WEEK 1: Understanding accounting in context.

Essential Textbook Deegan & Unerman 2011 Chapter 1

Accounting Theories

 Some accounting theories are developed on the basis of past observation, of which are
further developed to make the predictions about likely occurrences.
 Since accounting is a human activity (cannot have accounting without accountants), theories
of financial accounting will consider such things as people's behaviour and/or people's need
as regards financial information
 or the reasons why people within organizations might elect to supply particular information
to particular stakeholder groups.
 Accounting theories aim to provide a coherent and systematic framework for investigating,
understanding and/or developing various accounting practices.
 Therefore, the evaluation of individual accounting practices is likely to be much more
effective where the person evaluating these practices has a thorough grasp of accounting
theory.
 Accounting plays a very important and pervasive role within society.
 While learning the various rule of financial accounting which is embodied within accounting
standards and conceptual framework, it is important to also consider the implications that
accounting information could have.
 Accountants are often regarded as being very powerful and influential people as many
significant decisions are made on the basis of information that accountants provided

 There are many theories of financial accounting and there is no universally accepted one.
 This is because different researchers have different perspectives of the role of accounting
theory and what the central objective, role and scope of financial accounting should be.\\

 Inductive accounting theories

o Early development of accounting theory relied on the process of induction, which is
the development of ideas or theories through observation.
o Chalmer (1982) General condition for development of theory through observation
are :
i. The number of observations forming the basis of generalization must be
large
ii. The observations must be repeated under a wide variety of conditions
iii. No accepted observation should conflict with the derived universal law
o Patterns of consistent behaviour can be observed from the accounting practices
used by most accountants.
o In generating theories of accounting, it is assumed that what is done by the majority
of accountants is the most appropriate practice.

 Predictive accounting theories

o Accounting research changed their aim into explaining and predicting accounting
practice, rather than prescribing particular approaches.
o Positive theory begins with some assumptions and through logical deduction,
enables some predictions to be made about the way things will be.
o If prediction is sufficiently accurate when tested against observations of reality, then
it is regarded as an explanation of it.
o Positive theories can initially be developed through some form of logical and
deductive reasoning.
 o Positive Accounting Theory was the acceptance of the economics-based 'rational
economic person assumption'
o an assumption was made that accountants are primarily motivated by self-interest
(tied to wealth maximization), and that the particular accounting method selected
will be dependent upon certain considerations, such as:
i. Whether the person supporting the use of a particular accounting method is
rewarded in terms of accounting-based bonus systems
ii. Whether the organization they work for is close to breaching negotiated
accounting-based debt covenants
iii. Whether the organization that employs them is subject to political scrutiny
from various external groups, such as government, employee groups
o The assumption of self-interest challenges the view that accountants will
predominantly be objective when determining which accounting methods should be
used to record particular transactions and events.

 Prescriptive (normative) accounting theories

o Normative theories of accounting are not necessarily based on observation and
therefore should not be evaluated on the basis of whether the theories reflect
actual accounting practice.
o May use radical changes to current practice.
o The conceptual framework of accounting is an example of normative theory of
accounting.
o Relying upon various assumptions about the types or attributes of information
useful for decision-making, the conceptual framework of accounting provides
guidance on how assets, liabilities, expenses, income and equity should be defined,
when they should be recognized, and ultimately how they should be measured.
o We can classify some normative theories as 'decision usefulness theories'
o Decision usefulness theories ascribe a particular type of information for particular
classes of users on the basis of assumed decision-making needs.
o Have two branches - decision-makers emphasis and decision-models emphasis
o The decision-makers emphasis relies on undertaking research that seeks to ask the
users of the information what information they want.
o This knowledge is used to prescribe what information should be supplied to the
users of financial statements.
o The decision-models emphasis develop models based upon researchers' perception
of what is necessary for efficient decision-making.
o Typically assumes that classes of stakeholders have identical information needs.
o It concentrated on the types of information considered useful for decision-making.
WEEK 2: Accountability

Textbook chapter 2:

 Financial reporting is a process involving the collection and processing of financial

information to assist in the making of various decisions by many parties internal and external
to the organization.
 The role of financial accounting is focused on the provision of information to capital markets,
and regulations developed over along period of time in economies dominated by capital
markets.

The role of professional judgement in financial accounting

 At the core of the accounting process is an expectation that accountants should

be objective and free from bias when performing their duties. The information being
generated should represent faithfully the underlying transactions and events and it should be
neutral and complete.

