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    Dwi Handayani
    The document discusses the history and purpose of financial accounting theory. It covers topics like the effects of the Enron and Worldcom scandals, the role of accounting standards, and theories relevant to financial accounting like the rational investor theory and agency theory.

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    Scot ch01

    Uploaded by

    Dwi Handayani
    23 views14 pages
    The document discusses the history and purpose of financial accounting theory. It covers topics like the effects of the Enron and Worldcom scandals, the role of accounting standards, and theories relevant to financial accounting like the rational investor theory and agency theory.

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    The document discusses the history and purpose of financial accounting theory. It covers topics like the effects of the Enron and Worldcom scandals, the role of accounting standards, and theories relevant to financial accounting like the rational investor theory and agency theory.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    23 views14 pages

    Scot ch01

    Uploaded by

    Dwi Handayani
    The document discusses the history and purpose of financial accounting theory. It covers topics like the effects of the Enron and Worldcom scandals, the role of accounting standards, and theories relevant to financial accounting like the rational investor theory and agency theory.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
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    You are on page 1of 14

    Financial Accounting Theory

    Fifth Edition

    William R. Scott

    Purpose: To create an awareness


    and understanding of the financial
    reporting environment in a market
    economy

    Copyright 2009 by Pearson Education Canada

    1-1

    Chapter 1
    Introduction

    Copyright 2009 by Pearson Education Canada

    1-2

    1.2 Some Historical Perspective


    Early development
    Great depression of 1930s reinforced historical
    cost accounting
    Alternatives to historical cost
    Cash basis accounting
    Current value accounting
    Value-in-use
    Fair value (exit price)

    Mixed measurement model

    Copyright 2009 by Pearson

    1-3

    1.2 Financial Reporting Horror


    Stories
    Enron
    WorldCom
    Effects on financial reporting
    Sarbanes-Oxley Act
    More conservative accounting?

    Copyright 2009 by Pearson

    1-4

    1.3 Ethical Behaviour by


    Accountants/Auditors
    Was accountant/auditor behaviour leading up to
    Enron & WorldCom reporting disasters ethical?
    Serve the client or serve society?

    Why would you behave ethically in similar


    circumstances?
    Ethical principles to do the right thing?
    Yours and the professions long run interests?
    Note each reason produces similar behaviour
    But mindset differs

    Copyright 2009 by Pearson

    1-5

    1.6 Role of Information in a Market


    Economy
    To improve operation of capital markets
    Adverse selection problem

    To improve operation of managerial labour


    markets
    Moral hazard problem

    Both roles crucial


    Results of Enron collapse show importance
    Recession in U.S. economy, 2001
    Increased regulation (SOX)

    Copyright 2009 by Pearson

    1-6

    1.6 Role of Financial Reporting in a


    Market Economy
    Control adverse selection
    Convert inside information into outside
    Supply useful information to investors

    Control moral hazard


    Control manager shirking
    Improve corporate governance

    Copyright 2009 by Pearson

    1-7

    1.7 The Fundamental Problem Of


    Financial Accounting Theory
    The best measure of net income to control adverse
    selection not the same as the best measure to
    motivate manager performance
    Investors want information about future firm performance
    Current value accounting?

    Good corporate governance requires that managers work


    hard
    Do historical cost accounting, conservatism better reflect
    manager effort?

    Copyright 2009 by Pearson

    1-8

    1.8 Role of Standard Setting


    Is standard setting needed?
    Market forces motivate firms to produce information
    But market forces subject to failure
    Adverse selection
    Moral hazard

    Regulation steps in to try to correct market failures


    Regulation is costly

    Continued

    Copyright 2009 by Pearson

    1-9

    1.8 Role of Standard Setting (continued)


    Standard setting mediates between conflicting
    interests of investors and managers
    Investors want lots of useful information
    Managers may object to releasing all the information
    that investors desire

    Copyright 2009 by Pearson

    1-

    1.9.5 Ways to Mediate Between


    Conflicting Interests
    Due process in standard setting
    Representation of diverse constituencies
    Super-majority voting
    Exposure drafts

    Copyright 2009 by Pearson

    1 - 11

    1.9.5 Structure of Standard Setting


    Bodies
    IASB
    International standards

    FASB
    United States standards

    AcSB
    Canadian standards

    Securities commissions
    Role in enforcing firms to follow standards
    May set standards themselves
    Why do they delegate most standard setting?

    Copyright 2009 by Pearson

    1-

    Theories Relevant to Financial


    Accounting
    The rational investor
    A model of how an investor may use new information to
    revise beliefs about future firm performance
    Rationality holds on average, not necessarily for each
    individual

    Efficient securities markets


    Share prices fully reflect all publicly available information
    Efficiency is relative to a stock of information
    Role of financial reporting in improving/expanding the stock
    of information
    Continued

    Copyright 2009 by Pearson

    1-

    Theories Relevant to Financial


    Accounting (continued)
    Behavioural theories
    Investors do not use all the information in financial
    statements securities markets not fully efficient

    Agency theory
    Efficient contracts to motivate manager performance
    and achieve good corporate governance

    Copyright 2009 by Pearson

    1-

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