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The reasons driving companies to use accounting standards are also related to benefits resulting for managers and shareholders. In this regard, Watts and Zimmerman have proposed the Positive Accounting Theory, useful theory to explain the use of accounting standards (Watts and Zimmerman 1978, 1979, 1986). In fact, the authors of the Positive Accounting Theory claim that “management plays a central role in the determination of standards” and “one function of financial reporting is to constrain management to act in the shareholders’ interest,” thereby, this theory became an academic theory which helps in explaining and predicting practices in accounting. This theoretical framework highlighted also how the importance of adopting new and good accounting standards, specifically for large companies, can help to solve classic problems related to the agency theory (i.e., problems related to the difference in interests between shareholders and managers). In this context, Brown (2011) states that “accounting standards are important in a well-developed capital market because they help to resolve a serious agency problem. Insiders (managers) are better informed than outsiders (shareholders) about their firms’ investment opportunities, how hard they, the managers, will work and the perks they will consume and how well the firm is doing overall.” Therefore, uniform accounting and auditing standards are necessary because they are a relatively low-cost solution to a serious agency problem and providing clear and transparent information within the financial statements, allowing the interests of managers to be aligned to those of shareholders. Indeed, the issuance of new accounting standards should take into consideration all of these aspects: better quality information (more accurate, comprehensive, and timely financial statement information); the minor difference in the knowledge of information between small investors and professionals (adverse selection); greater comparability, eliminating many international differences in accounting standards and standardizing reporting formats (Ball 2006; Brown 2011). According to Ball (2006), higher-quality information “should reduce both the risk to all investors from owing shares and the risk to less-informed investors due to adverse selection. In theory, it should lead to a reduction in firms’ cost of equity capital.” |
