Corporate Finance

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ACCG927 CURRENT ISSUES IN ACCOUNTING & Corporate Governance

Week 1 Introduction and Overview of Accounting Theories

1

Introduction
• • • • • • • • • • About the unit Teaching and learning strategy Assessments In-class essays Essay writing workshop Research essay Turnitin requirements Oral team presentation Required readings Importance of written answers each week

2

The Nature of Accounting & Corporate Governance Theory

• What is a theory?
Kerlinger, 1964: "A set of interrelated constructs (concepts), definitions and propositions that present a systematic view of phenomena by specifying relations among variables with the purpose of explaining and predicting the phenomena."

• Concepts, definitions and propositions
– Systematic view – Variables – Explain & predict

3

Definition of Corporate Governance

ASX CGC (2007): The most authoritative definition of corporate governance (p.3): “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It encompasses the mechanisms by which companies, and those in control are held to account. Corporate governance influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised. Good Corporate governance structures encourage companies to create value (through entrepreneurialism, innovation, development and exploration) to provide accountability and control systems commensurate with the risks involved” • Seminar Question: “The common issues concerning corporate governance include the quality of published information, internal controls, independent directors, auditor independence, audit committees, ethical conduct and treatment of financial statement fraud”. Discuss how the various accounting theories that you are studying in ACCG927 provide useful insights into these issues concerning corporate governance.

4

Three Main Types of Theories
• Positive
AS IT IS

• Normative
AS IT SHOULD BE Problems: * No hypothesis testing and empirical evidence Example: Conceptual Framework

• Behavioural
Psychological & sociological influences on individuals using accounting data Example: Patel, C., G. Harrison and J. McKinnon, “Cultural Influences on Judgments of Professional Accountants in AuditorClient Conflict Resolution”, Journal of International Financial Management and Accounting (New York University Salomon Centre and the International Association of Accounting Research), Vol. 13, No. 1, 2002, pp.1-31.

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Introduction and Overview of Accounting Theory
Required Reading – Current Issues in Accounting, prepared by Chris Patel, McGraw-Hill 2010: topic 1, pages 2 to 24; 33-52; 79-85.

• Importance of theories
– Technical issues are important (Technical or Structural Functionalist Perspective) But techniques are changing rapidly (globalisation) Financial environment: complex

Great emphasis on a THEORETICAL FRAMEWORK
Techniques CONSISTENTLY derived from this theoretical framework

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• Importance of theories (cont.)
– Evidence from multinational enterprises
Importance of MANAGEMENT & COMMUNICATION of accounting information (need to understand theoretical issues in various cross-cultural contexts) – Role of accounting as the LANGUAGE of business is changing – Criticism that accounting had developed in an ad-hoc manner, and is largely a post-hoc reaction to accounting and audit “failures” Ad-hoc: list of inconsistencies in standards Post-hoc: corporate collapses resulting in new regulations

"BUSH FIRE" approach to developing accounting standards

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• Substance over (legal) form versus Legalistic approach
FINANCIAL REALITY GLOBALISATION

PROFESSIONAL JUDGMENT

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Overview of Theories of Accounting
• Many theories of accounting and corporate governance • No universally accepted theory of accounting – different perspectives about the central objective, role and scope of financial...
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