Business Accounting Methods : Accounting Disclosure Ratings

1 (a): Positive Accounting Theory:

Positive accounting theory states that the accounting methods, techniques and procedures adopted by an individual are driven by his self interests and that the individuals act in an opportunistic manner so as to maximize their wealth. The main objective of Positive accounting theory is to describe, explain and predict the accounting procedures adopted or to be adopted by the business managers. Positive accounting theory also aims to minimize the business costs and maximize shareholders’ wealth. In other words, positive accounting theory predicts about the probable real life situation and converts those real time situations to accounting domains. Positive accounting theory helps to explain the economic implications that may result as a consequence of selection of a particular accounting procedure. It assists in maintaining sustainable accounting in the sense that it aims to minimize the contractual and agency costs and maximize the shareholder’s wealth thereby outlining a favorable economic impact on the organizations, as a whole. Positive accounting theory ensures the fulfillment of both the organizational interests by entering into contractual agreements, at the same time, lays proper emphasis on their self interest objectives. Sustainability accounting basically revolves around the economic impact, the social impact and the environmental impact that the chosen accounting procedure has. Hence, Positive accounting theory accomplishes sustainable accounting policy. Corporate social responsibility is often referred to a social and environmental reporting (Deegan, 2007). CSR reporting can also be explained as the organization’s management  strategy to communicate with its stakeholders and the general public. Positive Accounting Theory becomes an interesting rationale for CSR reporting. Moreover as indicated by, Positive accounting theory considers the firm as a nexus of contracts between economic agents who act opportunistically (Reverte, 2009). Also, Positive accounting theory emphasizes on wealth maximization principle and also fulfillment of the self interests of the business managers (Gray, Koughy, & Lavers, 1995). PAT states that the firms would strive to minimize the contracting and agency costs by selecting an appropriate accounting method and technique (Graffikin, 2007). It is also examined that the Return on investments and equity are positively related to the corporate social disclosures made by the organization (Chan, 2003).

1(b): Legitimacy theory:

Legitimacy theory states that an entity is required to undertake at least such social and developmental activities, which the society and the community in which the entity operates expects the entity to conduct. It ensures that they operation within the norms and the framework designed by the respective communities (Deegan 2002; Deegan, Rankin and Voght 2000; Cormier and Gordon 2001). Legitimacy theory states that the company enters into a social contract with the society, in which it operates. This social contract between the company and the society tells about the social expectations that the society/ community has about the business operations. And these expectations vary with the change in time and the business scenario. This entails the need for the organizations to be dynamic and responsive in nature, rather than rigid (Deegan 2000, p. 253). If a company perceives that it is not able to fulfill the requirements required by the legitimacy theory,  then, it can opt for a series of strategies involving identification of the legitimacy gap and then analyzing whether  the societal expectations are reasonable or misleading and then, act accordingly (Gray, Kouhy and Lavers ,1995, p. 54).

1©: Stakeholder theory:

Stakeholder theory states that it is the utmost duty and responsibility of the organization to create as much value as possible for its stakeholders, which include internal parties like the shareholders or the owners, directors and also the external business parties like creditors, suppliers, debtors, Government and the local community. Stakeholders can be better described as those parties which have a legitimate interest in the business and its routine operations and they operate because of their self driven interests. Traditionally, organizations considered value creation for its shareholders to be very necessary and crucial. But, with the growing importance of every other party with which the business transacts or is liable to, the emphasis from only shareholders has moved towards stakeholders, which is a very wider term comparatively. In other words, stakeholder theory is a conceptual framework wherein greater emphasis is made towards the business ethics and values. In the ethical sense, organizations are required to discharge its social responsibilities along with the overall firm’s objective of wealth maximization. Corporate social responsibility requires n organization to fulfill all its social and environmental obligations, without compromising with   the wealth maximization objective.

