Applied Research in Financial Reporting: Text and Cases Chapter 2 An Overview of Applied Accounting Research

Chapter Issues Motivation for Accounting Research Definition of Accounting Research The Need for Accounting Research Research Quality Requirements Types of Research

Motivation for Accounting Research Accountants’ specialized knowledge & Service Professional judgment is an aspect of service Assurance services are expanding Information Technology is forging ahead

Definition of Accounting Research A systematic process of investigating an issue of concern –Contrast investigating with formulating in theory construction Theory based investigation (hypotheses) Exploratory investigation (descriptive) Examples: –SFAS based event studies (discuss an illustrative paper) –Field study of a client for a case study of issues

The Need for Professional Research Various areas of accounting are affected Regulatory organizations demand it: –e.g., the SEC stated in AAER 420 that: “Failure to conduct any research... constitutes a failure to act with due professional care” Promulgatory Organizations also demand it –e.g., professional code of conduct

The Reasons for Professional Research Standards overload: Too many standards Knowledge differentials: –between specialists and non-specialists –between naives, novices and experts Knowledge as a moving target even for experts New problems arise Litigation support

Approaches for Professional Research Research Units & Systems in large firms –Policy committee –Executive committee –Research staff Resources for smaller accounting firms: –Many resources such as:

Approaches for Professional Research The Role of Judgment: –Attention to facts and freedom from bias is not always the best approach in professional research e.g., advocacy research for clients in taxation See Exhibit 2-1 for numerous examples of judgment

From Exhibit 2-1 Example of Professional Judgment in an Audit Establishing materiality  Accounting materiality  Audit materiality  Acceptable business risk

Research Quality Requirements (Exhibit 2-2) Validity Freedom From Bias Variable Isolation Appropriate Inferential Logic

Validity To be valid a research must have: –Purpose –Rigor –Testability –Replicability –Precision Confidence is more applicable to accounting/auditing –Parsimony

Freedom From Bias Objectivity: –Only facts –No personal preferences However, this characteristic is frequently violated in advocacy research in accounting

Variable Isolation Internal Validity: –Dependent variables are identified and isolated –Independent variables are identified and isolated: Causality is established between independent and dependent variables –Control for confounding variables

Inferential logic Descriptive vs. Normative Descriptive vs. Prescriptive/predictive Deductive vs. Inductive –Establish causality Example: Your opinion about purchase vs. pooling of interest for business combinations

Types of Research Many types depending on classification –pre facto vs. post facto –descriptive vs. predictive A simple classification is in Exhibit 2-3: –Scientific: Basic or pure Applied Instructional

Types of Research Professional –Primarily applied, but also: basic knowledge can result instructional approaches can result –The Case Approach (Ch. 3) –The Issue-based Research (Ch. 5)