...Chapter 4 The economics of Financial Reporting Regulation The case for unregulated markets for accounting information * Support for unregulated marketing all relate to the incentives for a firm to report information about itself to owners and to the capital market. * Agency theory explains why incentives exist for voluntary reporting to owners. * Wider voluntary reporting to the capital market is explained by signaling theory * The arguments supporting unregulated markets for accounting information are largely deductive in nature. Agency Theory * Predicts and explains the behavior of parties involved with the firm. * It conceives of the firm itself as a nexus of agency relationship and seeks to understand organizational behavior by examining how parties to agency relationships within the firm maximize their own utility. * One major relationship is between the management group and the owners of the firm. * Managers are hired to administer the firms’ activities. * Owners and Managers may have different goals and may not be in perfect agreement. While owners are interested to maximize return of investment and security prices, managers have a wider range of economic interests and psychological needs. Because of this conflict, owners communicate with managers in such a way as to minimize conflict between the goals of two groups. * Costs relating to monitoring management reduce managers’ compensation. Therefore managers have an...
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...who held company stock in their 401(k) retirement accounts, lost tens of billions of dollars. Investigations of wrongdoing may take years to conclude, but Enron’s failure already raises financial oversight issues with wider applications. Why didn’t the watchdogs bark? This report briefly examines the accounting system that failed to provide a clear picture of the firm’s true condition, the independent auditors and board members who were unwilling to challenge Enron’s management, the Wall Street stock analysts and bond raters who missed the trouble ahead, the rules governing employer stock in company pension plans, and the unregulated energy derivatives trading that was the core of Enron’s business. The report will be updated regularly as further reliable information about Enron’s downfall – which is now extremely limited – becomes available. Other contributors to this report include Bob Lyke, Patrick Purcell, and Gary Shorter. Formed in 1985 from a merger of Houston Natural Gas and Internorth, Enron Corp. was the first nationwide natural gas pipeline network. Over time, the firm’s business focus shifted from the regulated transportation of natural gas to unregulated energy trading markets. The guiding principle seems to have been that there was more money to be made in buying and selling financial contracts linked to the value of energy assets (and to other economic variables) than in actual ownership of physical assets. Until late 2001, nearly all observers –...
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...THE ENRON COLLAPSE The Androids Under Attack case was similar to the case of Enron Corporation. It was formed in 1985 from a merger of Houston Natural Gas and Internorth, Enron Corp. was the first nationwide natural gas pipeline network. Over time, the firm’s business focus shifted from the regulated transportation of natural gas to unregulated energy trading markets. The guiding principle seems to have been that there was more money to be made in buying and selling financial contracts linked to the value of energy assets that in actual ownership of physical assets. Until late 2001, nearly all observers including professional Wall Street analysts regarded this transformation as an outstanding success. Enron’s reported annual revenues grew from under $10 billion in the early 1009s to $101 billion in 2000, ranking it seventh on the Fortune 500. Starting in August 2001, when CEO Jeffrey Skilling resigned for no reasons, October 16, Enron reported its first quarterly loss in 4 years, taking charge against the earnings of $1 billion for poorly performing businesses. The reported third quarter loss was $618 million with the profit of $292 million a year earlier. On November 8, the company announced in a Securities and Exchange Commission (SEC) filing that it was restating its earnings since 1997 which had reducing them by $586 million. The coup-de-grace came on November 28, when major bond rating agencies downgraded Enron’s debt to below-investment-grade, or junk bond status. The...
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...Introduction (Corporate Social Responsibility and the impact it has on society at a global level is studied (discussed/investigated) as we look at whether current regulations are sufficient or mandatory regulations are required in order to sustain our environment in the future.) Since the 1990’s there has been an increasing trend for companies to provide information regarding the environmental implications of their operations (Gozali et al., 2002). This has arisen due to the increasing importance of environmental issues worldwide, and as such there is increased discussion on whether environmental reporting should become regulated internationally or continue to remain voluntary. The environment disclosures are generally through a sustainability report, which may also include the social and economic performance of an organisation. This is commonly referred to as triple bottom–line reporting, and is tied together closely with the term Corporate Social Responsibility. What is Corporate Social Responsibility? While sustainable development is most commonly defined as ‘development that meets the needs of the present world without compromising the ability of future generations to meet their own needs’ (World Commission on Environment and Development – Brundtland Report, 1987), Corporate Social Responsibility focuses on the mission and values of an organisation and its obligations and impacts on a wider range of stakeholders. (CSR (promotes) principles are for sustainability...
