1. Chapter 2 Theories of financial accounting

2. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-2 Objectives Be able to describe various normative and positive theories of financial accounting. Be able to describe various normative and positive theories of financial accounting. Be aware of some of the limitations of the various theories of accounting. Be aware of some of the limitations of the various theories of accounting. Appreciate that there is no single unified theory of accounting. Appreciate that there is no single unified theory of accounting.

3. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-3 Objectives (cont.) Understand that the output of the accounting process is frequently used in various contractual arrangements between an organisation and its managers and debt holders. Understand that the output of the accounting process is frequently used in various contractual arrangements between an organisation and its managers and debt holders.

4. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-4 Objectives (cont.) Understand the various pressures and motivations that could potentially have an effect on the methods of accounting selected by an organisation. Understand the various pressures and motivations that could potentially have an effect on the methods of accounting selected by an organisation. Understand what is meant by ‘creative accounting’ and why it might occur. Understand what is meant by ‘creative accounting’ and why it might occur.

5. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-5 Theory definition A coherent group of propositions used as principles of explanation for a class of phenomena. A coherent group of propositions used as principles of explanation for a class of phenomena. A coherent group of hypothetical, conceptual and pragmatic principles forming a general framework of reference for a field of inquiry. A coherent group of hypothetical, conceptual and pragmatic principles forming a general framework of reference for a field of inquiry. Accounting theories explain and predict accounting practice (positive theories) or prescribe practice (normative theories). Accounting theories explain and predict accounting practice (positive theories) or prescribe practice (normative theories).

6. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-6 Positive Accounting Theory (PAT) PAT seeks to explain and predict accounting practice. PAT seeks to explain and predict accounting practice. A positive theory explains and predicts accounting practice. A positive theory explains and predicts accounting practice. Does not seek to prescribe particular actions. Does not seek to prescribe particular actions. Grounded in economic theory. Grounded in economic theory.

7. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-7 Positive Accounting Theory (PAT) (cont.) Focuses on the relationships between various individuals involved in providing resources to an organisation (agency relationship): Focuses on the relationships between various individuals involved in providing resources to an organisation (agency relationship): –owners and managers –managers and debt providers.

8. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-8 Agency theory Agency relationship Agency relationship –delegation of decision making from the principal to the agent. Agency problem Agency problem –delegation of authority can lead to loss of efficiency and increased costs. Agency costs Agency costs –costs that arise as a result of the agency relationship.

9. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-9 Agency costs Monitoring costs Monitoring costs Bonding expenditures Bonding expenditures Residual loss Residual loss

10. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-10 Assumptions of PAT All individual action is driven by self-interest. All individual action is driven by self-interest. Individuals will act in an opportunistic manner to increase their wealth. Individuals will act in an opportunistic manner to increase their wealth. Notions of loyalty and morality not incorporated within the theory (nor, typically, in other accounting theories). Notions of loyalty and morality not incorporated within the theory (nor, typically, in other accounting theories). Organisations are a collection of self- interested individuals who agree to cooperate. Organisations are a collection of self- interested individuals who agree to cooperate.

11. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-11 PAT predictions Organisations will seek to put in place mechanisms to align the interests of managers of the firm (agents) with the interests of the owners (principals). Organisations will seek to put in place mechanisms to align the interests of managers of the firm (agents) with the interests of the owners (principals). Some of these mechanisms rely on output of the accounting system. Some of these mechanisms rely on output of the accounting system. Where accounting alignment mechanisms are in place, financial statements need to be provided. Where accounting alignment mechanisms are in place, financial statements need to be provided.

12. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-12 Efficiency perspective Mechanisms are put in place up front, with the objective of minimising future agency costs. Mechanisms are put in place up front, with the objective of minimising future agency costs. Referred to as ex ante perspective. Referred to as ex ante perspective. Accounting methods adopted by firms best reflect the underlying financial performance of the entity. Accounting methods adopted by firms best reflect the underlying financial performance of the entity. Regulation is therefore argued to impose unwarranted costs on reporting entities. Regulation is therefore argued to impose unwarranted costs on reporting entities.

13. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-13 Opportunistic perspective Considers opportunistic actions that could be undertaken once various contractual arrangements have been put in place. Considers opportunistic actions that could be undertaken once various contractual arrangements have been put in place. Referred to as ex post. Referred to as ex post. Assumes managers will opportunistically select accounting methods to increase their own personal wealth. Assumes managers will opportunistically select accounting methods to increase their own personal wealth.

14. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-14 Owner/manager contracting Managers assumed to act in own self- interest at expense of owners Managers assumed to act in own self- interest at expense of owners –‘rational economic person’ assumption. Managers have access to information not available to principals Managers have access to information not available to principals –information asymmetry.

15. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-15 Methods of reducing agency costs of equity Price protection Price protection Monitoring by owners Monitoring by owners Bonding by managers Bonding by managers Managers may be rewarded: Managers may be rewarded: –on a fixed basis –on the basis of the results achieved –on a combination of the two.

16. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-16 Bonus schemes Remuneration based on the output of the accounting system. Remuneration based on the output of the accounting system. Based on: Based on: –profits of the firm –sales of the firm –return on assets. May also be rewarded based on market price of shares May also be rewarded based on market price of shares

17. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-17 Accounting-based bonus schemes Any changes in the accounting methods used by the organisation will affect the bonuses paid (e.g. as a result of a new accounting standard). Any changes in the accounting methods used by the organisation will affect the bonuses paid (e.g. as a result of a new accounting standard). Contracts may rely on ‘floating’ generally accepted accounting principles. Contracts may rely on ‘floating’ generally accepted accounting principles.

18. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-18 Incentives to manipulate accounting numbers Rewarding managers on the basis of accounting profits can induce them to manipulate the related accounting numbers to improve their apparent performance and related rewards. Rewarding managers on the basis of accounting profits can induce them to manipulate the related accounting numbers to improve their apparent performance and related rewards. Accounting profits may not always provide an unbiased measure of a firm’s performance. Accounting profits may not always provide an unbiased measure of a firm’s performance.

19. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-19 Market-based bonus schemes Market prices are assumed to be influenced by expectations about the net present value of expected future cash flows. Market prices are assumed to be influenced by expectations about the net present value of expected future cash flows. May award a cash bonus based on increases in share prices or providing managers with shares or options to shares in the firm. May award a cash bonus based on increases in share prices or providing managers with shares or options to shares in the firm.

20. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-20 Market-based bonus schemes (cont.) Problem: market prices also reflect market- wide factors, not just factors controlled by the manager. Problem: market prices also reflect market- wide factors, not just factors controlled by the manager. Only senior management is likely to be able to affect cash flows and hence securities prices. Only senior management is likely to be able to affect cash flows and hence securities prices. Market-related incentives might only be appropriate for senior management. Market-related incentives might only be appropriate for senior management.

21. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-21 Role of auditor If managers’ remuneration is based on accounting numbers, auditor takes a monitoring role. If managers’ remuneration is based on accounting numbers, auditor takes a monitoring role. Arbitrates on the reasonableness of the accounting methods adopted. Arbitrates on the reasonableness of the accounting methods adopted. However, there will always be scope for opportunism. However, there will always be scope for opportunism.

22. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-22 Other ways that align interests of managers and owners Threat of takeovers to under-performing firms. Threat of takeovers to under-performing firms. Well-informed labour market. Well-informed labour market.

23. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-23 Debt contracting Agency costs of debt: Agency costs of debt: –excess dividends –additional or excessive levels of debt –claim dilution –asset substitution –investment in risky projects. Assumption: managers’ interests are aligned with shareholders’ interests. Assumption: managers’ interests are aligned with shareholders’ interests.

24. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-24 Ways to minimise agency costs of debt Price protection Price protection –higher interest charges. Contracting Contracting –interest coverage clauses –debt to asset clauses. leverage clauses frequently used in Australian bank loan contracts. leverage clauses frequently used in Australian bank loan contracts. Monitoring Monitoring

25. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-25 Political costs Costs that groups external to the firm may be able to impose on the firm: Costs that groups external to the firm may be able to impose on the firm: –increased taxes –increased wage claims –product boycotts –decreased subsidies. Organisations are affected by governments, trade unions, environmental lobby groups or particular consumer groups. Organisations are affected by governments, trade unions, environmental lobby groups or particular consumer groups.

26. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-26 Political costs (cont.) Demands placed on the firm may be affected by accounting results Demands placed on the firm may be affected by accounting results –higher reported profits –how accounting numbers are generated is not important. Accounting numbers may be used as a means of providing ‘excuses’ for effecting wealth transfers in the political process. Accounting numbers may be used as a means of providing ‘excuses’ for effecting wealth transfers in the political process.

27. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-27 Ways to reduce political costs Management may: Management may: –adopt income-reducing accounting techniques –make voluntary social disclosures.

28. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-28 PAT in summary Selection of accounting methods can be explained by either efficiency or opportunistic arguments. Selection of accounting methods can be explained by either efficiency or opportunistic arguments. Accounting methods can impact cash flows associated with debt and management compensation contracts. Accounting methods can impact cash flows associated with debt and management compensation contracts. These effects can be used to explain why particular accounting methods are used. These effects can be used to explain why particular accounting methods are used. The use of particular accounting methods can have opposing effects. The use of particular accounting methods can have opposing effects.

29. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-29 Accounting policy selection and disclosure To allow comparison between reporting entities: To allow comparison between reporting entities: –a summary of accounting policies must be presented in the notes to the financial report (FRS-1, 5.1). –where accounting policy has changed and the change has a material effect on results, the notes must disclose the nature of, reason for, and financial effect of the change (FRS-1, 5.11). requirement also consistent with Statement of Concepts requirement also consistent with Statement of Concepts

30. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-30 Accounting policy choice and ‘creative accounting’ ‘ Creative accounting’ refers to the selection of accounting methods that provides the result desired by preparers. ‘ Creative accounting’ refers to the selection of accounting methods that provides the result desired by preparers. Also known as opportunistic. Also known as opportunistic. Can be creative and still follow accounting standards. Can be creative and still follow accounting standards.

31. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-31 Criticisms of PAT Does not provide prescription, so does not provide a means of improving accounting practice. Does not provide prescription, so does not provide a means of improving accounting practice. Not value free but is value laden. Not value free but is value laden. Underlying assumption of wealth maximisation. Underlying assumption of wealth maximisation. Issues being addressed have not shown great development. Issues being addressed have not shown great development. Scientifically flawed. Scientifically flawed.

32. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-32 Normative accounting theories Seek to provide guidance to select accounting procedures that are most appropriate. Seek to provide guidance to select accounting procedures that are most appropriate. Prescribe what should be done. Prescribe what should be done.

33. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-33 Statement of concepts Considered a normative theory. Considered a normative theory. Seeks to identify the objective of GPFR. Seeks to identify the objective of GPFR. Seeks to provide recognition and measurement rules within a ‘coherent’ and ‘consistent’ framework. Seeks to provide recognition and measurement rules within a ‘coherent’ and ‘consistent’ framework. Identifies the qualitative characteristics financial information should possess. Identifies the qualitative characteristics financial information should possess.

34. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-34 Other normative theories Three main classifications: Three main classifications: –current-cost accounting –exit-price accounting –deprival-value accounting. Addressed issues associated with changing prices. Addressed issues associated with changing prices. Developed in 1950s and 1960s during a period of high inflation. Developed in 1950s and 1960s during a period of high inflation.

35. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-35 Current-cost accounting Aim is to provide a calculation of income that, after adjusting for changing prices, can be withdrawn from the entity and still leave the physical capital (operating capacity) Aim is to provide a calculation of income that, after adjusting for changing prices, can be withdrawn from the entity and still leave the physical capital (operating capacity) of the entity intact. –referred to as true measure of income.

36. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-36 Current-cost accounting (cont.) True income theories propose a single measurement basis for assets and a consequent single measure of income (profit). True income theories propose a single measurement basis for assets and a consequent single measure of income (profit).

37. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-37 Exit-price accounting Continuously Contemporary Accounting. Continuously Contemporary Accounting. Uses exit or selling prices to value the entity’s assets and liabilities Uses exit or selling prices to value the entity’s assets and liabilities –referred to as current cash equivalents.

38. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-38 Exit-price accounting (cont.) Assumptions: Assumptions: –firms exist to increase the wealth of the owners –ability to adapt to changing circumstances –capacity to adapt best reflected monetary value of assets, liabilities and equities at balance date, where monetary value of based on the current exit or selling prices.

39. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-39 Deprival-value accounting Deprival value represents the amount of loss that might be incurred by an entity if it was deprived of the use of an asset and the associated economic benefits. Deprival value represents the amount of loss that might be incurred by an entity if it was deprived of the use of an asset and the associated economic benefits. Considers: Considers: –the net selling price –the present value of future cash flows –an asset’s current replacement cost.

40. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-40 Systems-oriented theories Focuses on the role of information and disclosure in the relationships between organisations, the State, individuals and groups. Focuses on the role of information and disclosure in the relationships between organisations, the State, individuals and groups. The entity is assumed to be influenced by the society in which it operates, and to have an influence on it. The entity is assumed to be influenced by the society in which it operates, and to have an influence on it.

41. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-41 Systems-oriented theories (cont.) Systems-based theories include: Systems-based theories include: –stakeholder theory –legitimacy theory.

42. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-42 Stakeholder theory Two branches Two branches –ethical (normative) branch –managerial (positive) branch.

43. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-43 Stakeholder theory (cont.) Ethical branch Ethical branch –Stakeholders are any group or individual who can affect, or are affected by, the achievement of the firm’s objectives. –Includes shareholders, employees, customers, lenders, suppliers, local charities, interest groups, government etc. –All stakeholders have a right to be provided with information.

44. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-44 Stakeholder theory (cont.) Managerial branch Managerial branch –Seeks to explain and predict how an organisation will react to demands of various stakeholders. –The organisation identifies its group of stakeholders: relative power or importance of stakeholders considered relative power or importance of stakeholders considered relative power and importance can change across time—associated with control of resources relative power and importance can change across time—associated with control of resources the firm will take actions to ‘manage’ the relationships with stakeholders. the firm will take actions to ‘manage’ the relationships with stakeholders.

45. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-45 Stakeholder theory (cont.) Managerial branch (cont.) Managerial branch (cont.) –Financial and social information is used to control conflicting demands of various stakeholder groups. Stakeholder theory (either branch) does not prescribe what information should be disclosed, other than indicating that provision of information can be useful for the continued operations of the entity. Stakeholder theory (either branch) does not prescribe what information should be disclosed, other than indicating that provision of information can be useful for the continued operations of the entity.

46. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-46 Legitimacy theory Organisations continually seek to ensure that they operate within the bounds and norms of their respective societies. Organisations continually seek to ensure that they operate within the bounds and norms of their respective societies. Organisations attempt to ensure their activities are perceived to be legitimate. Organisations attempt to ensure their activities are perceived to be legitimate. Bounds and norms change across time. Bounds and norms change across time. Based on a ‘social contract’ between society and the organisation. Based on a ‘social contract’ between society and the organisation.

47. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-47 Legitimacy theory (cont.) Organisations must appear to consider Organisations must appear to consider the rights of the public at large, not just investors. To gain or maintain legitimacy, organisations may rely on disclosure To gain or maintain legitimacy, organisations may rely on disclosure within the annual report.

48. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-48 Theories explaining why regulation is introduced Public interest theory Public interest theory Capture theory Capture theory Economic interest group theory Economic interest group theory

49. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-49 Public interest theory Regulation put in place to benefit society as a whole, rather than vested interests. Regulation put in place to benefit society as a whole, rather than vested interests. Regulatory body considered to represent interests of the society in which it operates, rather than private interests of the regulators. Regulatory body considered to represent interests of the society in which it operates, rather than private interests of the regulators. Assumes that government is a neutral arbiter. Assumes that government is a neutral arbiter.

50. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-50 Capture theory The regulated seeks to take charge The regulated seeks to take charge of (capture) the regulator. Seek to ensure rules subsequently released are advantageous to the parties subject to regulation. Seek to ensure rules subsequently released are advantageous to the parties subject to regulation. Although regulating initially in the public interest, difficult for regulator to remain independent. Although regulating initially in the public interest, difficult for regulator to remain independent.

51. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-51 Economic interest group theory Assumes groups will form to protect particular economic interests. Assumes groups will form to protect particular economic interests. Groups are often in conflict with each other, and will lobby government to put in place legislation which will benefit them at the expense of others. Groups are often in conflict with each other, and will lobby government to put in place legislation which will benefit them at the expense of others. No notion of public interest inherent in the theory. No notion of public interest inherent in the theory. Regulators (and all other individuals) deemed to be motivated by self-interest. Regulators (and all other individuals) deemed to be motivated by self-interest.

52. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-52 Economic interest group theory (cont.) The regulator is not a neutral arbiter but is seen as an interest group. The regulator is not a neutral arbiter but is seen as an interest group. Regulator motivated to ensure re-election or maintenance of its position of power. Regulator motivated to ensure re-election or maintenance of its position of power. Regulation serves the private interests of politically effective groups. Regulation serves the private interests of politically effective groups. Those groups with insufficient power will not be able to effectively lobby for regulation to protect their own interests. Those groups with insufficient power will not be able to effectively lobby for regulation to protect their own interests.

53. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-53 Critical theory Dissatisfaction with Positive Theory (PT) has led to the advocation of a critical approach to the development of knowledge and understanding in accounting. Dissatisfaction with Positive Theory (PT) has led to the advocation of a critical approach to the development of knowledge and understanding in accounting. Goal of critical theory is to provide a measure for understanding ‘reality’ and the development of a society that will enable a ‘truer freer and more just life for all’. Goal of critical theory is to provide a measure for understanding ‘reality’ and the development of a society that will enable a ‘truer freer and more just life for all’.

54. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-54 Critical theory and its application to accounting It recognises the primacy of social relationships over the technincal approach. It recognises the primacy of social relationships over the technincal approach. Greater cognisance is taken of underlying cultural elements, which are blended Greater cognisance is taken of underlying cultural elements, which are blended into the research and methodology used in accounting.

55. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-55 Critical theory and its application to accounting (cont.) It provides the justification for the use of non scientific methodologies in accounting research. It provides the justification for the use of non scientific methodologies in accounting research.

56. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 2-56 Critical theory concluded Its strength is the thorough epistemological standards imposed upon the researcher. Its strength is the thorough epistemological standards imposed upon the researcher. It provides an alternative device or way forward and avoids many of the problems of positivitism. It provides an alternative device or way forward and avoids many of the problems of positivitism.