Applied Research in Financial Reporting: Text and Cases

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

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

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

4. 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

5. The Need for Professional Research • Various areas of accounting are affected • Regulatory organizations demand it: • e.g., the SEC stated in AAER 420that: “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

6. 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

7. 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: • http://raw.urutgers.edu • http://www.aicpa.org • http://www.fasb.org

8. 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

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

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

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

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

13. 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

14. 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

15. 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

16. 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)