Positive theory, rationality and accounting regulation

Existing agency theory fails as a positive theory since it does not provide a theory of accounting regulatory development. Furthermore, the arguments against market failure theories in Watts and Zimmerman (1986) are inconsistent with positive theory in that they evaluate rather than predict the theories. In fact, the market for excuses arguments used by Watts and Zimmerman (1979) are capable of predicting the existence of market failure theories. That these arguments were not extended in Watts and Zimmerman (1986) seems to indicate an ideological bias. If Watts and Zimmerman wish to argue normatively, they should not do so under the guise of positive theory. The failure of agency theory to provide a prediction of accounting regulatory development stems from its reliance on a rationality assumption which is on one hand narrow and on the other hand broad and inconsistent. Richer theories relying on either a better specified rationality assumption or broader views of organizational behaviour are needed to predict and explain the development of accounting regulatory structures. A confluence of theories is most likely to provide the richest description.