1 Flashcards
What is accountability
A duty/responsibility that one individual, group or organisation owes to another
How can managers and entities be held accountable for their actions
Financial statements
Who can be held accountable
Companies and their managers/directors
To who are companies accountable
Those with power over the company such as providers of capital and the state
Who are affected by the company
Stakeholders
How can you ensure information is provided
Voluntary action by employees, develop best practice and develop regulations
Who sets regulations
Government through laws
Standard setting bodies
Industry bodies
Where can accounting rules come from
National legislators or standard setters
Transnational legislators
International standard setters
What are the different forms of regulation
General principle
Detailed rules
What is general principle
Gives high level guidance on how to account for various situations and transactions but doesn’t go into detail meaning those preparing financial statements need to use their judgement in applying the principles leading to lack of consistency in how similar situations are dealt with
What is detailed rules
Gives specific guidance on how to deal with situations and transactions. Business and rules are complex (IFRS) so may not be possible to anticipate every situation to which a rule should apply
Why are accounting regulations needed
Ensures minimum levels of disclosure
Enhance comparability
What does the agency theory regard a company as
Nexus of contracts between parties
Equity investors
Lenders
Managers
What does it mean if many contacts are based on accounting numbers
Managers pay may be profit related bonus
Lenders look at ability for companies to borrow (gearing)
Dividends tax
What is the link between Agency theory and accounting rules
Managers are responsible for preparing financial statements so risk they’ll choose accounting methods to benefit managers over shareholders. Reporting higher profits will lead to higher bonus. Reporting lower gearing will allow company to borrow more. Shareholders and lenders want to limit managers opportunities to prepare financial statements that suit managers interest and can be achieved by specifying how accounting numbers are measured in contracts.
