Q to think, discuss

1
Q to think, discuss present

• What is the purpose of business?
• How do you define wealth?
• Who is the owner of a firms?
• Why matching?
• Define accountability

• What is the purpose of financial reporting?
• Accounting Standard?
• What is social accounting?
• How about environmental accounting
• Why historical cost accounting?

60 minutes - is it ok?
2
Accounting HistoryDouble entry?

• 1300s A.D crusades opened the Middle East and
  Mediterranean trade routes
• Venice and Genoa became venture trading centers
  for commerce
• 1296 A.D Ledgers in Florence
• 1340 City of Massri Treasurers Accounts are in
  Double Entry Form
• 1458 Luca Paciolis A review of Arithmetic,
  Geometry and Proportions

3
Accounting HistoryGoing Concern and Accrual
Accounting

• Venture accounting over the life of a venture
  with interim statements evolved in the
  Netherlands
• 1673 Code of Commerce in France requires biannual
  balance sheet reporting
• Charge and discharge agency Responsibility and
  Stewardship Accounting in English trust accounting

4
Accounting HistoryLimited Liability Corporations
(?)

• 1555 Russia Company
• 1600 East India Company
• 1670 Hudsons Bay Company
• 1340 City of Massri Treasurers Accounts are in
  Double Entry Form
• Englands Joint Stock Companies Act of 1844
  required depreciation accounting for railroads,
  mining and manufacturing (although the concept of
  depreciation dates back to Roman times)

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Accounting HistorySpeculation Fever

• Fraud and corruption festered and grew with the
  trading of joint stock, especially after 1600.
  The South Seas Company scandal (reporting stock
  sales as income and paying dividend out of
  capital) led to Englands Bubble Act in 1720 that
  focus on misleading accounting practices that
  helped manager rip off investors, especially by
  crediting stock sales to income.

6
Accounting HistoryLaissez-Faire Accounting
survived endless debates and scandals until the
Great Depression in 1933

• Much of the debate focused on capital maintenance
  (e.g, failure to charge off depreciation and
  failure to provide for replacement of operating
  assets), but government did not legally impose
  auditing requirement and serious GAAP until the
  U.S securities law in the early 1930s. Accountant
  were vocal in reform movements but governments
  were slow to react with legislation and court
  failed to establish consistent GAAP
• Creation of the SEC in an effort to regain public
  trust in financial reporting and equity
  investing.
• Many firms did have independent audits and
  conformed to the best GAAP traditions of the day
  (thereby giving some evidence that agency theory
  works sometimes). Agency theory hypothesizes that
  it is in the best interest of management to
  contract for protection of investors and avoid
  scandalous asymmetries of information.

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Accounting HistoryPost 1933

• In a 3-2 vote the SEC followed George O. Mays
  efforts to mandate external audits of securities
  traded across state lines in the U.S.
• 1939 1959 Accounting standards were generated
  by the AICPAs committee on Accounting Procedure
  (CAP) that issued Accounting Research Bulletins
  (51 ARBs) but the tendency was to overlook
  controversial issues such as off-balance sheet
  financing, public disclosure of management
  forecast, price level accounting, current cost
  accounting, and exit value accounting.
  Controversial items avoided by the CAP included
  management compensation accounting, pension
  accounting, post employment benefits accounting
  and off balance sheet financing (OBSF). The CAP
  did very little to restrain diversity of
  reporting.
• 1960 1972 Accounting Standard in the U.S. were,
  and still are, being generated by the Financial
  Accounting Standards Board (FASB) that has seven
  members, including required members from
  industry, academe, and financial analyst in
  addition to members from public accountancy.

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Accounting HistoryPost 1933page 2

• The future of the FASB and all national standard
  setters is cloudy due to the globalization of
  business and increasing needs for international
  standards.
• The primary body for setting international
  standards was the International Accounting
  Standard Committee (IASC). Go to
  http//www.iasc.org.uk/ their homepage
• In 2001 the IASC was structured into the new and
  smaller International Accounting Standards Boars
  (IASB). The majority of the IASB members will be
  full-time, whereas the members of the IASC were
  only part-time and did not have daily
  face-to-face encounters with other boards or the
  IASC staff. The IASB will operate more like the
  FASB in the U.S.

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SEMINAR IN ACCOUNTING THEORY
Muhd Kamil Ibrahim Director, UiTM-ACCA FRRC,
Faculty of Accountancy Section 7, Shah
Alam mkamil_at_salam.uitm.edu.my http//www.muhdkami
l.asiansquare.com 019-3154444 019-3096999 03-55442
901
Objective The purpose of this lecture is to try
to pull together the course as a whole in a
single framework.
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DISCUSSION OUTLINE
Shareholders Objective
Monitor and Motivate Managers
Firms Prospects
Conceptual Framework
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Shareholders Objective
Max Personal Wealth
How do you define wealth?

• Is it the only possible objective? - are you
  sure?
• Are you sure that Shareholders own the firm?

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Stakeholder Theory
Fama (1980) argues that shareholders do not own
the firm which is a combination of many interests
with different people owning different resources
Theories of the Firm Agency Theory and
Stakeholder Theory (main ref Neil A Shankman
(May 1999) Reframing the debate between agency
and stakeholder theories of the firm, Journal of
Business Ethics Dordrecht. http//www.angelfire.c
om/md/muhdkamil/agency4.htm
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Shareholders Objective
Max Personal Wealth
Max NPVs Activities
BUT..
It seems that shareholders would like this
objective
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Q to think

• How do shareholders, who are typically
  diversified and therefore have rather limited
  direct interest in any one firm, persuade
  managers to maximize NPV when they have no direct
  control?
• Assuming some success, how do shareholders try to
  ensure that the capital market reflect the worth
  of the firm so that they are able to sell without
  unreasonable loss?

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Monitor and Motivate Managers

• Financial Reporting Auditing Budget Target
  etc.
• Promotion Bonus Line of Authority Perks
  Staff etc
• Is it familiar stuff?
• Agency Theory
• Positive Accounting Theory
• Information Inductance
• Matching Based Model

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Firms Prospects
Concepts of Predictive Value Efficient Market
Hypothesis Bankruptcy Prediction Valuation Model
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A CONCEPTUAL FRAMEWORK
Shareholders Objective Max Personal Wealth
Max NPVs Activities
Monitor and Motivate Managers
Ensure that Share Price Reflects Firms Prospects
Capitalist Perspective
Agency Theory Positive Accounting
Theory Information Inductance
Concepts of Predictive Value Efficient Market
Hypothesis Bankruptcy Prediction
Matching Based Models
Valuation Based Models
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Thank You
At the end of the course you are expected to
say.. Well accounting is not just about
numbers Politics, Socialism, Marxism.. have fun
in my class

• Assignments
• What is Accounting Theory?
• Politics in Accounting
• Accounting for Goodwill
• Value Relevance of Accounting Numbers
• Stewardship Accounting A case for social
  accounting