Advanced Financial Accounting - Sample Assignment

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
Name of the Student
Name of the University
Author’s Note

1ADVANCED FINANCIAL ACCOUNTING
The main objective of Positive Accounting Theory (PAT) is to make good prediction of
the real world events so that they can be translated into accounting predictions. Thus, the overall
intention of this theory lies in understanding and predicting the choice of accounting policies for
different organizations (Cooper 2015). The following discussion shows the major limitations and
critiques of PAT:
Limitations
The first limitation can be found with of the premises of PAT that says the reliance of
economies on the theoretical perfect market. A perfect market depends on prefect information
and no transaction cost. As accounting exists due to transaction costs, there is a problem in this
point of view (Cooper 2015). In addition, equilibrium of information is also difficult to imagine.
As per, Watts and Zimmerman, regulations and political costs have interference with the
operations of perfect market. As there is removal of regulations for effective allocation of
resources, there is not any existence of perfect market. After that, the lack of development in
PAT can be considered as another major limitation of this theory (Omran and El-Galfy 2014).
PAT was first developed in the year 1970 based on three major hypothesis; they are debt
hypothesis, bonus plan hypothesis and political cost hypothesis. However, after the initial
development, there has not been any change in the hypothesis or in the theory. The theory has
been remained stagnant with the change in accounting situation and this aspect has led to less
popularity of this theory (Omran and El-Galfy 2014). Moreover, limitation is there in the
argument that PAT is scientific and empirically based. It can be observed that PAT is more of
rhetoric than science. Another limitation of PAT can be seen in the presumption by Watts and
Zimmerman that the assumptions of this theory are free from value judgment. However,

2ADVANCED FINANCIAL ACCOUNTING
contradiction can be seen in this judgment as the major premise of PAT, the agency theory, is
heavily reliant of value judgment (Cooper 2015). These are the major limitations of PAT.
Critiques
It needs to be mentioned that PAT has been receiving many criticism. The theory has
received many critics due to its lack of prescription and it is a justified criticism. It can be
observed that PAT does not provide any prescription to the accounting profession as it has not
provided any mean to bring improvement in the accounting practices (Avelé 2014). Another
major reason to receive criticism is the presence of invalid assumptions. The main assumption of
PAT lies on the fact that the main driver of all the actions is wealth maximization. Most of the
researchers consider this assumption to much negative and simplistic from the perspective of
humankind (Avelé 2014). Another major reason for PAT to receive criticism is stagnation or
lack of development. It is a valid point of criticism as there has not been any positive
development in PAT after its inception in 1970. Apart from this, while undertaking large-scale
empirical research, PAT ignores many organizational-specific relationships (Broadbent and
Laughlin 2013). Thus, based on the discussion, it can be observed that all the reasons are valued
for PAT to receive criticism.

3ADVANCED FINANCIAL ACCOUNTING
References
A. Omran, M. and M. El-Galfy, A., 2014. Theoretical perspectives on corporate disclosure: a
critical evaluation and literature survey. Asian Review of Accounting, 22(3), pp.257-286.
Avelé, D., 2014. Positive accounting theory: theoretical and critical perspectives. International
Journal of Critical Accounting, 6(4), pp.396-415.
Broadbent, J. and Laughlin, R., 2013. Accounting control and controlling accounting:
Interdisciplinary and critical perspectives. Emerald Group Publishing.
Cooper, C., 2015. Accounting for the fictitious: a Marxist contribution to understanding
accounting's roles in the financial crisis. Critical Perspectives on Accounting, 30, pp.63-82.