This paper reviews and critiques the positive accounting literature following the publication of Watts and Zimmerman (1978, 1979), The 1978 paper helped generate the positive accounting literature that offers an explanation of accounting practice, suggests the importance of contracting costs, and has led to the discovery of some previously unknown empirical regularities. The 1979 paper produced a methodological debate that has not been very productive. This paper attempts to remove some common misconceptions about methodology that surfaced in that debate. It also suggests ways to improve positive research in accounting choice. The most important of these improvements is tighter links between the theory and the empirical tests. A second suggested improvement is the development of models that recognize the endogeneity among the variables in the regressions. A third improvement is reduction in measurement errors in both the dependent and independent variables in the regressions.

https://www.jstor.org/stable/pdfplus/247880.pdf

Positive Accounting Theory: A Ten Year Perspective

Positive accounting theory is claimed to be explanatory of accounting practice; a scientific, empirical, economics-based theory. These claims are examined severally, and in significant respects are found to be untenable. Vast tracts of accounting practice remain unexplained, even unnoticed. That scientific enterprise is directed to the development of technical norms or prescriptions is set aside. The association between the ideas of economics and accounting extends, at the hands of the theory’s exponents, not to the corpus of well-established economic notions, but only to tangential elements of economics. While purporting to shun prescription, the exponents of the theory, both actively and by implication, endorse conventional accounting which is heavily dependent on normative propositions. The ‘theory’ is marred by oversights, inconsistencies and paradoxes. The implicit hope that the methodology followed ‘will provide a useful positive accounting theory’ (Watts and Zimmerman, 1986, p. 362) entails that its proponents have offered no such theory.

Positive Accounting Theory

an economically efficient system of public financial reporting (audited accounting information) and disclosure (non-accounting information). Financial reporting and disclosure are complementary means of ameliorating information asymmetry between managers and parties contracting with their firm, including shareholders, lenders, suppliers, customers, and employees. The efficiency of a country’s financial reporting and disclosure system therefore is crucial to its development of economically efficient public corporations and public securities markets as well as to the development of its economy. A skeptical view of making sudden changes to reporting and disclosure systems is adopted, due to the economic, political, legal, and institutional complexity involved in effecting actual change. A particularly skeptical view is reserved for simply mandating new accounting standards for public financial reporting. This amounts to little more than “window dressing,” unless it is accompanied by wholesale revision of the infrastructure that determines the financial reporting incentives of managers and auditors. If forced to nominate a single place from which to

Infrastructure Requirements for an Economically Efficient System of Public Financial Reporting and Disclosure

June 2011 IAASB Discussion 1. At the June 2011 meeting, the IAASB considered a first draft of the Audit Quality Framework (\" Framework \") paper. The IAASB expressed strong support for a holistic approach to the development of the proposed Framework. Amongst other matters, suggestions were made for the paper to give greater recognition to the dynamism of audit quality (AQ), to recognize the influences of technology and industry circumstances as important additional contextual factors, to further consider the linkages with efficiency and cost, and to reconsider the AQ schematic so that it more effectively articulates the various elements of the Framework and the Framework's dynamism. 2. On the basis of this input and as agreed by the IAASB, the Task Force developed a revised draft of the Framework paper (the \" CAG Draft \" − see Agenda Item 6-F) for purposes of soliciting initial reactions and input from specific stakeholder groups in Q3-Q4 2011. 3. Key highlights of the discussions with stakeholders on the CAG Draft are set out below. representatives of the Task Force met six very experienced academics (four from the U.S., one from Australia, and one from Canada) in Denver on August 7 th to discuss the CAG draft. The meeting was arranged by Board member Bill Kinney, who was one of the participants. The academics seemed genuinely interested in the project and made a number of constructive suggestions as to how the Framework might be improved. A number said they struggled with understanding the current model. An alternative structure was suggested which is more consistent with the way the topic has been treated in a number of recent studies. 1 September 2011 IAASB CAG Meeting 5. Some CAG representatives welcomed the project and were broadly supportive of the CAG draft, with some commenting that it was well balanced and thoughtful. 6. One CAG representative, however, took a different position and criticized the paper for dealing with systemic issues rather than focusing on audit quality at the engagement level. A number of other CAG representatives agreed that poor contextual factors such as weak corporate governance cannot be used as an excuse for a poor quality audit. Several thought that the Framework should focus more on factors that auditors can control. 7. Some CAG representatives expressed concern that too much emphasis was placed on efficiency in the proposed Framework and were of the view that more of …

A Framework for Understanding and Researching Audit Quality

The numerical form of accounting has been interpreted as a use of metaphor (Morgan, Accounting, Organizations and Society, pp. 447–486, 1988). The dominance of quantification in accounting has also, more conventionally, been legitimated by claims to the representational accuracy of numbers and a model of scientific theory and practice (Mattessich, Accounting and Analytical Methods, Irwin, 1962; Chambers, Accounting Evaluation and Economic Behaviour, Prentice-Hall, 1966; Accounting, Organizations and Society, pp. 167–180, 1980). In this paper the preference for quantification in accounting is explained alternatively in terms of the development of inscriptions that enable action at a distance (Latour, Science in Action, Open University Press, 1987). The development of accounting is considered in terms of a continuing refinement of mobile, stable and combinable inscriptions that expedite long distance control. The paper concludes that studies of accounting metaphor are incomplete if they cannot address the processes that adjudicate the choices and production of metaphor.

