Podcast
Questions and Answers
What is the primary focus of Positive Accounting Theory (PAT)?
What is the primary focus of Positive Accounting Theory (PAT)?
- To legislate accounting standards
- To critique existing accounting theories
- To establish normative accounting practices
- To explain and predict accounting phenomena (correct)
Why might managers engage in creative accounting practices?
Why might managers engage in creative accounting practices?
- To enhance their personal remuneration (correct)
- To eliminate agency costs completely
- To align with shareholder interests at all times
- To comply strictly with legal accounting standards
What are agency costs primarily associated with in an organization?
What are agency costs primarily associated with in an organization?
- Expenses related to marketing strategies
- Costs of legal compliance
- Conflicts between management and shareholders (correct)
- Costs arising from employee training programs
Which accounting approach is designed to minimize contracting costs within an organization?
Which accounting approach is designed to minimize contracting costs within an organization?
What do political costs in accounting refer to?
What do political costs in accounting refer to?
How do accounting-based management compensation schemes help in an organization?
How do accounting-based management compensation schemes help in an organization?
How can accounting policies impact transaction costs within an organization?
How can accounting policies impact transaction costs within an organization?
Which criticism is commonly associated with Positive Accounting Theory?
Which criticism is commonly associated with Positive Accounting Theory?
How do firms primarily function according to the principles outlined in the content?
How do firms primarily function according to the principles outlined in the content?
What does agency theory primarily examine?
What does agency theory primarily examine?
Which of the following best describes the agency problem?
Which of the following best describes the agency problem?
Why might agents be incentivized to behave opportunistically?
Why might agents be incentivized to behave opportunistically?
What are agency costs primarily associated with?
What are agency costs primarily associated with?
In accounting, which aspect relates directly to transaction costs as described in the content?
In accounting, which aspect relates directly to transaction costs as described in the content?
What is a significant challenge faced by principals in the presence of agency problems?
What is a significant challenge faced by principals in the presence of agency problems?
How do agency relationships typically delegate authority?
How do agency relationships typically delegate authority?
What assumption underlies agency theory regarding agents?
What assumption underlies agency theory regarding agents?
What is a key implication of agency theory for firm management?
What is a key implication of agency theory for firm management?
Which hypothesis suggests that managers of firms with high levels of debt are more likely to choose accounting methods that inflate reported income?
Which hypothesis suggests that managers of firms with high levels of debt are more likely to choose accounting methods that inflate reported income?
What is the primary focus of the opportunistic perspective in accounting theory?
What is the primary focus of the opportunistic perspective in accounting theory?
Which type of costs are associated with the agency problem due to the actions of self-interested managers?
Which type of costs are associated with the agency problem due to the actions of self-interested managers?
What is the effect of accounting policies that allow for 'floating' GAAP on bonus plans?
What is the effect of accounting policies that allow for 'floating' GAAP on bonus plans?
Under which hypothesis are managers assumed to act in a way that minimizes reported income to avoid political scrutiny?
Under which hypothesis are managers assumed to act in a way that minimizes reported income to avoid political scrutiny?
Which mechanism is considered a bonding method to align managers’ actions with shareholders’ interests?
Which mechanism is considered a bonding method to align managers’ actions with shareholders’ interests?
What is a potential downside of rewarding managers based on reported accounting profits?
What is a potential downside of rewarding managers based on reported accounting profits?
Which perspective emphasizes the need for efficient contracting mechanisms to minimize agency costs before contracts are finalized?
Which perspective emphasizes the need for efficient contracting mechanisms to minimize agency costs before contracts are finalized?
What term describes the costs associated with establishing controls to manage self-interested behavior of managers?
What term describes the costs associated with establishing controls to manage self-interested behavior of managers?
Which of the following best defines the agency problem in accounting?
Which of the following best defines the agency problem in accounting?
In the context of accounting theory, which approach emphasizes the role of regulation in promoting transparency?
In the context of accounting theory, which approach emphasizes the role of regulation in promoting transparency?
Which accounting method might managers preferentially select to maximize their bonuses under a bonus plan?
Which accounting method might managers preferentially select to maximize their bonuses under a bonus plan?
What is the consequence of agency costs in the absence of proper controls over management behavior?
What is the consequence of agency costs in the absence of proper controls over management behavior?
