...Critical Perspectives on Accounting (1996) 7 , 409 – 435 RECONSIDERING THE ‘‘SOCIAL’’ IN POSITIVE ACCOUNTING THEORY: THE CASE OF SITE RESTORATION COSTS DEAN NEU AND CYNTHIA SIMMONS University of Calgary This paper seeks to challenge the hegemony of positive accounting theory explanations of managerial behaviour. We argue that the decontextualized perspective of positive accounting theory is limiting and that changing the perspective offers a more complete explanation of behaviour. Starting from the notion of social relations developed by Marx, we reinterpret positive theory variables as proxies for a subset of the social relations in which managers are embedded. From this perspective, a more inclusive explanation of behaviour can be obtained by considering the entire web of social relations that influence behaviour. To demonstrate the ‘‘cash value’’ of a social relations perspective, accounting for site restoration costs is used as an illustration. The results are consistent with a broad social relations perspective. ÷ 1996 Academic Press Limited Introduction ‘‘[I]t is clear there is a relation between firm’s accounting choice and other firm variables, such as leverage and size and the signs of the relations are mostly consistent across studies. Positive accounting research guided the search for empirical regularities and provided explanations for them. To date, there are no systematic alternative sets of explanations for those regularities articulated and tested...
Words: 13164 - Pages: 53
...The role of positive accounting theory. PAT has been the most significant accounting research agendas during the past four decades (Kabir). Before the arrival of PAT, normative accounting research had been the leading research tradition in accounting. Normative accounting theorists concentrated in developing accounting principles for recognition and measurement issues. In contrast with normative accounting theory which deals with “should” kind questions, PAT deals with “is” kind questions. According to Watts and Zimmerman “the objective of positive accounting theory is to explain and predict accounting practice. It explains why financial reports are prepared. Positive accounting theorists have explained the accounting practices by including the measures accountants employ to calculate total assets, total liabilities, owners' equity and net income. Moreover, they also claim that positive accounting theory provides a scientific explanations of accounting practice that is that their findings are empirically test. PAT also examines the effects of accounting standards on management’s self-interest hence PAT recognizes management biased attitude on accounting standards which are likely to affect corporates lobbying on accounting standards. Pat also identifies certain factors that are expected to affect a firms cash flows and share price .These factors are taxes, political costs and information production and management compensation. PAT theoretically played its role in examining...
Words: 1910 - Pages: 8
...136 Positive Accounting Theory and Science JCC Journal of CENTRUM Cathedra ™ Positive Accounting Theory and Science by M. Humayun Kabir Senior Lecturer, Faculty of Business Auckland University of Technology, Auckland, New Zealand Abstract This paper examines the development of positive accounting theory (PAT) and compares it with three standard accounts of science: Popper (1959), Kuhn (1996), and Lakatos (1970). PAT has been one of the most influential accounting research programs during the last four decades. One important reason which Watts & Zimmerman (1986) have used to popularize and legitimize their approach is that their view of accounting theory is the same as that used in science. Thus, it is important to examine how far accounting has been successful in imitating natural science and how the development of PAT compares with the three standard accounts of science. This paper shows that accounting could not emulate the success of natural science. Further, the methodological positions of PAT conform to none of the standard accounts of science. Rather, PAT contains elements of all three. Finally, this paper identifies some methodological gaps in PAT. Keywords: Positive Accounting Theory, Philosophy of Science, Methodological Controversies Acknowledgements I would like to thank two anonymous reviewers of the journal for their helpful comments. Earlier versions of this paper benefited from comments from Lee Parker of the University of South Australia, Keith...
Words: 9637 - Pages: 39
...It is implied by the positive accounting theory that managers base decisions based on personal or organizational objectives such as higher compensation or increased implementation of corporate governance procedures (Mattessich 2007). The two standard setting bodies try to implement policies in order to ensure better reliability and transparency of financial statements relevant to specific managers applying these standards. The two bodies set standards to improve accounting practice in their respective regions so they act on improving areas of corporate governance. Decision usefulness deals with the process of decision making based on accounting theories, concepts and principles. This theory involves the development of procedures that can be applied to make decisions in a useful manner (Cyert and DeGroot 1987). The standards proposed by both standard setting bodies entail a thorough process and involve significant research to make standards more useful to accountants, investors, shareholders and other users of financial statements in the decision making process. The moral hazards in accounting are concerned with risks between two parties when one party is not willing to work honestly or in a trustworthy manner (Wessels 2006). If any of the standard setting bodies does not want to apply same techniques and strategies in issuing standards then the other board is subject to moral hazards or risks. Measurement approaches deal with measurement of several items based on hypothetical...
