Theory of accounting standards

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Academic Research, as a systematic and methodical process of enquiry and investigation, which is the determinant in science to understand the nature of the world and it plays a significant role in knowledge increase. The following essay will compare and contrast two published papers which are "Towards a positive theory of the determination of accounting standards" written by Ross L. Watts and Jerold L. Zimmerman(1978) and "Activity-Based Costing and Central Overhead Cost Allocation in Universities: A Case Study" written by Andrew Goddard and Kean Ooi(1998). It will start with describe the subject matter of these two papers, followed by comparing and contrasting the underlying research paradigms in these two papers. Then, it will discuss the role of theory in each paper and illustrates the research methodologies derived from their paradigms and the specific methods utilized in these two papers. Finally, I will evaluate the contributions of these two papers to accounting literature and give my own views.

These two papers are focus on the same subject matter of research which is the accounting area; however, the specific research objects are obviously different. Study 1978 is a theoretical and conceptual research which paid attention to the accounting standard and tended to introduce positive theory to accounting to analyze and evaluate whether such theory is able to determine accounting standard. On the other hand, Study 1998 only focused on one subdimension of accounting which is the management accounting and selected one management accounting method called activity-based cost system to implemented in a specific case, evaluation and conclusion were provided based on the outcomes of case study in this paper.

Research paradigm is the cornerstone of any kind of research because it guides how a research can be conducted and which methods and techniques should be adopted during the research. Because of the different research objects and conducts, it is obvious that different research paradigms implied in each paper. Study 1978 is a typical research under the positivism paradigm. Positivism paradigm is a traditional research paradigm which assumes that reality is independent of researchers and the goal is the discovery of theories based on empirical research (Collis & Hussey, 2009, p.56). Study 1978 satisfy the assumptions of positivism paradigm in large extent, more specifically, the researchers firstly gave their hypothesis which is management plays a central role in determination accounting standard, and then illustrated the influencing factors generated from this hypothesis, a statistical model were be provided following to incorporate factors and such model were be tested by using a real world example which is corporations' position taken about FASB's Discussion Memorandum on General Price level Adjustments. Researchers are only the observers and analyzers who did not interacted with their research. On the other hand, Study 1998 showed a reserve research paradigm which is the interpretivism paradigm. Interpretivism paradigm, by contrast, believes that social reality is highly subjective and researcher interacts with what being researched, therefore, researcher focuses on exploring the complexity of social phenomena with a view to gaining interpretive understanding (Van Maanen, 1983, p.9). In study 1998, researchers accepted the Activity-Based Cost system as a mean for solving their research problem and designed an ABC model which underpinned by collected data. Conclusion of this paper was based on the outcomes of case study and researchers also gave their own comments about their study and ABC system as well.

The roles of theory in these two papers are also different because of different research paradigms. Positive theory is the basis of Study 1978 and hypothesis was developed under the theory. More precisely, researchers assumed if positive theory can be a new research approach utilized in accounting area. The research object, determination of accounting standard, is just as an example to evaluate and prove that if the positive theory is feasible in accounting area. On the other hand, in Study 1998, ABC as a management accounting theory has already been accepted as a mean for their research. Therefore, the researchers obtain their result under the ABC. Nevertheless, researchers are not be restricted by the theory because they are able to describe different patterns and criticize or develop the existed theory.

Different paradigms also bring different research methodologies in these two papers and specific research methods are varying with its methodology. Study 1978 mainly utilized experimental study as its methodology, which defied as investigate the relationship between variables and independent variables' effects on dependent variables. Several factors in terms of taxes, regulation, political cost, information production, management compensation plans were picked to constitute a mathematical model in Study 1978. Through the analysis of the model, discriminant analysis were be developed and several independent variables such as management compensation, depreciation and net monetary assets were be manipulated to test its hypothesis. For method issue, this paper decides the influencing factors and establishes a model by reviewing previous literatures, and collecting research data from published statement and other researchers' reference. They also frequently use the quantitative methods to analyze variables and many formula and linear regression forms were provided. By contrast, Study 1998 focused on one particular case which is the library service at the University of Southampton. Researchers firstly designed a unique ABC overhead allocation system and then introduced this system to the fixed case. They proposed to solve the emerged problem of overhead allocation as well as find some changes during the implementation, and then obtain an understanding from the result which might contribute to the improvement of theory. All of these features above can be classified as a methodology called action research. Researchers utilized several qualitative methods to conduct its research such as interview and observation. They also review historical financial statements and search documents to obtain cost data and other useful information. Literature review can be an important method which underpins the theoretical basis of their research.

Study 1978 confirmed the hypothesis that management is a determinant role in accounting standard and specifically pointed that firm size is the most important factor will influence managerial behavior, which has a significant implication for setting accounting standard. Furthermore, this conclusion of this paper convinced the feasibility of positive theory in accounting research which as a revolution in accounting research area. On the other hand, Study 1998 also gave us a significant conclusion which solved the problem of overhead allocation system in University of Southampton and also suggested that their evaluation valid not only the specific case but also other central services. Meanwhile, limitation also noticed that political consequences can be an important threat to a successful implementation of ABC system, which can be a reference when implementing ABC system and also can influence the development of ABC theory itself.

In conclusion, there is no consensus on the perfect framework in research because research process varies with different researchers' thoughts about the world. However, there are no contradictions between different types of research. Just as former two papers showed it is convinced that no matter which research type used, it can be a good research if its outcomes and approaches exert positive influence on the development of science and people's daily life.


  • Collis, J. & Hussey, R. (2009). Business Research, 3rd ed. Basingstoke: Macmillan.
  • Gaddard, A. and Ooi, K. (1998). Activity-based costing and central overhead cost allocation in universities: a case study, Public Money & Management, Vol. 3, pp. 31-38.
  • Van Maanen, J. (1983). Qualitative Methodology, London: Sage.
  • Watts, R.L. and Zimmerman, J.L. (1978). Towards a positive theory of the determination of accounting, The accounting review, Vol. L111, No.1, pp. 112-134.