What problem does the fixed salary method pose for managerial risk-taking?
What problem does the fixed salary method pose for managerial risk-taking?
What is the primary responsibility of the Auditing Oversight Board (AOB)?
What is the primary responsibility of the Auditing Oversight Board (AOB)?
Which of the following is NOT a method that the AOB employs to fulfill its mission?
Which of the following is NOT a method that the AOB employs to fulfill its mission?
What strategic theme is aligned with the AOB's mission regarding auditor registration?
What strategic theme is aligned with the AOB's mission regarding auditor registration?
What was the purpose of the Securities Commission Amendment Act 2010?
What was the purpose of the Securities Commission Amendment Act 2010?
What is one of the AOB's goals concerning financial statements?
What is one of the AOB's goals concerning financial statements?
Which of the following is a procedure used by the AOB to ensure compliance among auditors?
Which of the following is a procedure used by the AOB to ensure compliance among auditors?
In which area does the AOB's oversight primarily focus?
In which area does the AOB's oversight primarily focus?
What is a key focus area of the AOB in relation to its strategic framework?
What is a key focus area of the AOB in relation to its strategic framework?
What is a primary function of the Financial Reporting Foundation (FRF)?
What is a primary function of the Financial Reporting Foundation (FRF)?
Which of the following represents the correct order of the MASB's organizational structure?
Which of the following represents the correct order of the MASB's organizational structure?
What is one of the aims of the Malaysian Accounting Standards Board (MASB)?
What is one of the aims of the Malaysian Accounting Standards Board (MASB)?
Which of the following options is a sanction that the Auditing Oversight Board can impose?
Which of the following options is a sanction that the Auditing Oversight Board can impose?
What is the maximum financial penalty that can be imposed for an auditor's breach?
What is the maximum financial penalty that can be imposed for an auditor's breach?
What is the role of the Issues Committee established by MASB in 2002?
What is the role of the Issues Committee established by MASB in 2002?
How many members of the MASB Board must be members of the Malaysian Institute of Accountants (MIA) according to the Financial Reporting Act 1997?
How many members of the MASB Board must be members of the Malaysian Institute of Accountants (MIA) according to the Financial Reporting Act 1997?
What is one of the responsibilities of the Issues Committee within the MASB framework?
What is one of the responsibilities of the Issues Committee within the MASB framework?
How does the MASB ensure an efficient development process for its standards?
How does the MASB ensure an efficient development process for its standards?
Which of the following best describes the composition of the Board of MASB?
Which of the following best describes the composition of the Board of MASB?
What is the first step in the MASB standards development process?
What is the first step in the MASB standards development process?
For how long can an individual be prohibited from auditing financial statements of public interest entities?
For how long can an individual be prohibited from auditing financial statements of public interest entities?
What do the members of the Issues Committee primarily do regarding divergent views in interpretations?
What do the members of the Issues Committee primarily do regarding divergent views in interpretations?
Which of the following entities is NOT represented on the MASB Issues Committee?
Which of the following entities is NOT represented on the MASB Issues Committee?
What does the MASB do after gathering comments on an Exposure Draft?
What does the MASB do after gathering comments on an Exposure Draft?
Which fields of expertise do the additional members of the MASB Board need to possess?
Which fields of expertise do the additional members of the MASB Board need to possess?
What does Adam Smith’s concept of the 'invisible hand' primarily argue?
What does Adam Smith’s concept of the 'invisible hand' primarily argue?
What key aspect does the free-market argument often overlook?
What key aspect does the free-market argument often overlook?
In what situations did Adam Smith advocate for regulatory intervention?
In what situations did Adam Smith advocate for regulatory intervention?
Which characteristic does the market organization of economic activity promote according to Adam Smith’s views?
Which characteristic does the market organization of economic activity promote according to Adam Smith’s views?
What was one of Smith's concerns regarding government intervention?
What was one of Smith's concerns regarding government intervention?
How did Milton Friedman view the market mechanisms discussed by Adam Smith?
How did Milton Friedman view the market mechanisms discussed by Adam Smith?
What outcome is suggested when markets operate freely according to the content?
What outcome is suggested when markets operate freely according to the content?
What implication does the idea of 'accounting standards overload' suggest?
What implication does the idea of 'accounting standards overload' suggest?
