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Unformatted text preview: ACCT3003 Issues in Accounting Theory 2009 Topic 10: Behavioural research, critical perspectives Solutions to topic review questions Chapter 11 11.1 Behavioural research can be used to investigate the individual reactions of different categories of individuals. In accounting‐related studies this could involve investigating how a variety of financial statement users (including, but not restricted to, investors) react to a variety of accounting information, often presented in different forms. Capital market research, on the other hand, is used to investigate the aggregate reactions of investors to particular events, typically explored by reviewing movements in share prices around the time of particular events. Capital market research ignores the information demands of people who do not participate in the capital market and it relies on an assumption that the capital market is efficient (usually, the semi‐ strong‐form efficiency assumption). Behavioural research typically makes no assumptions about the efficiency of the subjects. Behavioural research often uses a fairly restricted number of observations (due to the ‘costs’ involved in getting subjects) whereas capital market studies can use large numbers of observations given the availability of share price data. Behavioural research can be particularly useful to accounting standard‐ setters as it can enable them to investigate how different classes of financial statement users will react to proposed accounting standards. That is, this form of research can enable standard‐setters to investigate possible reactions in advance of the rules being put in place. Again, this can be contrasted to capital market research which looks at the aggregate reaction of investors to actual releases made by the accounting standard‐setters (although, reactions can be investigated in relation to the release of draft accounting standards). The accounting profession can use the results of behavioural research to enable them to understand how various types and forms of disclosure will impact different categories of financial statement users (for example, analysts versus shareholders versus interest group members, and so on). This form of research can be undertaken prior to particular disclosure requirements being introduced. If it is found that particular disclosures do not influence the decisions of any of the various classes of financial statement users then perhaps the implication might be that the development of a particular disclosure requirement will be abandoned (an interesting issue arises if some categories of financial statement users are influenced by the disclosures but others are not—would this be sufficient to justify the 1 11.2 Issues in Accounting Theory 2009 Solutions: Topic 10 requirement, and are the needs of some classes of financial statement users more important than the needs of others?). This can be contrasted with capital market research which considers the reactions of investors in aggregate after particular requirements have been introduced (although some capital market studies do assess the reactions of capital market participants to proposed accounting requirements by looking at share price reactions around the time of the release of draft reporting requirements). 11.4 The Brunswik Lens Model depicts the processes involved in making decisions. It represents the processes involved when people use information cues, in a variety of ways, to come to a decision about future events. The Brunswik Lens Model also suggests that some of the cues might be interrelated. No individual cue is expected to provide a perfect predictor of the future event. Mathematical modelling is typically used when the Brunswik Lens Model is applied and it can be used to model the relationship between the information cues and the actual judgement made by the individuals (because it is a model, it will not perfectly predict the judgements of individuals). The approach can also be used to model the relationship between actual phenomena and particular information cues without explicitly involving individual judgements. The Lens Model can be used to investigate the use of inputs (for example, which information cues are used and is this perhaps influenced by how the data is presented), the decision process (for example, how various information cues appear to be weighted by the subjects), and the outputs (for example, how ‘accurate’ the decisions made by the subjects appear to be, or whether the judgements appear to be stable over time). Many factors need to be considered when answering this question. Firstly, we need to consider the method and rationale behind the selection of the subjects used in the study. Are they representative of all of the relevant financial statement user groups? If only investors are used then the results must be considered in this light. Perhaps other user groups which were not represented in the experiment might, or might not, use the information in the various decisions they make. Another consideration is the realism of the experiment. If the subjects did not take the experiment seriously, or if the setting was very different to the setting in which they normally make their particular decisions, then much care would need to be taken when interpreting the significance of the results. However, if the subjects were deemed to be representative of the larger population of financial statement users, and if the tasks did appear to be realistic then, in the absence of 2 11.7 Issues in Accounting Theory 2009 Solutions: Topic 10 evidence to the contrary, the results could indeed be grounds for the accounting profession to abandon the development of particular disclosure requirements. Of course there is an alternative perspective. People might not be using a particular cue because they do not know how to use it, or perhaps because they have never been exposed to it before. In this case, the accounting profession might consider educating the users about how such information can be useful. 