Week 4.2: Accounting theories

Question 1

What are the 3 types of theories and their purpose?

Answer 1

1) Descriptive theory- describe what people do.
2) Normative theory- Prescribe what people should do.
3) Positive theory- explain and predict what people do.

Question 2

What is the agency theory/ agency problem?

Answer 2

User to understand relationship between employees and owner.
The agency problem is when there is conflicting goals and interests, leading to managers doing things that is detrimental to owner.

Question 3

What is signalling theory?

Answer 3

Builds on agency theory.
As a result of information asymmetry, managers signal certain information to investors to show that they are better than other companies

Question 4

What are the 3 economic theories?

Answer 4

1) Agency theory
2) Positive Accounting theory
3) Signalling theory

Question 5

What are the 3 system-orientated theories?

Answer 5

1) Legitimacy theory
2) Stakeholder theory
3) Institutional theory

Question 6

What is legitimacy theory?

Answer 6

Organisations seek to ensure they operate within the norms, values, beliefs and expectations of their respective societies
This can help create a social contract

Question 7

What is stakeholder theory?

Answer 7

Stakeholder positive theory says that you should always be seen as legitimate with key stakeholder groups. E.g. if employees or investors do not see you as legitimate, you will loose them.

Question 8

What is institutional theory?

Answer 8

Institutional theory regards institutionalised structures as a mechanism to gain or maintain legitimacy
e.g. only a hand full of companies used to publish sustainability reports. Now it has become institiontinalised and most companies not partake in this.