Why Constituency Support Is Necessary before Particular Accounting Approaches - Assignment Example

UNTING THЕОRY Assignment Question 1 Introduction Accounting theory is a concept of accounting where it involves measuring and recording the financial values of assets, liabilities, debtors and capital for the business organization. It also involves the monitoring of these financial values of given period according to the regulations set by various accounting bodies in Australia. Financial accounting is influenced by many factors; activities of the business organization and accountants who act according to the economic, political and legal environment. According to Scott, (2014) the theories that have been developed by accounting scholars who have accumulated information about accounting. The standards that are set by various recognized accounting bodies that have legitimate authority from the Australian laws. These accounting concepts have been developed from the time it started around 1494 in France. The importance of this concepts has been varying over a given period since the accounting sectors in various parts of the world has been developing. Financial measurement that are set by accounting bodies has been able to facilitate the determination of the financial position of firms at any given time. This has been a significant feature of the accounting theory. It enables investors to access and analyzes the potential investments in various companies. It also facilitates decision making by the management of the organization when there is a crisis. The shareholders also use the financial measurement features to determine if their investments are doing well in the stock market and terms of returns. Accounting theory can also lead to the accounting doctrine that involves ideas from theorist and practitioners with the intention of giving meaning to the control and evolution of the practice of financial accounting. The accounting theory in Australia has been developed by many recognized bodies like the Australian Accounting Standards Board and Australian Securities and Investments Commission. This essay will cover the reasons why constituency support is necessary before particular accounting approaches become embodied in accounting standards. The implication has on the set standards and conceptual framework according to current regulations in Australia. The corporations act of 1989 which was adopted by the devolved powers of the Commonwealth had the mandate to set the rules and regulations governing the finance accounting sectors in respective countries. The Australian standard undergoes a vetting process before it determines if certain regulation and suggestions are to be implemented as laws in the accounting sector. The consultation process is initiated with its constituents being the members of the accounting standards board and the business people who are practitioners. The constituency support is, therefore, necessary according to Scott, (2014), the practitioners and scholars who come up with new suggestions on the accounting regulations should be incorporated in the decision-making process of the Australian accounting standards board. This is important since the affected parties are involved in the setting of the new standards. According to the interpretation act of 1901.22, Gaffikin, & Aitken, 2014 urge that the constituents who are affected by the new regulations developed by the accounting board. There are many accounting approaches that can be implemented like descriptive, normative, decision-making, empirical and welfare. In an accounting approach like descriptive, there are many stakeholders who should be involved according to DRURY, (2013). This accounting approach is majorly concerned with the activities of the accountants. This approach depends on the inductive reasoning that involves observations and drawing of general conclusions. The theory is developed by making sufficient similar observations on the activities of the accountants. This will require them to be included in the constituent that develops the accounting standards in a particular country. The implications of the approaches in developing accounting theories have experience in many sectors in different parts of the world. Accounting theory approaches have also been experienced in the conceptual framework. The term conceptual framework is referred by most scholars as concepts that are used in the development of financial statement for external users in an organization. This concept is normally applied in the organization of realities into categories that give an opportunity to practitioners to respond to complexities making it more intelligent (Kaplan, & Atkinson, 2015). This framework is so significant as stressed by Zimmerman, & Yahya-Zadeh, (2011), arguing that conceptual framework indicates the roles played by the constituency in the development of accounting theories. The members of the constituent like business enterprise and government entities get answers from this framework about the fundamental issues that they experience while practicing accounting. From the above scholar arguments, I can be able to deduce that the inclusion of constituency is important in decision making during the determination of accounting standards. The support from the constituent is very much significant in the process of creating accounting standards. The approaches that are used in the creation of the accounting theories involve decision-making approach that is essential and involves the constituency that will be affected by the standards. While making a decision on which accounting standard to be set, the constituency should be involved as much as possible. This is necessary since the people who will be affected by the standards are the same people who should not be left behind in developing these standards. When there is no support from the constituency, there will be no standard to be set since the practitioners and stakeholders in the accounting sector will not be ready to support that standard that is set by the board without their involvement. It will be very important for any accounting standard to have full backing from the constituent before it implements the standards. This will go a long way in ensuring that there will be no conflict of interest in the future. When there are conflicts and the constituency was involved in the development of the standard then it will be easily solved since both parties will reconcile to their initial decision of creating that standard. Assignment Question 2 Positive accounting theory that was developed by researchers who classified their findings as either positive or normative. The research conducted by various scholars like Watts and Zimmerman tried to predict and give a various explanation for different issues affecting the financial accounting sector. This were classified as positive research and later associated with the positive theory. The theory takes a lot of assumptions that are developed through logical deduction which enables the researchers to predict the way thing will be done on various accounting practices. According to Näsi, et al, (2014), when the prediction is bearing enough accuracy when it is tested against the reality being observed. This will be regarded as an approach with sufficient reasons why accounting practices are done the way they are. According to Jones, (2015), further emphasized that the positive accounting theory is manifested in economics where the prices can be used to yield a prediction. When a certain condition is met, and there is a rapid change of prices to a higher level. This is evident in positive accounting theory whereby a positive prediction is yielded when certain conditions are met and when certain accounting practices are maintained. Positive theories are derived from deductive reasoning when there is sufficient evidence that the theory is working from several and random observations. The chances of success or failure of the developed theory will