Positive Accounting Theory

768 Words4 Pages
The Flaws of Agency Theory The EMH argues effectively that markets can see through accounting methods, but it doesn’t explain why accountants change their reporting methods from time to time. This is why Watts and Zimmerman have called upon another theory with which to support their work. Agency theory uses examples of self-interested people who don’t act out of good will. This theory has been criticised as being dehumanising (Godfrey, Hodgson & Holmes 2000) as being “unobservable” (Chambers 1992) and referring to phenomena that could be explained in another way. For example, agency theory describes political interference in accounting as being the way self interested politicians can gain popularity – by acting on the wants of minority groups. Politicians acting in the public interest could also explain the same occurrence just as effectively (Mouck 1992). There are further PAT studies that look to notions besides that of self-interest and look at efficiency; however Watts and Zimmerman have not been a part of this. Above all, agency theory is hard to swallow on the basis that people are self-interested. If such a notion were true then it would be logical to introduce more legislation, not less. The Flawed argument that PAT is scientific and empirically based. Watts and Zimmerman have claimed that normative theories were not effective and are not to be respected because they did not base themselves on scientific or empirical research (Godfrey et al. 2000). This argument however is flawed on numerous levels. Although Watts and Zimmerman spend a lot of time discussing their empirical basis for their theory, the actual results are not particularly firm. Mouck (1992) has stated that their basis is more of rhetoric than science and that for two researchers who spend so much time describing the benefits of empiricism the results are somewhat disappointing. Watts and
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