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...Chapter 3: The Regulation of financial accounting Why examine theories of regulation? Better placed to understand why some accounting prescriptions become part of legislation while others do not. Accounting standard – setting is a very political process While some proposed requirements may be technically sound and logical, they may not be mandated due to political ‘power’ or influence of some affected parties What is regulation? The Oxford Dictionary defines regulation in terms of a “prescribed rule” Macquarie Dictionary defined regulation as “a rule of order, as for conduct, prescribed by authority; a governing direction or law”. On the basis of these definitions can say that regulation is designed to control or govern conduct Hence, when we are discussing regulations relating to financial accounting, we are discussing rules that have been developed by an independent authoritative body that has been given the power to govern how we are to prepare financial statements, and the actions of the authoritative body will have the effect of restricting the accounting options that would otherwise be to an organisation. ‘Free Market’ perspective Accounting information should be treated like other goods, with demand and supply forces allowed to operate to generate an optimal supply. Arguments supporting ‘free – market’ perspective Private economic – based incentives ‘Market for managers’ ‘Market for corporate takeovers’ ‘Market for lemons’ Private economic – based...
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...come to change the auditor’s report to develop a different grading system and increase the value of auditing to society? Regulatory attempts to improve the functioning of capital markets often try to make corporate activities more transparent. The International Auditing and Assurance Standards Board (IAASB) invited comments on its proposals contained in “Improving the Auditors Report,” with an exposure draft expected to be issued by June. These proposals are intended to make the audit report more useful, and to better communicate the role of auditors. Auditors’ boilerplate, essentially pass/fail, reports reveal little of the fine-grained understanding they gain about the inner workings of their clients, including internal controls, accounting policies, disclosure and governance. The IAASB proposes to replace the current three-paragraph standard by a new four-page report that will add two new elements: an opinion about management’s use of the going concern assumption and an auditor commentary. The rationale for this five- or six-fold expansion under the proposal is that the commentary should help users better understand the audited financial statements and the audit. A sample report in the proposal includes comments on litigation, goodwill, financial instruments, and audit strategy for verifying revenue, receivables and cash receipts, the entity’s internal control over these items, involvement of other auditors, responsibilities of management and responsibilities of the...
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...MANAGEMENT ACCOUNTING: AN OVERVIEW Learning Objectives Distinguish between managerial & financial accounting. Understand the evolution of management accounting. Explain about the IFAC model. Understand how managers can use accounting information to implement strategies. Explain about Relevant Lost & Relevant Regained. 2 Learning Objectives Distinguish between managerial & financial accounting. Understand the evolution of management accounting. Explain about the IFAC model. Understand how managers can use accounting information to implement strategies. Explain about Relevant Lost & Relevant Regained. 3 Accounting System (accumulates financial and managerial accounting data) Managerial Accounting Information for decision making, and control of an organization’s operations. Internal Users Financial Accounting Published financial statements and other financial reports. External Users Managerial Accounting Users of information Managers within company Regulation Financial Accounting Interested outside parties Required. Must comform to Not required because for internal GAAP which is regulated by use only FASB and SEC. Basic accounting system plus Almost exclusively from the Source of Data various other sources basic accounting system Reports often focus on subunits. Reports focus on the enterprise Nature of Reports Based on a combination of in its entirety. Based on and...
