Positive Accounting Theory

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Positive Accounting Theory
• Sometimes abbreviated as PAT
• Explains and predicts accounting practice
• Does not seek to prescribe particular actions
• Grounded in economic theory
• Focuses on the relationships between various individuals involved in providing resources to an organisation (agency relationship) • Owners and managers
• Managers and debt providers
Positive Accounting Theory
• Assumptions of PAT
• All individual action is driven by self-interest • Individuals will act in an opportunistic manner to increase their wealth • Notions of loyalty and morality are not incorporated within the theory • Organisations are a collection of self-interested individuals who agree to cooperate Positive Accounting Theory

• PAT predictions
• Organisations will seek to put in place mechanisms to align the interests of managers of the firm (agents) with the interests of the owners (principals) • Some of these mechanisms rely on the output of the accounting system PAT - Practices to Be Explained

• Why do firms prepare accounting reports?
• Why are those reports so conservative?
• What motivates the choice amongst accounting method alternatives? • Why firms lobby for/against accounting regulations?
Positive Accounting Theory
• Research that applies PAT usually adopts either an efficiency or an opportunistic perspective • Efficiency perspective of PAT
• Researchers explain how contracting mechanisms can be put in place up front with the objective of minimising agency costs, ie the costs associated with assigning the decision making processes to an agent • Referred to as ex ante perspective i.e. before the fact, what things are introduced up front to try and minimize future agency costs • Efficiency perspective also argues accounting practices adopted by firms are...
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