1
7-1
ACCOUNTING THEORY
TOPIC 6
CHAPTER 7
Positive Accounting Theory
Learning objectives
7.1 Understand how a positive theory differs from a normative
theory.
7.2 Be aware of the origins of Positive Accounting Theory (PAT).
7.3 Understand that PAT uses insights from agency theory and
why agency theory is of relevance to financial accounting
practices.
7.4 Be aware of the central assumptions of PAT.
7.5 Be aware of the meaning and nature of agency costs.
7.6 Understand why an organisation can usefully be referred to
as a ‘nexus of contracts’.
7.7 Understand the perceived role of accounting in minimising the
transaction costs of an organisation.
continued
Learning objectives (cont.)
7.8 Be aware that accounting policy choices made by
management will be influenced by both efficiency
considerations as well as opportunistic motivations.
7.9 Be able to identify the reasons for the existence of ‘creative
accounting’.
7.10 Be able to explain the meaning of ‘political costs’ and how
accounting can be used to reduce the costs associated with
various political processes.
7.11 Understand the role of accounting-based management
compensation schemes and debt covenants in reducing
potential conflicts (agency costs) within an organisation.
7.12 Understand how particular accounting-based agreements
with parties such as debtholders and managers can provide
incentives for managers to manipulate accounting numbers.
continued
1
2
3
2
Learning objectives (cont.)
7.13 Be aware of what constitutes ‘conservative’ accounting
procedures and why conservative accounting procedures
provide efficient mechanisms for minimising the contracting
costs within an organisation.
7.14 Understand the relevance of PAT to current debates about
how assets and liabilities should be measured.
7.15 Be able to identify some of the criticisms of PAT.
Positive theories compared to
normative theories
• A positive theory seeks to explain and predict
particular phenomena
– Positive Accounting Theory (PAT), which we explore in this
lecture, is one example of a positive theory of accounting.
Other examples are covered in the next lecture (when we
consider theories such as Legitimacy Theory and
institutional theories which are positive theories that can be
applied to explain the practice of accounting)
• By contrast, normative theories (which were
considered in Chapters 5 and 6) prescribe how a
particular practice should be undertaken
– the prescription might depart from existing practice
Positive Accounting Theory
defined
• 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.’ (Watts and Zimmerman 1986, p. 7)
• Again, positive theories do not prescribe what should
occur – they focus on explaining or predicting what
does occur
continued
4
5
...
1
7-1
ACCOUNTING THEORY
TOPIC 6
CHAPTER 7
Positive Accounting Theory
Learning objectives
7.1 Understand how a positive theory differs from a normative
theory.
7.2 Be aware of the origins of Positive Accounting Theory (PAT).
7.3 Understand that PAT uses insights from agency theory and
why agency theory is of relevance to financial accounting
practices.
7.4 Be aware of the central assumptions of PAT.
7.5 Be aware of the meaning and nature of agency costs.
7.6 Understand why an organisation can usefully be referred to
as a ‘nexus of contracts’.
7.7 Understand the perceived role of accounting in minimising the
transaction costs of an organisation.
continued
Learning objectives (cont.)
7.8 Be aware that accounting policy choices made by
management will be influenced by both efficiency
considerations as well as opportunistic motivations.
7.9 Be able to identify the reasons for the existence of ‘creative
accounting’.
7.10 Be able to explain the meaning of ‘political costs’ and how
accounting can be used to reduce the costs associated with
various political processes.
7.11 Understand the role of accounting-based management
compensation schemes and debt covenants in reducing
potential conflicts (agency costs) within an organisation.
7.12 Understand how particular accounting-based agreements
with parties such as debtholders and managers can provide
incentives for managers to manipulate accounting numbers.
continued
1
2
3
2
Learning objectives (cont.)
7.13 Be aware of what constitutes ‘conservative’ accounting
procedures and why conservative accounting procedures
provide efficient mechanisms for minimising the contracting
costs within an organisation.
7.14 Understand the relevance of PAT to current debates about
how assets and liabilities should be measured.
7.15 Be able to identify some of the criticisms of PAT.
Positive theories compared to
normative theories
• A positive theory seeks to explain and predict
particular phenomena
– Positive Accounting Theory (PAT), which we explore in this
lecture, is one example of a positive theory of accounting.