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...Managerial Accounting in a y Dynamic Business Environment McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objective 1 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Define Managerial Accounting g g Managerial accounting is the process of Identifying Measuring Analyzing Interpreting Communicating information 1-3 Learning Objective 2 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Managing Resources, Activities, and P d People l An organization . . . Directing Acquires Resources Organized set of activities Decision Making Controlling g Planning Hires People 1-5 Learning Objective 3 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. How Managerial Accounting Adds Value to the Organization Add V l t th O i ti • Providing information for decision making and planning. • Assisting managers in directing and controlling g g g g activities. g g p y • Motivating managers and other employees towards organization’s goals. • Measuring performance of activities, managers, and other employees. • Assessing the organization’s competitive position. 1-7 Learning Objective 4 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Managerial versus Financial Accounting A ti Financial Accounting IInterested...
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...account for the reality of under employment, a category derived from the formal labour markets of the industrialised economies of the north. It assumed exclusion of workers from the formal economy and their absorption in the informal economy of small enterprises, often employing family members (Munck, 2002). Correspondingly, International Labour Organization (1972) and Hart (1973) crystallised the phenomenon of unregulated economic activity into the term “informal sector”. There was little anticipation that this sector could become the centre of attraction within a few decades in many countries. Once through of as a precipitate of formal activities, the informal sector gradually expanded in as many forms as imaginable in a complex economy (Marjit and Kar, 2011). Further, waves of globalisation and related maze of actions are smearing the boundaries of formality and informality (Marjit and Kar, 2011). Another view presented by Barbara-Harris White in her book, “Indian market society” that two third of Indian economy is reckoned to be social regulated economy accounting for ninety percent of...
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...selected case On December 2nd 2001 the largest bankruptcy in US history was filed by energy trader, Enron Corporation. Once regarded as one of the fasted growing, innovative and best managed businesses in the United States, the collapse of the energy giant highlighted a series of corrupt and criminal activities that were, according to several investigations, rife throughout Enron’s operations. Enron Corporation was formed in 1985 from a merger of Houston Natural Gas and Internorth. Enron held the title of operating the first nationwide network of natural gas pipelines in the United States as a result of the merger. Created on the basis of operating a regulated network for the transport of natural gas, Enron’s operating aim shifted during the early 1990’s to a new central focus. The corporation’s new focus was now in the unregulated energy trading markets of the United States. Until late 2001, nearly all observers- including professional Wall Street analysts- regarded this transformation as an outstanding success. (Jickling 2002, p1) Throughout the 1990’s Enron’s annual revenues grew significantly. In the early 1990’s, Enron’s annual profit was reported to be under $10 billion before ballooning to $101 billion in the lead up to 2000. By autumn of 2000, Enron was starting to crumble under its own weight. (Seabury 2003, p1) Enron’s CEO, Jeffery Skilling, who oversaw the company that only a year earlier had reported a $101 billion profit, resigned in August of 2001. At the end...
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...within a short span of 8 years since its establishment. Of course it doesn’t talk about the many people who would have gone bankrupt due to gambling. But this is the visible picture. According to a story published in the Businessworld in 2008, unlawful betting in the IPL cricket season averaged $100 million per match in 2008. Indians bought over 30 million lotteries a day and the lottery market alone was estimated to be upto Rs 50,000. The total gambling industry was upwards of Rs. 100,000 crore in 2008 itself. There is hardly any doubt that despite all the recessions, the gambling industry has only gone up. Howsoever we frown at the moral aspect of gambling, it remains the most popular vice. That it can’t be stopped is clear. That it be regulated and made legal remains to be tried. The most recent spate of events has once again highlighted the necessity to legalise it and make its tracking possible. On February 13, 2011, The Guardian reported Indian police being on alert as bookies prepare for betting bonanza duirng the ongoing ICC Cricket World Cup. Not a week passed and reports came of Indian police arresting nine men...