Answer 1(d):  Institutional Theory:

Institutional theory relates to the manner in which the rules, institutional norms and guidelines happen to become the authorized guideline for social behavior. Every person dealing or working in the organization, whether internally or externally, must adhere to these established guidelines ( Scott, 2007). Institutional theory addresses on how the changes in technology, legal regulations, rules affect the sustainable and environmental activities, undertaken by the firm. (Fowler and Hope, 2007). Institutional theory provides a real yet complex outlook of the organization. These theories lay the fact that organizations are influenced by both internal as well as external pressures, which encourages the organization to be rigid in complying with the norms and laws already set.

2: Positive accounting theory states that the accounting methods, techniques and procedures adopted by an individual are driven by his self interests and that the individuals act in an opportunistic manner so as to maximize their wealth.

Some of the much known shortcomings of Positive Accounting theory are as follows:

Positive accounting theory assumes that managers will select a particular accounting method on the basis of their presumptions that this will lead to an increase their personal wealth. This clearly states that this theory is abrupt and is based on one’s beliefs and presumptions, rather than on some reliable scientifically accepted mechanism.

Positive Accounting Theory (PAT) considers self-interest to be the only criteria to choose accounting methods and techniques as well as policy decisions. It is vague and featured only the value perspective.

The positive accounting approach doesn’t specify the manner and method of reporting to be done by the firm. Hence, in the absence of a universal method, complexities would arise.

Positive accounting theory does not provide any means of improving the manner in which the accounting process is carried out. Rather, it just specifies that the accounting methods and techniques, considered suitable and convenient as per their self interests shall be effected by the business managers.

Positive accounting theory lays excessive focus on the manager’s self driven interests and further claims that they select the accounting practice only on the basis of those value based interests. Hence, such chosen accounting method shall be partial and prejudicial.

Positive accounting theory focuses on the individual choices of the managers in the organization. As we all know, an organization consists of a large number of managers, employees and other officials. So, it is impossible for all to have one single choice of the accounting method and as a result, it would lead to a conflict of interests within the organization.

Positive accounting theory does not lay down any universally and globally accepted set of accounting rules, methods and techniques. So, in order to carry out any fundamental or technical analysis of one organization with the other, the business and finance manager would find it to be very inconvenient and complex.

After an in depth study about the Positive accounting theory, the above mentioned shortcomings or criticisms cannot be completely ignored. These criticisms are valid and it makes PAT a lesser reliable accounting theory. It is very definite for a proper accounting theory to be specific rather than general. The most apt theory must provide us with a set of rules and methods, which should be complied by all the organizations globally.  Moreover, mere emphasis on one’s personal value based interests makes the theory more prejudicial. Mere simplicity of the theory does not imply correctness and reliability of the theory.

References:

Deegan, C. M. (2007). Financial Accounting Theory, 2nd ed. Australia: McGraw-Hill.

Reverte, C. (2009). Determinants of corporate social responsibility disclosure ratings by Spanish listed firms. Journal of Business Ethics, pp.88, 351-366.

Deegan, C., Rankin, M. and Voght, P. (2000). Firms’ Disclosure Reactions to Social Incidents: Australian Evidence. Accounting Forum. Vol. 24, pp. 101-130.

Cormier, D. and Gordon, I. (2001). An Examination of Social and Environmental Reporting Strategies. Accounting, Auditing & Accountability Journal, Vol. 14, pp. 587- 616.

Orij, R. (2007). Corporate social disclosures and accounting theories: an investigation. European Accounting Association, Lisbon.

Gray, R., Owen, D., & Maunders, K. (1987). Corporate social reporting: Accounting and accountability. London: Prentice-Hall.

Graffikin, M. J. R. (2007). Accounting research and theory: The age of neo-empiricism. Australasian Accounting and Business and Finance Journal, Vol. 1(1), pp. 1-19.

Chan, C., & Kent, P. (2003). Application of stakeholder theory to the quantity and quality of Australian voluntary corporate environmental disclosures. Accounting and Finance Association of Australia and New Zealand (AFAANZ), Brisbane.

 

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