This website uses cookies to ensure you have the best experience. Learn more

Accounting Essay

2565 words - 11 pages

Positive accounting theory (PAT) is a general term for any theory that provides descriptive information regarding the behavior of accountants. The title has been used by Watts and Zimmerman and this is largely an expansion of previous studies carried out firstly by Fama and later by Ball & Brown in the 1960’s. 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 ...view middle of the document...

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. They claimed that 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).
This was then used to form and anti regulatory stance. As capital markets could ‘see through’ the accounting methods being used, regulation was considered little more than an inefficiency that interfered with the function of free markets and was costly to firms. 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 1992).
The question still existed however, that if managers didn’t change accounting methods in order to affect share prices then why did they do it? This is the question that Watts and Zimmerman attempted to answer and this was done with assistance from the concept of ‘agency theory’.
Agency is defined as
“A contract under which one or more (principals) engage another person (the agent) to perform some service on their behalf which involves delegating some decision-making authority to the agent”
- Jensen & Meckling (1976, p.308)
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 means that the owners of firms must align their goals with those of the ‘drivers’ of firms in order to minimize the associated costs of the separation of ownership and management (eg laziness). This will mean tying bonuses to goal achievement and this then produces the need for accounting information with which to measure goal achievement.
It is from this theory that the three main parts of Watts and Zimmerman’s PAT come into existence; the debt hypothesis, the political cost hypothesis and the bonus plan hypothesis. 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: empiricism and scientific research; the economic theory of perfect markets, The Efficient Market Hypothesis, (which is reliant upon the above economic theory) and agency theory
and its arguments of self interested agents. The broader new...

Other Papers Like Accounting

Accounting Essay

548 words - 3 pages Accounting Practices Name: XXXXXXXX oooo Accounting I-ACC100 Professor XXXXXXXXX Date: XXXXXXXXX Accounting Practices The year is 2011, and this country has been nearly crippled financially with the corporate accounting scandals. One of the most famous is the scandal of Enron, Waste Management, WorldCom, Qwest Communications, Health South Corporation, and then the infamous Bernard L. Madoff Investment scandal. The Medoff Ponzi

Accounting Essay

314 words - 2 pages After secondary school, I need to decide what course to choose in order to further my study. Two of my cousins who are chartered accountant explained to me about accounting. From the explanation and sharing, I have interest in the course and I understand that accountancy is a profession. By having an ACCA accreditation, I can also have other career opportunities such as auditor, manager, tax agent and so on besides account. I believe I can have

Accounting

1152 words - 5 pages Topic: Discuss the impact of technology on the accounting profession in relation to the point that “Accounting is moving to information management” considering whether the impact has increased, whether greater changes in technology have taken place which has impacted the point raised since 1999, and what are the expected future effects of technology. One of the impacts that the technology had on the Accounting profession was related to

Accounting - 557 words

557 words - 3 pages Question 1 Revenue: * The total money collected by the business for the sales of goods or services provided during the accounting period for that particular year. * Including net sales or exchange of assets or anything that will increase the owner’s equity before any expenses are being subtracted. Service revenue: * Reports the fees that are earned by the company during the accounting period in the income statement. * It’s

Accounting - 624 words

624 words - 3 pages Sole proprietorship - a business owned by one person; most common form of business organization . Partnership - voluntary association of two or more persons for the purpose of conducting a business. Corporation - legal entity created under laws of a state or federal government Accounting - process of measuring economic activity of an entity in monetary terms and communicating the results to users GAAP - set of standards and procedures that

Accounting - 584 words

584 words - 3 pages Understanding management accounting techniques in the context of organizational change: as strategic business partners with a responsibility to improve operations, management accountants must identify techniques that support incremental change and h elp transform their firm. EXECUTIVE SUMMARY Driven by the need for organizational change, management accounting techniques have developed and proliferated at an unprecedented rate in the last few