11.8 Some possible reasons for the disparity in results of different behavioural experiments could include differences in the: • settings of the experiments (perhaps some settings were more representative of the ‘real world’ than others); • experience, training or backgrounds of the subjects; • tasks being undertaken by the subjects as well as differences in how the tasks were administered; • incentives associated with the subjects doing the task. 11.9 Verbal protocol analysis typically requires subjects to ‘think aloud’ when they are making decisions, and what they say is frequently taped for subsequent analysis. Trotman (1996) identifies a number of advantages and disadvantages of protocol analysis, including the following. Advantages • A useful way to find out about previously unknown decision‐making processes—very useful for developing theory. • The sequence in which information is used can be determined. • A useful way to confirm previous theories about how people make decisions. • Useful for people to learn about how they themselves make decisions. Without the results of protocol analysis, this might not be obvious. Disadvantages • The process of ‘thinking aloud’ may actually affect how decisions are made—it is quite different to how decisions are normally made. • Subjects will not always verbalise all the processes involved in making a decision, hence resulting in omitted data. • Protocol analysis often generates considerable data (perhaps many hundreds of pages) for the researcher and what data is selected or utilised can be quite subjective. 11.10 Some general strengths of behavioural research relate to the fact that it enables researchers to manipulate a number of variables (for example, the form and type of disclosure; requiring decisions to be made by the subjects Issues in Accounting Theory 2009 Solutions: Topic 10 3 on an independent basis, or as part of a team; the impact of offering different amounts and types of incentives, and so on) in an endeavour to understand what factors influence the decision‐making process. In the area of accounting, behavioural research can be undertaken in advance of any regulations being introduced to see if the introduction is actually warranted (this can be contrasted with capital market research). This would be a lot less costly than introducing regulation only to find that it generates minimal or adverse benefits. In terms of the disadvantages of behavioural research, a major limitation is that it is often difficult to make the experiments realistic, which in turn has implications for the generalisability of the findings. Subjects typically have limited accountability for the decisions they are required to make within the experiment which would normally be quite different to the situation associated with their usual employment. Because it is often difficult to get a large number of cooperative subjects, laboratory studies often by necessity must use small sample sizes. This also has implications for the generalisability of the findings. Another limitation of behavioural research is that different studies often generate disparate results and it is often quite difficult to reconcile the differences (which could be due to a multitude of causes, such as differences in the setting, the task, the subjects, the incentives, instructions provided, and so forth). Chapter 12 12.1 A critical perspective of accounting is a perspective that critically evaluates the role of accounting in society. The label ‘critical perspective’ is a broad umbrella term which has been used to describe research undertaken by many researchers that sometimes applies different philosophical perspectives. As Hopper et al. (1995, p. 535) state: Critical theory is an umbrella term for a wide variety of theoretical approaches perhaps more united in what they oppose than what they agree upon. Consistent with the above perspective of critical theory, Reiter (1995, p. 53) states: In the critical world, there is no single established theory or approach, and little consensus on how to proceed, aside from an absolute horror of modernity and neo‐classical economics. Issues in Accounting Theory 2009 Solutions: Topic 10 4 Nevertheless, we can generalise by saying that a critical perspective does not consider issues such as which accounting methods should be used in which situations (an issue that often dominates the thoughts of many other accounting researchers)—rather, it tends to dismiss most of accounting as being against the interests of many people in society, and often views accounting as a major contributor to perceived social problems and inequities. A ‘critical perspective’ considers accounting to be a highly partisan activity and it is generally considered that accounting is not a neutral or unbiased process (neutrality, objectivity and similar characteristics are promoted within vehicles such as conceptual framework projects), but is a process which tends to favour those people in control of capital (the ‘powerful elite’). Accounting is seen as a ‘tool for constructing, sustaining and legitimising economic and political arrangements, institutions and ideological themes’ (Guthrie and Parker 1990, p. 166). The focus of the research is different. Most accounting researchers tend to accept current social systems as a ‘given’ and do not question whether current systems of accounting systematically favour certain classes in society at the expense of others. Consideration is given to such things as what accounting methods are most appropriate in certain circumstances, what motivates managers to use one accounting method in preference to another, how the share market will react to a particular disclosure, what information best suits particular users’ needs, and so on. Critical theorists, on the other hand, tend to dismiss the whole of accounting as being highly partisan, favouring the interests of those with control of scarce capital and undermining the interests of those people without power or wealth. They do not tend to debate which methods of accounting should be employed—rather they would generally believe that we need to reconsider the structures of society in terms of whether the structures are equitable, and we need to