Textbook Chapter 8:

 There are a number of theoretical arguments as to why corporate management might elect
voluntarily to provide particular information to parties outside the organization. (arguments
were grounded within Positive Accounting Theory)
 Theories are abstractions of reality and hence particular theories cannot be expected to
provide a full account or description of particular behaviour.
 It is useful to consider the perspectives provided by alternative theories.
 Three theoretical perspective that have been adopted by researchers:
i. Legitimacy theory
ii. Stakeholder theory
iii. Institutional theory
 These are referred to as 'system-oriented theories' or 'open-systems theories'
 Gray et al (1996) " a systems-oriented view of the organisation and society ... Permits us to
focus on the role of information and disclosure in the relationships between organisation,
the State, individuals and groups.
 Within system-based perspective, the entity is assumed to be influenced by and in turn to
have influence upon, the society in which it operates.
 Within the theories, accounting disclosure policies are considered to constitute a stretegy to
influence the organization's relationships with the other parties it interacts.
 stakeholder theory and legitimacy theory have frequently been applied to explain why
organizations make certain social responsibility disclosures within their annual reports, or
within other corporate reports.
 Could also be applied to explain why companies adopt particular financial accounting
techniques.
 Legitimacy theory and stakeholder theory are derived from a broader theory - political
economy theory.
i. Gray defined it as 'the social, political and economic framework within which human
life takes place'
 ii. The perspective embraced is that society, politics and economics are inseparable,
and economic issues cannot meaningfully be investigated in the absence
of considerations about the political, social and institutional framework in which the
economic activity takes place.

 Legitimacy theory (pp. 323-333)

 State that organizations continually seek to ensure that they are perceived as
operating within the bounds and norms of their respective societies, that is, they
attempt to ensure that their activities are perceived by outside parties as being
'legitimate'. (p. 323)
 These bounds and norms are not fixed, but changes over time, requiring
organizations to be responsive to the ethical and moral environment which they
operate.
 Lindblom (1993) , legitimacy is a condition or status which exists when an entity's
value system is consistent with the value system of the larger social system of which
the entity is a part of.
 Suchman (1995) , legitimacy is a generalised perception or assumption that the
actions of a entity are desirable, proper, or appropriate within some socially
constructed system of norms, values, beliefs and definitions.
 Legitimacy theory would suggest that whenever managers consider that the supply
of the particular resource – legitimacy – is vital to organizational survival, then they
will pursue strategies to ensure the continued supply of that resource.
 For an organization seeking to be perceived as legitimate it is not the actual conduct
of the organization that is important, it is what society collectively knows or
perceives about the organization’s conduct that shapes legitimacy.
 Legitimacy is based on perceptions.
 Nasi et al. (1997) ;
A corporation is legitimate when it is judged to be ‘just and worthy of support’
(Dowling and Pfeffer, 1975). Legitimacy therefore is not an abstract measure of
the ‘rightness’ of the corporation but rather a measure of societal perceptions
of the adequacy of corporate behaviour (Suchman, 1995). It is a measure of the attitude
of society toward a corporation and its activities, and it is a metter of degree ranging
from highly legitimate to highly illegitimate.
 Legitimacy theory relies upon the notion that there is a ‘social contract’ between the
organization in question and the society in which it operates.
 It is assumed within legitimacy theory that society allows the organization to continue
operations to the extent that it generally meets their expectations – that is, to the extent it
complies with the social contract.
 Legitimacy theory emphasizes that the organization must appear to consider the rights of
the public at large, not merely those of its investors.
 Failure to comply with social expectations may lead to sanctions being imposed by society -
exp. Legal restrictions on an organization's operations, limited resources being provided
and/or reduced demand for its product.
 Furthermore, organizations are not considered to have any inherent right to resources. -
right to access resources must be earned.
 Mathews (1993) -> the social contract would exist between corporation and individual
members of society. Society provides corporations with their legal standing and attributes
and the authority to own and use natural resources and to hire employee. The organisation
has no inherent rights to these benefits, and in order to allow their existence, society would
expect the benefits to exceed the costs to society.
 Legitimation strategies rely upon disclosure.
 Organization may prove the legitimacy of its activities:
 Can adapt its output, goals and methods of operation to conform to prevailing
definitions of legitimacy.
 Can attempt, through communication, to alter the definition of social legitimacy so
that it conforms to the organization's present practices, output and values
 Can attempt, through communication, to become identified with symbols, value or
institutions that have a strong base of legitimacy.
 Lindblom (1993) proposes that an organization can adopt a number of strategies where it
perceives that its legitimacy is in question because its actions (or operations) are at variance
with society’s expectations and values. Lindblom (1993) identifies four courses of action that
an organization can take to obtain, maintain, or repair legitimacy in these circumstances.
The organization can:
 seek to educate and inform its ‘relevant publics’ about (actual) changes in the
organization’s performance and activities which bring the activities and
performance more into line with society’s values and expectations;
 seek to change the perceptions that ‘relevant publics’ have of the organization’s
performance and activities – but not change the organization’s actual behaviour (while using
disclosures in corporate reports to indicate falsely that the performance and activities have
changed);
 seek to manipulate perception by deflecting attention from the issue of concern onto other
related issues through an appeal to, for example, emotive symbols, thus seeking to
demonstrate how the organization has fulfilled social expectations in other areas of its
activities; or
 seek to change external expectations of its performance, possibly by demonstrating that
specific societal expectations are unreasonable.
 The public disclosure of information in such places as annual reports can be used by an
organization to implement each of the above strategies.
 The technique might be symbolic ( not actually reflect any real change in activities) or they
might be substantive (reflect actual change in corporate activities).