Words: 257 - Pages: 2
...Financial Accounting Theory Chapter 8 – Summary The Positive Theory of Accounting 1. Outline In the text, Scott defines Positive accounting theory (PAT) as: “concerned with predicting such actions as the choices of accounting policies by firms and how firms will respond to proposed new accounting standards.” (263) PAT uses theory to predict the choices that management will make regarding their choice of accounting policies. This theory is introduced as a way to merge efficient securities markets with economic consequences. PAT takes the view that firms will conduct themselves in the way that maximizes their own best interests. Managers do not always do what is best for shareholders, but what will be the most beneficial to their organization. The choices that an organization makes are dependant on what industry they are in, and the factors within that industry. An organization can be portrayed by the contracts it enters into. A firm’s contracts with employees, suppliers, lenders, and shareholders are central to its operations. The organization is inclined to keep these contract costs as low as possible. PAT emphasizes that an organization’s choice of accounting policies is motivated by keeping contract costs down. PAT does not propose that organizations completely identify what accounting policies they will use. Such specification is costly to commit to, and does not give management the opportunity to respond to unforeseen circumstances. ...
Words: 2061 - Pages: 9
...Chapter 7 - Positive Theory Positive Accounting Theory Philosophy of PAT Million Friedman championed positive theories in economics. He stated that: (part 3 Empirical Research in Accounts of Accounting theory from Jayne Godfrey) The ultimate goal of positive science (i.e. INDUCTIVE) is • The development of a ‘theory ‘ or ‘hypothesis’; • that yields valid and meaningful “Predictions’ • about phenomena not yet “observed”. Consistent with Friedman’s view, Watts and Zimmerman asserts that: The objective of “positive accounting theory” is to “explain” and “predict” accounting practice. • “Explanation” means providing reasons for observed practice. For example, positive accounting theory seeks to explain why firms continue to use historical cost accounting and why certain firms switch between a numbers of accounting techniques. • “Prediction” of accounting practice means that the theory predicts “unobserved phenomena”. Watts and Zimmerman start their book with a fundamental statement of The Role of Theory (Chapter 1).They asserts that the objective of positive accounting theory is to explain and predict accounting practice,(p.2) “Unobserved phenomena” are not necessarily future phenomena; they include phenomena that have occurred, but on which systematic evidence has not been collected. For example – Predicting the reaction of firms to a proposed accounting standard and an explanation of why firms would lobby for and against...
Words: 2421 - Pages: 10
...Positive Accounting Theory: A Ten Year Perspective Ross L. Watts and Jerold L. Zimmerman University of Rochester ABSTRACT: This paper reviews and critiques the positive accounting literature following publication of Watts and Zimmerman (1978, 1979). The 1978 paper helped generate the positive accounting literature which offers an explanation of accounting practice, suggests the importance of contracting costs, and has led to the discovery of some previously unknown empirical regularities. The 1979 paper produced a methodological debate that has not been very productive. This paper attempts to remove some common misconceptions about methodology that surfaced in the debate. It also suggests ways to improve positive research in accounting choice. The most important of these improvements is tighter links between the theory and the empirical tests. A second suggested improvement is the development of models that recognize the endogeneity among the variables in the regressions. A third improvement is reduction in measurement errors in both the dependent and independent variables in the regressions. I T is more than a decade since our two papers, "Towards a Positive Theory of the Determination of Accounting Standards" and "The Demand for and Supply of Accounting Theories: The Market for Excuses" were published in The Accounting Review. The intervening time allows us to look back on these papers and the ensuing literature with some perspective. The two papers were...
Words: 273 - Pages: 2
...the accounting literature of the past decade" (1989, p. 327). They are also the joint founder-editors of The Journal of Accounting and Economics, a journal devoted to positive accounting research, which has achieved an international reputation. So their story, while admittedly controversial, has achieved credibility among a significant number of accounting researchers. But what accounts for that credibility? According to Watts and Zimmerman's (1986) view of science, a theory's credibility will ultimately be a function of explanatory power and predictive capability: "Ultimately the users, who assess alternative explanations' intuitive appeal and bear the costs and benefits of theories' predictions, will determine the success of the theory outlined in this book" (p. 355). And a theory, in their conception, consists of: the assumptions, including the definitions of variables and the logic that relates them, and the set of substantive hypotheses" (1986, p. 9). And since the hypotheses of a theory bear the brunt of empirical testing, the primary concern of the empirical testing of PAT is whether or not the hypotheses can predict accounting practice. Prediction of accounting practice means that the theory predicts unobserved accounting phenomena" (1986, p. 2). More concretely, they mean that PAT can be used to predict which accounting procedures will be chosen by management when management faces a "portfolio" of accepted accounting procedures from which to choose. In Positive Accounting...
