Need help-Accounting Theory Questions
Positive accounting theory and agency theory make certain central assumptions about what influences people’s decisions.
What are these assumptions? (3) Discuss whether you believe these are realistic of stakeholder behaviour? (5) How does this differ from the perspective embraced within normative research? (5) Does the current conceptual framework embrace a wide group of stakeholders? (2) Do you think that this framework is more aligned to the assumptions underlying a positive view by virtue of the stakeholders identified to be relevant? Discuss. (5)
Some information of how the question should be handled?
PAT (reference to self-interest, opportunistic behaviour, focus on wealth), Normative (reference to Legitimacy Theory – acceptability of actions to a community) (reference to ‘ethical’ dimension of stakeholder theory – addressing stakeholder ‘needs’)
Difference(s) – PAT descriptive and prescriptive – looks at what is, and therefore what is expected; Normative – looks at what should be – should be in terms of societal expectation, or the intrinsic needs of stakeholders.
Discussions of assumptions
Explain to a positive theorist – discuss in the context of an appeal to the assumptions underlying PAT – that is, when CSR reporting can be demonstrated to be important to generating wealth.
Note: use of examples to exemplify discussion is important.
Economics-based theories such as Positive Accounting Theory and Agency Theory make assumptions about what motivates human actions (for example, a quest to maximise personal wealth), and such motivations are attributed to all individuals.
By contrast, normative research studies consider what ‘should be’ and this may be explored empirically (legitimacy and stakeholder studies for example). These studies may explore individuals as groups or/and individuals’ actions and choices such as motivations to report information. They typically do not make broad-based assumptions about how all individuals behave, or about what motivates them to behave in a particular way (although there could be an acceptance that many individuals will tend to adopt specific strategies or biases when making decisions).
There has been an increasing trend since the 1990’s to broaden the concept of reporting to stakeholders. Prior to this time, the focus was on financial reporting of monetary amounts, and a strong focus on meeting compliance requirements. Since that time, financial and compliance requirements have increased significantly, but so has a trend to report on environmental and social activities, and more recently corporate governance matters. This has been an interesting change in terms of the expectations of what is required to report to stakeholders. Arguments have also moved to discussion that perhaps there are alternative reporting methods to monetary amounts, that in some cases monetary amounts may not be the most appropriate approach to reporting. This has implications for accountants who have had the main responsibility for both guiding reporting and offering assurance in regard to these reports.
Discuss this change in focus, ensuring you make clear the difference between integrated, sustainability and traditional financial reports. (14) In your response, you may like to consider whether this achievable in the historical cost framework? (6)
Some Information of how the Question should be handled
- What do you understand by traditional financial reporting (historic cost/variations on ‘true’ historic cost/reporting on past events??/basis to understand the future??). Traditional financial reporting focuses on recognising the financial effects of an entity’s transactions. It follows generally accepted accounting principles and accounting standards and is audited by an external auditor. The financial report is limited to transactions that have a financial impact. Sustainability reporting however goes beyond this. It includes reporting on the environmental activities and of the entity as well as its social impacts. These are combined with financial information.
- The following benefits can be gained from preparing sustainability reports:
- Embedding sound corporate governance and ethics systems throughout the organisation
- Improved management of risk through enhanced management systems and performance monitoring
- Formalising and enhancing communication with key stakeholders
- Attracting and retaining competent staff
- Ability to benchmark performance with other entities. Explain what is meant by sustainability reporting (the 3 dimensions/forward thinking)
- Differences between the two:
- Economic financial compared to eco/soc and env
- Report on past performance /future performance
- Historic cost/intergenerational equity
- Eco efficiency/eco-justice
- Need to change the outlook of accounting – the underlying process is based on historic cost and the past??
- How does the HCA model seek to achieve this? By recording actual business events/transaction in monetary form. A contract where a good/service is exchanged for $.
- However, this is a fiction:
- The HCA model operates as a mixed method model. There are judgements made relating to what is included making the model to a greater or lesser degree subjective, not totally reliable nor necessarily faithfully representative of events without bias. 
- Choice within accounting standards (Depreciation method, stock valuation, independent revaluations, impairment, fair value)
- Professional judgement in choices made
- Value systems of the accountant
- Approach where there not an accounting standard/regulation
- Implications of the additivity problem/changing prices
Need help-Accounting Theory Questions