 Stakeholder theory
 It has both ethical or normative branch and a positive(managerial) branch.
 Stakeholder theory provides a more refined resolution by referring to particular
groups within society (stakeholder group)
 because different stakeholder groups will have different views about how an
organization should conduct its operations, there will be various social contracts
‘negotiated’ with different stakeholder groups, rather than one contract with society
in general.
 the managerial branch of Stakeholder theory explicitly refers to issues of
stakeholder power, and how a stakeholder’s relative power affects their ability to
‘coerce’ the organization into complying with the stakeholder’s expectations.

 The ethical perspective argues that all stakeholders have the right to be treated fairly by an
organization, and that issues of stakeholder power are not directly relevant.
 There is a view that stakeholders have intrinsic rights and these rights should not be
violated.
 Stoney and Winstanley (2001), ethical branch is a concern for the ethical treatment of
stakeholders which may require that the economic motive of organizations - to be
profitable- be tempered to take account of the moral role of organizations and their
enormous social effects on people's lives.
 Stakeholders definition, Freeman and Reed (1983) : any identifiable group or individual who
can affect the achievement of an organisation's objectives, or is affected by the achievement
of an organisation's objectives.
 The broader ethical (and normative) perspective that all stakeholders (both primary
and secondary) have certain minimum rights that must not be violated can be extended
to a notion that all stakeholders also have a right to be provided with information about
how the organization is affecting them (perhaps through pollution, community
sponsorship, provision of employment safety initiatives), even if they choose not to use
the information, and even if they cannot directly have an impact on the survival of the
organization.
 In considering rights to information, Gray (1996) perspective of accountability.
 They define accountability as :
The duty to provide an account (by no means necessarily a financial account)
or reckoning of those actions for which one is held responsible.
 According to Gray et al. accountability involves two responsibilities or duties:
i. the responsibility to undertake certain actions (or to refrain from taking actions);
and
ii. the responsibility to provide an account of those actions.
 Reporting is assumed to be responsibility driven rather than demand driven
 Applying accountability model to corporate social reporting, Gray et al (1991) argue that:
The role of corporate social reporting is to provide society-at-large(the principal)
with information (accountability?) about the extent to which the organisation
(the agent) has met the responsibilities imposed upon it (has it played by the
rules of the game?).
 The role of a corporate report is to inform society about the extent to which actions for
which an organization is deemed to be responsible have been fulfilled.
 Hurst (1970) emphasizes importance of accountability , 'an institution which wield practical
power - which compels men's wills or behaviour - must be accountable for its purposes and
its performance by criteria not in the control of the institution itself'

 Managerial branch of stakeholder theory

 Attempt to explain when corporate management will be likely to attend to the expectations
of particular (typically powerful) stakeholders.
 Gray et al. (1996) state:
The stakeholders are identified by the organisation of concern, by reference to the
extent to which the organisation believes the interplay with each group needs to be
managed in order to further the interests of the organisation.
The more important the stakeholder to the organisation, the more effort will be exerted
in managing the relationship.
 The organization is also considered to be part of the wider social system, but this
perspective of stakeholder theory specifically considers the different stakeholder groups
within society and how they should best be managed if the organization is to survive.
 It is considered that the expectations of the various stakeholder groups will impact on the
operating and disclosure policies of the organization.
 Organization will respond to those stakeholders that are deemed to be 'powerful'
 A stakeholder’s power to influence corporate management is viewed as a function of the
stakeholder’s degree of control over resources required by the organization.
 A major role of corporate management is to assess the importance of meeting stakeholder
demands in order to achieve the strategic objectives of the firm.
 Roberts (1992) states :
 A major role of corporate management is to assess the importance of meeting
stakeholder demands in order to achieve the strategic objectives of the firm. As
the level of stakeholder power increases, the importance of meeting stakeholder
demands increases also.
 The greater the importance to the organization of the respective stakeholder's
resources/support, the greater the probability that the particular stakeholder's expectations
will be incorporated into the organization's operations.

 Institutional theory
 Intuitional theory considers the forms that organizations take, and provides
explanations for why organizations within a particular 'organizational field' tend to
take on similar characteristics and form.
 This theory views organizations as operating within a social framework of norms,
values, and taken-for-granted assumptions about what constitutes appropriate or
acceptable economic behaviour (Oliver,1997).
 It provides a complementary perspective, to both stakeholder theory and legitimacy
theory, in understanding how organizations understand and respond to changing
social and institutional pressures and expectations.
 It leads to the isomorphism which is the process that causes one unit in a population
to resemble other units in the population that face the same set of environmental
conditions. It is describe as a homogenization of organisation whereby organizations
tend to adopt the same structures and practices.
WEEK 3: Judgement and Financial Reporting

Tasks:

 Accounting is performative and not just descriptive because it a way of seeing and not
seeing an organisation. It is a shared visibility.
 Financial reporting as a 'frame of reference'
 Transformative learning is defined as the process by which we transform problematic
Frames of reference(mindsets, habits of mind, meaning perspective) - sets of assumption
and expectation, are the structures of culture and language through which we construe
meaning by attributing coherence and significance to our experience (Mezirow 2009)
 For example the IASB has recognised the problem with the frame of reference that people
are just going through the standards and making the checklist with a lot of useless
information in the financial reports, and not actually using their own judgement.
 Frames of reference is like rules in the family.
 Financial reporting helps us structure the representation and assessment of organisations
and their performance.
 Financial reporting: An institution
 "Institutions are social structures that have attained a high degree of resilience. They are
composed of cultural-cognitive, normative, and regulative elements that, together with
associated activities and resources, provide stability and meaning to social life". (scott, 2003)