Words: 1189 - Pages: 5
...7.14 What are some of the criticisms of PAT? Do you agree with them? Why or why not? Positive Accounting Theory (PAT) ▪ The branch of academic research in accounting that seeks to explain and predict actual accounting practices. ▪ Watts and Zimmerman: o PAT is concerned with explaining accounting practice. It is designed to explain and predict which firms will and which firms will not use a particular method…but it says nothing as to which method a firm should use. ▪ Explain why firms still use historic cost accounting, why certain firm switch between a numbers of accounting techniques. Criticisms of PAT ▪ Does NOT provide prescription o Not providing a means of improving accounting practice. o No guidance as to what people should do ▪ Not value free o Selecting a theory to adopt for research is based on a value judgement; what to research is a value judgement; ▪ Fundamental assumption that all action is driven by self interest argued to be too negative and simplistic a perspective humankind o All action is driven by a desire to maximise one’s wealth. o Rational behaviour of human ▪ Addressed issues have not shown great development o Continue to be tested in different environments and in relation to different accounting policies o The debt hypothesis o The bonus hypothesis o The political cost hypothesis ▪ Measurements or proxies being used within the literature are...
Words: 290 - Pages: 2
...The Positive Theory of Accounting Outline In the text, Scott defines Positive accounting theory (PAT) as: “concerned with predicting such actions as the choices of accounting policies by firms and how firms will respond to proposed new accounting standards.” (263) PAT uses theory to predict the choices that management will make regarding their choice of accounting policies. This theory is introduced as a way to merge efficient securities markets with economic consequences. PAT takes the view that firms will conduct themselves in the way that maximizes their own best interests. Managers do not always do what is best for shareholders, but what will be the most beneficial to their organization. The choices that an organization makes are dependent on what industry they are in, and the factors within that industry An organization can be portrayed by the contracts it enters into. A firm’s contracts with employees, suppliers, lenders, and shareholders are central to its operations. The organization is inclined to keep these contract costs as low as possible. PAT emphasizes that an organization’s choice of accounting policies is motivated by keeping contract costs down. PAT does not propose that organizations completely identify what accounting policies they will use. Such specification is costly to commit to, and does not give management the opportunity to respond to unforeseen circumstances. Managers have flexibility to choose from a set of accounting policies, and...
Words: 1003 - Pages: 5
...Qualitative characteristics in accounting disclosures: a desirability trade-off Malcolm Smith Associate Professor of Accounting, School of Economics and Commerce, Murdoch University, Perth, Australia A number of studies in the USA, UK, Australia and Canada have addressed the evaluation of the usefulness of accounting information and sought to identify criteria for assessing the quality and utility of financial reports (e.g. Institute of Chartered Accountants in England and Wales (1975), Financial Accounting Standards Board (1980), Institute of Chartered Accountants in Scotland (1988), Accounting Standards Board (1991)). The qualitative characteristics viewed as desirable for the fulfilment of the fundamental objective of communicating decision-useful measurement recognize that all of these characteristics are not simultaneously achievable and that some trade-off is necessary. Examines the nature of this conflict of objectives and attempts to quantify the extent of the conflict for different user groups. Introduction Since the late 1960s research efforts regarding a conceptual framework have been commissioned in response to mounting public and professional pressure with regard to the nature of corporate reporting and deficiencies in the accounting standard setting process. Peasnell[1, p. 254] with respect to the Financial Accounting Standards Board (FASB) conceptual framework observes: “it perceives a need to show that its heart and mind are in the right place: to demonstrate...
Words: 3323 - Pages: 14
...Issue one Can the funds be raised from existing members or anyone else without a prospectus? Relevant law The ability of raising funds from investors is one of the most important functions of companies, furthermore, a significant objective of the Corporations Act (CA) is to encourage and regular those kind of investments. Usually, when a company want to offer securities, a disclosure documents (DD) must be issued simultaneously. The types of DD were given by s 705, and prospectus was including in. From s 706 “ ISSUE OFFERS THAT NEED DISCLOSURE”, we can find that, “ An offer of securities for issue needs disclosure to investors under this Part unless section 708 or 708AA says otherwise.” Obviously, to solve this issue we need to discuss if the Growth Ltd can fulfill the circumstances under s708 or 708AA. As there are too many subsections under s 708 and s 708AA, i will pick out sever subsections instead of copy all of them here. 从投资者筹集资金的能力是企业最重要的功能之一，此外，公司法（CA）一显著的目标是鼓励和定期的一种投资。通常，当一个公司希望提供证券，一个披露文件（DD）必须同时发出。 DD的类型由s705分别给予和招股说明书，包括研究。从s706“需要泄露问题提供了”，我们可以发现，“对于发行证券的要约需要向投资者披露在本部中，除部分708或708AA否则说，“很显然，要解决这个问题，我们需要讨论，如果公司成长可在S708或708AA履行情况。因为有书下708太多小节和S708AA，我将挑选出断绝小节，而不是拷贝他们都在这里。 Application In case one, the amount of fundraising is $m20, which can be considered as a large offer. Thus, the subsection (1) - (7) of s 708, Small scale offering, will not be applied here. For example, s 708 (1) b showed that the offer of ”$ 2 million ceiling”. For some special investors...