What is the primary purpose of granting recognition to foreign auditors by the Audit Oversight Board?
What is the primary purpose of granting recognition to foreign auditors by the Audit Oversight Board?
Which of the following best summarizes the types of inspections conducted by the AOB?
Which of the following best summarizes the types of inspections conducted by the AOB?
What key factors does the AOB consider when determining sanctions for contraventions?
What key factors does the AOB consider when determining sanctions for contraventions?
What does an engagement review conducted by the AOB primarily assess?
What does an engagement review conducted by the AOB primarily assess?
How does the principle of proportionality apply in the AOB’s enforcement actions?
How does the principle of proportionality apply in the AOB’s enforcement actions?
Which of the following statements is true regarding the AOB's inspection programs?
Which of the following statements is true regarding the AOB's inspection programs?
What does the AOB focus on in relation to the audited financial statements of Public Interest Entities (PIEs)?
What does the AOB focus on in relation to the audited financial statements of Public Interest Entities (PIEs)?
When assessing the impact of a breach, what does AOB consider regarding confidence in financial statements?
When assessing the impact of a breach, what does AOB consider regarding confidence in financial statements?
What is the main mission of the Audit Oversight Board (AOB)?
What is the main mission of the Audit Oversight Board (AOB)?
Which of the following is NOT a responsibility of the AOB?
Which of the following is NOT a responsibility of the AOB?
Which strategic theme is emphasized by the AOB regarding registration?
Which strategic theme is emphasized by the AOB regarding registration?
What action can the AOB take regarding auditors who do not meet the required standards?
What action can the AOB take regarding auditors who do not meet the required standards?
What is a primary goal of the AOB concerning the interests of investors?
What is a primary goal of the AOB concerning the interests of investors?
Which of the following accurately describes the AOB's role in the auditing process?
Which of the following accurately describes the AOB's role in the auditing process?
What legislative framework established the AOB?
What legislative framework established the AOB?
How does the AOB contribute to the auditing of public interest entities?
How does the AOB contribute to the auditing of public interest entities?
What is a major issue identified with accounting standard overload?
What is a major issue identified with accounting standard overload?
Which of the following best describes the purpose of technical pronouncements issued by MASB?
Which of the following best describes the purpose of technical pronouncements issued by MASB?
What process is followed after the MASB reviews a draft document?
What process is followed after the MASB reviews a draft document?
What is the purpose of accounting standards convergence as pursued by MASB?
What is the purpose of accounting standards convergence as pursued by MASB?
Why has there been an increase in the number of accounting standards issued?
Why has there been an increase in the number of accounting standards issued?
What is meant by 'accounting standard overload'?
What is meant by 'accounting standard overload'?
Which stakeholders are represented in the MASB's composition?
Which stakeholders are represented in the MASB's composition?
What is the primary function of regulation in financial accounting?
What is the primary function of regulation in financial accounting?
What perspective suggests minimal regulation in accounting based on market forces?
What perspective suggests minimal regulation in accounting based on market forces?
Which of the following is a consequence of not producing adequate information in a market-oriented environment?
Which of the following is a consequence of not producing adequate information in a market-oriented environment?
What is a potential issue related to contracting in the presence of multiple stakeholders?
What is a potential issue related to contracting in the presence of multiple stakeholders?
Why is the concept of self-interested behavior significant in accounting?
Why is the concept of self-interested behavior significant in accounting?
What is the implication of imposing regulations on accounting methods?
What is the implication of imposing regulations on accounting methods?
In which situation could auditing play a critical role in the absence of regulation?
In which situation could auditing play a critical role in the absence of regulation?
What challenge may arise from the contracting argument in accounting?
What challenge may arise from the contracting argument in accounting?
What is implied by the phrase 'market for lemons' in relation to information scarcity?
What is implied by the phrase 'market for lemons' in relation to information scarcity?
Which assumption is made about managers in the context of self-interested behavior?
Which assumption is made about managers in the context of self-interested behavior?
What influence can political power have on accounting standards?
What influence can political power have on accounting standards?
What is a possible consequence of the free-market perspective on accounting regulation?
What is a possible consequence of the free-market perspective on accounting regulation?
What does the term 'private economic-based incentives' imply in management behavior?
What does the term 'private economic-based incentives' imply in management behavior?
How does the presence of diverse stakeholders complicate the contracting process?
