Question

Positive Accounting Theory represents the mainstream research in accounting. Critically discuss the relationship between Watts & Zimmerman’s arguments and agency theory. Your answer should review both the efficiency perspective, and the opportunistic perspective.

Answer 1

Ans;

Posetive accounting emerged with the accounting studies that generated in late 1960s.This concept was organised as a school of thought by Ross Watts and Jerold Zimmerman.

Posetive accounting is the branch of academic accounting research that seeks to explain and predict actual accounting practices.This contracts with normative accounting , that seeks to derive and prescribe "optimal "accounting standared.

Even afterits huge contribution to the feild of accounting ,it is fully developed .In this view , the agency theory breaks down as a posetive theory as it does not caterfor the theory of accounting regularitary development .

Agency theory is the one of the example of failiur of posetive accounting theory .It orginates from its dependance on a presumption of level headed conduct which in one regard is narrow and in another regard is both wide and conflicting.Agency relationship can be defied as an agreement under which atleast one people (the principle)(s)connect with someone else(the agent)to play out some administratin for their benefit which include some basic leadership position to the agent.In the event that the two gatherings to the relationship are utility maximizers, there is valid justification to accept that the agent won't generally act to the greatest advantage of the principal. Competition in the product and factor markets will in general drive costs towards smaller than the average expense in an action. Managers should subsequently persuade their organisations to build effectiveness to upgrade the chances of survival. Be that as it may, product and factor market disciplinary powers are frequently more fragile in new activities and activities that include generous economic rents or semi rents. In these cases, observing by the company's inside control framework and the market for corporate control are increasingly significant . The principal can limit divergences from his interest by establishing appropriate incentives for the agent and by incurring monitoring costs designed to limit the aberrant activities of the agent As the association between the investors and the managers of an organization is perfect to the meaning of a pure agency relationship, it should not come as a disturbance to find that the issues related with the "separation of ownership and control" in the modern diffuse ownership enterprise is personally connected with the general agency problem. The issue of actuating an "agent" to act as though he were boosting the "principal's" welfare is very broad. It exists in all associations and in every agreeable exertion— at each degree of the board in firms, in colleges, in mutual companies, in cooperatives, in government organisations and authorities, in associations, and inrelationships classified as agency relationship, for example, those normal in the performing art and the market for real estate. However, the amount of agency costs depends, among different things, on statutory and customary law and human creativity in contriving contracts. Borrower bankruptcy is conversely identified with the agency costs of undertaking physical investments. Both the law and the advancement of agreements important to the competition are the results of a past process in which there were strong incentives for people to limit agency costs. In addition, there were elective organisational structures accessible, and chances to develop new ones. Agency costs additionally encroach on publicly held firms, most likely limiting their capacity to issue outside equity. For instance, equity issuance may weaken managerial incentives (by bringing down the debt-equity proportion) or send a bad signal to outside investors (Bernanke & Gertler, 1986). The development of theories to clarify the structure which agency costs take in each one of these circumstances (where the authoritative relations contrast altogether), and how and why they are conceived will prompt rich theory of organisations which are currently lacking in economics and social science (Jensen & Meckling, 1976). The choices of managers will include not just the advantages he gets from monetary returns yet, in addition, the utility produced by different non-monetary parts of his pioneering exercises, for example, the physical arrangements of the workplace, the engaging quality of the workplace staff, the degree of representative control, the sort and the measure of altruistic commitments, individual relations ("fellowship," "regard, etc) with representatives, a bigger than the ideal PC to play with, or purchase of production inputs from companions.The ideal mix (without charges) of the different financial and non-financial advantages are accomplished when the minor utility got from an extra dollar of use (estimated net of any gainful impacts) is equivalent for each non-monetary thing and equivalent to the negligible utility got from an extra dollar of after-charge acquiring influence (riches). The power of "agency theory" as a clarification of accounting and authoritative development is an ongoing, exceptionally persuasive association of the standard suspicion. No place are the similitudes among the orders of accounting and law more apparent than in the theory of market at determines much significant legitimate idea and the office based ideas so inescapable in significant standard accounting research. All such closeness are particularly critical in two of them- jobs that create contracts and market play in accounting research based on agency, and furthermore concerning the neoclassical monetary economic fundamental to this area of examination and theory improvement (Hunt III, H. G., & Hogler, R. L., 1990). Agency connections will include relevant agency costs if it is expected (as it generally seems to be) that both the parties i.e. agent and the principal seek for the maximisation of their utility and the operator will subsequently not every time operate to the greatest advantage of the head. Indeed, it is commonly inconceivable for both the principal or agent at zero expense to guarantee that the agent would settle on ideal choices from the principal's perspective. In most office connections the principal and the agent will cause positive observing and holding costs (non-monetary just as financial), and what's more there will be some dissimilarity between the agent's choices and those choices which would augment the welfare of the principal. What could be compared to the decrease in welfare experienced by the principal because of this dissimilarity is additionally an expense of the office relationship, and we allude to this last cost as the "residual loss” (Jensen & Meckling, 1976). At the point when connected to an authoritative setting, for example, a company, agency theory expels the thought that an association is an important element. Rather, most associations are just lawful fictions which fill in as a nexus for a lot of contracting connections among people The private enterprise or firm is basically one type of legitimate fiction which fills in as a nexus for contracting connections. Seen thusly, it looks bad to attempt to recognize those things that are "inside" the firm from those things that are "outside" of it. There is undeniably just a large number of complex connections (for example contracts) between the lawful fiction (the firm) and the proprietors of work, material and capital information sourcees and the consumers of output. (Jensen & Meckling, 1976). Seventeenth AIMS International Conference on Management 533 Seen as such, the firm turns out to be minimal in excess of equilibrium of contending contractual connections went into by people, some of whom may represent different associations. The agency and property rights writing has been an affluent wellspring of testable significance for researchers from a few orders, particularly accounting. The acknowledgment that probably the most evident agency connections in the corporate environment (for example the manager/investor relation and the agent/debt holder connection send) use contracts dependent on accounting numbers has driven accounting analysts to utilize agency theory in endeavours to clarify, in addition to other things, the interest for financial reports, uncertainties in accounting strategy decision, campaigning attempts before administrative firms, and stock market responses to compulsory changes in accounting. In light of agency theory, positive scholars see accounting reporting as a feature of the organisation's contract procedure. Positive scholars don't see assorted variety in financial practices as tricky, yet as a need altogether for "contracting parties to tailor their accounting strategies to their very own particular conditions" Norm setters ought not to view cross-sectional varieties in accounting methods as a sign of administrations' endeavours to control accounting numbers so as to deceive investors (and apparently others). In addition, "Norm-setters ought to consider the impacts of prospective accounting measures on current contracts (so as to maintain a strategic distance from) unexpected wealth moves between parties of the firm (Watts, R. L., & Zimmerman, J. L., 1986). While the agency writing has delivered useful bits of knowledge for accounting analysts, its wide-spread acknowledgement by standard researchers has gotten basic consideration in a few recent investigations related to the profound accountants. Rising up out of these basic investigations is the acknowledgement that accountants have been immensely impacted by neoclassical financial aspects, that underestimated suppositions are precarious to a full comprehension of the socio-political condition of accounting, and that the two of these issues add up fundamentally to belief system in current accounting thought (Hunt III, H. G., & Hogler, R. L., 1990)