Other examples are covered in the next lecture (when we
consider theories such as Legitimacy Theory and
institutional theories which are positive theories that can be
applied to explain the practice of accounting)
• By contrast, normative theories (which were
considered in Chapters 5 and 6) prescribe how a
particular practice should be undertaken
– the prescription might depart from existing practice
Positive Accounting Theory
defined
• 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.’ (Watts and Zimmerman 1986, p. 7)
• Again, positive theories do not prescribe what should
occur – they focus on explaining or predicting what
does occur
continued
4
5
...
What Are Financial Statements?
Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. For-profit primary financial statements include the balance sheet, income statement, statement of cash flow, and statement of changes in equity. Nonprofit entities use a similar but different set of financial statements.
Respond to... Companies often try to keep accounting earnings .docxwilfredoa1
Respond to...
Companies often try to keep accounting earnings growing at a relatively steady pace in an effort to avoid large swings in earnings from period to period. They also try to manage earnings targets. Reflect on these practices and discuss the following in your discussion post.
Are these practices ethical?
According to Ortega & Grant (2003), “earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company to influence contractual outcomes” (p. 51). Because these practices are used to alter the financials of a firm from actuality, then, no, these practices are not ethical, however there are common practice and, in some circumstances, acceptable.
What are two tactics that a financial manager can use to manage earnings?
Financial managers at times will use certain tactics to manage earnings. Two tactics that financial managers use to manage earnings are the Big Bath technique and the cookie jar reserve. The big-bath technique consists of taking a one-time, large write-offs or restructuring charges against income in order to reduce assets to further lower future expenses (Hope & Wang, 2018). The use of the big bath method can affect a firms’ competitiveness as it is essentially reporting a loss, which can have negative results on stock prices. The other method is the cookie jar reserve occurs when a company saves money from successful years and draws from that money and applies it to bad years in order to bolster earnings reports (CPA Journal, 1999). The method is used as way to smooth income and appear financially better when in actuality the company is having a bad year.
What are the implications for cash flow and shareholder wealth?
Ultimately, financial manager’s job is to maximize profit, because of this conflict of interest may occur. According to Chalak & Mohammadnezhad (2012), “with respect to increase shareholder wealth, free cash flows are of importance because allow managers to seek growth opportunities which increase share value” (p. 430). Therefore, the use of the techniques in the regards to implications for cash flow and shareholder wealth can be detrimental due to unreliable and inaccurate information, which occurs from managers intentionally influencing actual financials.
Using the financial balance sheet as displayed in the text, provide an example of how purchasing an asset or issuing stocks or bonds could potentially impact earnings targets.
When purchasing an asset or issuing stocks earnings targets are impacted due the changes in cash flow. For instance, when purchasing assets, the cash accounts will decrease the purchase amount, while issuing stocks or bonds increases by the amount received for the purchased stocks. These actions can a company to miss or exceed its earnings targets by the amounts of cash flow coming in or going ou.
Organisations spend heavily on technology, people skills and consulting to understand billions of bits of data, but they still lack clear visibility and insight.....
1.1. Nature and Definition of Auditing
Different scholars have defined auditing in different ways. For example, Auditing is a process of collection and evaluation of evidence for the purpose of reporting on economic transaction. The other definition of auditing given by the Institute of Chartered Accountants of India, in its publication titled, General Guidelines on Internal Auditing has defined auditing as ‘ a systematic and independent evaluation of data, statements, records, operations and performances ( financial or otherwise) of an enterprise for stated purpose. In any auditing situation, the auditor perceives and recognizes the propositions before him for examination, collects evidence, evaluates the same and on this basis formulates his/her judgment which is communicated through audit report.
As it is cited in Kanal Gupta and Arora A.(1996,p6), Arens and Loebbecke defined auditing as the process by which a complete, independent person accumulates and evaluates evidence about quantifiable information related to specific economic entity for the purpose of determining and reporting on the degree of correspondence between the quantifiable information and established criteria. To sum up, Auditing is the process of verifying the assertions produced by accounting, as to whether they present a true and fair view of the entity's financial position in accordance with accounting standards and GAAP. In other words, auditing seeks to verify whether or not financial records have been properly prepared.
Study Note
The term audit is derived from the Latin term ‘audire,’ which means to hear. In early days an auditor used to listen to the accounts read over by an accountant in order to check them Auditing is as old as accounting.