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...SUMMARY Salem Telephone Company operates as a regulated public utility. The state Public Service Commission (PSC) permitted Salem to establish a wholly owned subsidiary to provide computer services to other companies for a profit. The reason for the separate entities was so Salem Data Services could sell services unregulated and Salem Telephone could operate without raising rates. In 2000, the initial report to the PSC from the president of Salem Telephone was to convince them that the public entity, Salem Data Services, would become profitable and would end the need to raise telephone rates. By 2003, Salem Data had not turned a profit. Mr. Flores requested a meeting with the manager of Salem Data, Ms. Wu, so some type of action would be taken to “reduce the drain on Salem Telephone Company resources” (Bruns, Jr. & Hertenstein, 2005). The analysis that follows will show that Salem Data Services will not be a problem to Salem Telephone and eventually make a profit by spending more on promotional activities to increase commercial hours, and by moving fixed costs into variable costs. ANALYSIS Salem Data’s variable expenses with respect to revenue hours are power expense and hourly salary. Their fixed expenses for revenue hours are rent, custodial services, computer leases, maintenance, depreciations of computer and office equipment and fixture, operations salaried staff, system development and maintenance, administration, sales, sales promotion and...
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...Salem Telephone Co Case Study #2 Overview: Salem Telephone Company (STC) is a telephone company who is regulated by the state Public Service Commission. The state Public Service Commission encouraged public utilities under its jurisdiction to seek new sources of revenue and profits. This would reduce the need for rate increase that higher costs would otherwise bring. The company formed an agreement with the state Public Service Commission to create a subsidiary. Thus Salem Data Services (SDS) was created to perform data processing for the telephone company and sell computer products and services to other companies and organizations. The separation between the companies is because STC was a regulated utility and SDS is an unregulated company. The only restriction the state Public Service Commission had was the average monthly charges for services provided by SDS to STC is not to exceed $82,000. This was the estimated cost of equivalent services used by STC in the year 2000. With retaining the separation between the two companies all accounts of SDS were separated from STC. Lastly, each company paid the other for services from the other. During April 2004 the president of STC, Peter Flores met with SDS’s manager Cynthia Wu to discuss the condition of the company. SDS currently has yet to have a profitable month, but Wu feels the company is progressing well and needed more time to show profits. This raised a concern for Flores. Also, in 2003 STC’s income was at an all-time...
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...HBS case – Salem Telephone Company Opening In 2000 the Public Service Commission (PSC) was informed by the president of Salem Telephone Company (STC) that a profitable computer service subsidiary would reduce pressure for increases to telephone rates. With approval from the Public Service Commission, STC, a regulated public utility, established Salem Data Services (SDS) in 2001, an unregulated public utility to perform data processing for the telephone company and additionally to sell computer services to other companies and organizations in its’ immediate metropolitan region. After three years of operations SDS has yet to finalize a month in positive numbers and the president of STC is faced with the challenge of whether the subsidiary, SDS can be a profitable business. As Peter Flores, president of STC is preparing to meet with Cynthia Wu, manager of SDS, our group will review some common cost behaviors associated with distinguishing different types of costs; whether fixed or variable relevant to activity, construct a contribution margin income statement, review net income relative to reduction and increases to commercial price, and finally based on our financial analysis of SDS, make specific recommendations to the president of STC as to whether it is more or less profitable to keep the subsidiary SDS. With Incremental analysis we will be able to calculate the differences in revenue and costs between decision alternatives. Determining the actual fixed and variable costs...
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...Kapitel 1 Normative (prescriptive) accounting theory Inte baserad på empiriska tester (som positive teorier är) utan de är baserade på vad researcher tror ska eller borde inträffa vid särskilda omständigheter. Teorier som föreskriver (prescribe) istället för förklarar (describe) särskilda handlingar kallas för normativa teorier eftersom att dom baseras på normer som researchern som lägger fram teorierna har. T.ex. säger hur vi ska ta till oss och använda redovisningsmetoder. Kapitel 2 Theories of regulation Public interest theory There is the public interest theory of regulation which propose that regulation be introduces to protect the public. It assumes that the regulatory body (usually government) is a neutral arbiter of the public interest and does not let its own self-interest impact on its rule-making processes. “The regulator does its best to regulate so as to maximize social welfare. Consequently, regulation is thought of as a trade-off between the costs of regulation and its social benefits in the form of improved operations of markets”. Regulation put in place to benefit society as a whole rather than vested interests. Regulatory body considered to represent interests of the society in which it operates, rather than private interests of the regulators. Assumes that government is a neutral arbiter. Criticisms of public interest theory Critics question assumptions that economic markets operate inefficiently if unregulated. Question the assumption that...
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