of the various stakeholder groups will impact on the
operating and disclosure policies of the organization. However,
according managerial perspective of stakeholder theory, the
organization will not respond to all stakeholders equally, but rather will
respond to those stakeholders that are deemed to be powerful.

37. How would the following theories explain CSR reporting?

Positive accounting theory

Legitimacy theory
Stakeholder theory
Institutional theory
While in most countries financial accounting is heavily regulated
according to applicable corporation laws and accounting standards,
there is a relative absence of regulatory requirements relating to the
public disclosure of information about the social and environmental
performance of an entity. Nevertheless, many organizations throughout
the world have been voluntarily providing public disclosures about the
social and environmental impacts of their operations for a number of
years. These social and environmental reporting practices are referred
to as corporate social responsibility (CSR) reporting. This essay will
briefly introduce the definition of CSR and CSR reporting. Then, it will
apply positive accounting theory (PAT), legitimacy theory, stakeholder
theory and institutional theory respectively to explain CSR reporting, so
as to develop a theoretical understanding of the phenomena that the
social and environmental reporting practices are being adopted by an
increasingly large number of organizations.
The definition of corporate social responsibility (CSR) is that the
continuing commitment by business to behave ethically and contribute
to economic development while protecting environment and improving
the quality of life of the workforce and their families as well as that of
the society. CSR reporting can also be considered as synonymous with
other terms, such as sustainability reporting, non-financial report, triple
bottom line reporting and more. It includes information about an
organisations economic performance, social performance and
environmental performance.
Positive accounting theory predicts that all individual action is
economically rationalthat is, the decision to undertake certain
activities, such as CSR report, is based on self-interest tied to the goal
of wealth maximisation. Hence, managers will elect to provide social
responsibility disclosures to the extent that it increases the value of the
organisation.
Legitimacy theory predicts that firms will undertake various actions to
ensure that they appear to be operating in a manner consistent with the
norms and expectations of the community in which they conduct their

operations. That is, that they appear to comply with the terms of the
social contract. Hence, various social responsibility disclosures will be
made in an effort to legitimise the ongoing existence of the
organisation. Failure to undertake those activities that are expected by
society may result in the entity no longer being considered legitimate (it
is perceived as breaching its social contract) and this in turn will impact
on the support it receives from the community, and hence its survival.
However, if it is considered that the community does not expect the
firm to make social and environmental disclosures (that is, it is not part
of the social contract), then no disclosures will be made.
There are two branches of stakeholder theorythe managerial branch
and the ethical (or normative, or moral) branch. Under the managerial
branch, disclosures are used as one strategy to control the actions of
powerful stakeholders. Powerful stakeholders are often considered as
those parties who have resources, which are important to the ongoing
survival of the organisation. Under this perspective, it is the needs of
the powerful stakeholders that are attended to over and above the
needs of other parties affected by the entitys operations. If the
powerful stakeholders expect social responsibility disclosures then the
firm is predicted to make them. By contrast, under the ethical, or
normative, branch of stakeholder theory there is a view that disclosures
are responsibility driven and that all stakeholders that are impacted by
the operations of the entity have a right to information about its
operations (the notion of right-to-know). Hence, under this perspective,
social responsibility disclosures are made in response to an ethical
responsibility, rather than in response to any desire to maximise wealth
or to appease particular, powerful parties.
Institutional theory assumes that the managers of an organisation will
develop or adopt new practices such as CSR reporting because of a
variety of institutional pressures, such as other organisations
developing new practices in these areas and managers being concerned
that, if they do not emulate these organisations, they will risk
disapproval from some of their economically powerful stakeholders.
There is a view that organisational form and practices might tend
towards some form of homogeneity that is, the structure of the
organisation and the practices adopted by different organisations tend
to become similar to conform with what is considered to be normal.
Organisations that deviate from being of a form that has become
normal or expected will potentially have problems in gaining or
retaining legitimacy. There are two main dimensions to institutional
theory. The first of these is termed isomorphism while the second is

termed decoupling. Both of these can be of central relevance to

explaining voluntary corporate reporting practices.
To conclude, there could be various motivations for managers to decide
to disclose information voluntarily, including information about social
and environmental performance by applying various theoretical
perspectives, such as positive accounting theory (PAT), legitimacy
theory, stakeholdertheory and institutional theory.