Words: 2431 - Pages: 10
...POSITIVE ACCOUNTING THEORY, POLITICAL COSTS AND SOCIAL DISCLOSURE ANALYSES: A CRITICAL LOOK Markus J. Milne Accountancy and Business Law University of Otago Dunedin New Zealand Ph: 64-3-479-8120 Fax: 64-3-479-8450 Email: mmilne@commerce.otago.ac.nz POSITIVE ACCOUNTING THEORY, POLITICAL COSTS AND SOCIAL DISCLOSURE ANALYSES: A CRITICAL LOOK* ABSTRACT This paper critically reviews the literature seeking to establish evidence for a positive accounting theory of corporate social disclosures. It carefully traces through the original work of Watts and Zimmerman (1978) showing their concern with the lobbying behaviour of large US oil companies during the 1970s. Such companies were argued to be abusing monopolists and likely targets of selfinterested politicians pursuing wealth transfers in the form of taxes, regulations and other ‘political costs’. Watts and Zimmerman’s reference to “social responsibility” is shown to be a passing remark, and most likely refers to “advocacy advertising”, a widespread practice amongst large US oil companies at that time. Subsequent literature that relies on Watts and Zimmerman to present a case for social disclosures is shown to extend their original arguments. In the process, concern over the “high profits” of companies is shown to diminish, and the notion of political costs is so broadened that it blurs with other social theories of disclosure. Consequently, the positive accounting based social disclosures literature fails to provide distinct...
Words: 11604 - Pages: 47
...DETERMINANTS OF DIFFERENT ACCOUNTING METHODS CHOICE IN TANZANIA : A POSITIVE ACCOUNTING THEORY APPROACH Objectives: • The purpose of this study is to investigate the factors that influence the choice of accounting policies by managers of companies in Tanzania. • These studies also examine the number of factors that influence the managers’ incentives for accounting choice. Population/ sample size: The study investigates managers’ decisions to choose accounting methods in a positive accounting theory perspective using panel data covering 60 years from 15 companies listed on the Dar es Salaam Stock Exchange. Research Methods: • Sample and data source: used quantitative methods to examine the relationship between independent variables and dependent variables. The data are drawn from annual reports of 15 companies listed on DSE for four years which resulted in 60 firm years. • Income strategy measurement: consider a company’s set of accounting choices that are disclosed in the company’s annual report as a single comprehensive decision. • Model specification: INCOME STRATEGY = α0 + α1 LEVER + α2 SIZE + α3 LABFORCE – α4 ODILUTION + α5 INTERFIN + α6 PROPNED + ε Findings: The results show that the significant factors are company size, internal financing, proportion of non-executive directors and labor force. Different with the outcome of prior studies, the authors found that the company size and internal financing are positively related with income strategy. So the research...
Words: 298 - Pages: 2
...number of normative theories of accounting. In doing so we examined conceptual framework projects which prescribe guidelines for how accounting should be done. We then examined a number of normative theories relating to how profit and the elements of our financial statements should be measured. This week we abandon our normative theories and begin looking at positive theories. In particular we examine a positive theory that we have made mention of a number of times, Positive Accounting Theory or PAT. Upon completion of this module you should have: A clear understanding of how a positive theory differs from a normative theory, The origins of Positive Accounting Theory (PAT) The perceived role of accounting in minimizing the transaction costs of an organisation You should understand: How accounting can be used to reduce the costs associated with various political processes How particular accounting-based agreements with parties such as debtholders and managers can provide incentives for managers to manipulate accounting numbers And some of the criticisms of PAT Before we begin our discussion of specific positive theories we should recap on what a positive theory is and how it differs from the normative theories we have examined in the previous two modules. You will recall from module one and the previous two modules that normative theories prescribe how a particular practice should be undertaken. As was evident in our study of current cost accounting and general price...
Words: 455 - Pages: 2
