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806 Words Sep 24th, 2014 4 Pages
Positivistic tendencies: Human Nature or Scientific Necessity

Differentiate between a positive and normative accounting theory * Positive Theory seeks to explain and predict particular phenomena * Focuses on relationships between various individuals and how accounting is used to assist in the functioning of these relationships * Normative Theory prescribe how a particular practice should be undertaken

Identify the origins of Positive Accounting Theory (PAT) * Assumption: All individual action is driven by self-interest opportunistic behaviour increase wealth does not incorporate notions of loyalty or morality * 1960s: paradigm shift from normative theories * Efficient Markets Hypothesis: capital
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se income and the closer the firm is to the constraints in debt covenants covenant violation results in costs of technical default * Political cost hypothesis: Large firms rather than small firms are more likely to use accounting choices that reduce reported profits, size is a proxy variable for political attention and the reduction of reported income is hypothesized to reduce the possibility that people will argue that the organisation is exploiting other parties * ^ Assumed: mangers will act opportunistically when selecting methods

Perspectives * Efficiency Perspective/ ex ante perspective Contracting mechanisms minimize agency costs of the firm Managers select accounting methods which most efficiently reflect underlying firm performance * Opportunistic Perspective/ ex post perspective Explains managers; actions once contracts are already in place not possible to write complete contracts, so mangers are assumed to opportunistically act to maximize own wealth

Review the role of accounting in minimizing the transaction costs of organisation

Fixed basis- salary independent of performance manager may not take great risks as does not share in potential gains

Salary plus remuneration – tied to firm performance (Bonus Schemes)

Rewarded in line with market price of the firm’s shares

Rewarding managers any changes in accounting methods will affect the bonuses paid contracts in some circumstances may be based on the old method in place so

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