week 10 - other accounting maters e.g. agency Flashcards
explain agency theory
According to the theory, the owners of the business (principal) cannot fully observe the management’s (agent’s) behaviour because the separation of company ownership and control creates an information gap (or information asymmetry) between the two parties where the agent holds more information about the company than the principal at any given moment and hence has an information advantage.
The agent can use this advantage to engage in opportunistic behaviour whereby it enhances its wealth often at the expense of the principal and “camouflages” the poor firm performance by producing a set of financial statements where the reported accounting figures do not match the underlying performance of the business. This is referred to as “low quality accounting”.
One way to reduce this information gap is to provide the principal with good quality financial and non-financial information, i.e. information that is relevant and faithfully represented. The supply of such information, however, largely depends on the agent’s incentives to reveal true firm performance.
what is cooperate governance
Corporate governance is a set of processes to direct and manage
corporate activity that includes achievement of business
objectives, maintaining conduct consistent with expectations,
protecting and increasing shareholder and stakeholder value and
transparency (empowerment) for shareholders and stakeholders
why is strong governance important
Strong governance has the potential to facilitate management disclosure and an environment of greater transparency
Academic research shows an association between weaknesses in corporate governance and:
Low financial reporting quality, measured in various ways:
Earnings quality (earnings management);
Financial statement fraud; and
Timeliness of disclosures
Poor future performance of a company, measured as:
Stock price performance; and
Operating performance
internal governance mechanisms
Board of Directors Responsible for monitoring management: hire, fire and compensate executives; and safeguard invested capital Important considerations: independent/non-executive directors; director ‘busyness’; and frequency of meetings board size
external governance mechanisms
Control exercised over the firm by stakeholders, which the firm may not have direct control over For example: External auditor; Debt covenants (banks); Analyst following; Government regulations; Competition watchdog; and Media pressure
global reporting initiative
To be in accordance with GRI, an entity’s must report against the following indicators: Direct economic impacts Environmental impacts Labour practices and decent work Society Product responsibility
explain integrated reporting
What is Integrated Reporting?
As set out in the International Framework, an integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.
Why have Integrated Reporting?
In the wake of the (global financial) crisis, the desire to promote financial stability and sustainable development by better linking investment decisions, corporate behaviour and reporting has become a global need.
what is GST
GST is a broad based consumption tax, and it applied to the majority of
transactions in Australia.
• Businesses are indirect tax collectors
You are entitled to an ABN if you’re either:
• carrying on or starting an enterprise in Australia (or making supplies connected with
Australia’s indirect tax zone), or
• a Corporations Act company.
For example this includes: • All companies registered under the Corporations Law in Australia. • Government departments and agencies. • Business entities • Organised charities
uses of abn
GST ‣ Luxury Car Tax ‣ Wine Equalisation Tax ‣ Fuel Tax Credits ‣ Pay As You Go withholding (but not Instalments) ‣ Fringe Benefits Tax
those ineligible to receive an abn
An employee
• Conducting a hobby.
• A self-funded retiree (in most cases).
• An individual or partnership who is not conducting
commercial activities with an expectation of profit.
No ABN means No GST Credits!
those capable of receiving an abn
You are entitled to an ABN
&
turnover is below the threshold
those who must register for an abn
those with an aggregate turnover > $75,000 or 150K for non for profit
tax free supplies
Wages • Residential rents • Interest income and Interest expense • Dividends • Exports • Registered education • Fresh food and essential products • Fines • Taxes