How does the presence of diverse stakeholders complicate the contracting process?
Under which condition do managers' self-interested actions potentially hurt shareholders?
Under which condition do managers' self-interested actions potentially hurt shareholders?
What is a significant risk when regulators are captured by the industries they oversee?
What is a significant risk when regulators are captured by the industries they oversee?
Which entity's lobbying efforts contributed to the capture in Australian accounting standard-setting?
Which entity's lobbying efforts contributed to the capture in Australian accounting standard-setting?
What does economic interest group theory of regulation primarily assume?
What does economic interest group theory of regulation primarily assume?
What aspect is NOT typically considered an influence of captured regulation?
What aspect is NOT typically considered an influence of captured regulation?
Which criticism of capture theory highlights a broader influence of interest groups?
Which criticism of capture theory highlights a broader influence of interest groups?
What motivates regulators according to the economic interest group theory?
What motivates regulators according to the economic interest group theory?
What is one possible outcome when a new accounting standard is adopted, such as AASB 138 Intangibles?
What is one possible outcome when a new accounting standard is adopted, such as AASB 138 Intangibles?
In the context of regulatory capture, which of the following is a key concern?
In the context of regulatory capture, which of the following is a key concern?
What critical step is often bypassed in captured regulatory scenarios?
What critical step is often bypassed in captured regulatory scenarios?
What outcome is likely for groups with insufficient power regarding regulation?
What outcome is likely for groups with insufficient power regarding regulation?
How do interest groups typically interact with government regarding regulation?
How do interest groups typically interact with government regarding regulation?
What is a common belief about regulators in the context of economic interest group theory?
What is a common belief about regulators in the context of economic interest group theory?
What often influences the priorities of regulatory bodies like the ASRB?
What often influences the priorities of regulatory bodies like the ASRB?
Why might regulating bodies struggle to maintain independence?
Why might regulating bodies struggle to maintain independence?
What is the main argument presented by proponents of the ‘invisible hand’ theory?
What is the main argument presented by proponents of the ‘invisible hand’ theory?
Which factor is often overlooked in discussions about the benefits of free markets?
Which factor is often overlooked in discussions about the benefits of free markets?
What concern did Adam Smith have regarding government intervention?
What concern did Adam Smith have regarding government intervention?
Why might businesses prefer reduced regulatory interference?
Why might businesses prefer reduced regulatory interference?
What assumption about freely operating markets is questioned by critics?
What assumption about freely operating markets is questioned by critics?
Who is noted for arguing that market control protects consumers?
Who is noted for arguing that market control protects consumers?
What is a key criticism of the ideology underpinning the ‘invisible hand’?
What is a key criticism of the ideology underpinning the ‘invisible hand’?
What does public interest theory assume about the role of government in regulation?
What does public interest theory assume about the role of government in regulation?
Which theory suggests that regulations may be influenced by economic interest groups?
Which theory suggests that regulations may be influenced by economic interest groups?
What is a key assumption of public interest theory regarding regulation?
What is a key assumption of public interest theory regarding regulation?
Which of the following best describes the role of regulatory bodies according to the theories mentioned?
Which of the following best describes the role of regulatory bodies according to the theories mentioned?
In the context of the introduction of regulation, what do capture theory critics believe?
In the context of the introduction of regulation, what do capture theory critics believe?
What is meant by the term 'balancing act' in relation to regulation?
What is meant by the term 'balancing act' in relation to regulation?
Which theory posits that regulation is primarily driven by the interests of powerful economic groups?
Which theory posits that regulation is primarily driven by the interests of powerful economic groups?
Which statement reflects a common critique of politicians in regards to regulation?
Which statement reflects a common critique of politicians in regards to regulation?
What is the primary responsibility of the Financial Reporting Foundation (FRF)?
What is the primary responsibility of the Financial Reporting Foundation (FRF)?
What does Section 27 of the Financial Reporting Act 1997 mandate for companies incorporated under the Companies Act 1965?
What does Section 27 of the Financial Reporting Act 1997 mandate for companies incorporated under the Companies Act 1965?
Which of the following is NOT a function of the Financial Reporting Foundation?
Which of the following is NOT a function of the Financial Reporting Foundation?
How does the FRF contribute to the MASB's functions?
How does the FRF contribute to the MASB's functions?
