Positive accounting theory

'Positive accounting theory can explain the greening of financial accounting disclosure; it can not provide a framework for improving it. ' Discuss with reference to the problems faced in the development of social and environmental reporting both in the UK and overseas. This assignment attempts to evaluate the Positive Accounting Theory's (PAT) ability to explain the increasing inclusion of Environmental Reporting (ER) information in the financial accounts and to search if PAT can provide a conceptual framework for the ER.

So as to deal with this research, there will be presented both Watts and Zimmerman (W.Z. ) job and the job of other researchers arguing about, if and how, can the PAT be related with ER. Secondly, it is going to be examined what can provide a conceptual framework for the ER. Since ER is still based on a voluntary basis and there are not yet developed standards able to provide a satisfactory framework, the answer of this question is going to be found through a survey of the related academic literature and research, the everyday practise of the companies, and the suggestions of the interested parties both in United Kingdom and overseas.

During the last decades companies started to pay an increasing attention to the social and environmental disclosure in their annual reports. This seems to be happened due to several reasons like the increasing power of the pressure groups as the labour units or the environmental organizations, the increasing interest of the public and the local governments about the ecological disasters and the environmental pollution; but basically because of the governments' willingness to take action about the protection of the eco-system.

Those reasons made the companies' management to realize that they had to move from the Classical Economic Theory which suggested that the only objective of a company is to provide the maximum possible profit to its owners or shareholders. What they had to do now was to create an image about their companies in order to show that firms are also interested in – and recognise – their social objectives ''social responsibility''. This image could be developed by using advertising through the media "advocacy advertising" or by providing information through their annual reports both about their financial and environmental performance.

The kind of this information has to be easily manipulated according to the demands of the company's internal and external environment which includes the firm's shareholders, its employees, its customers, its suppliers and the public in general. PAT, which was developed by W. Z. in 1978, is a try to explain the reasons behind the management's willingness to manipulate the accounting standards in order to achieve both their personal goals and the objectives of their companies. Moreover W. Z.

suggested that, by finding out the needs of a firm and the personal goals of its management, one can predict the accounting procedures that the management will adopt in order to achieve them. The Bonus plan hypothesis, which suggests that the managers of the firms who are using bonus plans will possibly choose accounting procedures which move reported earnings from a future period to the current period. The Debt covenant or debt/equity hypothesis, which suggests that the management of firms with high debt/equity ratios will also choose accounting procedures which move reported earnings from a future period to the current period and.

The Political cost or size hypothesis, which suggests that the management of firms susceptible to high political cost, due to their size or earnings or due to the sector that they perform, are more likely to choose accounting procedures which move reported earnings from the current period to future periods; or policies that help their companies to be more acceptable by the members of their society (advocacy advertising or social and environmental disclosures).