It was in use in all ancient countries such as Mesopotamia, Greece, Egypt. Rome, U.K. and India. The Vedas contain reference to accounts and auditing.
The original objective of auditing was to detect and prevent errors and frauds and most recently objective of audit shifted to ascertain whether the accounts were true and fair rather than detection of errors and frauds.
Auditing evolved and grew rapidly after the industrial revolution in the 18th century with the growth of the joint stock companies the ownership and management became separate.
The shareholders who were the owners needed a report from an independent expert on the accounts of the company managed by the board of directors who were the employees.
1.2. Historical Development of Auditing
The development of auditing is closely linked to the development of accounting. In the early stage of civilization, the number of transaction was usually so small that able to record the transactions himself. However, with the growth of civilization and consequential growth in volume and complexity of transactions, it becomes necessary to entrust the job of recording the transactions to other persons. The trend started with maintenance of accounts to empires by public officials
Developing a financial strategy is vital as a CEO. Doing so allows projections to be made for the coming months, including forecasting income and expenses, and can act as a crucial early warning system. Cash flow dips can be planned for, with the best times to start new projects identified and finance needs anticipated in advance. A financial strategy allows a CEO to assess progress and take steps to circumnavigate bumps in the road ahead.
Yes of course, you can easily start mining pi network coin today and sell to legit pi vendors in the United States.
Here the telegram contact of my personal vendor.
@Pi_vendor_247
#pi network #pi coins #legit #passive income
#US
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
What Are Financial Statements?
Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. For-profit primary financial statements include the balance sheet, income statement, statement of cash flow, and statement of changes in equity. Nonprofit entities use a similar but different set of financial statements.
Respond to... Companies often try to keep accounting earnings .docxwilfredoa1
Respond to...
Companies often try to keep accounting earnings growing at a relatively steady pace in an effort to avoid large swings in earnings from period to period. They also try to manage earnings targets. Reflect on these practices and discuss the following in your discussion post.
Are these practices ethical?
According to Ortega & Grant (2003), “earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company to influence contractual outcomes” (p. 51). Because these practices are used to alter the financials of a firm from actuality, then, no, these practices are not ethical, however there are common practice and, in some circumstances, acceptable.
What are two tactics that a financial manager can use to manage earnings?
Financial managers at times will use certain tactics to manage earnings. Two tactics that financial managers use to manage earnings are the Big Bath technique and the cookie jar reserve. The big-bath technique consists of taking a one-time, large write-offs or restructuring charges against income in order to reduce assets to further lower future expenses (Hope & Wang, 2018). The use of the big bath method can affect a firms’ competitiveness as it is essentially reporting a loss, which can have negative results on stock prices. The other method is the cookie jar reserve occurs when a company saves money from successful years and draws from that money and applies it to bad years in order to bolster earnings reports (CPA Journal, 1999). The method is used as way to smooth income and appear financially better when in actuality the company is having a bad year.
What are the implications for cash flow and shareholder wealth?
Ultimately, financial manager’s job is to maximize profit, because of this conflict of interest may occur. According to Chalak & Mohammadnezhad (2012), “with respect to increase shareholder wealth, free cash flows are of importance because allow managers to seek growth opportunities which increase share value” (p. 430). Therefore, the use of the techniques in the regards to implications for cash flow and shareholder wealth can be detrimental due to unreliable and inaccurate information, which occurs from managers intentionally influencing actual financials.
Using the financial balance sheet as displayed in the text, provide an example of how purchasing an asset or issuing stocks or bonds could potentially impact earnings targets.
When purchasing an asset or issuing stocks earnings targets are impacted due the changes in cash flow. For instance, when purchasing assets, the cash accounts will decrease the purchase amount, while issuing stocks or bonds increases by the amount received for the purchased stocks. These actions can a company to miss or exceed its earnings targets by the amounts of cash flow coming in or going ou.
Organisations spend heavily on technology, people skills and consulting to understand billions of bits of data, but they still lack clear visibility and insight.....
1.1. Nature and Definition of Auditing
Different scholars have defined auditing in different ways. For example, Auditing is a process of collection and evaluation of evidence for the purpose of reporting on economic transaction. The other definition of auditing given by the Institute of Chartered Accountants of India, in its publication titled, General Guidelines on Internal Auditing has defined auditing as ‘ a systematic and independent evaluation of data, statements, records, operations and performances ( financial or otherwise) of an enterprise for stated purpose. In any auditing situation, the auditor perceives and recognizes the propositions before him for examination, collects evidence, evaluates the same and on this basis formulates his/her judgment which is communicated through audit report.