Judgement
 "The accounting profession's prime asset is an attributable known as professional
judgement.
 Judgement, professional or otherwise, is a product of the mind. If judgment must be made
synonymous with subjectivity, we cannot have objectivity and profession at the same time.
 Clearly, we cannot accept such view of objectivity. Rather, we must show that the exercise
of professional judgement and the desire for objectivity are complementary propositions."
(Wagner 1965)
 Objective - are facts that are out in the world and can be explained
 Subjective - just opinions that are in the mind and have no reasons
 Anything that is the product of human thinking is technically subjective - in that it is the
product of human subjects and would not exist without people being around.
 Judgement is the ability to make decisions or to make good decisions, or the act of
developing an opinion, especially after careful thought.

Objectivity
 Objectivity in accounting is a quality said to exist when financial data are presented in a
manner that produces a highly reliable connection between the events taking place in a
given business entity and the mental image created in the user's mind about those events.
 Wagner says we need to move from something which is just an opinion to something which
everyone can call a fact.
 Objectivity in financial presentations is attained by the individual practitioner through the
competent and ethical exercise of professional judgement in conjunction with reference
points (procedures and principles) socially prescribe by the members of the profession as a
corporate body.
 ^ Wagner
 Accounting needs elements of coherence and correspondence. Calculated appropriately
(coherence) and traceable data there in the world (correspondence).
Conclusions
 There is a lack of a simple correspondence between economic datum and aggregated
accounting figures- financial statements contain the product of our concept and rules- our
judgements
 This allows us to remember that we are producing a managed picture of economic reality -
we are not just communicating we are constructing - brings with it power and responsibility
(Hines)
 Once we recognise financial statements are 'a' truth not the single and only 'truth' it o puts
responsibility on producers and users to understand the context of the numbers:
 Notes, disclosures - the text is as important as the numbers in understanding the
creation that is financial statements
 Understand financial statements as a spotlight - not everything is visible

Live Lecture:

 Hines :
 Make judgements about what we can include and what we can't include, when we include
it: we make and take data and re-present it as a version of the world that we deem useful.
 IFRS standard setting helps us think similarly in the judgements we make - it manages
judgement and shapes how we produce A truth not THE (one and only) truth.
 Financial statements are only a version the economic reality and not the economic reality.

Theory : week 3 lecture

Theory adds legitimacy to peoples work.
 Some work is inductive (taking lots of facts and building it up to a conclusion)
 Some is deductive (taking a large conclusion and thinking about its implications)
 Some Is normative or perspective.

The Conceptual Framework is an example of Normative Accounting Theory(NAT)

 Describe the objective of, and the concepts for, general purpose financial reporting
 Its purpose is to:
i. Assist the IASB to develop IFRS (standards) that are based on consistent concepts.
ii. Assist prepares to develop consistent accounting policies when no standard applies
to a particular transaction or event, or when a standard allows a choice of
accounting policy
iii. Assist all parties to understand and interpret the standards (help standard setters,
preparers and users with their understanding of the way financial statements
represent economic reality and their judgements within that process)

The objective of financial reporting - CF 2018 - decision-usefulness

 1.2 the objective of general purpose financial information about the reporting entity that is
useful to existing and potential investors, lenders and other creditors in making decisions
relating to providing resources to the entity....
 1.3 investors', lenders' and other creditors' expectations about return depend on their
assessment of the amount, timing and uncertainty of (the prospects for) future net cash
inflows to the entity and on their assessment of management's stewardship of the entity's
economic resources.
 Decision usefulness is providing relevant information for people looking to predict the future
cash flow.
  The objective of FR impacts the representation, measurement and accountability.

Faithful representation:

Free from error (from faithful representation)

 Not mean accurate in all respects
 E.g. "an unobservable price or value cannot be deemed to be accurate or inaccurate"
 Financial statements are full of estimates
 Provided estimates are reasonable, made with good judgement, information about items are
still faithful

Verifiability
 2.30 Verifiability helps assure users that information faithfully represents the economic
phenomena it purports to represent. Verifiability means that different knowledgeable and
independent observers could reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation. Quantified information
need not be a single point estimate to be verifiable. A range of possible amounts and the
related probabilities can also be verified.
 Over time accounting standards changed from reliability (free from material errors, and bias,
verifiable, faithful representation, etc) to relevance and faithful representation.

“accounting is objective if multiple users assessing the same issue come to similar conclusion”

WEEK 4: IFRS/IASB Legitimacy

Textbook chapter 3 and 4

Regulation
 Arguments for and against regulation
 Definition: A rule or principle governing behaviour or practices; esp. Such a directive
established and maintained by an authority.
 Designed to control or govern conduct.
 In the context of financial accounting, discussing about rules that have been developed by
an independent authoritative body that has been given the power to govern how we are to
prepare financial statements, and the actions of the authoritative body will have the effect
of restricting the accounting options that would otherwise be available to an organization.

