Accounting Fraud and the Market for Corporate Control - Literature review Example

Theory and Research Introduction In the present business context, organisations adopt effective measures based on business and accounting operations conducted in order to minimise accounting fraud. Business accounting or fraud has been an important concern for organisations, as it affects overall performances, reputation and sustainability (Erickson Heitzman and Zhang, 2011). Accounting fraud is the misstatement as well as material omissions relating to financial information in a deliberate manner (Erickson Heitzman and Zhang, 2011). Fraudulence is committed in accounting for presenting better valuation or performance level of a business with the aim of borrowing capital through misrepresented future earnings (Erickson Heitzman and Zhang, 2011). In this regard, accounting fraud is mainly committed through misrepresentation of audit reports and financial information (Erickson Heitzman and Zhang, 2011). Different theory and research are performed with the intention of possessing adequate knowledge as well as understanding about business accounting and fraud. Theory is term based on vast perceptions or phenomenon relating to a subject (Harlow, 2010). Theory signifies system of laws and ordering based on which a phenomenon is understood successfully (Harlow, 2010). In this respect, theory provided a framework for research projects where a research was comprehended effectively. Theoretical framework provides effective understanding about the procedures, based on which research studies were conducted (Harlow, 2010). There were different theories used with the objective of developing research paradigms (Harlow, 2010). The research paper presented the views on the nature and types of theories relating to business accounting and fraud. Relationship between theory and research is studied with the aim of understanding as well as explaining accounting fraud through the use of an appropriate theory. Discuss Views on the Nature and Types of Theory Different types of theory were utilised with the aim of studying a research subject in a comprehensive manner. Theories were also used for evaluating and analysing characteristics and linkage of a subject with different perceptions and behaviours among others. Gelso (2006) noted that scientific theory was utilised with the aim of studying different aspect of psychology related to behaviourism, humanism and psychoanalysis. Scientific theory was applied in the arena of psychology that was practice-oriented for equating therapy systems, which includes cognitive therapy, psychoanalytic therapy and person-centred therapy. A theory is developed based on the various constructions, which were assumed, factually demonstrated and hypothesised in order to determine the relationships amid variables. A theory is a statement providing the linkage that exists amid variables under study. According to Gelso (2006), a theory varies on the basis of informality or formality. Informal theories were not stated in an explicit manner and in contrast formal theories were stated explicitly (Gelso, 2006). Gelso (2006) stated that scientific theory was based on different paradigms and essential ingredients to develop a good theory. Scientific theory should be internally consistent, parsimonious, and integrative, so that research conducted was reliable. The theory was based on different features that include explanatory power, comprehensive, delimited, explicit and testability based on which a good theory is developed. The theory is conducted in accordance with a research approach comprised of three steps that include idea generation, hypothesis generation, and interpretation of results (Gelso, 2006). Accordion to Harlow (2010), case study method was an important procedure of conducting research study with the aim of having a comprehensive understanding about a specific phenomenon. In case study research, theory played a vital role for exploring a research topic explicitly. Theories were either tested or developed or both. Theory and case studies were interlinked, as the theories were tested. A case study research was based on certain procedures, which include review of literature, strengths as well as limitations of explanations, selecting cases required to be studied, data collection, data collection methods, and data analysis. Conducting a research study on the basis of case study method aided in having a comprehensive understanding as well as evaluation of a research subject (Harlow, 2010). Harlow (2010) stated that inductive and deductive reasoning was performed with the aim of having validated research outcomes. Case study research was based on theory testing and theory development procedure. Subsequently, case study research theory is a circular process termed as retroduction (Harlow, 2010). Retroduction signifies that the theoretical ideas were tested with emerging data for reframing ideas with the aim of obtaining validated and trustworthy findings. Case study research provided adequate understanding about theoretical insights where existing theory was challenged as well as confirmed. Theoretical contributions offered