As it is cited in Kanal Gupta and Arora A.(1996,p6), Arens and Loebbecke defined auditing as the process by which a complete, independent person accumulates and evaluates evidence about quantifiable information related to specific economic entity for the purpose of determining and reporting on the degree of correspondence between the quantifiable information and established criteria. To sum up, Auditing is the process of verifying the assertions produced by accounting, as to whether they present a true and fair view of the entity's financial position in accordance with accounting standards and GAAP. In other words, auditing seeks to verify whether or not financial records have been properly prepared.
Study Note
The term audit is derived from the Latin term ‘audire,’ which means to hear. In early days an auditor used to listen to the accounts read over by an accountant in order to check them Auditing is as old as accounting.
It was in use in all ancient countries such as Mesopotamia, Greece, Egypt. Rome, U.K. and India. The Vedas contain reference to accounts and auditing.
The original objective of auditing was to detect and prevent errors and frauds and most recently objective of audit shifted to ascertain whether the accounts were true and fair rather than detection of errors and frauds.
Auditing evolved and grew rapidly after the industrial revolution in the 18th century with the growth of the joint stock companies the ownership and management became separate.
The shareholders who were the owners needed a report from an independent expert on the accounts of the company managed by the board of directors who were the employees.
1.2. Historical Development of Auditing
The development of auditing is closely linked to the development of accounting. In the early stage of civilization, the number of transaction was usually so small that able to record the transactions himself. However, with the growth of civilization and consequential growth in volume and complexity of transactions, it becomes necessary to entrust the job of recording the transactions to other persons. The trend started with maintenance of accounts to empires by public officials
Developing a financial strategy is vital as a CEO. Doing so allows projections to be made for the coming months, including forecasting income and expenses, and can act as a crucial early warning system. Cash flow dips can be planned for, with the best times to start new projects identified and finance needs anticipated in advance. A financial strategy allows a CEO to assess progress and take steps to circumnavigate bumps in the road ahead.
Yes of course, you can easily start mining pi network coin today and sell to legit pi vendors in the United States.
Here the telegram contact of my personal vendor.
@Pi_vendor_247
#pi network #pi coins #legit #passive income
#US
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
The Evolution of Non-Banking Financial Companies (NBFCs) in India: Challenges...beulahfernandes8
Role in Financial System
NBFCs are critical in bridging the financial inclusion gap.
They provide specialized financial services that cater to segments often neglected by traditional banks.
Economic Impact
NBFCs contribute significantly to India's GDP.
They support sectors like micro, small, and medium enterprises (MSMEs), housing finance, and personal loans.
Currently pi network is not tradable on binance or any other exchange because we are still in the enclosed mainnet.
Right now the only way to sell pi coins is by trading with a verified merchant.
What is a pi merchant?
A pi merchant is someone verified by pi network team and allowed to barter pi coins for goods and services.
Since pi network is not doing any pre-sale The only way exchanges like binance/huobi or crypto whales can get pi is by buying from miners. And a merchant stands in between the exchanges and the miners.
I will leave the telegram contact of my personal pi merchant. I and my friends has traded more than 6000pi coins successfully
Tele-gram
@Pi_vendor_247
The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
where can I find a legit pi merchant onlineDOT TECH
Yes. This is very easy what you need is a recommendation from someone who has successfully traded pi coins before with a merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi network coins and resell them to Investors looking forward to hold thousands of pi coins before the open mainnet.
I will leave the telegram contact of my personal pi merchant to trade with
@Pi_vendor_247
If you are looking for a pi coin investor. Then look no further because I have the right one he is a pi vendor (he buy and resell to whales in China). I met him on a crypto conference and ever since I and my friends have sold more than 10k pi coins to him And he bought all and still want more. I will drop his telegram handle below just send him a message.
@Pi_vendor_247
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
What website can I sell pi coins securely.DOT TECH
Currently there are no website or exchange that allow buying or selling of pi coins..
But you can still easily sell pi coins, by reselling it to exchanges/crypto whales interested in holding thousands of pi coins before the mainnet launch.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and resell to these crypto whales and holders of pi..
