Different Accounting Theories Will Provide Alternative Explanations About Why an Entity Might Decide to Report Social and Environmental Information.

In: Business and Management

1. Different accounting theories will provide alternative explanations about why an entity might decide to report social and environmental information.

Positive accounting theory tries to make good prediction of real world events and translate them to accounting transactions, while normative theories tend to recommend what should be done. Positive theories try to explain and predict actions such as which accounting policies firms will choose and how firms will react to newly proposed accounting standards. Its overall intention is to understand and predict the choice of accounting policies across differing firms; it recognizes that economic consequences exist( Colignon, R. and M. Covaleski. 1991).Under PAT firms want to maximize their prospects for survival, so they organize themselves efficiently. Firms are viewed as the accumulation of the contracts they have entered into. In relation to PAT, because there is a need to be efficient, the firm will want to minimize costs associated with contracts. Examples of contract costs are negotiation, renegotiation and monitoring costs; contract costs involve accounting variables as contracts can be stipulated in terms of accounting information such as net income and financial ratios. The firm will choose the accounting policies that best acknowledge the need for minimization of contract costs (Danos, P. 1977). PAT recognizes that changing circumstances require managers to have flexibility in choosing accounting policies. This bring forward the problem of opportunistic behavior, this occurs when the actions of management are to better their own personal interests. With this in mind, the optimal set of accounting policies are described as a compromise between fixing accounting policies to minimize contract costs and providing flexibility in times of changing circumstances (Evans, T. G. 2002). There are three systems-based...

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