The 'free-market' perspective

 A fundamental assumption underlying a ‘free-market’ perspective to accounting regulation
is that accounting information should be treated like other goods, and demand and supply
 forces should be allowed to freely operate so as to generate an optimal supply of
information about an entity.
 Even in the absence of regulation, there are private economics-based incentives for the
organization to provide credible information about its operations and performance to
certain parties outside the organization, otherwise the costs of the organization’s operations
will rise.
 In the absence of information about the organization's operations, other parties, including
shareholders who are not involved in the management of the organization, will assume that
the managers will be assumed to operate the business for their own personal benefit, rather
than with the aim of maximising the value of the organization.
 The argument by some advocates of the ‘free-market’ perspective is that in the absence of
regulation there will be private incentives to produce accounting information.
 Imposing regulation that restricts the available set of accounting methods will decrease the
efficiency with which negotiated contracts will reduce agency costs.
 In the presence of a limited number of contracting parties, reducing regulation might seem
reasonable given the view that various items of financial information will be provided.

The 'pro-regulation' perspective

 Accounting information is a public good - once available, people can use it without paying
and can pass it on to others.
 'Free riders' cause true demand to be understated because they can obtain goods without
paying for it.
 Lack of incentive for producers of the particular good or service, leads to an
underproduction of information.
 Regulation is needed in order to avoid underproduction of accounting information due to
the presence of 'free rider'.
 From financial accounting perspective, everybody should have access to the same
information
 This is the basis of laws that prohibit insider trading, which rely upon an acceptance of the
view that there will not be, or perhaps should not be, transfers of wealth between parties
simply because one party has access to information which others do not.

Theories that describe why regulation is put in place, and describing which stakeholders are
expected to benefit from regulation:
 Public interest theory
 Posner (1974), 'holds that regulation is supplied in response to the demand of the
public for the correction of inefficient or inequitable market practices'.
 Regulation is put in place to benefit society as a whole and the regulatory body is
considered to be a neutral arbiter that represents the interests of the society in
which it operates, rather than the private interests of the regulators.
 The enactment of legislation is considered a balancing act between the social
benefits and the social costs of the regulation.
 Regulation is an instrument to create confidence that capital markets efficiently
allocate resources to productive assets.

 Capture theory
 In the process of introducing regulation, the organizations that are subject to the
regulation will come to control the regulator.
  The regulated parties or industries will seek to take charge of (capture) the regulator
with the intention of ensuring that the regulations subsequently released by the
regulator (post-capture) will be advantageous to their industry.
 Although the introduction of regulation is to protect 'public interest', it will be
difficult for a regulator to remain independent of those parties, as the survival of the
regulatory body over a period of time often depends on satisfying the expectations
of those parties or groups being regulated.

Objective of IFRS:
a. To develop, in the public interest, a single set of high quality, understandable, enforceable
and globally accepted financial reporting standards based upon
clearly articulated principles. These standards should require high quality,
transparent and comparable information in financial statements and other
financial reporting to help investors, other participants in the world’s capital
markets and other users of financial information make economic decisions.
b. to promote the use and rigorous application of those standards.
c. In fulfilling the objectives associated with (a) and (b), to take account of, as appropriate, the
needs of a range of sizes and types of entities in diverse economic settings.
d. To promote and facilitate adoption of IFRS, being the standards and interpretations issued
by the IASB, through the convergence of national accounting standards and IFRSs

Benefits of Accounting Standards

 Reduce accounting choices
 Improve comparability
 Based on a conceptual framework
 Improve disclosures
 Reduce opportunity for creative accounting
 Overall improve discipline and credibility of financial reporting
 Improve corporate accountability

Arguments against Standards

1. Adverse allocative effects

 Could occur is standard setters did not take account of the economic consequences flowing
from the standards they issued. For example:
 Additional cost could be imposed on preparers
 Suboptimal managerial decisions might be taken to avoid any reduction in reported
earnings.

2. Consensus-seeking
 Can lead to the issuing of standards that are over-influenced by those with the easiest access
to the standard setters as the subject matter becomes more complex.

3. Overload
 Too many standards
 Too detailed
 2021 ED The Disclosure Proble
Historically in the west there were 2 basic models:
Anglo – American model: Important equity market and many outside shareholders
Continental European Model: Bank and families were a more important source of finance since they
were usually on the board of directors.

Gary’s accounting values:

It basically shows how countries differ in terms of how they measure, report, etc their financial
reports.

“the lack of a formal mandate(black,2008) and the potential displacement of national accounting
standards, give rise to legitimacy issues. (Wingard and bosman, 2016)

WEEK 5: IFRS/IASB Changes and Tensions (representation and measurement)

Task

Measurement : a basis for deciding which monetary amount should be applied to the elements in
the financial statements.
Fair Value is an example of a current value.

Definition of fair value:

 IFRS 13; "the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date"
 Key points:
i. Price at which an item could be disposed (exit price)
ii. Orderly transaction: not a forced or liquidation
 iii. Market participants: market-based measure rather than entity-specific (market
price)
iv. Measurement date: current price on current market conditions

Fair value Hierarchy

 Level 1: Quoted prices in active markets for identical assets and liabilities that the entity can
access at the measurement date
 Level 2: Inputs other than quoted prices that are observable for the asset or liability either
directly or indirectly. Ex: quoted price of a share in a listed company which is similar to the
shares in an unlisted company.
 Level 3: Unobservable inputs for the assets or liability (mark to model). Ex: cash flow used to
value a share in a private equity firm.