Which act established the Financial Reporting Foundation?
Which act established the Financial Reporting Foundation?
What is a key role of the Malaysian Accounting Standards Board (MASB)?
What is a key role of the Malaysian Accounting Standards Board (MASB)?
Which act requires companies to have legal oversight of their accounting standards?
Which act requires companies to have legal oversight of their accounting standards?
Who has the statutory duty to ensure compliance with approved accounting standards within companies?
Who has the statutory duty to ensure compliance with approved accounting standards within companies?
What influence do standard-setters' considerations have on accounting standards?
What influence do standard-setters' considerations have on accounting standards?
Why is it questionable whether financial statements can be deemed 'true and fair'?
Why is it questionable whether financial statements can be deemed 'true and fair'?
What role do lobbying efforts by large firms play in accounting standards?
What role do lobbying efforts by large firms play in accounting standards?
How does the political nature of financial accounting affect wealth distribution?
How does the political nature of financial accounting affect wealth distribution?
What is a potential consequence of disregarding submissions from affected parties during the standard-setting process?
What is a potential consequence of disregarding submissions from affected parties during the standard-setting process?
What is often the assumed benefit of compliance with accounting standards?
What is often the assumed benefit of compliance with accounting standards?
In what way may regulators prioritize the views of preparers of financial statements?
In what way may regulators prioritize the views of preparers of financial statements?
What is a common misconception about financial accounting's objectivity?
What is a common misconception about financial accounting's objectivity?
Who appoints the members of the Malaysian Accounting Standards Board (MASB)?
Who appoints the members of the Malaysian Accounting Standards Board (MASB)?
According to the Financial Reporting Act 1997, how many members of the MASB Board must be from the Malaysian Institute of Accountants?
According to the Financial Reporting Act 1997, how many members of the MASB Board must be from the Malaysian Institute of Accountants?
Which of the following best describes one of the first steps in the MASB standard issuance process?
Which of the following best describes one of the first steps in the MASB standard issuance process?
What is a main responsibility of the Issues Committee within the MASB framework?
What is a main responsibility of the Issues Committee within the MASB framework?
Which groups are represented in the Issues Committee?
Which groups are represented in the Issues Committee?
What does the MASB initiate after identifying technical issues?
What does the MASB initiate after identifying technical issues?
Which of the following statements is true regarding the composition of the MASB Board?
Which of the following statements is true regarding the composition of the MASB Board?
What is one potential outcome of regulator capture by the industry?
What is one potential outcome of regulator capture by the industry?
Which theory suggests regulators act out of self-interest rather than public interest?
Which theory suggests regulators act out of self-interest rather than public interest?
What criticism is leveled against the capture theory?
What criticism is leveled against the capture theory?
In the context of capture of accounting standard-setting, what was a notable action of the ASRB?
In the context of capture of accounting standard-setting, what was a notable action of the ASRB?
Which of the following is an implication of economic interest group theory on the role of regulators?
Which of the following is an implication of economic interest group theory on the role of regulators?
Which statement best summarizes the concept of industry capture?
Which statement best summarizes the concept of industry capture?
According to economic interest group theory, what is assumed about the actions of regulators and politicians?
According to economic interest group theory, what is assumed about the actions of regulators and politicians?
What is a defining characteristic of the existing agencies under capture theory?
What is a defining characteristic of the existing agencies under capture theory?
What might be a consequence of industry lobbying in accounting standard-setting?
What might be a consequence of industry lobbying in accounting standard-setting?
How did the accounting profession influence the ASRB according to Walker's analysis?
How did the accounting profession influence the ASRB according to Walker's analysis?
Which of the following occurrences can signify that a regulatory agency has been captured?
Which of the following occurrences can signify that a regulatory agency has been captured?
What is a potential risk noted in the economic interest group theory of regulation?
What is a potential risk noted in the economic interest group theory of regulation?
In situations of industry capture, which role does the regulator typically play?
In situations of industry capture, which role does the regulator typically play?
Why is it challenging for regulators to remain independent?
Why is it challenging for regulators to remain independent?
Flashcards
Agency Costs
Agency Costs
Costs arising when agents act in their own self-interest, not aligned with the principal's objectives
Residual Loss
Residual Loss
Inevitably some opportunistic behavior remains despite efforts to control agency costs.