through case study research assisted in understanding research paradigms and disciplines (Harlow, 2010). Stam (2000) stated that psychological theory was of immense importance for having a better understanding about the state of affairs. The theory was based upon certain assumptions and definitions for developing a theory (Stam, 2000). The theory was dependent on different theories comprising realism, reductionism, and instrumentalism. The theory was identified to have certain psychological procedures of conducting a research study with the aim of determining different features of a subject relating to personality, behaviour, and cognitive aspects (Stam, 2000). The theory used statistical inference that includes aggregate scores as a tool for describing the psychological properties. The theory was an effective mean of studying behaviour in twentieth-century psychology. Different researches conducted with the assistance of pathological theorist aided in studying neo-behaviourism, logical behaviourism, methodological behaviourism and radical behaviourism (Stam, 2000). Stam (2010) implied that in a research study, a theory was usually generated in a systematic manner with the aim of representing genuine problem in logical and mathematical terms. Theory was recognised as a research design based on which research study was conducted in accordance with a desired procedure. Research design assisted in providing explanation relating to a problem, predictive utility and characteristics of a phenomenon. Different dimensions and conceptual frameworks were developed where research study was conducted in an appropriate and analytical way. Currently, theory was used in social sciences that include sociology and psychology for generating hypotheses, models and frameworks to determine features and interest of a phenomenon. Conducting of a research study based on a systematic procedure i.e. research design assists in ensuring that a phenomenon of interest is studied in an explanatory and in-depth way. Theory constituted different rules based on local and disciplinary concepts to ascertain empirical adequacy (Stam, 2010). According to Wacker (1998), theory-building research was an important concept based on which a framework was developed to analyse, develop an understanding of the phenomenon and applicability in the real world. A theory to be reliable and valid required to possess certain features that include parsimony, fecundity, uniqueness, conservation, internal consistency, abstraction, generalizability and empirical riskiness. A theory was grounded on four criteria that include domain limitations, predictions, conceptual definitions and relationship-building. Wacker (1998) noted that theory-building research aided in determining similarities amid different domains of a phenomenon, with the intention of having a comprehensive understanding about a subject or phenomenon. Theory-building research conducted was based on two procedures, which include empirical and analytical. Theory-building research assisted in conducting an analysis study, based on common relationship, common definitions, common predictions and common domains. Theory-building research procedures aided in performing a research study in an integrated manner for having a better understanding of a research subject. Furthermore, Wacker (1998) noted that the methodologies of theory-building research were conducted on the basis of certain procedures that include conceptual definitions, theoretical domain definition, identifying relationship, and prediction as along with verification (Wacker, 1998). Accounting Fraud According to Sharma and Panigrahi (2013), financial accounting fraud had increased to a large extent in the present economic scenario. Accounting fraud had attracted the attention of academic researchers, investors, media, regulator and financial community. Different accounting frauds were discovered as well as detected in Satyam, Enron, Lucent and WorldCom among others. The incidents of accounting frauds have raised the requirement for detecting, reporting as well as defining accounting frauds. The failure of internal auditing system of a company was responsible for raising accounting fraud issues, as inappropriate interpretation of financial information led to misrepresented financial statements (Sharma and Panigrahi, 2013). Chang, Chen and Chiao (2012) stated that accounting scandals in the early 2000s have adversely affected the confidence of public and corporate sector in accounting profession. Non-adherence of accounting principles led to accounting frauds. Financial information should be managed by adhering ‘Generally Accepted Accounting Principles’ (GAAP). Violation of the GAAP principles, while preparing auditing and financial statements leads to accounting fraud. In businesses, accounting played an important role of providing information about financial position. Financial information was important for having a comprehensive understanding about benefits and loses incurred for lenders, public and investors. Financial information was crucial for making effective decisions about investment opportunities and business performances. Accounting