Objective of Financial reporting:

 Decision usefulness and relevance. Decision usefulness is related to the value relevance of
information. If a company has relevance of information, it increases the value of the
company.

Stewardship/accountability:
 Conducting, supervising or managing of something especially careful supervision of
something.
 “the living law” “root metaphor of accounting”

Holding management to account

 Information that helps owners/investors understand that management decisions are
o Aligned to the owners' objectives
o Devising strategies aimed at making the best use of company assets; and
o No misappropriation of the company assets takes place
o Protecting the entity's economic resources from unfavourable economic effects
 Management is also accountable for ensuring that then entity complies with applicable laws,
regulations, and contractual provisions.
 Decisions about whether to replace or reappoint management, how to remunerate
management, and how to vote on shareholder proposals about management's policies

Objective of Financial Reporting 1989

 "12. The objective of financial statement is to provide information about the financial
position, performance and changes in financial position of an enterprise that is useful to a
wide range of users in making economic decisions
 13... Financial statements do not provide all the information that users may need to make
economic decisions since they largely portray the financial effects of past events and do not
necessarily provide non-financial information
 14 financial statements also show the results of the stewardship of management, or the
accountability of management for the resources entrusted to it..."
CF(2010)

CF (2018)

Lecture:

Grand theory: You cannot have a universal or single measurement basis – Whittington

Capital maintenance perspectives:

Old pnl vs PnL with other comprehensive income

The disclosure problem

 Overly perspective lagunage

 Unclear or duplicate requirement across standards

 A lack of specific objectives

WEEK 6: Quality and Audit Culture (How can financial information be trusted)

How do regulative, normative, and cultural-cognitive elements contribute to financial reporting as an

institution? (These elements are recognised as ‘pillars’ of institution)
 “Regulative elements involve the capacity to establish rules, surveillance mechanisms, and
sanctions to influence behaviour.
 Normative elements involve the creation of expectations that introduce a prescriptive,
evaluative, and obligatory dimension into social life.
 Cultural-cognitive elements involve the creation of shared conceptions that constitute the
nature of social reality and the frames through which meaning is made.” (Scott, 2003 p.880)

Key points:
 Involves agency theory which is the separation of ownership (shareholders) and control
(managers/directors).
 Agency theory assumes there is a separation of interests which then creates the agency
problem which is the inherent conflict of interest when one party is expected to act in the
interest of other.
 Financial statements help with the visibility and performance accountability needed to align
interests – they are mechanisms for enhancing governance, because it enables investors to
monitor director’s/manager’s actions.
 The importance of reducing moral hazard which is to reduce the risk of investment to a level
which investors are willing to accept.
 Questions the fundamental role of auditors which is to report on whether the annual
accounts show ‘a true and fair view’ of the company’s financial activity and position to its
shareholders. (in seminar they asked for auditor’s role in market)
 Thus, audit and monitoring and enforcement of audit is essential for financial statements to
be trusted, to be useful.
 There is a complex regulatory environment that lies beyond the remit of standard-setters.
 How have auditors ended up with legitimacy crisis? (seminar week 6)
Types of audit tests:
System tests – test the internal control system. Only choose certain areas and test if the system is
working properly.
Once they are assured that the systems are working properly, they implement detailed test of
transactions

Live lecture

Who controls the auditors:

Professional bodies control them
The company pays them

Key characteristics of profession:

Why do we trust the accountancy profession with audit?

 Since auditing is a profession, there are certain public expectations which they have to
match up with.
 “Auditing plays an important role in maintaining confidence in financial reporting, which in
its absence would almost certainly be highly unreliable.” (ICAEW)
 They have to demonstrate key competencies, and symbolic characteristics that persuade us
they are operating legitimately.
 They have to position themselves as somehow more than any old occupation – the term
‘profession’ is loaded with expectations.

Professional bodies governing auditing:

FRC, Department of business, energy and sustainable strategy, government.

“being professional and not a professional”

Professional means appearance or behaviour, prioritising firm and client, everything was in the name
of the client, mobile or restless career.
Organisational culture
 What’s the big deal about professionalism?
 According to Wyatt (2004), professionalism is lost due a move to consultancy culture,
rewarding people for contribution to profit – auditors are profit driven instead of prioritising
the public’s interest.
 Being a professional means not letting personal opinions get in the way (Anderson-Gough et
al, 1997-2001).
 Thus, it is important to have the appropriate behaviour (professional) to be the culture in an
organisation so they can understand the rewards of such behaviour (ensuring the greater
good of public interest).

How does culture affect behaviour and audit quality:

 Saving the money, pleasing your client, pleasing your boss, could be affected by:
 How much time to spend on audit
 How many questions should you ask your client or boss
 Where do I take issues which are troubling me about this client

So producing a good quality FR and audit depends on:

 A proactive and strong regulatory system
 How the profession (its firms and their members) understands the ‘big picture’ its purpose
and obligations – public interest focus.
*Which depends on the core characteristics of professional status, for example, legitimacy work
to keep the formal rights and the informal social contract.