explicitly consider the role of accounting in sustaining such structures and inequities. As Cooper and Sherer (1984, p. 222) state, ‘a critical approach to accounting starts from the premise that problems in accounting are potentially reflections of problems in and of society and accordingly that the latter should be critically analysed’. Accounting is seen as ‘a social practice within political struggles and not merely a market practice guided by equilibrium in an efficient market’ (Hopper et al. 1995, p. 528). From a critical perspective, the role of conceptual frameworks is not to improve the practice of financial accounting. Rather, conceptual frameworks legitimise the role of the accounting profession within society. Conceptual 5 12.2 12.3 Issues in Accounting Theory 2009 Solutions: Topic 10 frameworks (CFs) emphasise the qualitative characteristics of objectivity, neutrality, reliability, and so on. Such characteristics are deemed to have positive connotations. As Hines (1991, p. 328) states, ‘CFs provide social legitimacy to the accounting profession. Since the objectivity assumption is the central premise of our society … a fundamental form of social power accrues to those who are able to trade on the objectivity assumption’. By further legitimising the role of accountants in society, conceptual frameworks are a source of ‘power’ for the accounting profession, and if it is accepted that accounting acts as an instrument to maintain existing social structures (and the perceived inequities), then conceptual frameworks also provide a source of power, or legitimisation, for those people currently holding positions of power and wealth. 12.4 From a critical perspective, financial statements would probably never be considered as objective or neutral. Critical theorists consider that accounting serves to maintain the interests of those individuals with financial capital. Accounting is seen as a means of constructing and legitimising particular social orders. Arguments are also provided that those responsible for regulating accounting, and those involved in accounting research, act to sustain current social orders as such individuals typically benefit from the existing systems. So while regulators, for example government, may look as though they are putting in place rules or mechanisms to further the interests of particular disadvantaged groups, in essence, the government is probably only attempting to legitimise the current social system. Merino and Neimark (1982, p. 49) relate this view to the development of Securities Acts in the United States. They contend that ‘the securities acts were designed to maintain the ideological, social and, economic status quo while restoring confidence in the existing system and its institutions’. This view is also held by Puxty. He argues (1986, p. 87): financial information is legislated by the governing body of society (the state) which is closely linked to the interests of the dominant power group in society (Offe & Ronge, 1982; Miliband, 1969, 1983) and regulated either by agencies of that state or by institutions such as exist within societies like the United Kingdom, United States, and Australia that are linked to the needs of the dominant power group in partnership with the state apparatus (albeit a partnership that is potentially fraught with conflict). As the chapter further states, given that the practice of accounting is in the hands of reporting entities, such as large corporations, and that accounting regulation is in the hands of government and associated regulatory bodies Issues in Accounting Theory 2009 Solutions: Topic 10 6 (which as we noted above, are viewed as having a vested interest in maintaining the status‐quo), accounting information will, it is argued, never act to do anything but support our current social system, complete with all its perceived problems and inequities. Also, as accounting is deemed to support particular social structures, the introduction of new forms of accounting will only help to sustain that social system. In arguing that financial reports cannot be considered as objective or neutral, authors such as Hines also emphasise that accountants impose their own views about what items or factors the reporting entity should be accountable for, and what other factors are not worthy of consideration. Identifying what shall be ‘accounted’ is a subjective issue influenced by one’s own values. Hence, from the above overview, we can see that there are numerous arguments to support a view that while conceptual frameworks might embrace qualitative characteristics such as objectivity and neutrality, in practice, many forces operate against such ‘ideals’. 12.5 Critical theorists typically argue that introducing more accounting is not going to solve the inequalities they currently perceive exist within society. Accounting itself is considered a mechanism to sustain particular social structures and hence more accounting will only assist in furthering the interests of those who currently have ‘power’ while further undermining those who do not. Those in charge of regulating and applying accounting have a vested interest in maintaining the status‐quo and they will support methods of accounting that succeed in doing this. Whether we accept these arguments is really a matter of personal opinion—do we accept that governments, accounting professions and accountants seek to serve the interests of those people with wealth, and at the same time, seek to undermine any possibility of the ‘less powerful’ succeeding? 