fraud implied manipulation or falsification of financial statements through overstating assets, misappropriation in taxes, debts and liabilities as along with spurious entries with the aim of depicting better operating profit (Chen and Chiao, 2012). Lennox and Pittman (2010) stated that the issue of accounting fraud was an important factor affecting the sustainable growth and development of a company for violation of accounting principles and misinterpretation of financial information in financial statements. The theory related to inefficiency in offering high-profile and high-quality financial reports led to accounting fraud incidents in various large corporate sectors such as WorldCom and Enron among others (Lennox & Pittman, 2010). According to Gbegi and Adebisi (2013), fraud theory explained factors that are accountable for accounting fraud. The theory signified that behaviour and psychological factors, which include profit motive, shareholders satisfaction and attracting investors among others were responsible for misrepresenting financial statements (Gbegi and Adebisi, 2013). Gottschalk (2011) signified that incidents of accounting fraud have increased to a large scale for misrepresented financial statements and audited reports. The need of effective accounting measures and principles had increased, so that accounting reports and statements were prepared in a fair and legislated manner. Companies adopted forensic accounting with the aim of detecting and mitigating the issues of accounting fraud (Gottschalk, 2011). Jain & Godha (2014) noted that accounting fraud is committed due to the lax in corporate governance factors. The incidents of accounting fraud have led to the development of forensic accounting. Forensic accounting was adopted by corporate sectors after accounting fraud incidents in the early 2000s. Forensic accounting was used for finding facts and conducting accounting operations in an unbiased manner (Jain & Godha, 2014). Compare and Contrast Views of Three Relevant Factors That Constitutes a Theory It can be identified that accounting fraud was an important issue affecting the overall performances of a company. The literatures relating to accounting fraud provided comprehensive understanding of the aspect based on which a theory was developed with the intention of ascertaining the different domains that were associated with the research subject i.e. accounting fraud. The three important factors that were essential for conducting the study of accounting fraud and developing a theory include case study research, scientific theory and research design. Case study research, scientific theory and research design were used in a research study to constitute a theory. However, case study research, scientific theory and research design differ based on their approach to conduct a research study. These three factors differ on the basis of analysis procedure for understanding the different dimensions of a variable under study (Harlow, 2010; Stam, 2010; Gelso, 2006). The Relationship between Theory and Research According to Ellis and Levy (2008), a problem statement was an essential element based on which a research study is required to be conducted. A problem statement should be well-supported, well-argued and well-articulated with the intention of ascertaining that appropriate and meaningful findings were generated. A research study was based on research goals and research questions. Research goals specify the research objectives in accordance with which the problems related to a research study were intended to be studied. Research questions were used with the aim of narrowing down research purpose in a question format, so that problem statement was answered in a desired manner. A relationship existed between research goals and research questions based on which a research study could be conducted in an efficient way. A research study contained methodology, results and conclusions. Methodology section comprised of steps on the basis of which the findings obtained would be reliable and valid. In a research study, different research methods that include case study method, quantitative method, qualitative method, experimental method and mixed method were used with the aim of obtaining findings in a desired manner. Data and evidences were generated with the aim of determining the research questions successfully. In the conclusion section, the answers of research questions were detailed (Ellis & Levy, 2008). Similarly, Harlow (2010) noted that a theory developed in accordance with case study research should be based on certain procedures that include literature review for generating ideas, reframing ideas and testing the theoretical approach in order to analyse data effectively. Case study research was based on an inductive and deductive approach to determine appropriate findings (Harlow, 2010). Conducting the study of accounting fraud is an important consideration in the present day business operations, theories are developed in a systematic way with the aim of studying the problem effectively. The study of accounting fraud can be conducted with the assistance of qualitative research approach, as accounting