ASR 22420-Part 1 of the Assignment
Accounting numbers take part in an importance role of decision making, contracting and stewardship. Besides, accounting numbers are used mainly for decision making. They are also measures used in management compensation contract because of the following reasons: According to Ross et al (2011), in order to motivate managers act in the shareholders’ interests. It is known that a company is owned by its shareholders but the management is separate from the ownership. This means the owners (shareholders) will employ someone else to manage the company and represent their interest. The management may be concerned about salary ,position ,security of the employment while the owner s are concerned about investment opportunities, growth, risk, profit ,wealth maximization…etc. It is possibility that there is a conflict of interest occurring between the owner and the manager. Therefore in order to avoid this agency problem and to put closely the interest of owners and manager , the managers are compensated basing on the performance of the firm through accounting numbers. They are those numbers such as return on assets, net profit after tax, assets, liabilities, the profits and sales of the firm…etc . As Deegan (2010) suggested the ways that managers are compensated such as share of profit of the firm or better performer will get higher salaries and are promoted. Also, managers are rewarded when share price in the market increasing because managers are compensated with the option to buy share of the company at fixed price that usually below the market price so higher share price, higher compensations they earn. Moreover, company use accounting numbers to compensate managements because of attracting and retaining caliber and valued managers to produce value for shareholders and wealth for the company. However, also according to Deegan, this incentive method causes negative effects on accounting numbers that managers have a tendency...
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