The paper “ Financial Reporting, Positive Accounting Theory vs Institutional Theory” is a forceful example of an assignment on finance & accounting. Accounting theory/theories are used for various reasons in the accounting world. They are used in explaining existing accounting practices for purposes of obtaining a better understanding of these practices. It provides a set of coherent logical principles forming a general frame of reference for evaluating and developing sound accounting practices (Riahi-Belkaoui 2005, p. 164). The history of accounting theory development informs a good understanding of the current accounting theories and accounting practices.
The main objective of accounting theory is the provision of a basic way of predicting and explaining accounting behavior and events. In the article ‘ public losing confidence in capitalism’ , positive accounting theory (PAT) is one theory that is relevant to the case. The focus of this theory is on the relationship between individuals providing resources to a firm. An example is between owners of companies and respective managers or organizational managers and providers of credit to a company. It assumes that self-interest drives the actions of an individual. The issue of remuneration structures is one issue that the article has brought up.
Often, managers are remunerated based on some bonus scheme tied to the profitability and financial performance of a company. Positive accounting theory assumes that managers act in a manner that serves their own interests (Yrjo et al. , 2009, p. 146). Owners suffer the consequences of their managers’ actions. It has been argued in the article that remuneration of some managers is very complex and too high to the detriment of the company. PAT attempts to explain this phenomenon through three hypotheses; bonus plan, political cost, and debt/equity hypothesis (Collin & Tagesson 2009, p.
146). The bonus plan hypothesis asserts that those company managers having bonus plans are more likely to utilize methods of accounting which increases the reported income of the current period.
Aboody, D., and Kasznik, R., 2010. Executive compensation and financial accounting. Foundations and Trends® in Accounting, 4(2), pp.113-198.
Collin, Sven-Olof Yrjö, Torbjörn Tagesson, Anette Andersson, Joosefin Cato, and Karin Hansson. "Explaining the choice of accounting standards in municipal corporations: Positive accounting theory and institutional theory as competitive or concurrent theories." Critical perspectives on Accounting 20, no. 2 (2009): 141-174.
Day, R., 2001. The ‘public interest’ in the context of accounting regulation. Contemporary issues in accounting regulation (pp. 79-94). Springer US.
Epstein, B. J., Nach, R., & Bragg, S. M. (2007). Wiley GAAP 2008: interpretation and application of generally accepted accounting principles. Hoboken, N.J., Wiley.
Jensen, M., 2001. Value maximization, stakeholder theory, and the corporate objective function. European financial management, 7(3), pp.297-317.
Mard, M. J., Hitchner, J. R., & Hyden, S. D. (2011). Valuation for financial reporting: fair value, business combinations, intangible assets, goodwill, and impairment analysis. Hoboken, NJ, Wiley.
Riahi-Belkaoui, A. (2005). Accounting theory. London: Thomson.
Smith, B., & Koken, E. (2011). The Superannuation Handbook 2008-09. Hoboken: John Wiley & Sons.