The Role of Accounting Theory

For the purpose of understanding the world of
accounting or any discipline, there is a role for descriptions of how current
practice works. There is also a need for informed prescriptions as to how to
improve that practice. 

Theoretical development requires a postulated model
which either describes why things work as they do rather than simply how, or
what reaction can be expected from a given set of circumstances. Put simply, it
either explains or predicts. This mode will often be based on simplified
assumptions but in the first instance such simplifications will be required to
construct a testable hypothesis. The researcher then collects data with which
to confirm or refuse the hypothesis. Subsequent researchers will further
develop the hypothesis and the testing of it.
The advocates of scientific research assert that
the model should predate and guild the empirical testing but, despite the convection
in which many research reports are written, this is to some extent unrealistic.
An interesting problem will often be first identified by the evidence and
researcher would be negligent if they failed to pursue upon which they stumbled
in the pursuit of quite separate problems. For example, the interest in
calendar based regularities in stock market returns came not from a theory that
they should exist, indeed the prior presumption was that they should not, but
from market practitioners assertions that calendar regularities occur. Once a
theory has been put forward and tested, it will be imitated and adapted.
Improved methodology may allow some of the
simplifications in the basic assumptions to be relaxed and more realistic
models tested.
This procedure may lead to refinement and extension
of the original proposal. Original results may be refuted subsequently or more
refined models fail to show a significant improvement on the simple and robust
early specification.

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