Progress In Time, Positive Accounting Theory

Progress in time, positive accounting theory

The development of modern accounting research can be better understood as part of the general expansion of higher education in many industrialized countries in the 60s and 70s, combined with the widespread belief that scientific research could not only increase our domain over the worldNatural but it could also solve social problems and help manage social change. Accounting as well as other disciplines seeks to theorize about its usefulness and applicability, for this it must have an both quantitative and qualitative methodology, since it has the ability to count and describe the choice of a data sample and through this to do all accounting methodsTo expose them in the organization. When thinking about the definition of accounting but speaking from the vision of accounting practice, accounting can then be defined as a process or dogma full of rules. With the arrival of positivist theory this scheme is broken and the way of seeing accounting as a science is raised. Through this work, the positive accounting theory will be addressed, a bit of its history, as well as the financial theory and firm theory.

The beginnings of the positive accounting theory occurred at the time of the 60s promoted by Friedman’s positive economic theory, it was then that the normativist approach which accentuated the prescriptions and was unable to empirically prove the hypotheses that gave foundation to said prescriptions wasleaving behind and little by little positivist economic theory was taking boom.

The first drivers of the positive approach (Watts and Zimmerman, 1978) defined the positive accounting theory as an accounting discipline whose central objective is to explain and predict accounting practice, through one of its main instruments: empirical research. However, the background of this positive orientation is approaching the year 1964. This author was the first to provide a theory to explain the incentives that motivate the choice of accounting methods of the companies.

Then it is clear that the objective of the positive accounting theory is to explain and predict accounting practice. Explain that you must provide reasons for the practice that is observed and predict because it predicts, the redundancy is worthless, the un observed accounting phenomena, whether future or past (accounting practice).

The managers will choose those accounting policies that best relate the temporary series of results, and therefore, implicitly assume that they consider that users of the accounting information do not have enough capacity to identify the manipulations made and readjust the accounting figures to whatthat would be his evolution "true)). However, all these ideas were definitely introduced by Watts and Zimmerman [1978], who are unanimously recognized as the great promoters of positive accounting.

It can be understood that positivist theory seeks to explain why organizations select their accounting policies and go beyond focusing on the use of financial information, giving great importance and interest in their study.

The positive accounting theory is important because it can be supplied to those who must make decisions on accounting policies (corporate managers, public counters, lend agents, investors, financial analysts, regulators), predictions and explanations of the consequences of their decisions. An important test of an accounting theory is how useful it is. A user will use the theory that increases their well -being until a more beneficial theory develops.

Undoubtedly, the positive accounting theory has enough advantages over the great use of users, since it allows them to somehow predict the possible failures in their decisions or the possible events that could happen and affect the economy ofa company.’The authors argue that the administration of a company plays a central role in determining the standards and for this they seek to understand the incentives of management that influence the choice of accounting methods.". By approving a theory on another, theorists have influence for the intuitive attraction of the explanation that the theory gives to phenomena, due to the level of the phenomena that it can explain and for the usefulness of their predictions for users.

The positive approach is based on two major theories: financial theory based on the efficiency hypothesis, developed by Ball and Brown in 1968 and the firm theory that has its support in contractual costs and agency relations linked to contributionsof Jensen and Meckling in 1976. Regarding financial theory, Ball and Brown investigated and studied, through the use of ‘Perspective Information’, the relationship between the prices of the shares and the accounting results of the companies, demonstrating that the accounting results have information content,being appreciated by the market and incorporated into the stock market formation mechanism. 

In financial theory, information can be found that leads or allows prices in the market, in addition to being the set of knowledge that expresses the financial dynamics of the company that provides models and criteria to make decisions in this area.

The firm’s theory is based on the work of COASE who defined the company (signature) as a network of contracts without which the signatures would be irrelevant since consumers would directly hire the owners of productive factors. Watts and Zimmerman (1990), consider that accounting may not exist without contractual costs and that is why they think it is of great importance to refer to these costs when trying to produce a theory that explains accounting. 