38. Positive accounting theory and agency theory make certain central
assumptions about what influences peoples decisions. How does this
differ from the perspective embraced within behavioural research?
Positive accounting theory and agency theory are based on the central
economics-based assumption that all individual actions are driven by selfinterest and that individuals will always act in an opportunistic manner to
the extent that the actions will increase their wealth. However, although
agency theory considers what influences peoples decisions, it somewhat
simplistically attributes the same motivation to all individuals-this being
that all individuals are driven by self-interest with the goal of maximising
ones own wealth. While such an assumption might lead to some useful
explanations and predictions we are left with the same explanation for all
people and for all accounting choices. By contrast, behavioural research
studies individuals actions and choices and typically does not make
broad-based assumptions about how all individuals behave, or about what
motivates them to behave in a particular way (although there could be an
acceptance that many individuals will tend to adopt specific strategies or
biases when making decisions). Behavioural accounting research could
provide a richer understanding about how accounting-related decisions
might be different in different circumstances, places and time. Further,
behavioural research is typically grounded in organisational theory, and in
theories form psychology and sociology rather than from economics.
However, like theories such as Positive Accounting Theory, Legitimacy
Theory and Institutional Theory, behavioural research can be thought of as
positive research, because it seeks to explain particular actions or
behaviours (in contrast to normative research, which prescribes how
certain activities should be undertaken). However, unlike some theories
that strictly limit their attention to explaining and predicting behaviour at
an individual level, behavioural research typically also concerns itself with
improving the quality of decision making hence there can ultimately be a
normative component to behavioural research.

39. Roslender (2006, p.265) states:

Critical Theory makes no pretence of being objective. Those who embrace
a Critical Theory perspective do so because they recognise and value its
partiality.
Explain what is meant by this quote. 10
Critical perspective explicitly considers how the practice of accounting
tends to support particular economic and social structures (which are
typically considered by critical theorists as being unfair), and reinforces
unequal distributions of power and wealth across society. In doing so, this
form of accounting research rejects the view that accounting provides an
objective and unbiased account of particular transactions and events. The
view promoted by researchers operating from a critical perspective is that
accounting, far from being a practice that provides a neutral or unbiased
representation of underlying economic facts, actually provides the means
of maintaining the powerful positions of some sectors of the community
(those currently in power and with wealth) while suppressing the position
and interests of those without wealth. These theorists challenge any
perspectives that suggest that various rights and privileges are spread
throughout the society. Instead, they argue that most rights, opportunities
and associated power reside in a small (well-defined) group (often refered
to as an elite).

It has been argued that all research is likely to be influenced to some

extent by the (possibly subconscious) biases of the researchers involved,
but this explicit promotion of partisan research in critical accounting
studies might upset and worry researchers who adopt other approaches.
However, it could be considered simply more honest in that it is making
explicit that all research in social sciences relies on the subjective (and
therefore biased) interpretations of the researchers involved.One key
attribute of critical accounting researchers and one that often
differentiates them from other researchers is that they are typically very
open about the partisan nature of their research. There is a view amongst
critical accounting researchers that to create social change it is necessary
to be very open about the problems inherent within current systems, and
to highlight areas that need to be changed. Roslender states that the
purpose of the critical study is to promote a better society. The
presupposition is that there are many things about the existing social
arrangements that merit changing. Traditional theory does not subscribe
to this axiom. It is the quality that distinguishes critical theory from
traditional theory. This is not to imply that all of those scholars who elect

to embrace other ways of seeing are committed to the reproduction of the

existing social arrangements, rather that they do not avail themselves of a
way of seeing, critical theory, that explicitly links understanding and
change to the enactment of the philosophy of praxis.
In understanding what a partisan approach means we can usefully
consider a definition provided in the Oxford English Dictionary, which
states that a partisan approach is one taken by an adherent or supporter
of a person, party, or cause. Therefore, if critical theorists had a particular
view (or theory) about how society should function to achieve certain ends
or causes, then, in accord with a partisan approach, this will directly
influence their choice about the practices they support or oppose.

40. Explain the importance in critical accounting theory of assumptions

regarding the distribution of power in society. How do these assumptions
differ from those adopted in other theoretical perspectives.

This essay will explain the importance in critical accounting theory of

assumptions regarding the distribution of power in society. Then it will
discuss the difference between these assumptions and those adopted in
other theoretical perspectives.
Critical accounting theory is used to refer to an approach to accounting
research that goes beyond questioning whether particular methods of
accounting should be employed, and instead focuses on the role of
accounting in sustaining the privileged positions of those in control of
particular resources (capital) while undermining or restraining the voice
of those without capital. Critical perspective explicitly considers how the
practice of accounting tends to support particular economic and social
structures (which are typically considered by critical theorists as being
unfair), and reinforces unequal distribution of power and wealth across
society. The view promoted by researchers operating from a critical
perspective is that accounting far from being a practice that provides a
neutral or unbiased representation of underlying economic facts,
actually provides the means of maintaining the powerful positions of
some sector of the community (those currently in power and with
wealth) while suppressing the position and interests of those without
wealth. These theorists challenge any perspectives that suggest that
various rights and privileges are spread throughout society-instead they
argue that most rights, opportunities and associated power reside in a
small group. Such researchers seek to highlight the perceived

