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Order Positive accounting theory Positive accounting theory PAT is a general term for any theory that provides descriptive information regarding the behavior of accountants. In looking at the apparent acceptance by politicians, firms and wide publication in academic journals PAT could easily be mistaken as being a success.
A deeper analysis of the premises of PAT, its questionable scientific status, and the groups upon whom this theory has appealed to would suggest that it is flawed on many levels and is little more than an argument for deregulation and market capitalism.
This opposes its claim to be a useful theory used regularly by those concerned with the effects of accounting policy on the status of the firm.
The Premises of Positive Accounting Theory. The semi strong form of EMH argues that capital markets will reflect all information that is publicly available and it is this form that Watts and Zimmerman claim to be predominant.
The Ball and Brown study rejected the argument put forward by normative theorists that present accounting results were misleading and irrelevant and stated that historical cost accounting is actually useful Deegan This was because their study demonstrated that unexpected accounting earnings produced abnormal returns in capital markets.
This was also the case for unexpected poor earnings as they produced abnormal losses in capital markets.
Watts and Zimmerman used this research in developing PAT to illustrate that because there was a reaction in capital markets when accounting information showing abnormal results was released this information was useful and those who wanted to change the present system of measurement failed to appreciate the incumbents usefulness.
This was then used to form and anti regulatory stance. These firms could determine the best ways to report for themselves and it is believed under this theory that auditing will also occur without regulation because users of information will demand audited information so as to give it some value Mouck This means in a nutshell that firms are a nexus where various self motivated utility maximizes met to generate as much wealth as possible for their own selfish selves.
This will mean tying bonuses to goal achievement and this then produces the need for accounting information with which to measure goal achievement. For example, the bonus plan hypothesis states that management will change their accounting policies to the extent that is reasonably allowed in order to maximize reported income if their bonuses are dependant on the level of reported income due to their self interest.
This notion of self interest can also be applied to the other PAT hypothesis put forward by Watts and Zimmerman. Therefore, the premises of Positive Accounting Theory can be summarized as: The Flaws of Perfect Markets.
The first flaw that can be found with a premise of PAT is that of economics and its reliance on the theoretical perfect market. A perfect market relies on amongst other things perfect information and no transaction costs.
It is also difficult to imagine equilibrium for information when accounting information contributes to this equilibrium. Watts and Zimmerman also say that regulation and political costs interfere with the operation of perfect markets. The Flaws of Efficient Market Hypothesis.
This lack of perfect markets then calls into question the EMH as it is upon perfect markets that it finds its basis Deegan Defenders of the EMH will argue that there is empirical evidence to back up this perspective; however an analysis performed by Chambers in demonstrated that the Ball and Brown research on the EMH relied on some rather superficial evidence.
Chambers tells of how only a very small number of shares were ever traded after the release of information and the evidence did not include collapsed companies. It is also pointed out that capital market reactions to accounting information were not a new discovery and that researchers had known of it for some time.
Plausible explanations for examplethat much investment is done in an ad hoc manner also find no place with in the EMH framework. Essentially the EMH and the premise of PAT that historical cost information is useful and the system does not need additional regulation are questionable and perhaps somewhat dogmatic.
The Flaws of Agency Theory. This is why Watts and Zimmerman have called upon another theory with which to support their work.
For example, agency theory describes political interference in accounting as being the way self interested politicians can gain popularity— by acting on the wants of minority groups. Politicians acting in the public interest could also explain the same occurrence just as effectively Mouck There are further PAT studies that look to notions besides that of self-interest and look at efficiency; however Watts and Zimmerman have not been a part of this.
Above all, agency theory is hard to swallow on the basis that people are self-interested. If such a notion were true then it would be logical to introduce more legislation, not less. The Flawed argument that PAT is scientific and empirically based.
Watts and Zimmerman have claimed that normative theories were not effective and are not to be respected because they did not base themselves on scientific or empirical research Godfrey et al. This argument however is flawed on numerous levels.
Although Watts and Zimmerman spend a lot of time discussing their empirical basis for their theory, the actual results are not particularly firm. Mouck has stated that their basis is more of rhetoric than science and that for two researchers who spend so much time describing the benefits of empiricism the results are somewhat disappointing.
It will be discussed later as to why the level of research as a basis for judging a theory is spurious when claiming success. This point of view seems contradictory because one of the premises of PAT — agency theory — is heavily reliant on the value judgement that people are self-interested.Positive accounting theory do not gives prescriptions for accounting practice, it does not say something about good or bad accounting policy of the company.
researchers do not take into account relations between managers and accountants in the companies in their empirical investigations. This paper examines the development of positive accounting theory (PAT) and compares it with three standard accounts of science: Popper (), Kuhn (), and Lakatos ().
1. What Is Macroeconomics? Microeconomics is the study of the behavior of individual economic agents. Microeconomics asks how individuals allocate their time, income and wealth among various opportunities for labor, leisure, consumption, and savings. The theory relied in great part of work undertaken in the fields of economics, and central to the development of Positive Accounting Theory was the acceptance of economics based ‘rational economic person assumption”.
A comprehensive review of positive psychology. Positive psychology. William D. Tillier; Calgary Alberta; Update: Under construction. Positive accounting is the branch of academic accounting research that seeks to explain and predict actual accounting practices.
This contrasts with normative accounting, that seeks to derive and prescribe "optimal" accounting standards.