Week 10 - Contemporary Accounting Issuse Flashcards
Efficient Market Hypothesis:
Efficient market Hypothesis: Investors react to new information immediately.
• Useful accounting information thus influences trading and pricing decisions →
Share price movement (adjusting risk-return relationship
Fundamental qualitative characteristics of accounting: relevance
• Information related to decision making, e.g. helps predict or confirm outcomes • Judged by “materiality”: Its omission or misstatement significantly influences outcomes and decisions
Fundamental qualitative characteristics of accounting: Faithful representation
• Accounts reflect actual events • Three aspects: Complete, Neutral, Free from bias or error
Explain the agency theory
The separation of business ownership and control comes
at a potential cost of company profits being diverted from the principal to the agent if their interests are
not closely aligned.
Small company owned and controlled by same people, discourage to engage in activities
that are detrimental to the business as it would directly reduce their wealth.
Whereas in a larger company the shareholders/owners of the business might not be involved in the day-day operations and therefore they delegate this function to the management (the agent) who have the knowledge and
experience to run the business. The separation of company ownership and control creates an information
gap
Explain low quality accounting in relation to the agency theory
producing a set of financial statements where the reported accounting figures do not match the underlying performance of
the business.
Explain how to reduce the information gap present in the agency theory
h good quality financial and non financial information, The supply of such information, however, largely depends on the agent’s incentives to reveal true firm performance.
What is corporate governance?
Corporate governance: System (process and procedures) to direct and control business and managerial decisions and behavior
Why do we need coporate governance?
\+ Minimise negative social and environmental impacts (prevent market failure) \+ Facilitate sustainability / long term growth - Achieve objectives (e.g., maximize shareholder return and competitive advantage) \+ Reduce agency conflicts (e.g., ensure that managers do not engage in fraudulent reporting) -Maximise stakeholder confidence
Explain Internal corporate governance mechanism(s):
Board of Directors
Responsible for monitoring management
What doest the audit committee do?
Oversees and monitors the company’s audit processes, including the
company’s internal control activities.
Explain external government mechanisms
Control exercised over the firm by stakeholders, which the firm may not have direct control over.
The role of external auditors
It is management’s responsibility for the preparation and presentation of financial statements.
• The role of the auditor is to add credibility to this information (not to prepare it!).
• External auditing refers to the evaluation of an organisation’s financial statements by an auditor who should be independent of the management of the organisation.
Explain corporate social responsibility
‘Corporate Social Responsibility is often concerned with issues relating to a company’s Social, Environmental; and
Governance.’
Corporate social responsibility (CSR) refers to the socially responsible behaviour
exhibited by firms in order to be sustainable.
Explain the stakeholder theory
Stakeholder theory rejects the view that the sole important relationship is between managers
and shareholders of a corporation.
• Considers corporation from broader perspective.
Stakeholders are central to CSR as all stakeholders are considered, not just shareholders in the
establishment of CSR policy
Defining Corporate Social Responsibility ‘Reporting’
The provision of information about the performance of an organisation in relation to its interaction
with its physical and social environment. Includes factors such as:
• Interaction with local community
• Support for community projects