This is because pi network is not doing any pre-sale. The only way exchanges can get pi is by buying from miners and pi merchants stands in between the miners and the exchanges.
How can I sell my pi coins?
Selling pi coins is really easy, but first you need to migrate to mainnet wallet before you can do that. I will leave the telegram contact of my personal pi merchant to trade with.
Tele-gram.
@Pi_vendor_247
2. 2
What is PAT?
Studies Managers’ Accounting Policy
Choices, As Part of the Overall Process of
Corporate Governance
That Is, Accounting Policies are Chosen
Strategically
Positive, Not Normative. Tries to
Understand and Predict Managers’
Accounting Policy Choices.
3. 8-3
ASSUMPTIONS OF PAT
Managers are Rational (Like Investors)
Conflict (Between Interests of
Managers and Investors)
Efficient Securities Market
Efficient Managerial Labour Market
But may be inside information about
manager effort and ability (moral hazard
problem)
A second major role for financial reporting--
to report on manager effort and ability
5. 5
Positive Accounting Theory
Teori akuntansi positif mengarahkan pemahaman dan prediksi
pilihan kebijakan akuntansi perusahaan, dinyatakan bahwa pilihan
kebijakan akuntansi adalah bagian dari kebutuhan perusahaan
untuk meminimalisir biaya kontraknya.
Kebijakan akuntansi ditentukan oleh struktur organisasi perusahaan
menurut kondisi lingkungannya dan pilihan kebijakan akuntansi
menjadi bagian dari pengelolaan perusahaan.
Dalam praktiknya kebijakan akuntansi akrual diterapkan lewat
perlakuan transaksi yang berkaitan dengan laba agar lebih
mendekati nilai ekspektasi perusahaan. Hal ini mengingat pihak
manajemen memiliki kompetensi untuk mengendalikan kuantifikasi
kejadian yang berpengaruh terhadap laba
6. 6
Agency Theory
The agent (like the principal) will be
driven by self-interest, and therefore the
principals will anticipate that the
manager, unless restricted from doing
otherwise, will undertake self-serving
activities that could be detrimental to
economic welfare of the principals.
8. 8
Positive Accounting Theory
Assumptions:
The accountants (and, in fact, all
individuals) are primarily motivated by
self-interest (tied to wealth
maximisation), and that the particular
accounting method selected (where
alternative are available).
9. 9
The Three Hypotheses
Bonus Plan Hypothesis
Derives from managerial incentive contracts
Debt Covenant Hypothesis
Derives from debt contracts
Political Cost Hypothesis
Very large firms minimize political “heat”
NB: Contacts are Rigid
10. 10
The Bonus Plan Hypothesis
Bonus based on net income
To get more bonus, choosing
accounting methods that
increase current reported
earnings
11. 11
The Bonus Plan Hypothesis
All other things being equal, managers
of firms with bonus plans are more
likely to choose accounting procedures
that shift reported earnings from future
periods to the current period
12. 12
The Bonus Plan Hypothesis
Because of the nature of of the accrual
process, this will tend to lower future
reported earnings and bonuses, other things
equal.
PV of manager’s utility from future bonus
stream will be increased by shifting earnings
toward the present
13. 13
The Debt Covenant Hypothesis
All other things being equal, the closer a firm
is to violation of accounting-based debt
covenants, the more likely the firm manager
is to select accounting procedures that shift
reported earnings from future periods to the
current period
14. 14
The Debt Covenant Hypothesis
Violation of debt covenant is costly
Restriction on dividends
Limit additional borrowing
Issuance of stock, …
Increase current earnings
Assets increase
To avoid violation
15. 15
The Political Cost Hypothesis
All other things equal, the greater the
political costs (taxes, regulations)
faced by a firm, the more likely the
manager is to choose accounting
procedures that defer reported
earnings from current to future
periods
16. 16
The Political Cost Hypothesis
Large firm with high profit attracts
media, consumers, and politicians
attention
Large firm trend to reduce profit reports
20. 20
PAT Concept
Agency Theory Efficient Market
Hypothesis (EMH)
Positive Accounting
Theory (PAT)
Bonus
Plan
Hypothesis
Political
Cost
Hypothesis
Debt
Covenant
Hypothesis
Accounting Standards and Practices
Normative
Theory