Accounting numbers as 'inscription': action at a distance and the development of accounting.

Kenneth Macneal makes a strong presentation of his side of the argument. He is supported by some prominent accountants on both sides of the Atlantic. But it must be remembered that there are others among whom, to mention only two, are George O. May and Professor Eugen Schmalenbach, who hold that accounting is essentially a process of allocating historical costs, and not one of valuation. The decisions seem merely to hold that in certain peculiar situations such reduction does not affect the amount which may legally be paid as dividends. The history of bookkeeping contains a number of inaccuracies as to names of authors, titles and dates of books, and even as to the nature of their contents. These errors are evidently due to the author having accepted without further inquiry the statements contained in a crudely inaccurate book published in the United States a few years previously.

Accounting, evaluation, and economic behavior

. My paper was prompted by deviations in the state of the art of accounting from ideals espoused by individual accountants and professional bodies. Professor Benston's defense or advocacy of traditional practice disregards those deviations. He disregards the facts that up-to-date prices alone provide serviceable data for the calculation of solvency, debt to equity and asset composition ratios and rates of return, and that only money equivalents or resale prices of assets at a given date can properly be added to derive the asset components of those ratios.



Benston contends that traditional accounting may be upheld against exit price accounting on the grounds of its transactions basis, of its longevity, of its cost-benefit relationship, and of its free and willing acceptance by managers and other parties. There are serious defects in each of these lines of argument; and other critical observations on the use of selling price valuations will not withstand scrutiny. Only the acknowledgment of the flaws in present practice and the pursuit of ideals avowed by the profession will rid its practice of absurdities.



Resume. Les deviations de la pratique comptable par rapport aux ideaux vises par des comptables individuels et par des organismes professionnels m'ont incite a ecrire mon article. La defense ou le plaidoyer du professeur Benston en faveur de la pratique traditionnelle ne tient pas compte de ces deviations. Il neglige le fait selon lequel seuls les prix actuels fournissent des donnees utiles pour calculer la solvabilite, les ratios d'endettement et de composition de l'actif et les taux de rendement; il ne tient pas compte non plus du fait qu'on peut additionner seulement les equivalents monetaires ou les prix de revente des actifs a une date precise pour obtenir les elements d'actifs de ces ratios.



Benston pretend que la comptabilite traditionnelle peut se proteger contre la comptabilite des prix de sortie courants du fait qu'elle s'appuie sur des operations, du fait de sa longevite, de son rapport couts-avantages et de l'appui que lui accordent les gestionnaires et les autres parties. Chacun de ces raisonnements contient de serieuses lacunes; de plus, d'autres observations critiques sur l'utilisation des evaluations au prix de vente ne resisteront pas a un examen minutieux. La pratique comptable ne sera debarassee de ses absurdites que si on reconnait ses defauts actuels et que si on poursuit les ideaux que s'est fixee la profession.

Pursuit of an ideal

Positive accounting theory is claimed to be explanatory of accounting practice; a scientific, empirical, economics-based theory. These claims are examined severally, and in significant respects are found to be untenable. Vast tracts of accounting practice remain unexplained, even unnoticed. That scientific enterprise is directed to the development of technical norms or prescriptions is set aside. The association between the ideas of economics and accounting extends, at the hands of the theory's exponents, not to the corpus of well-established economic notions, but only to tangential elements of economics. While purporting to shun prescription, the exponents of the theory, both actively and by implication, endorse conventional accounting which is heavily dependent on normative propositions. The‘theory’is marred by oversights, inconsistencies and paradoxes. The implicit hope that the methodology followed‘will provide a useful positive accounting theory’(Watts and Zimmerman, 1986, p. 362) entails that its proponents have offered no such theory.

Positive Accounting Theory and the PA Cult

The Poverty of Accounting Discourse

Recourse to earlier legislation and to the constitutive documents of partnerships and companies in the early years of the nineteenth century suggests that the ‘true and correct view’ of the states of affairs expected in the companies legislation of 1844 and 1856 was to be given by the valuation of assets at up-to-date prices, and specifically at selling prices in the ordinary course of business.

R. J. Chambers

Papers

Accounting, evaluation, and economic behavior

Pursuit of an ideal

Positive Accounting Theory and the PA Cult

The Poverty of Accounting Discourse

A true and fair view of position and results: the historical background