Please enable JavaScript.
Coggle requires JavaScript to display documents.
Class 1: Intro to Acct. Theory (Ethics (Are Accountants Ethical? (WILL YOU…
Class 1: Intro to Acct. Theory
Historical Perspective
Collapses of Stock Market (1990s)
Examples
Enron
Worldcom
Outcomes
Reduced confidence in cap markets
Accountants: derecognition, disclosure
Policies: SOX, off-balance sheet rules
Causes
Current value accounting
Off balance sheet entities
Market meltdowns (2007/2008)
Causes
Lack of transparency
Value in use vs Fair Value accounting
Examples
Lehman Brothers
Outcomes
Disclosure of mgmt compensation
Remove transactions from shadow banking system
Increase capital reserve requirements for FIs
Ethics
Enron: auditor/accounting behavior led to meltdown?
serving client vs serving society
What determines who we serve? (client vs society)
Ethics: do the right thing
Profession: long run interests = do the right thing
Different mindset b/w profession and business of accounting
How can we improve the profession?
More laws?
Improved training? (e.g.: what does it mean to be a CPA
Legislative changes (penalties, separating professional services firms like what SOX did)
Are Accountants Ethical?
Yes (as a whole)
No: individual basis hard to tell. We know...BUT WILL WE ACT???
Profession
of accounting: ethics, hoity toitty, conflicts
Business
of accounting: clients, hours, retaining clients, etc
Ethics is a personal decision (moral compass). Hard to get everyone to agree, esp. when population is diverse
WILL YOU BE ETHICAL???
Yes: not much choice
Easy to be ethical when decisions are easy. Less when decisions are harder/have greater impact. BUT must consider professional consequences (reputational)
Gruntwork is easy to overlook
MUST understand the margins. Easy to say "I was just following the orders" or "no big deal"
Efficient Contracting
Basic Chararacteristics
Emphasis on
Contracts
Corporate governance
Definition of "Efficient"
Mutual trust b/w parties
tradeoff b/w benefits and costs
Management stewardship
Accounting Policy Implications
Reliable
Conservative
Conflicts with current value accounting principles
Historical: objective, perhaps to a fault :
Fair Value: estimates. may not be useful depending on user of statements
Rules based vs Principles Based
Principles Based
Reliance on ethical accounting/auditing profession
Role of conceptual framework
Example
: treatment of illegal immigrants (imposed law was rules-based, CRIMINALIEZD and separated families, but pricinciples based would have kept families together and been more humane)
Rules Based
Enron/WorldCom issues
Prescriptive, must be changed frequently
Role of regulation
Market forces motivate firms to produce info
Market forces subject to failure
Regulation's purpose = correct market failures
STANDARD SETTING: mediates interests of investors and managers
Investors: want LOTS of info
Managers: don't want to release all the info
Must balance investor vs management interests
Structure
IASB (International)
FASB (USA)
SEC/Securities Commissions
Information Asymmetry
Role of info in market economy
Improve operation of cap markets (Adverse selection)
Convert inside infor to outside
Supply useful info to investors
Improve operation of managerial labour markets (moral hazard)
Control manager shirking
Improve corporate governance
Fundamental Problem of FA Theory: best measure of net income != best measure to motivate manager performance
investors want info abt futur performance (current value)
good corp governance requires management works hard (reliability + conservatism)
Reliable information + conservatism vs current value accounting:
RELATED THEORIES
Rational investor:
investor use new info to revise beliefs about future firm performace. Rationality holds on average.
Due diligence to overcome bias, analytical (not emotional). Increases value of audited FS
Efficient Securities Markets
: efficienty is a matter of degree. Share prices reflect all publicly available information. Efficiency is relative to information, and FR improves the quality of info
Transparency + Objectivity
LIQUID: match up between buyers and sellers (lack of liquidity in commercial paper market resulted in bankrupcy of small firms in Canada during Fianncial Crisis
Impossible to create: too much info flowing back and forth
Rich research area: impact of restatements/timely statements, variables in market place, what impacts investors to make right decision
Behavioral Theories
: investors don't use all info in FS statements, so securities markets are not efficient
Agency Theory
: efficient contracts motivate manager performance and achieve good corporate governance