Positive Accounting Theory

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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 often far too simplistic

▪ Scientifically flawed as the hypotheses generated pursuant to PAT are frequently not supported

▪ Positive researchers believe that they can generate laws and principles expected to operate in different situations. o In undertaking large-scale empirical research, positive researchers ignore many organisation-specific relationships and the information…...

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