GAN PEI XIN B1500829
LIEW YUEIN KEI B1301108
LIM SHUE HUE B1500710
TEOH EE CHING B15500830
•
Positive theories are used to represent theories that are
about the world as it is.
They can: describe what is actually happening
explain what is happening
make predictions about what will happen
Positive Accounting Theory

PAT seeks to explain and predict accounting practice.
Watts and Zimmerman(1986,p.7) state:
PAT is concerned with explaining accounting
practice. It designed to explain and predict which
firms will and which firms will not use a particular
accounting method…..but it says nothing as to which
method a firm should use.
(Deegan ,2014)
Efficient Market Hypothesis (EMH)
•
Based on economic principles
•
assumes a perfect market where there is information asymmetry and no
transaction costs.
•
Semi strong form of EMH = Watts and Zimmerman claim
•
•
capital markets could see through changes in accounting policy and see
the bigger picture of firms, therefore rendering them impervious to
misleading accounting methods (Watts & Zimmerman 1986).
Model:
• debt hypothesis
• political cost hypothesis
• bonus plan hypothesis
(Deegan, 2014)
Assumptions of PAT
•
All individual action is driven by self-interest.
•
Individuals will act in an opportunistic manner to increase their
wealth.
•
Organizations are a collection of self-interested individuals who
agree to cooperate.
•
Notions of loyalty and morality are not incorporated within the
theory.
•
Organizations will seek to put in place mechanisms
to align the interests of managers of the firm (agents) with the
interests of the owners (principals).
•
Some of these mechanisms rely on the output of the accounting
system.
(Deegan, 2014)
5
Efficiency perspective
•
Mechanisms are put in place up front with the objective of
minimizing future agency costs.
•
Referred to as ex ante perspective.
•
Accounting methods adopted by firms best reflect the underlying
financial performance of the entity.
•
Regulation is therefore argued to impose unwarranted costs on
reporting entities.
(Deegan, 2014)
6
Opportunistic perspective
•
Considers opportunistic actions that could be taken once
various contractual arrangements have been put in place.
•
Assumes managers will opportunistically select
accounting methods to increase their own personal
wealth.
(Deegan, 2014)
7
Why did PAT rise to prominence?
•
1. The rise of scientism
- To be scientific became associated with the advancement
of knowledge and the conduct of useful activity because of
its visibly demonstrated utility.
- PAT rise to prominence was directly related to the prevailing
view that conformity to the methodology of the natural
sciences was the only criteria for judging the progressiveness
of any intellectual activity in the social science.
(Jones, Romano and Ratnatunga, 1995)
Why did PAT rise to prominence?
•
2. The paradigm of empiricism
-The equation of empiricism and scientism resulted in an explosion
of empirical accounting research. In past, researchers are required
to use modern research tools for testing hypotheses.
-This provide a powerful backcloth for the acceptance of PAT, as it
satisfied on audience that equated empiricism with scientism.
(Jones, Romano and Ratnatunga, 1995)
Why did PAT rise to prominence?
•
3. The rise of the Radical Right
-The rise of the Radical Right manifested in the electoral
victories of Reagan in 1980 and Thatcher in 1979.
-PAT was not only consistent with themes prevailing in the
academic environment but it was also harmonious with the
social and political ethos of its time.
-Milton Friedman, a leading economic guru in the USA and
Nobel Prize Laureate, published an article.
“The Methodology of Positive Economics”
(Jones, Romano and Ratnatunga, 1995)
Why did PAT rise to prominence?
•
4. Development in Finance
-Scientism in finance helped to generate the empirically-based
neoclassical economic theories of CAPM, EMH and agency theory
which attempted to predict how capital market worked.
-These theories are the building blocks of PAT.
PAT met the uniqueness of theoretical and methodological demands
of its time partly through its connection to significant theoretical
developments in finance.
(Jones, Romano and Ratnatunga, 1995)
Advantages of PAT
•
Perceived that theory should be able to generate hypotheses
capable of falsification through empirical testing.
•
Deemed desirable that theory aim was to explain and predict
accounting practices rather than supply prescriptions.
•
Necessary to rationalize existing accounting principles, which
normative theory didn’t attempt to do.
•
PAT attempt to model connection between accounting, firms, &
markets & analyse problems within an economic network.
(Arshad , n.d.)
12
Disadvantages of PAT
•
Lack of Prescription
•
Positive accounting theory is not value-free as it asserts assumption
that all action is driven by self-interest
•
Invalid Assumptions
•
Stagnation - Lack of Development
•
Individual choices vs. Many choices
•
The measurements or proxies being used within the literature are
often far too simplistic
•
Positive Accounting Theory is scientifically flawed.
•
Lack of Universality of the Conclusions
13
(Hassan, 2012)
Agency Theory
• “A contract under which one or
more persons (the principal(s))
engage another person (the agent) to
perform some service on their behalf
which involves delegating some
decision making authority to the
agent.” (Jesen & Meckling,1976)
Agency Theory
There is 2 types of agency relationship:
• Agency theory identifies a number of problems that can exist between
managers and owners.
• Contracts and accounting information can be used to ‘bond’ the interests of
owners and managers.
• Addresses 3 specific problems:
 Horizon problem: managers have a shorter time horizon with respect to
their association with the firm than do shareholders.