inequalities and structural problems inherent in existing social system

that are typically taken for granted by other non-critical researchers.
Therefore, by identifying problems inherent within existing structures
and processes (such as accounting), it ultimately aim to provide a fairer
society, which does not undermine the interests of particular groups,
such as employees. That is, the ultimate goal of critical research is
projected as being to create positive social change.
The critical perspective adopted by many critical accounting
researchers is ground in classical political economy theory, which
explicitly places sectional (class) interests, structural conflict, inequity,
and the role of the State the heart of the analysis. It tends to perceive
accounting reports and disclosures as a means of maintaining the
favoured position (for example, the wealth and power) of those who
control scarce resources (captical) and as a means of undermining the
position of those without scarce capital. It focuses on the structural
conflicts within society. In the contrast, the other stream of Political
Economy theory, Bourgeois political economy theory does not explicitly
consider structural conflicts and class struggles; rather, it tends to be
concerned with interactions between groups in an essentially pluralistic
world. It accepts the way society is currently structured as a given.
Researchers working within the critical perspective typically see the
State (government) as being a vehicle of supporting for the holders of
capital (for example, shareholders), as well as for the capitalist system
as a whole. Under this perspective the government will undertake
various actions from time to time to enhance the legitimacy of the
social system, and thereby protect and advance the power and wealth
of those who own capital, even though it might appear (to less critical
eyes) that the government was acting in the interests of particular
disadvantaged groups. These critical theorists would therefore reject
theories of regulation, such as public interest theory. For example, a
government might impose mandatory disclosure requirements for
corporations in terms of the disclosure of information about how the
corporations attend to the needs of certain minorities or the disabled.
However, it would be argued by critical theorists that such disclosures
are really implemented to pacify the challenges by or on behalf of
particular minorities that may be made against the capitalist system in
which corporations are given many rights and power. Hence, we are left
with a view that government does not operate in the public interest but
in the interests of those groups that are already well off and powerful.
Rather than thinking of accounting researchers as being relatively inert
with respect to their impact on parties outside their discipline,

numerous critical theorists see many accounting researchers as

providing research results and perspectives that help to legitimise and
maintain particular political ideologies. This is a different perspective
from what most accountants, accounting researchers and accounting
students would be used to.
41. Accountability is argued to be an objective of financial reporting.
What do we mean by accountability? Discuss the roles that estimation
and judgement play in accounting, and indicate how you think this may
impact on accountability.18,2
Sorry, guys, I give up on this question!!!
42. What is POSITIVE ACCOUNTING THEORY (PAT)? How does
accounting theory differ from normative accounting theory 22? What
was the major dissatisfaction with normative accounting theory that led
to the development of positive accounting theory?L9
PAT seeks to explain and predict particular phenomena rather than telling
what is being done in practice is the most efficient or equitable process,
which is tend to based on empirical observation. It focus on the
relationships between the various individuals involved in providing
resources to an organisation and how accounting is used to assist in the
functioning of these relationships. Examples are the relationships between
the owners and managers, or between managers and the firms debt
providers. PAT is based on the central economics-based assumption that
all individuals actions are driven by self-interest and that individuals will
always act in an opportunistic manner to the extent that the actions will
increase their wealth. Notions of loyalty, morality and the like are not
incorporated in the theory. Moreover, PAT predicts that organisations will
seek to put in place mechanisms that align the interests of managers of
the firm with the interests of owners of the firms. Thus, in order to reduce
the possibility that managers are work for their own interests, owners
carry on a series of actions to prevent, which arise bonding costs,
monitoring costs and residual costs. Additional, there are three hypothesis
of PAT, which are bones plan hypothesis (proposes that managers on
accounting-based bonus schemes will select accounting methods that leas
to an increase in profits.), debt hypothesis (proposes that organisations
close to breaching accounting-based debt covenants will select
accounting methods that lead to an increase in profits and assets) and
political cost hypothesis (proposes that firms subject to political scrutiny
will adopt accounting methods that reduce reported income).
Compared with PAT, normative theories prescribe what should be done in
particular circumstances based on particular assumptions made by the

researcher and this prescription might be a significant departure from

existing practice. A normative theory is generated as a result of the
particular theorist applying some norms, standards or objective against
which actual practice should strive to achieve. Moreover, NAT is not
necessarily based on observation and therefore cannot be evaluated on
whether they reflect actual accounting practice; however, it can be future
subdivided.
In 1980s, the dominant type of accounting research was normative
accounting researchresearch that sought to provide prescription based
on the theorists perspective of the underlying objective of accounting.
High-profile normative researchers were how to undertake accounting in
times of rising process, which did not rely on examining existing practice
that is, it did not tend to be empirical.
In reflecting on what caused the shift in paradigm from normative to
positive research, there is an argument that essential nature of
hypothesis forming and testing. A hypothesis would be formed to test a
prediction, for example that under specific conditions accountants would
select a particular method of accountingthis type of issue is something
that fascinates researchers working within a PAT framework. The reason
that normative researchers, on the other hand, would not form and test
hypotheses is that such researchers would not be concerned with what
should be. Hence, normative researchers do not necessarily develop any
predictive hypothesesbut this in itself should not be used to dismiss
their work as not being good research. Moreover, it was also argued that
around the mid-1960s and throughout the 1970s, computing facilities
improved markedly, such that it became increasingly practical to
undertake large-scale statistical analysisan approach used within the
positive research paradigm.
Therefore, all dissatisfaction led to the development of PAT.