Conclusions:
*Culture affects competence and ethics (quality)
 Commercialised private sector professional approaches are central to the production of
accounting and audit in many countries
 Formal regulation (IFRS) is filtered through day-to-day experience in firms
 Socialisation into thinking and behaving like an accountant is at the heart of accounting
quality.
 HOWEVER, how do practitioners understand ethics and public interest if they believe they
are first and foremost – employees for the firm rather than a member of profession – put
one client or the whole market first when deciding what to do?
 Simply put, it is easy to say why being professional is ethical but hard to provide the
environment and rewards for auditors to actually be professional, especially when other
workers (consultants) are rewarded more for satisfying clients.
WEEK 7: Management Control and Discipline

How accounting can help create comprehensive calculable spaces, increasingly covering spaces of
production?
a. Facilitating control through visibility
 Clear space for you to evaluate people
 Relates to the idea of surveillance
 Putting people in spaces where you can observe e.g. analyse, rank, calculate their
work
 Pushes the analytical spaces of production, meaning that you get to understand the
process of manufacturing (example) instead of just relying on numbers.

b. Increasing discipline and control

 Increasing the continuity of observation by superimposing analytical and physical
space
 Increasing the traceability of inscriptions by establishing paper trails and expanding
accountability
 Increasing activities at centres of calculation by increasing analysis and comparability
 *Increasing invasiveness at peripheries by disciplining minds and instilling self-
discipline because it increases the awareness that they are being observed.

c. Making ourselves visible

 Brivot & Gendron (2011) describe how employees in a professional services firm
made use of the firm’s information system to engage in complex “games of
visibility”.
 They observe that the prison metaphor of the panopticon does not work well to
understand this
 *Surveillance is taking place, but as a result of observation among peers, workers
show the possibilities of hiding work or showing off which is inefficient.

Conclusions:
 Accounting is involved in creating organisational spaces that are designed to facilitate
management control and discipline.
 Historically, the association of accounting with disciplinary practices can be traced to distinct
educational innovations concerned with the evaluation (marking and grading) of people.
 The lasting connection between accounting and educational practice implies that we have all
experienced the accountabilities created on this basis at length – and to some extent we
learn how to bend them to our own advantage.
 Personal take: since financial reporting also fulfils the stewardship role because stakeholders
require it to evaluate manager’s performance, or even the company’s performance overall.
 By using the strategic structure of reporting as an inspiration for creating the work spaces,
they can too evaluate others’ performance through analytical spaces.

Textbook Chapter 12:

o Overview of an alternative perspective about the role of accounting.

o Critical perspective, explicitly considers how the practice of accounting tends to support
particular economic and social structures, and reinforces unequal distribution of power and
wealth across society.
 o The view promoted by researchers from a critical perspective is that accounting actually
provided the means of maintaining the powerful positions of some sectors of the community
while holding back the position and interest of those without wealth.

The role of the state in supporting existing social structures.

o Government will undertake various actions from time to time to enhance the legitimacy of
the social system, and thereby protect and advance the power and wealth of those who own
capital, even though it might appear that the government was acting in the interests of
particular disadvantaged groups.
o For instance, a government might impose mandatory disclosure requirements for
corporations in terms of the disclosure of information about how the corporations attend to
the needs of certain minorities or the disabled.
o It is generally accepted that to make informed decisions as an individual or groups of
individuals must have access to information. Restricting the flow of information, or the
availability of specific types of information, can restrict the ability of other parties to make
informed choices.
o Hence, restricting available information is one strategy that can be employed to assist in the
maintenance of particular organizations and social structures.

The role of accounting research in supporting existing social structures.

o Accounting researchers are providing research results and perspectives that help to
legitimize and maintain particular political ideologies.
o The implementation of new accounting regulations can have many unwanted economic
implications and hence, before a new requirement such as an accounting standard is
mandated, careful consideration is warranted.
o The interest of accounting bodies were aligned with the shareholders and manager class ,
rather than society as a whole.

The role of accounting practice in supporting existing social structures.

o Hines (1991) states: CF presume, legitimise and reproduce the assumptions of an objective
world and as such they play a part in constituting the social world. CF provide social
legitimacy to the accounting profession. Legitimacy is achieved by tapping into this central
proposition because accounts generated around this proposition are perceived as 'normal'.
o Hines 1988 - in seminar
o any accounting report will tend to present selective and biased information in a manner
designed to lead to the construction of a single view of the underlying reality, with this view
being the one that most favours management and providers of capital.

The role of accounting in legitimizing the capitalist system.

o Given the role of accounting reports in ‘constructing, sustaining, and legitimising economic
and political arrangements, institutions, and ideological themes which contribute to the
corporation’s private interests’ (Guthrie and Parker, 1990, p. 166), the classical political
economy perspective views one of the key roles of accounting reports as being to legitimize
the capitalist system as a whole, and protect this system from threats arising as a result of
the outcomes of the structural conflict inherent in the capitalist system
WEEK 8: Positive Accounting Theory and the Silence of the Auditors
Task

The multiplicity of interest in accounting practice

Centrifugal forces:
 Rise of consulting and the tax avoidance industry
 Rise of bonus plans and share remuneration
 Privatisation of standard-setting
 Increasing power of the big accounting firms

The interest of the accounting profession:

 in maintaining control and jurisdiction over accounting practice
 keeping the regulation of accounting practice within the jurisdiction of the profession
 preserving the in transparency of professional expertise.

