Current State of the Positive Accounting Literature

tion of positive accounting is that the actions of the individuals in the organisation are mainly driven by the self-interest of them. The theory describes that the individuals of the firm would act in an opportunistic manner so that they increase their wealth with the help of their actions. Moreover, the theory based on the assumption of self-interest describe that the firms would try to introduce some mechanisms in the organisation that help align the interest of managers and owners working within the organisation. The theory focuses on the accounting methods that would be adopted by the firms and implication of the same on the organisation.

The theory is based on three different hypotheses that are bonus plan hypotheses, debt/equity hypothesis and political cost hypothesis. The theory uses these hypotheses to predict the use of accounting method by different firms. With the help of these three hypotheses, the theory tries to describe the use of earnings management by the companies. The theory is mainly introduced to merge efficient securities market with economic situations. it also states that the managers do not always perform to benefit the shareholders but most of the times they also work to benefit the organisation as a whole.

The organisation is best identified with the help of the contracts it enters into with different outside parties. The organisation’s contract with shareholders, suppliers, customers and bankers are important for its operations. The main objective of the organisation could be to keep the costs of contracting as low as possible. The theory states that the organisations choice of accounting is purely based on the objective of keeping the costs of contract low.

The research on positive accounting is being made since last four decades by many authors. Many empirical researches were conducted by different authors in last few years. a research made by Lev explained why is the reason behind choosing a particular accounting theory, why do managers oppose to the change in the accounting policies? A research made by Healy concluded that the organisations with bonus incentive plans would report higher income as the accrual policies would be adopted by the managers to account the transactions. Jones as result of study of the theory concluded that firms would show lower income while there were subject to import relief investigations because if the firms prove that they their income has been reduced due to the competition in foreign market, they would be given assistance by the government.

Political cost is one of the terms used in the theory. Political costs are the costs imposed on the firm by the external factors. The environmental authorities, governments or groups of consumers also affect the organisation. If the organisation records higher net income as a result of use of particular accounting practise, trade unions may demand to increase their share of income. Watts and Zimmerman in the year 1986 examined that in the year 1970, the US companies were demanded claims by the consumers, unions and government. The claims were due to the belief that the companies were making higher profits and their operations could harm the nation. It can be concluded that the claims must have been made to higher reported income by US oil companies. This way, managers would use different accounting approaches to increase or reduce the reported income. If, there are possibilities of higher wages demand or imposition of higher taxes, the managers would manipulate the data regarding income or expenses and accordingly show higher or lower income. Many transactions are uncovered by the IAS and IFRS that do not provide the treatment of the same and that’s where the managers get an opportunity to apply different accounting method and benefit from the same.

The theory has been criticized a lot as the theory only predicts and explain the accounting methods that would be adopted by the organisations but it doesn’t describe which method should be used by firms to get the maximum benefit out of the same. The authors of normative theory dictated the positive accounting as description rather than a prescription. The theory fails at giving improvements in the accounting theory as it doesn’t prescribe which accounting method to use. It is not sufficient just to explain and predict the accounting theories, it is should be helpful to be used by the followers of accounting. Moreover, the basic assumption of the theory on which the whole is based is too negative perspective of the humankind. Some of the researchers also state that the theory promotes bankrupt view of the world. The theory was developed in the year 1986 and till now the issues that were addressed regarding the theory have not shown any great developments.

Till now, after 25 years of the development of the theory, the theory is being correlated to many environments and the hypothesis is still tested in many accounting issues. The theory basically does not help the fraternity to choose the best accounting policy among many. Although, the theory is quite not useful to improve or select or go with best accounting policies, the theory is still being used by many of the users. Many of the journals on researches still continue to publish researches on PAT. The theory is still being taught by many of the accounting research schools. It should also be remembered that all the theories related to accounting will definitely have limitations.

The issues raised by the theory still have not shown any of the major developments. This way, the theory explains and predicts the behaviour and choice of the managers of the accounting policies.

References

Khosru, April. 2011., “Positive Accounting Theory”, Accessed on 10th January, 2016,

Markus J. Milne, N.D., “Positive Accounting Theory, Political costs and Social Disclosure Analysis: A Critical Look”, Accessed on 10th January, 2016,

M. Humayun Kabir, N.D., “Positive Accounting Theory and Science”, Accessed on 10th January, 2016,

ANON, N.D., “The Positive Theory of Accounting”, Accessed on 10th January, 2016,

Abdelmoula Salah, November.2010., “Master Thesis”, Accessed on 10th January, 2016,