The firm’s theory is based on the fact that the structure of the company has as a group of financial contracts, and that the participation of shareholders in the property of this is a legal fiction. According to this orientation, the stipulated relationships that are set between the obligation and the shareholders whether internal or external to the management of the company, are understood as agency relations and the separation between property and control as a manifestation of the main-agent problem. Accounting should be understood as a specialized function of signatures, which plays an essential role by facilitating information based on which the economic benefits of each contract are determined. In addition, this theory seeks the reasons or consequences that occur when accounting policies in a company and thus be able to have knowledge about how this affects different users.

Another important contribution made by the promoters of positivism, was to deepen the position of the management or administration of the companies taking into account their size, since this has an impact on political costs and according to the rise or decrease of the income that isThey report.

Given a small company with reduced income and, therefore, not subject to many political pressures, which their managers will have incentives to oppose the change in an accounting norm since their compensation plans will be adjusted if their income remains invariable by the new normaccountant. This is because the political, regulatory and fiscal benefit of informing reduced income due to a change in accounting standards is supposed to dominate the incentive compensation factor. 

This can change while the company grows, this will obtain a more positive performance in the event that the standard is received, thus, the profits and costs of said accounting standard will be subject to a variation with respect to the size of the company, since the impactof the change in informed income may be higher for larger companies.

On the other hand, in the case of a company with high income and a small size structure its benefits will be positive because management compensation plans dominate political, regulatory and fiscal factors. On the other hand, as the company’s size increases, its benefits for a change in an accounting standard will be negative because the increase in accounting income will cause an increase in government intervention by increasing political costs. 

The great role that the size of the companies plays with respect to the choice of accounting standards to be applied and the impact is positive or negative that a change of these can exercise in the economy of the company.

Those responsible for organizations are perfect knowledgeable of the fundamental role of accounting. For this reason, the choice of accounting methods and procedures is not precisely a neutral act, but must be understood as an action oriented with effects on wealth and the distribution of this. The accounting choice, which constitutes the main object of research based on the firm’s theory, is usually described as efficient or opportunistic.

To better understand, when talking that the accounting choice is efficient, it refers to the fact that the decisions that are based on the information provided by accounting, such as;The allocation of resources, the production of new goods and services, decisions on prices, sales projection and profits, purchases, and even the use of new possible investment opportunities, which are directly related to the choice of accounting policies,They must implement those policies that mean or lead to an improvement of these decisions.

Meanwhile, it is for opportunistic accounting election in which managers host the norms or policies that sponsor their particular interests, regardless of the opinion or consequences that this can cause to the parties they hire, so this election only increases thewealth of the management and not the net wealth of the company.

However, the proportion of efficiency and opportunism of each accounting choice will depend largely on the control that managers actually exercise the accounting policies of their organizations and the monitoring mechanisms (audit, for example) existing. 

Again, the important role played by managers can be identified, since they must ensure to take correct control over the accounting norms or policies that are applied within the company, since this will depend the success or failure of their elections, and alsoof the instruments or tools that are implemented in order to ensure the proper functioning of the company.

After everything expressed here it can be concluded that accounting during history has been characterized by expressing information and control of resources within the economy and organizations, but this information can become incomplete, that is why the need arisesto be useful to individuals and that can resolve decisions that explain the new realities. The world is constantly, many of the things that could previousPossible errors in the theories that already exist and are modified according to the new needs that arise, according to the realities that study or either because inconsistencies are detected in these, the progress that has occurred in economic theory have had to be applied to theAccounting, so to understand the current accounting theory it is completely necessary to understand and know its evolution.

References

1. Barbie, A, and Bauchet, A. (2014). Positive accounting theory: a review of its theoretical bases and the contribution to the general accounting theory. Cecin work documents, (16), 11.
2. Monterrey, j. (1998). A tour of positive accounting. Spanish Financing and Accounting Magazine, 27 (95), 427-467.
3. Wihtley, r. (1988). The Possity and Utility of Positive Accounting Theory. Elsevier, 13 (6), 31-645.
4. Watts, R & Zimmerman, J. (1986). Positive Accounting Theory. Prentice Hall, 404.