The programme of positive accounting theory:

 The quest for predictive theory (predictions for accounting outcomes)
 Reconsidering the demand for accounting theory
 Primary interest in financial accounting and patterns of reporting bahaviour (if they over
report or under report)
 Build mostly on micro-economic theory (since they are mostly monetary type)

Elements of positive accounting theory

 Efficient market
 Transaction cost economics
 Agency theory
 Hypotheses about financial reporting
 Bonus plan hypothesis
 Debt/equity hypothesis
 Political cost hypothesis

In accounting, good news is preferred:

 Keeping clients in the interest of audit service income
 Keeping clients in the interest of consulting service income.
 Marking your own homework
 Peer pressure on auditors inside the firm
 Competition on the market for audit and consulting services
 Fear of unintended signalling. (to the market by your auditing judgement)

Bad news:
 Eventually bad news will tend to surface at some point and holding them back will make the
bad news even worse.

PAT:
 Watts and Zimmerman refer to 3 main factors in their attempts to explain accounting
choices in financial reporting.
1. Compensation schemes
2. Debt/ equity ratios
3. Expectations about regulation
  These 3 factors have separate hypotheses:
1. Bonus plan hypothesis

2. Debt/equity hypothesis

3. Political cost hypothesis

The larger the firm, more likely

they are being observed by the government and hence the managers shit the revenue to
the next year so that the market doesn’t have a bad image of you.

Criticism of PAT:
 Other explanatory factors are not acknowledged at all.
 Social contexts of reporting practices are much more colourful and nuanced than positive
accounting theory would have them.
 PAT fails to capture areas of reporting beyond the “traditional” realm of financial reporting
practice.

Inductive theory is more context-sensitive but often struggles with generalising findings and making
predictions.
Predictive theory is less sensitive to context but allows for a more systematic testing of hypothesis
across contexts.

Textbook Chapter 7

Positive Accounting Theory defined

 It is a testable theory which is subjected to reformulation if there is evidence which falsifies
your previous understanding.
 is a theory that seeks to explain and predict particular phenomena.
 Watts and Zimmerman (1986) state, PAT is concerned with explaining accounting practice. It
is designed to explain and predict which firms will not use a particular method ... but it says
nothing as to which method a firm should use.
 PAT focuses on the relationship between the various individuals involved in providing
resources to an organization and how accounting is used to assist in the functioning of these
relationships.
 Example: between the owners and managers, or between the managers and the firm's debt
providers (creditors)
 agency theory - delegation of decision-making from one party to another.
 PAT is based on the central economics-based assumption that the actions of all individuals
are driven by self-interest, and that individuals will always act in an opportunistic manner to
the extent of their actions will increase their wealth.
Agency theory to help explain and predict managerial choice of accounting policies
 Agency theory provided a necessary explanation of why the selection of particular
accounting methods might matter, and hence was an important facet in the development of
PAT.
 Agency theory focused on the relationship between principals and agents which created
much uncertainty due to various information asymmetries.
 Agency theory accepted that transaction costs and information costs exist.

WEEK 9: Social and Environmental Accountability (sustainability reporting)

Sustainability Reporting framework:

 UN global compact
 Global reporting initiative
 The international framework
 The international sustainability standards Board

The idea of sustainable development

 The rise of interest in environmental issues is often associated with the publication of the
Brundtland Report in 1987 which introduced a definition of sustainable development.
 This definition combined ecological, social, economic concerns with a “can do” message.
 The term “sustainable development” has been a widely used catchphrase for formulating
policy responses to ecological disasters, adopted not just by governments but also by private
companies, particularly by those with a socially and environmentally challenged reputation.

Blended accounting practice

a. Blended reporting : its putting out sustainability report

b. Blended management control
 In sustainability-minded management accounting practices, one approach has been
to internalise economic externalities in terms of cost.
 This results in the costing of non-monetary resources such as water, carbon.
biodiversity
 This programmatic approach is often referred to as full cost accounting.
 Thomson et al (2014) explore similar dynamics in what they refer to as the creation
of “accounting-sustainability hybrids”


Reframing accountability on a more sustainable basis?

 Dillard and Vinnari (2019) offer a model of what they call "critical dialogical accountability”.
 This model calls on stakeholders to challenge and, where necessary, unsettle and redevelop
accountability frameworks.
 This would require accountability and sustainability to be reframed not from the top down
but from the bottom up, involving stakeholder engagement and inclusiveness.

Conclusions:

 The idea of sustainable development involves a packaging of economics, social, and

environmental concerns based on the assumption that these concerns can be reconciled.
 Mobilising accounting for the purpose of sustainable development involves a blending of
accounting practice based on a similar assumption of compatibility.
 There is a risk that this ultimately leads to established purposes and orientations of
accounting to take over,
 And that opportunities to establish broader accountabilities to a wider range of stakeholders
will be missed.