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Chapter 4 - Solution Manual

According to agency theory the political process has

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Unformatted text preview: According to agency theory, the political process has an impact on agency relationships because political officials frequently believe that inefficient markets can only be remedied by government intervention. Agency theory may help to explain the absence of a comprehensive theory of accounting because of the diverse interests involved in financial reporting; however, it will not help to identify the correct accounting procedures because it only attempts to explain the state of current practice not the best methods of practice. Case 4-5 68 Studies attempting to assess an individual's ability to use information are termed human information processing research. In general this research has indicated that individuals have a limited ability to process large amounts of information. The main consequences of this finding are: 1. An individual's perception of information is selective. That is, since individuals are capable of comprehending only a small part of their environment, their anticipation of what they expect to perceive about a particular situation will determine to a large extent what they do perceive. 2. Since individuals make decisions on the basis of a small part of the total information available, they do not have the ability to make optimal decisions. 3. Since individuals are incapable of integrating a great deal of information, they process information sequentially. If these conclusions are correct, the current focus on disclosure by the FASB may have an effect opposite to what is intended. That is, the annual reports may already contain more information than can be processed by individuals. Case 4-6 a. Critical perspective research rejects the view that knowledge of accounting is grounded in objective principles. Rather researchers adopting this viewpoint share a belief in the indeterminacy of knowledge claims. This indeterminacy view rejects the notion that knowledge is externally grounded and is only revealed through systems of rules that are superior over other ways of understanding phenomena. These researchers attempt to interpret the history of accounting as a complex web of economic, political and accidental co-occurrences. They have also argued that accountants have been unduly influenced by one particular viewpoint in economics (utility based, marginalist economics). This economic viewpoint holds that business organizations trade in markets that form a part of a society's economy. Profit is the result of these activities and is indicative of the organization's efficiency in using society's scarce resources. In addition, these researchers maintain that accountants have also taken as given the current institutional framework of government, markets, prices and organizational forms with the result that accounting serves to aid certain interest groups in society to the detriment of other interest groups....
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