Accounting - 1259 words

1259 words - 6 pages Unit 4 Assignment 1 1. Accrual Basis Accounting: Under the accrual basis accounting, business transactions specifically those relating to income and expenses are recognized and recorded in the books the moment the substance of the transaction has been perfected. Generally Accepted Accounting Principles (GAAP) prefers that financial statements are based entirely on the accrual basis accounting instead of the cash basis accounting. In its

Accounting - 3380 words

3380 words - 14 pages An Analysis of Accounting Ethics Anna Aspras ACC 770 Proposal Hunter College INTRODUCTION Ethics refers to the discipline that deals with the bad and the good and also with the moral duties as well as moral obligations (Stolowy and Breton 2004). As Weidmann and Lenzen (2006) points out, ethics entails doing the right thing. Accounting ethics is mainly in the area of applied ethics and at the same time, it is also a part of business ethics as

Accounting - 5996 words

5996 words - 24 pages CHAPTER 1 ACCOUNTING: INFORMATION FOR DECISION MAKING OVERVIEW OF BRIEF EXERCISES, EXERCISES, AND CRITICAL THINKING CASES Brief Exercises B. Ex. 1.1 B. Ex. 1.2 B. Ex. 1.3 B. Ex. 1.4 B. Ex. 1.5 B. Ex. 1.6 B. Ex. 1.7 B. Ex. 1.8 B. Ex. 1.9 B. Ex. 1.10 Learning Objectives 1, 3, 5 2, 5 3, 4 5, 6 1, 3, 5, 6 5, 6 2, 5, 6 7, 8 5, 7 1 Topic Users of accounting information Components of internal control Inexact or approximate measures Standards for

Accounting - 1776 words

1776 words - 8 pages | | |Principles of Accounting II | Copyright © 2011 by University of Phoenix. All rights reserved. Course Description This course introduces accounting concepts in a business environment. Students learn to create and apply accounting documents in making better business decisions. Other topics include plant assets

Accounting - 838 words

838 words - 4 pages Class: Here are some excerpts from the model solution to UpBeat that discuss four possible alternative solutions to the issues raised in this case. Discussion 1 For each of the transfer provisions included in the agreement, determine whether the provision would preclude sales accounting. Alternative 1 — Fail sale accounting criteria because of Transfer Provision 1. ASC 860-10-40-5(b) requires that the bank have the right to

Related Essays

Accounting Essay 1031 Words

1031 words - 5 pages Question 1:  * Proficient-level:  * There are several important functions performed in an organization, among which accounting is one of them. Define the accounting function and discuss how it differs from double-entry bookkeeping. Answer: According to the Dictionary of Accounting Terms, Accounting is defined as a one step process of recording, measuring, interpreting and communicating financial data by preparing financial

Accounting Essay 1693 Words

1693 words - 7 pages Intermediate accounting 1 paper Kari Andrew 11/15/13 There are many different accounting specialties cost accounting, managerial accounting, financial governmental accounting, tax accounting, and many more. Right now I am currently an accounting major as well as business marketing major. Accounting was never my first choice; however when I had taken it in high school I found a small interest in it. Math was always my strongest subject in

Accounting Essay 1281 Words

1281 words - 6 pages Cash vs. accrual: Is there a difference in recognizing transactions? ACC205: Principles of Accounting I Professor Student Name Date Cash vs. accrual: Is there a difference in recognizing transactions? Cash and accrual based accounting are two ways use to record revenue or expense transactions. However, there is a difference in recognizing cash and accrual accounting

Accounting Essay 1214 Words

1214 words - 5 pages Accounting Principles By: Mae Sejour American InterContinental University Unit 1 IP ACCT205-1204B-06 October 7, 2012 Abstract This paper will be giving in details the main objectives of accounting, the basic terminology of accounting process, the job responsibilities of an accountant to individuals and businesses, the part technology play in a business and how accounting can affect my personal life; stressing accounting role in