Accounting's Role in Contracts
Accounting's Role in Contracts
Accounting information is used to monitor and control agents' (managers') actions to reduce agency costs.
Bonus Plan Hypothesis
Bonus Plan Hypothesis
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Debt Hypothesis
Debt Hypothesis
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Political Cost Hypothesis
Political Cost Hypothesis
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Efficiency Perspective
Efficiency Perspective
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Opportunistic Perspective
Opportunistic Perspective
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Owner/Manager Contracting
Owner/Manager Contracting
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Information Asymmetry
Information Asymmetry
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Agency Costs
Agency Costs
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Bonding
Bonding
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Fixed Salary
Fixed Salary
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Bonus Schemes
Bonus Schemes
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Accounting-Based Bonus Plans
Accounting-Based Bonus Plans
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Incentives for Accounting Manipulation
Incentives for Accounting Manipulation
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Positive Accounting Theory (PAT)
Positive Accounting Theory (PAT)
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Nexus of Contracts
Nexus of Contracts
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Transaction Costs
Transaction Costs
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Accounting Policy Choices
Accounting Policy Choices
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Creative Accounting
Creative Accounting
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Political Costs
Political Costs
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Conservative Accounting
Conservative Accounting
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Why Do Firms Exist?
Why Do Firms Exist?
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Agency Theory
Agency Theory
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Agency Relationship
Agency Relationship
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Opportunistic Behaviour
Opportunistic Behaviour
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Price Protection
Price Protection
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Agency Problem
Agency Problem
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Monitoring Costs
Monitoring Costs
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MASB
MASB
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Issues Committee
Issues Committee
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Who appoints MASB members?
Who appoints MASB members?
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What are MASB's advisors?
What are MASB's advisors?
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MASB Working Group
MASB Working Group
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How are MASB standards created?
How are MASB standards created?
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What is unique about the MASB Issues Committee?
What is unique about the MASB Issues Committee?
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What is the role of the MASB Issues Committee?
What is the role of the MASB Issues Committee?
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Auditing Oversight Board (AOB)
Auditing Oversight Board (AOB)
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AOB's Mission
AOB's Mission
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What does the AOB do?
What does the AOB do?
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Public Interest Entities
Public Interest Entities
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Schedule Funds
Schedule Funds
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Registration of Auditors
Registration of Auditors
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AOB Strategic Framework
AOB Strategic Framework
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Importance of AOB's Role
Importance of AOB's Role
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MASB's Aims
MASB's Aims
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MASB Standard Development
MASB Standard Development
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MASB's Structure
MASB's Structure
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MASB's Role
MASB's Role
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Financial Reporting Foundation (FRF)
Financial Reporting Foundation (FRF)
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Auditing Oversight Board: Enforcement Actions
Auditing Oversight Board: Enforcement Actions
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Auditing Oversight Board: Sanctions
Auditing Oversight Board: Sanctions
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MASB's Primary Focus
MASB's Primary Focus
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Accounting Standard-Setting
Accounting Standard-Setting
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Regulation
Regulation
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Free-Market Perspective
Free-Market Perspective
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Private Economic-based Incentives
Private Economic-based Incentives
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Market for Managers
Market for Managers
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Market for Corporate Takeovers
Market for Corporate Takeovers
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Market for Lemons
Market for Lemons
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Contracts with Shareholders & Debtholders
Contracts with Shareholders & Debtholders
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Accounting-Based Management Bonus Schemes
Accounting-Based Management Bonus Schemes
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Accounting-Based Debt Covenants
Accounting-Based Debt Covenants
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Cost of Capital and Information Production
Cost of Capital and Information Production
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Problems with many owners or Debtholders
Problems with many owners or Debtholders
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Contracting Argument
Contracting Argument
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Auditing
Auditing
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Self-interest in Contracting
Self-interest in Contracting
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Adam Smith's 'Invisible Hand'
Adam Smith's 'Invisible Hand'
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Market Failures
Market Failures
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Monopolies
Monopolies
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Uneven Distribution of Power
Uneven Distribution of Power
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Public Interest
Public Interest
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Regulatory Intervention
Regulatory Intervention
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Misrepresentation of Smith's Work
Misrepresentation of Smith's Work
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Purpose of Regulation
Purpose of Regulation
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AOB's Responsibilities
AOB's Responsibilities
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Public Interest Entities (PIEs)
Public Interest Entities (PIEs)
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AOB's Enforcement Actions
AOB's Enforcement Actions
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AOB's Goal
AOB's Goal
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Capture Theory
Capture Theory
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Economic Interest Group Theory
Economic Interest Group Theory
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How does Capture Theory affect accounting standard-setting?
