Accounting Theory

Accounting Theory

ACC 601

Take Home Exam

Fall 2013

Session II

(Due December 10)

Question 1 (6 points): Explain the public interest and interest group theories of regulation and how it impacts the market.

Interest Group Theory believes that many different interests compete to control government policy, and that their conflicting interests can balance out each other to provide good government. Public interest theory is regulatory intervention occurs in the interest of the public at large. Government regulation exists to correct some of the shortfalls of the free market economy (market failures: monopoly power and externalities). Public interest theory in the market place Insures competition, Impacts externalities, Stabilize the economy and Introduces social objectives in economic policies.

Question 2 (5 points): Explain the purpose of Regulation FD. Was it effective? Why or why not?

The rule mandates that all publicly traded companies must disclose material information to all investors at the same time. The regulation sought to stamp out selective disclosure, in which some investors (often large institutional investors) received market moving information before others (often smaller, individual investors). Yes it was effective, regulation FD fundamentally changed how companies communicate with investors by bringing more transparency and more frequent and timely communications, perhaps more than any other regulation in the history of the SEC.

Question 3 (5 points): Do investors’ perspective and the contracting perspective equally support the continued use of the historical cost model. Explain.

Yes, an individual who commits money to investment products with the expectation of financial return. Generally, the primary concern of an investor is to minimize risk while maximizing return, as opposed to a speculator, who is willing to accept a higher level of risk in the hopes of collecting higher-than-average profits.

Question 4: (5 points) Describe briefly discretionary accruals and their role in earnings management. Can you tell from looking at a company’s financial statements how they have handled discretionary accruals?

Non-obligatory expense (such as an anticipated bonus for management) that is yet to be realized but is recorded in the account books and managers use of discretionary accruals to shift reported income among fiscal periods. Such an examination of the accruals entails specification of a model to estimate discretionary accruals. The models range from the simple, in which total accruals are used as a measure of discretionary accruals to the relatively sophisticated (regression),