Outline the principle strengths and weaknesses of accounting and business research.

Abstract

This project/essay is broadly based on a research article “The management of accounting number: case study evidence from the ‘crash’ of an airline” by Ann Jorissen and David Otiey (2009 publishing date) and “Earnings quality in ex-post failed firms” by Juan Manuel Garcia Lara, Beatriz Garcia Osma and Evi Neophytou (December 2008 publishing date). Main body is mostly concentrated on the research methods used and the strengths and weaknesses of the two approaches and the methodologies used by the researchers in these empirical papers.

Introduction

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The empirical papers which I have chosen for “accounting and business research” have done research on an “airline company” {Case I} and “bankrupt firms” {Case II} and they have conducted several interview, used multi-theory method (upper-echelons, power-circulation & strategic choice) and sampling method & many models to justify there research respectively.

Research method

Case I: company

The researchers had selected SA irgroup (former Swiss Air) as there case company to study process and mechanism triggering to manipulation of accounting numbers.

Case I: data

Interview of different ex-employees was conducted anddifferent categories of archival data were used by researchers like:

• Bonus and stock option plan SA ir-Executives – 1997-2000;
• Bonus and stock option plan Sabena – Executives – 1999-2000: etc was used.

Case II: company

The researchers selected a junk of companies of UK by sampling method which had gone bankrupt and had data available in FAME entering bankruptcy 1998-2204 or continuing firms which had full data available in FAME 1995-2004.

Case II: data

The data used by researchers was taken from the FAME.

Method used

Case I

They analyzed data in two phases wherein embedded design was employed which implied multiple levels of analysis (Eisenhardt, 1989). They had adopted interview method for there research but also included archival data. There research was based on both accounting as well as management perspective.

First phase

In the first stage they arranged data in chronological order and reviewed all internal and external data available. Herein they analyzed data in directionality of the relationships assumed in traditional accounting research. They used a multiple case approach by considering each investment of the SA irgroup in a foreign airline. Each case they analyzed served to confirm inferences drawn from the analysis of the choices made in relation to the SA irgroup’s first investment in Sabena (Yin, 2003). The collection of data on all accounting and real choices with regard to all events and transactions would involve an immense amount of data so they used “disaggregated approach”.

Second phase

The analysis in second phase is based on theories like upper-echelons, strategic choice and power circulation. Then by combining results of the both phases they could explain more about the directionality between the different variables, one employed in financial misrepresentation and the other employed to create the necessary discretion to engage in managing accounting numbers.

Case II

In the first stage they collected all data they needed for the research via sampling method and then they used “working capital version” model of Jones (1991). They used this model first because research had indicated that management had more discretion over current accruals & and moreover manipulation of long-term accruals such as depreciation was unlikely due to their high visibility & low flexibility (Becker et al 1998; Young, 1999). After working capital version model they used “modified jones model” which works on the assumption that revenues are not discretionary i.e. the model disregards that managers also engage in real activities manipulation.

The next model which they have used was “Kasznik model” (1999). The model incorporates the change in operating cash flow as an explanatory variable to account for the negative correlation between accruals and cash flows. The formula to obtain a measure of abnormal working capital according to Kasznik model is as under:

Where, WCA is working capital accruals, REV is change in sales, CFO is change in cash flow from operations and TA are total assets, and t is the time period indicator. Next, for each firm, we calculate abnormal working capital accruals (AWCA) as follows:

Where, a0,a1 anda2 are the fitted industry-coefficients from equation.

After Kasznik model they used Chariton et.al (2004) model to calculate the ex-ante one-year-ahead probability of bankruptcy of all failed firms. The formula what they used to calculate it is as under:

Where, Pjt (Y = 1) is the probability of failure for entity j at the end of year t.

The next model they used was of Roychowdhury (2006) & Ball and Shiva kumar (2005). The earlier model was used to analyze the existence of real activities manipulation. Herein was focus was on sales manipulation. The later model was used to measure the different recognition speed of economics gains and losses in earnings by using time series & accruals based measures of conditional conservatism.

Strengths

Case I Case II

1. Inclusion of both perspective i.e. accounting & management (multiple methods) helped them for understanding the process of financial misrepresentation while as previous studies used accounting perspective only which couldn’t give much clarifications of the process.
2. This multi-theory perspective allowed them to discover various additional elements of discretion on top of the variables used in the extant literature.
3. According to me face-to-face interviews as conducted by the researchers is that the answer of the interviewee is more spontaneous, without any extended reflection and manipulation.
4. This disaggregated approach has the potential advantage of yielding precise, directional predictions based on the researches’ understanding and Analysis of how decision- makers trade off the incentives associated with the accounting object of the study (Francis, 2001).
5. The biggest advantage what these researchers had was having access to group’s internal information which helped a lot in carrying out there researches and justifying there conclusions.

• Jones working capital & modified model could analyze a proxy for manipulation capturing only pure accounting manipulation & a proxy that pools together accounting and real activities manipulation.
• By using UK sample they were advantageous as the insolvency code are allowed for a wider definition of bankruptcy, with different implications, than in the US (Franks et al 1996; Bradbury, 2007).
• The best part of sampling method is that it is straightforward and probably the simplest method and is usually unbiased.
• There access to FAME database and deriving data regarding bankrupt companies made an ease in making assessment of these and setting up there research.
• Since the researchers have selected or used purposive sampling wherein probability of getting astray is minimum and variance is low in this case of sampling.

Weaknesses

Case I Case II

• Interview is a complex and demanding technique (Frey & Oishi 1995:02 )
  “An unusual degree of trust is likely to lead to willingness on the part of the subjects to answer the questions carefully and with validity. This is especially advantageous when the questions are of a sensitive nature” (Lull 1990:53).
• Personal bias may b involved in interview method or understanding factor may become hindrance.
• According to me data taken by the researchers was too big in size so accuracy of the result was at stake.
• Sampling method can lead to the consequences of redundancy and thus hampering the accuracy of the result.
• Using data from data base is complex method and time consuming.

Impact of methodology on my dissertation

The methods used by the researchers to conduct there research i.e. “sampling” and “interview” and then applying different models and methodologies to derive the results or elaborate there research gave a perfect insight as to how a research should be conducted and then concluded. But I would like to go for “interview”, “available public information” and “questionnaire” method for my dissertation in coming months which would be on “Development in Banking sector in Kashmir” most probably. According to me interview method of collecting information is one of the best as the interviewee has very less time to respond and cannot manipulate answers so quickly in his brain and moreover interview method can help in extracting much internal information if the interviewer has those tactics and attitude of extracting as much information as possible. The questionnaire method gives an insight regarding what people or what the subject think about the given topic or question, it is one of the easiest methods and helps in figuring out the situation or the subject opinion from there point of view and this method would be the most important for my dissertation. Excess to public information and internal information will give positiveness to the dissertation because sometimes these information’s contain very important elements which throw light on various aspects which one researcher is looking for. I would try to rectify all disadvantages of the methods and apply then on my dissertation.

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