 Risk aversion: managers prefer less risk than do shareholders.
 Dividend retention: managers prefer to pay out less of the profits as
dividends than shareholders prefer.
(Deegan, 2014)
Agency Theory
• to provide funds to an entity there is the risk that the lending party may
not repay those funds.
• These are:
 Excessive dividend payments: reduces the asset base securing the debt.
 Underinvestment: shareholders have incentives not to undertake
positive NPV projects because to do so would increase the funds
available to the debtholders but not to the shareholders.
 Asset substitution : firm invests in higher risk projects to benefit
shareholders.
 Claim dilution: occurs when the firm issues debt of a higher priority
than the debt already on issue.
(Deegan, 2014)
Why conflict arise between manager and shareholder?
• Human nature
-normally acts in the own self-interest and mostly opportunistic.
• Separation of ownership and control
-manager will not willing to give their best effort.
• Asymmetric information
- Manager knows better than shareholders whether there are
capable of meeting the shareholder’s objective.
• Relationship to other stakeholders
-manager are responsible to other stakeholders and they must
balance the interest of everyone.
(Deegan, 2014)
Agency cost
- Borne by shareholders to prevent agency problems in order to
maximize owners wealth.
•
Monitoring cost
-designed to limit the aberrant activities of the agent.
•
Bonding cost
-designed to guarantee that agent will not take harmful action
towards principal and ensure compensation of principal.
•
Residual loss
-incurred from divergent principal and agent interests despite the
use of monitoring and bonding.
(Deegan, 2014)
Institutional Theory
•
Provides an explanation about why organizations tend to take on
similar characteristics and form.
•
Bring legitimacy to the organization.
- ‘Organisations conform because they are rewarded for doing so
through increased legitimacy, resources and survival capabilities’.
(Scott, 1987)
(Deegan, 2014)
• “Isomorphism refers to ‘a constraining process that forces
one unit in a population to resemble other units that face the
same set of environmental conditions”. (DiMaggio & Powell,
1983)
• Coercive
- Arise as the pressure from those stakeholders.
• Mimetic
- Arise as the uncertainty and tend to mitigate others.
• Normative
- Arise as the consequence of professionalism from “group
norms”.
•
“Organizational decoupling defines as separating formal structure
from actual organizational practice”.
-
It implies a weakening of interdependence and control between
groups.
-
They maintain that organizations in institutional environments often
de-couple formal structures from their technical core to maintain
external legitimacy and still retain organizational effectiveness
(Meyer and Rowan, 1977).
Legitimacy Theory
•
1. Based on the idea of a social contract
-Represents the explicit and implicit expectations that society
has about how the organisation should conduct its operations.
- Implications of not meeting social contract.
Outcomes:
 The organization may find it difficult to obtain the necessary
support and resources to continue operations.
 Sanctions such as legal restrictions on operations, limited
resources provided or reduced demand for products
(Deegan ,2014)
Legitimacy Theory
•
2. Organisational legitimacy
-The values and norm evident in the social contract have changed
over time.
-In the past legitimacy was considered only in terms of economic
performance.
-Now businesses are now expected to consider a range of issues,
including the environmental and social consequences of their
activities.
(Rankin et al., 2012)
Legitimacy Theory
•
Lindblom identifies four ways an organisation can obtain or maintain
legitimacy:
1. Seek to educate and inform society about actual changes in the
organisation’s performance and activities
2. Seek to change the perceptions of society, but not actually
change behaviour
3. Seek to manipulate perception by deflecting attention from the
issue of concern to other related issues
4. Seek to change expectations of its performance.
(Rankin et al., 2012)
References
Deegan, C. (2014). Financial Accounting Theory. Melbourne: McGraw-Hill Education.
Godfrey, J. (2010). Accounting theory. Milton, Qld: Wiley-Blackwell.
Johnston, M. (2013). Mimetic, Coercive and Normative Influences and the Decision of National Sport Organisations
to bid for World Championship Events. Auckland: Auckland University of Technology.
Meckling, M. C. (1976). Theory of the Firm: Managerial Behaviour, Agency Cost and Ownership structure. Journal
of Financial Economics , 305-360.
Michaela Rankin, K. F. (2012). Contemporary issues in accounting. Australia: John Wiley and Sons. Australia: John
Wiley and Sons Australia Ltd.
Powell, P. J. (1983). The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational
Fields. American Sociological Review, 147-160.
Rowan, J. W. (1977). Institutionalized Organizations: Formal Structure as Myth and Ceremony. American Journal of
Sociology, 340-363.
Scott, W. R. (1987). The Adolescence of Institutional Theory. Administrative Science Quarterly, 493-511.
Shamima Haque, C. D. (2011). Climate Change-related Corporate Governance Information: An Explanation of the
Difference between the Supply of and Demand for such Information. Melbourne: RMIT University.
Stewart Jones, C. A. (1995). Accounting Theory. Marrickville, N.S.W: Harcourt Brace.
THANK YOU
Debate Question:
1.Which theory is more appropriate to develop
general theory of accounting?
2. By separately considering the two perspectives of
stakeholder theory, it could be construed that
management might either be ethically aware, or
focused on the survival of the organization.