How does Capture Theory affect accounting standard-setting?
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What are some criticisms of Capture Theory?
What are some criticisms of Capture Theory?
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How does the Economic Interest Group Theory view regulators?
How does the Economic Interest Group Theory view regulators?
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What is a key difference between Capture Theory and the Economic Interest Group Theory?
What is a key difference between Capture Theory and the Economic Interest Group Theory?
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How can Economic Interest Group Theory be applied to accounting standards?
How can Economic Interest Group Theory be applied to accounting standards?
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What are some examples of the impact of accounting standards on businesses?
What are some examples of the impact of accounting standards on businesses?
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How does the MASB operate?
How does the MASB operate?
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Auditing Oversight Board (AOB) in Malaysia
Auditing Oversight Board (AOB) in Malaysia
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Exposure Draft
Exposure Draft
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Standard Overload
Standard Overload
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MASB's Due Process
MASB's Due Process
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Invisible Hand
Invisible Hand
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Smith's Misrepresentation?
Smith's Misrepresentation?
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Public Interest Theory
Public Interest Theory
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Political Influence on Accounting
Political Influence on Accounting
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Lobbying and Accounting Standards
Lobbying and Accounting Standards
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True and Fair?
True and Fair?
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MASB: What is it?
MASB: What is it?
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MASB Issues Committee: What's its job?
MASB Issues Committee: What's its job?
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MASB Working Group: What does it do?
MASB Working Group: What does it do?
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Creating MASB Standards: What's the process?
Creating MASB Standards: What's the process?
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Auditing Oversight Board (AOB): What's its role?
Auditing Oversight Board (AOB): What's its role?
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Capture Theory: What is it?
Capture Theory: What is it?
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What is MASB's due process for developing accounting standards?
What is MASB's due process for developing accounting standards?
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What are the key responsibilities of the Auditing Oversight Board (AOB) in Malaysia?
What are the key responsibilities of the Auditing Oversight Board (AOB) in Malaysia?
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What is an exposure draft?
What is an exposure draft?
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What is the main purpose of the AOB in Malaysia?
What is the main purpose of the AOB in Malaysia?
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Financial Reporting Act 1997 (FRA 1997)
Financial Reporting Act 1997 (FRA 1997)
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FRF
FRF
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PIEs
PIEs
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Study Notes
Introduction to Accounting Theory
- Accounting theory is a set of interrelated constructs, definitions, and propositions that systematically views phenomena by specifying relations among variables to explain and predict phenomena (Kerlinger, 1964).
- Accounting theory should have generally descriptive and normatively prescriptive approaches. There also must be a high quality of authenticity and authority.
- Ideal theories must be widely accepted, provide accurate evaluations and explanations of current events, and accurately analyze past events and forecast future developments.
- Accounting theories are useful by identifying the underlying assumptions, their formulation, and their application in explaining and predicting actual events.
Types of Accounting Theories
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Pragmatic Theories:
- Based on observed behaviors of accountants.
- Developed from how accountants act in situations.
- Tested by observing whether accountants act in a manner consistent with the theory.
- Inductive approach.
- Critiques include not considering the quality of accountants' actions, no provision for challenging accounting practices, and focusing on behavior rather than firm attributes.
- Psychological pragmatic approach: theory depends on user reactions to accountant outputs. Reactions are viewed as evidence of usefulness of outputs.
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Normative Theories:
- Developed in the 1950s and 1960s emphasizing policy recommendations.
- Focused on what should be.
- Derived from analytic and empirical propositions.
- Aim at true income and decision-usefulness.
- Focuses on the provision of information for decision-making.
- Features include market-based theories involving non-historical cost methods.
- They are based on value judgments or personal opinions.
- True income is a unique measure of assets representing a correct profit figure.
- Decision usefulness emphasizes accounting as a tool to aid decision-making by providing useful information.
-
Positive Theories:
- Expanded during the 1970s.
