Accounting Theory & Current Issues

Added on - 28 May 2020

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Accounting Theory and Current IssuesName of the Student:Name of the University:Author Note
1IntroductionAccounting theories that govern the fundamental principles of accounting are constantlybeing modified and evolved in order to enhance the suitability and adoptability of the accountingprinciples in relation to the global standards. The topic that has been chosen for the purpose ofthe study is that a journal article that depicts the implications of the positive accounting theorieshypotheses. The particular journal article that has been chosen for the purpose of the study is the“The opportunistic approach of the Positive Accounting theory fails to explain a case study: Ananomalous situation?” by Adolfo Henrique Coutinho e Silva, Moacir Sancovschi and ArianeGabriela Chagas dos SantosThe journal article reviews particular literature that seeks to establish evidence thatsupports the positive accounting theory of corporate social disclosures. In this particular articlefocus has been put upon the Watts and Zimmerman’s reference to social responsibility.Furthermore, the high degree of revenue that have been displayed by the organizations todecrease and the unprecedented rise in the political costs make the disclosures related to socialtheories, confusing. This particular study also lists the potential problems that are reflected by thecompanies while adopting the positive accounting theory (Williams 2014).Case Study AnalysisThere have been numerous accounting theories in use like the legitimacy theory,stakeholder theory and the critical or political economic theory. Along with these traditionaltheories, the new accounting theory that has come up in the new age, political accounting theoryor the political cost hypothesis that effectively justifies the voluntary social disclosures. Thearticle depends on the studies conducted by Watts and Zimmerman and other related literature.There have been enough literature supporting the fact that the positive accounting theories arenot about how a social report should be but the what a social report is. It has been argued by theexperts that the positive accounting theories contribute in no way for the improvement of socialreporting based on the corporate standards (Li 2015).The view that has been proposed in the journal has been that the managers in anorganization make use of the accounting systems for performing the opportunistic voluntary
2changes in the accounting practices for affecting the external contracts or maximizing their owncompensations. The Positive Accounting Hypothesis explains the opportunistic accountingchoices without taking into consideration that the estimations in regards to this theory (McLellan2014). The three major hypotheses of this theory are as follows:Bonus Plan HypothesisDebt Covenants HypothesisResponse to the regulatory constraints or political costsOther experts argue that the justification in relation to as to why companies providevoluntary disclosures in the financial reports, the role of positive accounting theories cannot bedemeaned. However, the critiques have provided enough argument stating that the socialdisclosures depend on a number of material factors like the size of the firm and the nature ofindustry in which the business is established. Thus, in order to reject the positive accountingtheory on the basis that it does not provide enough justification in the firms providing voluntarydisclosures, the implications of the voluntary disclosures have to be understood properly. Thiscan be achieved by the proper understanding of the works conducted by Watts and Zimmermanon social responsibility (Biondi 2017).The organization that has been selected in the journal is the largest private oil and gasexplorer in the recent history of Brazil. The case study that has been presented in the journalsuggests that the company had made use of the incentives in order to perform the accountingchoices similar to the ones that have been forecasted by the positive accounting theoryhypothesis (Samaha and Khlif 2016).The company had also gone through a phase of decline and growth that motivated theorganization to perform the voluntary disclosures in regards to the accounting choices such as thevoluntary management changes; restructuring of the corporate governance hierarchy; executionof the initial public offering; issuance of debt notes. Thus, this evidently states that the positiveaccounting theory hypothesis has not properly justified the voluntary disclosures in the financialreport of the company.In order to understand the implication of the positive accounting theory with much moreclarity, the concept of Positive Accounting Theory should be discussed in accordance to the
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