depend entirely on the following facts: Empirically based theories- this are explanations based on the observed characteristics of accounting practitioners. Assumptions- this is a prediction of certain accounting practices that are experienced by people. Generalization- this is the process by which sample of data is analyzed and conclusion are drawn from the general point of view. The positive theory always is focused on the prediction of certain practices that are experienced by various firms. It's only that they are not specific on the type of firm that are not supposed to experience certain accounting norms. The theory that is being developed is taken through many stages, and various observations are done to replicate the different parts of the society. Before generalizing the observations there has to be a very strong base of the argument. However, the theory does not specify the kind of firm that should apply the standards set by the theory. The approaches that are used by this theory does not give the requirements that are specifically suited for a particular firm. The theory only predicts the future actions that are positive and then it tries to give a valid explanation for that observation (Jones, 2015). The positive accounting theory has been faced with a lot of opposition from several scholars. According to Sterling, (1990), he criticizes the theory indicating that the theory was a wasted effort. The fact that the critics clearly indicate that the accounting theories give prescription rather than description. Others argue that the theory provided no accomplishments regarding determining which practices were suited to various firms and accountants. They claim that the theory is empty and commonplace. The theory is not giving exact approaches to be used to set various standards of accounting. The decision-making process in the development of positive accounting theory should be clears to avoid any mistakes on making conclusions. According to Santos, (2012), the usefulness of decision making should be considered when developing a good theory that will not face a lot of opposition from other scholars. When this is not considered by scholars who are basing their analysis on the accounting theories, then there will be possible resistance from the constituency that may lead to the cancelation of the ideas brought up by the theory. The decision approaches that are applied so as to facilitate efficient creation of upright theories is; I. Decision model emphasis II. Decision maker emphasis The decision-makers’ emphasis normally depends on the research that is done with the inclusion of the practitioners of accounting to determine what they like to be included in the theory that is being developed. When the decision is made the prescribed information is then supplied to the users of the financial statements. Most of the research done are based on questionnaires that make is fairly disjointed with what other studies address. This creates a limited linkage between the various variables of decision-makers’ emphasis. The research works with assumptions that if the capital market gives a feedback to the provided information. This is also seen from the fact that changes in prices of various changes that are experienced when certain information are released (Santos, 2012). From my point of view, the above scholars argue that the positive theory has been of great disappointment. Others have argued that the theory provides sufficient information that can be evidenced by observation of what practitioners are found to be doing. Positive accounting theories have tried to predict the way accounting practices should be conducted even though the information provided is not sufficient to determine the specific firm that is applied to. This is a disadvantage of the theory, but it does not mean the ability only to predict the accounting practices that should be included in the development of the standards is disregarded. The positive accounting theory should be considered since it has only a few setbacks because it cannot be applied by a specific firm. Even though the theory gives prediction, there is little information of which approaches are to be applied in the setting standards for firms that deal on different commodities. The theory might be accepted since its usefulness exceed the ability for it to provide the exact information affecting a particular company. This theory should be acceptable since the observation capability created by this theory enables it to be efficient in the prediction of the standards to be applied by various accounting approaches that are used to generate the required standards. There is a possibility for the theory to provide prediction that may give variation from the previous observation hence becoming inconsistent. Although this is experienced, the theory is known well to be generated from trial and error method and hence the standards set using this method has to be accepted as they are by the constituency since they are better than other methods of setting the financial accounting standards. In conclusion, the constituency should be included in the decision-making process when developing various accounting standards. The Australian accounting standard board should ensure that the constituencies that are going to be affected by the standards that are set should be included in the development of those accounting standards. The support provided by the accounting theories should not be skipped during the decision making. The suggestion put across by these theories are from the observations of accounting activities that is done by the practitioners. The development of this theories using various financial accounting approaches should be included in the process of ensuring that the required accounting standards are development without neglecting the contribution of the constituency. The positive accounting theory may be seen by many people as a theory that does not account for all organizations. However, this should not create a negative impact when the standards are being set by the accounting standards board. Positive accounting theory is efficient in the prediction of the standards to be used by the organization. The theory is developed from research that are undertaken while observing the accounting practitioners. The theory develops a good foundation of creating a general conclusion based on the observation of the approaches used by the accountants. These observations are efficient in the development of various accounting standards. The support from the constituency is significant since they are the one who will be affected by the set standards. The scholars who generate these theories should be supported by the community event though the theories have flaws, they are efficient in the development and prediction of the accounting standards. References DRURY, C.M., 2013. Management and cost accounting. Springer. Gaffikin, M. and Aitken, M., 2014. The Development of Accounting Theory (RLE Accounting): Significant Contributors to Accounting Thought in the 20th Century. Routledge. Jones, S., 2015. Development of financial accounting theory. The Routledge Companion to Financial Accounting Theory, p.1. Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning. Näsi, S., Saccon, C., Wüstemann, S. and Walton, P., 2014. European accounting theory: evolution and evaluation. The Routledge Companion to Accounting, Reporting and Regulation, pp.54-71. Penman, S., 2013. Accounting standard setting: Thoughts on developing a conceptual framework. China Journal of Accounting Studies, 1(3-4), pp.157-167. Santos, F.M., 2012. A positive theory of social entrepreneurship. Journal of business ethics, 111(3), pp.335-351. Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2011. Financial accounting theory and analysis: text and cases. John Wiley and Sons. Scott, W.R., 2014. Financial accounting theory. Pearson Education Canada. Scott, W.R., 2014. Financial accounting theory. Pearson Education Canada. Read More