12.6 Critical theorists tend to be vocal opponents of economics‐based research, such as Positive Accounting Theory (PAT). Reasons for this include: • PAT, like many other theories, does not challenge the existing social structures, and this is considered to be naïve. • PAT accepts that the functioning of markets (such as capital and labour markets) will lead to some form of ideal outcomes. Critical theorists believe that ‘leaving it to the markets’ will only act to undermine the interests of those people who should be protected. PAT is deemed to adopt a ‘conservative right‐wing ideology’ in promoting the virtues of markets, the rights of shareholders (the capitalist class), and so on. Issues in Accounting Theory 2009 Solutions: Topic 10 7 • • • • • Tied to the above point, PAT relies in part on work from the efficient markets hypothesis, which assumes that if information is useful, then it will evoke a capital market reaction. A problem with this, however, is that it ignores whether information may be useful to other non‐ capital market participants (who nevertheless, have a right‐to‐know about the operations of an entity). PAT relies upon work from agency theory, which dictates that contractual arrangements should be put in place to minimise the agency costs of the firm and thereby to maximise the value of the firm—this will directly benefit the owners at the possible expense of others. Further, within the agency theory literature it is typically assumed that agents (employees) will always try to do things that benefit themselves at the expense of others. Critical theorists would probably argue that it is the owners of capital who are more likely to do this. PAT typically considers the motivations of managers, and owners (those with power) and pays little attention to the interests of others. PAT researchers typically undertake research that uses corporate data from many different organisations on the assumption that all entities in a sample can be treated the same for the purpose of the analysis. Many critical theorists would emphasise that no two organisations are the same, hence it is naive to treat them as such. PAT presumes that laws and principles can be generated that are expected to hold in different situations and that there is an underlying truth that can be determined by an independent, impartial observer who is not influenced by individual perceptions, idiosyncrasies or biases. PAT research has often been promoted in the past as being ‘value‐ neutral’ as it does not provide prescription. Many critical theorists have been critical of this claim. All research involves value‐ judgements. 12.7 A number of critical theorists have been critical of the work of researchers whose work is grounded within Legitimacy Theory. Bases for this criticism include: • Legitimacy Theory, like many other theories, does not challenge the existing social structures. Rather, it accepts the social system as a ‘given’ and does not question its fairness. By not addressing the underlying problems of society, it is considered that any concern with new systems of accounting is a waste of time. • Following from the above point, researchers who adopt Legitimacy Theory often discuss how societal perceptions can influence how an organisation operates (for example, that it must conform to the ‘social 8 Issues in Accounting Theory 2009 Solutions: Topic 10 • • contract’). Critical theorists argue that this is naïve—to assume that society operates in a pluralistic manner, in which no individuals or groups dominate, is a simplistic and incorrect assumption. Some researchers who adopt Legitimacy Theory appear to have adopted a position that legitimising actions provide some form of benefits to society (for example, in the form of greater corporate disclosure). Legitimising disclosures mean that the organisation is responding to particular concerns that have arisen in relation to their operations. The implication is that unless concerns are aroused (and importantly, the managers perceive the existence of such concerns) then unregulated disclosures could be quite minimal. Disclosure decisions driven by the desire to be legitimate are not the same as disclosure policies driven by a management view that the community has a right‐to‐know about certain aspects of an organisation’s operations. One motivation relates to survival, whereas the other motivation relates to responsibility. Researchers working within Legitimacy Theory do not typically make this point. Following on from the above point, Cooper and Sherer (1984) would argue that legitimising disclosures simply act to sustain corporate operations that are of concern to some individuals within society. To the extent that the disclosures reflect or portray management concern as well as corporate moves towards actual change, the corporate disclosures may be merely forestalling any real changes in corporate activities. While researchers adopting legitimacy theory often do not question or, perhaps, consider this issue, some ‘critical’ researchers see legitimising behaviour as potentially quite harmful, particularly if it legitimises activities that are not in the interests of particular groups within society. For example, Puxty (1991, p. 39) states: I do not accept that I see legitimation as innocuous. It seems to me that the legitimation can be very harmful indeed, insofar as it acts as a barrier to enlightenment and hence progress. It is considered that proponents of Legitimacy Theory typically ignore this possibility. • 12.11 Central to much critical accounting research is an underlying belief that the distribution of power in society is not even and that the way society is structured benefits a particular ‘elite’, and undermines the rest. Given that accounting is deemed to sustain particular social structures, critical theorists Issues in Accounting Theory 2009 Solutions: Topic 10 9 believe that the introduction of new forms of accounting will only help to sustain existing social systems. Critical accounting theorists seek to expose the role of accounting in supporting unequal distributions of power and wealth across society. By contrast, accounting researchers who adopt other theoretical perspectives typically do not consider issues associated with an uneven distribution of power in society. They accept the way society is currently structured as ‘a given’ and tend to make an implicit assumption that power is evenly spread throughout society. Issues in Accounting Theory 2009 Solutions: Topic 10 10 ...
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This note was uploaded on 04/30/2011 for the course ACCT 3003 taught by Professor Jennymarks during the Three '10 term at South Australia.
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