1. Presentation of Research Area George Iatridis University of Thessaly – ΤΕΙ of Larissa

2. Positive Accounting Theory (PAT)
PAT…is concerned with explaining accounting practice. It is designed to explain and predict which firms will and which firms will not use a particular method…but it says nothing as to which method a firm should use

3. PAT (cntd.)
Focuses on relationships between various individuals and how accounting is used to assist in the functioning of these relationships
examples of relationships:
owners and managers
managers and the firm’s debt providers

4. Key hypotheses
Three key hypotheses frequently used in PAT literature to explain and predict support or opposition to an accounting method:
bonus plan hypothesis
debt hypothesis
political cost hypothesis
research assumes managers will act opportunistically when selecting methods

5. Bonus plan hypothesis
Managers of firms with bonus plans are more likely to use accounting methods that increase current period reported income
also called management compensation hypothesis
action increases the present value of bonuses paid to management

6. Debt hypothesis
The higher the firm’s debt/equity ratio, the more likely managers use accounting methods that increase income
also called debt/equity hypothesis
the higher the debt/equity ratio, the closer the firm is to the constraints in debt covenants
covenant violation results in costs of technical default

7. Political cost hypothesis
Large firms rather than small firms are more likely to use accounting choices that reduce reported profits
size is a proxy variable for political attention
reduction of reported income is hypothesised to reduce the possibility that people will argue that the organisation is exploiting other parties

8. Opportunistic perspective
Seeks to explain managers’ actions once contracts are already in place
not possible to write complete contracts, so managers are assumed to opportunistically act to maximise own wealth
known as ex post perspective
considers opportunistic actions after the fact

9. Stakeholder theory Two branches of Stakeholder theory:
ethical (moral) or normative branch
positive (managerial) branch
many similarities between Legitimacy theory and Stakeholder theory
should not be treated as two separate theories but two (overlapping) perspectives of the issue set within a ‘political economy’ framework

10. Ethical branch of Stakeholder theory
All stakeholders have the right to be treated fairly by an organisation
issues of stakeholder power are not directly relevant
management should manage the organisation for the benefit of all stakeholders
where interests conflict, business managed to attain optimal balance among them

11. Managerial branch of Stakeholder theory
Attempts to explain when corporate management will be likely to consider the expectations of particular (powerful) stakeholders
theories can be tested with empirical observation
unlike normative ethical branch
specifically considers the different stakeholder groups within society, and how they should be best managed
not society as a whole like Legitimacy theory
expectations of stakeholders considered to impact on operating and disclosure policies

12. Social accounting Addresses eco-justice issues
social accounting refers to consideration of social-based issues for external reporting purposes
helps to evaluate how well a firm is fulfilling its social contract

13. Eco-justice and Eco-efficiency reporting
When considering environmental and social implications, eco-efficiency and eco-justice issues are considered

14. Eco-efficiency reporting
Concerned with maximising the use of a given quantity of resources and minimising the environmental implications of using the resources
relates to environmental protection

15. Eco-justice reporting
Eco-justice reporting indicates how the entity is using its limited resources to ensure that disadvantaged groups are not forgotten
includes information about creation of employment, education, health care, observance of human rights and equal opportunities, support for people in developing countries, etc.