fraud is the study of behaviour and psychology of accountants performing unethical practices. Moreover, accounting fraud would be studied effectively through the use of case study research. The study of accounting fraud could be studied effectively with the use of case study research, as the theory developed would facilitate in studying the subject through different cases relating to accounting frauds that include Enron, Satyam and WorldCom among others. Contextually, conducting case study research assists in developing theoretical ideas in an effective manner based on adequate knowledge. The study of accounting fraud with the assistance of case study research assists in developing better theoretical thinking (Sharma & Panigrahi, 2013; Chang et al., 2012; Harlow, 2010). Appropriate Theory for Understanding Accounting and Two Areas of Controversies Accountants and auditors are entrusted with the responsibility of performing auditing operations and preparing financial reports. Accounting frauds signified misstatement and misrepresentation of financial reports by accountants. Therefore, accounting fraud is based on the behaviour and perceptions of accountants. The appropriate theory for understanding accounting is scientific theory, as the theory is based on analysing behaviour, cognitive level and interpretation skills among others. Scientific theory is appropriate for studying the psychological conceptions that are associated for committing accounting frauds. The theory would assist in understanding the perceptions of accountants in relation to their behaviour for increased accounting fraud (Sharma and Panigrahi, 2013; Gelso, 2006). However, scientific theory possessed certain controversies relating to biasness and reliability along with validity. Biasness is concerned in the area of selecting cases that are to be considered for the research study. The findings generated from case study research are difficult for determining validity as well as reliability as commitment of accounting fraud is based on behaviour and perceptions (Sharma and Panigrahi, 2013; Chang et al., 2012; Harlow, 2010). Conclusion It can be comprehended, from the above analysis that a theory plays an important role for the development of a research. Theory is constituted on the basis of certain procedures with the aim of evaluating characteristics and association of a subject with different variables that include perceptions and behaviour among others. Various approaches that include scientific research, research design, case study research and theory-building research are used in a study to ascertain a theory based on which the study would be conducted appropriately. The study based on accounting fraud signifies that fraudulent committed in financial information have augmented to a drastic level affecting overall business performances. The need for effective accounting practice has increased to ensure that accounting operations are performed accordingly. The study accounting fraud can be conducted efficiently with the use of scientific theory as fraudulence committed in accounting statements depend on the psychological aspects of accountants conducting audit operations. References Chang, W., Chen, M., & Chiao, C. (2012). Does immateriality matter? Evidence from accountants concerning the acceptability of questionable accounting practices. Modern Economy, 3, 223-228. Ellis, T. J., & Levy, Y. (2008). Framework of problem-based research: A guide for novice researchers on the development of a research-worthy problem. Informing Science: The International Journal of an Emerging Transdiscipline, 11, 17-33. Erickson, M., Heitzman, S., & Zhang, X. F. (2011). Accounting fraud and the market for corporate control. Accounting Fraud, 1-43. Gbegi, D. O., & Adebisi, J. F. (2013). The new fraud diamond model- how can it help forensic accountants in fraud investigation in Nigeria? European Journal of Accounting Auditing and Fiancé Research, 1(4), 129-138. Gelso, C. J. (2006). The psychology research handbook: a guide for graduate students and research assistants. Applying Theories to Research: The Interplay of Theory and Research in Science, 1-21. Gottschalk, P. (2011). Prevention of white-collar crime: The role of accounting. Journal of Forensic & Investigative Accounting, 3(1), 23-48. Haslow, E. (2010). Encyclopedia of case study research. Sage Publications, 1-7. Jain, P., & Godha, A. (2014). Forensic accounting: a burgeoning tool to prevent financial fraud. SELP Journal of Social Science, 5(20), 97-103. Lennox, C., & Pittman, J. A. (2010). Big five audits and accounting fraud. Contemporary Accounting Research, 27(1), 209-247. Sharma, A., & Panigrahi, P. K. (2013). A review of financial accounting fraud detection based on data mining techniques. International Journal of Computer Applications, 39(1), 37-47. Stam, H. (2000). The international handbook of psychology. Theoretical Psychology, 551-570. Stam, H. J. (2010). Encyclopedia of research design. Theory, 1-11. Wacker, J. G. (1998). A definition of theory: research guidelines for different theory-building research methods in operations management. Journal of Operations Management, 16, 361-385. Read More