- Based on positivism and empiricism (testing and relating accounting hypotheses to facts).
- Focused on explaining current accounting practices.
- Predicting the roles of accounting information in decision-making.
- Accounting information is assumed to be an economic and political commodity; people act in their own self-interest.
- Aims to describe how people act regardless of whether it is right, and to explain why people behave differently.
Behavioral Theories
- Derived from psychology, sociology, and organizational theories.
- Focuses on the behavior of accountants and non-accountants concerning accounting functions and reports.
- Encompasses judgements and decisions of accountants and auditors, and the output’s influence on users' judgements and decisions.
- Important of behavioral accounting research: identifies how people use and process accounting information, examines decision-making activities, and provides valuable insight into how different decisions are produced and processed.
- Important of behavioral accounting research: identifies how people use and process accounting information, examines decision-making activities of preparers, users and auditors, provides insight into the ways different decisions are produced and processed, and improves decision-making to avoid bad decisions.
Approaches to Accounting Theory Formulation
- Deductive: Reasoning from general to specific statements. All humans are opportunistic, managers are human > managers are opportunistic. Premises are accepted as true for conclusions to follow. Premises are accepted as true for conclusions to follow.
- Inductive: Reasoning from specific statements to general statements. Recording descriptions and observations, analyzing to detect recurring relationships, making conclusions from observations, and testing those generalizations are key components of inductive reasoning.
Approaches to Accounting Theory
- Ethical: Fairness, justice, equality, and truth are central concepts aiming at accounting statements unaffected by undue influence or bias.
- Sociological: Focuses on the social effects of accounting techniques and their impact across groups in a society. It evaluates if a given accounting principle or technique is acceptable based on its effects on different groups in society, making accounting useful for social welfare judgments.
- Economical: Focuses on controlling the behavior of macroeconomic indicators resulting from accounting techniques and evaluating how different accounting techniques affect the national economy. Considering accounting policies and techniques reflective of 'economic reality' influences the choice of techniques based on 'economic consequences'.
- Eclectic: Combining various approaches; professionals and governments try to participate in establishing accounting concepts and principles, resulting in a combination of various approaches (rather than relying on a single approach).
Revision topics
- Purpose of accounting theory
- Development of accounting theory
- Role of theory in accounting
- Example using induction to develop theory
- Evaluating theory and its hypothesis
- Scientific method in accounting
- Areas where the scientific method resolves accounting issues
Positive Accounting Theory (PAT)
- Definition: PAT is a theory that focuses on relationships between various individuals (e.g., owners, managers, and debt providers) and explains how accounting functions in these relations. It tries to explain what happens in accounting rather than how it should function.
- Origins - Capital Markets Research: PAT was influenced by the development of the Efficient Market Hypothesis (EMH), which suggested that capital markets react quickly and fairly to available information. The 1968 Ball & Brown paper was crucial in moving accounting research toward a more positive approach to explaining market reactions.
- Agency Theory: PAT uses insights from agency theory to understand how accounting influences the relationship between principals and agents.
- Key Hypotheses: Bonus plan hypothesis (managers use accounting methods to increase reported income to maximize bonuses), debt hypothesis (firms with high debt levels are incentivized to manipulate earnings) and political cost hypothesis (larger firms are more affected by political pressures than smaller firms).
- Perspectives: PAT considers both the efficiency perspective (where accounting mechanisms minimize agency costs) and the opportunistic perspective (recognizing actions after contracts are already in place).
- Criticisms: PAT's focus on negative aspects of human behavior and its perceived lack of prescription have been criticized.
Learning Objectives
- Understand how positive theory differs from normative theory.
- Origins of Positive Accounting Theory (PAT)
- Understanding that PAT uses insights from agency theory.
- Meaning of agency costs.
- Understanding the nexus of contracts
- Understanding the role of accounting in minimizing transaction costs.
- Influence of accounting policy choices made by managers.
- Understanding and explaining 'creative accounting' and 'political costs'
- Role of accounting in reducing agency costs via monitoring and bonding mechanisms.
- Three key PAT hypotheses
- Perspectives adopted by PAT research (efficiency and opportunistic).
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Description
Explore the key concepts and frameworks of accounting theory, including its definitions and interrelated constructs. This quiz will help you understand the different approaches to accounting theories, such as pragmatic theories and their relevance in real-world applications.
